UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. ~~20549_______________________________~~ 20549

FORM 10-~~Q_____________________~~Q

Quarterly Report Pursuant to Section 13 or 15(d) of ~~the Securities Exchange Act of 1934~~

~~For~~of the ~~Quarterly~~Securities ~~Period~~Exchange ~~Ended~~Act ~~March~~of ~~31,~~1934 ~~2006Commission File Number 1-14160~~

~~PainCare~~For ~~Holdings, Inc.(Exact~~the ~~Name~~Quarterly ofPeriod ~~Registrant~~Ended asJune 30, ~~Specified~~2006 ~~in its Charter)~~

Florida	06-1110906
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

Commission File Number 1-14160

~~1030~~PainCare ~~N. Orange Avenue~~Holdings, ~~Suite~~Inc. ~~105, Orlando, Florida 32801(Address of Principal Executive Offices)~~

(~~407)~~Exact ~~367-0944(~~Name of Registrant’s ~~Telephone~~as ~~Number~~Specified in its Charter)

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No___

Florida

06-1110906

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

~~Indicate~~1030 byN. ~~check~~Orange ~~mark~~Avenue, ~~whether~~Suite ~~the registrant is a large accelerated filer~~105, ~~an accelerated filer~~Orlando, orFlorida a32801 ~~non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):~~

~~Large~~(Address ~~Accelerated Filer ___ Accelerated Filer X Non-Accelerated~~of ~~Filer~~Principal ~~___~~Executive Offices)

As(407) of367-0944 ~~June 28, 2006 there were 65,360,366 outstanding shares of the Registrant’s common stock, $0.0001 par value.~~

1(Registrant’s Telephone Number)

~~PAINCARE~~Indicate ~~HOLDINGS~~by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), ~~INC~~and (2) has been subject to such filing requirements for the past 90 days.~~INDEX~~ Yes x No ¨

~~Table~~Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of ~~Contents~~“accelerated tofiler ~~Form~~and 10large accelerated filer” in Rule 12b-Q2 ~~for~~of the ~~Three Months~~Exchange ~~Ended~~Act. ~~March~~(Check ~~31,~~one): ~~2006~~

PART I	FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Balance Sheets as of March 31, 2006 (Unaudited) and December 31, 2005
	Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005 (Unaudited)
	Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005 (Unaudited)
	Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2006 (Unaudited)
	Notes to Consolidated Financial Statements (Unaudited)
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II	OTHER INFORMATION
Item 1.	Legal Proceedings
Item 1A	Risk Factors
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds
Item 3.	Defaults Upon Senior Securities
Item 4.	Submission of Matters to a Vote of Security Holders
Item 5.	Other Information
Item 6.	Exhibits
	Signatures

Large Accelerated Filer ¨ Accelerated Filer x Non-Accelerated Filer ¨

As of August 10, 2006 there were 65,836,016 outstanding shares of the Registrant’s common stock, $0.0001 par value.

PAINCARE HOLDINGS, INC.

INDEX


PART I		FINANCIAL INFORMATION

	Item 1.	Financial Statements	3
		Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005 (Audited)	3
		Consolidated Statement of Operations for the three and six months ended June 30, 2006 and 2005 (Unaudited)	4
		Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (Unaudited)	5
		Consolidated Statements of Stockholders’ Equity for the six months ended June 30, 2006 (Unaudited)	6
		Notes to Consolidated Financial Statements (Unaudited)	7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
	Item 4.	Controls and Procedures	36

PART II		OTHER INFORMATION

	Item 1.	Legal Proceedings	38
	Item 1A.	Risk Factors	39
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	53
	Item 3.	Defaults Upon Senior Securities	54
	Item 4.	Submission of Matters to a Vote of Security Holders	54
	Item 5.	Other Information	54
	Item 6.	Exhibits	54
		Signatures	55

PART I
ITEM 1. FINANCIAL STATEMENTS
PAINCARE HOLDINGS, INC.
Consolidated Balance Sheets
As of March 31, 2006 and December 31, 2005
Assets
	March 31, 2006		December 31, 2005
	(Unaudited)
Current assets:
Cash and cash equivalents	$ 8,986,479		$ 22,713,165
Accounts receivable, net	24,854,087		21,263,405
Due from stockholders	2,603,887		-
Deposits and prepaid expenses	2,714,248		2,557,492
Deferred tax asset	850,878		683,391
Total current assets	40,009,579		47,217,453
Property and equipment, net		12,207,230		11,494,656
Goodwill, net		135,732,200		111,468,292
Due from stockholders		-		427,553
Deferred tax asset		617,918		867,854
Other assets	15,939,158		11,834,822
Total assets	$ 204,506,085		$ 183,310,630
Liabilities and Stockholders' Equity
Liabilities:
Accounts payable and accrued expenses	$	3,125,137	$	3,522,714
Accrued compensation expense		17,142,549		17,142,549
Derivative liabilities		2,557,900		12,952,455
Acquisition consideration payable		257,400		8,011,567
Common stock payable		-		5,405,601
Income tax payable		2,472,329		3,003,766
Current portion of notes payable		12,697,012		3,883,012
Current portion of convertible debentures		8,842,191		8,519,131
Current portion of capital lease obligations	1,562,270		1,646,378
Total current liabilities		48,656,788		64,087,173
Notes payable, less current portion		24,857,923		26,129,569
Convertible debentures, less current portion		1,163,515		1,133,877
Capital lease obligations, less current portion	2,700,889		2,872,708
Total liabilities	77,379,115		94,223,327
Minority interests in consolidated subsidiaries	2,120,644		1,763,838
Commitments and contingencies
Stockholders' equity:
Common stock, $.0001 par value. Authorized 200,000,000
shares; issued and outstanding 63,676,312 and 55,823,026
shares		6,368		5,582
Preferred stock, $.0001 par value. Authorized 10,000,000
shares; issued and outstanding -0- shares		-		-
Additional paid in capital		132,047,810		106,253,345
Accumulated deficit		(7,094,990)		(18,983,089)
Accumulated other comprehensive income	47,138		47,627
Total stockholders' equity	125,006,326		87,323,465
Total liabilities and stockholders' equity	$ 204,506,085		$ 183,310,630
See accompanying notes to consolidated financial statements.

PART I

ITEM 1. FINANCIAL STATEMENTS

PAINCARE HOLDINGS, INC.

Consolidated Balance Sheets

As of June 30, 2006 and December 31, 2005


	June 30, 2006			December 31, 2005
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	6,249,412		$	22,713,165
Accounts receivable, net		26,313,430			21,263,405
Due from stockholders		2,733,420			—
Deposits and prepaid expenses		2,950,435			2,557,492
Deferred tax asset		1,042,033			683,391

Total current assets		39,288,730			47,217,453
Property and equipment, net		12,697,511			11,494,656
Goodwill, net		139,812,167			111,468,292
Due from stockholder		—			427,553
Deferred tax asset		—			867,854
Other assets		16,897,250			11,834,822

Total assets	$	208,695,658		$	183,310,630

Liabilities and Stockholders’ Equity
Liabilities:
Accounts payable and accrued expenses	$	3,899,135		$	3,522,714
Accrued compensation expense		17,142,549			17,142,549
Derivative liabilities		—			12,952,455
Acquisition consideration payable		2,554,000			8,011,567
Common stock payable		—			5,405,601
Income tax payable		1,420,409			3,003,766
Current portion of notes payable		12,699,012			3,883,012
Current portion of convertible debentures		8,334,717			8,519,131
Current portion of capital lease obligations		1,573,664			1,646,378

Total current liabilities		47,623,486			64,087,173

Notes payable, less current portion		24,282,363			26,129,569
Convertible debentures, less current portion		1,184,944			1,133,877
Capital lease obligations, less current portion		2,886,440			2,872,708
Deferred tax liability		311,198			—

Total liabilities		76,288,431			94,223,327

Minority interests in consolidated subsidiaries		2,505,516			1,763,838

Commitments and contingencies
Stockholders’ equity:
Common stock, $.0001 par value. Authorized 200,000,000 shares; issued and outstanding 65,686,016 and 55,823,026 shares		6,569			5,582
Preferred stock, $.0001 par value. Authorized 10,000,000 shares; issued and outstanding -0- shares		—			—
Additional paid in capital		137,719,608			106,253,345
Accumulated deficit		(7,901,081	)		(18,983,089	)
Accumulated other comprehensive income		76,615			47,627

Total stockholders’ equity		129,901,711			87,323,465

Total liabilities and stockholders’ equity	$	208,695,658		$	183,310,630

See accompanying notes to consolidated financial statements.

PAINCARE HOLDINGS, INC.
Consolidated Statements of Operations
For the Three Months Ended March 31, 2006 and 2005 (Unaudited)
	For the Three Months Ended
	March 31,
	2006	2005
		(As restated)
Revenues:
Pain management	$ 13,229,499	$ 9,261,065
Surgeries	1,881,030	1,403,803
Ancillary services	8,197,945	3,571,872
Total revenues	23,308,474	14,236,740
Cost of revenues	4,740,734	2,581,223
Gross profit	18,567,740	11,655,517
General and administrative expense	12,606,803	7,195,508
Compensation expense-variable stock options	-	18,138,790
Amortization expense	491,331	247,768
Depreciation expense	623,500	264,351
Operating income (loss)	4,846,106	(14,190,900)
Interest expense	(1,932,194)	(898,920)
Derivative benefit (expense)	10,394,555	(18,238,898)
Other income	142,109	29,021
Income (loss) before income taxes	13,450,576	(33,299,697)
Provision (benefit) for income taxes	1,188,607	(5,536,065)
Income (loss) before minority interests	12,261,969	(27,763,632)
Minority interests in net earnings of consolidated
subsidiaries	373,870	-
Net income (loss)	$ 11,888,099	$ (27,763,632)
Basic income (loss) per common share	$ 0.19	$ (0.63)
Basic weighted average common shares outstanding	61,598,932	44,412,972
Diluted income (loss) per common share	$ 0.17	$ (0.63)
Diluted weighted average common shares outstanding	71,654,327	44,412,972
See accompanying notes to consolidated financial statements.

PAINCARE HOLDINGS, INC.

Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2006 and 2005 (Unaudited)


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2006			2005			2006			2005
				(As restated)						(As restated)
Revenues:
Pain management	$	12,485,143		$	9,794,283		$	25,714,642		$	19,055,347
Surgeries		1,604,047			2,301,230			3,485,077			3,705,033
Ancillary services		9,502,122			3,792,340			17,700,067			7,364,213

Total revenues		23,591,312			15,887,853			46,899,786			30,124,593

Cost of revenues		5,370,006			2,434,558			10,110,740			5,015,781

Gross profit		18,221,306			13,453,295			36,789,046			25,108,812

General and administrative expense		15,455,145			981,758			28,061,948			26,316,057
Amortization expense		626,074			285,131			1,117,405			532,899
Depreciation expense		548,095			241,526			1,171,595			505,877

Operating income (loss)		1,591,992			11,944,880			6,438,098			(2,246,021	)

Interest expense		2,095,721			1,292,490			4,027,915			2,191,410
Derivative expense (benefit)		(98,396	)		(4,992,151	)		(10,492,951	)		13,246,747
Other income		311,428			114,361			453,537			143,383

Income (loss) before income taxes		(93,905	)		15,758,902			13,356,671			(17,540,795	)

Provision (benefit) for income taxes		315,717			4,551,003			1,504,324			(985,062	)

Income (loss) before minority interests		(409,622	)		11,207,899			11,852,347			(16,555,733	)

Minority interests in net earnings of consolidated subsidiaries		396,469			97,072			770,339			97,072

Net income (loss)	$	(806,091	)	$	11,110,827		$	11,082,008		$	(16,652,805	)


Basic income (loss) per common share	$	(0.01	)	$	0.22		$	0.18		$	(0.37	)

Basic weighted average common shares outstanding		64,482,619			51,621,811			63,011,366			44,412,972

Diluted income (loss) per common share	$	(0.01	)	$	0.18		$	0.16		$	(0.37	)

Diluted weighted average common shares outstanding		64,482,619			61,803,873			71,718,631			44,412,972

See accompanying notes to consolidated financial statements.

PAINCARE HOLDINGS, INC.
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2006 and 2005 (Unaudited)
	2006		2005 (As restated)
Cash flows from operating activities:
Net income (loss)	$ 11,888,099		$ (27,763,632)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization		1,114,831		512,119
Non-cash transactions and other		275,975		39,163
Amortization of debt discount		653,328		470,841
Stock issued for interest payments		196,050		354,044
Derivative (benefit) expense	(10,394,555)			18,238,898
Deferred income taxes		(201,772)		(6,483,833)
Amortization of deferred financing expenses		(38,787)		-
Compensation expense-variable stock options		-		18,138,790
Minority interests		373,870		-
Change in operating assets and liabilities, net of assets acquired:
Accounts receivable		(1,537,217)		(223,491)
Deposits and prepaid expenses		107,294		(859,316)
Other assets		28,559		(670,952)
Interest payable		-		(27,305)
Income tax payable		(531,437)		(1,696,096)
Accounts payable and accrued expenses	(1,486,815)		287,270
Net cash provided by operating activities	447,423		316,500
Cash flows from investing activities:
Purchase of property and equipment		(420,542)		(773,301)
Cash paid for earnouts		(5,808,668)		(4,044,167)
Cash used for acquisitions		(9,664,286)		(3,500,000)
Cash from acquisitions	655,558		-
Net cash used in investing activities	(15,237,938)		(8,317,468)
Cash flows from financing activities:
Proceeds from issuance of common stock, net of capital offering costs		4,090,707		167,000
Payments of capital lease obligations		(405,107)		(197,961)
Payment of convertible debentures		-		(135,500)
Due from stockholders		(2,170,722)		(397,843)
Cash distributions to minority interests		(447,049)		-
Payments on notes payable, net	(4,000)		(263,122)
Net cash provided by (used in) financing activities	1,063,829		(827,426)
Net decrease in cash and cash equivalents	(13,726,686)			(8,828,394)
Cash and cash equivalents at beginning of period	22,713,165		19,100,840
Cash and cash equivalents at end of period	$ 8,986,479		$ 10,272,446
Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$ 1,082,816		$ 455,384
Cash paid during the period for income taxes		1,767,500		2,730,000
Non-cash investing and financing transactions:
Common stock issued for acquisitions		9,624,459		11,062,500
Common stock issued for convertible debentures		-		7,628,968
Common stock issued for earnouts		6,196,358		2,687,805
Acquisition consideration payable		257,400		849,584
Common stock issued for common stock payable		5,405,601		-
See accompanying notes to consolidated financial statements.

PAINCARE HOLDINGS, INC.

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2006 and 2005 (Unaudited)


	2006			2005
				(As restated)
Cash flows from operating activities:
Net income (loss)	$	11,082,008		$	(16,652,805	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		2,289,000			1,038,776
Non-cash transactions and other		431,373			42,112
Amortization of debt discount		1,367,078			1,196,210
Common stock issued for debenture interest payments		196,050			599,067
Derivative (benefit) expense		(10,492,951	)		13,246,747
Deferred income taxes		385,474			(4,145,762	)
Amortization of deferred financing expenses		(37,014	)		(475,717	)
Non-cash compensation expense		1,182,015			11,977,160
Minority interests		770,339			97,072

Change in operating assets and liabilities, net of assets acquired:
Accounts receivable		(2,996,560	)		(3,248,097	)
Deposits and prepaid expenses		107,294			(923,059	)
Other assets		(102,396	)		(1,375,831	)
Interest payable		—			(59,075	)
Income tax payable		(1,583,357	)		455,009
Accounts payable and accrued expenses		(712,817	)		616,976

Net cash provided by operating activities		1,885,536			2,388,783

Cash flows from investing activities:
Purchase of property and equipment		(1,022,302	)		(562,185	)
Cash paid for earnouts		(7,705,992	)		(3,960,833	)
Cash used for acquisitions		(9,982,214	)		(16,283,479	)
Cash from acquisitions		655,556			127,712

Net cash used in investing activities		(18,054,952	)		(20,678,785	)

Cash flows from financing activities:
Proceeds from issuance of common stock, net of capital offering costs		4,090,707			424,362
Payments of capital lease obligations		(879,755	)		(773,526	)
Payment of convertible debentures		—			(135,500	)
Due from stockholders		(2,294,643	)		(495,202	)
Cash distributions to minority interests		(458,646	)		—
Net proceeds from (payments on) notes payable		(752,000	)		12,400,119

Net cash provided by (used in) financing activities		(294,337	)		11,420,253

Net decrease in cash and cash equivalents		(16,463,753	)		(6,869,749	)
Cash and cash equivalents at beginning of period		22,713,165			19,100,840

Cash and cash equivalents at end of period	$	6,249,412		$	12,231,091

Supplemental disclosures of cash flow information:
Cash paid during the period for interest	$	2,464,787		$	439,774
Cash paid during the period for income taxes		2,538,328			—
Non-cash investing and financing transactions:
Common stock issued for acquisitions		9,624,459			15,922,038
Common stock issued for earnouts		7,481,786			4,858,807
Acquisition consideration payable		2,554,000			2,154,300
Common stock issued for debenture conversions		—			15,735,237
Common stock issued for cancelled warrants		3,486,632			—
Common stock issued for common stock payable		5,405,601

See accompanying notes to consolidated financial statements.

PAINCARE HOLDINGS, INC.
Consolidated Statements of Stockholders’ Equity
For the Three Months Ended March 31, 2006 (Unaudited)
				AccumulatedDeficit	Accumulated Other Comprehensive Income
			AdditionalPaid in Capital			Total Stockholders’Equity
	Common Stock
	Shares	Amount
Balances at December 31, 2005	55,823,026	$ 5,582	$106,253,345	$(18,983,089)	$ 47,627	$ 87,323,465
Common stock issued for earnouts	1,764,798	177	6,196,181	-	-	6,196,358
Common stock issued for acquisitions	2,719,803	272	9,624,187	-	-	9,624,459
Common stock options issued to employees	-	-	282,076	-	-	282,076
Common stock issued for debenture interest payments	63,652	6	196,044	-	-	196,050
Common stock issued for private placement offering	3,305,033	331	9,495,977	-	-	9,496,308
Components of comprehensive income (loss):
Translation adjustment	-	-	-	-	(489)	(489)
Net income	-	-	-	11,888,099	-	11,888,099
Comprehensive income	-	-	-	-	-	11,887,610
Balances at March 31, 2006	63,676,312	$ 6,368	$132,047,810	$ (7,094,990)	$ 47,138	$125,006,326
See accompanying notes to consolidated financial statements.

PAINCARE HOLDINGS, INC.

Consolidated Statements of Stockholders’ Equity

For the Six Months Ended June 30, 2006 (Unaudited)


	Common Stock			Additional Paid in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	Shares	Amount		Additional Paid in Capital		Accumulated Deficit			Accumulated Other Comprehensive Income		Total Stockholders’ Equity
Balances at December 31, 2005	55,823,026	$	5,582	$	106,253,345	$	(18,983,089	)	$	47,627	$	87,323,465
Common stock issued for earnouts	2,464,502		247		7,481,539		—			—		7,481,786
Common stock issued for acquisitions	2,719,803		272		9,624,187		—			—		9,624,459
Common stock options issued to employees	—		—		1,182,015		—			—		1,182,015
Common stock issued for debenture interest payments	63,652		6		196,044		—			—		196,050
Common stock issued for private placement offering	3,305,033		331		9,495,977		—			—		9,496,308
Common stock issued for cancelled warrants	1,310,000		131		3,486,501		—			—		3,486,632
Components of comprehensive income:
Translation adjustment	—		—		—		—			28,988		28,988
Net income	—		—		—		11,082,008			—		11,082,008

Comprehensive income	—		—		—		—			—		11,110,996

Balances at June 30, 2006	65,686,016	$	6,569	$	137,719,608	$	(7,901,081	)	$	76,615	$	129,901,711

PainCare Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(1) Organization and Basis of Presentation

Nature of the Business

PainCare Holdings, Inc. (“the Company”) is a provider of pain-focused medical and surgical solutions. Through its proprietary network of acquired or managed physician practices and ambulatory surgery centers, and in partnership with independent physician practices and medical institutions throughout the United States and Canada, PainCare is committed to utilizing the most advanced science and technologies to diagnose and treat pain stemming from neurological and musculoskeletal conditions and disorders.

Through its majority-owned subsidiary, Amphora, the Company is also engaged in providing advanced Intraoperative Monitoring (IOM) and interpretation services to hospitals and surgeons; and through its wholly owned subsidiary, Caperian, Inc., PainCare offers medical real estate and development services.

Presentation of Interim Statements

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United ~~States~~ States for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2005. In the ~~opinion~~ opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included in the accompanying unaudited consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year. The consolidated financial results as of and for the three and six-month ~~period~~periods ended ~~March~~ 31June 30, 2005 have been restated; for further information as to the restatement refer to the Company’s annual report on Form 10-K for the year ended December 31, 2005 filed with the SEC on June 1, 2006.

Use of Estimates

The preparation of financial statements in conformity with United States generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The more significant estimates relate to revenue recognition, contractual allowances and uncollectible accounts, intangible assets, accrued liabilities, derivative liabilities, income taxes, litigation and contingencies. Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for judgments about results and the carrying values of assets and liabilities. Actual results and values may differ significantly from these estimates.

(2) Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the accounts of PainCare Holdings, Inc. and its wholly-owned and majority-owned subsidiaries. The other parties’ interest in entities that are majority-owned by the Company are reported as minority interests in the consolidated financial statements. All significant intercompany balances and transactions have been eliminated in consolidation.

7The Company operates fourteen practices in states with laws governing the corporate practice of medicine. In those states, a corporation is precluded from owning the medical assets and practicing medicine. Therefore, contractual arrangements are effected to allow the Company to manage the practice.

The Company operates fourteen practices in states with laws governing the corporate practice of medicine. In those states, a corporation is precluded from owning the medical assets and practicing medicine. Therefore, contractual arrangements are effected to allow the Company to manage the practice. Emerging Issues Task Force No. 97-2 (“EITF No. 97-2”) states that consolidation can occur when a physician practice management entity establishes an other than temporary controlling financial interest in a physician practice through contractual arrangements. All but one of the management services agreements between the Company and the physician satisfies all of the criteria of EITF No. 97-2. The Company includes these practices in the consolidated financial statements in accordance with EITF No. 97-2.

Cash and Cash Equivalents

The Company has a qualified cash requirement from the HBK Investments credit facility. This requires the Company to maintain a minimum consolidated balance of $2,000,000 in cash and cash equivalents at all times.

Property and Equipment

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the respective assets. Leasehold improvements are depreciated over the shorter of the term of the lease, including renewal periods when appropriate, or the estimated useful lives of the improvements. Expenditures for repairs and maintenance are charged to expense as incurred. Expenditures for betterments and major improvements are capitalized and depreciated over the remaining useful life of the asset. The carrying amounts of assets sold or retired and related accumulated depreciation are eliminated in the year of disposal and the resulting gains and losses are included in other income or expense. The useful lives of operating equipment range from five to ten years, and the depreciation period for leasehold improvements ranges from three to ten years.

Property and equipment, net at June 30, 2006 and December 31, 2005, consisted of:


	June 30, 2006		December 31, 2005
Furniture, fixtures & equipment	$	11,363,050	$	10,744,044
Medical equipment		9,650,659		7,895,215

Total cost		21,013,709		18,639,259
Less accumulated depreciation		8,316,198		7,144,603

Property and equipment, net	$	12,697,511	$	11,494,656

Valuation of Goodwill and Intangible Assets

During the three month period ended Match 31, 2006, the Company recorded $24,263,908 million of goodwill and $322,164 of identified intangible assets, in connection with the acquisitions described in note 7.

Goodwill acquired in purchase business combinations and determined to have an infinite useful life is not amortized, but instead tested for impairment at least annually. In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS 142”), the Company conducts, on at least an annual basis, a review of its reporting entities to determine whether the carrying values of goodwill exceed the fair market value using a combination of the income or discounted cash flow approach and the market approach, which uses comparable market data, for each entity. Should this be the case, the value of its goodwill may be impaired and written down. Identified intangible assets are amortized over their estimated useful lives.

Income Taxes

The Company records income taxes using the liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequence of temporary differences between the financial statement and income tax bases of its assets and liabilities. The Company estimates its income taxes in each of the jurisdictions in which we operate. This process involves estimating our tax exposure together with assessing temporary differences resulting from differing treatment of items for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheets.

The recording of a net deferred tax asset assumes the realization of such asset in the future, otherwise a valuation allowance must be recorded to reduce this asset to its net realizable value. The Company considers future pretax income and, if necessary, ongoing prudent and feasible tax planning strategies in assessing the need for such a valuation allowance. In the event that the Company determines that it may not be able to realize all or part of the net deferred tax asset in the future, a valuation allowance for the deferred tax asset is charged against income in the period such determination is made. The Company has not recorded any valuation allowances as of ~~March 31~~June 30, 2006 or 2005. The Company anticipates that it will generate sufficient pretax income in the future to realize its ~~deferred~~ deferred tax assets.

Fair Value Disclosures

The carrying values of cash, accounts receivable, deposits, prepaid expenses, accounts payable and accrued expenses generally approximate the respective fair values of these instruments due to their current nature.

The carrying value of acquisition consideration payable consists of the value of cash and Company stock to be paid per contractual obligations and approximates fair value due to the current nature of the cash obligation and the stock which is recorded at fair value.

The fair values of debt instruments for disclosure purposes only are estimated based upon the present value of the estimated cash flows at interest rates applicable to similar instruments.

The Company generally does not use derivative financial instruments to hedge exposures to cash flow or market risks. However, certain other financial instruments, such as warrants and embedded conversion features that are indexed to the Company’s common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.

Revenue Recognition

Revenue consists of net patient fee-for-service revenue. Net patient fee-for-service revenue is recognized when services are rendered. Net patient service revenue is recorded net of contractual adjustments and other arrangements for providing services at less than established patient billing rates. Allowances for contractual adjustments and bad debts are provided for accounts receivable based on estimated collection rates. The Company estimates contractual allowances based on the patient mix at each location, the impact of contract pricing and historical collection information.

Substantially all of the accounts receivable are due under fee-for-service contracts from third party payers, such as insurance companies and government-sponsored healthcare programs or directly from patients. Services are generally provided pursuant to contracts with healthcare providers or directly to patients. Accounts receivable for services rendered have been recorded at their established charges and reduced by the estimated contractual adjustments and bad debts. Contractual adjustments result from the differences between the rates charged for services performed and reimbursements by government-sponsored healthcare programs and insurance companies. Receivables generally are collected within industry norms for third-party payors. The Company continuously monitors collections from its customers and maintains an allowance for bad debts based upon any specific payor collection issues that have been identified, the historical collection experience including each practice’s experiences, and the aging of patient accounts receivable balances. The Company is not aware of any claims, disputes or unsettled matters with third-party payors which could have a material effect on the financial statements. The Company either uses in-house billing or local billing companies in each location it operates. Therefore, the Company analyzes its accounts receivable and allowance for doubtful accounts on a site-by-site basis as opposed to a company-wide basis. This allows the Company to be more detailed and more accurate with its collection estimates. While such credit losses have historically been within our expectations and the provisions established, an inability to accurately estimate credit losses in the future could have a material adverse impact on operating results.

The estimated contractual allowance rates for each facility are reviewed periodically. The Company adjusts the contractual allowance rates, as changes to the factors discussed above become known. As these factors change, the historical collection experience is revised accordingly in the period known. These allowances are reviewed periodically and adjusted based on historical payment rates. Depending on the changes made in the contractual allowance rates, net revenue may increase or decrease.

(3) Categories of Revenue by Operating Segment

We present three categories of revenue in our statement of operations: pain management, surgeries and ancillary services. Pain management revenue is derived from our owned and managed practices, which provide pain management services. Surgery revenue is derived from our owned and managed practices, which primarily provide surgical services. Ancillary service revenue is derived from our owned and managed practices and limited management practices, which provide one or more of our ancillary services, including: orthopedic rehabilitation, electrodiagnostic medicine, intra-articular joint treatment and diagnostic imagery. Our cost of revenue is primarily physicians’ salaries and medical supplies.

We have set forth below our revenues, expenses and operating income classified by the type of service we perform as well as the expenses allocated to our corporate office.

For the Three Months Ended March 31, 2006
	Pain Mgmt	Surgeries	Ancillary Services	Corporate	Totals
Revenues	$ 13,229,499	$ 1,881,030	$ 8,197,945	$ -	$23,308,474
Operating income	4,480,638	486,214	2,748,930	(2,869,676)	4,846,106
For the Three Months Ended March 31, 2005
	Pain Mgmt	Surgeries	Ancillary Services	Corporate	Totals
Revenues	$ 9,261,065	$ 1,403,803	$ 3,571,872	$ -	$14,236,740
Operating income (loss)	4,202,294	430,638	1,242,173	(20,066,005)	(14,190,900)


	For the Three Months Ended June 30, 2006
	Pain Mgmt		Surgeries		Ancillary Services		Corporate			Totals
Revenues	$	12,485,143	$	1,604,047	$	9,502,122	$	—		$	23,591,312
Operating income (loss)		3,275,756		169,779		3,677,856		(5,531,399	)		1,591,992

	For the Three Months Ended June 30, 2005
	Pain Mgmt		Surgeries		Ancillary Services		Corporate			Totals
Revenues	$	9,794,283	$	2,301,230	$	3,792,340	$	—		$	15,887,853
Operating income (loss)		5,613,722		774,835		1,485,353		4,070,970			11,944,880

	For the Six Months Ended June 30, 2006
	Pain Mgmt		Surgeries		Ancillary Services		Corporate			Totals
Revenues	$	25,714,642	$	3,485,077	$	17,700,067	$	—		$	46,899,786
Operating income (loss)		7,756,394		655,994		6,426,784		(8,401,074	)		6,438,098

	For the Six Months Ended June 30, 2005
	Pain Mgmt		Surgeries		Ancillary Services		Corporate			Totals
Revenues	$	19,055,347	$	3,705,033	$	7,364,212	$	—		$	30,124,592
Operating income (loss)		9,816,015		1,205,473		2,727,527		(15,995,036	)		(2,246,021	)

These items, appearing in the Statements of Operations, are not allocated to the company’s operating segments: interest expense, derivative expense (benefit), and other income. Total assets of the operating segments have materially changed since December 31, 2005 as a result of the company’s acquisitions, as described in Note 7.

Pain management revenue, expense and income are attributable to five owned and eleven managed practices that primarily offer physician services for pain management and physiatry. With respect to one of our managed practices, we only include the revenue recognized from management fees earned. Surgery revenue, expense and income are attributable to two owned and one managed physician practices that offer surgical physician services, including minimally invasive spine surgery. Ancillary service revenue, expense and income are attributable to two managed practices that primarily offer orthopedic rehabilitation services. We have 34 practices under limited management agreements, including orthopedic rehabilitation, electrodiagnostic medicine and real estate services.

(4) Income Per Common Share

Basic income per common share is computed by dividing income available to common shareholders by the weighted average number of common shares outstanding. The weighted average shares used in computing diluted income per common share include the dilutive effect of stock options, warrants, convertible debt, and other common stock equivalents using the treasury stock method, and income is adjusted for the diluted computation for the assumed non-payment of interest, etc., upon conversion. The shares used in the computation of the Company’s basic and diluted income per common share are reconciled as follows:


	For the Three Months Ended June 30,					For the Six Months Ended June 30,
	2006			2005		2006		2005
Basic income (loss) per common share:
Net income (loss) available to common shareholders	$	(806,091	)	$	11,110,827	$	11,082,008	$	(16,652,805	)

Basic weighted average common shares outstanding		64,482,619			51,621,811		63,011,366		44,412,972

Basic income (loss) per common share	$	(0.01	)	$	0.22	$	0.18	$	(0.37	)

Diluted income (loss) per common share:

Net income (loss) available to common shareholders	$	(806,091	)	$	11,110,827	$	11,082,008	$	(16,652,805	)
Plus impact of assumed conversions
Interest expense on 7.5% convertible note due 2006, net of tax		—			104,114		225,000		—
Interest expense on 7.25% convertible note due 2007, net of tax		—			—		—		—
Interest expense on 7.5% convertible note due 2007, net of tax		—			17,438		33,750		—

Net income (loss) available to common shareholders plus assumed conversions	$	(806,091	)	$	11,232,379	$	11,340,758	$	(16,652,805	)

Basic weighted average common shares outstanding		64,482,619			51,621,811		63,011,366		44,412,972
Plus incremental shares from assumed conversions
7.5% convertible note due 2006		—			4,713,242		4,713,242		—
7.25% convertible note due 2007		—			—		—		—
7.5% convertible note due 2007		—			789,474		789,474		—
Employee stock option plan for vested, in the money options		—			3,174,115		2,612,773		—
Warrants issued, outstanding, and in the money		—			1,505,231		256,776		—
Contingent shares for acquisitions		—			—		335,000		—
Initial shares for acquisitions, weighted		—			—		—		—

Diluted weighted average common shares outstanding		64,482,619			61,803,873		71,718,631		44,412,972

Diluted income (loss) per common share	$	(0.01	)	$	0.18	$	0.16	$	(0.37	)

	For the Three Months Ended March 31,
		2006		2005
Basic income (loss) per common share:
Net income (loss) available to common shareholders	$	11,888,099	$	(27,763,632)
Basic weighted average common shares outstanding		61,598,932		44,412,972
Basic income (loss) per common share	$	0.19	$	(0.63)
Diluted income (loss) per common share:
Net income (loss) available to common shareholders	$	11,888,099	$	(27,763,632)
Plus impact of assumed conversions
Interest expense on 7.5% convertible note due 2006, net of tax		112,500		—
Interest expense on 7.25% convertible note due 2007, net of tax		—		—
Interest expense on 7.5% convertible note due 2007, net of tax		16,875		—
Net income (loss) available to common shareholders plus assumed conversions	$	12,017,474	$	(27,763,632)
Basic weighted average common shares outstanding		61,598,932		44,412,972
Plus incremental shares from assumed conversions
7.5% convertible note due 2006		4,713,242		—
7.25% convertible note due 2007		—		—
7.5% convertible note due 2007		789,474		—
Employee stock option plan for vested, in the money options		3,709,895		—
Warrants issued, outstanding, and in the money		842,784		—
Contingent shares for acquisitions		—		—
Initial shares for acquisitions, weighted		—		—
Diluted weighted average common shares outstanding		71,654,327		44,412,972
Diluted income (loss) per common share	$	0.17	$	(0.63)

Potentially dilutive shares for the three months ended March 31, 2006, of approximately 10,055,395 shares, were included in diluted weighted average common shares outstanding for the diluted per share calculation. Potentially dilutive shares for the three months ended March 31, 2005, of approximately 11,308,249 shares, were anti-dilutive.

Weighted average common shares outstanding, assuming dilution, includes the incremental shares that would be issued upon the assumed exercise of stock options, warrants, as well as the assumed conversion of the convertible notes. Certain of the Company’s stock options and warrants were excluded from the calculation of diluted earnings per share because they were anti-dilutive, but these options could be dilutive in the future. The 7.5% convertible debenture notes dated February 27, 2004 and July 1, 2004 that are anti-dilutive were excluded from the calculation of diluted earnings per share. If the convertible notes had been dilutive, net income (loss) would have been adjusted for the net after tax interest cost that the Company would not have paid assuming the convertible debentures were converted at the beginning of the year.

(5) Income Taxes

The income tax provision for the three months ended March 31, 2006 and 2005 consists of the following:

	2006	2005
Computed “expected” tax expense (benefit)	$ 4,550,982	$ (11,321,897)
Increase (reduction) in income tax expense resulting from:
Derivative (benefit) expense	(3,534,149)	6,201,225
Derivative interest expense	133,105	178,739
State income taxes, net of federal income tax benefit	175,802	(682,122)
Assets acquired with no tax basis	82,617	67,977
Other, net	(67,718)	16,880
Other state taxes	(43,407)	-

Unamortized deferred taxes	(91,193)	-
Income from foreign subsidiary, net	(43,120)	(11,567)
Amortization of acquisition intangibles	25,688	14,700
Total	$ 1,188,607	$ (5,536,065)

Potentially dilutive shares at June 30, 2006 of approximately 1,781,419 shares were not included in the diluted weighted average shares as their inclusion would be anti-dilutive.

Potentially dilutive securities for options, warrants, and contingent shares were 1,395,781, 162,305, and 223,333 respectively.

Potentially dilutive shares at June 30, 2005 of approximately 9,973,026 shares were not included in the diluted weighted average shares as their inclusion would be anti-dilutive.

Potentially dilutive securities for options, warrants, and convertible debentures were 3,063,152, 1,407,158 and 5,502,716 respectively.

Diluted weighted average common shares outstanding includes the incremental shares that would be issued upon the assumed exercise of stock options, warrants, as well as the assumed conversion of the convertible notes. As described above, certain of the Company’s stock options and warrants were excluded from the calculation of diluted earnings per share for certain periods because they were anti-dilutive, but these shares could be dilutive in the future. The 7.5% convertible debenture notes dated February 27, 2004 and July 1, 2004 that are anti-dilutive were excluded from the calculation of diluted earnings per share. If the convertible notes had been dilutive, net income (loss) would have been adjusted for the net after tax interest cost that the Company would not have paid assuming the convertible debentures were converted at the beginning of the year.

(5) Income Taxes

The income tax provision for the three and six months ended June 30, 2006 and 2005 consists of the following:


	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2006			2005			2006			2005
Computed “expected” tax expense (benefit)	$	(166,727	)	$	5,325,022		$	4,279,353		$	(5,996,875	)
Increase (reduction) in income tax expense resulting from:
Derivative (benefit) expense		(33,455	)		(1,697,331	)		(3,567,603	)		4,503,894
Derivative interest expense		177,271			252,095			310,376			430,834
State income taxes, net of federal income tax benefit		577			564,282			138,615			(117,840	)
Assets acquired with no tax basis		—			75,375			82,617			143,352
Other, net		131,494			31,560			54,409			51,573
State taxes deferred		26,337			—			26,337			—
Income from flowthroughs		180,220			—			180,220			—

Total	$	315,717		$	4,551,003		$	1,504,324		$	(985,062	)

(6) Other Assets

The Company isentered into a ~~distributor~~ ~~for~~distribution ~~the~~agreement ~~sale~~with ofMedX96, ~~MedX~~Inc. ~~equipment~~on inMay 1, ~~North~~2002. ~~America~~The ~~under~~agreement anallowed ~~agreement expiring~~the onCompany ~~July~~to ~~28,~~market ~~2013.~~and sell MedX equipment isin ~~used~~return tofor ~~provide~~a ~~orthopedic rehabilitation~~50% ~~services~~commission inof ~~our~~the ~~owned,~~gross ~~managed~~selling ~~and~~price ~~limited managed physician~~of ~~practices.~~all ~~The~~equipment ~~agreement~~sold ~~provides~~to ~~for~~ the Company toand ~~repurchase~~our ~~MedXs’~~affiliates. ~~right~~MedX96, to Inc. received 15% of the ~~gross~~revenue ~~collections~~ generated by the ~~limited~~Company ~~managed~~and ~~orthopedic rehabilitation~~our ~~practices~~affiliates. InThe ~~addition,~~equipment ~~the~~is ~~Company~~used ~~receives~~to aprovide ~~25%~~orthopedic ~~commission~~rehabilitation ~~on all~~services ~~MedX~~in ~~products~~our ~~purchased~~owned, ~~for~~managed, ~~resale.~~and ~~This contract right is being amortized~~limited ~~over~~managed ~~the~~physician ~~contract term of ten years.~~

On12 April 29, 2004, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company X, Inc. (PNAC X), and Denver Pain Management (DPM), a Colorado corporation. Effective August 27, 2004, DPM and PNAC X entered into an addendum to their agreement whereby the initial consideration to be paid to the shareholders was reduced from $3,750,000 to $700,000 of which $100,000 is payable in cash and the balance of $600,000, is payable with 200,000 shares of common stock priced at $3.00 per share. In addition, the former owners of DPM may receive up to $6,800,000 in additional consideration if certain net earnings goals are achieved in each of the first three fiscal years following the closing. DPM is a pain management practice located in Denver, Colorado. The center is run by Robert Wright, M.D., a board certified pain management physician. This contract right is being amortized over the contract term of nine years.

practices. The contract was amended on July 28, 2003 and provides for the Company to repurchase MedXs’ right to 15% of the gross collections generated by the limited managed orthopedic rehabilitation practices. In addition, the Company receives a 25% commission on all MedX products purchased for resale. This contract right is being amortized over the contract term of ten years.

On April 29, 2004, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company X, Inc. (PNAC X), and Denver Pain Management (DPM), a Colorado corporation. Effective August 27, 2004, DPM and PNAC X entered into an addendum to their agreement whereby the initial consideration to be paid to the shareholders was reduced from $3,750,000 to $700,000 of which $100,000 is payable in cash and the balance of $600,000, is payable with 200,000 shares of common stock priced at $3.00 per share. In addition, the former owners of DPM may receive up to $6,800,000 in additional consideration if certain net earnings goals are achieved in each of the first three fiscal years following the closing. DPM is a pain management practice located in Denver, Colorado. The center is run by Robert Wright, M.D., a board certified pain management physician.

The addendum also reduced the contract term from a period of forty years to nine years. In accordance with EITF 97-2 the agreement is for a term less than that requiring consolidation in the Company’s financials. The management agreement is subsequently treated as an intangible asset contract right. This contract right is being amortized over the contract term of nine years.

The Company has costs associated with closing acquisitions. These costs are deferred as an asset until the acquisition is closed, at which time they are either allocated to the acquisition costs or expensed if a potential acquisition is not closed.

The Company purchased from Rehab Management Group, Inc., a South Carolina based corporation (“RMG”), all rights, title and interest that RMG owns or acquires and all management fees, revenues, compensation and payments of any kind with respect to three electro-diagnostic management agreements with physician’s practices.

The table below summarizes the other assets at ~~March 31~~June 30, 2006 and December 31, 2005:

	~~2006~~	2006		~~2005~~					2005
Asset	~~Total Cost~~	~~AccumulatedAmortization~~Total Cost	~~Net Value~~	~~Total Cost~~	~~AccumulatedAmortization~~Accumulated Amortization	~~Net Value~~	Net Value		Total Cost		Accumulated Amortization		Net Value
MedX Distribution right	~~$ 2,212,673~~	$ ~~637,148~~	~~$ 1~~2,~~575~~212,~~525~~673	~~$ 2,212,673~~	$ ~~581,831~~	~~$ 1~~690,~~630,842~~859	$	1,521,814	$	2,212,673	$	581,831	$	1,630,842
Deferred acquisition costs	~~475,958~~	~~90,624~~	~~385~~65,~~334~~891	~~475,958~~	-	~~475,958~~—		65,891		475,958		—		475,958
Contract Right – DPM	~~10,467,442~~	~~1,010,885~~	911,~~456~~958,~~557~~485	~~6,026,200~~	~~677,124~~	51,~~349~~365,~~076~~473		10,593,012		6,026,200		677,124		5,349,076
Contract Right – APG	~~482,107~~	~~45,643~~	~~436~~482,~~464~~107	~~486,023~~	~~34,452~~	~~451~~56,~~571~~834		425,273		486,023		34,452		451,571
Contract Right – SPA	~~1,419,471~~	~~151,177~~	1,~~268~~419,~~294~~471	~~1,433,132~~	~~118,657~~	1183,~~314,475~~697		1,235,774		1,433,132		118,657		1,314,475
Contract Right – SCPI	~~1,041,546~~	~~110,956~~	~~930~~1,~~590~~041,546	~~1,051,564~~	~~87,095~~	~~964~~135,~~469~~267		906,279		1,051,564		87,095		964,469
Physician practice & surgery center acquisitions	2,483,921	597,527	1,886,394	2,161,757	513,326	1,648,431
Physician practice and surgery center acquisitions			2,860,709			711,502		2,149,207		2,161,757		513,326		1,648,431
Total	~~$18,583,118~~	$ ~~2,643,960~~	~~$ 15~~20,~~939~~040,~~158~~882	~~$13,847,307~~	$ ~~2,012,485~~	~~$11~~3,~~834~~143,~~822~~632	$	16,897,250	$	13,847,307	$	2,012,485	$	11,834,822

12(7) Acquisitions

~~(7) Acquisitions~~ The Company operates fourteen practices in states with laws governing the corporate practice of medicine. In those states, a corporation is precluded from owning the medical assets and practicing medicine. Therefore, ~~contractual~~ contractual arrangements are effected to allow the Company to manage the practice. FASB Emerging Issues Task Force Issue No. 97-2 (“EITF No. 97-2”) states that ~~consolidation~~ can occur when a physician practice management entity establishes an other than temporary controlling financial interest in a physician practice through contractual arrangements. All but one of the management services agreements between the Company and the physician satisfies all of the criteria of EITF No. 97-2. The Company includes revenue with respect to these practices in the consolidated financials in accordance with EITF No. 97-2.

On January 3, 2006, the Company closed an acquisition pursuant to an Asset Purchase Agreement with its wholly-owned subsidiary, PainCare Surgery Centers III, Inc. (PCSC III), and the members of Center for Pain Management ASC, LLC (CPMASC). The Asset Purchase Agreement provides for the purchase of 100% ownership of CPMASC by PCSC III, a Florida corporation. In exchange for this acquisition the members of CPMASC received 1,021,942 shares of common stock of the Company priced at $3.44 per share and $3,750,000 in cash. In addition, the former members of CPMASC will receive the remaining balance of the purchase price in the form of a promissory note for $7,500,000 plus interest, due in January 2007. CPMASC is a fully accredited ambulatory surgery center with four locations in Maryland. The members of CPMASC did have a prior relationship with the Company from the acquisition of Center for Pain Management, LLC in December 2004.

CPMASC was purchased on January 3, 2006 and utilized the purchase method of accounting.Purchase price allocation:

Cash Consideration	$ 3,750,000
Promissory Notes	7,500,000
Stock Consideration	3,515,480
Acquisition Costs	279,923
Less:
Cash	477,845
Accounts receivable	767,718
Property and equipment	263,563
Prepaid and deposits	80,035
Other assets	47,459
Imputed interest on notes payable	215,489
Plus:
Accounts payable and accrued liabilities	86,046
Other liabilities	696,009
Goodwill	$ 13,975,349

consolidation can occur when a physician practice management entity establishes an other than temporary controlling financial interest in a physician practice through contractual arrangements. All but one of the management services agreements between the Company and the physician satisfies all of the criteria of EITF No. 97-2. The Company includes revenue with respect to these practices in the consolidated financials in accordance with EITF No. 97-2.

CPMASC was purchased on January 3, 2006 and utilized the purchase method of accounting. During the second quarter of 2006, the purchase price was reduced by $376,788 due to a change in identifiable intangible assets and an addition of $150,715 for deferred taxes. The net change was a $226,073 reduction in the purchase price.

Purchase price allocation:


Cash Consideration	$	3,750,000
Promissory Notes		7,500,000
Stock Consideration		3,515,480
Acquisition Costs		279,923
Less:
Cash		477,845
Accounts receivable		767,718
Property and equipment		263,563
Prepaid and deposits		80,035
Other assets		47,459
Imputed interest on notes payable		215,489
Identifiable intangible assets		376,788
Plus:
Accounts payable and accrued liabilities		86,046
Other liabilities		696,009
Deferred taxes		150,715

Goodwill	$	13,749,276

On January 6, 2006, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company XXII, Inc. (PNAC XXII), and REC, Inc. and CareFirst Medical Associates, P.A. (REC/CMA). The Merger Agreement provides for the acquisition of the non-medical assets of REC/CMA by PNAC XXII, a Florida corporation. In exchange for the non-medical assets the shareholders of REC/CMA received 191,131 shares of common stock of the Company priced at $3.51 per share and $625,000 in cash. In addition, the former shareholders of REC/CMA may receive up to $1,250,000 in additional consideration if certain net earnings goals are achieved in each of the first three fiscal years following the closing. REC/CMA is an orthopedic rehabilitation practice located in Whitehouse, Texas. Neither REC, CMA nor its members had any prior relationship with the Company or its affiliates.

REC/CMA was acquired on January 6, 2006 and utilized the purchase method of accounting.Purchase price allocation:

Cash Consideration	$ 625,000
Stock Consideration	670,870
Acquisition Costs	105,493
Less:
Cash	28,106
Accounts receivable	80,841
Property and equipment	56,767
Intangible assets	82,089
Plus:
Accounts payable and accrued liabilities	37,274
Deferred taxes	35,442
Goodwill	$ 1,226,276

On January 20, 2006, the Company closed a merger pursuant to a Merger Agreement with its wholly-owned subsidiary, PainCare Acquisition Company XIX, Inc. (PNAC XIX), and Desert Pain Medicine Group (DPMG). The Merger Agreement provides for the acquisition of the non-medical assets of DPMG by PNAC XIX, a Florida corporation. In exchange for the non-medical assets the shareholder of DPMG received 471,698 shares of common stock of the Company priced at $3.41 per share and $1,500,000 in cash. In addition, the former shareholder of DPMG may receive up to $3,000,000 in additional consideration if certain net earnings goals are achieved in each of the first three fiscal years following the closing. DPMG is a pain management physician practice with four locations in California. Neither DMPG nor its members had any prior relationship with the Company or its affiliates.

DMPG was acquired on January 20, 2006 and utilized the purchase method of accounting.Purchase price allocation:

Cash Consideration	$ 1,500,000
Stock Consideration	1,608,490
Acquisition Costs	110,845
Less:
Cash	77,144
Accounts receivable	198,792
Property and equipment	418,384
Deposits and prepaid expenses	27,259
Other assets	8,111
Intangible assets	130,707
Plus:
Accounts payable and accrued liabilities	155,718
Note payable	20,417
Capital lease obligations	62,523
Deferred taxes	134,556
Goodwill	$ 2,732,152

REC/CMA was acquired on January 6, 2006 and utilized the purchase method of accounting. During the second quarter of 2006 $23,257 additional acquisition costs were added to the purchase price.

Purchase price allocation:


Cash Consideration	$	625,000
Stock Consideration		670,870
Acquisition Costs		128,750
Less:
Cash		28,106
Accounts receivable		80,841
Property and equipment		56,767
Intangible assets		82,089
Plus:
Accounts payable and accrued liabilities		37,274
Deferred taxes		35,442

Goodwill	$	1,249,533

DMPG was acquired on January 20, 2006 and utilized the purchase method of accounting. During the second quarter of 2006 $44,155 additional acquisition costs were added to the purchase price.

Purchase price allocation:


Cash Consideration	$	1,500,000
Stock Consideration		1,608,490
Acquisition Costs		155,000
Less:
Cash		77,144
Accounts receivable		198,792
Property and equipment		418,384
Deposits and prepaid expenses		27,259
Other assets		8,111
Intangible assets		130,707
Plus:
Accounts payable and accrued liabilities		155,718
Note payable		20,417
Capital lease obligations		62,523
Deferred taxes		134,556

Goodwill	$	2,776,307

On February 1, 2006, the Company closed a majority interest purchase pursuant to a Membership Interest Purchase Agreement with its wholly-owned subsidiary, PainCare Neuromonitoring I, Inc. (PCN I), and the members of Amphora, LLC (AMP). The Membership Interest Purchase Agreement provides for the purchase of 60% ownership of AMP by PCN I, a Florida corporation. In exchange for the majority interest purchase the members of AMP received 1,035,032 shares of common stock of the Company priced at $3.70 per share and $3,250,000 in cash. In addition, the former members of AMP will receive the remaining balance of the purchase price of $8,500,000 in the form of performance-based installments over four years. AMP is an intraoperative monitoring company based in Denver, Colorado.

Majority interest in AMP was purchased on February 1, 2006 and utilized the purchase method of accounting.~~Purchase~~ During the second quarter of 2006 $250,516 additional acquisition costs were added to the purchase price. ~~allocation:~~

Cash Consideration	$ 3,250,000
Stock Consideration	3,829,618
Acquisition Costs	43,025
Less:
Cash	72,463
Accounts receivable	1,006,114
Property and equipment	176,817
Intangible assets	109,368
Plus:
Accounts payable and accrued liabilities	114,191
Capital lease obligations	66,240
Deferred taxes	114,223
Minority interests	429,985
Goodwill	$ 6,482,520

Purchase price allocation:


Cash Consideration	$	3,250,000
Stock Consideration		3,829,618
Acquisition Costs		293,541
Less:
Cash		72,463
Accounts receivable		1,006,114
Property and equipment		176,817
Intangible assets		109,368
Plus:
Accounts payable and accrued liabilities		114,191
Capital lease obligations		66,240
Deferred taxes		114,223
Minority interests		429,985

Goodwill	$	6,733,036

In January 2006, the Company paid $218,333 in cash and issued 59,654 shares of common stock to the former shareholder of Bone and Joint Surgical Clinic, representing the second of four potential earnout payments.

In January 2006, the Company paid $583,333 in cash and issued 159,381 shares of common stock to the former shareholder of Kenneth M. Alo, M.D., P.A., representing the second of four potential earnout payments.

In January 2006, the Company paid $2,254,500 in cash and issued 615,984 shares of common stock to the former shareholder of Denver Pain Management, representing a portion of potential earnout payments.

In January 2006, the Company paid $2,291,667 in cash and issued 626,138 shares of common stock to the former shareholders of Center for Pain Management, LLC, representing the first of three potential earnout payments.

In March 2006, the Company paid $208,333 in cash and issued 58,194 shares of common stock to the former shareholder of Spine and Pain Center, P.C., representing the second of three potential earnout payments.

In March 2006, the Company issued 176,457 shares of common stock to the former shareholder of the Health Care Center of Tampa, Inc., representing the second of three potential earnout payments. The cash portion of this earnout payment was paid throughout 2005.

In March 2006, the Company paid $252,500 in cash and issued 68,990 shares of common stock to the shareholders of RMG, Inc., representing the second of three potential earnout payments. ~~Following~~ are the summarized unaudited pro forma results of operations for the three months ended March 31, 2006 and March 31, 2005, assuming the acquisitions of Center for Pain Management ASC, LLC, REC, Inc. and CareFirst Medical, Desert Pain Medicine Group and Amphora, LLC had taken place at the beginning of the year. The unaudited pro forma results are not necessarily indicative of future earnings that would have been reported had the acquisitions been completed when assumed.

Pro Forma Consolidated Statement of Operations
Three Months Ended March 31, 2006
(Unaudited)
	PainCare Historical							Pro Forma Adjustment
			CPMASC(4)	REC (5)	DPMG (6)	AMP (7)			Pro Forma
Revenues	$	23,308,474	$ 16,064	$ 13,761	$ 324,614	$	91,316	$ -	$ 23,754,229
Cost of revenues	4,740,734		1,690	976	64,354	19,617		(25,483)(1)	4,801,888
Gross profit		18,567,740	14,374	12,785	260,260		71,699	25,483	18,952,341
General and administrative expenses		12,606,803	9,528	12,070	174,302		50,182	(234,910) (2)	12,617,975
Depreciation and amortization expense	1,114,831		-	-	-	-		-	1,114,831
Operating income		4,846,106	4,846	715	85,958		21,517	260,393	5,219,535
Interest expense		(1,932,194)	(24)	(2)	(424)		-	-	(1,932,644)
Derivative benefit (expense)		10,394,555	-	-	-		-	-	10,394,555
Other income	142,109		-	-	-	-		-	142,109
Income before taxes		13,450,576	4,822	713	85,534		21,517	260,393	13,823,555
Provision for income taxes	1,188,607		-	-	-	-		39,405(3)	1,228,012
Income before minority interests’ share		12,261,969	4,822	713	85,534		21,517	220,988	12,595,543
Minority interests’ share	373,870		-	-	-	8,607		-	382,477
Net income	$ 11,888,099		$ 4,822	$ 713	$ 85,534	$ 12,910		$ 220,988	$ 12,213,066
Basic income per common share									$ 0.20
Basic weighted average common shares outstanding									61,732,711
Diluted income per common share									$ 0.17
Diluted weighted average common shares outstanding									71,788,106

In April 2006, the Company paid $128,700 in cash and issued 35,165 shares of common stock to the former shareholder of Pain and Rehabilitation Network, Inc., representing the final earnout payment.

In April 2006, the Company paid $458,333 in cash and issued 183,333 shares of common stock to the former shareholder of Medical Rehabilitation Specialists, Inc., representing the final earnout payment.

In May 2006, the Company paid $814,125 in cash and issued 325,650 shares of common stock to the former shareholder of Denver Pain Management.

In May 2006, the Company paid $350,000 in cash and issued 155,556 shares of common stock to the former shareholder of Colorado Pain Specialists, P.C., representing the first of three potential earnout payments.

Following are the summarized unaudited pro forma results of operations for the six months ended June 30, 2006 and June 30, 2005, assuming the acquisitions of Center for Pain Management ASC, LLC, REC, Inc. and CareFirst Medical, Desert Pain Medicine Group and Amphora, LLC had taken place at the beginning of the year. The unaudited pro forma results are not necessarily indicative of future earnings that would have been reported had the acquisitions been completed when assumed.

Pro Forma Consolidated Statement of Operations

Six Months Ended June 30, 2006

(Unaudited)


	PainCare Actual			CPMASC⁽⁴⁾		REC⁽⁵⁾		DPMG⁽⁶⁾		AMPHORA⁽⁷⁾		Pro forma Adjustments			Pro forma
Revenues	$	46,899,786		$	16,064	$	13,761	$	324,614	$	91,316	$	—		$	47,345,541

Cost of revenues		10,110,740			1,690		976		64,354		19,617		(25,483	)(1)		10,171,894

Gross profit		36,789,046			14,374		12,785		260,260		71,699		25,483			37,173,647

Operating expenses:

General & administrative		28,061,948			9,528		12,070		174,302		50,182		(234,910	)(2)		28,073,120
Depreciation & amortization		2,289,000			—		—		—		—		—			2,289,000

Operating income		6,438,098			4,846		715		85,958		21,517		260,393			6,811,527

Interest expense		4,027,915			24		2		424		—		—			4,028,365
Derivative expense (benefit)		(10,492,951	)		—		—		—		—					(10,492,951	)
Other income		453,537			—		—		—		—		—			453,537

Income before taxes		13,356,671			4,822		713		85,534		21,517		260,393			13,729,650

Provision for income taxes		1,504,324			—		—		—		—		39,405	(3)		1,543,729

Income before minority interests’ share		11,852,347			4,822		713		85,534		21,517		220,988			12,185,921
Less: Minority interests’ share		770,339			—		—		—		8,607		—			778,946

Net income	$	11,082,008		$	4,822	$	713	$	85,534	$	12,910	$	220,988		$	11,406,975

Basic earnings per share															$	0.18

Basic weighted average shares outstanding																63,145,145

Diluted earnings per share															$	0.16

Diluted weighted average shares outstanding																71,852,410

Footnotes to Unaudited Pro Forma Financial Statements:

1) Adjustment for non-recurring cost of revenues. 2) Adjustment for non-recurring general and administrative expenses. 3) Represents the provision for income taxes at an effective rate of 35%. 4) Represents the results from the period beginning on January 1, 2006 and ending on January 2, 2006. 5) Represents the results from the period beginning on January 1, 2006 and ending on January 5, 2006. 6) Represents the results from the period beginning on January 1, 2006 and ending on January 31, 2006. 7) Represents the results from the period beginning on January 1, 2006 and ending on January 31, 2006.

152) Adjustment for non-recurring general and administrative expenses.

~~Pro Forma Consolidated Statement of Operations Three Months Ended March 31, 2005 (Unaudited~~3) ~~PainCare Historical Pro~~ ~~Forma Adjustment CPMASC(4) REC~~Represents ~~(5) DPMG (6) AMP (7) Pro Forma Revenues $ 14,236,740 $1,477,575 $~~the ~~235,314 $~~provision ~~914,156 251,855 $ - $~~for 17,115,640 Cost of revenues 2,581,223 155,475 16,686 181,228 54,105 (116,913)(1) 2,871,804 Gross profit 11,655,517 1,322,100 218,628 732,928 197,750 116,913 14,243,836 General and administrative expenses 7,195,508 876,285 206,406 490,857 138,405 (1,052,212) (2) 7,855,249 Compensation expense 18,138,790 - - - - - 18,138,790 Depreciation and amortization expense 512,119 - - - - - 512,119 Operating income ~~(loss) (14,190,900) 445,815 12,222 242,071 59,345 1,169,125 (12,262,322) Interest~~ expense (898,920) (2,295) (90) (1,193) - - (902,498) Derivative benefit (expense) (18,238,898) - - - - - (18,238,898 ) Other income 29,021 - - - - - 29,021 Income (loss) before taxes ~~(33,299,697) 443,520 12,132 240,878 59,345 1,169,125 (31,374,697) Provision~~ ~~for~~at ~~income taxes (5,536,065) - - - - 264,556(3) (5,271,509) Net~~an ~~income (loss) $ (27,763,632) $~~effective ~~443,520 $ 12,132 $~~tax ~~240,878 $ 59,345 $ 904,569 $~~rate ~~(26,103,188) Basic~~of ~~income per common share $ (0~~35%.59) Basic weighted average common shares outstanding 44,546,751 Diluted income per common share $ (0.59) Diluted weighted average common shares outstanding 44,546,751

4) Represents the results from the period beginning on January 1,~~Footnotes~~ to2006 ~~Unaudited~~and ~~Pro~~ending ~~Forma~~on ~~Financial Statements:~~January 2, 2006.

1) Adjustment for non-recurring cost of revenues. 2) Adjustment for non-recurring general and administrative expenses. 3) Represents the provision for income taxes at an effective rate of 35%. 4) Represents the results from the period beginning on January 1, 2005 and ending on March 31, 2005. 5) Represents the results from the period beginning on January 1, ~~2005~~2006 and ending on ~~March 31, 2005. 6) Represents the results from the period beginning on~~ January 15, ~~2005 and ending on March 31, 2005~~2006. ~~7) Represents the results from the period beginning on January 1, 2005 and ending on March 31, 2005.~~

6)	Represents the results from the period beginning on January 1, 2006 and ending on January 31, 2006.

7)	Represents the results from the period beginning on January 1, 2006 and ending on January 31, 2006.

Pro Forma Consolidated Statement of Operations

Six Months Ended June 30, 2005

(Unaudited)


	PainCare Actual			CPMASC⁽⁴⁾		REC⁽⁵⁾		DPMG⁽⁶⁾		AMPHORA⁽⁷⁾		Pro forma Adjustments			Pro forma
Revenues	$	30,124,593		$	2,987,944	$	110,060	$	2,124,748	$	328,739	$	—		$	35,676,084

Cost of revenues		5,015,781			314,374		3,464		421,228		11,221		(887,500	)(1)		4,878,568

Gross profit		25,108,812			2,673,570		106,596		1,703,520		317,518		887,500			30,797,516

Operating expenses:

General & administrative		14,338,897			1,772,052		103,859		1,140,879		240,056		(1,425,545	)(2)		16,170,198
Compensation expense		11,977,160			—		—		—		—		—			11,977,160
Depreciation & amortization		1,038,776			—		—		—		—		—			1,038,776

Operating income (loss)		(2,246,021	)		901,518		2,737		562,641		77,462		2,313,045			1,611,382

Interest expense		2,191,410			4,625		—		2,778		—		—			2,198,813
Derivative expense		13,246,747			—		—		—		—		—			13,246,747
Other income		143,383			—		—		—		—		—			143,383

Income (loss) before taxes		(17,540,795	)		896,893		2,737		559,863		77,462		2,313,045			(13,690,795	)

Provision (benefit) for income taxes		(985,062	)		—		—		—		—		315,672	(3)		(669,390	)

Income before minority interests’ share		(16,555,733	)		896,893		2,737		559,863		77,462		1,997,373			(13,021,405	)
Less: Minority interests’ share		97,072			—		—		—		—		—			97,072

Net income (loss)	$	(16,652,805	)	$	896,893	$	2,737	$	559,863	$	77,462	$	1,997,373		$	(13,118,477	)

Basic earnings per share															$	(0.29	)

Basic weighted average shares outstanding																44,546,751

Diluted earnings per share															$	(0.29	)

Diluted weighted average shares outstanding																44,546,751

Footnotes to Unaudited Pro Forma Financial Statements:

1)	Adjustment for non-recurring cost of revenues.

2)	Adjustment for non-recurring general and administrative expenses.

3)	Represents the provision for income taxes at an effective tax rate of 35%.

4)	Represents the results from the period beginning on January 1, 2005 and ending on June 30, 2005.

5)	Represents the results from the period beginning on January 1, 2005 and ending on June 30, 2005.

6)	Represents the results from the period beginning on January 1, 2005 and ending on June 30, 2005.

7)	Represents the results from the period beginning on January 1, 2005 and ending on June 30, 2005.

(8) Related Party Transactions

During the ~~three~~six months ended ~~March 31~~June 30, 2006 and 2005 the Company had transactions with companies owned by certain shareholders of the Company. The following is a summary of transactions with these entities for the ~~three~~six months ended ~~March 31~~June 30, 2006 and 2005:

			Expense related to the three months ended March 31:
					Expense Related to the Six MonthsEnded June 30:
	Type of Practice				ReportedAs
Practice Name		Type of Practice		Type of Related Party Transaction	2006		2005		ReportedAs
Practice Name		Type of Related Party Transaction	2006	2005
Associated Physicians Group, Ltd.		Managed Practice		The Company leases its office space from a limited liability company partially owned by a certain shareholder of the Company. The lease commenced January 1, 2005 for an initial term of ten years with the option to renew for two five year periods.	$	73,590	$	24,057	G&A
Associated Physicians Group, Ltd.	Managed Practice	The Company leases its office space from a limited liability company partially owned by a certain shareholder of the Company. The lease commenced January 1, 2005 for an initial term of ten years with the option to renew for two five year periods.	$ 36,795	$ -	G&A
The Center for Pain Management, LLC		Managed Practice		The Company leases certain employees from a limited liability company owned by certain shareholders of the Company. The Company also charged this entity for the use of its equipment and certain services.	$	1,154,901	$	—	G&A
The Center for Pain Management, LLC	Managed Practice	The Company leases certain employees from a limited liability company owned by certain shareholders of the Company. The Company also charged this entity for the use of its equipment and certain services.	$ 571,265	$ -	G&A
				The Company has an agreement to outsource its billing and collections function to a limited liability company owned by certain shareholders of the Company. The Company is charged a fee of 8% of net collections under this arrangement.	$	404,411	$	366,107	G&A
		The Company has an agreement to outsource its billing and collections function to a limited liability company owned by certain shareholders of the Company. The Company is charged a fee of 8% of net collections under this arrangement.	$ 191,889	$ 159,224	G&A
				* (A)
		* (A)
				* (B)
		* (B)
Dynamic Rehabilitation Centers, Inc.		Managed Practice		The Company leases its office space from a limited liability company partially owned by certain shareholders of the Company. The lease associated with the Redford location has a ten year term commencing January 1, 2000 with no option to renew. The lease associated with the Clinton Township location commenced October 8, 2004 and expires December 31, 2014. The lease was amended in July 2005 for the occupancy of additional space by the Company.	$	84,444	$	84,444	G&A
Dynamic Rehabilitation Centers, Inc.	Managed Practice	The Company leases its office space from a limited liability company partially owned by certain shareholders of the Company. The lease associated with the Redford location has a ten year term commencing January 1, 2000 with no option to renew. The lease associated with the Clinton Township location commenced October 8, 2004 and expires December 31, 2014. The lease was amended in July 2005 for the occupancy of additional space by the Company.	$ 42,222	$ 42,222	G&A
				The Company provides services for billing, accounting and management oversight to a limited liability company owned by certain shareholders of the Company.	$	495,007	$	—	G&A
		The Company provides services for billing, accounting and management oversight to a limited liability company owned by certain shareholders of the Company.	$ 217,387	$ -	G&A
				* (C)
		* (C)
Health Care Center of Tampa, Inc.		Owned Practice		The Company has an agreement to outsource its billing and collections function to a limited liability company owned by a certain shareholder of the Company. The Company is charged a fee of 10% of net collections under this arrangement.	$	159,418	$	63,888	G&A
Health Care Center of Tampa, Inc.	Owned Practice	The Company has an agreement to outsource its billing and collections function to a limited liability company owned by a certain shareholder of the Company. The Company is charged a fee of 10% of net collections under this arrangement.	$ 101,431	$ 35,118	G&A
Rick Taylor, D.O., P.A.		Managed Practice		The Company has an agreement to lease an aircraft from a limited liability company owned by a certain shareholder of the Company. The lease agreement was entered into in June 2003 for a period of 60 months. Effective January 1, 2005, the lease payment was lowered to a nominal amount of $1 per year; the Company will continue to pay a third party provider for the related fuel and maintenance cost. Effective January 1, 2004 the lease fee was reduced from the original amount of $12,000 per month to $7,000 per month; maintenance, fuel, insurance recurring training, hangar rental and any other fees required to maintain the aircraft were the responsibility of the Company.	$	16,042	$	48,828	G&A
Rick Taylor, D.O., P.A.	Managed Practice	The Company has an agreement to lease an aircraft from a limited liability company owned by a certain shareholder of the Company. The lease agreement was entered into in June 2003 for a period of 60 months. Effective January 1, 2005, the lease payment was lowered to a nominal amount of $1 per year; the Company will continue to pay a third party provider for the related fuel and maintenance cost. Effective January 1, 2004 the lease fee was
Spine and Pain Center, P.C.		Managed Practice		The Company leases its office space from a limited liability company partially owned by certain shareholders of the Company. The lease commenced December 23, 2003 and expires December 31, 2008, with no option to renew.	$	63,348	$	61,032	G&A

1620

		reduced from the original amount of $12,000 per month to $7,000 per month; maintenance, fuel, insurance recurring training, hangar rental and any other fees required to maintain the aircraft were the responsibility of the Company.	$ 9,664	$ 20,150	G&A
PSHS Alpha Partners, Ltd. d/b/a Lake Worth Surgical Center				The Company, through a subsidiary, is the majority partner of the PSHS Alpha Partners, Ltd. Partnership Dr. Merrill Reuter, the Company’s chairman, is a minority partner of partnership. The Company owns 67.5% and Dr. Reuter owns 9.75% of the partnership. Dr. Reuter received distributions from the partnership representing his share of the profits of the surgery center. These distributions are reported as a reduction in minority interest on the balance sheet.		$	76,538	$	27,924	BS
Spine and Pain Center, P.C.	Managed Practice	The Company leases its office space from a limited liability company partially owned by certain shareholders of the Company. The lease commenced December 23, 2003 and expires December 31, 2008, with no option to renew.	$ 31,674	$ 34,969	G&A
The Center for Pain Management ASC, LLC		Managed Practice		The Company leases certain employees from a limited liability company owned by certain shareholders of the Company. The Company also charged this entity for the use of its equipment and certain services.		$	614,432	$	—	G&A
		The Company, through a subsidiary, is the majority partner of the PSHS Alpha Partners, Ltd. Partnership Dr. Merrill Reuter, the Company’s chairman, is a minority partner of partnership. The Company owns 67.5% and Dr. Reuter owns 9.75% of the partnership. Dr. Reuter receives distributions from the partnership representing his share of the profits of the surgery center. These distributions are reported as a reduction in minority interest on the balance sheet.	$ 29,250	$ -	Minority Interest
				The Company has an agreement to outsource its billing and collections function to a limited liability company owned by certain shareholders of the Company. The Company is charged a flat fee of $40,000 per month under this arrangement.		$	240,000	$	—	G&A
				* (A)
				* (B)
Georgia Pain Physicians, P.C.		Managed Practice		The Company has an agreement to lease RF equipment from a limited partnership wholly owned by Dr. Windsor. The lease commenced February 1, 2006 with no expiration date.		$	8,500	$	—	G&A

(A)

The Company has the option to purchase a “Competitive Business Opportunity” (CBO) from shareholders of the Company who are currently operating a competitive rehabilitation clinic that fall outside a ten mile radius from the Center for Pain Management, LLC clinics. The Company has an option to purchase the CBO at market rates similar to the original acquisition. There is no guarantee that the option will be exercised by the Company, nor is the purchase price discounted for the Company should they chose to execute the option to purchase.

(B)

The Company has the option to purchase a “Competitive Business Opportunity” (CBO) from shareholders of the Company who are currently operating a competitive surgery center that fall outside a ten mile radius from the Center for Pain Management, LLC clinics. The Company has an option to purchase the CBO at market rates similar to the original acquisition. There is no guarantee that the option will be exercised by the Company, nor is the purchase price discounted for the Company should they chose to execute the option to purchase.

(C)

The Company has the option to purchase a “Competitive Business Opportunity” (CBO) from shareholders of the Company who are currently operating competitive rehabilitation clinics that fall outside a ten mile radius from the Dynamic Rehabilitation Centers, Inc. The Company has an option to purchase the CBO at market rates similar to the original acquisition. There is no guarantee that the option will be exercised by the Company, nor is the purchase price discounted for the Company should they chose to execute the option to purchase.

(9) Due from Stockholders

The balance in due from stockholders at ~~March 31~~June 30, 2006 and December 31, 2005 consists of the following:

Practice/Stockholder	~~2006~~	~~2005~~2006		2005
Merrill Reuter, M.D.	~~$ 433,165~~	$ ~~427,553~~	438,776	$	427,553
John Vick	~~150,000~~	-	213,000		—
Saqib Khan, M.D.	~~452,846~~	-	863,768		—
Robert Windsor, M.D.	~~150,000~~	-	150,000		—
Jeff & Michael Wayne	450,000	-
Kenneth Alo, M.D.			642,876		—
Rick Taylor, D.O.	~~200,000~~	-	300,000		—
Bradley Vilims, M.D.	~~325,000~~	-	100,000		—
Kenneth Alo, M.D.	442,876	-
Christopher Cenac, M.D.			25,000
Total	~~$ 2,603,887~~	$ ~~427,553~~	2,733,420	$	427,553

Pursuant to a Construction Development & Leasing Agreement, Merrill Reuter, M.D., Chairman of the Board of the Company and President of AOSF, is obligated, subject to conditions, to pay the Company’s subsidiary, Caperian, Inc. (“Caperian”), $450,000 for real estate development and construction oversight services relating to a planned medical office and ambulatory surgery facility on land that the agreement anticipates Dr. Reuter will acquire. Fifty percent of the amount owed is due upon commencement of construction of the facility and fifty percent upon completion. Upon completion of the facility, Caperian is also entitled to earn leasing fees from Dr. Reuter for procuring tenants to lease space in the facility. Dr. Reuter currently owns approximately 4.5% of the outstanding shares of the Company’s common stock.

The amount due from Saqib Khan, M.D. represents an advance on the contingent earnout cash payment due at the end of the year.

The amount due from Kenneth Alo, M.D. is associated with employee, billing, and other managerial services provided to a company wholly owned by Dr. Alo for which payment is due the Company.

Due from John Vick, Robert Windsor, M.D., Rick Taylor, D.O., Bradley Vilims, M.D., and Christopher Cenac, M.D. represents management fees due the Company from the physician’s respective practice.

(10) Long-Term Debt

Long-term debt consists of the following at ~~March 31~~June 30:

	~~2006~~	2006
PSHS Partnership Ventures, Inc. (a)	~~$ 1,324,886~~	$	1,344,706
Gary J. Lustgarten Profit Sharing and Trust (b)	~~276,018~~		280,147
HBK Investments (c)	~~28,551,647~~		27,898,266
Wells Fargo (d)			66,000
CPM ASC acquisition promissory note (e)			7,392,256
			36,981,375
Less current installments			12,699,012
		$	24,282,363

17At June 30, 2006, the aggregate annual principal payments with respect to the obligations existing at that date as described above, are as follows:

Wells Fargo (d)	64,000
Twelve Months Ending June 30:
CPM ASC acquisition promissory note (e)	7,338,383
2007		$	12,699,012
	37,554,935
2008			8,000,000
Less current installments	12,697,012
2009			17,750,000
	$ 24,857,923
Less unamortized discount			1,467,637
		$	36,981,375

At(a) ~~March~~Note 31payable for acquisition of PSHS Beta Partners, ~~2006~~Ltd. Due on August 1, 2006 without a stated interest rate. Interest is imputed at 6.25% over the ~~aggregate~~period. ~~annual~~The ~~principal payments~~face value is $1,351,458 with ~~respect~~unamortized discount of $6,752. The total amount amortized to ~~the~~interest ~~obligations~~expense ~~existing~~in at2006 ~~that~~was ~~date~~$39,422. asThe ~~described above~~note is secured by the Company’s interest in PSHS Beta Partners, ~~are~~Ltd. asThe ~~follows:~~Company’s carrying amount of the partnership is $1,949,486.

Three Months Ending March 31:
2006	$ 12,697,012
2007	5,000,000
2008	17,000,000
2009	4,500,000
Thereafter	-
Less unamortized discount	1,642,077
	$ 37,554,935

(ab) Note payable for acquisition of PSHS Beta Partners, Ltd. Due on August 1, 2006 without a stated interest rate. Interest is imputed at 6.25% over the period. The face value is $1281,~~351,458~~554 with unamortized discount of $261,~~572~~407. The total amount amortized to interest expense in 2006 was $198,~~602~~213. The note is secured by the Company'’s interest in PSHS Beta Partners, Ltd. The Company'’s carrying amount of the partnership is $1,949,486.

(bc) Note payable ~~for~~to ~~acquisition~~HBK ~~of PSHS Beta Partners, Ltd~~Investments. Due on ~~August~~November 110, 2006 ~~without~~interest ais ~~stated~~either ~~interest~~LIBOR ~~rate~~+ 7.25% ~~Interest~~or ~~is imputed~~Prime at+ 64.255% ~~over~~at the ~~period~~discretion of the company. ~~The~~Interest ~~face~~payments ~~value~~are isdue ~~$281,554~~monthly with ~~unamortized discount~~quarterly principal repayments beginning on April 1, 2006. Certain mandatory prepayments must be made upon the occurrence of $5any sale or disposition of property or assets,~~535~~ upon the receipt of an extraordinary receipts, and upon issuance of any indebtedness other than indebtedness permitted by the agreement, including equipment leases and notes. The ~~total~~agreement ~~amount~~requires ~~amortized~~compliance towith ~~interest~~various ~~expense~~financial and nonfinancial covenants for the Company starting in the second quarter of 2005. ~~was $4~~The primary financial covenants pertain to,~~084~~ among other things, minimum EBITDA, minimum Free Cash Flow, Leverage ratio, and Market Capitalization. The ~~note~~company for the second quarter ended 2006 is ~~secured~~in byviolation of five sections of the agreement. The company has financial restatements that violates the No Material Adverse Change clause. This also caused a violation of the complete disclosure clause. The Disclosures over internal control report one or more material weeknesses. The restatement also caused a violation of meeting certain SEC laws regarding disclosure obligations. The Company's ~~interest~~failed to meet the EBITDA covenant for the quarter ended June 30, 2006. On May 2, 2006, June 20, 2006 and August 9, 2006 we entered into letter agreements with the lenders under the credit facility in ~~PSHS~~consideration ~~Beta~~for ~~Partners~~which we paid $300, ~~Ltd~~000, $150,000 and $100,000 in waiver fees, respectively, to the lenders. The ~~Company's~~Face ~~carrying~~value ~~amount~~ of the ~~partnership~~Note is $29,250,000 with unamortized discount of $1,~~949~~351,~~486~~734. The total amount amortized to interest expense during 2006 was $280,910.

(cd) ~~Note~~Line of credit payable to ~~HBK~~Wells ~~Investments.~~Fargo ~~Due~~for onequipment ~~November 10, 2006 interest is either LIBOR + 7.25% or Prime + 4.5%~~ at ~~the~~The ~~discretion~~Centeno ~~of the Company~~Clinic. ~~Interest~~Due ~~payments are due monthly with quarterly principal repayments beginning~~ on ~~April~~January 125, ~~2006.~~2007 Cetain mandatory prepayments must be made upon the occurrence of any sale or disposition of property or assets, upon the receipt of an extraordinary receipts, and upon issuance of any indebtedness other than indebtedness permitted by the agreement, including equipment leases and notes. The agreement requires compliance with ~~various~~Prime ~~financial~~+ ~~and nonfinancial~~2% ~~covenants~~interest ~~for~~is ~~the~~payable ~~Company starting in the second quarter of 2005~~monthly. ~~The~~ primary financial covenants pertain to, among other things, minimum EBITDA, minimum Free Cash Flow, Leverage ratio, and Market Capitalization. For the year end 2005 the Company was in violation of five sections of the agreement. The ~~Company~~ ~~has~~unused ~~financial~~portion ~~restatements that violate the No Material Adverse Change clause. This also caused a violation~~ of the complete disclosure clause. The disclosures over internal control report one or more material weaknesses. The restatement also caused a violation of meeting certain SEC laws regarding disclosure obligations. The Company failed to meet the EBITDA covenant for the quarter ended March 31, 2006. On May 2, 2006 and June 20, 2006 we entered into letter agreements with the lenders under our $30 million senior credit ~~facility~~line ~~pursuant~~is ~~to which the lenders waived certain historic breaches of the terms of the credit facility in consideration for which we paid a~~ $~~300~~84,000 ~~and a $150,000 waiver fee, respectively, to the lenders~~. The ~~face value~~line of ~~the~~credit ~~note~~ is ~~$30,000,000~~secured ~~with~~by ~~unamortized~~property ~~discount~~for ofuse ~~$1,448,353.~~at ~~The total~~the ~~amount amortized to interest expense during 2005 was $184,284~~practice.

(de) ~~Line~~Note ~~of credit~~ payable ~~to Wells Fargo~~ for ~~equipment~~ atacquisition ~~The~~of ~~Centeno~~CPM, ~~Clinic~~ASC LLC. Due on January 253, 2007 with ~~Prime~~a +stated 2% interest israte ~~payable~~of ~~monthly~~3.45%. ~~The~~Interest ~~unused~~is ~~portion~~imputed ofat 6.75% over the ~~credit~~period. ~~line~~The face value is $867,500,000 with unamortized discount of $107,744. The ~~line~~total ofamount ~~credit~~amortized to interest expense in 2006 was $53,872. The note is secured by ~~property~~the ~~for~~Company’s ~~use~~interest atin PainCare Surgery Centers III, Inc. The Company’s carrying amount of the ~~practice~~partnership is $15,045,403.

~~(e)~~23 Note payable for acquisition of CPM, ASC LLC. Due on January 3, 2007 with a stated interest rate of 3.45% . Interest is imputed at 6.75% over the period. The face value is $7,500,000 with unamortized discount of $161,617. The total amount amortized to interest expense in 2006 was $161,617. The note is secured by the Company's interest in PainCare Surgery Centers III, Inc. The Company's carrying amount of the partnership is $15,045,403.(11) Contractual Obligations

A(11) ~~summary~~Contractual ofObligations ~~our contractual obligations and commercial commitments at March 31, 2006 were as follows:~~

		Less than 1 Year	1-3 Years	3-5 Years
Contractual Obligations	Total				5+ years
Long-term debt	$31,697,012	$ 3,879,012	$ 27,818,000	$ -	$ -
Convertible debentures	17,666,500	14,935,007	2,731,493	-	-
Capital leases (1)	4,278,626	1,562,270	2,426,210	290,146	-
Operating leases	16,214,628	3,325,812	6,728,016	2,884,528	3,276,272
Acquisition consideration (2)	51,988,232	257,400	51,730,832	-	-
Employment agreements (3)	3,000,000	600,000	1,800,000	600,000
Total contractual obligations	$124,844,998

A summary of our contractual obligations and commercial commitments at June 30, 2006 were as follows:

1) Includes the total minimum lease payments due in each year. 2) Includes both the cash and stock components of the acquisition earnouts. One-half of the contractual obligation is a payment in cash, while the remaining half in payable in common stock priced at fair market value. This assumes the practices meet all earnings threshold obligations. 3) Includes guaranteed minimum management bonuses through employment agreements which expire on December 31, 2010.


Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		5+ Years
Long-term debt	$	38,449,012	$	12,699,012	$	25,750,000	$	—	$	—
Convertible debentures		10,455,160		8,955,160		1,500,000		—		—
Capital leases(1)		4,460,104		1,573,664		2,729,608		156,832		—
Operating leases		16,184,529		3,449,246		6,706,364		2,818,541		3,210,378
Acquisition consideration(2)		51,463,330		17,796,666		33,666,664		—		—
Employment agreements(3)		3,000,000		600,000		1,800,000		600,000

Total contractual obligations	$	124,012,135

~~(12~~1) ~~Private~~Includes ~~Placement Offering~~the total minimum lease payments due in each year.

On2) ~~January~~Includes ~~30,~~both ~~2006,~~ the ~~Company~~cash and astock ~~group~~components of ~~accredited~~the ~~investors~~acquisition ~~closed~~earnouts. aOne-half ~~private placement~~ of ~~3,305,033~~ ~~shares of~~ the ~~Company's~~contractual ~~common~~obligation ~~stock~~is at a ~~purchase~~payment ~~price~~in ~~of $3.10 per share~~cash, ~~for~~while ~~gross proceeds of $10,245,602. In addition,~~ the ~~private placement~~remaining ~~investors~~half ~~were~~in ~~granted~~payable ~~warrants~~in ~~to purchase up to an additional 1,349,884 shares of~~ common stock priced at ~~$3.45~~fair ~~per~~market ~~share~~value. ~~The~~This ~~warrants~~assumes ~~issued~~the ~~in connection~~practices ~~with~~meet ~~this~~all ~~private~~earnings ~~placement~~threshold ~~offering are accounted for as derivative instruments in accordance with FAS 133~~obligations.

183) Includes guaranteed minimum management bonuses through employment agreements which expire on December 31, 2010.

(1312) Recent Accounting ~~PronouncementsStock-Based Compensation~~ Pronouncements

~~In the first quarter of 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share~~Stock-Based ~~Payment, (“SFAS 123R”). This Statement requires companies to expense the~~ ~~estimated~~Compensation fair value of stock options and similar equity instruments issued to employees over the vesting period in their statement of operations. SFAS 123R eliminates the alternative to use the intrinsic method of accounting provided for in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees, (“APB 25”), which generally resulted in no compensation expense recorded in the financial statements related to the grant of stock options to employees if certain conditions were met.

In the first quarter of 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment, (“SFAS 123R”). This Statement requires companies to expense the estimated fair value of stock options and similar equity instruments issued to employees over the vesting period in their statement of operations. SFAS 123R eliminates the alternative to use the intrinsic method of accounting provided for in Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees , (“APB 25”), which generally resulted in no compensation expense recorded in the financial statements related to the grant of stock options to employees if certain conditions were met.

The Company adopted SFAS 123R using the modified prospective method effective January 1, 2006, which requires the Company to record compensation expense over the vesting period for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Accordingly, amounts for periods prior to January 1, 2006 presented herein have not been restated to reflect the adoption of SFAS 123R.

The pro forma effect for the ~~March~~three 31and six months ended June 30, 2005 period is as follows (as restated) and has been ~~disclosed~~ disclosed to be consistent with prior accounting rules:

	For the Three Months Ended March 31, 2005
		For the three monthsended June 30, 2005			For six months endedJune 30, 2005
Net income (loss), as reported	$	(27,763,632)
Net income(loss), as reported		$	11,110,827		$	(16,652,805	)
Stock-based employee compensation included in reported net income (loss), net of tax		~~10,883,274~~	(3,696,979	)		7,186,296
Stock-based employee compensation expense as determined under the fair value method for all awards, net of tax		~~(385,883)~~				(385,883	)
Net income (loss), pro forma	$	(17,266,241)
Stock-based compensation expense as determined under the fair value method for all awards, net of tax			(153,668	)		(641,997	)
Earnings per share:
Net income(loss), pro forma		$	7,260,180		$	(10,108,506	)
Basic – as reported	$	(0.63)
Earnings per share:
Basic – pro forma	$	(0.39)
Basic – as reported		$	0.22		$	(0.37	)
Diluted – as reported	$	(0.63)
Basic – pro forma		$	0.14		$	(0.23	)
Diluted – pro forma	$	(0.39)
Diluted – as reported		$	0.18		$	(0.37	)
Diluted – pro forma		$	0.12		$	(0.23	)

The fair value concepts were not changed significantly in SFAS 123R; however, in adopting SFAS 123R, companies must choose among alternative valuation models and amortization assumptions. After assessing alternative valuation models and amortization assumptions, the Company will continue using the Black-Scholes valuation model and has elected to use the ratable method to amortize compensation expense over the vesting period of the grant.

The fair value of each option granted was estimated using the following assumptions:
	2006	2005
Risk-free interest rate	4.56%	3.71%
Expected life	2.504 years	2.50 years
Volatility	43.84%	48.90%
Dividend yield	0.00%	0.00%

The fair value of each option granted was estimated using the following assumptions:

Total non-cash compensation expense for the three months ended March 31, 2006 related to unvested stock options amounted to $282,076 and is included in general and administrative expenses in the consolidated statement of operations.


	2006		2005
Risk-free interest rate	5.11	%	3.71	%
Expected life	2.50 years		2.50 years
Volatility	43.84	%	48.90	%
Dividend yield	0.00	%	0.00	%

~~Subsequent~~Total tonon-cash ~~March~~compensation ~~31, 2006,~~expense for the ~~Company~~three ~~granted~~months ~~175~~ended June 30,~~000~~ ~~options~~2006 related to unvested ~~employees~~stock ~~and~~options ~~directors~~amounted atto ~~their fair~~$899,939 ~~value~~and onfor the ~~date~~six ofmonths ~~grant.~~ended ~~The~~June 30, ~~total~~2006 ~~value of these options~~ amounted to $771,~~580~~182,015 and ~~will~~is beincluded ~~expensed~~ in ~~the~~general ~~second~~and ~~quarter,~~administrative ~~since~~expenses ~~they~~in ~~vested~~the onconsolidated ~~the grant~~statement ~~date~~of operations.

19Included in the expense is $760,912 of compensation expense related to accelerations of stock options that occurred in the three months ended June 30, 2006. During the three months ended June 30, 2006 and 2005, the Company granted 175,000 and 50,000 options, respectively, to employees and directors at their fair value on the grant date. The options granted during the three months ended June 30, 2006 had a weighted average exercise price of $1.39 per share.

~~(14)~~Uncertainty ~~Subsequent Events On~~in ~~April~~Income ~~3, 2006,~~Taxes the Company received notice from the American Stock Exchange (“AMEX”) of a failure to satisfy certain of the AMEX continued listing standards. The notice related to the failure of the Company to timely file its annual report on Form 10-K for the fiscal year ended December 31, 2005. The AMEX accepted the Company’s plan of compliance and granted the Company an extension to file its Form 10-K by June 2, 2006 and its Form 10-Q for the period ended March 31, 2006 by June 30, 2006. The Company successfully filed its Form 10-K for the fiscal year ended December 31, 2005 on June 1, 2006 and the Company plans to meet the deadline to file its Form 10-Q for the period ended March 31, 2006 by June 30, 2006.

OnIn ~~June~~July 7, 2006, the ~~American~~ ~~Stock~~Financial ~~Exchange~~Accounting ~~approved~~Standards ~~the~~Board ~~Company’s~~(FASB) ~~request~~issued toFASB ~~replace~~Interpretation 2No. 48,~~593,316~~ Accounting for Uncertainty in Income Taxes – an ~~warrants~~interpretation ~~previously~~of ~~granted~~FASB toStatement ~~Midsummer~~No. 109 ~~Investments~~(FIN 48), ~~Ltd~~which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements, ~~Islandia~~the impact of a tax position, ~~L.P.~~if ~~and~~that ~~Laurus~~position ~~Master~~is ~~Fund~~more likely than not of being sustained on audit, ~~Ltd~~based on the technical merits of the position. inThe ~~connection~~provisions ~~with~~of ~~convertible~~FIN ~~debenture~~48 ~~financings with~~are aeffective ~~total~~as of 1the beginning of the Company’s 2007 fiscal year,~~310~~ with the cumulative effect,~~000~~ ~~restricted~~if ~~common~~any, ~~shares~~of the change in accounting principle recorded as an adjustment to opening retained earnings.~~(15)~~ ~~Litigation~~The Company is currently evaluating the impact of adopting FIN 48 on the financial statements.

(13) Subsequent Events

On August 2, 2006, the Company completed a private placement of 8.5% convertible debentures in the principal amount of $3.0 million with Midsummer Investments Ltd. and Islandia, L.P. The 8.5% Convertible Debentures are due August 2, 2009 and are convertible into shares of the Company’s common stock at an initial price of $1.90 per share at the holder’s option. Interest on the 8.5% Convertible Debentures is payable in quarterly installments commencing in October 2006. Subject to the satisfaction of certain conditions, the Company has the right to redeem the 8.5% Convertible Debentures at any time after the two years from issuance, to make certain redemption payments in shares of the Company’s common stock, and to make interest payments in shares of the Company’s common stock.

Concurrently with the August 2, 2006 financing, the Company, Midsummer, and Islandia entered into an amendment agreement pursuant to which the due dates on the $10 million and $1.5 million Convertible Debentures were extended until August 2, 2009. The Company has agreed to issue the two debenture holders 500,000 shares of the Company’s common stock in connection with the financing and the due date extension. Management is in the process of performing the calculations related to the restructuring and has not yet determined the impact on the financial statements for the third quarter.

(14) Litigation

We have become aware of eleven putative class action lawsuits and one derivative action filed against us and certain of our officers and directors. We understand that the lawsuits arose in connection with our determination to restate certain of our historical financial statements. We believe that the lawsuits lack merit and we have engaged the international law firm of McDermott Will & Emery LLP to vigorously defend against such allegations and claims. There can be no assurance at this time how the lawsuits in question will ultimately be resolved, or the impact, if any, such resolutions will have on our operations and/or financial condition.

On March 21, 2006, Roy Thomas Mould filed a complaint under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company, as well as the Company'’s chief executive officer and chief financial officer, before the United States District Court for the Middle District of Florida. The complaint is entitled Mould v. PainCare Holdings, Inc., et al. , Case No. 06-CV-00362-JA-DAB. Mr. Mould alleges material misrepresentations and omissions in connection with the Company'’s financial statements which appear to relate principally to the Company'’s previously announced intention to restate certain past financial statements. Mr. Mould seeks unspecified damages and purports to represent a class of shareholders who purchased the Company'’s common stock from August 27, 2002 to March 15, 2006. Ten ~~additional~~ additional complaints were filed shortly afterward before the same court which recite similar allegations. (Collectively, these cases will be referred to as the "“Securities Litigation."”) To allow for the selection of a lead plantiff(s) and counsel, and the consolidation of the individual class action complaints, plaintiffs and defendants have agreed that a response to the individual complaints is not required until after a consolidated complaint has been filed. The Company cannot predict the outcome of the Securities Litigation, but believes that the allegations lack merit and will vigorously defend against them. The Company anticipates that it will move to dismiss plaintiff’s consolidated class action complaint.

On April 7, 2006, Kenneth R. Cope filed a derivative complaint against the directors of the Company before the United States District Court for the Middle District of Florida. The complaint is entitled Cope v. Reuter, et al., Case No. 06-CV-00449-JA-DAB. Mr. Cope alleges that the directors breached their fiduciary duties by failing to supervise and manage the operations of the company, among other claims. Mr. Cope'’s complaint appears to relate principally to the Company'’s previously announced intention to restate certain past financial statements; Mr. Cope also recites many of the same allegations contained in the Securities Litigation. (This litigation is referred to as the “Derivative Action.”) Mr. Cope seeks unspecified damages from the directors on behalf of the Company. The Company'’s management cannot predict the outcome of the Derivative Action, but believes that the allegations lack merit and will vigorously defend against them.

On March 30, 2006 and May 3, 2006, two purported shareholders of the Company made separate demands on the Company’s board of directors. These demands raise many if not all of the same issues as the derivative action, but asks the independent directors to investigate the charges and to take “legal action against those individuals responsible.”

In accordance with ~~governing~~ governing Florida law, the Company formed a special committee of independent directors (Tom Crane, Jay Rosen and Aldo Berti) to review and investigate the two derivative demands and the allegations of the derivative complaint, to oversee settlement discussions and to make recommendations concerning the handling of the demands and the complaint to the full board of directors. To assist with this charge, the special committee has retained the law firm of Morris, Nichols, Arshdt & Tunnel.

2026

demands and the complaint to the full board of directors. To assist with this charge, the special committee has retained the law firm of Morris, Nichols, Arshdt & Tunnel.

The Company is currently involved in active settlement negotiations with the attorneys representing the shareholders to address the issues raised in the derivative demands and the derivative action. Although the outcome of these discussions cannot be predicted, the Company hopes to resolve the issues raised on an amicable basis and, thus, avoid the expense and uncertainty of protracted litigation.

Except for the above matters, neither we nor any of our subsidiaries or managed practices are a party to any other legal action or proceeding which we believe could have a material adverse effect on our business, financial condition or results of operation.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF ~~FINACNIAL~~FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with the Consolidated Financial Statements and the related notes that appear elsewhere in this document.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. For additional information regarding some of the risks and uncertainties that affect our business and the industry in which we operate and that apply to an investment in our common stock, please read “Risk Factors.” Our actual results may differ materially from those estimated or projected in any of these forward-looking statements.

Outlook

We are a health care services company focused on the treatment of pain. We have relationships with 60 64 physician practices and surgery centers. Our growth strategy is to enter into management agreements with profitable, established physician practices and expand the range of services they offer. Because we have acquired either the non-medical assets or the entire practice of 21 practices since December 1, 2000, and because our growth strategy involves acquiring additional physician practices, our historical results are not necessarily indicative of results to be expressed from any future period. Our company was formed in February 1997 and was acquired by HelpMate Robotics, Inc. in a merger in June 2002. Before the merger, the Company operated two pain management practices and HelpMate had sold its previous business. You should read the notes to our consolidated financial statements if you would like more information on our history.

We provide our services through physician practices with which we have one of three types of relationships:

·• Owned practices. These practices are owned by us through one of our wholly-owned subsidiaries. We own the property and the physicians are our employees. · Managed practices. In states where the corporate practice of medicine is not permitted, we are not permitted to own a physician’s practice. In these states, we manage physician practices pursuant to a management agreement. · Service and equipment contracts. We provide limited management services and equipment pursuant to specific contractual arrangements in such areas as in-house physical therapy, electrodiagnostic services and in-office surgery.

We• ~~currently~~Managed ~~have two owned~~ practices. ~~primarily~~In ~~providing~~states ~~surgery~~where ~~services,~~the ~~five~~corporate ~~owned~~practice ~~practices primarily~~of ~~providing~~medicine ~~pain~~is ~~management~~not ~~services~~permitted, ~~one~~we ~~managed~~are ~~practice~~not ~~primarily providing~~permitted ~~surgery~~to ~~services,~~own ~~eleven~~a ~~managed~~physician’s ~~practices~~practice. ~~primarily~~In ~~providing~~these ~~pain management services~~states, ~~two~~we ~~managed~~manage physician practices ~~providing~~pursuant ~~ancillary~~to ~~services,~~a ~~and 30 limited~~ management ~~services and equipment contracts~~agreement.

We• ~~had~~Service aand ~~number~~equipment ~~of acquisitions~~contracts. ~~since~~We weprovide ~~began~~limited ~~our~~management ~~current~~services ~~business~~and inequipment ~~2000.~~pursuant ~~The~~to ~~following~~specific ~~table presents~~contractual ~~the~~arrangements ~~changes~~ in ~~the~~such ~~number~~areas ofas ~~practices~~in-house wephysical ~~own and manage at December 31~~therapy, ~~2005,~~electrodiagnostic ~~2004,~~services ~~2003, 2002~~ and ~~March~~in-office ~~31, 2006~~surgery.

2127

	At December 31,				At March 31,
	2002	2003	2004	2005	2006
Owned physician practices	3	6	7	7	7
Managed physician practices	0	3	8	12	14
Limited Management service and equipment contracts	3	8	22	34	30

We currently have one owned practice primarily providing surgery services, five owned practices primarily providing pain management services, two managed practices primarily providing surgery services, eleven managed practices primarily providing pain management services, two managed practices providing ancillary services, and 34 limited management services and equipment contracts. Advanced Orthopaedics of South Florida (AOSF) was converted to a managed surgery practice from an owned surgery practice.

We ~~manage~~had ~~fourteen practices~~a innumber ~~states with laws governing the corporate practice~~ of ~~medicine.~~acquisitions ~~In those~~since ~~states,~~we abegan ~~corporation~~our iscurrent ~~precluded~~business ~~from~~in ~~owning the medical assets and practicing medicine~~2000. ~~Therefore,~~The ~~contractual~~following ~~arrangements~~table ~~are~~presents ~~effected to allow us to manage~~ the ~~practice.~~changes Emerging Issues Task Force (“EITF”) No. 97-2 states that financial consolidation can occur when a physician practice management entity establishes an other than temporary controlling financial interest in ~~a physician practice through contractual arrangements. In all cases but one,~~ the ~~management~~ ~~services~~number ~~agreement between PainCare and our managed practices satisfies each~~ of ~~the EITF issues. Except for one of our managed~~ practices, we ~~recognize~~ ~~all~~own ~~of the revenue~~ and ~~expenses~~manage ofat ~~these~~December 31, ~~practices~~2005, in2004, ~~our~~2003, ~~consolidated financials~~2002 ~~in accordance with EITF No. 97-2. With respect to the one managed practice for which we do not recognize all of the revenue~~ and ~~expenses and in~~ ~~all of our limited managed practices~~June 30, ~~we recognize only the management fees earned and expenses incurred by us with respect to such practices~~2006.

The Company’s previously issued consolidated financial statements as of and for the years ended December 31, 2000 through 2004 and all quarterly financial information for each of these years and the first three quarters of 2005 have been restated to give effect to the correction of certain errors that were discovered subsequent to December 31, 2005.


	At December 31,				At June 30,
	2002	2003	2004	2005	2006
Owned physician practices	3	6	7	7	6
Managed physician practices	0	3	8	12	15
Limited Management service and equipment contracts	3	8	22	34	34

AsWe ~~part~~manage fifteen practices, of awhich ~~periodic review~~fourteen bypractices ~~the~~are ~~Division~~located ofin ~~Corporation~~states ~~Finance~~with oflaws governing the ~~SEC~~corporate practice of ~~our~~medicine. ~~Annual~~In ~~Report~~those ~~on Form~~states, ~~10-KSB~~a ~~for~~corporation is precluded from owning the ~~year~~medical ~~ended~~assets ~~December~~and ~~31,~~practicing ~~2004~~medicine. Therefore, wecontractual ~~received~~arrangements ~~and~~are ~~responded~~effected to allow us to manage the practice. Emerging Issues Task Force (“EITF”) No. 97-2 states that financial consolidation can occur when a physician practice management entity establishes an other than temporary controlling financial interest in a physician practice through contractual arrangements. ~~number~~In all cases but one, the management services agreement between PainCare and our managed practices satisfies each of ~~SEC~~the ~~staff~~EITF ~~comments~~issues. AsExcept for one of ~~June~~our 28managed practices, ~~2006~~we ~~certain~~recognize all of the ~~SEC~~revenue ~~comments~~and expenses of these practices in our ~~remain~~consolidated ~~unresolved~~financials ~~and~~in ~~pertain~~accordance with EITF No. 97-2. With respect to ~~our~~the ~~method~~one ofmanaged ~~accounting~~practice for ~~(i)~~which ~~certain~~we ~~term notes,~~do ~~freestanding~~not recognize all of the revenue and ~~embedded~~expenses ~~derivatives~~and in all of our limited managed practices, ~~and~~we ~~(ii)~~recognize ~~intangible~~only ~~assets~~the management fees ~~acquired~~earned inand ~~connection~~expenses ~~with~~incurred ~~physician~~by ~~practice~~us ~~and~~with ~~surgery~~respect ~~center acquisitions~~to such practices.

InThe ~~order~~Company’s topreviously ~~resolve~~issued ~~the foregoing~~consolidated ~~comments~~financial westatements as ~~intend~~of toand ~~continue~~for ~~to discuss relevant accounting issues with~~ the ~~SEC~~years ~~staff~~ended December 31, to2000 ~~continue~~through to2004 ~~file~~and ~~responses~~all toquarterly ~~the~~financial ~~accounting~~information ~~comments which~~for ~~the~~each ~~SEC~~of ~~staff~~these ~~has~~years ~~provided to date,~~ and ~~to respond to any additional accounting comments which~~ the ~~SEC~~first ~~staff~~three ~~may~~quarters ~~provide. In addition, based upon our interpretation~~ of ~~the~~2005 ~~applicable accounting pronouncements, we~~ have been restated ~~our consolidated~~to ~~financial~~give ~~statements~~effect ~~for~~to the ~~years~~correction ~~ended~~of ~~December~~certain ~~31,~~errors ~~2000,~~that were ~~December~~discovered ~~31,~~subsequent ~~2001,~~to December 31, ~~2002, December 31, 2003 and December 31, 2004 and the quarters ended March 31,~~ 2005~~, June 30, 2005 and September 30, 2005~~.

~~Additional~~As ~~disclosure regarding~~part of a periodic review by the ~~foregoing~~Division ~~matters~~of isCorporation ~~set~~Finance ~~forth~~of inthe ~~our~~SEC ~~Current~~of our Annual Report on Form 810-~~K filed~~KSB ~~with~~for the year ended December 31, 2004, we received and responded to a number of SEC onstaff ~~March~~comments. 15As of August 10, 2006, certain of the SEC comments remain unresolved and inpertain to our ~~audited~~method ~~consolidated~~of ~~financial statements~~accounting for (i) certain ~~the~~term ~~year~~notes, ~~ended~~freestanding ~~December~~and 31embedded derivatives, ~~2005~~and (ii) intangible assets acquired in connection with physician practice and surgery center acquisitions.

~~Results~~In order to resolve the foregoing comments we intend to continue to discuss relevant accounting issues with the SEC staff, to continue to file responses to the accounting comments which the SEC staff has provided to date, and to respond to any additional accounting comments which the SEC staff may provide. In addition, based upon our interpretation of ~~Operations~~the applicable accounting pronouncements, we have restated our consolidated financial statements for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003 and December 31, 2004 and the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005.

~~Set~~Additional ~~forth~~disclosure ~~below~~regarding the foregoing matters is ~~certain~~ ofset ~~our~~forth ~~selected~~in ~~consolidated~~our Current ~~financial~~Report ~~and~~on ~~operating~~Form ~~information~~8-K ~~for~~filed with the ~~three~~ ~~months~~SEC ~~ended~~on March 31 15, 2006, and ~~the comparable period~~ in ~~2005, respectively.~~our ~~The~~audited ~~selected~~ consolidated financial ~~information is derived from our consolidated financial~~ statements for ~~such~~the ~~periods.~~year ~~The~~ended ~~information~~December 31, ~~set forth below should be read in conjunction with Management’s Discussion and Analysis of Results of Operations and Financial Condition and our Consolidated Financial Statements and Notes thereto~~2005.

	Three Months Ended March 31, (in thousands, except per share amounts)
	2006	2005
		(As restated)
Total revenues	$23,308	$14,237
Gross profit	18,568	11,656
Net income (loss)	11,888	(27,764)

22Results of Operations

Income (loss) per common share, basic	$ 0.19	$ (0.63)
Income (loss) per common share, diluted	$ 0.17	$ (0.63)
Weighted average common shares outstanding:
Basic	61,599	44,413
Diluted	71,654	44,413
	At March 31, 2006
	(in thousands)
Working capital	$ (8,647)
Total current assets	40,010
Total assets	204,506
Stockholders’ equity	125,006

Set forth below is certain of our selected consolidated financial and operating information for the three and six months ended June 30, 2006 and the comparable periods in 2005, respectively. The selected consolidated financial information is derived from our consolidated financial statements for such periods. The information set forth below should be read in conjunction with Management’s Discussion and Analysis of Results of Operations and Financial Condition and our Consolidated Financial Statements and Notes thereto.

Comparison of the three months ended March 31, 2006 and 2005


	Three Months Ended June 30,
	(in thousands, except per share amounts)
	2006			2005
Total revenues	$	23,591		$	15,888
Gross profit		18,221			13,453
Net income (loss)		(806	)		11,111

Earnings per common share, basic	$	(0.01	)	$	0.22
Earnings per common share, diluted	$	(0.01	)	$	0.18

Weighted average common shares outstanding:
Basic		64,482,619			51,621,811
Diluted		64,482,619			61,803,873

	Six Months Ended June 30,
	(in thousands, except per share amounts)
	2006			2005
Total revenues	$	46,900		$	30,124
Gross profit		36,789			25,109
Net income (loss)		11,082			(16,653	)

Earnings per common share, basic	$	0.18		$	(0.37	)
Earnings per common share, diluted	$	0.16		$	(0.37	)

Weighted average common shares outstanding:
Basic		63,011,366			44,412,972
Diluted		71,718,631			44,412,972

~~Total~~Comparison ~~revenues increased~~of ~~to $23,308,474 for~~ the three months ended ~~March 31~~June 30, 2006 from $14,236,740 for the comparable 2005 period, representing an increase of 63.7% . Operating income increased to $4,846,106 for the three months ended March 31, 2006 from $(14,190,900) for the comparable 2005 period. This increase was primarily the result $7,889,260 in revenue and ~~$3,143,723 in operating income from “New-Practices” acquired since March 31,~~ 2005. There was a 7.61% increase in revenues from practices acquired/managed prior to March 31, 2005 (“Same-Practices”). Net revenue for Same-Practices on a year over year basis is reflected in the chart below.

	For the Three Months Ended March 31,
	2006	2005	% Increase
Same-Practices
Revenues	$ 14,347,264	$ 13,332,764	7.61%
New-Practices
Revenues	$ 7,899,260	-	-

Total revenues increased to $23,591,312 for the three months ended June 30, 2006 from $15,887,853 for the comparable 2005 period, representing an increase of 48.5%. Operating income decreased to $1,591,992 for the three months ended June 30, 2006 from $11,944,880 for the comparable 2005 period. This decrease was the result of a $6,161,131 benefit related to the accounting for variable stock option plan. There was a 10.3% increase in revenues from practices acquired/managed prior to June 30, 2005 (“Same-Practices”). Net revenue for Same-Practices on a year over year basis is reflected in the chart below.

Gross profit increased to $18,567,740 for the three months ended March 31, 2006 from $11,655,517 for the comparable 2005 period, representing an increase of 59.3% . This increase is attributed to the six practices, three ambulatory surgical centers and intraoperative monitoring company interest acquired since March 31, 2005.


	For the Three Months Ended June 30,
	2006		2005		% Increase
Same-Practices
Revenues	$	13,300,623	$	12,060,034	10.3	%

New-Practices
Revenues	$	9,831,553	$	703,936	—

~~Operating~~29 expenses decreased to $13,721,634 for the three months ended March 31, 2006 from $25,846,417 in the comparable 2005 period, representing a decrease of 46.9% . The decrease is primarily due to the non-cash charge of $18,138,790 in 2005 related to accounting for our variable stock option plan. In addition, $1,090,390 in 2006 is attributed to non-recurring accounting, legal, and consulting expenses related to our financial restatement, class action lawsuits and initial implementation of Sarbanes-Oxley compliance.

~~Interest~~Gross ~~expense~~ profit increased to $118,~~932~~221,~~194~~306 for the three months ended ~~March 31~~June 30, 2006 from $~~898~~13,~~920 in~~453,295 for the comparable 2005 period, representing an increase of ~~114~~35.94% . This increase is ~~primarily~~attributed to the ~~result~~six ~~of $849~~practices,~~378~~ inthree ~~non-cash~~ambulatory ~~interest~~surgical ~~expense~~centers ~~from derivative~~and ~~instruments~~intraoperative ~~related~~monitoring tocompany ~~our~~interest ~~convertible~~acquired ~~debentures~~since June 30, 2005.

~~The~~Operating ~~provision~~expenses ~~for income taxes~~ increased to $116,~~188~~619,~~607~~314 for the three months ended ~~March 31~~June 30, 2006 ~~compared~~ ~~with~~from ~~a benefit of~~ $(51,~~536~~508,~~065)~~415 ~~for~~in the ~~three~~comparable ~~months ended March 31,~~ 2005, ~~representing an increase of 121~~period.5% .The ~~This~~ increase is primarily ~~related~~due to the ~~temporary~~non-cash ~~difference~~benefit ~~caused~~of by$6,161,631 ~~the~~in ~~tax~~2005 ~~benefit~~ related to ~~the~~ accounting for our variable stock ~~options~~option plan. ~~This~~In ~~tax~~addition, ~~benefit~~$2,539,950 in 2006 is ~~not~~attributed to non-recurring ~~since~~accounting, ~~the~~legal, ~~company~~and ~~now reports~~consulting ~~stock~~expenses ~~options~~related into ~~accordance~~our ~~with~~financial restatement, ~~FAS~~class ~~123R~~action aslawsuits and initial implementation of ~~January~~Sarbanes-Oxley ~~1, 2006~~compliance.

AsInterest aexpense ~~result~~increased ofto ~~the above changes, net income was~~ $112,~~888~~095,~~099~~721 for the three months ended ~~March 31~~June 30, 2006 ~~compared~~from ~~with net loss of~~ $~~(27~~1,~~763~~292,~~632)~~490 in the comparable 2005 period, representing an increase of ~~142~~62.81% . This increase is primarily ~~due to~~ the ~~non-cash~~ ~~benefit~~result of $10582,~~394,555~~906 in ~~2006~~incremental asinterest ~~compared~~expense tofrom athe ~~non-cash~~HBK ~~expense~~Investments, ofL.P. credit ~~$(18,238,898)~~facility insince ~~2005~~the ~~from~~full ~~derivative~~principal ~~instruments~~balance ~~related~~was todrawn ~~our~~during ~~convertible debentures~~the quarter ended June 30, 2006 versus June 30, 2005.

23The provision for income taxes decreased to $315,717 for the three months ended June 30, 2006 compared with a provision of $4,551,003 for the three months ended June 30, 2005. This decrease is primarily related to the permanent difference caused by the tax benefit related to the accounting for derivatives.

~~Liquidity~~As a result of the above changes, net loss was $806,091 for the three months ended June 30, 2006 compared with net income of $11,110,827 in the comparable 2005 period. This decrease is primarily due to the non-cash benefit of $6,161,631 in 2005 and ~~capital~~a ~~resources~~non-cash onbenefit ~~March~~of 31$4,992,151 in 2005 from variable options and derivative instruments related to our convertible debentures, respectively. There was no variable option benefit during 2006 and the derivate benefit was $98,396.

~~Cash~~Comparison ~~amounted to $8,986,479 at March 31, 2006, compared to $10,272,446 as~~ of ~~March 31, 2005. The net cash provided by operations was $447,423 for~~ the ~~three~~six months ended ~~March 31~~June 30, 2006, ~~compared~~and ~~to cash provided by operations of $316,500 for the comparable period in~~ 2005. This net decrease in cash from operations is primarily due to non-recurring accounting, legal and consulting expenses related to our financial restatement, class action lawsuits and initial implementation of Sarbanes-Oxley compliance.

~~Cash~~Total ~~used~~revenues inincreased ~~investing~~to $46,899,786 for the six ~~activities~~months ~~was~~ended June 30, 2006 from $~~(15~~30,~~237~~124,~~938)~~593 for the ~~three~~comparable 2005 period, representing an increase of 55.7%. Operating income increased to $6,438,098 for the six months ended ~~March 31~~June 30, 2006 ~~compared with~~from a ~~use~~loss of $(82,~~317~~246,~~468)~~021 infor the comparable 2005 period. This increase is was primarily ~~due~~the toresult ~~acquisitions~~of ~~during~~$17,730,813 ~~the~~in ~~three~~revenue ~~months~~acquired ~~ended~~since ~~March~~June 30, 312005. There was a 8.9% increase in revenues from practices acquired/managed prior to June 30, 2005 (“Same-Practices”). Net ~~2006~~revenue for Same-Practices on a year over year basis is reflected in the chart below.

Cash provided by financing activities was $1,063,829 for the three months ended March 31, 2006 compared with a use of $(827,426) in the comparable 2005 period. This increase is primarily due to cash raised through the private placement common stock offering, which closed in January 2006.


	For the Six Months Ended June 30,
	2006		2005		% Increase
Same-Practices
Revenues	$	27,647,886	$	25,392,798	8.9	%

New-Practices
Revenues	$	17,730,813	$	703,936	—

~~Management~~Gross ~~believes~~profit ~~the current~~increased ~~cash position will be sufficient~~ to ~~provide~~$36,789,046 ~~us with capital to fund working capital needs~~ for the ~~next~~six ~~twelve~~ months. Weended ~~have significant indebtedness~~June 30, ~~as described under “Convertible Debt” and “Other Debt.” We are obligated to make principal payments of $10,830,160 in~~ 2006, ~~and~~from $625,~~500~~108,~~000 in~~812 ~~2007.~~for ~~We may not have adequate funds from operations to pay~~ the ~~debt~~comparable ~~when~~2005 ~~it comes due. It will be necessary~~period, inrepresenting ~~order~~an toincrease ~~expand~~of ~~our business, consummate acquisitions and refinance indebtedness, to raise additional capital~~46.5%. ~~No assurance~~This ~~can~~increase beis ~~given~~attributed ~~at this time that such funds will be available, or if available will be sufficient in the near term or that future funds will be sufficient~~ to ~~meet growth. In~~ the ~~event~~six ~~of such developments~~practices, ~~attaining financing~~three ~~under~~ambulatory ~~such~~surgical ~~conditions~~centers ~~may~~and ~~not~~intraoperative bemonitoring ~~possible,~~company orinterest ~~even~~acquired ifsince ~~such funds are available~~June 30, ~~the terms on which such capital may be available, may not be commercially feasible or advantageous~~2005.

~~Convertible~~30 ~~debt~~

OnOperating ~~December~~expenses ~~18,~~increased ~~2003, we completed a private placement offering of $10 million in 7.5% convertible debentures~~ to ~~two institutional investors~~$30, ~~Midsummer Investments Ltd. and Islandia~~350,948 ~~L.P.~~for ~~The~~the ~~debentures~~six ~~are~~months ~~due~~ended ~~December 17~~June 30, 2006 ~~and~~from ~~are convertible by the investors at any time into shares of common stock at an adjusted fixed price of~~ $~~1.90 per share. Interest on the debentures is payable (in cash or stock~~27, ~~at our election) in quarterly installments~~354, ~~which commenced in March 2004. Interest~~833 ~~paid~~ in ~~shares is based upon 90% of~~ the ~~market~~comparable ~~value~~2005 ~~for~~period, ~~the~~representing ~~shares~~an asincrease ~~defined in~~of ~~the debentures~~11.0%. The ~~debentures~~increase have full ratchet anti-dilution protection, which means that, with certain exceptions, if we issue common stock or securities convertible or exercisable for common stock, with a purchase, conversion or exercise price below the conversion price of the debentures such conversion price is ~~automatically~~primarily ~~reduced~~due to the ~~lower~~non-cash ~~price.~~charge ~~The debenture holders also have a right~~ of ~~first~~$11,972,160 ~~refusal to participate~~ in ~~future~~2005 ~~equity financings~~related ~~of PainCare. With certain exceptions, PainCare is not permitted~~ to ~~incur~~ ~~debt~~accounting ~~that~~for ~~would~~our bevariable ~~senior~~stock tooption ~~or pari passu with the debentures~~plan. ~~The~~In ~~securities~~addition, purchase agreement pursuant to which the debentures were sold provides that we shall not effect any conversion of debentures and holder shall not have the right to convert any portion of debentures to the extent that after giving effect to such conversion the holder (together with the holder’s affiliates)$3,630,340 ~~would beneficially own~~ in ~~excess~~ of2006 ~~4.99%~~is ofattributed ~~the number of shares of the common stock outstanding immediately after giving effect~~ to ~~such conversion. The investors also received~~ ~~warrants~~non-recurring toaccounting, ~~purchase 1~~legal,~~263,316~~ ~~shares~~and ofconsulting ~~common~~expenses ~~stock.~~related ~~The~~to ~~warrants~~our ~~were cancelled~~financial ~~on June 7~~restatement, ~~2006,~~class inaction ~~consideration~~lawsuits ~~for~~and ~~the~~initial ~~issuance~~implementation of ~~761,622~~Sarbanes-Oxley ~~shares of common stock to the investors~~compliance.

OnInterest ~~July~~expense 1,increased ~~2004~~to $4,027,915 ~~we completed~~for anthe ~~institutional~~six ~~private~~months ~~placement~~ended ~~offering~~June 30, ~~with~~2006 ~~aggregate~~from ~~proceeds of~~ $~~1.5~~2,191,410 ~~million~~in ~~from~~the ~~Midsummer~~comparable ~~Investments~~2005 ~~Ltd.~~period, ~~Pursuant~~representing ~~to a separate securities~~an ~~purchase~~increase ~~agreement~~of ~~with Midsummer, we issued and sold a $1~~83.~~5 million fixed price 7.5~~8% ~~Convertible Debenture~~. ~~The~~This ~~7.5%~~increase ~~convertible debenture~~ is ~~due~~primarily ~~July~~the 1,result ~~2007 and is convertible into shares~~ of ~~our common stock at an adjusted price of~~ $1~~.90 per~~,433,363 ~~share. Interest on the debenture is payable~~ in ~~quarterly~~interest ~~installments commencing~~expense infrom ~~September~~the ~~2004~~HBK ~~in cash or stock~~Investment, ~~at our election~~L.P. ~~The~~credit ~~conversion terms~~facility ~~and~~since ~~other~~the ~~terms,~~full ~~including~~principal ~~anti-dilution~~balance ~~protections,~~was ~~are~~drawn ~~otherwise substantially~~during the ~~same~~entire asperiod ~~the~~ending ~~December 17~~June 30, ~~2003~~2006 ~~debenture~~versus ~~issued~~only ~~to Midsummer.~~part ~~Midsummer also received warrants to purchase 165,000 shares~~ of ~~common~~the ~~stock.~~six ~~The warrants~~months ~~were~~ended ~~cancelled on~~ June 7 30, ~~2006, in consideration for the issuance of 98,378 shares of common stock to Midsummer~~2005.

~~Other~~The ~~debt~~provision for income taxes increased to $1,504,324 for the six months ended June 30, 2006 compared with a benefit of $985,062 for the six months ended June 30, 2005. This increase is primarily related to the permanent difference caused by the tax benefit related to the accounting for derivatives.

24As a result of the above changes, net income was $11,082,008 for the six months ended June 30, 2006 compared with net loss of $16,652,805 in the comparable 2005 period. This increase is primarily due to the non-cash benefit of $10,492,951 in 2006 as compared to a non-cash expense of $13,246,747 in 2005 from derivative instruments related to our convertible debentures.

OnLiquidity ~~May~~and ~~11,~~capital ~~2005,~~resources ~~the Company closed~~ on ~~a $25 million~~June 30, ~~senior~~2006 secured credit facility from an investment fund managed by HBK Investments L.P. The credit facility, which carries a term of 48 months and an interest rate equal to LIBOR + 7.25% or prime + 4.25%, will be used primarily to fund the Company’s growth-through-acquisition strategy and to retire a portion of the Company’s existing debt. No warrants or other equity securities were issued to any party in connection with this transaction.

OnCash ~~September~~amounted 15to $6,249,412 at June 30, 2006, compared to $12,231,091 as of June 30, 2005. The net cash provided by operations was $1, 885,536 for the ~~Company~~six ~~entered~~months ~~into~~ended anJune 30, ~~amendment~~2006, compared to ~~the~~cash ~~HBK~~provided ~~credit~~by ~~facility~~operations ~~that increased~~of $2,388,782 in the ~~amount~~comparable of2005 ~~the~~period. ~~credit~~This ~~facility~~net decrease in cash from ~~$25~~operations ~~million~~is toprimarily ~~$30~~due ~~million.~~to ~~The~~non-recurring ~~terms~~accounting, ~~conditions~~ legal and ~~date~~consulting ofexpenses ~~maturity~~related ofto ~~the~~our ~~credit~~financial ~~facility~~restatement, ~~were~~class ~~not~~action ~~changed~~lawsuits ~~pursuant to~~and ~~the~~initial ~~amendment~~implementation of Sarbanes-Oxley compliance.

~~The~~Cash ~~outstanding~~used ~~balance~~in ~~under~~investing activities was $18,054,952 for the ~~credit~~six ~~facility~~months ~~was~~ended June 30, 2006 compared with a use of $3020,~~000~~678,~~000~~785 atin ~~March~~the 31comparable 2005 period. This decrease is primarily due to acquisitions and earn out payments during the three months ended June 30, 2006.

OnCash ~~May~~used 2,in ~~2006~~financing ~~and~~activities ~~June 20,~~was ~~2006~~$294,337 wefor ~~entered into letter agreements with~~ the ~~lenders~~six ~~under~~months ~~the~~ended ~~credit facility~~June 30, ~~pursuant~~2006 tocompared ~~which~~with ~~the~~a ~~lenders~~use ~~waived certain historic breaches~~ of ~~the terms of the credit facility in consideration for which we paid a~~ $~~300~~11,~~000 and a $150~~420,~~000~~254 ~~waiver~~in ~~fee,~~the ~~respectively,~~comparable to2005 ~~the lenders~~period. ~~Subsequent~~This todecrease ~~the~~is ~~date~~primarily ofdue ~~the letter agreements we may have failed~~ to ~~comply~~cash ~~with~~raised ~~certain~~through ~~covenants set forth~~the inHBK ~~the~~Investments ~~credit facility~~L.P. ~~To date we have not received a notice letter from the lenders with respect to any breaches or defaults under the terms of the~~ credit facility ~~after~~which ~~the~~closed ~~date~~in ofMay ~~the letter agreement~~2005.

AManagement ~~summary~~believes the current cash position will be sufficient to provide us with capital to fund working capital needs for the next twelve months. We have significant indebtedness, as described under “Convertible Debt” and “Other Debt.” We are obligated to make principal payments of ~~our~~$12,699,012 ~~contractual~~for the ~~obligations~~twelve months ending June 30, 2007, $8,000,000 for twelve months ending June 30, 2008 and $17,750,000 for the twelve months ending June 30, 2009. We may not have adequate funds from operations to pay the debt when it comes due. It ~~commercial~~will ~~commitments~~be necessary, in order to expand our business, consummate acquisitions and refinance indebtedness, to raise additional capital. No assurance can be given at ~~March~~this 31time that such funds will be available, ~~2006~~or ~~were~~if asavailable ~~follows:~~will be sufficient in the near term or that future funds will be sufficient to meet growth. In the event of such developments, attaining financing under such conditions may not be possible, or even if such funds are available, the terms on which such capital may be available, may not be commercially feasible or advantageous.

		Less than 1 Year	1-3 Years	3-5 Years
Contractual Obligations	Total				5+ years
Long-term debt	$ 31,697,012	$ 3,879,012	$ 27,818,000	$ -	$ -
Convertible debentures	17,666,500	14,935,007	2,731,493	-	-
Capital leases (1)	4,278,626	1,562,270	2,426,210	290,146	-
Operating leases	16,214,628	3,325,812	6,728,016	2,884,528	3,276,272
Acquisition consideration (2)	51,988,232	257,400	51,730,832	-	-
Employment agreements (3)	3,000,000	600,000	1,800,000	600,000
Total contractual obligations	$124,844,998

1)Convertible ~~Includes~~debt the total minimum lease payments due in each year. 2) Includes both the cash and stock components of the acquisition earnouts. One-half of the contractual obligation is a payment in cash, while the remaining half in payable in common stock priced at fair market value. This assumes the practices meet all earnings threshold obligations. 3) Includes guaranteed minimum management bonuses through employment agreements which expire on December 31, 2010.

~~Recent~~On ~~events~~December 18, 2003, we completed a private placement offering of $10 million in 7.5% convertible debentures to two institutional investors, Midsummer Investments Ltd. and Islandia, L.P. The debentures are due December 17, 2006 and are convertible by the investors at any time into shares of common stock at an adjusted fixed price of $1.90 per share. Interest on the debentures is payable (in cash or stock, at our election) in quarterly installments, which commenced in March 2004. Interest paid in shares is based upon 90% of the market value for the shares as defined in the debentures. The debentures have full ratchet anti-dilution protection, which means that, with certain exceptions, if we issue common stock or securities convertible or exercisable for common stock, with a purchase, conversion or exercise price below the conversion price of the debentures such conversion price is automatically reduced to the lower price. The debenture holders also have a right of first refusal to participate in future equity financings of PainCare. With certain exceptions, PainCare is not permitted to incur debt that would be senior to or pari passu with the debentures. The securities purchase agreement pursuant to which the debentures were sold provides that we shall not effect any conversion of debentures and holder shall not have the right to convert any portion of debentures to the extent that after giving effect to such conversion the holder (together with the holder’s affiliates), would beneficially own in excess of 4.99% of the number of shares of the common stock outstanding immediately after giving effect to such conversion. The investors also received warrants to purchase 1,263,316 shares of common stock. On June 7, 2006, the American Stock Exchange approved the Company’s request to replace 2,593,316 warrants previously granted to Midsummer Investments, Ltd., Islandia, L.P. and Laurus Master Fund, Ltd in connection with convertible debenture financings with a total of 1,310,000 restricted common shares.

On ~~January 3~~July 1, 2004, ~~2006~~we ~~the Company~~completed ~~acquired~~an ~~Center~~institutional ~~for~~private ~~Pain~~placement ~~Management~~offering ~~ASC,~~with ~~LLC~~aggregate ~~(“CPMASC”),~~proceeds of $1.5 million from Midsummer Investments Ltd. Pursuant to a ~~fully accredited~~separate ~~ambulatory~~securities ~~surgical~~purchase ~~center~~agreement with ~~four~~Midsummer, ~~locations~~we inissued ~~Maryland~~and sold a $1.5 ~~The~~million fixed price ~~initial~~7.5% ~~portion~~Convertible Debenture. The 7.5% convertible debenture is due July 1, 2007 and is convertible into shares of ~~the~~our ~~purchase~~common ~~price~~stock ~~consisted~~at an adjusted price of $~~3,750,000~~1.90 per share. Interest on the debenture is payable in ~~cash~~quarterly ~~plus~~installments commencing 1in September 2004 in cash or stock,~~021,942~~ ~~common~~at ~~shares~~our election. The ~~Company~~conversion ~~will~~terms ~~pay~~and other terms, including anti-dilution protections, are otherwise substantially the ~~balance~~same ofas the ~~consideration~~December 17, 2003 debenture issued to Midsummer. Midsummer also received $7warrants to purchase 165,~~500,~~000 inshares ~~cash~~of common stock. On June 7, ~~one~~2006, ~~year~~the ~~from~~American Stock Exchange approved the ~~acquisition~~Company’s ~~date~~request to replace 2,593,316 warrants previously granted to Midsummer Investments, Ltd., ~~The~~Islandia, ~~members~~L.P. ofand ~~CPMASC~~Laurus ~~did~~Master ~~have~~Fund, aLtd ~~prior~~in ~~relationship~~connection with ~~the~~convertible ~~Company~~debenture ~~from~~financings ~~the~~with ~~acquisition~~a total of ~~Center for Pain Management~~1,310,000 ~~LLC~~restricted incommon ~~December 2004~~shares.

On ~~January~~August 62, 2006, the Company ~~acquired~~completed ~~REC,~~a ~~Inc.~~private &placement ~~CareFirst~~of ~~Medical Associates, P~~8.~~A.,(“REC”~~5% ~~and “CMA”)~~convertible ~~co-located~~debentures ~~pain~~in ~~management~~the ~~and~~principal ~~orthopedic~~amount ~~rehabilitation~~of ~~practices located in Whitehouse, Texas~~$3.0 Inmillion ~~connection~~ with ~~the~~Midsummer ~~purchase~~Investments ofLtd. ~~REC~~ and ~~CMA~~Islandia, ~~the~~ ~~Company~~L.P. ~~will~~The ~~provide,~~8.5% ~~through~~Convertible aDebentures ~~wholly~~are ~~owned~~due ~~subsidiary~~August 2, ~~ongoing~~2009 ~~management~~ and ~~administrative~~are ~~services~~convertible ~~pursuant to a Management Agreement entered~~ into ~~with~~ ~~REC~~shares ~~and~~of ~~CMA.~~the ~~The~~Company’s ~~initial~~common ~~portion~~stock ofat ~~the~~an ~~purchase~~initial price ~~consisted~~ of $~~625,000~~1.90 ~~in cash~~per ~~and~~share ~~191,131~~at ~~PainCare~~the ~~common~~holder’s ~~shares~~option. ~~subject~~Interest toon ~~certain~~the ~~post-closing~~8.5% ~~adjustments,~~Convertible ifDebentures ~~any.~~is Inpayable ~~addition,~~in ~~the~~quarterly ~~Company~~installments ~~will~~commencing ~~pay~~in ~~REC~~October ~~and~~2006. ~~CMA~~Subject anto the satisfaction of ~~additional~~certain $1conditions,~~250,000~~ inthe ~~three~~Company ~~equal~~has ~~annual~~the ~~payments~~right ~~(50%~~to inredeem ~~cash~~the ~~and 50~~8.5% ~~in PainCare~~Convertible ~~common~~Debentures ~~stock priced~~ at ~~market)~~any ~~subject~~time toafter the ~~satisfaction~~two ofyears ~~certain earnings~~from ~~goals~~issuance, ~~and~~to ~~the~~make ~~payment~~certain ofredemption ~~the~~payments ~~management~~in ~~fee~~shares toof the Company.’s ~~Neither REC~~common stock, ~~CMA~~and ~~nor~~to ~~its~~make ~~members~~interest ~~have~~payments ~~any~~in shares ~~prior~~of ~~relationship with~~ the Company’s orcommon ~~its affiliates~~stock.

25Concurrently with the August 2, 2006 financing, the Company, Midsummer, and Islandia entered into an amendment agreement pursuant to which the due dates on the $10 million and $1.5 million Convertible Debentures were extended until August 2, 2009. The Company has agreed to issue the two debenture holders 500,000 shares of the Company’s common stock in connection with the financing and the due date extension. Management is in the process of performing the calculations related to the restructuring and has not yet determined the impact on the financial statements for the third quarter.

On32 January 20, 2006, the Company acquired Desert Pain Medicine Group, a California-based pain management practice operating three offices in Palm Springs, Yucca Valley and Rancho Mirage, California. In connection with the purchase of Desert Pain, the Company will provide, through a wholly owned subsidiary, on going management and administrative services pursuant to a Management Agreement entered into with Desert Pain. The initial portion of the purchase price consisted of $1,500,000 in cash and 471,698 shares of PainCare’s common stock subject to certain post-closing adjustments, if any. In addition, the Company will pay Desert Pain an additional $3,000,000 in three equal annual payments (50% in cash and 50% in PainCare common stock priced at market) subject to the satisfaction of certain earnings goals and the payment of the management fee to the Company. Neither Desert Pain nor its members have any prior relationship with the Company or its affiliates. On January 30, 2006, the Company and a group of accredited investors closed a private placement of 3,305,033 shares of the Company's common stock at a purchase price of $3.10 per share, for gross proceeds of $10,245,602. In addition, the private placement investors were granted warrants to purchase up to an additional 1,349,884 shares of common stock at $3.45 per share. On February 1, 2006, the Company acquired 60% of the capital stock of Amphora, LLC, a Colorado-based Intraoperative Monitoring (IOM) company serving medical institutions and surgeons throughout Colorado, Wyoming, Arizona and Nebraska. The terms of the acquisition provide for PainCare to pay Amphora's members total consideration of up to $15 million for a 60% ownership in the Company. The initial portion of the purchase price consisted of $3,250,000 in cash and 1,035,032 shares of PainCare’s common stock. The balance of the consideration will be paid in installments over four years subject to a yearly formula.

~~FORWARD-LOOKING~~Other ~~STATEMENTS~~debt

~~The~~Note ~~terms~~payable ~~“PainCare,”~~for ~~“Company~~acquisition of PSHS Beta Partners,” ~~“we~~Ltd. Due on August 1,” ~~“our~~2006 without a stated interest rate. The face value is $1,”351,458. ~~and “us”~~The ~~refer~~note tois ~~PainCare~~secured ~~Holdings~~by the Company’s interest in PSHS Beta Partners, ~~Inc~~Ltd. ~~and~~The ~~its~~Company’s ~~consolidated~~carrying ~~subsidiaries~~amount ~~unless~~ of the ~~context~~partnership ~~suggests~~is ~~otherwise~~$1,949,486. The note was paid in full August 4, 2006

~~This quarterly report~~Note ~~contains~~payable ~~and~~for ~~may~~acquisition ~~incorporate~~of byPSHS ~~reference~~Beta ~~“forward-looking” statements~~Partners, ~~including~~ ~~statements~~Ltd. ~~regarding~~Due ~~our~~on ~~expectations~~August 1, ~~beliefs,~~2006 ~~intentions~~without ~~or strategies~~a ~~regarding~~stated ~~the~~interest ~~future~~rate. ~~Such~~The ~~statements~~face ~~can~~value beis ~~identified~~$281,554. byThe ~~the~~note ~~use~~is ~~of forward-looking~~secured ~~terminology~~by ~~such~~the asCompany’s ~~“may,”~~interest ~~“will,”~~in ~~“believe,”~~PSHS ~~“intend,” “expect,”~~Beta ~~“anticipate~~Partners,” ~~“estimate,”~~Ltd. ~~“continue,”~~The orCompany’s ~~other similar words.~~carrying ~~Variations~~amount onof ~~those~~the orpartnership ~~similar~~is ~~words~~$1,949,486. orThe ~~the~~note ~~negatives~~was ofpaid ~~such~~in ~~words~~full August 1, ~~also may indicate forward-looking statements~~2006.

~~These~~On ~~forward-looking~~May 11, 2005, the Company closed on a $25 ~~statements~~million, senior secured credit facility from an investment fund managed by HBK Investments L.P. The credit facility, which ~~may~~carries ~~include~~a ~~statements~~term ~~regarding~~of ~~our~~48 ~~future~~months ~~financial performance~~and an interest rate equal to LIBOR + 7.25% or ~~results~~prime of+ ~~operations~~4.25%, ~~including~~will ~~expected~~be ~~revenue~~used ~~growth,~~primarily ~~cash~~to fund the ~~flow~~Company’s growth,-through-acquisition ~~future~~strategy ~~expenses,~~and ~~future~~to ~~operating~~retire ~~margins~~a ~~and~~portion ~~other~~of ~~future~~the Company’s existing debt. No warrants or ~~expected~~ ~~performance,~~other ~~are~~equity ~~subject~~securities were issued to ~~the~~any ~~following~~party ~~risks:~~in connection with this transaction.

On September 15, 2005, the ~~acquisition~~Company ofentered ~~businesses~~into oran amendment to the ~~launch~~HBK ofcredit ~~new~~facility ~~lines~~that increased the amount of the credit facility from $25 ~~business,~~million ~~which~~to ~~could~~$30 ~~increase~~million. ~~operating~~The ~~expenses~~terms, conditions and ~~dilute~~date ~~operating~~of ~~margins;~~ maturity of the credit facility were not changed pursuant to the amendment.

~~the~~The ~~inability~~outstanding tobalance ~~attract~~under ~~new~~the ~~patients~~credit byfacility ~~our~~was ~~owned practices~~$29, ~~the~~250,000 ~~managed~~at ~~practices~~June 30, ~~and~~2006. ~~the limited management practices;~~

~~increased~~On ~~competition~~May 2, 2006, June 20, ~~which~~2006 ~~could~~and ~~lead~~August 9, 2006 we entered into letter agreements with the lenders under the credit facility pursuant to ~~negative~~which ~~pressure~~the lenders waived certain historic breaches of the terms of the credit facility in consideration onfor ~~our~~which ~~pricing~~we paid $300,000, $150,000 and $100,000 in waiver fees, respectively, to the ~~need~~lenders. ~~for~~The ~~increased~~August ~~marketing;~~9, 2006 letter agreement further provides that the Company and the lenders must reach an agreement on or before October 15, 2006 with respect to modification of certain financial covenants set forth in the credit facility documents. Any failure to reach such an agreement will be an Event Default under the credit facility. Subsequent to the date of the letter agreements we may have failed to comply with certain covenants set forth in the credit facility. To date we have not received a notice letter from the lenders with respect to any breaches or defaults under the terms of the credit facility after the date of the most recent letter agreement.

~~the~~A ~~inability~~summary toof ~~maintain,~~our ~~establish~~contractual orobligations ~~renew~~and ~~relationships with~~commercial ~~physician~~commitments ~~practices~~at June 30, ~~whether~~2006 ~~due~~were toas ~~competition~~follows: ~~or other factors;~~

the inability to comply with regulatory requirements governing our owned practices, the managed practices and the limited management practices;


Contractual Obligations	Total		Less than 1 Year		1-3 Years		3-5 Years		5+ Years
Long-term debt	$	38,449,012	$	12,699,012	$	25,750,000	$	—	$	—
Convertible debentures		10,455,160		8,955,160		1,500,000		—		—
Capital leases(1)		4,460,104		1,573,664		2,729,608		156,832		—
Operating leases		16,184,529		3,449,246		6,706,364		2,818,541		3,210,378
Acquisition consideration(2)		51,463,330		17,796,666		33,666,664		—		—
Employment agreements(3)		3,000,000		600,000		1,800,000		600,000

Total contractual obligations	$	124,012,135

261) Includes the total minimum lease payments due in each year.

~~that~~33 ~~projected operating efficiencies will not be achieved due to implementation difficulties or contractual spending commitments that cannot be reduced; and~~

to2) Includes both the ~~general~~cash ~~risks~~and ~~associated~~stock ~~with~~components ~~our~~of ~~businesses~~the acquisition earnouts. One-half of the contractual obligation is a payment in cash, while the remaining half in payable in common stock priced at fair market value. This assumes the practices meet all earnings threshold obligations.

In3) ~~addition~~Includes toguaranteed ~~the risks~~minimum ~~and~~management ~~uncertainties~~bonuses ~~discussed~~through ~~above~~employment ~~you~~agreements ~~can~~which ~~find~~expire ~~additional~~on ~~information concerning~~December risks and uncertainties that would cause actual results to differ materially from those projected or suggested in the forward-looking statements in this quarterly report under the section “Risk Factors.” The forward-looking statements contained in this quarterly report represent our judgment as of the date of this quarterly report31, ~~and you should not unduly rely on such statements~~2010.

~~Unless otherwise required by law, we undertake no obligation to publicly update or revise any forward~~FORWARD-~~looking~~LOOKING ~~statements,~~STATEMENTS whether as a result of new information, future events or otherwise after the date of this quarterly report. In light of these risks and uncertainties, the forward-looking events and circumstances discussed in the filing may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements.

~~ITEM~~The 3terms “PainCare,” “Company,” “we,” “our,” and “us” refer to PainCare Holdings, Inc. ~~QUANTITATIVE~~and ~~AND~~its ~~QUALITATIVE~~consolidated ~~DISCLOSURES~~subsidiaries ~~ABOUT~~unless ~~MARKET~~the ~~RISK~~context suggests otherwise.

~~Market~~This ~~risk~~quarterly ~~generally represents~~report ~~the~~contains ~~risk~~and ofmay ~~loss~~incorporate ~~that~~by ~~may~~reference ~~result~~“forward-looking” ~~from~~statements, ~~the~~including ~~potential~~statements ~~change~~regarding inour ~~value~~expectations, ofbeliefs, aintentions ~~financial~~or ~~instrument~~strategies asregarding athe ~~result~~future. ofSuch ~~fluctuations~~statements incan ~~interest~~be ~~rates~~identified ~~and market~~by ~~prices.~~the Weuse doof ~~not~~forward-looking ~~currently~~terminology ~~have~~such ~~any~~as ~~trading~~“may,” ~~derivatives~~“will,” ~~nor~~“believe,” do“intend,” we “expect,” to“anticipate,” ~~have~~“estimate,” ~~any~~“continue,” inor ~~the~~other ~~future~~similar words. WeVariations ~~have~~on ~~established~~those ~~policies~~or ~~and~~similar ~~internal~~words, ~~processes related~~or to the ~~management~~negatives of ~~market~~such ~~risks~~words, ~~which~~also wemay ~~use~~indicate inforward-looking ~~the normal course of our business operations~~statements.

~~Interest~~These ~~Rate~~forward-looking ~~Risk~~statements, which may include statements regarding our future financial performance or results of operations, including expected revenue growth, cash flow growth, future expenses, future operating margins and other future or expected performance, are subject to the following risks:

We• have interest rate risk, in that borrowings under our credit facility are based on variable market interest rates. As of March 31, 2006, we had $30 million of variable rate debt outstanding under our credit facility. Presently, the ~~revolving~~acquisition ~~credit line bears interest at a rate~~ of ~~either~~businesses ~~LIBOR plus 7.25%~~ or ~~prime~~the ~~plus~~launch ~~4.25%, with a term~~ of 48new ~~months.~~lines ~~A hypothetical 10% increase in our credit facility’s weighted average interest rate~~ of ~~10.92% per annum for the three months ended March 31~~business, ~~2006~~ ~~would~~which ~~correspondingly~~could ~~decrease~~increase ~~our pre-tax earnings and~~ operating ~~cash flows~~expenses ~~by approximately $146,880~~ and ~~$2,375,~~dilute ~~respectively.~~operating margins;

~~Intangible~~• ~~Asset~~the ~~Risk~~inability to attract new patients by our owned practices, the managed practices and the limited management practices;

We• ~~have~~increased a substantial amount of intangible assets. We are required to perform goodwill impairment tests whenever events or circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. As a result of our periodic evaluationscompetition, ~~we may determine that the intangible asset values need to be written down to their fair values,~~ which could ~~result~~lead ~~in material charges that could be adverse~~ to ~~our~~negative ~~operating~~pressure ~~results~~on ~~and financial position. Although at March 31, 2006 we believed~~ our ~~intangible~~pricing ~~assets were recoverable, changes in the economy, the business in which we operate~~ and ~~our own relative performance could change~~ the ~~assumptions~~need ~~used~~for toincreased ~~evaluate intangible asset recoverability. We continue to monitor those assumptions and their effect on the estimated recoverability of our intangible assets.~~marketing;

~~Equity~~• ~~Price~~the ~~Risk~~inability to maintain, establish or renew relationships with physician practices, whether due to competition or other factors;

We• dothe ~~not~~inability ~~own~~to ~~any equity~~comply ~~investments,~~with ~~other~~regulatory ~~than~~requirements ingoverning our ~~subsidiaries.~~owned ~~As a result~~practices, wethe domanaged ~~not currently~~practices ~~have~~and ~~any~~the ~~direct~~limited ~~equity~~management ~~price risk.~~practices;

~~Commodity~~• ~~Price~~that ~~Risk~~projected operating efficiencies will not be achieved due to implementation difficulties or contractual spending commitments that cannot be reduced; and to the general risks associated with our businesses.

We34 ~~do not enter into contracts for the purchase or sale of commodities. As a result, we do not currently have any direct commodity price risk.~~

27In addition to the risks and uncertainties discussed above you can find additional information concerning risks and uncertainties that would cause actual results to differ materially from those projected or suggested in the forward-looking statements in this quarterly report under the section “Risk Factors.” The forward-looking statements contained in this quarterly report represent our judgment as of the date of this quarterly report, and you should not unduly rely on such statements.

~~ITEM~~Unless 4.otherwise ~~CONTROLS~~required ~~AND~~by ~~PROCEDURESEvaluation~~law, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of ~~Disclosure~~new ~~Controls~~information, future events or otherwise after the date of this quarterly report. In light of these risks and ~~Procedures~~uncertainties, the forward-looking events and circumstances discussed in the filing may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements.

~~We maintain "disclosure~~ ~~controls~~ITEM 3. ~~and~~QUANTITATIVE ~~procedures,"~~AND asQUALITATIVE ~~such~~DISCLOSURES ~~term~~ABOUT isMARKET ~~defined~~RISK in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act") designed to ensure information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

AsMarket ofrisk ~~the~~generally ~~end~~represents of the ~~period~~risk ~~covered~~of byloss ~~this~~that ~~report,~~may weresult ~~carried~~from ~~out an evaluation, under~~ the ~~supervision~~ ~~and~~potential ~~with~~change ~~the~~in ~~participation~~value of ~~our~~a ~~disclosure~~financial ~~committee~~instrument ~~and management,~~as ~~including~~a ~~our~~result ~~chief executive officer and chief financial officer,~~ of ~~the~~fluctuations ~~effectiveness~~in ofinterest ~~the~~rates ~~design~~ and ~~operation~~market ofprices. ~~our~~We ~~disclosure~~do ~~controls~~not ~~and procedures~~currently ~~pursuant~~have toany ~~Exchange~~trading ~~Act~~derivatives ~~Rules~~nor ~~13a-15(b)~~do ~~and~~we ~~15d-15(b).~~expect ~~During~~to ~~this evaluation,~~have ~~management~~any ~~considered~~in the ~~impact any material weaknesses and other~~future. ~~deficiencies~~We ~~in our internal control over financial reporting might~~ have onestablished ~~our disclosure~~policies ~~controls~~ and ~~procedures.~~internal Inprocesses ~~accordance~~related ~~with~~to ~~Section~~the ~~404~~management of ~~the Sarbanes-Oxley~~market ~~Act~~risks, ~~and~~which ~~the rules and regulations promulgated under this section,~~ we ~~were~~use ~~required~~in ~~for our Annual Report on Form 10-K for~~ the ~~year~~normal ~~ended~~course ~~December 31,~~of ~~2005 to evaluate and report on~~ our ~~internal~~business ~~control over financial reporting~~operations. ~~In our report contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, we reported the following material weaknesses:~~

~~Inadequate~~Interest ~~controls over~~Rate ~~the~~Risk process for the identification and implementation of the proper accounting for complex and non-routine transactions which caused the Company to restate its consolidated financial statements for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003 and December 31, 2004, and for the quarterly periods ended March 31, 2005, June 30, 2005 and September 30, 2005 (collectively, the “financial statements”) to correct the Company's financial statements;

~~Inadequate~~We ~~segregation~~have interest rate risk, in that borrowings under our credit facility are based on variable market interest rates. As of ~~duties~~June 30, 2006, we had $29.25 million of variable rate debt outstanding under our credit facility. Presently, the revolving credit line bears interest at a rate of either LIBOR plus 7.25% or prime plus 4.25%, with a term of 48 months. A hypothetical 10% increase in our credit facility’s weighted average interest rate of 12.4% per annum for the ~~field~~three ~~locations;~~months ended June 30, 2006 would correspondingly decrease our pre-tax earnings and operating cash flows by approximately $90,675.

~~Inadequate~~Intangible ~~controls~~Asset ~~to timely~~Risk ~~identify, analyze, record, and properly disclose all transactions with related parties;~~

~~Inadequate~~We ~~controls~~have a substantial amount of intangible assets. We are required to perform goodwill impairment tests whenever events or circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. As a result ~~over~~of our periodic evaluations, we may determine that the intangible asset values need to be written down to their fair values, which could result in material charges that could be adverse to our operating ~~knowledge~~results orand ~~training~~financial position. Although at June 30, ~~adequate~~2006 ~~backup~~we believed our intangible assets were recoverable, changes in the economy, the business in which we operate and ~~security~~our ofown ~~certain~~relative performance could change the assumptions used to evaluate intangible asset recoverability. We ~~critical~~continue ~~financial~~to ~~systems;~~monitor those assumptions and their effect on the estimated recoverability of our intangible assets.

~~Inadequate controls~~Equity ~~over~~Price ~~the~~Risk ~~timeliness and accuracy of the monthly close process; and~~

~~Inadequate~~We ~~adequate technical~~do ~~expertise~~not ~~with~~own ~~respect~~any toequity ~~income~~investments, ~~tax~~other ~~accounting~~than ~~and~~in ~~tax~~our ~~compliance~~subsidiaries. ~~to effectively~~As ~~oversee~~a ~~these~~result, ~~areas~~we do not currently have any direct equity price risk.

~~Because~~Commodity ~~the~~Price ~~material weaknesses~~Risk identified in connection with the assessment of our internal control over financial reporting as of December 31, 2005 have not yet been remediated, our Chief Executive Officer and our Chief Financial Officer concluded our disclosure controls and procedures were not effective as of March 31, 2006. To address these control weaknesses, the Company performed additional analysis and performed other procedures in order to prepare the unaudited quarterly consolidated financial statements in accordance with generally accepted accounting principles in the United States of America.

~~The~~We ~~certifications~~do ~~of our~~not ~~Chief~~enter ~~Executive~~into ~~Officer and our Chief Financial Officer required in~~contracts ~~accordance~~for ~~with Section 302 of~~ the ~~Sarbanes-Oxley~~purchase ~~Act~~or sale of ~~2002 are attached as exhibits to this Quarterly Report on Form 10-Q~~commodities. ~~The~~As ~~disclosures~~a ~~set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and procedures~~result, ~~referred~~we todo innot ~~paragraph~~currently 4have ofany ~~the~~direct ~~certifications.~~commodity ~~Those certifications~~price ~~should be read in conjunction with this Item 4 for a more complete understanding of the matters covered by the certifications~~risk.

~~Remediation~~35 ~~Plans for Material Weaknesses in Internal Control over Financial Reporting~~

28 ITEM 4. CONTROLS AND PROCEDURES

InEvaluation ~~order~~of toDisclosure ~~remediate the~~Controls ~~material weaknesses in internal control over financial reporting~~ and ~~ensure the~~Procedures ~~integrity of our financial reporting processes for the remainder of 2006, we are planning the following enhancements:~~

~~Identification~~We maintain “disclosure controls and ~~implementation~~procedures,” as such term is defined in Rules 13a-15(e) and 15d-15(e) of the ~~proper~~Securities Exchange Act of ~~accounting~~1934 ~~for~~(the ~~complex~~“Exchange Act”) designed to ensure information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and ~~non-routine~~reported ~~transactions~~within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure.

~~The~~As ~~creation~~of ~~and staffing~~the end of anthe ~~Assistant~~period ~~Controller~~covered ~~position~~by tothis ~~provide~~report, ~~oversight~~we ~~over~~carried out an evaluation, under the supervision and with the ~~accounting~~participation ~~organization~~of asour ~~well~~disclosure ascommittee ~~other~~and ~~actions~~management, toincluding ~~strengthen~~our ~~the~~chief ~~operation~~executive officer and chief financial officer, of the effectiveness of the design and operation of our ~~internal~~disclosure controls and ~~allow~~procedures ~~the~~pursuant ~~Controller~~to ~~the~~Exchange ~~essential~~Act Rules ~~time~~13a-15(b) toand ~~identify~~15d-15(b). ~~accounting~~During ~~issues~~this evaluation, management considered the impact any material weaknesses and ~~prepare~~other deficiencies in our internal control over financial reporting might have on our disclosure controls and procedures. In accordance with Section 404 of the Sarbanes-Oxley Act and the rules and regulations promulgated under this section, we were required ~~disclosures~~for inour Annual Report on Form 10-K for the ~~notes~~ year ended December 31, 2005 to ~~the~~evaluate and report on our internal control over financial ~~statements~~reporting. In our report contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, we reported the following material weaknesses:

~~Engage~~Inadequate acontrols ~~third~~over ~~party~~the process for the identification and implementation of the proper accounting for complex and non-routine transactions which ~~advisor~~caused ~~with~~the ~~expertise~~Company into ~~identifying~~restate its consolidated financial statements for the years ended December 31, ~~researching~~2000, December 31, 2001, December 31, 2002, December 31, 2003 and ~~evaluating~~December 31, 2004, and for the quarterly ~~appropriateness~~periods ofended ~~complex~~March 31, ~~accounting~~2005, June 30, ~~principles~~2005 and ~~for~~September 30, ~~evaluating~~2005 (collectively, the ~~effects of~~“financial ~~new~~statements”) ~~accounting~~to ~~pronouncements.~~correct the Company’s financial statements;

~~Segregation~~Inadequate segregation of duties in the field locations;

~~The~~Inadequate ~~creation~~controls ~~and staffing of two Internal Auditors~~ to ~~provide~~timely ~~technical~~identify, ~~expertise~~analyze, inrecord, ~~the review of accounting~~ and ~~reconciliation~~properly ~~processes~~disclose asall ~~well~~transactions aswith ~~enforcing of corporate policy and procedures~~ related toparties; ~~field operations.~~

~~Timely~~Inadequate ~~identify,~~controls ~~analyze,~~over ~~record~~operating knowledge or training, adequate backup and ~~properly disclose~~security ~~all~~of ~~transactions~~certain ~~with~~critical ~~related~~financial ~~parties~~systems;

~~The~~Inadequate ~~two~~controls ~~Internal Auditors~~over ~~will also be responsible for~~ the ~~identification~~timeliness and ~~documentation~~accuracy of ~~new~~ ~~related~~the ~~parties.~~monthly Inclose ~~addition,~~process; ~~they will also review all existing related party arrangements~~ and ~~authorize transactions to ensure that documentation is analyzed and recorded timely.~~

~~Engage a third party~~Inadequate ~~advisor~~technical ~~with~~ expertise inwith ~~identifying,~~respect ~~researching~~to ~~and~~income ~~evaluating~~tax ~~the appropriateness of complex~~ accounting ~~principles~~ and ~~for~~tax ~~evaluating~~compliance ~~the~~to ~~effects of~~effectively ~~new~~oversee ~~accounting~~these ~~pronouncements~~areas.

~~Operating~~Because ~~knowledge~~the ormaterial weaknesses ~~training~~identified in connection with the assessment of our internal control over financial reporting as of December 31, ~~adequate~~2005 ~~backup~~have not yet been remediated, our Chief Executive Officer and our Chief Financial Officer concluded our disclosure controls and ~~security~~procedures were not effective as of ~~certain~~June 30, ~~critical~~2006. To address these control weaknesses, the Company performed additional analysis and performed other procedures in order to prepare the unaudited quarterly consolidated financial statements ~~systems~~in accordance with generally accepted accounting principles in the United States of America.

~~Engage~~36 ~~a third party advisor with expertise in information system security to help implement, train and ensure compliance with corporate IT policies and procedures.~~

~~Timeliness~~The certifications of our Chief Executive Officer and ~~accuracy~~our Chief Financial Officer required in accordance with Section 302 of the ~~monthly~~Sarbanes-Oxley ~~close~~Act of 2002 are attached as exhibits to this Quarterly Report on Form 10-Q. The disclosures set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and ~~process~~procedures, referred to in paragraph 4 of the certifications. Those certifications should be read in conjunction with this Item 4 for a more complete understanding of the matters covered by the certifications.

~~The~~Remediation ~~creation~~Plans ~~and staffing~~for ofMaterial anWeaknesses ~~Assistant~~in ~~Controller~~Internal toControl ~~provide oversight~~ over ~~the~~Financial ~~accounting organization~~Reporting as well as other actions to strengthen the operation and effectiveness of our internal controls and allow the Controller the essential time to identify accounting issues, and prepare the required disclosures in the notes to the financial statements.

~~Engage~~In aorder ~~third~~to ~~party advisor~~remediate ~~with~~the ~~expertise~~material weaknesses in ~~identifying,~~internal ~~researching~~control over financial reporting and ~~evaluating~~ensure the ~~appropriateness~~ integrity of ~~complex~~our ~~accounting~~financial ~~principles~~reporting ~~and~~ processes for ~~evaluating~~ the ~~effects~~ remainder of ~~new~~2006, ~~accounting~~we ~~pronouncements.~~are planning the following enhancements:

~~The~~Identification ~~creation~~ and ~~staffing~~ implementation of ~~two Internal Auditors to provide technical expertise in~~ the ~~review~~proper of accounting ~~and~~for ~~reconciliation~~complex ~~processes to ensure the accurate~~ and ~~timely reporting~~non-routine ~~of each field location prior to consolidation at corporate~~transactions.

~~Accounting~~The ~~for~~creation ~~income~~and ~~taxes~~staffing of an Assistant Controller position to provide oversight over the accounting organization as well as other actions to strengthen the operation and effectiveness of our internal controls and allow the Controller the essential time to identify accounting issues, and prepare the required disclosures in the notes to the financial statements.

Engage a third party advisor towith ~~provide~~expertise ~~oversight~~in ~~over~~identifying, ~~the~~researching ~~income tax accounting~~ and ~~tax~~evaluating ~~compliance~~the asappropriateness ~~well~~of ascomplex ~~other~~accounting ~~actions~~principles toand ~~strengthen~~for evaluating the ~~income~~effects ~~tax~~of new accounting ~~function within the organization~~pronouncements.

~~Until~~Segregation ~~these~~of ~~changes~~duties ~~are fully implemented, the material weaknesses will continue to exist. Management presently anticipates that the changes necessary to remediate these weaknesses will be~~ in ~~place by~~ the ~~end~~field oflocations ~~the third quarter of 2006.~~

~~Changes~~The increation and staffing of two Internal ~~Control~~Auditors ~~over~~to ~~Financial~~provide technical ~~Reporting~~expertise in the review of accounting and reconciliation processes as well as enforcing of corporate policy and procedures related to field operations.

29Timely identify, analyze, record, and properly disclose all transactions with related parties

~~There~~The two ~~was~~Internal noAuditors ~~change~~will ~~in our~~also ~~internal~~be ~~control~~responsible ~~over~~for ~~financial~~the ~~reporting~~identification ~~(as~~and ~~defined~~documentation inof ~~Rule~~new ~~13a-15(f) under~~related ~~the~~parties. ~~Exchange~~In ~~Act)~~addition, ~~during~~they ~~our~~will ~~last~~also ~~fiscal~~review ~~quarter~~all ~~that~~existing ~~has~~related ~~materially affected,~~party orarrangements isand ~~reasonably~~authorize ~~likely~~transactions to ~~materially~~ensure ~~affect,~~that ~~our~~documentation ~~internal control~~is ~~over~~analyzed ~~financial~~and ~~reporting~~recorded timely.

~~PART~~Engage IIa –third ~~OTHER~~party advisor with expertise in identifying, researching and evaluating the appropriateness ~~INFORMATIONITEM~~of 1complex accounting principles and for evaluating the effects of new accounting pronouncements. ~~LEGAL~~ ~~PROCEEDINGS~~

WeOperating ~~have become aware of~~knowledge ~~eleven~~or ~~putative~~training, ~~class~~adequate ~~action~~backup ~~lawsuits~~ and ~~one~~security ~~derivative action filed against us and certain~~ of ~~our officers and directors. We understand that the lawsuits arose in connection with our determination to restate~~ certain ofcritical ~~our historical~~ financial ~~statements.~~systems We believe that the lawsuits lack merit and we have engaged the international law firm of McDermott Will & Emery LLP to vigorously defend against such allegations and claims. There can be no assurance at this time how the lawsuits in question will ultimately be resolved, or the impact, if any, such resolutions will have on our operations and/or financial condition.

OnEngage ~~March 21, 2006, Roy Thomas Mould filed~~ a ~~complaint~~third ~~under~~party ~~Sections~~advisor 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company, as well as the Company's chief executive officer and chief financial officer, before the United States District Court for the Middle District of Florida. The complaint is entitled Mould v. PainCare Holdings, Inc., et al. , Case No. 06-CV-00362-JA-DAB. Mr. Mould alleges material misrepresentations and omissions in connection with ~~the~~expertise ~~Company's financial~~in ~~statements~~information ~~which~~system ~~appear~~security to ~~relate~~help principally to the Company's previously announced intention to restate certain past financial statements. Mr. Mould seeks unspecified damages and purports to represent a class of shareholders who purchased the Company's common stock from August 27implement, ~~2002~~train to March 15, 2006. Ten additional complaints were filed shortly afterward before the same court which recite similar allegations. (Collectively, these cases will be referred to as the "Securities Litigation.") To allow for the selection of a lead plantiff(s) and ~~counsel,~~ensure ~~and~~compliance ~~the~~with ~~consolidation~~corporate ofIT ~~the~~policies ~~individual class action complaints, plaintiffs~~ and ~~defendants have agreed that a response to the individual complaints is not required until after a consolidated complaint has been filed~~procedures. ~~The~~ Company cannot predict the outcome of the Securities Litigation, but believes that the allegations lack merit and will vigorously defend against them. The Company anticipates that it will move to dismiss plaintiff’s consolidated class action complaint.

OnTimeliness April 7, 2006, Kenneth R. Cope filed a derivative complaint against the directors of the Company before the United States District Court for the Middle District of Florida. The complaint is entitled Cope v. Reuter, et al., Case No. 06-CV-00449-JA-DAB. Mr. Cope alleges that the directors breached their fiduciary duties by failing to supervise and ~~manage~~accuracy ~~the operations~~ of the ~~company,~~monthly ~~among other~~close ~~claims.~~process Mr. Cope's complaint appears to relate principally to the Company's previously announced intention to restate certain past financial statements; Mr. Cope also recites many of the same allegations contained in the Securities Litigation. (This litigation is referred to as the “Derivative Action.”) Mr. Cope seeks unspecified damages from the directors on behalf of the Company. The Company's management cannot predict the outcome of the Derivative Action, but believes that the allegations lack merit and will vigorously defend against them.

OnThe ~~March~~creation ~~30,~~and ~~2006~~staffing ~~and May~~of 3,an ~~2006,~~Assistant ~~two~~Controller ~~purported~~to ~~shareholders~~provide oversight ofover the ~~Company~~accounting ~~made~~organization ~~separate~~as ~~demands~~well ~~on the~~as ~~Company’s~~other ~~board~~actions ofto ~~directors.~~strengthen ~~These~~the ~~demands~~operation ~~raise~~and ~~many~~effectiveness ifof ~~not~~our ~~all~~internal ofcontrols ~~the same~~and ~~issues~~allow asthe Controller the ~~derivative~~essential ~~action,~~time ~~but~~to ~~asks~~identify ~~the~~accounting ~~independent~~issues, ~~directors~~and ~~to investigate~~prepare the ~~charges~~required disclosures ~~and~~in tothe ~~take~~notes ~~“legal~~to ~~action~~the ~~against~~financial ~~those individuals responsible~~statements.”

In37 accordance with governing Florida law, the Company formed a special committee of independent directors (Tom Crane, Jay Rosen and Aldo Berti) to review and investigate the two derivative demands and the allegations of the derivative complaint, to oversee settlement discussions and to make recommendations concerning the handling of the demands and the complaint to the full board of directors. To assist with this charge, the special committee has retained the law firm of Morris, Nichols, Arshdt & Tunnel.

~~The~~Engage ~~Company~~a ~~is currently~~third ~~involved~~party inadvisor ~~active settlement negotiations~~ with ~~the~~expertise ~~attorneys representing the shareholders to address the issues raised~~ in ~~the~~identifying, ~~derivative demands~~researching and ~~the~~evaluating ~~derivative action. Although~~ the appropriateness ~~outcome~~ of ~~these~~complex ~~discussions cannot~~accounting beprinciples ~~predicted, the Company hopes to resolve the issues raised on an amicable basis~~ and, ~~thus,~~for ~~avoid~~evaluating the ~~expense~~effects ~~and~~of ~~uncertainty~~new ofaccounting ~~protracted litigation~~pronouncements.

30The creation and staffing of two Internal Auditors to provide technical expertise in the review of accounting and reconciliation processes to ensure the accurate and timely reporting of each field location prior to consolidation at corporate.

~~Except~~Accounting for ~~the~~income ~~above matters,~~taxes neither we nor any of our subsidiaries or managed practices are a party to any other legal action or proceeding which we believe could have a material adverse effect on our business, financial condition or results of operation.

~~ITEM~~Engage ~~1A.~~a ~~RISK~~third ~~FACTORS~~party advisor to provide oversight over the income tax accounting and tax compliance as well as other actions to strengthen the income tax accounting function within the organization.

WeUntil ~~believe~~these ~~that~~changes ~~the risks~~are ~~and~~fully ~~uncertainties~~implemented, ~~described below are~~ the ~~principal~~ material ~~risks~~weaknesses ~~facing our~~will ~~company~~continue asto ~~of the date of this Form 10-Q~~exist. InManagement ~~the~~presently ~~future,~~anticipates ~~we may become subject to additional risks~~ that ~~are~~the ~~not~~changes ~~currently~~necessary ~~known~~ to ~~us. Our business,~~ ~~financial~~remediate ~~condition~~these orweaknesses ~~results~~will ~~of operations could~~ be ~~materially~~in ~~adversely affected~~place by ~~any of~~ the ~~following~~end ~~risks. The trading price~~ of ~~our~~the ~~common~~third ~~stock could~~quarter ~~decline due to any~~ of ~~the following risks~~2006.

~~Risks~~Changes ~~Related~~in toInternal ~~Our~~Control ~~Business~~over Financial Reporting

WeThere ~~may~~was ~~need~~no tochange ~~restate~~in our ~~consolidated~~internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during our ~~statements~~last ~~again~~fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

~~Based upon comments~~ ~~received~~PART ~~from~~II ~~the~~– ~~SEC~~OTHER ~~staff~~INFORMATION regarding our method of accounting for (i) certain term notes, freestanding and embedded derivatives, and (ii) intangible assets acquired in connection with physician practice and surgery center acquisitions, we have restated our consolidated financial statements for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003, December 31, 2004 and the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005. We based the foregoing restatements on our interpretation of applicable accounting pronouncements, notwithstanding the fact that the SEC staff comments remain unresolved. There can be no assurance that the SEC staff will agree with our interpretation of the applicable accounting pronouncements. In the event the SEC staff disagrees with one or more of our interpretations of applicable accounting pronouncements, we may have to restate our consolidated financial statements again in the future.

~~A number of class action lawsuits have been filed~~ ~~against~~ITEM 1. usLEGAL ~~and~~PROCEEDINGS ~~certain of our officers and directors.~~

We have become aware of eleven putative class action lawsuits and one derivative action filed against us and certain of our officers and directors. We understand that the lawsuits arose in connection with our determination to restate certain of our historical financial statements. We believe that the lawsuits lack merit and we have engaged the international law firm of McDermott Will & Emery LLP to vigorously defend against such allegations and claims. There can be no assurance at this time how the lawsuits in question will ultimately be resolved, or ~~the~~ the impact, if any, such resolutions will have on our operations and/or financial condition.

WeOn ~~may~~March 21, ~~need~~2006, toRoy ~~negotiate~~Thomas Mould filed a ~~waiver~~complaint ~~letter~~under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company, as well as the Company’s chief executive officer and chief financial officer, before the United States District Court for the Middle District of Florida. The complaint is entitled Mould v. PainCare Holdings, Inc., et al., Case No. 06-CV-00362-JA-DAB. Mr. Mould alleges material misrepresentations and omissions in connection with the Company’s financial ~~respect~~statements which appear to ~~our~~relate ~~senior~~principally ~~credit~~to ~~facility~~the Company’s previously announced intention to restate certain past financial statements. Mr. Mould seeks unspecified damages and purports to represent a class of shareholders who purchased the Company’s common stock from August 27, 2002 to March 15, 2006. Ten additional complaints were filed shortly afterward before the same court which recite similar allegations. (Collectively, these cases will be referred to as the “Securities Litigation.”) To allow for the selection of a lead plantiff(s) and counsel, and the consolidation of the individual class action complaints, plaintiffs and defendants have agreed that a response to the individual complaints is not required until after a consolidated complaint has been filed. The Company cannot predict the outcome of the Securities Litigation, but believes that the allegations lack merit and will vigorously defend against them. The Company anticipates that it will move to dismiss plaintiff’s consolidated class action complaint.

On38 May 2, 2006 and June 20, 2006 we entered into letter agreements with the lenders under our $30 million senior credit facility pursuant to which the lenders waived certain historic breaches of the terms of the credit facility in consideration for which we paid a $300,000 and a $150,000 waiver fee, respectively, to the lenders.

~~Subsequent~~On toApril 7, ~~the~~2006, ~~date of~~Kenneth ~~the~~R. ~~letter~~Cope ~~agreement~~filed wea ~~may~~derivative ~~have~~complaint ~~failed~~against tothe ~~comply~~directors ~~with~~of ~~certain~~the ~~covenants set~~Company ~~forth~~before in the ~~credit~~United ~~facility.~~States ~~While~~District weCourt ~~have~~for ~~not~~the ~~received~~Middle aDistrict ~~notice~~of ~~letter~~Florida. ~~from the~~The ~~lenders~~complaint ~~with~~is ~~respect~~entitled toCope ~~any~~v. ~~breaches~~Reuter, oret ~~defaults~~al., ~~under~~Case ~~the~~No. 06-CV-00449-JA-DAB. ~~terms~~Mr. Cope ofalleges ~~the credit~~that ~~facility after~~ the ~~date~~directors ofbreached ~~the~~their ~~letter~~fiduciary ~~agreement,~~duties ~~there~~by ~~can~~failing ~~be no~~to ~~assurance~~supervise ~~that~~and ~~such~~manage athe ~~notice~~operations ~~letter~~of ~~will~~the ~~not~~company, beamong ~~received~~other inclaims. ~~the future~~Mr. Cope’s Incomplaint ~~the event~~appears weto ~~are~~relate ~~served~~principally ~~with~~to ~~such a notice letter in~~ the ~~future~~Company’s wepreviously ~~will~~announced ~~attempt~~intention to ~~enter~~ ~~into~~restate ~~another~~certain ~~waiver~~past ~~agreement~~financial ~~with~~statements; ~~the lenders~~Mr. ~~There can be no assurance~~ Cope ~~that~~also werecites ~~would~~many beof ~~able~~the tosame ~~enter~~allegations ~~into~~contained ~~any~~in ~~such~~the ~~waiver~~Securities ~~agreement~~Litigation. As(This ~~the~~litigation ~~credit facility~~ is ~~secured~~referred ~~by all of our assets,~~ to as the ~~extent~~“Derivative weAction.”) ~~were~~Mr. Cope ~~unable~~seeks ~~to negotiate~~unspecified adamages ~~waiver~~from ~~letter with~~ the ~~lenders~~directors ~~the~~on ~~lenders~~behalf ~~might~~of ~~attempt~~the toCompany. ~~take~~The ~~certain~~Company’s ~~actions~~management ~~that~~cannot ~~could~~predict ~~materially~~the ~~adversely~~outcome ~~impact~~of ~~our~~the ~~operations~~Derivative Action, ~~including,~~ but ~~not~~believes ~~limited~~that ~~to,~~the ~~taking~~allegations ~~control~~lack ofmerit ~~one~~and orwill ~~more~~vigorously ofdefend ~~our~~against ~~operating subsidiaries and/or other company assets~~them.

WeOn ~~Need~~March 30, to2006 ~~Continue~~and toMay 3, ~~Improve~~2006, ~~and~~two ~~Implement~~purported ~~our~~shareholders of the Company made separate demands on the Company’s board of directors. These demands raise many if not all of the same issues as the ~~Controls~~derivative action, but asks the independent directors to investigate the charges and ~~Procedures~~to take “legal action against those individuals responsible.”

~~Requirements~~In ~~adopted~~accordance ~~by the~~with ~~SEC~~governing inFlorida ~~response~~law, to the ~~passage~~Company offormed ~~the~~a ~~Sarbanes-Oxley~~special ~~Act~~committee of ~~2002~~independent ~~require~~directors ~~us to~~ (i)Tom ~~evaluate~~Crane, Jay Rosen and ~~report~~Aldo onBerti) ato ~~quarterly~~review ~~basis~~and investigate the ~~effectiveness~~two ofderivative ~~our~~demands and the allegations ~~disclosure~~of ~~controls~~the ~~and~~derivative ~~procedures~~complaint, ~~and~~to ~~(ii)~~oversee ~~assess~~settlement discussions and ~~report~~to onmake anrecommendations ~~annual basis~~concerning the ~~effectiveness~~handling of ~~our~~the ~~internal~~demands ~~controls~~and ~~over~~the ~~financial~~complaint to the full board of directors. To assist with this charge, the special committee has retained the ~~reporting~~law firm of Morris, Nichols, Arshdt & Tunnel.

31The Company is currently involved in active settlement negotiations with the attorneys representing the shareholders to address the issues raised in the derivative demands and the derivative action. Although the outcome of these discussions cannot be predicted, the Company hopes to resolve the issues raised on an amicable basis and, thus, avoid the expense and uncertainty of protracted litigation.

~~During~~Except ~~our~~for ~~assessment with respect to~~ the ~~effectiveness~~above ofmatters, ~~the~~neither ~~foregoing~~we ~~controls~~nor asany of ~~December 31,~~our ~~2005,~~subsidiaries ~~the~~or ~~end~~managed ofpractices ~~our~~are ~~most~~a ~~recent~~party ~~fiscal~~to ~~year,~~any ~~management~~other ~~identified~~legal aaction ~~number~~or ~~of material~~proceeding ~~weaknesses,~~ which ~~are~~we ~~fully~~believe ~~disclosed~~could inhave ~~Item~~a 9Amaterial ofadverse ~~our~~effect ~~10-K~~on ~~for~~our ~~the fiscal~~business, ~~year~~financial ~~ended~~condition ~~December~~or ~~31,~~results ~~2005~~of operation.

~~As a result of the~~ material weaknesses, management concluded that our disclosure controls and procedures and our internal controls over financial reporting as of December 31, 2005, the end of our most recent fiscal year, were not effectiveITEM 1A. ~~Management~~RISK ~~has concluded~~FACTORS ~~that our disclosure controls and procedures remain not effective as of March 31, 2006.~~

InWe anbelieve ~~effort~~that ~~to rectify~~ the ~~foregoing~~risks ~~material~~and ~~weaknesses,~~uncertainties wedescribed ~~have~~below ~~modified~~are ~~our~~the ~~method~~principal material ofrisks ~~accounting~~facing ~~for certain~~our ~~transactions~~company ~~and~~as ~~have~~of ~~implemented~~the ~~additional~~date ~~controls~~of this Form 10-Q. In sothe ~~doing~~future, we ~~restated~~ ~~our~~may ~~consolidated~~become ~~financial~~subject ~~statements~~to ~~for~~additional ~~the~~risks ~~years~~that ~~ended~~are ~~December~~not ~~31, 2000,~~currently ~~December~~known ~~31,~~to ~~2001,~~us. ~~December~~Our 31business, ~~2002,~~financial ~~December~~condition ~~31,~~or ~~2003,~~results ~~December~~of ~~31,~~operations ~~2004~~could be materially adversely ~~and~~affected by any of the ~~quarters~~following ~~ended~~risks. ~~March~~The ~~31,~~trading ~~2005,~~price ~~June~~of ~~30,~~our ~~2005~~common ~~and~~stock ~~September~~could ~~30, 2005~~decline due to any of the following risks.

WeRisks ~~continue~~Related to ~~evaluate~~Our ~~our~~Business disclosure controls and procedures and our internal controls over financial reporting, and may modify, enhance or supplement them as appropriate in the future. There can be no assurance that we will be able to maintain compliance with all of the SEC control requirements. Any modifications, enhancements or supplements to our controls systems could be costly to prepare or implement, divert the attention of our management from operating our business, and cause our operating expenses to increase over the ensuing year. Further, our stock price may be adversely affected by the current, or any future, determination that our disclosure controls and procedures and/or internal controls over financial reporting were not effective.

~~The~~We ~~success~~may ofneed ~~our~~to ~~growth~~restate ~~strategy~~our ~~depends~~consolidated onfinancial ~~the successful~~statements ~~identification, completion and integration of acquisitions~~again.

WeBased ~~have~~upon ~~acquired~~comments ~~or entered~~received ~~into~~from ~~general~~the ~~management~~SEC ~~agreements~~staff ~~with~~regarding 21our ~~physician~~method ~~practices~~of ~~and~~accounting ~~9 ambulatory~~for ~~surgery~~(i) certain ~~centers~~term ~~since~~notes, ~~2002~~freestanding and weembedded ~~intend to pursue additional~~derivatives, ~~acquisitions~~ and ~~management~~(ii) intangible ~~relationships.~~assets ~~Our~~acquired ~~future~~in ~~success~~connection ~~will~~with ~~depend~~physician onpractice ~~our ability to identify~~ and ~~complete~~surgery center acquisitions, ~~and~~we ~~integrate~~have ~~the~~restated ~~acquired businesses with~~ our ~~existing~~consolidated ~~operations.~~financial ~~Our~~statements ~~growth~~for ~~strategy~~the ~~will~~years ~~result~~ended inDecember 31, 2000, December 31, ~~significant~~2001, December 31, ~~additional~~2002, December 31, ~~demands on our infrastructure~~2003, December 31, 2004 and ~~will~~the ~~place~~quarters ~~a significant~~ended ~~strain on our management~~March 31, ~~administrative~~2005, ~~operational~~ June 30, ~~financial~~2005 and ~~technical~~ ~~resources~~September 30, ~~and~~2005. ~~increase~~We ~~demands~~based the foregoing restatements on our ~~systems~~interpretation ~~and~~of applicable ~~controls.~~accounting ~~Our growth~~pronouncements, ~~strategy~~notwithstanding ~~involves~~the ~~numerous~~fact ~~risks,~~that ~~including,~~the ~~but~~SEC ~~not~~staff ~~limited to:~~comments remain unresolved.

~~the~~39 ~~possibility that we are not able to identify suitable acquisition candidates or consummate acquisitions on acceptable terms;~~

~~possible~~There ~~decreases~~can inbe ~~capital~~no ~~resources~~assurance that the SEC staff will agree with our interpretation of the applicable accounting pronouncements. In the event the SEC staff disagrees with one or ~~dilution~~more of our interpretations of applicable accounting pronouncements, we may have to ~~existing~~ ~~stockholders;~~ restate our consolidated financial statements again in the future.

~~difficulties~~A number of class action lawsuits have been filed against us and ~~expenses~~certain ~~incurred~~of inour ~~connection~~officers ~~with~~and ~~an acquisition;~~ directors.

We have become aware of eleven putative class action lawsuits and one derivative action filed against us and certain of our officers and directors. We understand that the ~~difficulties~~lawsuits arose in connection with our determination to restate certain of ~~operating~~our anhistorical ~~acquired~~financial ~~business;~~statements. We believe that the lawsuits lack merit and we have engaged the international law firm of McDermott Will & Emery LLP to vigorously defend against such allegations and claims. There can be no assurance at this time how the lawsuits in question will ultimately be resolved, or the impact, if any, such resolutions will have on our operations and/or financial condition.

~~the~~We ~~diversion~~may ofneed ~~management’s~~to ~~attention~~negotiate ~~from~~a ~~other~~waiver ~~business concerns;~~ letter with respect to our senior credit facility.

aOn ~~limited~~May 2, ~~ability~~2006, June 20, 2006 and August 9, 2006 we entered into letter agreements with the lenders under our $30 million senior credit facility pursuant to ~~predict~~which ~~future~~the ~~operating~~lenders ~~results~~waived certain historic breaches of ~~acquired~~ ~~practices;~~the terms of the credit facility in consideration for which we paid $300,000, $150,000 and $100,000 in waiver fees, respectively, to the lenders.

Subsequent to the ~~potential~~date ~~loss~~of the letter agreement we may have failed to comply with certain covenants set forth in the credit facility. While we have not received a notice letter from the lenders with respect to any breaches or defaults under the terms of ~~key~~the ~~physicians~~credit facility after the date of the letter agreement, ~~employees~~there ~~and~~can ~~patients~~be no assurance that such a notice letter will not be received in the future. In the event we are served with such a notice letter in the future we will attempt to enter into another waiver agreement with the lenders. There can be no assurance that we would be able to enter into any such waiver agreement. As the credit facility is secured by all of anour ~~acquired~~assets, ~~practice~~to the extent we were unable to negotiate a waiver letter with the lenders the lenders might attempt to take certain actions that could materially adversely impact our operations, including, but not limited to, taking control of one or more of our operating subsidiaries and/or other company assets.

InWe ~~the~~Need ~~event~~to ~~that~~Continue ~~the operations of an acquired practice do not meet expectations, we may be required~~ to ~~restructure~~Improve ~~the~~and ~~acquired~~Implement ~~practice or write-off the value of some or all of the assets of the acquired practice. We cannot assure you that any acquisition will be successfully integrated into~~ our ~~operations or will have the intended~~Controls ~~financial~~and ~~or strategic results~~Procedures.

InRequirements ~~addition, acquisitions~~adopted ~~entail~~by anthe ~~inherent~~SEC ~~risk~~in ~~that~~response weto ~~could~~the ~~become~~passage ~~subject~~of tothe ~~contingent or~~Sarbanes-Oxley ~~other~~Act ~~liabilities~~of in2002 ~~connection~~require ~~with~~us ~~the~~to (i) evaluate ~~acquisitions,~~and ~~including~~report ~~liabilities arising~~on ~~from~~a ~~events~~quarterly orbasis ~~conduct~~the ~~pre-dating~~effectiveness of our ~~acquisition~~disclosure controls and ~~that~~procedures, ~~were~~and ~~not known~~(ii) assess toand usreport aton ~~the~~an ~~time~~annual ofbasis ~~acquisition.~~the ~~Although~~effectiveness weof ~~conduct~~our ~~due~~internal ~~diligence~~controls ~~in connection~~over ~~with~~financial ~~each~~reporting. ~~of our~~

32During our assessment with respect to the effectiveness of the foregoing controls as of December 31, 2005, the end of our most recent fiscal year, management identified a number of material weaknesses, which are fully disclosed in Item 9A of our 10-K for the fiscal year ended December 31, 2005.

~~acquisitions,~~As ~~this~~a ~~does~~result ~~not~~of ~~mean~~the material weaknesses, management concluded that weour ~~will~~disclosure ~~necessarily~~controls ~~identify~~and ~~all~~procedures ~~potential~~and ~~problems~~our orinternal ~~issues~~controls inover ~~connection~~financial ~~with~~reporting ~~any~~as ~~given~~of ~~acquisition~~December 31, ~~some~~2005, the end of ~~which~~our ~~could~~most berecent fiscal ~~significant~~year, were not effective. Management has concluded that our disclosure controls and procedures remain not effective as of June 30, 2006.

~~Our~~In ~~failure~~an effort to ~~successfully~~rectify ~~identify~~the ~~and~~foregoing ~~complete~~material ~~future~~weaknesses, ~~acquisitions~~we orhave tomodified ~~integrate~~our ~~and~~method ~~successfully~~of ~~manage~~accounting ~~completed~~for ~~acquisitions~~certain ~~could~~transactions and have aimplemented ~~material~~additional ~~adverse~~controls. ~~effect~~In onso ~~our business~~doing, ~~financial~~we ~~condition and~~restated ~~results of operations.~~

~~Our~~40 ~~growth strategy may not prove viable and expected growth and value may not be realized.~~

~~Our~~our ~~strategy~~consolidated isfinancial tostatements ~~rapidly~~for ~~grow~~the byyears ~~acquiring,~~ended ~~establishing and managing a network of pain management~~December 31, ~~minimally invasive spine surgery and orthopedic rehabilitation centers. Identifying appropriate physician groups and proposing~~2000, ~~negotiating and implementing economically attractive affiliations with them can be a lengthy~~ December 31, ~~complex and costly process. There can be no assurance that we will be successful in identifying and establishing~~ ~~relationships with orthopedic surgery and pain management groups. If we are successful in implementing our strategy of rapid growth~~2001, ~~such growth may impair our ability to efficiently provide non-professional support services~~ December 31, ~~facilities~~2002, ~~equipment~~ December 31, ~~non-professional~~ ~~personnel~~2003, December 31, ~~supplies~~2004 and ~~non-professional~~the ~~support~~quarters ~~staff~~ended toMarch 31, ~~medical~~2005, June 30, ~~practices.~~2005 ~~Our~~and ~~future~~September 30, ~~financial results could be materially adversely affected if we are unable to manage growth effectively~~2005.

~~There~~We ~~can~~continue beto noevaluate ~~assurance~~our ~~that~~disclosure ~~physicians,~~controls ~~medical~~and ~~providers~~procedures orand ~~the~~our ~~medical~~internal ~~community~~controls inover ~~general~~financial ~~will~~reporting, ~~accept~~and ~~our~~may ~~business~~modify, ~~strategy~~enhance ~~and~~or ~~adopt~~supplement them ~~the~~as ~~strategy~~appropriate ~~offered~~in bythe usfuture. ~~The~~There ~~extent~~can tobe ~~which,~~no ~~and~~assurance ~~rate~~that ~~at which,~~we ~~these~~will ~~services~~be ~~achieve~~able ~~market~~to ~~acceptance~~maintain ~~and~~compliance ~~penetration~~with ~~will~~all ~~depend~~of onthe ~~many~~SEC ~~variables~~control ~~including,~~requirements. ~~but~~Any ~~not limited to~~modifications, ~~the~~enhancements ~~establishment~~or ~~and~~supplements ~~demonstration~~to inour ~~the~~controls ~~medical~~systems ~~community~~could ofbe ~~the~~costly ~~clinical~~to ~~safety,~~prepare ~~efficacy and cost-effectiveness of~~or ~~these services~~implement, divert the ~~advantage~~attention of ~~these~~our ~~services~~management ~~over~~from ~~existing~~operating ~~technology~~our business, and ~~third-party~~cause ~~reimbursement~~our ~~practices.~~operating ~~There~~expenses ~~can~~to beincrease noover ~~assurance that~~ the ~~medical~~ensuing ~~community~~year. ~~and~~Further, ~~third-party payors will accept~~ our ~~technology.~~stock ~~Similar~~price ~~risks~~may ~~will~~be ~~confront any~~adversely ~~other~~affected ~~services developed~~ by usthe incurrent, ~~the~~or any future., ~~Failure~~determination of that our ~~services~~disclosure tocontrols ~~gain~~and ~~market~~procedures ~~acceptance~~and/or ~~would~~internal ~~have~~controls aover ~~material adverse effect on our business,~~ financial ~~condition,~~reporting ~~and~~were ~~results~~not ~~of operations~~effective.

IfThe wesuccess doof ~~not~~our ~~have~~growth ~~sufficient~~strategy ~~additional~~depends on ~~capital~~the tosuccessful ~~finance our growth strategy~~identification, ~~our~~completion ~~development~~and ~~may~~integration beof ~~limited~~acquisitions.

We ~~will~~have ~~need~~acquired toor ~~raise~~entered ~~additional~~into ~~capital~~general inmanagement agreements ~~order~~with to21 ~~acquire,~~physician ~~integrate,~~practices ~~develop, operate~~ and ~~expand~~9 ~~our~~ambulatory ~~affiliated~~surgery ~~physician~~centers ~~practices.~~since We2002 ~~may finance future acquisition~~ and ~~development~~we ~~projects~~intend ~~through debt~~to orpursue ~~equity~~additional ~~financings~~acquisitions and ~~may~~management ~~use~~relationships. ~~shares~~Our offuture ~~our~~success ~~capital~~will ~~stock~~depend ~~for~~on ~~all~~our orability ~~a portion of the consideration~~ to beidentify ~~paid~~and incomplete acquisitions. Toand integrate the ~~extent~~acquired ~~that~~businesses wewith ~~undertake~~our ~~these~~existing ~~financings~~operations. orOur ~~use~~growth ~~capital~~strategy ~~stock~~will asresult ~~consideration, our stockholders may,~~ in ~~the~~ ~~future, experience~~ significant ~~ownership~~additional ~~dilution.~~demands Toon ~~the~~our ~~extent we incur indebtedness~~infrastructure, ~~we may have significant interest expense~~ and ~~may~~will beplace ~~subject~~a tosignificant ~~covenants~~strain inon ~~the related debt agreements that affect the conduct of~~ our ~~business.~~management, Weadministrative, ~~have convertible~~operational, ~~notes~~ financial and ~~debentures~~technical ~~outstanding~~resources, ~~that have anti-dilution rights~~ and ~~limitations~~increase demands on ~~incurring~~our ~~additional~~systems ~~indebtedness~~and ~~that~~controls. ~~could~~Our ~~limit~~growth ~~our~~strategy ~~ability~~involves tonumerous ~~obtain~~risks, ~~financing~~including, onbut ~~favorable~~not ~~terms,~~limited orto: ~~at all.~~

We• ~~can~~the ~~give~~possibility ~~no assurances~~ that we ~~will~~are benot able to ~~obtain~~identify ~~financing~~suitable ~~necessary for our~~ acquisition ~~and~~candidates ~~development strategy~~ or ~~that,~~consummate ifacquisitions ~~available, the financing will be~~ on ~~terms~~ acceptable ~~to us. If we do not have sufficient capital resources, our growth could be limited and our operations impaired.~~terms;

~~There~~• ~~has~~possible ~~been~~decreases ain ~~lack~~capital ofresources ~~profitable~~or ~~operations~~dilution into ~~recent~~existing ~~periods.~~stockholders;

~~For~~• ~~the~~difficulties ~~years ended December 31, 2005, 2004~~ and ~~2003,~~expenses ~~net~~incurred loss was ($5,339,378), $(1,501,482) and ($11,482,842), respectively. We expect to increase our spending significantly as we continue to expand our service offerings and commercialization activities. As a result, we will need to generate significant revenues in ~~order~~connection towith ~~continue~~an ~~to grow our business and become profitable.~~acquisition;

A• ~~significant~~the ~~portion~~difficulties of ~~our~~operating ~~assets~~an ~~consists~~acquired ~~of goodwill and other intangible assets and any impairment, reduction, or elimination of these intangible assets could hurt our results of operations.~~business;

As• ~~of March 31, 2006, we had an intangible asset, net goodwill, of approximately $135.7 million, which constituted 66% of our total assets. The net goodwill reflects~~ the ~~amount~~diversion ~~we pay for our acquired practices in excess~~ of ~~the~~management’s ~~fair~~attention ~~value~~from of other ~~identifiable~~business intangible and tangible assets. Our net goodwill will increase in the future as a result of our acquisitions as we pay the contingent purchase price for the acquisitions according to the terms of the respective purchaseconcerns;

33• a limited ability to predict future operating results of acquired practices; and

~~agreements.~~• In addition, we expect to acquire additional goodwill in connection with future acquisitions. As prescribed by generally accepted accounting principles, we do not amortize goodwill; rather it is carried on our balance sheet until it is impaired. At least annually we test net goodwill for impairment. Any determination of impairment could require a significant reduction, or the ~~elimination,~~potential ofloss ~~goodwill, which could hurt our results~~ of ~~operations.~~key ~~Also~~physicians, ~~the~~employees ~~effect of a prolonged downturn in our business will be exacerbated by the impairment,~~ and ~~resulting~~patients ~~write-down,~~ of ~~goodwill~~an ~~related to a reduction in the value of our~~ acquired ~~practices~~practice.

~~Our~~In ~~cash~~the ~~flow~~event ~~and~~that ~~financial~~the ~~condition~~operations of an acquired practice do not meet expectations, we may be ~~adversely~~required ~~affected~~to byrestructure the ~~assumption~~acquired practice or write-off the value of ~~credit~~some ~~risks~~or all of the assets of the acquired practice. We cannot assure you that any acquisition will be successfully integrated into our operations or will have the intended financial or strategic results.

~~Our~~In ~~managed~~addition, ~~and~~acquisitions ~~limited~~entail ~~management~~an ~~practices~~inherent ~~bill~~risk ~~their~~that ~~patients’~~we ~~insurance~~could ~~carriers~~become ~~for~~subject ~~services~~to ~~provided~~contingent byor ~~the~~other ~~practices.~~liabilities Byin ~~undertaking~~connection with the ~~responsibility~~acquisitions, ~~for~~including ~~patient~~liabilities ~~billing~~arising ~~and~~from ~~collection activities,~~events ~~the~~or ~~practices~~conduct ~~assume~~pre-dating our ~~the~~acquisition ~~credit~~and ~~risk~~that ~~presented~~were bynot ~~the~~known ~~patient~~to ~~base,~~us asat ~~well as~~ the ~~risk~~time of ~~payment delays attendant to reimbursement through governmental programs or third-party payors~~acquisition. IfAlthough ~~our~~we ~~practices~~conduct ~~are~~due ~~unsuccessful~~diligence in ~~collecting~~connection ~~a substantial~~with ~~amount~~each of ~~such~~our ~~fees~~acquisitions, itthis ~~will~~does ~~have~~not amean ~~material~~that ~~adverse~~we ~~affect~~will onnecessarily ~~our~~identify ~~financial~~all ~~condition~~potential ~~because~~problems ~~our~~or ~~compensation~~issues ~~from~~in connection ~~these~~with ~~practices~~any isgiven ~~dependent~~acquisition, onsome ~~the~~of ~~practices’~~which ~~collections~~could be significant.

IfOur wefailure ~~are~~to ~~forced~~successfully toidentify ~~repay~~and ~~our~~complete ~~debentures~~future acquisitions ~~and~~or ~~notes~~to inintegrate ~~cash,~~and wesuccessfully ~~may~~manage ~~not~~completed acquisitions could have ~~enough~~a ~~cash~~material toadverse ~~fund~~effect on our business, financial condition and results of operations.

~~Our~~41 7.5% convertible debentures and our secured convertible term notes contain certain provisions and restrictions, which if violated, could result in the full principal amount, $9,653,008 as of March 31, 2006, together with interest and other amounts, becoming immediately due and payable in cash on such securities. If such an event occurred and if a holder of such securities demanded repayment, we might not have the cash resources to repay such indebtedness. The debentures have a term of three years, with interest payable quarterly. Subject to certain conditions, the quarterly interest payments on the debentures may be paid, at our option, in cash or additional shares of our common stock. Our secured convertible term notes are repayable in monthly installments of principal over the three year life of the notes. Subject to certain conditions, the monthly principal and interest payments on the notes may be paid, at our option, in cash or additional shares of common stock. If we made the payments on the debentures and notes in cash rather than additional shares of common stock, it would reduce the amount of cash available to fund operations.

WeOur ~~rely~~growth onstrategy ~~the services of our physicians. We~~ may not beprove ~~able~~viable ~~to attract~~ and ~~retain~~expected ~~qualified~~growth ~~physicians~~and wevalue ~~need~~may tonot ~~support~~be ~~our business~~realized.

Our ~~operations~~strategy ~~are~~is ~~substantially~~to ~~dependent~~rapidly ongrow ~~the~~by ~~services~~acquiring, ofestablishing ~~our~~and ~~practices’~~managing ~~physicians.~~a ~~With~~network ~~respect~~of topain ~~our owned practices~~management, weminimally ~~have~~invasive ~~employment~~spine ~~agreements~~surgery ~~with~~and ~~our~~orthopedic rehabilitation ~~physicians~~centers. ~~that~~Identifying ~~generally~~appropriate ~~have~~physician ~~terms of~~groups ~~five~~and ~~years~~proposing, ~~but~~negotiating ~~may~~and beimplementing ~~terminated~~economically byattractive ~~either~~affiliations ~~party in certain circumstances. Our management agreements~~ with ~~our~~them ~~managed~~can ~~practices~~be ~~generally have~~ a ~~40 year term~~lengthy, ~~while~~complex ~~our~~and ~~agreements~~costly ~~with~~process. ~~limited~~There ~~management~~can ~~practices~~be ~~have~~no aassurance 5that ~~year~~we ~~term~~will ~~with options~~be ~~for~~successful ~~two~~in ~~additional~~identifying ~~five~~and ~~year~~establishing ~~renewal~~relationships ~~terms~~with ~~which~~orthopedic ~~are~~surgery ~~exercisable~~and atpain ~~our~~management ~~election~~groups. ~~These~~If ~~agreements may be earlier terminated under certain circumstances. Although~~ we ~~will~~are ~~endeavor~~successful ~~to maintain and renew such contracts,~~ in ~~the~~implementing ~~event~~our astrategy ~~significant number~~ of ~~physicians~~rapid ~~terminate~~growth, ~~their~~such ~~relationships~~growth ~~with~~may ~~us,~~impair our ~~business~~ability ~~could~~to beefficiently ~~adversely~~provide non-professional ~~affected.~~support ~~While~~services, ~~our~~facilities, ~~employment~~equipment, ~~and~~non-professional ~~management~~personnel, ~~agreements~~supplies ~~contain~~and ~~covenants~~non-professional ~~not~~support staff to ~~compete~~medical ~~with~~practices. usOur ~~for~~future afinancial ~~period~~results ofcould ~~generally~~be ~~two~~materially ~~years~~adversely ~~after~~affected ~~termination~~if ~~of employment,~~we ~~these~~are ~~provisions~~unable ~~may~~to ~~not~~manage growth ~~be enforceable~~effectively.

There can be no assurance that physicians, medical providers or the medical community in general will accept our Webusiness ~~compete~~strategy ~~with~~and adopt the strategy offered by us. The extent to which, and rate at which, these services achieve market acceptance and penetration will depend on many ~~types~~variables ofincluding, ~~health~~but ~~care~~not ~~providers~~limited to, the establishment and ~~government~~demonstration in ~~institutions~~the ~~for~~medical community of the clinical safety, efficacy and cost-effectiveness of these services, the advantage of ~~qualified~~these ~~physicians~~services over existing technology, and third-party reimbursement practices. IfThere wecan ~~are~~be ~~unable~~no toassurance ~~attract~~that the medical community and ~~retain~~third-party ~~physicians,~~payors will accept our ~~revenues~~technology. Similar risks will ~~decrease~~confront ~~and~~ any other services developed by us in the future. Failure of our services to gain market acceptance would have a material adverse effect on our business, financial ~~will~~condition, ~~suffer~~and results of operations.

If ~~certain~~we ~~key~~do ~~employees~~not ~~were~~have tosufficient ~~leave,~~additional wecapital ~~may be unable~~ to ~~operate~~finance our ~~business~~growth ~~profitably~~strategy, ~~complete~~our ~~existing~~development ~~projects~~may ~~or undertake certain new projects~~be limited.

~~Our~~We ~~key~~will ~~employees~~need ~~and~~to ~~consultants~~raise ~~include~~additional ~~Merrill~~capital ~~Reuter,~~in ~~M.D.,~~order ~~Randy~~to ~~Lubinsky~~acquire, ~~Mark~~integrate, ~~Szporka~~develop, operate and ~~Ron~~expand ~~Riewold~~our affiliated physician practices. We ~~have~~may ~~entered~~finance ~~into~~future ~~employment~~acquisition ~~agreements~~and ~~with~~development ~~Randy~~projects ~~Lubinsky~~through ~~(Chief~~debt ~~Executive~~or ~~Officer~~equity financings and ~~Director),~~ ~~Ron~~may ~~Riewold~~use ~~(President~~shares ~~and~~of ~~Director),~~our ~~Mark~~capital ~~Szporka~~stock ~~(Chief~~for ~~Financial~~all ~~Officer~~or ~~and~~a ~~Director),~~portion ~~and~~of Drthe consideration to be paid in acquisitions. ~~Merrill~~To ~~Reuter~~the ~~(President~~extent ofthat ~~one~~we ofundertake these ~~our~~financings ~~subsidiaries~~or ~~and~~use ~~Chairman~~capital ofstock ~~the~~as ~~Board).~~consideration, ~~Should~~our stockholders may, in the ~~services~~future, ofexperience Drsignificant ownership dilution. ~~Reuter,~~To ~~Randy~~the ~~Lubinsky,~~extent ~~Ron Riewold~~we incur indebtedness, orwe ~~Mark~~may ~~Szporka~~have orsignificant ~~other~~interest ~~key~~expense ~~personnel~~and ~~become~~may ~~unavailable~~be subject to uscovenants ~~for~~in the ~~any~~related ~~reason,~~debt agreements that affect the conduct of our business. ~~could~~We behave ~~adversely~~convertible ~~affected.~~notes ~~There~~and isdebentures nooutstanding ~~assurance~~that have anti-dilution rights and limitations on incurring additional indebtedness that wecould ~~will~~limit beour ~~able~~ability to ~~retain~~obtain financing ~~these~~on ~~key~~favorable ~~individuals~~terms, ~~and/~~or ~~attract~~at ~~new~~all. ~~employees~~We ofhave notes due within the ~~caliber needed~~next totwelve ~~achieve~~months ~~our~~totaling ~~objectives~~$7,758,750, including principal and interest. WeIn doaddition, ~~not~~we ~~maintain~~are ~~any~~obligated ~~key~~to ~~employee~~make ~~life~~debt ~~insurance~~principal ~~policies~~payments of $3,000,000 over the next twelve months.

We can give no assurances that we will be able to obtain financing necessary for our acquisition and development strategy or that, if 34available, the financing will be on terms acceptable to us. If we do not have sufficient capital resources, our growth could be limited and our operations impaired.

~~Our~~There ~~employment~~has ~~agreements~~been ~~with certain senior executive officers entitle them to individual annual bonuses equal to~~ a ~~minimum~~lack of ~~$200,000~~profitable upoperations toin arecent ~~maximum of 150% of salary~~periods.

~~Our~~For ~~employment~~the ~~agreements~~years ~~with~~ended December 31, ~~our~~2005, ~~Chief~~2004 ~~Executive~~and ~~Officer~~2003, ~~Chief~~net ~~Financial~~loss ~~Officer~~was ~~and~~($5,339,378), ~~President~~$(1,501,482) ~~which~~and ~~expire~~($11,482,843), onrespectively. ~~December~~We ~~31,~~expect ~~2010,~~to ~~and~~increase ~~were~~our ~~amended~~spending ~~effective~~significantly ~~January~~as 1,we ~~2006,~~continue ~~entitle~~to ~~each~~expand ~~officer~~our toservice ~~a minimum~~offerings ~~annual~~and ~~bonus~~commercialization ofactivities. ~~$200~~As a result,~~000~~ upwe will need to agenerate ~~maximum~~significant ofrevenues ~~150%~~in oforder ~~their~~to ~~base~~continue ~~salary~~to ingrow ~~any~~our ~~one~~business ~~calendar~~and ~~year~~become profitable.

A significant portion of our ~~Increased~~assets ~~costs~~consists ~~associated~~of ~~with~~goodwill ~~corporate~~and ~~governance~~other ~~compliance~~intangible ~~may~~assets ~~significantly~~and ~~affect~~any impairment, reduction, or elimination of these intangible assets could hurt our results of operations.

~~The~~As ~~Sarbanes-Oxley Act~~ of ~~2002 and our being subject to the Securities Exchange Act of 1934~~June 30, ~~as amended~~2006, ~~requires~~we ~~changes~~had inan ~~some~~intangible ofasset, ~~our~~net ~~corporate governance and securities disclosure and compliance practices~~goodwill, ~~and requires a review~~ of ~~our~~approximately ~~internal control procedures~~$139.8 ~~We expect these developments to increase our legal compliance and financial reporting costs. In addition~~million, ~~they~~which ~~could~~constituted ~~make~~67% ~~it more difficult for us to attract and retain qualified members~~ of our ~~board~~total ~~of directors, or qualified executive officers~~assets. ~~Finally,~~The ~~director~~net ~~and~~goodwill ~~officer~~reflects ~~liability~~the ~~insurance~~amount ~~for public companies has become more difficult and more expensive to obtain, and~~ we ~~may~~pay befor ~~required to accept reduced coverage or incur higher costs to obtain coverage that is satisfactory to us and~~ our ~~officers or directors. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude or additional costs we may incur as a result.~~

~~Changes~~42 ~~associated with reimbursement by third-party payors for our services may adversely affect our operating results and financial condition.~~

~~Approximately~~acquired ~~50%~~practices in excess of ~~our~~the ~~revenues~~fair ~~are~~value ~~directly~~of ~~dependent~~other onidentifiable ~~the~~intangible ~~acceptance~~and oftangible assets. Our net goodwill will increase in the ~~services~~future ~~provided~~as bya result of our ~~managed~~acquisitions ~~practices~~as ~~and~~we ~~limited~~pay ~~management~~the ~~practices~~contingent aspurchase ~~covered~~price ~~benefits~~for ~~under~~the ~~third-party~~acquisitions ~~payor programs,~~according ~~including~~to ~~PPOs,~~the ~~HMOs~~terms ~~and~~of ~~other~~the ~~managed~~respective ~~care~~purchase ~~entities~~agreements. ~~The~~In ~~health~~addition, ~~care~~we ~~industry~~expect isto ~~undergoing~~acquire ~~significant~~additional ~~changes,~~goodwill in connection with ~~third-party~~future ~~payors~~acquisitions. ~~taking~~As ~~measures~~prescribed toby ~~reduce~~generally ~~reimbursement~~accepted ~~rates~~accounting orprinciples, inwe ~~some~~do ~~cases,~~not ~~denying~~amortize ~~reimbursement~~goodwill; ~~for~~rather ~~previously acceptable~~it ~~treatment~~is ~~modalities.~~carried ~~There~~on isour nobalance ~~assurance~~sheet ~~that~~until ~~third-party~~it ~~payors~~is ~~will~~impaired. ~~continue~~At toleast ~~pay~~annually ~~for~~we ~~the~~test ~~services~~net ~~provided~~goodwill byfor ~~our~~impairment. ~~owned~~Any determination ~~practices~~of ~~under~~impairment ~~their~~could ~~payor~~require ~~programs~~a orsignificant byreduction, or the ~~managed~~elimination, ~~practices.~~of ~~Failure~~goodwill, which could hurt our results of ~~third-party~~operations. ~~payors~~Also, tothe ~~adequately cover~~effect ~~minimally~~of ~~invasive~~a ~~surgery~~prolonged ordownturn ~~other~~in ~~services~~our business will ~~have~~be exacerbated by the impairment, and resulting write-down, of goodwill related to a ~~material~~reduction ~~adverse~~in ~~effect~~the onvalue usof our acquired practices.

~~Professional~~Our ~~liability~~cash ~~claims~~flow ~~could~~and financial condition may be adversely affected ~~impact~~by ~~our~~the ~~business~~assumption of credit risks.

Our managed ~~practices~~and ~~are~~limited ~~involved~~management inpractices ~~the~~bill ~~delivery~~their ofpatients’ ~~health~~insurance ~~care~~carriers for services toprovided by the ~~public~~practices. ~~and~~By ~~are~~undertaking ~~exposed to~~ the ~~risk~~responsibility offor ~~professional~~patient ~~liability~~billing ~~claims.~~and ~~Claims~~collection ~~of this nature~~activities, ifthe ~~successful,~~practices ~~could~~assume ~~result in damage awards to~~ the ~~claimants~~credit inrisk ~~excess~~presented ofby the ~~limits~~patient ofbase, ~~any~~as ~~applicable~~well ~~insurance~~as ~~coverage.~~the ~~Insurance~~risk ~~against losses related to claims~~ of ~~this~~payment ~~type~~delays ~~can~~attendant beto reimbursement ~~expensive~~through ~~and~~governmental ~~varies~~programs ~~widely~~or ~~from~~third-party ~~state to state~~payors. ~~There~~If ~~can be no assurance that~~ our ~~owned~~practices ~~and managed~~are ~~practices~~unsuccessful ~~will~~in ~~not~~collecting bea ~~subject~~substantial toamount of such ~~claims~~fees, ~~that~~it ~~any claim~~ will behave ~~successfully~~a ~~defended~~material ~~or,~~adverse ifaffect on our ~~practices~~financial ~~are~~condition ~~found~~because ~~liable,~~our ~~that~~compensation ~~the~~from these ~~claim~~practices ~~will~~is ~~not~~dependent ~~exceed~~on the ~~limits~~practices’ ~~of our insurance~~collections. ~~Liabilities in excess of our insurance could have a material adverse effect on us.~~

~~Our~~If ~~business~~we isare ~~subject~~forced to ~~substantial~~repay ~~competition~~our ~~which~~debentures ~~could~~and ~~have~~notes ain ~~material~~cash, ~~impact~~we onmay ~~our~~not ~~business~~have ~~and~~enough cash ~~financial~~to ~~condition~~fund our operations.

~~The~~Our ~~health~~7.5% ~~care~~convertible ~~industry,~~debentures inand ~~general,~~our ~~and~~secured ~~the~~convertible ~~markets~~term ~~for~~notes ~~orthopedic,~~contain ~~rehabilitation~~certain provisions and restrictions, ~~minimally~~which ~~invasive~~if ~~surgery~~violated, ~~services~~could result in ~~particular,~~the ~~are~~full ~~highly~~principal ~~competitive.~~amount, ~~The~~$10,455,160 ~~practices~~as weof ~~own~~June 30, or2006, ~~manage~~together ~~compete~~ with interest and other ~~physicians~~amounts, becoming immediately due and ~~rehabilitation~~payable ~~clinics~~in ~~who~~cash ~~may~~on besuch ~~better~~securities. ~~established~~If orsuch ~~have~~an ~~greater~~event ~~recognition~~occurred and inif a ~~particular~~holder ~~community~~of ~~than~~such securities demanded repayment, we might not have the ~~physicians~~cash inresources ~~these~~to ~~practices.~~repay ~~These~~such ~~practices~~indebtedness. ~~also~~The ~~compete~~debentures ~~against~~have ~~hospitals~~a ~~and~~term ~~large~~of ~~health~~three ~~care companies~~years, ~~such~~with asinterest ~~HealthSouth,~~payable ~~Inc~~quarterly. ~~and~~Subject ~~U.S.~~to ~~Physical~~certain ~~Therapy~~conditions, ~~Inc.,~~the ~~with~~quarterly ~~respect~~interest payments toon ~~orthopedic~~the ~~and~~debentures ~~rehabilitation~~may ~~services~~be paid, ~~and~~at ~~Symbion~~our ~~and~~option, ~~AmSurg~~in ~~Corp,~~cash ~~with~~or ~~respect~~additional toshares ~~outpatient~~of ~~surgery~~our ~~centers~~common stock. ~~These~~Our ~~hospitals~~secured ~~and~~convertible ~~companies~~term ~~have~~notes ~~established operating~~are ~~histories~~repayable ~~and~~in ~~greater~~monthly ~~financial~~installments ~~resources~~of ~~than~~principal ~~us.~~over Inthe ~~addition,~~three weyear ~~expect~~life ~~competition~~of the notes. Subject to ~~increase~~certain conditions, ~~particularly~~the inmonthly principal and interest payments on the ~~market~~notes ~~for~~may ~~rehabilitation~~be ~~services~~paid, asat ~~consolidation~~our ofoption, ~~the~~in ~~physical~~cash ~~therapy~~or ~~industry~~additional ~~continues~~shares ~~through~~of ~~the~~common ~~acquisition by~~stock. ~~hospitals~~If ~~and~~we ~~large~~made ~~health~~the ~~care~~payments ~~companies~~on ofthe ~~physician-owned~~debentures and ~~other~~notes ~~privately~~in ~~owned~~cash ~~physical~~rather ~~therapy~~than ~~practices.~~additional Weshares ~~will~~of ~~also~~common ~~compete~~stock, it ~~with~~would ~~our~~reduce ~~competitors~~the inamount ~~connection~~of ~~with~~cash ~~acquisition~~available ~~opportunities~~to fund operations.

~~Failure~~We torely ~~obtain~~on ~~managed~~the ~~care~~services ~~contracts~~of our physicians. We may not be able to attract and ~~legislative~~retain qualified ~~changes~~physicians ~~could~~we ~~adversely~~need ~~affect~~to support our business.

Our operations are substantially dependent on the services of our practices’ 35physicians. With respect to our owned practices, we have employment agreements with our physicians that generally have terms of five years, but may be terminated by either party in certain circumstances. Our management agreements with our managed practices generally have a 40 year term, while our agreements with limited management practices have a 5 year term with options for two additional five year renewal terms which are exercisable at our election. These agreements may be earlier terminated under certain circumstances. Although we will endeavor to maintain and renew such contracts, in the event a significant number of physicians terminate their relationships with us, our business could be adversely affected. While our employment and management agreements contain covenants not to compete with us for a period of generally two years after termination of employment, these provisions may not be enforceable.

~~There~~43 can be no assurance that our owned or managed practices will be able to obtain managed care contracts. These practices’ future inability to obtain managed care contracts in their markets could have a material adverse effect on our business, financial condition or results of operation. In addition, federal and state legislative proposals have been introduced that could substantially increase the number of Medicare and Medicaid recipients enrolled in HMOs and other managed care plans. We derive, through these practices, a substantial portion of our revenue from Medicare and Medicaid. In the event such proposals are adopted, there can be no assurance that these practices will be able to obtain contracts from HMOs and other managed care plans serving Medicare and Medicaid enrollees. Failure to obtain such contracts could have a material adverse effect on the business, financial condition and results of operations. Even if our practices are able to enter into managed care contracts, the terms of such agreements may not be favorable to us.

~~Risks~~We ~~Related~~compete with many types of health care providers and government institutions for the services of qualified physicians. If we are unable to ~~Our~~attract ~~Industry~~and retain physicians, our revenues will decrease and our business will suffer.

~~The~~If ~~health~~certain ~~care industry is highly regulated and~~key ~~our~~employees ~~failure~~were to ~~comply with laws and regulations applicable to us or the owned practices~~leave, ~~and~~we ~~the~~may ~~failure~~be ofunable ~~the managed practices and the limited management practices~~ to ~~comply~~operate ~~with~~our ~~laws~~business ~~and regulations applicable to them~~profitably, ~~could~~complete ~~have~~existing ~~an adverse~~projects ~~effect~~or onundertake ~~our~~certain ~~financial~~new ~~condition and results of operations~~projects.

Our ~~owned~~key ~~practices, the~~employees ~~managed practices~~ and ~~the~~consultants ~~limited~~include ~~management~~Merrill ~~practices~~Reuter, ~~are~~M.D., ~~subject~~Randy ~~to stringent federal~~Lubinsky, ~~state~~Mark Szporka, and ~~local~~Ron ~~government~~Riewold. ~~health~~We ~~care~~have ~~laws~~entered ~~and~~into ~~regulations. If~~employment weagreements orwith ~~they~~Randy ~~fail~~Lubinsky to(Chief ~~comply~~Executive ~~with~~Officer ~~applicable~~and ~~laws~~Director), orRon ifRiewold a(President ~~determination is made~~and ~~that~~Director), inMark ~~the~~Szporka ~~past~~(Chief weFinancial orOfficer ~~the~~and ~~managed~~Director), ~~practices~~and orDr. Merrill ~~the~~Reuter ~~limited~~(President ~~management~~of ~~practices have~~one ~~failed~~of toour ~~comply~~subsidiaries ~~with~~and ~~these~~Chairman ~~laws,~~of wethe ~~may~~Board). beShould ~~subject~~the toservices ~~civil~~of ~~or criminal penalties~~Dr. Reuter, ~~including~~Randy ~~the~~Lubinsky, ~~loss~~Ron ofRiewold, ~~our license~~ or ~~our~~Mark ~~physicians’~~Szporka ~~licenses to~~or ~~operate~~other ~~and~~key ~~our~~personnel ~~ability~~become unavailable to ~~participate~~us infor ~~Medicare~~any reason, ~~Medicaid~~our ~~and~~business ~~other government~~could ~~sponsored~~be ~~and~~adversely ~~third-party health care programs~~affected. InThere ~~addition,~~is ~~laws~~no ~~and regulations~~assurance ~~are~~that ~~constantly~~we ~~changing~~will ~~and~~be ~~may~~able ~~impose~~to ~~additional~~retain ~~requirements. These~~these ~~changes~~key ~~could~~individuals ~~have~~and/or ~~the~~attract ~~effect~~new employees of ~~impeding~~the ~~our~~caliber ~~ability~~needed to ~~continue~~achieve toour objectives. We do ~~business~~ ornot ~~reduce~~maintain ~~our~~any ~~opportunities~~key toemployee ~~continue~~life toinsurance ~~grow~~policies.

~~Periodic~~Our ~~revisions~~employment toagreements ~~laws~~with ~~and~~certain ~~regulations~~senior ~~may~~executive officers entitle them ~~reduce~~to ~~the~~individual ~~revenues~~annual ~~generated~~bonuses byequal ~~the~~to ~~owned~~a ~~practices~~minimum of $200,000 ~~managed~~up ~~practices~~to ~~and~~a ~~the limited~~maximum ~~management~~of ~~practices~~150% of salary.

AOur ~~significant~~employment ~~amount~~agreements ~~of the~~with ~~revenues generated by~~ our ~~owned~~Chief Executive ~~practices~~Officer, ~~the~~Chief ~~managed~~Financial ~~practices~~Officer and ~~the limited~~President, ~~management~~which ~~practices~~expire ison ~~derived~~December 31, ~~from~~2010, ~~governmental~~and ~~payors.~~were ~~These governmental~~amended ~~payors~~effective ~~have~~January 1, ~~taken~~2006, ~~and~~entitle ~~may~~each ~~continue~~officer to ~~take~~a ~~steps~~minimum ~~designed~~annual tobonus ~~reduce the cost~~ of ~~medical care. Private payors often follow the lead of governmental payors~~$200,000 ~~and~~up ~~private payors have been taking steps~~ to ~~reduce~~a ~~the~~maximum ~~cost to them~~ of ~~medical~~ ~~care.~~150% ~~A change in the makeup~~ of ~~the~~their ~~patient mix that results in a~~base ~~decrease~~salary in ~~patients~~any ~~covered~~one bycalendar ~~private insurance or a shift by private payors to other payment structures could also adversely affect our business, financial condition and results of operations~~year. If reductions in reimbursement occur, the revenues generated by the owned practices, the managed practices and the limited management practices could shrink. This shrinkage would cause a reduction in our revenues. Accordingly, our business could be adversely affected by reductions in or limitations on reimbursement amounts for medical services rendered, payor mix changes or shifts by payors to different payment structures.

~~Because government-sponsored~~Increased ~~payors~~costs ~~generally~~associated ~~pay~~with ~~providers~~corporate ~~based~~governance oncompliance ~~a fee schedule, and the trend is for private payors to do the same, we~~ may ~~not~~significantly beaffect ~~able to prevent a decrease in~~ our ~~revenues~~results by increasing the amounts the owned practices charge for services. The same applies to the limited management practices and the managed practices. They cannot increase their charges in an attempt to counteract reductions in reimbursement for services. There can be no assurance that any reduced operating margins could be recouped through cost reductions, increased volume, and introduction of ~~additional procedures or otherwise~~operations. We ~~believe that trends in cost containment in the health care industry will continue to result in reductions from historical levels of per-patient revenue.~~

~~Federal~~The Sarbanes-Oxley Act of 2002 and ~~state~~our ~~healthcare~~being ~~reform~~subject ~~may~~to ~~have~~the anSecurities Exchange Act of 1934, as amended, requires changes in some of ~~adverse~~our ~~effect~~corporate ongovernance and securities disclosure and compliance practices, and requires a review of our internal control procedures. We expect these developments to increase our legal compliance and financial ~~condition~~reporting costs. In addition, they could make it more difficult for us to attract and ~~results~~retain qualified members of our board of directors, or qualified executive officers. Finally, director and officer liability insurance for public companies has become more difficult and more ~~operations~~expensive to obtain, and we may be required to accept reduced coverage or incur higher costs to obtain coverage that is satisfactory to us and our officers or directors. We are presently evaluating and monitoring regulatory developments and cannot estimate the timing or magnitude or additional costs we may incur as a result.

~~Federal~~Changes ~~and~~associated ~~state governments~~with ~~have~~reimbursement ~~continued~~by tothird-party ~~focus~~payors ~~significant~~for ~~attention on health care reform.~~our Aservices ~~broad~~may ~~range~~adversely ofaffect health care reform measures have been introduced in Congress and in state legislatures. It is not clear at this time what proposals, if any, will be adopted, or, if adopted, what effect, if any, such proposals would have on our ~~business.~~operating ~~Currently~~results ~~proposed federal~~ and ~~state~~financial ~~legislation could have an adverse effect on our business~~condition.

36Approximately 50% of our revenues are directly dependent on the acceptance of the services provided by our managed practices and limited management practices as covered benefits under third-party payor programs, including PPOs, HMOs and other managed care entities. The health care industry is undergoing significant changes, with third-party payors taking measures to reduce reimbursement rates or, in some cases, denying reimbursement for previously acceptable treatment modalities. There is no assurance that third-party payors will continue to pay for the services provided by our owned practices under their payor programs or by the managed practices. Failure of third-party payors to adequately cover minimally invasive surgery or other services will have a material adverse effect on us.

~~Our~~44 ~~affiliated physicians may not appropriately record or document services they provide.~~

~~Our~~Professional ~~affiliated~~liability ~~physicians~~claims ~~are~~could ~~responsible~~adversely ~~for~~impact assigning reimbursement codes and maintaining sufficient supporting documentation for the services they provide. The owned practices, managed practices and limited management practices use this information to seek reimbursement for their services from third-party payors. If these physicians do not appropriately code or document their services, our ~~financial condition and results of operations could be adversely affected~~business.

Our managed practices are involved in the delivery of health care services to the public and are exposed to the risk of professional liability claims. ~~Unfavorable~~Claims ~~changes~~of orthis ~~conditions~~nature, if successful, could ~~occur~~result in damage awards to the ~~geographic~~claimants ~~areas~~in ~~where~~excess of the limits of any applicable insurance coverage. Insurance against losses related to claims of this type can be expensive and varies widely from state to state. There can be no assurance that our ~~operations~~owned and managed practices will not be subject to such claims, that any claim will be successfully defended or, if our practices are ~~concentrated~~found liable, that the claim will not exceed the limits of our insurance. Liabilities in excess of our insurance could have a material adverse effect on us.

AOur ~~majority~~business ofis ~~our~~subject ~~revenue~~to insubstantial ~~2005~~competition ~~was generated by our operations in five states. In particular, Florida accounted for approximately 37% of our revenue in 2005. Adverse changes or conditions affecting these~~which ~~particular~~could ~~markets, such as health care reforms, changes in laws and regulations, reduced Medicaid reimbursements and government investigations, may~~ have a material ~~adverse~~impact ~~effect~~ on our ~~financial~~business ~~condition~~ and ~~results~~financial ~~of operations~~condition.

~~Regulatory~~The ~~authorities~~health ~~could~~care ~~assert~~industry, ~~that~~in general, and the ~~owned~~markets ~~practices~~for orthopedic, ~~the~~rehabilitation ~~managed~~and ~~practices~~minimally orinvasive ~~the~~surgery ~~limited~~services ~~management~~in particular, are highly competitive. The practices ~~fail~~we toown ~~comply~~or ~~with~~manage ~~the~~compete ~~federal~~with ~~Stark~~other ~~Law.~~physicians Ifand ~~such~~rehabilitation aclinics ~~claim~~who ~~were~~may ~~successfully~~be ~~asserted,~~better ~~this~~established ~~would~~or ~~result~~have greater recognition in a particular community than the ~~inability~~ ofphysicians in these practices. These practices also compete against hospitals and large health care companies, such as HealthSouth, Inc. and U.S. Physical Therapy, Inc., with respect to ~~bill~~orthopedic ~~for~~and rehabilitation services, ~~rendered~~and Symbion and AmSurg Corp, ~~which~~with ~~would~~respect ~~have~~to anoutpatient ~~adverse~~surgery ~~effect~~centers. onThese ~~our~~hospitals ~~financial~~and ~~condition~~companies have established operating histories and ~~results~~greater offinancial ~~operations~~resources than us. In addition, we ~~could~~expect becompetition ~~required~~ to increase, ~~restructure~~particularly orin ~~terminate~~the ~~our~~market ~~arrangements~~for ~~with~~rehabilitation ~~these~~services, ~~practices. This~~as ~~result,~~consolidation orof ~~our~~the ~~inability~~physical totherapy ~~successfully~~industry ~~restructure~~continues through the ~~arrangements~~acquisition toby ~~comply~~hospitals ~~with~~and ~~the~~large ~~Stark~~health ~~Law,~~care ~~could~~companies ~~jeopardize~~of physician-owned and other privately owned physical therapy practices. We will also compete with our ~~business~~competitors in connection with acquisition opportunities.

~~Section~~Failure ~~1877 of Title 18 of the Social Security Act, commonly referred~~ to asobtain ~~the~~managed ~~“Stark~~care ~~Law”,~~contracts prohibits a physician from making a referral to an entity for the furnishing of Medicare-covered “designated health services” if the physician (or an immediate family member of the physician) has a “financial relationship” with that entity. “Designated health services” include clinical laboratory services; physical and occupational therapy services; radiology services, including magnetic resonance imaging, computerized axial tomography scans, and ultrasound services (including the professional component of such diagnostic testing, but excluding procedures ~~where~~legislative ~~the~~changes ~~imaging~~could ~~modality~~adversely isaffect ~~used~~our to guide a needle, probe or catheter accurately); radiation therapy services and supplies; durable medical equipment and supplies; home health services; inpatient and outpatient hospital services; and othersbusiness. A “financial relationship” is defined as an ownership or investment interest in or a compensation arrangement with an entity that provides designated health services. Sanctions for prohibited referrals include denial of Medicare payment and civil monetary penalties of up to $15,000 for each service ordered. Designated health services furnished pursuant to a referral that is prohibited by the Stark Law are not covered by Medicare and payments improperly collected must be promptly refunded.

~~The~~There ~~physicians~~can inbe no assurance that our owned or managed practices ~~have~~will abe ~~financial~~able ~~relationship~~to obtain ~~with~~managed ~~the~~care ~~owned~~contracts. These practices’ ~~(they~~future ~~receive~~inability ~~compensation~~to ~~for~~obtain ~~services~~managed ~~rendered)~~care ~~and~~contracts ~~may~~in ~~refer~~their ~~patients~~markets tocould ~~the~~have ~~owned~~a ~~practices~~material ~~for~~adverse ~~physical~~effect on our business, financial condition or results of operation. In addition, federal and state ~~occupational~~legislative ~~therapy~~proposals ~~services~~have ~~(and~~been ~~perhaps~~introduced ~~other~~that ~~designated~~could ~~health~~substantially ~~services)~~increase ~~covered~~the bynumber of Medicare and Medicaid recipients enrolled in HMOs and other managed care plans. ~~Therefore~~We derive, anthrough ~~exception~~these ~~would~~practices, ~~have~~a tosubstantial ~~apply~~portion toof ~~allow~~our revenue from Medicare and Medicaid. In the ~~physicians~~event insuch ~~our~~proposals ~~owned~~are adopted, there can be no assurance that these practices towill ~~refer~~be ~~patients~~able to ~~the~~obtain ~~owned~~contracts ~~practices~~from ~~for~~HMOs ~~the~~and ~~provision~~other managed care plans serving Medicare and Medicaid enrollees. Failure to obtain such bycontracts could have a material adverse effect on the ~~owned~~business, financial condition and results of operations. Even if our practices are able to enter into managed care contracts, the terms of ~~Medicare-covered~~such ~~designated~~agreements ~~health~~may ~~services~~not be favorable to us.

~~There~~Risks ~~are~~Related ~~several exceptions~~ to ~~the~~Our ~~prohibition~~Industry on referrals for designated health services which have the effect of allowing a physician that has a financial relationship with an entity to make referrals to that entity for the provision of Medicare-covered designated health services. The exception on which we rely with respect to the owned practices is the exception for employees, as all of the physicians employed in our owned practices are W-2 employees of the respective owned practices. Therefore, we believe that the physicians employed by our owned practices can refer patients to the owned practices for the provision of designated health services covered by Medicare. Nevertheless, should the owned practices fail to adhere to the conditions of the employment exception, or if a regulator determines that the employees or the employment relationship do not meet the criteria of the employment exception, the owned practices would be liable for violating the Stark Law, which could have a material adverse effect on us. We believe that our relationships with the managed practices and the limited management practices, respectively, do not trigger the Stark Law. Nevertheless, if a regulator were somehow to determine that these relationships are subject to the Stark Law, and that the relationships do not meet the conditions of any exception to the Stark Law, such failure would have a material adverse effect on us.

The health care industry is 37highly regulated and our failure to comply with laws and regulations applicable to us or the owned practices, and the failure of the managed practices and the limited management practices to comply with laws and regulations applicable to them, could have an adverse effect on our financial condition and results of operations.

~~The~~Our ~~referral~~owned ofpractices, ~~Medicare patients by physicians employed by or under contract with~~ the managed practices and the limited management practices, ~~respectively,~~are subject to ~~their~~stringent ~~respective practices~~federal, ~~however,~~state ~~does trigger~~and ~~the~~local ~~Stark~~government ~~Law.~~health Wecare ~~believe,~~laws ~~nevertheless, that the in-office ancillary exception to the Stark Law has the effect of permitting these physician members of the respective managed practices~~ and ~~limited~~regulations. ~~management~~If ~~practices~~we toor ~~refer~~they ~~patients~~fail to ~~their~~ ~~respective~~comply ~~group~~with ~~practice~~applicable ~~for~~laws, ~~the~~or ~~provision~~if bya ~~the~~determination ~~respective~~is ~~group~~made ~~practice~~that ofin ~~Medicare-covered~~the ~~designated~~past ~~health~~we ~~services.~~or If the managed practices or the limited management practices ~~were~~have ~~found~~failed ~~not~~ to comply with ~~the~~these ~~terms of the in-office ancillary exception~~laws, ~~they~~we ~~cannot~~may ~~properly~~be ~~bill~~subject ~~Medicare~~to ~~for~~civil ~~the~~or ~~designated~~criminal ~~health services provided by them. In such an event~~penalties, ~~our~~including ~~business could be materially adversely affected because~~ the ~~revenues~~loss weof ~~generate~~our ~~from~~license ~~these practices are dependent, at least in part, on the revenues~~ or ~~profits~~our ~~generated~~physicians’ bylicenses ~~those~~to ~~practices.~~

~~Regulatory~~45 authorities could assert that our owned practices, the managed practices or the limited management practices, or the contractual arrangements between us and the managed practices or the limited management practices, fail to comply with state laws analogous to the Stark Law. In such event, we could be subject to civil penalties and could be required to restructure or terminate the contractual arrangements.

Atoperate ~~least~~and ~~some~~our ofability ~~the~~to ~~states~~participate in ~~which~~Medicare, weMedicaid doand ~~business~~other ~~also~~government ~~have~~sponsored ~~prohibitions~~and ~~on physician self~~third-~~referrals~~party ~~that~~health ~~are similar to the Stark Law~~care programs. ~~These~~In addition, laws and ~~interpretations~~regulations ~~vary from state to state and~~ are ~~enforced~~ byconstantly ~~state~~changing ~~courts~~ and ~~regulatory~~may ~~authorities,~~impose ~~each~~additional ~~with broad discretion~~requirements. AsThese ~~indicated~~changes ~~elsewhere,~~could wehave ~~enter into management agreements with~~ the ~~managed~~effect ~~practices~~of ~~and~~impeding ~~the~~our ~~limited~~ability ~~management practices. Under those agreements, we provide management and other items and services~~ to ~~the~~continue ~~practices in exchange for compensation. Although we believe that the practices comply with these laws, and although we attempt~~ to ~~structure~~do ~~our~~business ~~relationships with these practices in a manner that we believe keeps us from violating these laws (~~or inreduce ~~a manner that we believe does not trigger the law), state regulatory authorities or other parties could assert that the practices violate these laws and/or that~~ our ~~agreements~~opportunities ~~with~~to ~~the~~continue ~~practices violate~~to ~~these laws~~grow. ~~Any such conclusion could adversely affect our financial results and operations.~~

~~Regulatory~~Periodic ~~authorities~~revisions orto ~~other~~laws ~~persons~~and ~~could~~regulations ~~assert~~may ~~that~~reduce ~~our~~the ~~relationships~~revenues ~~with~~generated ~~our~~by the owned practices, ~~the~~ managed practices orand the limited management practices ~~fail to comply with the anti-kickback law~~. If such a claim were successfully asserted, we could be subject to civil and criminal penalties and could be required to restructure or terminate the applicable contractual arrangements. If we were subject to penalties or are unable to successfully restructure the relationships to comply with the Anti-Kickback Statute it would have an adverse effect on our financial condition and results of operations.

~~The~~A ~~anti-kickback~~significant ~~provisions~~amount of the ~~Social~~revenues ~~Security~~generated ~~Act~~by ~~prohibit~~our ~~anyone~~owned practices, the managed practices and the limited management practices is derived from ~~knowingly~~governmental payors. These governmental payors have taken and ~~willfully~~may ~~(a)~~continue ~~soliciting~~to ortake ~~receiving~~steps ~~any~~designed ~~remuneration~~to inreduce ~~return~~the ~~for~~cost ~~referrals~~of ~~for~~medical ~~items~~care. Private payors often follow the lead of governmental payors, and ~~services~~private ~~reimbursable~~payors have been ~~under~~taking ~~most~~steps ~~federal~~to ~~health~~reduce the cost to them of medical care. ~~programs;~~A orchange ~~(b)~~in ~~offering~~the ormakeup ~~paying~~of ~~any~~the ~~remuneration~~patient tomix ~~induce~~that results in a ~~person~~decrease in patients covered by private insurance or a shift by private payors to ~~make~~other ~~referrals~~payment ~~for~~structures ~~items~~could also adversely affect our business, financial condition and ~~services~~results ~~reimbursable~~of ~~under~~operations. ~~most~~If ~~federal~~reductions ~~health~~in ~~care~~reimbursement ~~programs~~occur, ~~which~~the werevenues ~~refer~~generated toby asthe owned practices, the ~~“Anti-Kickback~~managed practices and the limited management practices could shrink. This shrinkage would ~~Statute”~~cause ora ~~“Anti-Kickback~~reduction ~~Law~~in our revenues.” ~~The~~Accordingly, ~~prohibited~~our ~~remuneration~~business ~~may~~could be ~~paid~~adversely ~~directly~~affected orby ~~indirectly,~~reductions ~~overtly~~in or ~~covertly~~limitations on reimbursement amounts for medical services rendered, inpayor ~~cash~~mix changes or inshifts ~~kind~~by payors to different payment structures.

~~Violation~~Because ofgovernment-sponsored ~~the~~payors ~~Anti-Kickback~~generally ~~Statute~~pay isproviders based on a ~~felony~~fee schedule, and ~~criminal~~the ~~conviction~~trend ~~results~~is infor aprivate ~~fine~~payors ofto do the same, we may not ~~more~~be ~~than~~able ~~$25,000,~~to ~~imprisonment~~prevent ~~for~~a ~~not~~decrease ~~more~~in ~~than~~our ~~five~~revenues ~~years,~~by orincreasing ~~both.~~the ~~Further,~~amounts the ~~Secretary~~owned ofpractices charge for services. The same applies to the ~~Department~~ oflimited ~~Health~~management practices and ~~Human~~the ~~Services~~managed ~~(“DHHS”)~~practices. ~~has~~They ~~the~~cannot ~~authority~~increase their charges in an attempt to ~~exclude~~counteract ~~violators~~reductions ~~from~~in ~~all~~reimbursement ~~federal~~for ~~health~~services. ~~care~~There ~~programs~~can ~~and/or~~be ~~impose~~no ~~civil~~assurance ~~monetary~~that ~~penalties~~any ofreduced ~~$50,000~~operating ~~for~~margins ~~each~~could ~~violation~~be ~~and~~recouped ~~assess~~through ~~damages~~cost reductions, increased volume, and introduction of ~~not~~additional ~~more~~procedures ~~than~~or otherwise. We ~~three~~believe ~~times~~that trends in cost containment in the ~~total~~health ~~amount~~care ofindustry ~~remuneration~~will ~~offered,~~continue ~~paid,~~to ~~solicited~~result orin ~~received~~reductions from historical levels of per-patient revenue.

AsFederal ~~the~~and ~~result~~state ofhealthcare areform ~~congressional~~may ~~mandate,~~have ~~the~~an ~~Office~~adverse ofeffect ~~the~~on ~~Inspector~~our ~~General~~financial ~~(“OIG”)~~condition ofand ~~DHHS~~results promulgated a regulation specifying certain payment practices which the OIG determined to be at minimal risk for abuse. The OIG named these payment practices “Safe Harbors.” If a payment arrangement fits within a Safe Harbor, it will be deemed not to violate the Anti-Kickback Statute. Merely because a payment arrangement does not comply with all of ~~the elements of any Safe Harbor, however, does not mean that the parties to the payment arrangement are violating the Anti-Kickback Statute~~operations.

WeFederal ~~receive~~and ~~fees~~state ~~under~~governments ~~our~~have ~~agreements~~continued ~~with~~to ~~the~~focus ~~managed~~significant ~~practices~~attention ~~and~~on ~~the~~health ~~limited~~care ~~management~~reform. ~~practices~~A ~~for~~broad ~~management~~range ~~and~~of ~~administrative~~health ~~services~~care ~~and~~reform ~~equipment~~measures have been introduced in Congress and ~~supplies~~in state legislatures. WeIt dois not ~~believe~~clear weat ~~are~~this intime awhat ~~position~~proposals, toif ~~make~~any, orwill ~~influence~~be ~~referrals~~adopted, ~~of patients~~ or, ~~services~~if ~~reimbursed~~adopted, ~~under~~what ~~Medicare~~effect, ~~Medicaid~~if orany, ~~other~~such ~~governmental~~proposals ~~programs.~~would ~~Because~~have ~~the~~on ~~provisions~~our ofbusiness. ~~the~~Currently ~~Anti-Kickback~~proposed ~~Statute~~federal ~~are~~and ~~broadly~~state ~~worded~~legislation ~~and~~could have ~~been~~an ~~broadly~~adverse ~~interpreted~~effect byon ~~federal courts,~~our business.

38Our affiliated physicians may not appropriately record or document services they provide.

~~however,~~Our itaffiliated isphysicians ~~possible~~are ~~that~~responsible ~~the~~for ~~government~~assigning ~~could~~reimbursement ~~take~~codes ~~the~~and ~~position~~maintaining ~~that~~sufficient ~~we,~~supporting asdocumentation afor ~~result~~the ofservices ~~our~~they provide. ~~ownership~~The ~~of the~~ owned practices, managed practices and aslimited amanagement ~~result~~practices ofuse ~~our~~this ~~relationships~~information ~~with~~to ~~the~~seek ~~limited~~reimbursement ~~management~~for ~~practices~~their ~~and~~services ~~the~~from ~~managed~~third-party ~~practices,~~payors. ~~will be~~If ~~subject~~these physicians do not appropriately code or document their services, ~~directly~~our financial condition and ~~indirectly,~~results toof ~~the~~operations ~~Anti-Kickback~~could ~~Statute~~be adversely affected.

~~With~~Unfavorable ~~respect~~changes toor ~~the~~conditions ~~managed~~could ~~practices~~occur and the limited management practices, we contract with the managed practices to provide general management services and limited management services, respectively. In return for those services, we receive compensation. The OIG has concluded that, depending on the facts of each particular arrangement, management arrangements may be subject to the Anti-Kickback Statute. In particular, an advisory opinion published by the OIG in ~~1998 (98-4) concluded that in a proposed management services arrangement where a management company was required to negotiate managed care contracts on behalf of~~ the ~~practice,~~geographic ~~the~~areas ~~proposed arrangement could constitute prohibited~~where ~~remuneration~~our ~~where~~operations ~~the~~are ~~management company would be reimbursed for its costs and paid a percentage of net practice revenues~~concentrated.

~~Our~~A ~~management~~majority ~~agreements~~of ~~with~~our ~~the~~revenue ~~managed~~in ~~practices~~2005 ~~and~~was ~~the~~generated ~~limited~~by ~~management~~our ~~practices~~operations ~~differ from the management agreement analyzed~~ in ~~Advisory~~five ~~Opinion 98-4~~states. ~~Significantly,~~In ~~we believe we are not in a~~particular, ~~position~~Florida toaccounted ~~generate referrals~~ for ~~the~~approximately ~~managed~~37% ~~practices~~of orour ~~the~~revenue ~~limited~~in ~~management practices~~2005. InAdverse ~~fact,~~changes ~~our management agreements do not require us to negotiate managed care contracts on behalf of the managed practices~~ or ~~the~~conditions ~~limited~~affecting ~~management practices,~~these orparticular ~~to provide marketing~~markets, ~~advertising,~~such ~~public~~as ~~relation~~health ~~services~~care ~~or practice expansion services to those practices. Because we do not undertake to generate referrals for the managed practices or the limited management practices~~reforms, ~~and~~changes ~~the services provided to these practices differ~~ in ~~scope~~laws ~~from~~and ~~those provided under Advisory Opinion 98-4~~regulations, wereduced ~~believe~~Medicaid ~~that~~reimbursements ~~our management agreements with the managed practices~~ and ~~limited management practices do not violate the Anti-Kickback Statute.~~government ~~Nevertheless~~investigations, ~~although~~may ~~we believe we~~ have ~~structured our management agreements in such~~ a ~~manner~~material asadverse ~~not~~effect toon violate the Anti-Kickback Statute, we cannot guarantee that a regulator would not conclude that the compensation to us under the management agreements constitutes prohibited remuneration. In such an event, our ~~operations~~financial ~~would~~condition beand ~~materially~~results ~~adversely~~of ~~affected~~operations.

~~The~~46 relationship between the physicians employed by the owned practices and the owned practices is subject to the Anti-Kickback Statute as well because the employed physicians refer Medicare patients to the owned practices and the employed physicians receive compensation from the owned practices for services rendered on behalf of the owned practices. Nevertheless, we have tried to structure our arrangements with our physician employees to meet the employment Safe Harbor. Therefore, it is our position that the owned practices’ arrangements with their respective employed physicians do not violate the Anti-Kickback Statute. Nevertheless, if the relationship between the owned practices and their physician employees is determined not to be a bona fide employment relationship, this could have a material adverse effect on us.

~~Our~~Regulatory ~~agreements~~authorities ~~with~~could ~~the~~assert ~~limited~~that ~~management~~the ~~practices~~owned ~~may also raise different Anti-Kickback concerns~~practices, ~~but~~the wemanaged ~~believe~~practices ~~that~~or ~~our arrangements are sufficiently different from those deemed suspect by~~ the ~~OIG~~limited somanagement aspractices ~~not~~fail to ~~violate~~comply with the ~~law.~~federal InStark ~~April~~Law. ofIf ~~2003,~~such ~~the OIG issued~~ a ~~Special~~claim ~~Advisory~~were ~~Bulletin~~successfully ~~where~~asserted, ~~the~~this ~~OIG~~would ~~addressed~~result ~~contractual arrangements where a health care provider~~ in ~~one~~the ~~line~~inability of ~~business~~these ~~(“Owner”)~~practices ~~expands~~to ~~into~~bill afor ~~related~~services ~~health~~rendered, ~~care business~~which bywould ~~contracting~~have ~~with~~ an ~~existing~~adverse ~~provider~~effect ofon aour ~~related~~financial ~~item~~condition orand results ~~service~~of ~~(“Manager”) to provide the new item or service to the Owner’s existing patient population~~operations. In ~~those arrangements~~addition, ~~the~~we ~~Manager~~could ~~not~~be ~~only~~required ~~manages~~to ~~the~~restructure ~~new~~or ~~line of~~terminate ~~business,~~our ~~but~~arrangements ~~may also supply it~~ with ~~inventory,~~these ~~employees, space, billing and other services~~practices. InThis ~~other words~~result, ~~the~~or ~~Owner~~our ~~contracts~~inability ~~out~~to ~~substantially~~successfully ~~the~~restructure ~~entire operation of~~ the ~~related~~arrangements ~~line~~to ofcomply ~~business~~with to the ~~Manager~~Stark Law, ~~receiving~~could injeopardize ~~return the~~our ~~profits of the~~ business ~~as remuneration for its federal program referrals to the Manager~~.

~~According~~Section to1877 of Title 18 of the ~~OIG~~Social Security Act, ~~contractual~~commonly ~~joint~~referred ~~ventures~~to ~~have~~as the ~~following~~“Stark ~~characteristics:~~Law”, ~~(i)~~prohibits ~~the~~a ~~establishment~~physician from ofmaking a ~~new~~referral ~~line~~to an entity for the furnishing of ~~business;~~Medicare-covered ~~(ii)~~“designated ahealth ~~captive~~services” ~~referral~~if ~~base;~~the physician (~~iii)~~or ~~the~~an ~~Owner~~immediate ~~lacks~~family ~~business~~member ~~risk;~~of ~~(iv)~~ the ~~Manager~~physician) ishas a ~~would~~“financial berelationship” ~~competitor~~with ofthat ~~the~~entity. “Designated ~~Owner’s~~health ~~new~~services” ~~line~~include ofclinical ~~business~~laboratory services; ~~(v)~~physical ~~the~~and ~~scope~~occupational oftherapy services; ~~provided~~radiology byservices, including magnetic resonance imaging, computerized axial tomography scans, and ultrasound services (including the ~~Manager~~professional iscomponent ~~extremely~~of ~~broad~~such diagnostic testing, ~~with~~but excluding procedures where the ~~manager~~imaging ~~providing:~~modality ~~day~~is used to ~~day~~guide ~~management;~~a ~~billing;~~needle, ~~equipment;~~probe ~~personnel~~or catheter accurately); ~~office~~radiation ~~space~~therapy services and supplies; durable medical equipment and ~~training~~supplies; home health ~~care~~services; ~~items,~~inpatient ~~supplies~~ and outpatient hospital services; ~~(vi)~~and ~~the~~others. ~~practical~~A ~~effect~~“financial ofrelationship” ~~the~~is ~~arrangement~~defined isas toan ~~enable~~ownership ~~the~~or ~~Owner~~investment tointerest ~~bill~~in ~~insurers~~or ~~and~~a ~~patients~~compensation ~~for~~arrangement ~~business~~with ~~otherwise~~an ~~provided~~entity bythat ~~the~~provides ~~Manager;~~designated health ~~(vii)~~services. ~~the~~Sanctions ~~parties~~for ~~agree~~prohibited toreferrals ainclude ~~non-compete~~denial ~~clause barring~~of ~~the~~Medicare ~~Owner~~payment ~~from~~and ~~providing~~civil ~~items~~monetary orpenalties ~~services~~of up to ~~any~~$15,000 ~~patient~~for ~~other~~each ~~than~~service ~~those~~ordered. ~~coming~~Designated ~~from~~health ~~the~~services ~~Owner~~furnished ~~and/or~~pursuant ~~barring~~to a referral that is prohibited by the Stark ~~Manager~~Law ~~from~~are ~~providing~~not ~~services~~covered inby ~~its~~Medicare ~~own~~and ~~right~~payments toimproperly ~~the~~collected ~~Owner’s~~must ~~patients~~be promptly refunded.

The physicians in our owned practices 39have a financial relationship with the owned practices (they receive compensation for services rendered) and may refer patients to the owned practices for physical and occupational therapy services (and perhaps other designated health services) covered by Medicare. Therefore, an exception would have to apply to allow the physicians in our owned practices to refer patients to the owned practices for the provision by the owned practices of Medicare-covered designated health services.

WeThere ~~have~~are ~~attempted~~several exceptions to ~~draft~~the ~~our~~prohibition ~~agreements~~on ~~with~~referrals for designated health services which have the ~~limited~~effect ~~management~~of ~~practices~~allowing ina physician that has a ~~manner~~financial relationship with an entity to make referrals to that ~~takes~~entity ~~into~~for ~~account~~the provision of Medicare-covered designated health services. The exception on which we rely with respect to the ~~concerns~~owned practices is the exception for employees, as all of the physicians employed in our owned practices are W-2 employees of the ~~Special~~respective ~~Advisory~~owned ~~Bulletin~~practices. ~~Specifically~~Therefore, ~~under~~we ~~our~~believe ~~arrangements,~~that the ~~limited~~ ~~management~~physicians ~~practice~~employed ~~takes~~by ~~business~~our ~~risk.~~owned Itpractices iscan ~~financially~~refer ~~responsible~~patients to the owned practices for the ~~following~~provision ~~costs:~~of designated health services covered by Medicare. Nevertheless, should the ~~space~~owned ~~required~~practices fail to ~~provide~~adhere to the ~~services;~~conditions of the employment ~~costs~~exception, ofor ~~the~~if ~~personnel~~a ~~providing~~regulator determines that the ~~services~~employees ~~and~~or ~~intake~~the ~~personnel;~~employment ~~and~~relationship ~~billing~~do ~~and~~not meet the ~~collections.~~criteria Weof dothe ~~not~~employment ~~reimburse~~exception, the ~~limited~~owned ~~management~~practices ~~practice~~would be liable for ~~any~~violating ofthe ~~these~~Stark ~~costs~~Law, which could have a material adverse effect on us. We ~~provide~~believe ~~solely~~that ~~equipment,~~our ~~supplies~~relationships with the managed practices and ~~our~~the limited management practices, ~~expertise.~~respectively, Indo ~~return~~not ~~for~~trigger ~~these~~the ~~items~~Stark ~~and~~Law. ~~services~~Nevertheless, weif ~~receive~~ a ~~percentage~~regulator ofwere somehow to determine that these relationships are subject to the ~~limited~~Stark ~~management practice’s~~Law, ~~collections~~and ~~from~~that the ~~services~~relationships ~~being~~do ~~managed~~not bymeet ~~us.~~the ~~Consequently,~~conditions weof ~~believe~~any ~~that~~exception to the ~~limited~~Stark Law, ~~management~~such ~~practice~~failure iswould ~~not~~have ~~being~~a ~~compensated~~material ~~for~~adverse ~~its~~effect ~~referrals~~on us.

~~Although~~The wereferral ~~believe~~of ~~that~~Medicare ~~our~~patients ~~arrangements~~by ~~with~~physicians ~~the~~employed ~~limited~~by ~~management~~or ~~practices~~under contract dowith ~~not violate~~ the ~~Anti-Kickback~~managed ~~Statute~~practices ~~for~~and the ~~reasons~~limited ~~specified~~management ~~above~~practices, werespectively, ~~cannot~~to ~~guarantee~~their ~~that~~respective ~~our~~practices, ~~arrangements~~however, ~~will~~does ~~be free~~trigger ~~from scrutiny by~~ the ~~OIG~~Stark orLaw. ~~that~~We ~~the~~believe, ~~OIG~~nevertheless, ~~would not conclude~~ that ~~these arrangements violate~~ the ~~Anti~~in-~~Kickback~~office ~~Statute.~~ancillary Inexception ~~the event the OIG were~~ to ~~conclude that these arrangements violate~~ the ~~Anti-Kickback~~Stark ~~Statute, this would have a material adverse effect on us.~~

~~State~~47 regulatory authorities or other parties may assert that we are engaged in the corporate practice of medicine. If such a claim were successfully asserted, we could be subject to civil, and perhaps criminal, penalties and could be required to restructure or terminate the applicable contractual arrangements. This result, or our inability to successfully restructure our relationships to comply with these statutes, could jeopardize our business and results of operations.

~~Many~~Law ~~states~~has inthe ~~which~~effect weof dopermitting ~~business~~these ~~have~~physician ~~corporate~~members ~~practice~~ of ~~medicine laws which prohibit us from exercising control over~~ the ~~medical~~respective ~~judgments~~managed orpractices ~~decisions~~and oflimited ~~physicians.~~management practices ~~These~~to ~~laws~~refer ~~and~~patients to their ~~interpretations~~ ~~vary~~respective ~~from~~group ~~state~~practice tofor ~~state~~the ~~and~~provision ~~are enforced~~ by ~~state~~the ~~courts~~respective ~~and~~group ~~regulatory~~practice ~~authorities,~~of ~~each~~Medicare-covered ~~with~~designated ~~broad~~health ~~discretion~~services. WeIf ~~enter~~the ~~into management agreements with~~ managed practices ~~and~~or limited management practices. ~~Under~~were ~~those~~found ~~agreements,~~not ~~we provide~~to ~~management~~comply ~~and~~with the ~~other~~terms ~~items~~of ~~and services to~~ the ~~practices~~ in-office ~~exchange~~ancillary ~~for~~exception, athey ~~service~~cannot ~~fee.~~properly Webill ~~structure~~Medicare ~~our~~for ~~relationships with~~ the ~~practices~~designated inhealth aservices ~~manner~~provided ~~that~~by wethem. ~~believe~~In ~~keeps~~such usan ~~from~~event, ~~engaging~~our inbusiness ~~the~~could ~~corporate~~be ~~practice~~materially ofadversely ~~medicine~~affected orbecause ~~exercising control over~~ the ~~medical~~revenues ~~judgments~~we orgenerate ~~decisions~~from ofthese practices ~~the~~are ~~practices~~dependent, orat ~~their~~least ~~physicians.~~in ~~Nevertheless~~part, ~~state~~on ~~regulatory~~the ~~authorities~~revenues or ~~other~~profits ~~parties~~generated ~~could~~by ~~assert~~those ~~that our agreements violate these laws~~practices.

Regulatory authorities orcould ~~others may~~ assert that our ~~agreements~~owned practices, ~~with~~the managed practices or the limited management practices, or the contractual arrangements between us and the managed practices, or ~~our~~the ~~owned~~limited management practices, ~~violate~~fail ~~state~~to ~~fee~~comply ~~splitting~~with state laws. Ifanalogous ~~such~~to athe ~~claim~~Stark ~~were~~Law. ~~successfully~~In ~~asserted,~~such event, we could be subject to civil ~~and perhaps criminal~~ penalties, and could be required to restructure or terminate the ~~applicable~~ contractual arrangements. ~~This result, or our inability to successfully restructure our relationships to comply with these statutes, could jeopardize our business and results of operations.~~

~~The~~At ~~laws~~least some of the ~~many~~ states ~~prohibit~~in ~~physicians~~which ~~from~~we ~~splitting~~do ~~fees~~business ~~with~~also ~~non~~have prohibitions on physician self-~~physicians~~referrals ~~(or~~that ~~other~~are ~~physicians)~~similar to the Stark Law. These laws and interpretations vary from state to state and are enforced by ~~the~~state courts and by regulatory authorities ~~with~~, each with broad discretion. ~~The~~As ~~relationship~~indicated ~~between~~elsewhere, uswe onenter ~~the~~into ~~one~~management ~~hand,~~agreements ~~and~~with the managed practices and the limited management practices. Under those agreements, onwe ~~the~~provide ~~other~~management ~~hand,~~and ~~may~~other ~~raise~~items ~~issues~~and inservices ~~some~~to ~~states~~the ~~with~~practices ~~fee~~in ~~splitting~~exchange for ~~prohibitions~~compensation. Although we ~~have~~believe ~~attempted~~that ~~to structure~~the ~~our~~practices ~~contracts~~comply with ~~the~~these ~~managed~~laws, ~~practices~~ and ~~the~~although ~~limited~~we ~~management~~attempt to structure our relationships with these practices in a manner that we believe keeps us from violating ~~prohibitions~~these onlaws ~~fee~~(or ~~splitting~~in a manner that we believe does not trigger the law), state regulatory authorities or other parties ~~may~~could assert that wethe ~~are~~practices ~~engaged~~violate inthese ~~practices~~ laws and/or that ~~constitute~~our ~~fee-splitting,~~agreements ~~which~~with ~~would~~the ~~have~~practices aviolate ~~material~~these ~~adverse~~laws. ~~effect~~Any onsuch usconclusion could adversely affect our financial results and operations.

Regulatory authorities or other persons could assert that our relationships with our owned practices, the managed ~~Our~~practices ~~use~~or the limited management practices fail to comply with the anti-kickback law. If such a claim were successfully asserted, we could be subject to civil and ~~disclosure~~criminal ofpenalties ~~patient~~and ~~information~~could isbe required to restructure or terminate the applicable contractual arrangements. If we were subject to ~~privacy~~penalties ~~regulations~~or are unable to successfully restructure the relationships to comply with the Anti-Kickback Statute it would have an adverse effect on our financial condition and results of operations.

~~Numerous~~The ~~state,~~anti-kickback ~~federal~~provisions ~~and international laws and regulations govern the collection, dissemination, use and confidentiality~~ of ~~patient-identifiable health information, including~~ the ~~federal~~Social ~~Health Insurance~~Security ~~Portability~~Act ~~and~~prohibit ~~Accountability~~anyone ~~Act~~from ofknowingly ~~1996~~ and ~~related~~willfully ~~rules,~~(a) soliciting or ~~HIPAA.~~receiving any Inremuneration ~~the~~in ~~provision~~return offor ~~services~~referrals tofor ~~our~~items ~~patients,~~and weservices ~~may~~reimbursable ~~collect,~~under ~~use,~~most ~~maintain~~federal ~~and~~health ~~transmit~~care ~~patient~~programs; ~~information~~or in(b) offering ~~ways that may~~ or ~~will~~paying beany ~~subject~~remuneration to ~~many~~induce ofa ~~these~~person ~~laws and regulations. The three rules that were promulgated pursuant~~ to ~~HIPAA~~make ~~that~~referrals ~~could most significantly affect our business are the Standards~~ for ~~Electronic~~items ~~Transactions,~~and orservices ~~Transactions~~reimbursable ~~Rule;~~under ~~the~~most federal ~~Standards~~health ~~for~~care ~~Privacy of Individually Identifiable Health Information~~programs, orwhich ~~Privacy~~we ~~Rule;~~refer ~~and~~to as the ~~Health~~“Anti-Kickback ~~Insurance~~Statute” ~~Reform; Security Standards,~~ or ~~Security~~“Anti-Kickback ~~Rule~~Law.” The ~~respective~~prohibited ~~compliance~~remuneration ~~dates~~may ~~for~~be ~~these~~paid ~~rules~~directly ~~for~~or ~~most entities were October 16~~indirectly, ~~2002,~~overtly ~~April~~or 16covertly, ~~2003~~in ~~and~~cash ~~April~~or ~~21,~~in ~~2005~~kind. ~~HIPAA applies to covered entities, which include most health care providers that will contract for the use of our services. HIPAA~~

Violation of the Anti-Kickback Statute is a felony and criminal conviction results in a fine of not more than $25,000, imprisonment for not more than 40five years, or both. Further, the Secretary of the Department of Health and Human Services (“DHHS”) has the authority to exclude violators from all federal health care programs and/or impose civil monetary penalties of $50,000 for each violation and assess damages of not more than three times the total amount of remuneration offered, paid, solicited or received.

~~requires~~As ~~covered~~the result ~~entities~~of toa ~~bind~~congressional ~~contractors~~mandate, ~~to comply~~the ~~with~~Office ~~certain~~of ~~burdensome~~the ~~HIPAA~~Inspector ~~requirements.~~General ~~Other~~(“OIG”) ~~federal~~of ~~and~~DHHS ~~state~~promulgated ~~laws restricting~~a ~~the~~regulation ~~use~~specifying ~~and~~certain ~~protecting~~payment practices which the ~~privacy~~OIG ofdetermined ~~patient~~to ~~information~~be ~~also~~at ~~apply~~minimal risk for abuse. The OIG named these payment topractices us“Safe Harbors.” If a payment arrangement fits within a Safe Harbor, ~~either~~it ~~directly~~will orbe ~~indirectly~~deemed not to violate the Anti-Kickback Statute.

~~The~~48 HIPAA Transactions Rule establishes format and data content standards for eight of the most common health care transactions. When we perform billing and collection services for our owned practices or managed practices we may be engaging in one or more of these standard transactions and will be required to conduct those transactions in compliance with the required standards. The HIPAA Privacy Rule restricts the use and disclosure of patient information, requires covered entities to safeguard that information and to provide certain rights to individuals with respect to that information. The HIPAA Security Rule establishes elaborate requirements for safeguarding patient information transmitted or stored electronically. We may be required to make costly system purchases and modifications to comply with the HIPAA requirements that are imposed on us and our failure to comply may result in liability and adversely affect our business.

~~Federal~~Merely ~~and~~because ~~state consumer~~a ~~protection~~payment ~~laws~~arrangement ~~are~~does ~~being~~not ~~applied~~comply ~~increasingly~~with byall ~~the~~of ~~Federal Trade Commission, or FTC, and state attorneys general, to regulate~~ the ~~collection,~~elements ~~use and disclosure~~ of ~~personal~~any orSafe ~~patient~~Harbor, ~~information~~however, ~~through~~does ~~websites~~not ormean ~~otherwise,~~that ~~and to regulate~~ the ~~presentation~~parties ofto ~~website content. Courts may also adopt~~ the ~~standards~~payment ~~for~~arrangement ~~fair~~are ~~information~~violating ~~practices promulgated by~~ the ~~FTC,~~Anti-Kickback ~~which concern consumer notice, choice, security and access~~Statute.

~~Numerous~~We ~~other~~receive ~~federal and~~fees ~~state~~under ~~laws~~our ~~protect~~agreements with the ~~confidentiality~~managed practices ofand ~~private~~the ~~information.~~limited ~~These~~management ~~laws~~practices ~~in many~~for ~~cases~~management ~~are~~and ~~not~~administrative ~~preempted~~services byand ~~HIPAA~~equipment and ~~may~~supplies. beWe ~~subject~~do tonot ~~varying interpretations~~believe bywe ~~courts~~are ~~and~~in ~~government~~a ~~agencies,~~position ~~creating~~to ~~complex~~make ~~compliance issues~~or ~~for~~influence usreferrals ~~and~~of ~~potentially~~patients ~~exposing~~or usservices toreimbursed ~~additional~~under ~~expense~~Medicare, ~~adverse~~Medicaid ~~publicity~~or ~~and~~other ~~liability~~governmental programs. ~~Other~~Because ~~countries~~the ~~also~~provisions of the Anti-Kickback Statute are broadly worded and have been broadly interpreted by federal courts, orhowever, ~~are~~it ~~developing~~is possible that the government could take the position that we, ~~laws~~as a result of ~~governing~~our ownership of the ~~collection~~owned practices, ~~use~~ and ~~transmission~~as a result of ~~personal~~our orrelationships ~~patient information~~with ~~and,~~the iflimited ~~applicable,~~management ~~these~~practices ~~laws~~and ~~could~~the ~~create~~managed ~~liability~~practices, ~~for~~will usbe ~~or increase~~subject, ~~our~~directly ~~cost~~and ofindirectly, ~~doing~~to ~~business~~the Anti-Kickback Statute.

~~New~~With ~~health~~respect ~~information standards~~to the managed practices and the limited management practices, ~~whether~~we ~~implemented~~contract ~~pursuant~~with the managed practices to ~~HIPAA,~~provide ~~congressional~~general ~~action~~management orservices ~~otherwise,~~and ~~could~~limited ~~have~~management aservices, ~~significant~~respectively. ~~effect~~In onreturn ~~the~~for ~~manner~~those inservices, ~~which~~ we ~~must~~receive ~~handle health~~compensation. ~~care~~The ~~related~~OIG ~~data~~has concluded that, ~~and~~depending on the ~~cost~~facts of ~~complying~~each ~~with~~particular ~~these~~arrangement, ~~standards~~management ~~could~~ arrangements may be ~~significant~~subject to the Anti-Kickback Statute. IfIn weparticular, doan ~~not~~advisory ~~properly~~opinion ~~comply~~published ~~with~~by ~~existing~~the orOIG ~~new~~in ~~laws~~1998 ~~and regulations~~(98-4) ~~related~~concluded that in a proposed management services arrangement where a management company was required to ~~patient~~negotiate ~~health~~managed ~~information~~care contracts on behalf of the practice, wethe proposed arrangement could constitute prohibited remuneration where the management company would be ~~subject~~reimbursed ~~to criminal~~for orits ~~civil~~costs ~~sanctions~~and paid a percentage of net practice revenues.

~~Risks~~Our ~~Related~~management agreements with the managed practices and the limited management practices differ from the management agreement analyzed in Advisory Opinion 98-4. Significantly, we believe we are not in a position to ~~Our~~generate ~~Common~~referrals for the managed practices or the limited management practices. In fact, our management agreements do not require us to negotiate managed care contracts on behalf ~~Stock~~of the managed practices or the limited management practices, or to provide marketing, advertising, public relation services or practice expansion services to those practices. Because we do not undertake to generate referrals for the managed practices or the limited management practices, and the services provided to these practices differ in scope from those provided under Advisory Opinion 98-4, we believe that our management agreements with the managed practices and limited management practices do not violate the Anti-Kickback Statute. Nevertheless, although we believe we have structured our management agreements in such a manner as not to violate the Anti-Kickback Statute, we cannot guarantee that a regulator would not conclude that the compensation to us under the management agreements constitutes prohibited remuneration. In such an event, our operations would be materially adversely affected.

~~Because~~The werelationship ~~use~~between ~~our~~the ~~common~~physicians ~~stock~~employed asby ~~consideration for~~the ~~our~~owned ~~acquisitions,~~practices ~~your~~and ~~interest~~the inowned ~~our~~practices ~~company~~is ~~will~~subject beto ~~significantly diluted.~~the InAnti-Kickback ~~addition,~~Statute ifas well because the ~~investors~~employed inphysicians ~~our~~refer ~~recent~~Medicare ~~financings~~patients ~~convert~~to ~~their~~the owned ~~debentures~~practices and ~~notes,~~the oremployed ifphysicians receive compensation from the owned practices for services rendered on behalf of the owned practices. Nevertheless, we ~~elect~~have tried to ~~pay~~structure ~~principal~~our ~~and/or~~arrangements ~~interest~~with onour physician employees to meet the employment ~~debentures~~Safe ~~and~~Harbor. ~~notes~~Therefore, it is our position that the owned practices’ arrangements with ~~shares~~their ofrespective ~~our~~employed ~~common~~physicians ~~stock~~do ornot ~~anti~~violate the Anti-~~dilution~~Kickback ~~rights~~Statute. inNevertheless, if the relationship between the owned practices and their ~~these~~physician ~~securities~~employees ~~are~~is ~~triggered~~determined not to be a bona fide employment relationship, ~~our~~this ~~existing~~could ~~shareholders~~have ~~will~~a ~~experience significant~~material ~~dilution~~adverse effect on us.

~~We have used, and we~~Our ~~expect~~agreements inwith the ~~future~~limited tomanagement ~~use,~~practices ~~our~~may ~~common~~also ~~stock~~raise asdifferent ~~consideration~~Anti-Kickback ~~for our acquisitions. In addition~~concerns, abut ~~significant~~we ~~amount~~believe ofthat our ~~acquisitions’~~arrangements ~~purchase price~~are issufficiently ~~contingent~~different ~~upon~~from ~~future~~those ~~performance.~~deemed Wesuspect ~~expect~~by tothe ~~issue~~OIG aso ~~significant amount~~as ofnot ~~our common stock~~ to ~~pay~~violate ~~contingent~~the ~~purchase prices for previous acquisitions~~law. In ~~addition,~~April ~~because~~of 2003, the ~~value~~OIG ofissued ~~the~~a ~~stock~~Special weAdvisory ~~issue~~Bulletin aswhere ~~payment~~the ~~of contingent~~OIG ~~consideration~~addressed iscontractual ~~not~~arrangements ~~fixed,~~where toa ~~the~~health ~~extent~~care ~~our~~provider ~~stock~~in ~~price~~one ~~decreases our~~line ~~existing~~of ~~shareholders~~business ~~interest~~(“Owner”) inexpands ~~our~~into ~~company~~a ~~will~~related behealth ~~even~~care ~~more~~business ~~diluted~~ by ~~the~~ ~~payment~~contracting ofwith ~~contingent~~an ~~consideration.~~existing

To49 the extent that our outstanding debentures and notes are converted, a significantly greater number of shares of our common stock will be outstanding and the interests of our existing stockholders will be substantially diluted. In addition, if we complete a financing at a price per share that is less than the conversion price of our debentures and notes, the conversion price of our debentures and notes will be reduced to the financing price. We cannot predict whether or how many additional shares of our common stock will become issuable as a result of these provisions. Hence, such amounts could be substantial. Additionally, we may elect to make payments of principal and interest on the debentures and the notes in shares of our common stock, which could result in increased downward pressure on our stock price and further dilution to our existing stockholders.

~~Future~~provider ~~sales~~ of ~~our~~a ~~common~~related ~~stock~~item inor service (“Manager”) to provide the ~~public~~new item or service to the Owner’s ~~market~~existing patient population. In those arrangements, ~~including~~the ~~sales~~Manager bynot ~~our~~only ~~stockholders~~manages ~~with~~the ~~significant~~new ~~holdings~~line of business, but may also supply it with inventory, employees, space, billing and other services. In other words, the Owner contracts out substantially the ~~depress~~entire ~~our~~operation ~~stock~~of ~~price~~the related line of business to the Manager, receiving in return the profits of the business as remuneration for its federal program referrals to the Manager.

41According to the OIG, contractual joint ventures have the following characteristics: (i) the establishment of a new line of business; (ii) a captive referral base; (iii) the Owner lacks business risk; (iv) the Manager is a would be competitor of the Owner’s new line of business; (v) the scope of services provided by the Manager is extremely broad, with the manager providing: day to day management; billing; equipment; personnel; office space; training; health care items, supplies and services; (vi) the practical effect of the arrangement is to enable the Owner to bill insurers and patients for business otherwise provided by the Manager; (vii) the parties agree to a non-compete clause barring the Owner from providing items or services to any patient other than those coming from the Owner and/or barring the Manager from providing services in its own right to the Owner’s patients.

~~Most~~We ofhave ~~our~~attempted ~~outstanding shares~~to ofdraft ~~common~~our ~~stock~~agreements ~~are~~with ~~freely~~the ~~tradable.~~limited Inmanagement ~~2004,~~practices wein ~~filed~~a ~~registration~~manner ~~statements~~that ~~registering~~takes into account the ~~resale~~concerns ofin ~~49,376,123~~the ~~shares~~Special Advisory Bulletin. Specifically, ~~which~~under ~~includes~~our ~~shares issuable~~arrangements, ~~upon~~the ~~conversion~~limited ofmanagement ~~convertible~~practice ~~notes~~takes ~~and~~business ~~debentures,~~risk. ~~upon~~It ~~exercise~~is ~~of options~~financially ~~and~~responsible ~~warrants~~for ~~and~~the ~~shares~~following ~~that~~costs: ~~are~~the ~~issuable~~space ~~pursuant~~required to provide the ~~earnout provisions~~services; employment costs of ~~various~~the ~~business~~personnel ~~acquisitions.~~providing ~~The~~the ~~market~~services ~~price~~and ofintake ~~our~~personnel; ~~common stock~~and ~~could~~billing ~~drop~~and ~~due~~collections. toWe ~~sales~~do ofnot areimburse ~~large~~the ~~number~~limited management practice for any of ~~shares~~these orcosts. ~~the~~We ~~perception~~provide ~~that~~solely equipment, supplies and our ~~such~~management ~~sales~~expertise. ~~could~~In ~~occur~~return for these items and services, ~~including~~we ~~sales~~receive ora ~~perceived~~percentage ~~sales~~of bythe ~~our~~limited ~~directors, officers~~management orpractice’s ~~principal~~collections ~~stockholders.~~from ~~These~~the ~~factors~~services ~~also~~being ~~could~~managed ~~make~~by itus. ~~more difficult~~Consequently, towe ~~raise~~believe ~~funds~~that ~~through~~the ~~future~~limited ~~offerings~~management ofpractice ~~common~~is ~~stock~~not being compensated for its referrals.

~~There~~Although iswe abelieve that our arrangements with the limited ~~market~~management practices do not violate the Anti-Kickback Statute for the reasons specified above, we cannot guarantee that our ~~common~~arrangements ~~stock~~will ~~and~~be free from scrutiny by the OIG or that the OIG would not conclude that these arrangements violate the Anti-Kickback Statute. In the event the OIG were to conclude that these arrangements violate the ~~market~~Anti-Kickback ~~price~~Statute, ofthis ~~our~~would ~~common~~have ~~stock~~a ~~has~~material ~~been~~adverse ~~volatile~~effect on us.

~~There~~State ~~is a limited~~regulatory ~~market~~authorities ~~for~~or ~~our~~other ~~common~~parties ~~stock.~~may ~~There~~assert ~~can be no assurance~~ that anwe ~~active~~are ~~trading market~~engaged ~~for~~in the ~~common~~corporate ~~stock~~practice ~~will~~of ~~be developed or maintained~~medicine. ~~Historically,~~If ~~the market~~such ~~prices~~a ~~for~~claim ~~securities~~were ofsuccessfully ~~companies~~asserted, ~~like~~we uscould ~~have~~be ~~been~~subject ~~highly~~to ~~volatile. In fact~~civil, ~~since~~and ~~January~~perhaps 1criminal, ~~2002,~~penalties ~~our~~and ~~common~~could ~~stock~~be ~~price~~required ~~has~~to ~~ranged~~restructure ~~from a low of~~or ~~$0.12~~terminate tothe aapplicable ~~high~~contractual ~~of $5~~arrangements.45 ~~(as~~This ~~determined~~result, onor aour ~~reverse-split~~inability ~~basis). The market price of the shares could continue~~ to besuccessfully ~~subject~~restructure toour ~~significant~~relationships ~~fluctuations in response~~ to ~~various~~comply ~~factors~~with ~~and~~these ~~events~~statutes, ~~including~~could ~~the~~jeopardize ~~liquidity~~our ~~of the market for the shares, announcements of potential~~ business ~~acquisitions,~~ and ~~changes~~results ~~in general~~of ~~market conditions~~operations.

WeMany states in which we do ~~not~~business ~~expect~~have corporate practice of medicine laws which prohibit us from exercising control over the medical judgments or decisions of physicians. These laws and their interpretations vary from state to ~~pay~~state and are enforced by state courts and regulatory authorities, each with broad discretion. We enter into management agreements with managed practices and limited ~~dividends~~management practices. Under those agreements, we provide management and other items and services to the practices in exchange for a service fee. We structure our relationships with the practices in a manner that we believe keeps us from engaging in the corporate practice of medicine or exercising control over the medical judgments or decisions of the practices or their physicians. Nevertheless, state regulatory authorities or other parties could assert that our agreements violate these laws.

~~Any~~50 determination to pay dividends in the future will be at the discretion of our Board of Directors and will be dependent upon our results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant by the Board of Directors. The Board of Directors is not expected to declare dividends or make any other distributions in the foreseeable future, but instead intends to retain earnings, if any, for use in business operations. In addition, the securities purchase agreement for our convertible notes contains restrictions on the payment of dividends. Accordingly, investors should not rely on the payment of dividends in considering an investment in our Company.

~~Provisions~~Regulatory ofauthorities ~~Florida~~or ~~law~~others ~~and~~may assert that our ~~charter~~agreements with limited management practices or managed ~~documents~~practices, ~~may~~or ~~hinder~~our owned practices, violate state fee splitting laws. If such a ~~change~~claim ofwere ~~control~~successfully asserted, we could be subject to civil and ~~therefore~~perhaps ~~depress~~criminal penalties, and could be required to restructure or terminate the ~~price~~applicable contractual ofarrangements. This result, or our ~~common~~ ~~stock~~inability to successfully restructure our relationships to comply with these statutes, could jeopardize our business and results of operations.

~~Our~~The ~~articles~~laws of ~~incorporation,~~ ~~our~~many ~~bylaws~~states ~~and~~prohibit ~~Florida~~physicians ~~law~~from ~~contain~~splitting ~~provisions~~fees ~~that~~with ~~could~~non-physicians ~~have~~(or ~~the effect~~other ofphysicians). ~~delaying,~~These ~~deferring~~laws orvary ~~preventing~~from astate ~~change~~to instate ~~control~~and ofare enforced us by ~~various means~~the ~~such~~courts asand aby ~~tender~~regulatory ~~offer~~authorities orwith ~~merger~~broad ~~not~~discretion. ~~approved~~The byrelationship ~~our~~between ~~board~~us ofon ~~directors. These~~the ~~provisions~~one ~~may~~hand, ~~have~~and the ~~effect~~managed ofpractices ~~discouraging,~~and ~~delaying~~limited ormanagement ~~preventing~~practices, ~~a change~~on inthe ~~control~~other orhand, anmay ~~unsolicited~~raise ~~acquisition~~issues ~~proposal~~in ~~that~~some astates ~~stockholder~~with fee ~~might~~splitting ~~consider~~prohibitions. ~~favorable,~~Although ~~including~~we ahave ~~proposal~~attempted ~~that~~to ~~might~~structure ~~result~~our incontracts with the ~~payment of~~managed apractices ~~premium~~and ~~over~~ the ~~market~~limited ~~price~~management ~~for~~practices ~~the~~in ~~shares~~a ~~held~~manner bythat ~~stockholders.~~keeps ~~These provisions~~us ~~may~~from ~~also~~violating ~~entrench~~prohibitions ~~our~~on ~~management~~fee bysplitting, ~~making~~state itregulatory ~~more~~authorities ~~difficult~~or other ~~for~~parties ~~a potential~~may ~~acquirer~~assert tothat ~~replace~~we orare ~~remove~~engaged ~~our~~in ~~management~~practices orthat ~~board~~constitute offee-splitting, ~~directors. See~~which ~~“Description~~would ofhave ~~Capital~~a ~~Stock~~material adverse effect on us.”

~~ITEM~~Our 2.use ~~UNREGISTERED~~and disclosure ~~SALES~~of OFpatient ~~EQUITY~~information ~~SECURITIES~~is ~~AND~~subject ~~USE~~to OFprivacy ~~PROCEEDS~~regulations.

~~The~~Numerous ~~following~~state, federal and international laws and regulations ~~information~~govern ~~sets~~the ~~forth~~collection, ~~certain~~dissemination, use and confidentiality of patient-identifiable health information, ~~for~~including ~~all~~the ~~securities~~federal ~~sold~~Health byInsurance Portability and Accountability Act of 1996 and related rules, or HIPAA. In the provision of services to ~~Company~~our ~~during~~patients, ~~the~~we may collect, use, maintain and transmit patient information in ways that may or will be subject to many of these laws and regulations. The three ~~months~~rules ~~ended~~that ~~March~~were ~~31,~~promulgated ~~2006~~pursuant ~~without~~to ~~registration~~HIPAA ~~under~~that could most significantly affect our business are the ~~Securities~~Standards ~~Act~~for Electronic Transactions, or Transactions Rule; the Standards for Privacy of ~~1933~~Individually Identifiable Health Information, asor ~~amended~~Privacy (Rule; and the ~~"Securities~~Health ~~Act")~~Insurance Reform; Security Standards, or Security Rule. The respective compliance dates for these rules for most entities were October 16, 2002, April 16, 2003 and April 21, 2005. HIPAA applies to covered entities, which include most health care providers that will contract for the use of our services. HIPAA requires covered entities to bind contractors to comply with certain burdensome HIPAA requirements. Other federal and state laws restricting the use and protecting the privacy of patient information also apply to us, either directly or indirectly.

~~Between~~The ~~January~~HIPAA 1,Transactions ~~2006~~ Rule establishes format and ~~March~~data ~~31,~~content ~~2006~~standards afor ~~total~~eight of ~~63,652~~the most common ~~stock~~health ~~shares~~care transactions. ~~were~~When ~~issued~~we perform billing and collection services for our owned practices or managed practices we may be engaging in one or more of these standard transactions and will be required to conduct those transactions in compliance with the ~~payment~~required standards. The HIPAA Privacy Rule restricts the use and disclosure of ~~convertible~~patient ~~debenture~~information, ~~interest~~requires ~~due~~covered entities to ~~Midsummer~~safeguard ~~Investments,~~that ~~Ltd~~information and to provide certain rights to individuals with respect to that information. The HIPAA Security Rule establishes elaborate requirements for safeguarding patient information transmitted or stored electronically. We may be required to make costly system purchases and modifications to comply with the HIPAA requirements that are imposed ~~Islandia,~~on Lus and our failure to comply may result in liability and adversely affect our business.P.

~~Between~~Federal ~~January~~and 1,state ~~2006~~consumer protection laws are ~~and~~being ~~March~~applied ~~31,~~increasingly ~~2006~~by athe ~~total~~Federal ofTrade 3Commission,~~305~~ or FTC,~~033~~ ~~common~~and ~~stock~~state ~~shares~~attorneys general, to regulate the collection, use and 1disclosure of personal or patient information,~~349~~ through websites or otherwise,~~884~~ and to regulate the presentation of ~~warrants~~website ~~were~~content. ~~issued~~Courts inmay ~~connection~~also ~~with~~adopt athe ~~private~~standards ~~placement~~for offair ~~offering~~information ofpractices promulgated by the ~~Company’s~~ ~~common~~FTC, ~~stock~~which concern consumer notice, choice, security and access.

~~Between~~Numerous ~~January~~other 1,federal ~~2006~~ and ~~March~~state ~~31,~~laws ~~2006~~protect athe ~~total~~confidentiality of 1private information. These laws in many cases are not preempted by HIPAA and may be subject to varying interpretations by courts and government agencies,~~021~~ creating complex compliance issues for us and potentially exposing us to additional expense,~~942~~ ~~common~~adverse ~~stock~~publicity ~~shares~~and ~~were~~liability. ~~issued~~Other ~~for~~countries also have, or are developing, laws governing the ~~acquisition~~ collection, use and transmission of ~~the~~personal ~~Center~~or patient ~~for~~information ~~Pain~~and, ~~Management~~if ~~ASC~~applicable, ~~LLC~~these laws could create liability for us or increase our cost of doing business.

~~Between~~51 ~~January 1, 2006 and March 31, 2006 a total of 191,131 common stock shares were issued for the acquisition of REC, Inc. and CareFirst Medical Associates.~~

42New health information standards, whether implemented pursuant to HIPAA, congressional action or otherwise, could have a significant effect on the manner in which we must handle health care related data, and the cost of complying with these standards could be significant. If we do not properly comply with existing or new laws and regulations related to patient health information, we could be subject to criminal or civil sanctions.

~~Between~~Risks ~~January~~Related 1,to ~~2006 and~~Our ~~March~~Common ~~31,~~Stock ~~2006 a total of 471,698 common stock shares were issued for the acquisition of Desert Pain Medicine Group.~~

~~Between~~Because ~~January~~we 1use our common stock as consideration for our acquisitions, ~~2006~~your interest in our company will be significantly diluted. In addition, if the investors in our ~~and~~recent ~~March~~financings 31convert their debentures and notes, ~~2006~~or aif ~~total~~we elect to pay principal and/or interest on the debentures and notes with shares of ~~1,035,032~~our common stock ~~shares~~or ~~were~~anti-dilution ~~issued~~rights ~~for~~in ~~the acquisition~~these ofsecurities ~~Amphora~~are triggered, ~~LLC~~our existing shareholders will experience significant dilution.

~~Between~~We ~~January~~have 1used, ~~2006~~ and ~~March~~we ~~31,~~expect ~~2006~~in athe ~~total~~future ofto ~~159~~use,~~381~~ our common stock ~~shares~~as ~~were~~consideration ~~issued~~for our ~~representing~~acquisitions. ~~the~~In ~~second~~addition, a significant amount of ~~three~~our ~~earnout~~acquisitions’ ~~installments~~purchase ~~related~~price is contingent upon future performance. We expect to ~~the~~issue ~~acquisition~~ a significant amount of ~~Kenneth~~our Mcommon stock to pay contingent purchase prices for previous acquisitions. In ~~Alo~~addition, ~~M.D.~~because the value of the stock we issue as payment of contingent consideration is not fixed, Pto the extent our stock price decreases our existing shareholders interest in our company will be even more diluted by the payment of contingent consideration.A.

~~Between~~To ~~January~~the 1extent that our outstanding debentures and notes are converted, ~~2006~~a significantly greater number of shares of our common stock will be outstanding and ~~March~~the 31interests of our existing stockholders will be substantially diluted. In addition, ~~2006~~if we complete a ~~total~~financing at a price per share that is less than the conversion price of ~~615~~our debentures and notes,~~984~~ the conversion price of our debentures and notes will be reduced to the financing price. We cannot predict whether or how many additional shares of our common stock ~~shares~~will ~~were~~become ~~issued representing~~issuable as a ~~portion~~result of ~~the~~these ~~potential~~provisions. ~~earnout~~Hence, ~~installments~~such ~~related~~amounts could be substantial. Additionally, we may elect to make payments of principal and interest on the ~~acquisition~~ debentures and the notes in shares of ~~Denver~~our ~~Pain~~common ~~Management~~stock, which could result in increased downward pressure on our stock price and further dilution to our existing stockholders.

~~Between~~Future ~~January~~sales ~~1, 2006 and March 31, 2006 a total~~ of ~~626,138~~our common stock ~~shares~~in ~~were~~the ~~issued representing~~public ~~the~~market, ~~first~~including ofsales ~~three~~by ~~earnout~~our ~~installments~~stockholders ~~related~~with tosignificant ~~the~~holdings, ~~acquisition~~may ofdepress ~~Center~~our ~~for~~stock ~~Pain Management~~price.

~~Between~~Most ~~January~~of 1our outstanding shares of common stock are freely tradable. In 2004, ~~2006~~we filed registration statements ~~and~~registering ~~March~~the 31resale of 49,376,123 ~~2006~~shares, awhich ~~total~~includes shares issuable upon conversion of 59convertible notes and debentures,~~654~~ ~~common~~upon ~~stock~~exercise of options and warrants and shares ~~were~~that ~~issued representing~~are issuable pursuant to the ~~second~~earnout provisions of ~~four~~various business ~~earnout~~acquisitions. ~~installments~~The ~~related~~market price of our common stock could drop due to sales of a large number of shares or the ~~acquisition~~perception that such sales could occur, including sales or perceived sales by our directors, officers or principal stockholders. ofThese ~~Bone~~factors ~~and~~also ~~Joint~~could ~~Surgical~~make ~~Clinic~~it more difficult to raise funds through future offerings of common stock.

~~Between~~There ~~January~~is ~~1, 2006 and March 31, 2006~~ a ~~total~~limited ofmarket ~~58,194~~for our common stock ~~shares were issued~~ ~~representing~~and the ~~second~~market price of ~~three~~our ~~earnout~~common ~~installments~~stock ~~related~~has tobeen ~~the Spine and Pain Center~~volatile.

~~Between~~There ~~January~~is 1,a ~~2006~~limited market for our common stock. There can be no assurance ~~and~~that ~~March~~an 31active trading market for the common stock will be developed or maintained. Historically, ~~2006~~the amarket ~~total~~prices for securities of 68companies like us have been highly volatile. In fact,~~990~~ since January 1, 2002, our common stock ~~shares~~price ~~were~~has ~~issued~~ranged ~~representing~~from ~~the~~a ~~second~~low of ~~three~~$0.12 ~~earnout~~to ~~installments~~a ~~related~~high of $5.45 (as determined on a reverse-split basis). The market price of the shares could continue to be subject to significant fluctuations in response to various factors and events, including the ~~purchase~~liquidity of the market ~~three~~for ~~EDX~~the ~~contract~~shares, ~~rights~~announcements of potential business acquisitions, and changes in general market conditions.

~~Between~~52 ~~January 1, 2006 and March 31, 2006 a total of 176,457 common stock shares were issued representing the second of three earnout installments related to the Health Care Center of Tampa, Inc.~~

~~With~~We ~~respect~~do to the foregoing offers and sale of restricted and unregistered securities, the Company relied on the provisions of Sections 3(b) and 4(2) of the Securities Act and rules and regulations promulgated thereunder, including, but not ~~limited~~expect to ~~Rules~~ ~~505~~pay ~~and 506 of Regulation D, in that such transaction did not involve any public offering of securities and were exempt from registration under the Securities Act~~dividends. The offers and sale of the securities was not made by any means of general solicitation, the securities were acquired by the investors without a view towards distribution, and all purchasers represented to the Company that they were sophisticated and experienced in such transactions and investments and able to bear the economic risk of their investment. A legend was placed on the certificates or instruments, as the case may be, they have not been registered under the Securities Act and setting forth the restrictions on their transfer and sale. Each investor also signed a written agreement that the securities would not be sold without registration under the Securities Act or pursuant to an applicable exemption from such registration.

~~ITEM~~Any 3determination to pay dividends in the future will be at the discretion of our Board of Directors and will be dependent upon our results of operations, financial condition, capital requirements, contractual restrictions and other factors deemed relevant by the Board of Directors. ~~DEFAULTS~~The ~~UPON~~Board ~~SENIOR~~of ~~SECURITIES~~Directors is not expected to declare dividends or make any other distributions in the foreseeable future, but instead intends to retain earnings, if any, for use in business operations. In addition, the securities purchase agreement for our convertible notes contains restrictions on the payment of dividends. Accordingly, investors should not rely on the payment of dividends in considering an investment in our Company.

~~None~~Provisions of Florida law and our charter documents may hinder a change of control and therefore depress the price of our common stock.

~~ITEM~~Our 4articles of incorporation, our bylaws and Florida law contain provisions that could have the effect of delaying, deferring or preventing a change in control of us by various means such as a tender offer or merger not approved by our board of directors. ~~SUBMISSION~~These OFprovisions ~~MATTERS~~may TOhave Athe ~~VOTE~~effect OFof ~~SECURITY~~discouraging, ~~HOLDERS~~delaying or preventing a change in control or an unsolicited acquisition proposal that a stockholder might consider favorable, including a proposal that might result in the payment of a premium over the market price for the shares held by stockholders. These provisions may also entrench our management by making it more difficult for a potential acquirer to replace or remove our management or board of directors. See “Description of Capital Stock.”

~~None~~ ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

~~ITEM~~The 5.following ~~OTHER~~information ~~INFORMATION~~sets forth certain information for all securities sold by the Company during the three months ended June 30, 2006 without registration under the Securities Act of 1933, as amended (the “Securities Act”).

~~None~~Between March 31, 2006 and June 30, 2006 a total of 35,165 common stock shares were issued representing the final earnout installment related to the acquisition of Pain and Rehabilitation Network, Inc.

~~ITEM~~Between 6March 31, 2006 and June 30, 2006 a total of 183,333 common stock shares were issued representing the final earnout installment related to the acquisition of Medical Rehabilitation Specialists, Inc. ~~EXHIBITS~~

43Between March 31, 2006 and June 30, 2006 a total of 325,650 common stock shares were issued representing earnout installments related to the acquisition of Denver Pain Management.

No.	Description
10.1	Securities Purchase Agreement By and Among PainCare Holdings, Inc. and Those Certain Buyers Listed in the Schedule Attached to the Agreement. (1)
10.2	Asset Purchase Agreement By and Among PainCare Holdings, Inc., PainCare Surgery Centers III, Inc. and Center for Pain Management ASC, LLC.
10.3	Merger Agreement and Plan of Reorganization By and Among PainCare Holdings, Inc., PainCare Acquisition Company XXII, Inc., REC, Inc. and Robert Carpenter, D.C. (3)
10.4	Merger Agreement and Plan of Reorganization By and Among PainCare Holdings, Inc., PainCare Acquisition Company XXII, Inc., CareFirst Medical Associates, P.A. and Randall Rodgers, D.O. (3)
10.5	Merger Agreement and Plan of Reorganization By and Among PainCare Holdings, Inc., PainCare Acquisition Company XIX, Inc., Desert Pain Medicine Group and C. Edward Anderson, Jr., M.D. (4)
10.6	Membership Interest Purchase Agreement By and Among Bruce Lockwood, M.D., John D. Bender, D.O., Richard Flores, Amphora, LLC, PainCare Holdings, Inc. and PainCare Neuromonitoring I, Inc. (5)
31.1	Certification of Chief Executive Officer of PainCare Holdings, Inc. pursuant to Rule 13a - 14(a)/15d-14(a) of the Securities Exchange Act of 1934.
31.2	Certification of Chief Financial and Accounting Officer of PainCare Holdings, Inc. pursuant to Rule 13a - 14(a)/15d-14(a) of the Securities Exchange Act of 1934.
32.1	Certifications of Chief Executive Officer and Chief Financial and Accounting Officer of PainCare Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(1)	Previously filed with the SEC with the Company’s Form 8-K on January 3, 2006
(2)	Previously filed with the SEC with the Company’s Form 8-K on January 9, 2006
(3)	Previously filed with the SEC with the Company’s Form 8-K on January 11, 2006
(4)	Previously filed with the SEC with the Company’s Form 8-K on January 25, 2006
(5)	Previously filed with the SEC with the Company’s Form 8-K on February 3, 2006

Between March 31, 2006 and June 30, 2006 a total of 155,556 common stock shares were issued representing the first of three earnout installments related to the acquisition of Colorado Pain Specialists, P.C.

~~SIGNATURES~~Between March 31, 2006 and June 30, 2006 a total of 1,310,000 common stock shares were issued to Midsummer Investments, Ltd. and Islandia, L.P. replacing cancelled warrants, which were previously issued in connection with two convertible debt financings.

In53 ~~accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~

Date: June 29, 2006	PainCare Holdings, Inc. /s/ Randy A. Lubinsky Randy A. Lubinsky Chief Executive Officer
Date: June 29, 2006	/s/ Mark Szporka Mark Szporka Chief Financial & Accounting Officer

With respect to the foregoing offers and sale of restricted and unregistered securities, the Company relied on the provisions of Sections 3(b) and 4(2) of the Securities Act and rules and regulations promulgated thereunder, including, but not limited to Rules 505 and 506 of Regulation D, in that such transaction did not involve any public offering of securities and were exempt from registration under the Securities Act. The offers and sale of the securities was not made by any means of general solicitation, the securities were acquired by the investors without a view towards distribution, and all purchasers represented to the Company that they were sophisticated and experienced in such transactions and investments and able to bear the economic risk of their investment. A legend was placed on the certificates or instruments, as the case may be, they have not been registered under the Securities Act and setting forth the restrictions on their transfer and sale. Each investor also signed a written agreement that the securities would not be sold without registration under the Securities Act or pursuant to an applicable exemption from such registration.

45 ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS


No.		Description
10.1		Letter Agreement between PainCare Holdings, Inc. and HBK Investments, L.P. (1)

10.2		Warrant Cancellation Agreement between PainCare Holdings, Inc. and Laurus Master Fund, Ltd.(2)

10.3		Warrant Cancellation Agreement between PainCare Holdings, Inc. and Midsummer Investments, Ltd.(2)

10.4		Warrant Cancellation Agreement between Paincare Holdings, Inc. and Islandia, LP(2)

31.1		Certification of Chief Executive Officer of PainCare Holdings, Inc. pursuant to Rule 13a - 14(a)/15d-14(a) of the Securities Exchange Act of 1934.

31.2		Certification of Chief Financial and Accounting Officer of PainCare Holdings, Inc. pursuant to Rule 13a - 14(a)/15d-14(a) of the Securities Exchange Act of 1934.

32.1		Certifications of Chief Executive Officer and Chief Financial and Accounting Officer of PainCare Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(1)	Previously filed with the SEC with the Company’s Form 8-K on May 8, 2006

(2)	Previously filed with the SEC with the Company’s Form 8-K on May 8, 2006

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		PainCare Holdings, Inc.

Date: August 14, 2006		/s/ Randy A. Lubinsky Randy A. Lubinsky Chief Executive Officer

Date: August 14, 2006		/s/ Mark Szporka Mark Szporka Chief Financial & Accounting Officer

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