**U.S.
      SECURITIES AND EXCHANGE COMMISSION**
 WASHINGTON,
      D.C. 20549
   **FORM
      10-QSB**
   **QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES**
 **EXCHANGE
      ACT OF 1934**
 **FOR
      THE QUARTERLY PERIOD ENDED JUNE 30, 2005**
  **Commission
      File No. 001-16587**
  **ORION
      HEALTHCORP, INC.**
 (NAME
      OF SMALL BUSINESS ISSUER IN ITS CHARTER)
  **Delaware**
            
            **58-1597246**(STATE
                OR OTHER JURISDICTION
              OF
                INCORPORATION OR ORGANIZATION)
            
            (IRS
                EMPLOYER IDENTIFICATION NO.)**1805
                Old Alabama Road**
              **Suite
                350, Roswell GA**
            
            **30076**(ADDRESS
                OF PRINCIPAL EXECUTIVE OFFICES)
            
            (ZIP
                CODE)
  ISSUER'S
      TELEPHONE NUMBER: **(678) 832-1800**
   SECURITIES
      REGISTERED UNDER SECTION 12(B) OF THE ACT:
  TITLE
                OF EACH CLASS
            
            NAME
                OF EACH EXCHANGE ON
              WHICH
                REGISTERED**Class
                A Common Stock, $0.001 par value per share**
            
            **The
                American Stock Exchange**
  Indicate
      by check mark whether the Registrant (1) has filed all reports required to
      be
filed
      by
      Section13 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
      o
   As
      of August 11, 2005, 11,321,265 shares of the Registrant's Class A Common Stock, par value $0.001, were
      outstanding, 10,642,306 shares of the Registrant’s Class B Common Stock, par
      value $0.001, were outstanding and 1,555,137 shares of the Registrant’s Class C
      Common Stock, par value $0.001, were outstanding.
   
  
  
  **ORION
      HEALTHCORP, INC.**
 **Quarterly
      Report on Form 10-QSB**
 **For
      the Quarterly Period Ended June 30, 2005**
 
 **TABLE
      OF CONTENTS**
 
 **Item
                Number**
            
            **Page
                Number****PART
                I - FINANCIAL INFORMATION**1.
            Financial
                Statements
            32.
            Management’s
                Discussion and Analysis or Plan
                of Operation
            33.
            Controls
                and Procedures
            23**PART
                II - OTHER INFORMATION**1.
            Legal
                Proceedings
            232.
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds
            243.
            Defaults
                Upon Senior Securities
            264.
            Submission
                of Matters to a Vote of Security
                Holders
            275.
            Other
                Information
            276.
            Exhibits
            28SIGNATURES
            29CONSOLIDATED
                FINANCIAL STATEMENTS
            F-1INDEX
                OF EXHIBITS
            F-20
   
 
 **NOTE
      REGARDING FORWARD-LOOKING STATEMENTS**
 
 Certain
      statements in this Quarterly Report on Form 10-QSB constitute “forward-looking
      statements” within the meaning of Section 27A of the Securities Act of 1933, as
      amended, and Section 21E of the Securities Exchange Act of 1934, as amended
      (collectively, the “Acts”). Forward-looking statements include statements
      preceded by, followed by or that include the words “may”, “will”, “would”,
“could”, “should”, “estimates”, “predicts”, “potential”, “continue”, “strategy”,
“believes”, “anticipates”, “plans”, “expects”, “intends” and similar
      expressions. Any statements contained herein that are not statements of
      historical fact are deemed to be forward-looking statements.
 
 The
      forward-looking statements in this report are based on current beliefs,
      estimates and assumptions concerning the operations, future results, and
      prospects of Orion HealthCorp, Inc. (formerly known as SurgiCare, Inc.
“SurgiCare”) (“Orion” or the “Company”) and its affiliated companies described
      herein. As actual operations and results may materially differ from those
      assumed in forward-looking statements, there is no assurance that
      forward-looking statements will prove to be accurate. Forward-looking statements
      are subject to the safe harbors created in the Acts. Any number of factors
      could
      affect future operations and results, including, without limitation, changes
      in
      federal or state healthcare laws and regulations and third party payer
      requirements, changes in costs of supplies, labor and employee benefits,
      increases in interest rates on the Company’s indebtedness as well as general
      market conditions, competition and pricing. The Company undertakes no obligation
      to update publicly any forward-looking statements, whether as a result of new
      information or future events.
 
 **PART
      I - FINANCIAL INFORMATION**
 
 **ITEM
      1. FINANCIAL STATEMENTS**
 
 The
      Company’s consolidated financial statements and related notes thereto are
      included as a separate section of this report, commencing on page
      F-1.
 
 **ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN
      OF OPERATION**
 
 The
      following Management’s Discussion and Analysis of Financial Condition and
      Results of Operations highlights the principal factors that have affected
      Orion’s financial condition and results of operations as well as Orion’s
      liquidity and capital resources for the periods described. All significant
      intercompany balances and transactions have been eliminated in
      consolidation.
 
 **Certain
      Recent Developments**
 
 *Acquisition
      and Restructuring Transactions*
 
 On
      November 18, 2003, the Company entered into an agreement and plan of merger
      with
      Integrated Physician Solutions, Inc. (“IPS”), which was amended and restated on
      February 9, 2004, and further amended on July 16, 2004 and on September 9,
      2004
      (the “IPS Merger Agreement”), relating to the Company’s acquisition of IPS (the
“IPS Merger”). On February 9, 2004, the Company entered into an agreement and
      plan of merger with Dennis Cain Physician Solutions, Ltd. (“DCPS”) and Medical
      Billing Services, Inc. (“MBS”), which was amended and restated on July 16, 2004,
      and further amended on September 9, 2004 and on December 15, 2004 (the “DCPS/MBS
      Merger Agreement”), relating to the Company’s acquisition of DCPS and MBS (the
“DCPS/MBS Transaction” and together with the IPS Merger, the “Acquisitions”).
      The Company completed the IPS Merger and the DCPS/MBS Transaction on December
      15, 2004. As a result of the IPS Merger and the DCPS/MBS Transaction, IPS,
      MBS
      and DCPS became wholly-owned subsidiaries of the Company.
 
 On
      December 15, 2004, and simultaneous with the consummation of the IPS Merger
      and
      DCPS/MBS Transaction, the Company consummated its previously disclosed
      restructuring transactions (the “Closing”), which included issuances of new
      equity securities for cash and contribution of outstanding debt, and the
      restructuring of its debt facilities. The Company also completed a one-for-ten
      reverse stock split (the “Reverse Stock Split”), created three new classes of
      common stock (Class A, Class B and Class C Common Stock) and changed its name.
      SurgiCare common stock was converted to shares of Orion’s Class A Common Stock
      (the “Reclassification”).
 
 Also
      on December 15, 2004, the Company issued 11,482,261 shares of its
      Class B Common Stock (the “Investment Transaction”) to various investors
      for $13,200,000 in cash plus cash in the amount of $128,350, which amount
      equaled the accrued but unpaid interest immediately prior to the Closing owed
      to
      a subsidiary of Brantley Partners IV, L.P. (“Brantley IV”) by SurgiCare and IPS
      on amounts advanced prior to October 24, 2003 (the “Base Bridge Interest
      Amount”). At the Closing, Orion used $5,908,761 to pay off the debt owed to the
      subsidiary of Brantley IV. The Company also granted to Brantley IV the right
      to
      purchase shares of Class A Common Stock for cash in an amount up to
      an
      aggregate of $3,000,000 after the Closing (the “Purchase Right”). Brantley IV
      may exercise the Purchase Right at any time after December 15, 2004.
      Each
      additional investment will be: (i) subject to the approval of a majority
      of
      the members of the board of directors of the Company that are not affiliated
      with Brantley IV, (ii) consummated on a date mutually agreed by the
      Company
      and Brantley IV, and (iii) accomplished with documentation reasonably
      satisfactory to the Company and Brantley IV. Pursuant to the terms of the
      Purchase Right, the purchase price per share of the Class A Common Stock
      will be equal to the lesser of (a) $1.25, and (b) 70% multiplied by
      the
      average of the daily average of the high and low price per share of the
      Class A Common Stock on the American Stock Exchange (“AMEX”) or a similar
      system on which the Class A Common Stock shall be listed at the time,
      for
      the twenty trading days immediately preceding the date of the closing of the
      exercise of the Purchase Right.
   -3-
  Holders
        of shares of Class B Common Stock have the option to convert their
        shares
        of Class B Common Stock into shares of Class A Common Stock
        at any
        time based on a conversion factor in effect at the time of the conversion.
        The
        conversion factor is designed to yield one share of Class A Common
        Stock
        per share of Class B Common Stock converted, plus such additional
        shares of
        Class A Common Stock, or portions thereof, necessary to approximate
        the
        unpaid portion of the return of the original purchase price for the Class B
        Common Stock less the Base Bridge Interest Amount, plus an amount equal to
        nine
        percent (9%) per annum on the amount of the original purchase price less
        the
        Base Bridge Interest Amount, without compounding, from the date the Class B
        Common Stock was first issued to the date of conversion. The conversion factor
        is calculated based on a number equal to one plus the quotient of $1.15 plus
        9%
        per annum (not compounded), divided by the fair market value of the Class A
        Common Stock (which is determined by reference to the prices at which
        Class A Common Stock trades immediately prior to the conversion).
        Therefore, so long as the Class B Common Stock has not yet received
        a full
        return of its purchase price less the Base Bridge Interest Amount and a 9%
        rate
        of return, if the market value of a share of Class A Common Stock
        increases, a share of Class B Common Stock will convert into fewer
        shares
        of Class A Common Stock, and if the market value of Class A
        Common
        Stock shares decreases, a share of Class B Common Stock will convert
        into
        more shares of Class A Common Stock. The initial conversion factor
        was
        approximately 1.28 (one share of Class B Common Stock converts into
        approximately 1.28 shares of Class A Common Stock). As of June 30,
        2005,
        the conversion factor was approximately 2.435549575995 shares (one
        share of
        Class B Common Stock converts into approximately 2.435549575995 shares
        of Class A Common Stock). The holders of Class B Common Stock
        vote
        together with the holders of Class A Common Stock and Class C
        Common
        Stock, as a single class, generally, with each holder of Class A Common
        Stock entitled to one vote per share of Class A Common Stock held
        by such
        holder; with each holder of Class B Common Stock entitled to one vote
        per
        share of Class B Common Stock held by such holder; and with each holder
        of
        Class C Common Stock entitled to one vote per share of Class C
        Common
        Stock held by such holder.
  Additionally,
      the Company used $3,683,492 of the proceeds of the Investment Transaction to
      repay a portion of the indebtedness to unaffiliated third parties and
      restructured additional existing indebtedness.
 
 *New
      Line of Credit and Debt Restructuring*
 
 In
      connection with the Closing, Orion also entered into a new secured two-year
      revolving credit facility pursuant to the Loan and Security Agreement (the
“Loan
      and Security Agreement”), dated December 15, 2004, by and among Orion, certain
      of its affiliates and subsidiaries, and Healthcare Business Credit Corporation
      (“HBCC”). Under this facility, up to $4,000,000 of loans may be made available
      to Orion, subject to a borrowing base. Orion borrowed $1,600,000 under this
      facility concurrently with the Closing. The interest rate under this facility
      is
      equal to the prime rate plus 3%. Upon an event of default, HBCC can accelerate
      the loans or call the guaranties described below. In connection with entering
      into this new facility, Orion also restructured its previously-existing debt
      facilities, which resulted in a decrease in aggregate debt owed to DVI Business
      Credit Corporation and DVI Financial Services (collectively, “DVI”) from
      approximately $10.1 million to a combined principal amount of approximately
      $6.5 million, of which approximately $2 million was paid at the
      Closing.
 
 Pursuant
      to the Guaranty Agreement (the “Brantley IV Guaranty”), dated as of
      December 15, 2004, provided by Brantley IV to HBCC, Brantley IV agreed
      to
      provide a deficiency guaranty in the amount of $3,272,727. Pursuant to the
      Guaranty Agreement (the “Brantley Capital Guaranty”; and together with the
      Brantley IV Guaranty, collectively, the “Guaranties”), dated as of
      December 15, 2004, provided by Brantley Capital Corporation (“Brantley
      Capital”) to HBCC, Brantley Capital agreed to provide a deficiency guaranty in
      the amount of $727,273. In consideration for the Guaranties, Orion issued
      warrants to purchase 20,455 shares of Class A Common Stock, at an exercise
      price of $0.01 per share, to Brantley IV, and issued warrants to purchase 4,545
      shares of Class A Common Stock, at an exercise price of $0.01 per share,
      to
      Brantley Capital.
 
 *Post-Restructuring
      Loan Transactions*
 
 On
      March 16, 2005, Brantley IV loaned the Company an aggregate of $1,025,000
      (the “First Loan”). On June 1, 2005, the Company executed a convertible
      subordinated promissory note in the principal amount of $1,025,000 (the “First
      Note”) payable to Brantley IV to evidence the terms of the First Loan. The
      material terms of the First Note are as follows: (i) the First Note is
      unsecured; (ii) the First Note is subordinate to the Company's outstanding
      loan
      from HBCC and other indebtedness for monies borrowed, and ranks pari passu
      with
      general unsecured trade liabilities; (iii) principal and interest on the First
      Note is due April 19, 2006 (the “First Note Maturity Date”); (iv) the interest
      accrues from and after March 16, 2005, at a per annum rate equal to nine percent
      (9.0%) and is non-compounding; (v) if an event of default occurs and is
      continuing, Brantley IV, by notice to the Company, may declare the principal
      of
      the First Note to be due and immediately payable; and (vi) on or after the
      First
      Note Maturity Date, Brantley IV, at its option, may convert all or a portion
      of
      the outstanding principal and interest due of the First Note into shares of
      Class A Common Stock of the Company at a price per share equal to $1.042825
      (the
“First Note Conversion Price”). The number of shares of Class A Common Stock
      issuable upon conversion of the First Note shall be equal to the number obtained
      by dividing (x) the aggregate amount of principal and interest to be converted
      by (y) the First Note Conversion Price (as defined above); provided, however,
      the number of shares issuable upon conversion of the First Note shall not exceed
      the lesser of: (i) 1,159,830 shares of Class A Common Stock, or (ii) 16.3%
      of
      the then outstanding Class A Common Stock.
  -4-
   On
      April 19, 2005, Brantley IV loaned the Company an additional $225,000 (the
      “Second Loan”). On June 1, 2005, the Company executed a convertible subordinated
      promissory note in the principal amount of $225,000 (the “Second Note”) payable
      to Brantley IV to evidence the terms of the Second Loan. The material terms
      of
      the Second Note are as follows: (i) the Second Note is unsecured; (ii) the
      Second Note is subordinate to the Company's outstanding loan from HBCC and
      other
      indebtedness for monies borrowed, and ranks pari passu with general unsecured
      trade liabilities; (iii) principal and interest on the Second Note is due April
      19, 2006 (the “Second Note Maturity Date”); (iv) the interest accrues from and
      after April 19, 2005, at a per annum rate equal to nine percent (9.0%) and
      is
      non-compounding; (v) if an event of default occurs and is continuing, Brantley
      IV, by notice to the Company, may declare the principal of the Second Note
      to be
      due and immediately payable; and (vi) on or after the Second Note Maturity
      Date,
      Brantley IV, at its option, may convert all or a portion of the outstanding
      principal and interest due of the Second Note into shares of Class A Common
      Stock of the Company at a price per share equal to $1.042825 (the “Second Note
      Conversion Price”). The number of shares of Class A Common Stock issuable upon
      conversion of the Second Note shall be equal to the number obtained by dividing
      (x) the aggregate amount of principal and interest to be converted by (y) the
      Second Note Conversion Price (as defined above); provided, however, the number
      of shares issuable upon conversion of the Second Note shall not exceed the
      lesser of: (i) 254,597 shares of Class A Common Stock, or (ii) 3.6% of the
      then
      outstanding Class A Common Stock.
 
 Additionally,
      in connection with the First Loan and the Second Loan, the Company entered
      into
      a First Amendment to the Loan and Security Agreement (the “First Amendment”),
      dated March 22, 2005, with certain of the Company’s affiliates and subsidiaries,
      and HBCC, whereby its $4,000,000 secured two-year revolving credit facility
      has
      been reduced by the amount of the loans from Brantley IV to $2,750,000. As
      a
      result of the First Amendment, the Brantley IV Guaranty was amended by the
      Amended and Restated Guaranty Agreement (the “Amended Brantley IV Guaranty”),
      dated March 22, 2005, which reduces the deficiency guaranty provided by Brantley
      IV by the amount of the First Loan to $2,247,727. Also as a result of the First
      Amendment, the Brantley Capital Guaranty was amended by the Amended and Restated
      Guaranty Agreement (the “Amended Brantley Capital Guaranty”), dated March 22,
      2005, which reduces the deficiency guaranty provided by Brantley Capital by
      the
      amount of the Second Loan to $502,273.
 
 *Post-Restructuring
      Transactions Involving Subsidiaries*
 
 On
      June 7, 2005, InPhySys, Inc. (f/k/a IntegriMED, Inc.) (“IntegriMED”), a
      wholly-owned subsidiary of IPS, executed an Asset Purchase Agreement (the
“Agreement”) with eClinicalWeb, LLC (“eClinicalWeb”) to sell substantially all
      of the assets of IntegriMED. The Agreement was deemed to be effective as of
      midnight on June 6, 2005. The property sold by IntegriMED to eClinicalWeb
      (hereinafter collectively referred to as the “Acquired Assets”) includes the
      machinery, equipment, supplies, materials, computers, software, software
      licenses, and other personal property owned by IntegriMED and used exclusively
      in the operation of IntegriMED's business, IntegriMED's goodwill and all of
      the
      business conducted under the name "IntegriMED" and "InPhySys", sales and
      customer lists, account lists, records, manuals, and telephone numbers used
      exclusively in the operation of IntegriMED's business, and all of IntegriMED's
      rights and interests in all contracts, open customer purchase orders, quotations
      or similar agreements to the extent entered into by IntegriMED or assigned
      to
      IntegriMED. Additionally, eClinicalWeb agreed to assume and to thereafter
      perform and pay when due all liabilities related to the Acquired Assets but
      only
      to the extent such liabilities arise from and after the Closing Date (as defined
      below). eClinicalWeb also agreed to sublease certain space from IPS that was
      occupied by employees of IntegriMED as of the Closing Date. As consideration
      for
      the purchase of the Acquired Assets, eClinicalWeb issued to IntegriMED the
      following: (i) a two percent (2%) ownership interest in eClinicalWeb; and (ii)
      $69,033.90, for the payoff of certain leases and purchase of certain software,
      via wire transfer at the closing of the transfer and delivery of all documents
      and instruments necessary to consummate the transactions contemplated by the
      Agreement (the "Closing Date"), which occurred concurrently with the execution
      of the Agreement. In addition to the consideration listed above, IntegriMED
      retained the following assets related to IntegriMED's business: (i) all cash
      and
      cash equivalents relating to IntegriMED's business as of the Closing Date;
      (ii)
      all accounts receivable relating to IntegriMED's business as of the Closing
      Date; and (iii) other assets of IntegriMED not used exclusively in IntegriMED's
      business.
 
 On
      June 13, 2005, the Company announced that it has accepted an offer to purchase
      its interests in the ambulatory surgery center and the magnetic resonance
      imaging (“MRI”) facility in Dover, Ohio. Under the terms of the offer letter,
      the Company’s interests in these facilities would be sold to a local hospital
      for cash and assumption of debt. In addition, the Company would continue to
      operate the facilities under a long-term management agreement. This transaction
      has not yet closed.
 
 *2004
      Incentive Plan*
 
 On
      June 1, 2005, the Company executed Amendment No. 1 (the “First Plan Amendment”)
      to the Orion HealthCorp, Inc. 2004 Incentive Plan (“the Plan”), which was
      adopted in December 2004. The First Plan Amendment amends the Plan to allow
      the
      grant of restricted stock units, as well as restricted stock (which was allowed
      under the Plan) and is attached hereto as Exhibit 10.6.
 
 On
      June 17, 2005, the Company granted 1,357,000 stock options to certain employees,
      officers, directors and former directors of the Company pursuant to the Plan,
      which allows for a maximum of 2.2 million shares of Class A Common Stock to
      be
      delivered in satisfaction of awards made under the Plan. The Form of Orion
      HealthCorp, Inc. Stock Option Agreement (Incentive Stock Option), dated as
      of
      June 17, 2005, is attached hereto as Exhibit 10.7.
  -5-
 *American
      Stock Exchange Compliance*
 
 On
      July 8, 2005, the Company received a letter from AMEX stating that the Company
      had evidenced compliance with the requirements necessary for continued listing
      on AMEX. This letter was a result of the Company’s notification by AMEX on March
      7, 2005, that it was not in compliance with the AMEX Company Guide in connection
      with two issuances of common stock in 2003 and 2004 without advance shareholder
      approval. After submission of and acceptance by the AMEX of a plan of
      correction, which included the Company’s obtaining such shareholder approval at
      its May 31, 2005 Annual Meeting of Shareholders, the Company has now regained
      compliance. The results of the 2005 Annual Meeting of Shareholders are described
      under the caption “Part II, Item 4. Submission of Matters to a Vote of Security
      Holders.”
 
 **Critical
      Accounting Policies and Estimates**
 
 The
      preparation of Orion’s financial statements is in conformity with accounting
      principles generally accepted in the United States of America, which require
      management to make estimates and assumptions that affect the amounts reported
      in
      the financial statements and footnotes. Orion management bases these estimates
      on historical experience and on various other assumptions that are believed
      to
      be reasonable under the circumstances, the results of which form the basis
      for
      making judgments that are not readily apparent from other sources. These
      estimates and assumptions affect the reported amounts of assets and liabilities
      and disclosure of contingent assets and liabilities at the date of the financial
      statements, as well as the reported amounts of revenues and expenses during
      the
      reporting period. Changes in the facts or circumstances underlying these
      estimates could result in material changes and actual results could differ
      from
      these estimates. Orion believes the following critical accounting policies
      affect the most significant areas involving management’s judgments and
      estimates.
 
 *Consolidation
      of Physician Practice Management Companies.* In
      March 1998, the Emerging Issues Task Force (“EITF”) of the Financial
      Accounting Standards Board (“FASB”) issued its Consensus on Issue 97-2 (“EITF
      97-2”). EITF 97-2 addresses the ability of physician practice management (“PPM”)
      companies to consolidate the results of medical groups with which it has an
      existing contractual relationship. Specifically, EITF 97-2 provides guidance
      for
      consolidation where PPM companies can establish a controlling financial interest
      in a physician practice through contractual management arrangements. A
      controlling financial interest exists, if, for a requisite period of time,
      the
      PPM has “control” over the physician practice and has a “financial interest”
      that meets six specific requirements. The six requirements for a controlling
      financial interest include:
 
 (a)
            the
                contractual arrangement between the PPM and physician practice (1)
                has a
                term that is either the entire remaining legal life of the physician
                practice or a period of 10 years or more, and (2) is not terminable
                by the
                physician practice except in the case of gross negligence, fraud,
                or other
                illegal acts by the PPM or bankruptcy of the PPM;
 
 (b)
            the
                PPM has exclusive authority over all decision making related to (1)
                ongoing, major, or central operations of the physician practice,
                except
                the dispensing of medical services, and (2) total practice compensation
                of
                the licensed medical professionals as well as the ability to establish
                and
                implement guidelines for the selection, hiring, and firing of them;
 
 (c)
            the
                PPM must have a significant financial interest in the physician practice
                that (1) is unilaterally salable or transferable by the PPM and (2)
                provides the PPM with the right to receive income, both as ongoing
                fees
                and as proceeds from the sale of its interest in the physician practice,
                in an amount that fluctuates based upon the performance of the operations
                of the physician practice and the change in fair value
                thereof.
 
 IPS’s
      management services agreements (each a “MSA” and collectively the “MSAs”)
      governing the contractual relationship with its affiliated medical groups are
      for forty year terms; are not terminable by the physician practice other than
      for bankruptcy or fraud; provide IPS with decision making authority other than
      related to the practice of medicine; provide for employment and non-compete
      agreements with the physicians with governing compensation; provide IPS the
      right to assign, transfer or sell its interest in the physician practice and
      assign the rights of the MSAs; provide IPS with the right to receive a
      management fee based on results of operations and the right to the proceeds
      from
      a sale of the practice to an outside party or, at the end of the MSA term,
      to
      the physician group. Based on this analysis, IPS has determined that its
      contracts meet the criteria of EITF 97-2 for consolidating the results of
      operations of the affiliated medical groups and has adopted EITF 97-2 in its
      statement of operations. EITF 97-2 also has addressed the accounting method
      for
      future combinations with individual physician practices. IPS believes that,
      based on the criteria set forth in EITF 97-2, any future acquisitions of
      individual physician practices will be accounted for under the purchase method
      of accounting.
 
 *Revenue
      Recognition.* The
      Company recognizes revenue from its surgery and diagnostic center business
      on
      the date the procedures are performed, and accounts receivable are recorded
      at
      that time. Revenues are reported at the estimated realizable amounts from
      patients and third-party payers. If such third-party payers were to change
      their
      reimbursement policies, the effect on revenue could be significant. Earnings
      are
      charged with a provision for contractual adjustments and doubtful accounts
      based
      on such factors as historical trends of billing and cash collections,
      established fee schedules, accounts receivable agings and contractual
      relationships with third-party payers. Contractual allowances are estimated
      primarily using each surgery center’s collection experience. Contractual rates
      and fee schedules are also helpful in this process. On a rolling average basis,
      the Company tracks collections as a percentage of related billed charges. This
      percentage, which is adjusted on a quarterly basis, has proved to be the best
      indicator of expected realizable amounts from patients and third-party payers.
      Contractual adjustments and accounts deemed uncollectible are applied against
      the allowance account. The Company is not aware of any material claims, disputes
      or unsettled matters with third-party payers and there have been no material
      settlements with third party payers for the three months and six months ended
      June 30, 2005.
  -6-
 IPS
      records revenue based on patient services provided by its affiliated medical
      groups. Net patient service revenue is impacted by billing rates, changes in
      current procedural terminology code reimbursement and collection trends. IPS
      reviews billing rates at each of its affiliated medical groups on at least
      an
      annual basis and adjusts those rates based on each insurer’s current
      reimbursement practices. Amounts collected by IPS for treatment by its
      affiliated medical groups of patients covered by Medicaid and other contractual
      reimbursement programs, which may be based on cost of services provided or
      predetermined rates, are generally less than the established billing rates
      of
      IPS’ affiliated medical groups. IPS estimates the amount of these contractual
      allowances and records a reserve against accounts receivable based on historical
      collection percentages for each of the affiliated medical groups, which include
      various payer categories. When payments are received, the contractual adjustment
      is written off against the established reserve for contractual allowances.
      The
      historical collection percentages are adjusted quarterly based on actual
      payments received, with any differences charged against net revenue for the
      quarter. Additionally, IPS tracks cash collection percentages for each medical
      group on a monthly basis, setting quarterly and annual goals for cash
      collections, bad debt write-offs and aging of accounts receivable. IPS is not
      aware of any material claims, disputes or unsettled matters with third party
      payers and there have been no material settlements with third party payers
      for
      the three months and six months ended June 30, 2005 and 2004.
 
 MBS
      earns revenues based on the collection of MBS’s customers’ receivables. Revenues
      are recognized during the period in which collections were received.
 
 *Accounts
      Receivable and Allowance for Doubtful Accounts* .
      The Company’s surgery and diagnostic centers and IPS’s affiliated medical groups
      grant credit without collateral to its patients, most of which are insured
      under
      third-party payer arrangements. The provision for bad debts that relates to
      patient service revenues is based on an evaluation of potentially uncollectible
      accounts. The provision for bad debts includes a reserve for 100% of the
      accounts receivable older than 180 days. Establishing an allowance for
      bad
      debt is subjective in nature. IPS uses historical collection percentages to
      determine the estimated allowance for bad debts, and adjusts the percentage
      on a
      quarterly basis.
 
 MBS
      records uncollectible accounts receivable using the direct write-off method
      of
      accounting for bad debts. Historically, MBS has experienced minimal credit
      losses and has not written-off any material accounts during 2005 or 2004.
 
 *Investment
      in Limited Partnerships.* The
      investments in limited partnerships are accounted for by the equity method.
      Under the equity method, the investment is initially recorded at cost and is
      subsequently increased to reflect the Company’s share of the income of the
      investee and reduced to reflect the share of the losses of the investee or
      distributions from the investee.
 
 These
      general partnership interests were accounted for as investment in limited
      partnerships due to the interpretation of Statement of Financial Accounting
      Standards (“SFAS”) 94/Accounting Research Bulletin (“ARB”) 51 and the
      interpretations of such by Issue 96-16 and Statement of Position (“SOP”) 78-9.
      Under those interpretations, the Company could not consolidate its interest
      in
      those facilities in which it held a minority general partnership interest due
      to
      management restrictions, shared operating decision-making, capital expenditure
      and debt approval by limited partners and the general form versus substance
      analysis. Therefore, the Company recorded them as investments in limited
      partnerships.
 
 *Goodwill
      and Other Intangible Assets.* Goodwill
      represents the excess of cost over the fair value of net assets of companies
      acquired in business combinations accounted for using the purchase method.
      In
      July 2001, the FASB issued SFAS No. 141, “Business Combinations,” and
      SFAS No. 142, “Goodwill and Other Intangible Assets.” SFAS No. 141
      eliminates pooling-of-interest accounting and requires that all business
      combinations initiated after June 30, 2001, be accounted for using the
      purchase method. SFAS No. 142 eliminates the amortization of goodwill
      and
      certain other intangible assets and requires the Company to evaluate goodwill
      for impairment on an annual basis by applying a fair value test. SFAS
      No. 142 also requires that an identifiable intangible asset that is
      determined to have an indefinite useful economic life not be amortized, but
      separately tested for impairment using a fair value-based approach at least
      annually. The Company evaluates its goodwill and other intangible assets in
      the
      fourth quarter of each fiscal year.
 
 **Overview**
 
 ***Surgery
      and Diagnostic Center Business***
 
 The
      Company was incorporated in Delaware on February 24, 1984 as Technical Coatings
      Incorporated. On September 10, 1984, its name was changed to Technical Coatings,
      Inc. Immediately prior to July 1999, the Company was an inactive company. On
      July 11, 1999, the Company changed its name to SurgiCare, Inc., and at that
      time
      changed its business strategy to developing, acquiring and operating
      freestanding ambulatory surgery centers (“ASCs”). On July 21, 1999, the Company
      acquired all of the issued and outstanding shares of common stock of Bellaire
      SurgiCare, Inc. (“Bellaire SurgiCare”), in exchange for the issuance of 9.86
      million shares of common stock (now 986,000 shares of Class A Common Stock
      after
      giving effect to the Reverse Stock Split and Reclassification), and 1.35 million
      shares of Series A Redeemable preferred stock, par value $.001 per share, to
      the
      holders of Bellaire SurgiCare’s common stock. For accounting purposes, this
      reverse acquisition was effective July 1, 1999. On December 15, 2004, the
      Company changed its name to Orion HealthCorp, Inc.
 
 -7-
   As
      of June 30, 2005, the Company owned a majority interest in two surgery centers
      and a minority interest as general partner in one additional center. Two of
      the
      centers are located in Texas and one is located in Ohio. In limited
      circumstances, the Company, or its subsidiaries, may also furnish anesthesia
      services in support of the activities of the surgery centers. The Company’s ASCs
      perform various types of procedures including: orthopedic surgery; colonoscopy;
      ophthalmic laser surgery; pain injections; and various pediatric surgeries.
      The
      most common procedures performed in the Company’s ASCs include knee arthroscopy,
      lumbar nerve block and sacral injection, colonoscopy, hammertoe correction,
      sinus endoscopic biopsy, cataract removal, breast biopsy, Mitchell procedures
      and cystourethroscopy. The Company also owns a 41% interest in an open MRI
      center in Ohio, which opened in July 2004. The open MRI center performs
      diagnostic procedures using MRI technology. On June 13, 2005, the Company
      announced that it has accepted an offer to purchase its interests in the
      ambulatory surgery center and the MRI center. Under the terms of the offer
      letter, the Company’s interests in these facilities would be sold to a local
      hospital for cash and assumption of debt. In addition, the Company would
      continue to operate the facilities under a long-term management agreement.
      This
      transaction has not yet closed.
 
 The
      following table sets forth information related to Orion’s surgical and
      diagnostic centers in operation as of June 30, 2005:
 
 **Name**
            
            **Location**
            
            **Acquisition**
              **Date**
            
            **Orion**
              **Ownership**SurgiCare
                Memorial Village
            
            Houston,
                Texas
            
            Oct.
                2000
            
            60%San Jacinto
                Surgery Center
            
            Baytown,
                Texas
            
            Oct.
                2000
            
            10%Tuscarawas
                Ambulatory Surgery Center
            
            Dover,
                Ohio
            
            June 2002
            
            51%Tuscarawas
                Open MRI
            
            Dover,
                Ohio
            
            July 2004
            
            41%
 
 ***Integrated
      Physician Solutions***
 
 IPS,
      a Delaware corporation, was founded in 1996 as a business development company
      to
      provide physician practice management services to general and subspecialty
      pediatric practices. IPS commenced its business activities upon consummation
      of
      several medical group business combinations effective January 1, 1999. The
      Pediatric Physician Alliance (“PPA”) division of IPS manages pediatric medical
      clinics. On June 7, 2005, IntegriMED, a wholly-owned subsidiary of IPS, executed
      an Asset Purchase Agreement with eClinicalWeb, LLC to sell substantially all
      of
      the assets of IntegriMED. The Agreement was deemed to be effective as of
      midnight on June 6, 2005. (See ““Part I, Item 2. Management’s Discussion and
      Analysis or Plan of Operations - Certain Recent Developments -
      Post-Restructuring Transactions Involving Subsidiaries.”
 
 PPA
      is an experienced and innovative provider of healthcare management services
      dedicated to the practice of pediatrics. As of June 30, 2005, PPA managed 10
      practice sites, representing six medical groups in Illinois, Ohio and New
      Jersey. PPA provides business management and administrative services to the
      affiliated medical groups. These services include human resources management,
      accounting, group purchasing, public relations, marketing, information
      technology, and general day-to-day business operations management services.
      The
      affiliated physicians, who are all employed by separate corporations, provide
      all clinical and patient care related services. There is a standard forty-year
      contract between PPA and the various affiliated medical groups whereby the
      physicians are compensated after all practice expenses and a management fee
      is
      paid to PPA.
 
 IPS
      owns all the assets used in the operation of the medical groups and the
      physicians, who were equity owners in IPS, and, as a result of the IPS Merger,
      are now equity owners in Orion. IPS manages the day-to-day business operations
      of each medical group and provides the assets for the physicians to use in
      their
      practice, for a fixed fee or percentage of the net operating income of the
      medical group. All revenues are collected by IPS, the fixed fee or percentage
      payment to IPS is taken from the net operating income of the medical group
      and
      the remainder of the net operating income of the medical group is paid to the
      physicians as a salary and treated as an expense on IPS’s accounting records.
 
 ***Medical
      Billing Services***
 
 MBS
      is based in Houston, Texas and was incorporated in Texas on October 16,
      1985. DCPS is based in Houston, Texas and was organized as a Texas limited
      liability company on September 16, 1998. DCPS reorganized as a Texas
      limited partnership on August 31, 2003. The Company acquired MBS and
      DCPS
      in the DCPS/MBS Transaction. Subsequent to the DCPS/MBS Transaction, DCPS has
      operated as a wholly-owned subsidiary of MBS. MBS and DCPS provide practice
      management, billing and collection, managed care consulting and
      coding/reimbursement services to hospital-based physicians and clinics. The
      discussion of MBS below includes the operations of DCPS.
 
 ·
            *Medical
                Practice Management Services.*MBS
                provides a wide range of management services to medical practices,
                including accounting and bookkeeping services, evaluation of staffing
                needs, and billing and reimbursement analysis. These management services
                help create a more efficient medical practice and provide assistance
                with
                the business aspects associated with operating a medical practice.
  -8-
 
 
  ·
              *Billing
                  and Collection Services.*MBS
                  provides billing and collection services to its clients. These
                  include
                  coding, reimbursement services, charge entry, claim submission,
                  collection
                  activities, and financial reporting services.
  ·
              *Managed
                    Care Consulting Services.*MBS
                    provides consulting services aimed at assisting clients with
                    navigating
                    and interacting with managed care
                    organizations.
  MBS
      provides services to approximately 58 customers throughout Texas. These
      customers include anesthesiologists, pathologists, radiologists, imaging
      centers, comprehensive breast centers, hospital labs, cardio-thoracic surgeons
      and ASCs.
 
 **Results
      of Operations**
 
 As
      part of the Acquisitions and restructuring transactions, which closed on
      December 15, 2004, the IPS Merger has been treated as a reverse acquisition,
      meaning that the purchase price, comprised of the fair value of the outstanding
      shares of the Company prior to the transaction, plus applicable transaction
      costs, has been allocated to the fair value of the Company’s tangible and
      intangible assets and liabilities prior to the transaction, with any excess
      being considered goodwill. IPS is being treated as the continuing reporting
      entity, and thus IPS’s historical results have become those of the combined
      company. Orion’s results include the results of IPS for the three months and six
      months ended June 30, 2004 and the results of IPS, the Company’s surgery and
      diagnostic center business and MBS (which includes DCPS) for the three months
      and six months ended June 30, 2005. The descriptions of the business and results
      of operations of MBS set forth in this report include the business and results
      of operations of DCPS.
 
 The
      following table sets forth selected unaudited consolidated condensed statements
      of operations data expressed as a percentage of Orion’s net operating revenues
      for the three months and six months ended June 30, 2005 and 2004, respectively.
      Orion’s historical results and period-to-period comparisons are not necessarily
      indicative of the results for any future period.
  **Three
                  Months Ended**
              
              **Six
                  Months Ended****June
                  30, 2005**
              
              **June
                  30, 2004**
              
              **June
                  30, 2005**
              
              **June
                  30, 2004***(Unaudited)*
              
              *(Unaudited)*
              
              *(Unaudited)*
              
              *(Unaudited)***Net
                  operating revenues**
              
              
              100.0%
              
              
              100.0%
              
              
              100.0%
              
              
              100.0%**Direct
                  cost of revenues**
              
              
              45.0%
              
              
              62.4%
              
              
              45.3%
              
              
              61.6%**Gross
                  margin**
              
              
              55.0%
              
              
              37.6%
              
              
              54.7%
              
              
              38.4%**Total
                  operating expenses**
              
              
              146.3%
              
              
              46.9%
              
              
              108.6%
              
              
              48.0%**Loss
                  from continuing operations before other income (expenses)**
              
              
              (91.3%)
              
              
              (9.3%)
              
              
              (53.9%)
              
              
              (9.6%)Total
                  other income (expenses), net
              
              
              (1.1%)
              
              
              (5.7%)
              
              
              (1.0%)
              
              
              (5.8%)Minority
                  interest earnings in partnership
              
              
              (0.3%)
              
              
              0.0%
              
              
              (0.4%)
              
              
              0.0%**Loss
                  from continuing operations**
              
              
              (92.7%)
              
              
              (15.0%)
              
              
              (55.3%)
              
              
              (15.4%)**Discontinued
                  operations**Loss
                  from operations of discontinued components, including gain (loss)
                  on
                  disposal
              
              
              (6.5%)
              
              
              (7.6%)
              
              
              (4.7%)
              
              
              (5.2%)**Net
                  loss**
              
              
              (99.2%)
              
              
              (22.6%)
              
              
              (60.0%)
              
              
              (20.6%)Preferred
                  stock dividends
              
              
              0.0%
              
              
              (4.0%)
              
              
              0.0%
              
              
              (4.0%)**Net
                  loss attributable to common stockholders**
              
              
              (99.2%)
              
              
              (26.6%)
              
              
              (60.0%)
              
              
              (24.6%)
   -9-
  Three
      Months Ended June 30, 2005 as Compared to Three Months Ended June 30,
      2004
  The
      following table sets forth, for the periods indicated, the unaudited
      consolidated condensed statements of operations of Orion.
  **For
                  the Three Months**
                **Ended
                  June 30,****2005**
              
              **2004***(Unaudited)*
              
              *(Unaudited)***Net
                  operating revenues**
              
              $
              8,421,649
              
              $
              4,124,692**Direct
                  cost of revenues**
              
              
              3,786,846
              
              
              2,573,503**Gross
                  margin**
              
              
              4,634,803
              
              
              1,551,189**Operating
                  expenses:**Salaries
                  and benefits
              
              
              2,777,112
              
              
              752,510Facility
                  rent and related costs
              
              
              460,248
              
              
              296,791Depreciation
                  and amortization
              
              
              960,360
              
              
              136,609Professional
                  and consulting fees
              
              
              453,797
              
              
              113,935Insurance
              
              
              247,815
              
              
              132,939Provision
                  for doubtful accounts
              
              
              335,458
              
              
              255,845Other
                  expenses
              
              
              722,759
              
              
              244,454Charge
                  for impairment of intangible assets
              
              
              6,362,849
              
              
              -Total
                  operating expenses
              
              
              12,320,397
              
              
              1,933,083**Loss
                  from continuing operations before other income (expenses)**
              
              
              (7,685,595
              )
              
              (381,894
              )**Other
                  income (expenses):**Interest
                  expense
              
              
              (113,503
              )
              
              (228,811
              )Equity
                  in earnings of limited partnerships
              
              
              17,376
              
              
              -Other
                  expense, net
              
              
              2,165
              
              
              (7,079
              )Total
                  other income (expenses), net
              
              
              (93,961
              )
              
              (235,890
              )Minority
                  interest earnings in partnership
              
              
              (22,355
              )
              
              -**Loss
                  from continuing operations**
              
              
              (7,801,910
              )
              
              (617,784
              )**Discontinued
                  operations**Income
                  from operations of discontinued components,
              
              
              (545,878
              )
              
              (314,622
              )**Net
                  loss**
              
              
              (8,347,788
              )
              
              (932,406
              )Preferred
                  stock dividends
              
              
              -
              
              
              (165,300
              )**Net
                  loss attributable to common stockholders**
              
              $
              (8,347,788
              )
              $
              (1,097,706
              )
   *Net
      Operating Revenues.* Net operating revenues, which include net patient service revenue related to
      the
      operations of IPS’s affiliated medical groups, other revenue, surgery and
      diagnostic center revenue and billing services revenue, increased $4,296,957,
      or
      104.2%, to $8,421,649 for the three months ended June 30, 2005, as compared
      with
      $4,124,692 for the same period in 2004. The Company’s surgery and diagnostic
      center business and MBS reported net operating revenues of $684,184 and
      $2,631,772, respectively, for the three months ended June 30, 2005, and
      accounted for 77.2% of the increase in the second quarter of 2005.
 
 IPS
      net patient service revenue for the three months ended June 30, 2005 increased
      $967,163, or 23.5%, from the same period in 2004. The increase in net patient
      service revenue for the quarter was primarily the result of: (i) increased
      patient volume during the quarter, with procedures and office visits at the
      clinic-based facilities increasing 8,801 and 3,682, respectively, from second
      quarter 2004 levels; (ii) rate increases beginning in January 2005 for three
      of
      IPS’s affiliated medical groups, which resulted in average revenue per visit of
      $140 in the second quarter of 2005 compared to $121 for the second quarter
      of
      2004; and (iii) two new providers, who began practicing at one of IPS’s
      affiliated medical groups in July 2004, whose production in the second quarter
      of 2005 was approximately 254% higher than the second quarter 2004 production
      of
      the providers they replaced.
 
 Other
      revenue totaled $3,818 in the second quarter of 2004, increasing $13,838, or
      362.4%, to $17,656 for the three months ended June 30, 2005. In the second
      quarter of 2005, revenue from the IPS Vaccine Alliance, a group purchasing
      alliance for vaccines and medical supplies, increased $2,344 over 2004 to
      $6,162. Revenue related to a small number of former IntegriMED customers not
      fully transitioned to eClinicalWeb totaled $10,390 in June 2005.
 
 *Direct
      Cost of Revenues.* Direct cost of revenues, which includes physician compensation, surgical and
      diagnostic costs and medical group direct clinical expenses and totaled
      $2,573,503 in the second quarter of 2004, increased $1,213,343, or 47.1%, to
      $3,786,846 for the three months ended June 30, 2005. The Company’s surgery and
      diagnostic center business recorded direct cost of revenues totaling $424,542
      for the second quarter of 2005 and accounted for 35.0% of the increase in
      2005.
 
 Pursuant
      to the terms of the MSAs governing each of IPS’s affiliated medical groups, the
      physicians of each medical group are compensated after the payment of all clinic
      facility expenses as well as a management fee to IPS. The management fee revenue
      and expense, which is eliminated in the consolidation of the financial
      statements, is either a fixed fee, or is calculated based on a percentage of
      net
      operating income and represented approximately 14.2% of physician medical group
      net operating income in the second quarter of 2005 compared to 14.0% in the
      second quarter of 2004. Physician compensation increased $640,004, or 38.9%,
      for
      the quarter ended June 30, 2005 to $2,283,400, as compared with $1,643,396
      for
      the quarter ended June 30, 2004. Physician compensation expense represented
      44.7% of total net operating revenues in the second quarter of 2005, compared
      with 39.8% for the same period in 2004. The increase in compensation in the
      second three months of 2005 was directly related to an increase in net patient
      service revenue, which was primarily the result of: (i) increased patient
      volume and (ii) rate increases implemented by three of IPS’s affiliated
      medical groups.
 
 Direct
      clinical expenses are expenses that are directly related to the practice of
      medicine by the physicians who practice at the affiliated medical groups managed
      by IPS. For the quarter ended June 30, 2005, direct clinical expenses increased
      $148,797, or 16.0% to $1,078,904, largely as a result of increased vaccine
      expenses due to increased patient volume at the affiliated medical
      groups.
 
 *Operating
      Expenses.*
 
 *Salaries
      and Benefits.* Consolidated salaries and benefits increased $2,024,602 in the second quarter
      of
      2005 to $2,777,112, compared to $752,510 for the same period in 2004. The
      Company’s surgery and diagnostic center business and MBS recorded salaries and
      benefits expenses totaling $288,512 and $1,644,931, respectively in the second
      three months of 2005, and accounted for 95.5% of the increase over
      2004.
 
 Salaries
      and benefits, excluding the surgery and diagnostic center business and MBS,
      represent the employee-related costs of all non-clinical practice personnel
      and
      the IPS and Orion corporate staff in Roswell, Georgia. These expenses increased
      $91,158, or 12.1%, from $752,510 for the quarter ended June 30, 2004 to $843,668
      for the same period in 2005. Of the total increase, $73,500 is for severance
      costs related to the corporate staff reductions in Houston.
  *Facility
      Rent and Related Costs.* Facility rent and related costs increased 55.1% from $296,791 for the quarter
      ended June 30, 2004 to $460,248 for the quarter ended June 30, 2005. For the
      second three months of 2005, the Company’s surgery and diagnostic center
      business and MBS recorded facility rent and related expenses totaling $78,565
      and $108,550, respectively, which accounted for 114.5% of the increase over
      2004.
   -10-
  Facility
      rent and related costs associated with IPS’s affiliated medical groups and
      corporate office totaled $273,103 for the quarter ended June 30, 2005, a
      decrease of $23,658. Of the total decrease, $7,883 is the result of the
      sublease, which began in June 2005, between eClinicalWeb and IPS for a portion
      of the corporate office in Roswell, Georgia. The remainder of the decrease
      is a
      result of rent reductions at the facilities of two of IPS’s affiliated medical
      groups.
 
 *Depreciation
      and Amortization.* Consolidated depreciation and amortization expense totaled $960,360 in the
      second quarter of 2005, an increase of $823,751 over the quarter ended June
      30,
      2004. For the three months ended June 30, 2005, depreciation expense related
      to
      the fixed assets of the Company’s surgery and diagnostic center business and MBS
      totaled $127,585 and $20,218, respectively. Depreciation expense related to
      the
      fixed assets of IPS totaled $26,944 for the quarter ended June 30, 2005.
      Amortization expense related to the MSAs totaled $88,392 and $97,668 for the
      quarters ended June 30, 2005 and 2004, respectively.
 
 As
      part of the IPS Merger, the purchase price, comprised of the fair value of
      the
      outstanding shares of the Company prior to the transaction, plus applicable
      transaction costs, has been allocated to the fair value of the Company’s
      tangible and intangible assets and liabilities prior to the transaction, with
      any excess being considered goodwill. The amortization expense related to the
      intangible assets recorded as a result of the reverse acquisition totaled
      $431,697 for the quarter ended June 30, 2005.
 
 As
      part of the DCPS/MBS Transaction, the Company purchased MBS and DCPS for a
      combination of cash, notes and stock. Since the consideration for this purchase
      transaction exceeded the fair value of the net assets of MBS and DCPS at the
      time of the purchase, a portion of the purchase price was allocated to
      intangible assets and goodwill. The amortization expense related to the
      intangible assets recorded as a result of the DCPS/MBS Transaction totaled
      $265,523 for the quarter ended June 30, 2005.
 
 *Professional
      and Consulting Fees.* For the quarter ended June 30, 2005, professional and consulting fees totaled
      $453,797, an increase of $339,862, or 298.3%, over the same period in 2004.
      For
      the second three months of 2005, the Company’s surgery and diagnostic center
      business and MBS recorded professional and consulting fees totaling $63,787
      and
      $10,368, respectively, and accounted for 21.8% of the increase over
      2004.
 
 IPS’s
      professional and consulting fees, which also include the costs of Orion
      corporate accounting, financial reporting and compliance, increased from
      $113,935 for the three months ended June 30, 2004 to $379,642 for the three
      months ended June 30, 2005. Of the total increase, $163,790 relates to
      additional accounting, audit and legal fees as a result of the expanded
      reporting requirements resulting from the IPS Merger and the DCPS/MBS
      Transaction. An additional $26,417 in professional fees was recorded in the
      second quarter of 2005 for investor relations and corporate
      communications.
 
 *Insurance.* Consolidated insurance expense, including professional liability insurance
      for
      affiliated physicians, property and casualty insurance, and directors and
      officers liability insurance, increased from $132,939 for the quarter ended
      June
      30, 2004 to $247,815 for the quarter ended June 30, 2005. Insurance expenses
      of
      the Company’s surgery and diagnostic center business and MBS totaled $43,143 and
      $749, respectively, for the second quarter of 2005, and accounted for 38.2%
      of
      the increase over 2004.
 
 Directors
      and officers liability insurance expense for the Company, which is included
      in
      IPS’s insurance expense, increased $60,321 from the second quarter of 2004 to
      the second quarter of 2005, and relates solely to the increase in premiums
      as a
      result of the acquisition and restructuring transactions that closed in December
      2004.
 
 *Provision
      for Doubtful Accounts.* The provision for doubtful accounts increased $79,613, or 31.1%, for the quarter
      ended June 30, 2005 to $335,458. For the three months ended June 30, 2005,
      the
      Company’s surgery and diagnostic center business recorded bad debt expense
      totaling $32,402. IPS’s provision for doubtful accounts for the second three
      months of 2005 accounted for 5.9% of total net operating revenues compared
      to
      6.2% for the same period in 2004. The total collection rate, after contractual
      allowances, for IPS’s affiliated medical groups was 71.6% in the second quarter
      of 2005, compared to 67.5% for the second quarter of 2004.
 
 *Other
      Expenses.* Other expenses, which include other operating expenses such as office and
      computer supplies, telephone, data communications, printing, postage and
      transfer agent fees, as well as board of directors’ compensation and meeting
      expenses, totaled $722,759 for the quarter ended June 30, 2005, an increase
      of
      $478,305 over the same period in 2004. For the second quarter of 2005, the
      Company’s surgery and diagnostic center business and MBS recorded other expenses
      totaling $108,621 and $325,806, respectively, which accounted for 90.8% of
      the
      increase over 2004. IPS’s other expenses, which include Orion’s corporate costs,
      totaled $288,332 in the second quarter of 2005, an increase of $43,878 over
      the
      same period in 2004. Of the total increase, $23,288 and $10,756 relate to Orion
      board of directors’ compensation and meeting expenses and transfer agent fees,
      respectively, which are new costs for the Company in 2005.Additional printing
      costs associated with the Company’s SEC filings totaled $25,639 for the three
      months ended June 30, 2005.
 
 *Charge
      for Impairment of Intangible Assets.* On June 13, 2005, the Company announced that it has accepted an offer to
      purchase its interests in the Tuscarawas ASC and the Tuscarawas open MRI
      facility in Dover, Ohio. Under the terms of the offer letter, the Company’s
      interests in these facilities would be sold to a local hospital for cash and
      assumption of debt. In addition, the Company would continue to operate the
      facilities under a long-term management agreement. In preparation for this
      pending transaction, the Company tested the identifiable intangible assets
      and
      goodwill related to the surgery center business using the present value of
      cash
      flows method. Based on the pending sales transaction involving the Tuscarawas
      ASC and the Tuscarawas open MRI facility, as well as the uncertainty of future
      cash flows related to the Company’s surgery center business, the Company has
      recorded a charge for impairment of intangible assets of $6,362,849 for the
      three months ended June 30, 2005.
   -11-
 
 *Interest
      Expense.* Consolidated interest expense totaled $113,503 for the second three months
      of
      2005, a decrease of $115,308 from the same period in 2004. The decrease from
      2004 can be explained generally by the following events:
 
 ·
            As
                part of the Investment Transaction, the Company used $5,908,761 to
                pay off
                the debt owed to a subsidiary of Brantley IV.
 ·
            As
                described in “Item 2. Management’s Discussion and Analysis and Plan of
                Operation - Certain Recent Developments - New Line of Credit and
                Debt
                Restructuring,” the Company restructured its previously-existing debt
                facilities, which resulted in a decrease in aggregate debt owed to
                DVI
                from approximately $10.1 million to a combined principal amount
                of
                approximately $6.5 million, of which approximately $2 million
                was paid at the Closing.
 ·
            Brantley
                Capital and Brantley Venture Partners III, L.P. (“Brantley III”) each held
                debt of IPS and are party to an Amended and Restated Debt Exchange
                Agreement dated February 9, 2004, as amended on July 16,
                2004
                (the “Debt Exchange Agreement”). Pursuant to the Debt Exchange Agreement,
                Brantley Capital and Brantley III received Class A Common
                Stock with
                a fair market value (based on the daily average of the high and low
                price
                per share of SurgiCare common stock over the five trading days immediately
                prior to the Closing) equal to the amounts owing to Brantley Capital
                and
                Brantley III under their loans to IPS in exchange for contribution
                of such
                debt to Orion. Pursuant to the Debt Exchange Agreement, Brantley
                Capital
                also received Class A Common Stock with a fair market value
                (based on
                the daily average of the high and low price per share of SurgiCare
                common
                stock over the five trading days immediately prior to the Closing)
                equal
                to the amount of certain accrued dividends owed to it by IPS in exchange
                for the contribution of such indebtedness, provided that the amount
                of
                shares received in respect of such dividends was subject to reduction
                to
                the extent necessary to achieve the guaranteed allocation of shares
                of
                Class A Common Stock to the holders of IPS common stock and
                Series B Convertible preferred stock pursuant to the IPS Merger
                Agreement. The aggregate amount of debt exchanged by the parties
                to the
                Debt Exchange Agreement was $4,375,229, which included accrued interest
                as
                of the Closing, and $593,100 of debt in respect of accrued dividends.
 
 *Equity
      in Earnings of Limited Partnerships.*  The
      investments in limited partnerships are accounted for by the equity method.
      Under the equity method, the investment is initially recorded at cost and is
      subsequently increased to reflect the Company’s share of the income of the
      investee and reduced to reflect the share of the losses of the investee or
      distributions from the investee.
 
 These
      general partnership interests were accounted for as investment in limited
      partnerships due to the interpretation of FAS 94/ARB 51 and the interpretations
      of such by Issue 96-16 and SOP 78-9. Under those interpretations, the Company
      could not consolidate its interest in those facilities in which it held a
      minority general interest partnership interest due to management restrictions,
      shared operating decision-making, capital expenditure and debt approval by
      limited partners and the general form versus substance analysis. Therefore,
      the
      Company recorded them as investments in limited partnerships. For the three
      months ended June 30, 2005, the Company recorded income of $19,036 on the
      minority interest in San Jacinto Surgery Center, based on the Company’s 10%
      ownership of that surgery center. Additionally, the Company recorded a loss
      of
      $1,660 on the minority interest in eClinicalWeb, based on the Company’s 2%
      ownership in that entity beginning June 6, 2005.
 
 *Discontinued
      Operations.* On September 19, 2003, IPS entered into a Mutual Release and Settlement
      Agreement (the “Settlement Agreement”) with Dr. Jane Kao and PediApex Heart
      Center for Children (the “Heart Center”) to settle disputes as to the existence
      and enforceability of certain contractual obligations. As part of the Settlement
      Agreement, Dr. Kao, the Heart Center and IPS agreed that, until
      December 31, 2004, each party would conduct their operations under the
      terms established by the MSA. Additionally, among other provisions, after
      December 31, 2004, Dr. Kao and the Heart Center were released
      from any
      further obligation to IPS arising from any previous agreement, and Dr. Kao
      purchased the accounts receivable related to the Heart Center and IPS terminated
      its ownership and management agreement with the Heart Center. The operating
      results of the Heart Center were not included in the consolidated statements
      of
      operations of IPS after September 19, 2003 because this medical group
      did
      not meet the criteria for consolidation after that date in accordance with
      EITF
      97-2. The operations of this component are reflected in the Company’s
      consolidated statements of operations as ‘income from operations of discontinued
      components’ in the second quarter of 2004. IPS recorded a loss on disposal of
      this discontinued component of $12,366 for the year ended December 31,
      2004. There were no operations for this component in the second quarter of
      2005.
  -12-
 
 The
      following table contains selected financial statement data related to the Heart
      Center as of and for the three months ended June 30, 2004:
  **Three
                Months
                Ended****June
                30, 2004**Income
                statement data:Net
                operating revenues
            
            $
            496,566Direct
                cost of revenues
            
            
            178,149Operating
                expenses
            
            
            299,622Net
                income
            
            $
            18,795Balance
                sheet data:Current
                assets
            
            $
            112,826Other
                assets
            
            
            93,287Total
                assets
            
            $
            206,113Current
                liabilities
            
            $
            596,992Other
                liabilities
            
            
            —Total
                liabilities
            
            $
            596,992
   As
      part of the Acquisitions and restructuring transactions that closed on
      December 15, 2004, the Company recorded intangible assets related to
      the
      IPS Merger and the DCPS/MBS Transaction. As of the Closing, the Company’s
      management expected the case volumes at Bellaire SurgiCare to improve in 2005.
      However, by the end of February 2005, it was determined that the expected case
      volume increases were not going to be realized. On March 1, 2005, the
      Company closed Bellaire SurgiCare and consolidated its operations with the
      operations of SurgiCare Memorial Village. The Company tested the identifiable
      intangible assets and goodwill related to the surgery and diagnostic center
      business using the present value of cash flows method. As a result of the
      decision to close Bellaire SurgiCare and the resulting impairment of the joint
      venture interest and management contracts related to the surgery centers, the
      Company recorded a charge for impairment of intangible assets of $4,090,555
      for
      the year ended December 31, 2004. The Company also recorded a loss on
      disposal of this discontinued component (in addition to the charge for
      impairment of intangible assets) of $163,050 for the quarter ended March 31,
      2005. There were no operations for this component in the second quarter of
      2005.
 
 On
      April 1, 2005, IPS entered into a Mutual Release and Settlement Agreement
      (the “Settlement”) with Dr. Bradley E. Chipps, M.D. and Capital Allergy and
      Respiratory Disease Center, a Medical Corporation (“CARDC”) to settle disputes
      as to the existence and enforceability of certain contractual obligations.
      As
      part of the Settlement, Dr. Chipps, CARDC, and IPS agreed that CARDC
      would
      purchase the assets owned by IPS as shown on the balance sheet on March 31,
      2005 in exchange for termination of the MSA. Additionally, among other
      provisions, after April 1, 2005, Dr. Chipps and CARDC have been
      released from any further obligation to IPS arising from any previous agreement.
      As a result of the Settlement, the Company recorded a charge for impairment
      of
      intangible assets related to CARDC of $704,927 for the year ended
      December 31, 2004. The Company also recorded a gain on disposal of this
      discontinued component (in addition to the charge for impairment of intangible
      assets) of $506,625 for the quarter ended March 31, 2005. For the quarter ended
      June 30, 2005, the Company reduced the gain on disposal of this discontinued
      component by $238,333 as the result of post-settlement adjustments related
      to
      the reconciliation of balance sheet accounts. The operations of this component
      are reflected in the Company’s consolidated statements of operations as ‘income
      from operations of discontinued components’ for the quarter ended June 30, 2004.
      There were no operations for this component in the second quarter of 2005.
 
 The
      following table contains selected financial statement data related to CARDC
      as
      of and for the three months ended June 30, 2005:
 
 **Three
                Months
                Ended****June
                30, 2005**Income
                statement data:Net
                operating revenues
            
            $
            913,934Direct
                cost of revenues
            
            
            644,113Operating
                expenses
            
            
            231,122Net
                income
            
            $
            38,699Balance
                sheet data:Current
                assets
            
            $
            282,901Other
                assets
            
            
            12,863Total
                assets
            
            $
            295,764Current
                liabilities
            
            $
            314,419Other
                liabilities
            
            
            —Total
                liabilities
            
            $
            314,419
 
 On
      June 7, 2005, as described in “Part I, Item 2. Management’s Discussion and
      Analysis or Plan of Operations - Certain Recent Developments -
      Post-Restructuring Transactions Involving Subsidiaries,” IPS executed an Asset
      Purchase Agreement with eClinicalWeb to sell substantially all of the assets
      of
      IntegriMED. As a result of this transaction, the Company recorded a loss on
      disposal of this discontinued component of $47,101 for the quarter ended June
      30, 2005. The operations of this component are reflected in the Company’s
      consolidated statements of operations as ‘income from operations of discontinued
      components’ for the three months ended June 30, 2005 and 2004,
      respectively.
  -13-
 
 The
      following table contains selected financial statement data related to IntegriMED
      as of and for the three months ended June 30, 2005 and 2004,
      respectively:
 
 **Three
                Months Ended June 30,****2005**
            
            **2004**Income
                statement data:Net
                operating revenues
            
            $
            82,155
            
            $
            65,553Direct
                cost of revenues
            
            
            —
            
            
            —Operating
                expenses
            
            
            392,931
            
            
            437,669Net
                income
            
            $
            (310,776
            )
            $
            (372,116
            )Balance
                sheet data:Current
                assets
            
            $
            (24,496
            )
            $
            210,400Other
                assets
            
            
            —
            
            
            39,138Total
                assets
            
            $
            (24,496
            )
            $
            249,538Current
                liabilities
            
            $
            17,022
            
            $
            278,383Other
                liabilities
            
            
            —
            
            
            —Total
                liabilities
            
            $
            17,022
            
            $
            278,383
 
 On
      June 13, 2005, the Company announced that it has accepted an offer to purchase
      its interests in the Tuscarawas ASC and the Tuscarawas open MRI facility in
      Dover, Ohio. Under the terms of the offer letter, the Company’s interests in
      these facilities would be sold to a local hospital for cash and assumption
      of
      debt. In addition, the Company would continue to operate the facilities under
      a
      long-term management agreement. Although this transaction has not yet been
      consummated, pursuant to SFAS No. 144, “Accounting for the Impairment or
      Disposal of Long-Lived Assets,” the assets and liabilities of the Tuscarawas ASC
      and Tuscarawas open MRI facility have been reclassified as assets held for
      sale
      and liabilities held for sale on the Company’s consolidated balance sheet as of
      June 30, 2005. The operations of this component are reflected in the Company’s
      consolidated statements of operations as ‘income from operations of discontinued
      components’ for the three months ended June 30, 2005.
 
 The
      following table contains selected financial statement data related to the
      Tuscarawas ASC and Open MRI as of and for the three months ended June 30,
      2005:
 
 **Three
                Months Ended****June
                30, 2005**Income
                statement data:Net
                operating revenues
            
            $
            873,949Direct
                cost of revenues
            
            
            394,402Operating
                expenses
            
            
            429,225Net
                income
            
            $
            50,332Balance
                sheet data:Cash
            
            $
            (4,673
            )Accounts
                receivable, net
            
            
            718,490Other
                current assets
            
            
            81,014Property
                and equipment, net
            
            
            1,416,356Other
                long-term assets
            
            
            71,376Total
                assets held for sale
            
            $
            2,282,564Accounts
                payable and accrued expenses
            
            $
            709,779Capital
                lease obligation
            
            
            462,295Long-term
                debt
            
            
            445,095Total
                liabilities held for sale
            
            $
            1,617,168
 
 -14-
  The
      following table summarizes the components of income from operations of
      discontinued components:
 
 **Three
                Months Ended June 30,****2005**
            
            **2004**Income
                from operations of discontinued components:CARDCNet
                income
            
            $
            -
            
            $
            38,699Gain
                on disposal
            
            
            (238,333
            )Heart
                CenterNet
                income
            
            
            -
            
            
            18,795Bellaire
                SurgiCareNet
                loss
            
            
            -
            
            
            -Loss
                on disposal
            
            
            -
            
            
            -IntegriMEDNet
                loss
            
            
            (310,776
            )
            
            (372,116
            )Loss
                on disposal
            
            
            (47,101
            )
            
            -Tuscarawas
                ASC and Open MRINet
                income
            
            
            50,332
            
            
            -Total
                income from operations of discontinued components
            
            $
            (545,878
            )
            $
            (314,622
            )
 
 *Preferred
      Stock Dividends.* Prior
      to the IPS Merger, holders of IPS’s Series A-2 preferred stock were
      entitled to receive, when, as and if declared by the board of directors,
      cumulative dividends payable at the annual rate of $0.40 for each share.
      Dividends accrued, even if not declared, and were to be declared and paid in
      cash in equal installments on the first day of January, April, July and October
      immediately following the issue date, or continued to be accrued until such
      time
      as the preferred stockholders demanded payment. Preferred stock dividends in
      the
      amount of $165,300 were accrued for the quarter ended June 30, 2004. No cash
      payments of dividends were made in the second quarter of 2004. The
      Series A-2 redeemable convertible preferred stock, along with the other
      three series of redeemable convertible preferred stock held by IPS stockholders
      prior to the IPS Merger, including any accrued and unpaid dividends therein,
      were exchanged for shares of Orion’s Class A Common Stock as a part of the
      IPS Merger.
 
  -15-
  Six
      Months Ended June 30, 2005 as Compared to Six Months Ended June 30,
      2004
 
 The
      following table sets forth, for the periods indicated, the unaudited
      consolidated condensed statements of operations of Orion.
 
 **For
                  the Six Months**
                **Ended
                  June 30,****2005**
              
              **2004***(Unaudited)*
              
              *(Unaudited)***Net
                  operating revenues**
              
              $
              16,725,495
              
              $
              8,293,691**Direct
                  cost of revenues**
              
              
              7,568,571
              
              
              5,106,968**Gross
                  margin**
              
              
              9,156,924
              
              
              3,186,723**Operating
                  expenses:**Salaries
                  and benefits
              
              
              5,454,081
              
              
              1,529,818Facility
                  rent and related costs
              
              
              944,651
              
              
              586,574Depreciation
                  and amortization
              
              
              1,951,026
              
              
              269,736Professional
                  and consulting fees
              
              
              801,437
              
              
              290,554Insurance
              
              
              479,291
              
              
              271,969Provision
                  for doubtful accounts
              
              
              678,545
              
              
              510,766Other
                  expenses
              
              
              1,497,676
              
              
              523,167Charge
                  for impairment of intangible assets
              
              
              6,362,849
              
              
              -Total
                  operating expenses
              
              
              18,169,556
              
              
              3,982,584**Loss
                  from continuing operations before other income (expenses)**
              
              
              (9,012,633
              )
              
              (795,861
              )**Other
                  income (expenses):**Interest
                  expense
              
              
              (191,921
              )
              
              (468,861
              )Equity
                  in earnings of limited partnerships
              
              
              17,376
              
              
              -Other
                  expense, net
              
              
              4,246
              
              
              (12,523
              )Total
                  other income (expenses), net
              
              
              (170,299
              )
              
              (481,384
              )Minority
                  interest earnings in partnership
              
              
              (61,801
              )**Loss
                  from continuing operations**
              
              
              (9,244,733
              )
              
              (1,277,245
              )**Discontinued
                  operations**Income
                  from operations of discontinued components,
              
              
              (783,686
              )
              
              (429,602
              )**Net
                  loss**
              
              
              (10,028,418
              )
              
              (1,706,847
              )Preferred
                  stock dividends
              
              
              -
              
              
              (330,600
              )**Net
                  loss attributable to common stockholders**
              
              $
              (10,028,418
              )
              $
              (2,037,447
              )
  *Net
      Operating Revenues.* Net operating revenues, which include net patient service revenue related to
      the
      operations of IPS’s affiliated medical groups, other revenue, surgery and
      diagnostic center revenue and billing services revenue, increased $8,431,804,
      or
      101.7%, to $16,725,495 for the six months ended June 30, 2005, as compared
      with
      $8,293,691 for the same period in 2004. The Company’s surgery and diagnostic
      center business and MBS reported net operating revenues of $1,267,842 and
      $5,153,753, respectively, for the six months ended June 30, 2005, and accounted
      for 76.4% of the increase in the first half of 2005.
 
 IPS
      net patient service revenue for the six months ended June 30, 2005 increased
      $1,987,853, or 24.0%, from the same period in 2004. The increase in net patient
      service revenue for the first half of the year was primarily the result of:
      (i)
      increased patient volume during the six months ended June 30, 2005, with
      procedures and office visits at the clinic-based facilities increasing 19,682
      and 8,361, respectively, from 2004 levels; (ii) rate increases beginning in
      January 2005 for three of IPS’s affiliated medical groups, which resulted in
      average revenue per visit of $135 in the first six months of 2005 compared
      to
      $124 for the first half of 2004; and (iii) two new providers, who began
      practicing at one of IPS’s affiliated medical groups in July 2004, whose
      production in the first half of 2005 was approximately 214% higher than the
      2004
      year-to-date production of the providers they replaced.
 
 Other
      revenue totaled $19,233 in the first six months of 2004, increasing $22,356,
      or
      116.2%, to $41,589 for the six months ended June 30, 2005. In the first half
      of
      2005, revenue from the IPS Vaccine Alliance, a group purchasing alliance for
      vaccines and medical supplies, increased $11,966 over 2004 to $31,199. Revenue
      related to a small number of former IntegriMED customers not fully transitioned
      to eClinicalWeb totaled $10,390 in June 2005.
 
 *Direct
      Cost of Revenues.* Direct cost of revenues, which includes physician compensation, surgical and
      diagnostic costs and medical group direct clinical expenses and totaled
      $5,106,968 in the first half of 2004, increased $2,461,603, or 48.2%, to
      $7,568,571 for the six months ended June 30, 2005. The Company’s surgery and
      diagnostic center business recorded direct cost of revenues totaling $803,136
      for the first six months of 2005 and accounted for 32.6% of the increase in
      2005.
 
 Pursuant
      to the terms of the MSAs governing each of IPS’s affiliated medical groups, the
      physicians of each medical group are compensated after the payment of all clinic
      facility expenses as well as a management fee to IPS. The management fee revenue
      and expense, which is eliminated in the consolidation of the financial
      statements, is either a fixed fee, or is calculated based on a percentage of
      net
      operating income and represented approximately 13.9% of physician medical group
      net operating income in the first six months of 2005 compared to 14.8% in the
      same period in 2004. Physician compensation increased $1,428,182, or 44.5%,
      for
      the six months ended June 30, 2005 to $4,636,089, as compared with $3,207,907
      for the six months ended June 30, 2004. Physician compensation expense
      represented 45.0% of total net operating revenues in the first half of 2005,
      compared with 38.7% for the same period in 2004. The increase in compensation
      in
      the first six months of 2005 was directly related to an increase in net patient
      service revenue, which was primarily the result of: (i) increased patient
      volume and (ii) rate increases implemented by three of IPS’s affiliated
      medical groups.
 
 Direct
      clinical expenses are expenses that are directly related to the practice of
      medicine by the physicians who practice at the affiliated medical groups managed
      by IPS. For the quarter ended June 30, 2005, direct clinical expenses increased
      $230,285, or 12.1% to $2,129,346, largely as a result of increased vaccine
      expenses due to increased patient volume at the affiliated medical
      groups.
 
 *Operating
      Expenses.*
 
 *Salaries
      and Benefits.* Consolidated salaries and benefits increased $3,924,263 in the first half of
      2005 to $5,454,081, compared to $1,529,818 for the same period in 2004. The
      Company’s surgery and diagnostic center business and MBS recorded salaries and
      benefits expenses totaling $601,865 and $3,220,067, respectively in the first
      six months of 2005, and accounted for 97.4% of the increase over
      2004.
 
 Salaries
      and benefits, excluding the surgery and diagnostic center business and MBS,
      represent the employee-related costs of all non-clinical practice personnel
      and
      the IPS and Orion corporate staff in Roswell, Georgia. These expenses increased
      $102,331, or 6.7%, from $1,529,818 for the six months ended June 30, 2004 to
      $1,632,149 for the same period in 2005. Of the total increase, $73,500 is for
      severance costs related to the corporate staff reductions in
      Houston.
  *Facility
      Rent and Related Costs.* Facility rent and related costs increased 61.0% from $586,574 for the six months
      ended June 30, 2004 to $944,651 for the six months ended June 30, 2005. For
      the
      first six months of 2005, the Company’s surgery and diagnostic center business
      and MBS recorded facility rent and related expenses totaling $157,129 and
      $217,563, respectively, which accounted for 104.6% of the increase over 2004.
  -16-
 
 Facility
      rent and related costs associated with IPS’s affiliated medical groups and
      corporate office totaled $569,959 for the six months ended June 30, 2005, a
      decrease of $16,615. Of the total decrease, $7,883 is the result of the
      sublease, which began in June 2005, between eClinicalWeb and IPS for a portion
      of the corporate office in Roswell, Georgia. The remainder of the decrease
      is a
      result of rent reductions at the facilities of two of IPS’s affiliated medical
      groups.
 
 *Depreciation
      and Amortization.* Consolidated depreciation and amortization expense totaled $1,951,026 in the
      first six months of 2005, an increase of $1,681,290 over the six months ended
      June 30, 2004. For the six months ended June 30, 2005, depreciation expense
      related to the fixed assets of the Company’s surgery and diagnostic center
      business and MBS totaled $245,638 and $41,835, respectively. Depreciation
      expense related to the fixed assets of IPS totaled $59,771 for the year-to-date
      period ended June 30, 2005. Amortization expense related to the MSAs totaled
      $209,341 and $195,336 for the six-month periods ended June 30, 2005 and 2004,
      respectively.
 
 As
      part of the IPS Merger the purchase price, comprised of the fair value of the
      outstanding shares of the Company prior to the transaction, plus applicable
      transaction costs, has been allocated to the fair value of the Company’s
      tangible and intangible assets and liabilities prior to the transaction, with
      any excess being considered goodwill. The amortization expense related to the
      intangible assets recorded as a result of the reverse acquisition totaled
      $863,394 for the six months ended June 30, 2005.
 
 As
      part of the DCPS/MBS Transaction, the Company purchased MBS and DCPS for a
      combination of cash, notes and stock. Since the consideration for this purchase
      transaction exceeded the fair value of the net assets of MBS and DCPS at the
      time of the purchase, a portion of the purchase price was allocated to
      intangible assets and goodwill. The amortization expense related to the
      intangible assets recorded as a result of the DCPS/MBS Transaction totaled
      $531,046 for the six months ended June 30, 2005.
 
 *Professional
      and Consulting Fees.* For the six months ended June 30, 2005, professional and consulting fees totaled
      $801,437, an increase of $510,883, or 175.8%, over the same period in 2004.
      For
      the first six months of 2005, the Company’s surgery and diagnostic center
      business and MBS recorded professional and consulting fees totaling $120,709
      and
      $22,850, respectively, and accounted for 28.1% of the increase over
      2004.
 
 IPS’s
      professional and consulting fees, which also include the costs of Orion
      corporate accounting, financial reporting and compliance, increased from
      $290,554 for the six months ended June 30, 2004 to $657,877 for the six months
      ended June 30, 2005. Of the total increase, $242,171 relates to additional
      accounting, audit and legal fees as a result of the expanded reporting
      requirements resulting from the IPS Merger and the DCPS/MBS Transaction. An
      additional $40,264 in professional fees was recorded in the first six months
      of
      2005 for investor relations and corporate communications.
 
 *Insurance.* Consolidated insurance expense, including professional liability insurance
      for
      affiliated physicians, property and casualty insurance, and directors and
      officers liability insurance, increased from $271,969 for the six-month period
      ended June 30, 2004 to $479,291 for the six months ended June 30, 2005.
      Insurance expenses of the Company’s surgery and diagnostic center business and
      MBS totaled $69,984 and $5,002, respectively, for the first half of 2005, and
      accounted for 36.2% of the increase over 2004.
 
 Directors
      and officers liability insurance expense for the Company, which is included
      in
      IPS’s insurance expense, increased $120,261 from the first six months of 2004 to
      the six months ended June 30, 2005, and relates solely to the increase in
      premiums as a result of the acquisition and restructuring transactions that
      closed in December 2004.
 
 *Provision
      for Doubtful Accounts.* The provision for doubtful accounts increased $167,779, or 32.8%, for the six
      months ended June 30, 2005 to $678,545. For the first six months of 2005, the
      Company’s surgery and diagnostic center business recorded bad debt expense
      totaling $60,234. IPS’s provision for doubtful accounts for the first half of
      2005 accounted for 6.3% of total net operating revenues compared to 6.2% for
      the
      same period in 2004. The total collection rate, after contractual allowances,
      for IPS’s affiliated medical groups was 70.6% in the first six months of 2005,
      compared to 68.1% for the six months ended June 30, 2004.
 
 *Other
      Expenses.* Other expenses, which include other operating expenses such as office and
      computer supplies, telephone, data communications, printing, postage and
      transfer agent fees, as well as board of directors’ compensation and meeting
      expenses, totaled $1,497,676 for the six months ended June 30, 2005, an increase
      of $974,509 over the same period in 2004. For the first six months of 2005,
      the
      Company’s surgery and diagnostic center business and MBS recorded other expenses
      totaling $243,048 and $662,667, respectively, which accounted for 92.9% of
      the
      increase over 2004. . IPS’s other expenses, which include Orion’s corporate
      costs, totaled $591,961 in the first six months of 2005, an increase of $68,794
      over the same period in 2004. Of the total increase, $73,181 and $16,392 relate
      to Orion board of directors’ compensation and meeting expenses and transfer
      agent fees, respectively, which are new costs for the company in 2005.
      Additional printing costs associated with the Company’s SEC filings totaled
      $41,513 in the first half of 2005, while bank charges fell more than $50,000
      in
      the first half of 2005 when compared with the same period in 2004, as a result
      of the reduction in overdraft expenses associated with the Company’s revolving
      line of credit.
  -17-
 
 *Charge
      for Impairment of Intangible Assets.* On June 13, 2005, the Company announced that it has accepted an offer to
      purchase its interests in the Tuscarawas ASC and the Tuscarawas open MRI
      facility in Dover, Ohio. Under the terms of the offer letter, the Company’s
      interests in these facilities would be sold to a local hospital for cash and
      assumption of debt. In addition, the Company would continue to operate the
      facilities under a long-term management agreement. In preparation for this
      pending transaction, the Company tested the identifiable intangible assets
      and
      goodwill related to the surgery center business using the present value of
      cash
      flows method as of June 30, 2005. Based on the pending sales transaction
      involving the Tuscarawas ASC and Tuscarawas open MRI facility, as well as the
      uncertainty of future cash flows related to the Company’s surgery center
      business, the Company has recorded a charge for impairment of intangible assets
      of $6,362,849 for the six months ended June 30, 2005.
 
 *Interest
      Expense.* Consolidated interest expense totaled $191,921 for the first six months of
      2005,
      a decrease of $276,940 from the same period in 2004. The decrease from 2004
      can
      be explained generally by the following events:
 
 ·
            As
                part of the Investment Transaction, the Company used $5,908,761 to
                pay off
                the debt owed to a subsidiary of Brantley IV.
 ·
            As
                described in “Item 2. Management’s Discussion and Analysis and Plan of
                Operation - Certain Recent Developments - New Line of Credit and
                Debt
                Restructuring,” the Company restructured its previously-existing debt
                facilities, which resulted in a decrease in aggregate debt owed to
                DVI
                from approximately $10.1 million to a combined principal amount
                of
                approximately $6.5 million, of which approximately $2 million
                was paid at the Closing.
 ·
            Brantley
                Capital and Brantley III each held debt of IPS and are party to the
                Debt
                Exchange Agreement. Pursuant to the Debt Exchange Agreement, Brantley
                Capital and Brantley III received Class A Common Stock with
                a fair
                market value (based on the daily average of the high and low price
                per
                share of SurgiCare common stock over the five trading days immediately
                prior to the Closing) equal to the amounts owing to Brantley Capital
                and
                Brantley III under their loans to IPS in exchange for contribution
                of such
                debt to Orion. Pursuant to the Debt Exchange Agreement, Brantley
                Capital
                also received Class A Common Stock with a fair market value
                (based on
                the daily average of the high and low price per share of SurgiCare
                common
                stock over the five trading days immediately prior to the Closing)
                equal
                to the amount of certain accrued dividends owed to it by IPS in exchange
                for the contribution of such indebtedness, provided that the amount
                of
                shares received in respect of such dividends was subject to reduction
                to
                the extent necessary to achieve the guaranteed allocation of shares
                of
                Class A Common Stock to the holders of IPS common stock and
                Series B Convertible preferred stock pursuant to the IPS Merger
                Agreement. The aggregate amount of debt exchanged by the parties
                to the
                Debt Exchange Agreement was $4,375,229, which included accrued interest
                as
                of the Closing, and $593,100 of debt in respect of accrued dividends.
 
 *Equity
      in Earnings of Limited Partnerships.*  The
      investments in limited partnerships are accounted for by the equity method.
      Under the equity method, the investment is initially recorded at cost and is
      subsequently increased to reflect the Company’s share of the income of the
      investee and reduced to reflect the share of the losses of the investee or
      distributions from the investee.
 
 These
      general partnership interests were accounted for as investment in limited
      partnerships due to the interpretation of FAS 94/ARB 51 and the interpretations
      of such by Issue 96-16 and SOP 78-9. Under those interpretations, the Company
      could not consolidate its interest in those facilities in which it held a
      minority general interest partnership interest due to management restrictions,
      shared operating decision-making, capital expenditure and debt approval by
      limited partners and the general form versus substance analysis. Therefore,
      the
      Company recorded them as investments in limited partnerships. For the six months
      ended June 30, 2005, the Company recorded income of $19,036 on the minority
      interest in San Jacinto Surgery Center, based on the Company’s 10% ownership of
      that surgery center. Additionally, the Company recorded a loss of $1,660 on
      the
      minority interest in eClinicalWeb, based on the Company’s 2% ownership in that
      entity beginning June 6, 2005.
 
 *Discontinued
      Operations.* On September 19, 2003, IPS entered into the Settlement Agreement with
      Dr. Jane Kao and the Heart Center to settle disputes as to the existence
      and enforceability of certain contractual obligations. As part of the Settlement
      Agreement, Dr. Kao, the Heart Center and IPS agreed that, until
      December 31, 2004, each party would conduct their operations under the
      terms established by the MSA. Additionally, among other provisions, after
      December 31, 2004, Dr. Kao and the Heart Center were released
      from any
      further obligation to IPS arising from any previous agreement, and Dr. Kao
      purchased the accounts receivable related to the Heart Center and IPS terminated
      its ownership and management agreement with the Heart Center. The operating
      results of the Heart Center were not included in the consolidated statements
      of
      operations of IPS after September 19, 2003 because this medical group
      did
      not meet the criteria for consolidation after that date in accordance with
      EITF
      97-2. The operations of this component are reflected in the Company’s
      consolidated statements of operations as ‘income from operations of discontinued
      components’ for the six months ended June 30, 2004. IPS recorded a loss on
      disposal of this discontinued component of $12,366 for the year ended
      December 31, 2004. There were no operations for this component in
      2005.
 
  -18-
  The
      following table contains selected financial statement data related to the Heart
      Center as of and for the six months ended June 30, 2004:
  **Six
                    Months
                    Ended****June
                    30, 2004**Income
                    statement data:Net
                    operating
                    revenues
                $
                    1,225,707Direct
                    cost of
                    revenues
                503,651Operating
                    expenses
                657,257Net
                    income
                $
                    64,799Balance
                    sheet data:Current
                    assets
                $
                    112,826Other
                    assets
                93,287Total
                    assets
                $
                    206,113Current
                    liabilities
                $
                    596,992Other
                    liabilities
                —Total
                    liabilities
                $
                    596,992
 
 As
      part of the acquisition and restructuring transactions that closed on
      December 15, 2004, the Company recorded intangible assets related to
      the
      IPS Merger and the DCPS/MBS Transaction. As of the Closing, the Company’s
      management expected the case volumes at Bellaire SurgiCare to improve in 2005.
      However, by the end of February 2005, it was determined that the expected case
      volume increases were not going to be realized. On March 1, 2005, the
      Company closed Bellaire SurgiCare and consolidated its operations with the
      operations of SurgiCare Memorial Village. The Company tested the identifiable
      intangible assets and goodwill related to the surgery and diagnostic center
      business using the present value of cash flows method. As a result of the
      decision to close Bellaire SurgiCare and the resulting impairment of the joint
      venture interest and management contracts related to the surgery centers, the
      Company recorded a charge for impairment of intangible assets of $4,090,555
      for
      the year ended December 31, 2004. The Company also recorded a loss on
      disposal of this discontinued component (in addition to the charge for
      impairment of intangible assets) of $163,050 for the quarter ended March 31,
      2005. There were no operations for this component in the second quarter of
      2005.
 
 The
      following table contains selected financial statement data related to Bellaire
      SurgiCare as of and for the six months ended June 30, 2005:
 **Six
                  Months
                  Ended****June
                  30, 2005**Income
                  statement data:Net
                  operating
                  revenues
              
              $
              161,679Direct
                  cost of
                  revenues
              
              
              235,993Operating
                  expenses
              
              
              114,104Net
                  income
              
              $
              (188,418)Balance
                  sheet data:Current
                  assets
              
              $
              —Other
                  assets
              
              
              —Total
                  assets
              
              $
              —Current
                  liabilities
              
              $
              —Other
                  liabilities
              
              
              —Total
                  liabilities
              
              $
              —
 
 On
      April 1, 2005, IPS entered into the Settlementwith Dr. Bradley
      E.
      Chipps, M.D. and CARDC to settle disputes as to the existence and enforceability
      of certain contractual obligations. As part of the Settlement, Dr. Chipps,
      CARDC, and IPS agreed that CARDC would purchase the assets owned by IPS as
      shown
      on the balance sheet on March 31, 2005 in exchange for termination of
      the
      MSA. Additionally, among other provisions, after April 1, 2005,
      Dr. Chipps and CARDC have been released from any further obligation
      to IPS
      arising from any previous agreement. As a result of the Settlement, the Company
      recorded a charge for impairment of intangible assets related to CARDC of
      $704,927 for the year ended December 31, 2004. The Company also recorded
      a
      gain on disposal of this discontinued component (in addition to the charge
      for
      impairment of intangible assets) of $506,625 for the quarter ended March 31,
      2005. For the quarter ended June 30, 2005, the Company reduced the gain on
      disposal of this discontinued component by $238,333 as the result of
      post-settlement adjustments related to the reconciliation of balance sheet
      accounts. The operations of this component are reflected in the Company’s
      consolidated statements of operations as ‘income from operations of discontinued
      components’ for the six months ended June 30, 2005 and 2004, respectively. There
      were no operations for this component in the second quarter of 2005.
 
  -19-
  The
        following table contains selected financial statement data related to CARDC
        as
        of and for the six months ended June 30, 2005 and 2004,
        respectively:
  **Six
                Months Ended June
                30,****2005**
            
            **2004**Income
                statement data:Net
                operating revenues
            
            $
            848,373
            
            $
            1,679,416Direct
                cost of revenues
            
            
            523,255
            
            
            1,140,087Operating
                expenses
            
            
            286,418
            
            
            462,830Net
                income
            
            $
            38,700
            
            $
            76,499Balance
                sheet data:Current
                assets
            
            $
            —
            
            $
            282,901Other
                assets
            
            
            —
            
            
            12,863Total
                assets
            
            $
            —
            
            $
            295,764Current
                liabilities
            
            $
            —
            
            $
            314,419Other
                liabilities
            
            
            —
            
            
            —Total
                liabilities
            
            $
            —
            
            $
            314,419
 
 On
      June 7, 2005, as described in “Part I, Item 2. Management’s Discussion and
      Analysis or Plan of Operations - Certain Recent Developments -
      Post-Restructuring Transactions Involving Subsidiaries,” IPS executed an Asset
      Purchase Agreement with eClinicalWeb to sell substantially all of the assets
      of
      IntegriMED. As a result of this transaction, the Company recorded a loss on
      disposal of this discontinued component of $47,101 for the quarter ended June
      30, 2005. The operations of this component are reflected in the Company’s
      consolidated statements of operations as ‘income from operations of discontinued
      components’ for the six months ended June 30, 2005 and 2004,
      respectively.
 
 The
      following table contains selected financial statement data related to IntegriMED
      as of and for the six months ended June 30, 2005 and 2004,
      respectively:
 
 **Six
                Months Ended June 30,****2005**
            
            **2004**Income
                statement data:Net
                operating revenues
            
            $
            191,771
            
            $
            109,864Direct
                cost of revenues
            
            
            —
            
            
            —Operating
                expenses
            
            
            899,667
            
            
            680,764Net
                income
            
            $
            (707,896
            )
            $
            (570,900
            )Balance
                sheet data:Current
                assets
            
            $
            (24,496
            )
            $
            210,400Other
                assets
            
            
            —
            
            
            39,138Total
                assets
            
            $
            (24,496
            )
            $
            249,538Current
                liabilities
            
            $
            17,022
            
            $
            278,383Other
                liabilities
            
            
            —
            
            
            —Total
                liabilities
            
            $
            17,022
            
            $
            278,383
 
 On
      June 13, 2005, the Company announced that it has accepted an offer to purchase
      its interests in the Tuscarawas ASC and the Tuscarawas open MRI facility in
      Dover, Ohio. Under the terms of the offer letter, the Company’s interests in
      these facilities would be sold to a local hospital for cash and assumption
      of
      debt. In addition, the Company would continue to operate the facilities under
      a
      long-term management agreement. Although this transaction has not yet been
      consummated, pursuant to SFAS No. 144, “Accounting for the Impairment or
      Disposal of Long-Lived Assets,” the assets and liabilities of the Tuscarawas ASC
      and Tuscarawas open MRI facility have been reclassified as assets held for
      sale
      and liabilities held for sale on the Company’s consolidated balance sheet as of
      June 30, 2005. The operations of this component are reflected in the Company’s
      consolidated statements of operations as ‘income from operations of discontinued
      components’ for the six months ended June 30, 2005.
 
  -20-
  The
        following table contains selected financial statement data related to the
        Tuscarawas ASC and Tuscarawas open MRI facility as of and for the six months
        ended June 30, 2005:
 **Six
                Months Ended****June
                30, 2005**Income
                statement data:Net
                operating revenues
            
            $
            1,670,801Direct
                cost of revenues
            
            
            774,156Operating
                expenses
            
            
            880,858Net
                income
            
            $
            15,787Balance
                sheet data:Cash
            
            $
            (4,673
            )Accounts
                receivable, net
            
            
            718,490Other
                current assets
            
            
            81,014Property
                and equipment, net
            
            
            1,416,356Other
                long-term assets
            
            
            71,376Total
                assets held for sale
            
            $
            2,282,564Accounts
                payable and accrued expenses
            
            $
            709,779Capital
                lease obligation
            
            
            462,295Long-term
                debt
            
            
            445,095Total
                liabilities held for sale
            
            $
            1,617,168
  The
      following table summarizes the components of income from operations of
      discontinued components:
 
 **Six
                Months Ended June 30,****2005**
            
            **2004**Income
                from operations of discontinued components:CARDCNet
                income
            
            $
            38,700
            
            
            $
            76,499Gain
                on disposal
            
            
            268,292Heart
                CenterNet
                income
            
            
            -
            
            
            
            64,799Bellaire
                SurgiCareNet
                loss
            
            
            (188,418
            )
            
            
            -Loss
                on disposal
            
            
            (163,050
            )
            
            
            -IntegriMEDNet
                loss
            
            
            (707,896
            )
            
            
            (570,900)Loss
                on disposal
            
            
            (47,101
            )
            
            
            -Tuscarawas
                ASC and Open MRINet
                income
            
            
            15,787
            
            
            
            -Total
                income from operations of discontinued components
            
            $
            (783,686
            )
            
            $
            (429,602)
 
 *Preferred
      Stock Dividends.* Prior
      to the IPS Merger, holders of IPS’s Series A-2 preferred stock were
      entitled to receive, when, as and if declared by the board of directors,
      cumulative dividends payable at the annual rate of $0.40 for each share.
      Dividends accrued, even if not declared, and were to be declared and paid in
      cash in equal installments on the first day of January, April, July and October
      immediately following the issue date, or continued to be accrued until such
      time
      as the preferred stockholders demanded payment. Preferred stock dividends in
      the
      amount of $330,600 were accrued for the six months ended June 30, 2004. No
      cash
      payments of dividends were made in the first six months of 2004. The
      Series A-2 redeemable convertible preferred stock, along with the other
      three series of redeemable convertible preferred stock held by IPS stockholders
      prior to the IPS Merger, including any accrued and unpaid dividends therein,
      were exchanged for shares of Orion Class A Common Stock as a part of
      the
      IPS Merger.
 
 **Liquidity
      and Capital Resources**
 
 Net
      cash used in operating activities totaled $951,095 for the three months ended
      June 30, 2005 compared to net cash used in operating activities of $529,714
      for
      the same period in 2004. The increase in net cash used in operations can be
      attributed primarily to the growth in operating expenses related to the IPS
      Merger and DCPS/MBS Transaction.
 
 For
      the six-month period ended June 30, 2005, net cash used in operating activities
      totaled $1,805,230 compared to $770,896 in net cash used by operating activities
      for the same period in 2004.
 
 Net
      cash provided by investing activities totaled $12,051 for the three months
      ended
      June 30, 2005 compared to net cash used in investing activities totaling
      $117,400 for the three months ended June 30, 2004. Certain fixed assets of
      the
      IntegriMED were sold to eClinicalWeb as part of the Agreement, which is
      described in “Part I, Item 2. Management’s Discussion and Analysis or Plan of
      Operations - Certain Recent Developments - Post-Restructuring Transactions
      Involving Subsidiaries.” The only other investing activities in the second three
      months of 2005 and 2004, respectively, consisted of purchases and retirements
      of
      property and equipment.
  -21-
 
  
 For
      the six-month period ended June 30, 2005, net cash provided by investing
      activities totaled $32,195 compared to $151,630 in net cash used by investing
      activities for the same period in 2004.
 
 Net
      cash provided by financing activities totaled $637,780 for the three months
      ended June 30, 2005 compared to net cash provided by financing activities
      totaling $599,744 for the three months ended June 30, 2004. For the six-month
      period ended June 30, 2005, net cash provided by financing activities totaled
      $1,382,273 compared to net cash provided by financing activities of $1,009,073
      for the same period in 2004. The following financing activities occurred in
      the
      first six months of 2005:
  Repayments
                  of capital lease obligations totaled $125,650;Net
                  borrowings on the HBCC revolving credit facility totaled $364,514;
                  andOn
                  March 16, 2005, Brantley IV loaned the Company an aggregate of
                  $1,025,000.
                  On April 19, 2005, Brantley IV loaned the Company an additional
                  $225,000.
                  (See “Part I, Item 2. Management’s Discussion and
                Analysis
                  or Plan of Operation - Certain Recent Developments - Post-Restructuring
                  Loan Transaction.)
 As
      of June 30, 2005, the Company had $311,083 of cash and cash equivalents on
      hand
      and a working capital deficit of $5,516,249. The Company incurred operating
      losses of $7,801,910 and $9,244,733, respectively for the three months and
      six
      months ended June 30, 2005. In addition, the Company has used substantial
      amounts of working capital in its operations.
 
 The
      Company has financed its growth primarily through the issuance of equity,
      secured and/or convertible debt, most recently by completing the Acquisitions,
      the Investment Transaction, the Reclassification and the restructuring of its
      debt owed to DVI (the “Debt Restructuring”). In connection with the Closing of
      the Acquisitions and the Investment Transaction, the Company entered into a
      new
      secured two-year revolving credit facility pursuant to the Loan and Security
      Agreement by and among Orion, certain of its affiliates and subsidiaries, and
      HBCC. (See “Item 2. Management’s Discussion and Analysis or Plan of
      Operation - Certain Recent Developments - Acquisition and Restructuring
      Transactions.”) In connection with entering into this new facility, Orion also
      consummated the Debt Restructuring, which resulted in a decrease in aggregate
      debt owed to DVI from approximately $10.1 million to a combined principal
      amount of approximately $6.5 million, of which approximately
      $2 million was paid at the Closing. In addition to the Closing, on
      March 16, 2005, Brantley IV loaned Orion an aggregate of $1,025,000.
      On
      April 19, 2005, Brantley IV loaned the Company an additional $225,000.
      (See
“Item 2. Management’s Discussion and Analysis or Plan of Operation - Certain
      Recent Developments - Post-Restructuring Loan Transactions.) Paul H. Cascio,
      the
      Chairman of the board of directors of Orion, and Michael J. Finn, a director
      of
      Orion, are affiliates of Brantley IV. Additionally, as part of this transaction,
      the Company entered into the First Amendment whereby its $4,000,000 secured
      two-year revolving credit facility has been reduced by the amount of the loans
      from Brantley IV to $2,750,000. As a result of the First Amendment, the Brantley
      IV Guaranty was amended by the Amended Brantley IV Guaranty, which reduces
      the
      deficiency guaranty provided by Brantley IV by the amount of the First Loan
      to
      $2,247,727. Also as a result of the First Amendment, the Brantley Capital
      Guaranty was amended by the Amended Brantley Capital Guaranty, which reduces
      the
      deficiency guaranty provided by Brantley Capital by the amount of the Second
      Loan to $502,273.
 
 As
      part of the Loan and Security Agreement, the Company is required to comply
      with
      certain financial covenants, measured on a quarterly basis, beginning as of
      and
      for the six months ended June 30, 2005. The financial covenants include
      maintaining a required debt service coverage ratio and meeting a minimum
      operating income level for the surgery and diagnostic centers before corporate
      overhead allocations. As of and for the six months ended June 30, 2005, the
      Company was out of compliance with both of these financial covenants and has
      notified the lender as such. Under the terms of the Loan and Security Agreement,
      failure to meet the required financial covenants constitutes an event of
      default. Under an event of default, the lender may (i) accelerate and declare
      the obligations under the credit facility to be immediately due and payable;
      (ii) withhold or cease to make advances under the credit facility; (iii)
      terminate the credit facility; (iv) take possession of the collateral pledged
      as
      part of the Loan and Security Agreement; (v) reduce or modify the revolving
      loan
      commitment; and/or (vi) take necessary action under the Guaranties. The loan
      is
      secured by the Company’s healthcare accounts receivable. As of August 11, 2005,
      the outstanding principal under the revolving credit facility was $2,605,203.
      The full amount of the loan as of June 30, 2005 is recorded as a current
      liability. The Company is currently in negotiations with the lender and is
      seeking to obtain a waiver of the financial covenants as of and for the six
      months ended June 30, 2005. In the event the lender declares the obligations
      under the credit facility to be immediately due and payable or exercises its
      other rights described above, the Company would not be able to meet its
      obligations to the lender or its other creditors. As a result, such action
      would
      have a material adverse effect on the Company and on its ability to continue
      as
      a going concern.
 
 As
      of June 30, 2005, the Company’s existing credit facility with HBCC has limited
      availability to provide for working capital shortages. Although the Company
      believes that it will generate cash flows from operations in the future, there
      is substantial doubt as to whether it will be able to fund its operations solely
      from its cash flows. On April 28, 2005, the Company announced the initiation
      of
      a strategic plan designed to accelerate the Company’s growth and enhance its
      future earnings potential. The plan focuses on the Company’s strengths, which
      include providing billing, collections and complementary business management
      services to physician practices in addition to the provision of development
      and
      management services to ambulatory surgery centers. A fundamental component
      of
      the Company’s plan is the selective consideration of accretive acquisition
      opportunities in these core business sectors. In addition, the Company will
      cease investment in business lines that do not complement the Company’s
      strategic plans and will redirect financial resources and Company personnel
      to
      areas that management believes enhances long-term growth potential. On June
      7,
      2005, as described in “Part I, Item 2. Management’s Discussion and Analysis or
      Plan of Operations - Certain Recent Developments - Post-Restructuring
      Transactions Involving Subsidiaries,” the Company, via its IPS subsidiary
      executed an Asset Purchase Agreement with eClinicalWeb to sell substantially
      all
      of the assets of IntegriMED. Additionally, on June 13, 2005, the Company
      announced that it has accepted an offer to purchase its interests in the
      Tuscarawas ASC and Tuscarawas open MRI facility in Dover, Ohio. Under the terms
      of the offer letter, the Company’s interests in these facilities would be sold
      to a local hospital for cash and assumption of debt. In addition, the Company
      would continue to operate the facilities under a long-term management agreement.
      This transaction has not yet closed. The Company does not anticipate a
      significant reduction of revenue as a result of the implementation of these
      strategic initiatives. However, the Company anticipates a substantial reduction
      of annual expenses attributable to a combination of these initiatives and the
      consolidation of corporate functions currently duplicated at the Company’s
      Houston and Atlanta facilities.
  -22-
 
 The
      Company intends to continue to manage its use of cash. However, the Company’s
      business is still faced with many challenges. If cash flows from operations
      and
      borrowings are not sufficient to fund the Company’s cash requirements, the
      Company may be required to further reduce its operations and/or seek additional
      public or private equity financing or financing from other sources or consider
      other strategic alternatives, including possible additional divestitures of
      specific assets or lines of business. There can be no assurances that additional
      financing or strategic alternatives will be available, or that, if available,
      the financing or strategic alternatives will be obtainable on terms acceptable
      to the Company or that any additional financing would not be substantially
      dilutive to the Company’s existing stockholders.
 
 **ITEM
      3. CONTROLS AND PROCEDURES**
 
 *Evaluation
      of Disclosure Controls and Procedures* .
      The Company maintains a set of disclosure controls and procedures that are
      designed to provide reasonable assurance that information required to be
      disclosed by us in the reports filed by us under the Securities and Exchange
      Act
      of 1934, as amended (“Exchange Act”), is recorded, processed, summarized and
      reported accurately and within the time periods specified in the Security and
      Exchange Commission’s rules and forms. As of the end of the period covered by
      this report, the Company evaluated, under the supervision and with the
      participation of our management, including our Chief Executive Officer and
      Chief
      Financial Officer, of the design and effectiveness of our disclosure controls
      and procedures pursuant to Rule 13a-15(c) of the Exchange Act. Based
      on
      that evaluation, our Chief Executive Officer and Chief Financial Officer
      concluded that our disclosure controls and procedures are effective in timely
      alerting them to material information relating to the Company (including our
      consolidated subsidiaries) required to be included in our periodic filings.
 
 *Changes
      in Internal Controls* .
      During the most recent fiscal quarter, there have been no changes in our
      internal controls over financial reporting that have materially affected, or
      are
      reasonably likely to materially affect, our internal control over financial
      reporting.
  **PART
      II - OTHER INFORMATION**
 
 **ITEM
      1. LEGAL PROCEEDINGS**
 
 On
      January 1, 1999, IPS acquired Children’s Advanced Medical Institutes, Inc.
      (“CAMI”) in a merger transaction. On that same date, IPS began providing
      management services to the Children’s Advanced Medical Institutes, P.A. (the
“P.A.”), an entity owned by the physicians affiliated with CAMI. The parties’
      rights and obligations were memorialized in a merger agreement, a management
      services agreement and certain other agreements. On February 7, 2000,
      the
      P.A., certain physicians affiliated with the P.A., and the former shareholders
      of CAMI filed suit against IPS in the U.S. District Court for the Northern
      District of Texas, Dallas Division, Civil Action File No. 3-00-CV-0536-L. On
      May 9, 2001, IPS (which was formerly known as Pediatric Physician Alliance,
      Inc.) filed suit against the P.A., certain physicians who were members of the
      P.A., and Patrick Solomon as Escrow Agent of CAMI. The case was filed in the
      U.S. District Court for the Northern District of Texas, Dallas Division, Civil
      Action File No. 3-01CV0877-L. Certain settlements were reached in the
      cases. The two cases were referred to arbitration pursuant to the arbitration
      clauses in the agreements between the parties. The arbitration includes all
      remaining claims in both lawsuits. The P.A., the physicians and the former
      shareholders of CAMI sought recovery of pre-merger accounts receivable they
      claim were collected by IPS after the merger, but belong to CAMI under the
      merger agreement and agreements between CAMI and the affiliated physicians.
      IPS
      asserted a right of set-off for over-payments that it made after the merger
      to
      the physicians. IPS also asserted a claim against the physicians for breach
      of
      the management services agreement and other agreements. In their complaint,
      the
      P.A., the former shareholders of CAMI and the physicians sought a claim against
      IPS for approximately $500,000 (which includes interest and attorneys’ fees).
      IPS asserted a claim against the physicians for over $5,000,000 due to the
      overpayments and their alleged breach of the agreements. An arbitration hearing
      was held on the claim filed by the former shareholders of CAMI in
      January 2004, and the Arbitrator issued an award against IPS. The award
      was
      confirmed by the U.S. District Court in the amount of $548,884 and judgment
      was
      entered. On June 1, 2005, IPS and the physicians executed a settlement agreement
      under which $300,000 of the judgment was paid to the physicians with the
      remaining amount of the judgment being returned to IPS. All claims asserted
      in
      the lawsuit and arbitration have been dismissed with prejudice.
  -23-
 
 On
      July 12, 2005, Orion was named as a defendant in a suit entitled American
      International Industries, Inc. vs. Orion HealthCorp, Inc., previously known
      as
      SurgiCare, Inc., Keith G. LeBlanc, Paul Cascio, Brantley Capital Corporation,
      Brantley Venture Partners III, L.P., and Brantley Venture Partners IV, L.P.
      in
      the 80 th Judicial District Court of Harris County, Texas, Cause No. 2005-44326. This
      case
      involves allegations that the Company made material and intentional
      misrepresentations regarding the financial condition of the parties to the
      acquisition and restructuring transactions effected on December 15, 2004 for
      the
      purpose of inducing American International Industries, Inc. (“AII”) to convert
      its SurgiCare Class AA convertible preferred stock (“Class AA Preferred Stock”)
      into shares of Orion Class A Common Stock. AII asserts that the value of its
      Class A Common Stock of Orion has fallen as a direct result of the alleged
      material misrepresentations by the Company. AII is seeking actual damages of
      $3,800,000, punitive damages of $3,800,000, and rescission of the agreement
      to
      convert the Class AA Preferred Stock into Class A Common Stock. The Company
      and
      the other defendants filed an Answer denying the allegations set forth in the
      Complaint.
 
 In
      addition, the Company is involved in various other legal proceedings and claims
      arising in the ordinary course of business. The Company’s management believes
      that the disposition of these additional matters, individually or in the
      aggregate, is not expected to have a materially adverse effect on the Company’s
      financial condition. However, depending on the amount and timing of such
      disposition, an unfavorable resolution of some or all of these matters could
      materially affect the Company’s future results of operations or cash flows in a
      particular period.
 
 **ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS**
 
 *Convertible
      Notes.* In
      November 2003, the Company completed a $470,000 financing for working capital
      through the issuance of one-year convertible unsecured promissory notes (the
      “Convertible Notes”) bearing interest at 10% per annum (with a default interest
      rate of 18% per annum). The holders of the Convertible Notes also received
      five-year warrants to purchase an aggregate of 335,700 shares of the Company’s
      common stock (the “Warrants”).
 
 The
      Convertible Notes are convertible into shares of Company’s common stock, at any
      time, at the option of the note holders. The Warrants may be exercised on a
      cashless basis at the option of the holder. Initially, the Convertible Notes
      converted at a price per share of (a) $0.35 per share if converted on or prior
      to January 31, 2004, or (b) the lesser of (i) $.25, or (ii) seventy-five percent
      (75%) of the average closing price for the 20 trading days immediately prior
      to
      the conversion date, if converted after January 31, 2004. Initially, the
      Warrants were exercisable at an exercise price of $.35 per share.
 
 The
      Convertible Notes matured on October 31, 2004, and were not paid at that time
      by
      the Company causing the interest rate to increase to 18% per annum. Prior to
      October 31, 2004, one of the eight holders of Convertible Notes converted its
      Convertible Note into common stock of the Company. As a result of the Reverse
      Stock Split and the Reclassification, which took place after January 31, 2004,
      the Convertible Notes became convertible at a price per share equal to the
      lesser of (i) $.25, or (ii) seventy-five percent (75%) of the average closing
      price for the 20 trading days immediately prior to the conversion date. Also,
      as
      a result of the Reverse Stock Split and the Reclassification, the Warrants
      are
      exercisable for an aggregate of 33,570 shares of the Company’s Class A Common
      Stock at an exercise price of $3.50 per share.
 
 On
      December 21, 2004, the Company offered all holders of outstanding Convertible
      Notes the opportunity to convert their Convertible Notes at a price of $2.00
      per
      share, provided the conversions were completed by January 31, 2005. Two of
      the
      holders of the Convertible Notes elected to convert their Convertible Notes
      at
      $2.00 per share in January 2005. During the month of January 2005, the stock
      price of the Company’s Class A Common Stock decreased below $2.50 per share and
      it was not beneficial for the remaining note holders to convert. Therefore,
      the
      Company offered the holders of all remaining unconverted Convertible Notes
      the
      opportunity to convert their Convertible Notes at a price of $1.50 per share,
      provided the conversions were completed by January 31, 2005. One holder of
      the
      Convertible Notes elected to convert his Convertible Note at $1.50 per share
      in
      January 2005. All but one of the holders of the remaining unconverted
      Convertible Notes elected to convert their Convertible Notes in April 2005,
      per
      the terms of the original Convertible Notes.
 
 From
      January 1, 2005 through August 11, 2005, holders of the Convertible Notes
      converted an aggregate of $270,000 of indebtedness (plus accrued interest
      totaling $66,225.21) into 374,164 shares of the Company’s Class A Common Stock.
      The Company’s Class A Common Stock was issued upon conversion of certain of the
      Convertible Notes as of the following dates:
  **Effective
                  Date of**
                **Issuance**
              **Aggregate
                  Principal**
                **and
                  Interest of Notes**
                **Converted**
              **Number
                  of Shares of**
                **Class
                  A Common**
                **Stock
                  Issued**1/3/05
              $24,211.51
              12,1061/13/05
              $60,528.77
              30,2641/31/05
              $61,293.15
              40,8624/26/05
              $126,778.08
              193,6284/27/05
              $12,682.74
              19,4614/27/05
              $50,730.96
              77,843
 
 -24-
 
 There
      was no placement agent or underwriter for the conversions. The Company processed
      the conversions internally. The shares were not sold for cash. The shares of
      Class A Common Stock were issued in exchange for (and in conversion of) the
      outstanding Convertible Notes. The shares of Class A Common Stock issued are
      not
      convertible or exchangeable. **** In
      connection with the issuance of the shares of Class A Common Stock in connection
      with the conversion of the Convertible Notes, the Company relied upon the
      exemption from the registration requirements of the Securities Act of 1933,
      as
      amended, by virtue of Section 3(a)(9) thereof.
 
 *Class
      B Common Stock Conversions.* As
      part of the acquisition and restructuring transactions completed on December
      15,
      2004, the Company created Class B Common Stock, which was issued in connection
      with the Investment Transaction. Holders of shares of Class B Common Stock
      have
      the option to convert their shares of Class B Common Stock into Class A Common
      Stock at any time based on a conversion factor in effect at the time of the
      transaction. The conversion factor is designed to yield one share of
      Class A Common Stock per share of Class B Common Stock converted,
      plus
      such additional shares of Class A Common Stock, or portions thereof,
      necessary to approximate the unpaid portion of the return of the original
      purchase price for the Class B Common Stock less the Base Bridge Interest
      Amount, plus an amount equal to nine percent (9%) per annum on the amount of
      the
      original purchase price less the Base Bridge Interest Amount, without
      compounding, from the date the Class B Common Stock was first issued
      to the
      date of conversion. As of August 11, 2005, each share of Class B Common Stock
      is
      convertible into 3.485247414034 shares of Class A Common Stock. As of that
      date,
      10,642,306 shares of Class B Common Stock were issued and outstanding. (See
      Part
      I, Item 2. Management’s Discussion and Analysis of Plan of Operation - Certain
      Recent Developments - Acquisition and Restructuring Transactions.)
 
 From
      January 1, 2005 through August 11, 2005, holders of shares of Class B Common
      Stock converted an aggregate of 839,955 shares of Class B Common Stock into
      2,023,144 shares of Class A Common Stock. The Company’s Class A Common Stock was
      issued upon conversion of certain of the Company’s Class B Common Stock as of
      the following dates:
 
 
 **Effective
                  Date of**
                **Issuance**
              **Number
                  of Shares of**
                **Class
                  B Common**
                **Stock
                  Converted**
              **Number
                  of Shares of**
                **Class
                  A Common**
                **Stock
                  Issued**4/22/05
              64,612
              134,2925/23/05
              86,149
              201,8296/21/05
              646,119
              1,560,8028/5/05
              43,075
              126,221
 
 There
      was no placement agent or underwriter for the conversions. The Company processed
      the conversions internally. The shares of Class A Common Stock were not sold
      for
      cash. The Company did not receive any consideration in connection with the
      conversions, other than the return of the shares of Class B Common Stock. The
      shares of Class A Common Stock issued are not convertible or exchangeable.
      In
      connection with the issuance of the Class A Common Stock upon conversion of
      shares of the Class B Common Stock, the Company relied upon the exemption from
      the registration requirements of the Securities Act of 1933, as amended, by
      virtue of Section 3(a)(9) thereof. In
      connection with the original issuance of the Class B Common Stock in the
      Investment Transaction, the Company relied on the exemption from the
      registration requirements of the Securities Act of 1933, as amended, by virtue
      of Section 4(2) thereof and Rule 506 of Regulation D promulgated
      thereunder. For purposes of the exemption, the Company relied upon:
      (i) certain representation and warranties of certain individuals and
      entities receiving equity securities in the Investment Transaction at the
      Closing; and (ii) its own independent investigation to confirm that
      each of
      such individuals and entities were “accredited investors” (as such term is
      defined in Rule 501 of Regulation D). The Company did not pay
      any
      underwriting discounts or commissions in connection with the issuance of the
      Class B Common Stock in the Investment Transaction
 
 *Class
      C Common Stock Conversions.* As
      part of the acquisition and restructuring transactions completed on December
      15,
      2004, the Company created Class C Common Stock, which was issued in connection
      with the DCPS/MBS Transaction. Holders of shares of Class C Common Stock have
      the option to convert their shares of Class C Common Stock into shares of Class
      A Common Stock at any time based on a conversion factor in effect at the time
      of
      the transaction. The conversion factor is designed initially to yield one share
      of Class A Common Stock per share of Class C Common Stock converted,
      with the number of shares of Class A Common Stock reducing to the extent
      that distributions are paid on the Class C Common Stock. The conversion
      factor is calculated as (x) the amount by which $3.30 exceeds the aggregate
      distributions made with respect to a share of Class C Common Stock divided
      by (y) $3.30. The initial conversion factor was one (one share of Class C
      Common Stock converts into one share of Class A Common Stock) and is
      subject to adjustment as discussed below.
 
 If
      the fair market value used in determining the conversion factor for the
      Class B Common Stock in connection with any conversion of Class B
      Common Stock is less than $3.30 (subject to adjustment to account for stock
      splits, stock dividends, combinations or other similar events affecting
      Class A Common Stock), holders of shares of Class C Common Stock
      have
      the option to convert their shares of Class C Common Stock (within
      10 days of receipt of notice of the conversion of the Class B
      Common
      Stock) into a number of shares of Class A Common Stock equal to
      (x) the amount by which $3.30 exceeds the aggregate distributions made
      with
      respect to a share of Class C Common Stock divided by (y) the
      fair
      market value used in determining the conversion factor for the Class B
      Common Stock (the “Anti-Dilution Option”). The aggregate number of shares of
      Class C Common Stock so converted by any holder shall not exceed a number
      equal to (a) the number of shares of Class C Common Stock held
      by such
      holder immediately prior to such conversion plus the number of shares of
      Class C Common Stock previously converted in Class A Common Stock
      by
      such holder multiplied by (b) a fraction, the numerator of which is
      the
      number of shares of Class B Common Stock converted at the lower price
      and
      the denominator of which is the aggregate number of shares of Class B
      Common Stock issued at the closing of the Investment Transaction.
  -25-
 
 From
      January 1, 2005 through August 11, 2005, holders of shares of Class C Common
      Stock converted an aggregate of 108,132 shares of Class C Common Stock into
      409,933 shares of Class A Common Stock. The Class C conversion price for each
      Class C conversion was determined by the Anti-Dilution Option calculated after
      each conversion of Class B Common Stock. The Company’s Class A Common Stock was
      issued upon conversion of certain of the Company’s Class C Common Stock as of
      the following dates:
 
 **Effective
                Date of**
              **Issuance**
            **Number
                of Shares of**
              **Class
                C Common**
              **Stock
                Converted**
            **Number
                of Shares of**
              **Class
                A Common**
              **Stock
                Issued**5/11/05
            2,217
            6,6505/11/05
            2,217
            6,6505/12/05
            222
            6655/12/05
            222
            6655/12/05
            3,582
            10,7475/12/05
            44
            1335/12/05
            364
            1,0916/16/05
            2,939
            10,8976/16/05
            2,939
            10,8976/16/05
            59
            2186/17/05
            294
            1,0906/17/05
            294
            1,0906/17/05
            4,749
            17,6106/17/05
            482
            1,7877/5/05
            21,877
            84,9357/5/05
            21,877
            84,9357/7/05
            2,188
            8,4947/7/05
            2,188
            8,4947/7/05
            35,354
            137,2567/7/05
            3,588
            13,9297/10/05
            438
            1,699
 
 There
      was no placement agent or underwriter for the conversions. The Company processed
      the conversions internally. The shares were not sold for cash. The Company
      did
      not receive any consideration in connection with the conversions, other than
      the
      return of the shares of Class C Common Stock. The shares of Class A Common
      Stock
      issued are not convertible or exchangeable. In connection with the issuance
      of
      the Class A Common Stock upon conversion of shares of the Class C Common Stock,
      the Company relied upon the exemption from the registration requirements of
      the
      Securities Act of 1933, as amended, by virtue of Section 3(a)(9) thereof. In
      connection with the original issuance of the Class C Common Stock in the
      DCPS/MBS Transaction, the Company relied on the exemption from the registration
      requirements of the Securities Act of 1933, as amended, by virtue of
      Section 4(2) thereof and Rule 506 of Regulation D promulgated
      thereunder. For purposes of the exemption, the Company relied upon:
      (i) certain representation and warranties of certain individuals and
      entities receiving equity securities in the DCPS/MBS Transaction at the Closing;
      (ii) its own independent investigation to confirm that certain of such
      individuals and entities were “accredited investors” (as such term is defined in
      Rule 501 of Regulation D); and (iii) the inclusion of
      no more
      than 35 purchasers who were not “accredited investors” in accordance with
      Rule 506 of Regulation D.
 
 **ITEM
      3. DEFAULTS UPON SENIOR SECURITIES**
 
 As
      part of the Loan and Security Agreement, the Company is required to comply
      with
      certain financial covenants, measured on a quarterly basis, beginning as of
      and
      for the six months ended June 30, 2005. The financial covenants include
      maintaining a required debt service coverage ratio and meeting a minimum
      operating income level for the surgery and diagnostic centers before corporate
      overhead allocations. As of and for the six months ended June 30, 2005, the
      Company was out of compliance with both of these financial covenants and has
      notified the lender as such. Under the terms of the Loan and Security Agreement,
      failure to meet the required financial covenants constitutes an event of
      default. Under an event of default, the lender may (i) accelerate and declare
      the obligations under the credit facility to be immediately due and payable;
      (ii) withhold or cease to make advances under the credit facility; (iii)
      terminate the credit facility; (iv) take possession of the collateral pledged
      as
      part of the Loan and Security Agreement; (v) reduce or modify the revolving
      loan
      commitment; and/or (vi) take necessary action under the Guaranties. The loan
      is
      secured by the Company’s healthcare accounts receivable. As of August 11, 2005,
      the outstanding principal under the revolving credit facility was $2,605,203.
      The full amount of the loan as of June 30, 2005 is recorded as a current
      liability. The Company is currently in negotiations with the lender and is
      seeking to obtain a waiver of the financial covenants as of and for the six
      months ended June 30, 2005. In the event the lender declares the obligations
      under the credit facility to be immediately due and payable or exercises its
      other rights described above, the Company would not be able to meet its
      obligations to the lender or its other creditors. As a result, such action
      would
      have a material adverse effect on the Company and on its ability to continue
      as
      a going concern.
  -26-
 
 **ITEM
      4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY
      HOLDERS**
 
 The
      Company held its Annual Meeting of Stockholders (the “Annual Meeting”) on May
      31, 2005. At the Annual Meeting, the stockholders voted on and approved each
      of
      the following proposals:
  **Proposal
              One:**
            To
                elect seven directors to serve until the 2006 annual meeting of
                stockholders or until their successors are elected and qualified.
                The
                following list indicates the number of votes received by each of
                the
                nominees for election to Orion’s board of directors in Proposal
                One:**For**
            
            **Against**
            
            **Abstain**
            
            **Withheld**Terrence
              L. Bauer
            15,544,901
            
            0
            
            0
            
            1,673Paul
              H. Cascio
            15,544,901
            
            0
            
            0
            
            1,673David
                Crane
            15,529,808
            
            0
            
            0
            
            16,766Michael
                J. Finn
            15,544,851
            
            0
            
            0
            
            1,723Keith
                G. LeBlanc
            15,529,758
            
            0
            
            0
            
            16,816Gerald
                M. McIntosh
            15,544,901
            
            0
            
            0
            
            1,673Joseph
                M. Valley, Jr.
            15,544,951
            
            0
            
            0
            
            1,623**Proposal
                Two:**
            To
                ratify a March 2003 private placement of units consisting of common
                shares
                of the Company and warrants to purchase common shares. Proposal Two
                was
                approved by holders of 71.2% of the outstanding shares of the Company’s
                common stock (including Class A, Class B and Class C Common Stock)
                entitled to vote at the Annual Meeting. Specifically, a total of
                15,478,669 shares were voted in favor of this proposal, 2,229 shares
                were
                voted against the proposal and 65,676 shares abstained from voting
                on the
                proposal. There were no broker non-votes on this
                proposal.**Proposal
                Three:**
            To ratify a February 2004
              issuance
              of common shares of the Company to consultants as compensation for
              services rendered. Proposal Three was approved by holders of 71.6%
              of the
              outstanding shares of the Company’s common stock (including Class A, Class
              B and Class C Common Stock) entitled to vote at the Annual Meeting.
              Specifically, a total of 15,541,862 shares were voted in favor of this
              proposal, 3,942 shares were voted against the proposal and 770 shares
              abstained from voting on the proposal. There were no broker non-votes
              on
              this proposal.**Proposal
                Four:**
            To
                ratify the appointment of UHY Mann Frankfort Stein & Lipp CPAs, LLP
                (“UMFSL”) as the Company’s independent public accountants. Proposal Four
                was approved by holders of 72.6% of the outstanding shares of the
                Company’s common stock (including Class A, Class B and Class C Common
                Stock) entitled to vote at the Annual Meeting. Specifically, a total
                of
                15,545,444 shares were voted in favor of this proposal, 1,130 shares
                were
                voted against the proposal and 0 shares abstained from voting on
                the
                proposal.
 
 
 **ITEM
      5. OTHER INFORMATION**
 
 From
      January 1, 2005 through August 11, 2005, holders of the Convertible Notes
      converted an aggregate of $270,000 of indebtedness (plus accrued interest
      totaling $66,225.21) into 374,164 shares of the Company’s Class A Common Stock.
      (See “Part II, Item 2. Unregistered Sales of Equity Securities and Use of
      Proceeds - Convertible Notes.”)
 
 From
      January 1, 2005 through August 11, 2005, holders of shares of Class B Common
      Stock converted an aggregate of 839,955 shares of Class B Common Stock into
      2,023,144 shares of Class A Common Stock. (See “Part II, Item 2. Unregistered
      Sales of Equity Securities and Use of Proceeds - Class B Common Stock
      Conversions.”)
 
 From
      January 1, 2005 through August 11, 2005, holders of shares of Class C Common
      Stock converted an aggregate of 108,132 shares of Class C Common Stock into
      409,933 shares of Class A Common Stock. (See “Part II, Item 2. Unregistered
      Sales of Equity Securities and Use of Proceeds - Class C Common Stock
      Conversions.”)
 
 As
      part of the Loan and Security Agreement, the Company is required to comply
      with
      certain financial covenants, measured on a quarterly basis, beginning as of
      and
      for the six months ended June 30, 2005. The financial covenants include
      maintaining a required debt service coverage ratio and meeting a minimum
      operating income level for the surgery and diagnostic centers before corporate
      overhead allocations. As of and for the six months ended June 30, 2005, the
      Company was out of compliance with both of these financial covenants and has
      notified the lender as such. (See “Part II, Item 3. Defaults Upon Senior
      Securities.”)
  -27-
 
 **ITEM
      6. EXHIBITS AND REPORTS ON FORM 8-K**
 
 Exhibits
 
 **Exhibit
                No.**
            
            **Description**Exhibit
                2.1
            
            Asset
                Purchase Agreement, dated as of June 6, 2005, by and among InPhySys,
                Inc.
                (f/k/a IntegriMED, Inc.) and eClinicalWeb, LLC (Incorporated by reference
                to Exhibit 2.1 filed with the Company’s Current Report on Form 8-K filed
                on June 13, 2005)Exhibit
                10.1
            
            First
                Amendment to Loan and Security Agreement, dated as of March 22, 2005,
                by
                and among Orion HealthCorp, Inc., certain affiliates and subsidiaries
                of
                Orion HealthCorp, Inc., and Healthcare Business Credit Corporation
                (Incorporated by reference to Exhibit 10.1 filed with the Company’s
                Quarterly Report on Form 10-QSB filed on May 13, 2005)Exhibit
                10.2
            
            Amended
                and Restated Guaranty Agreement, dated as of March 22, 2005, provided
                by
                Brantley Partners IV, L.P. to Healthcare Business Credit Corporation
                (Incorporated by reference to Exhibit 10.2 filed with the Company’s
                Quarterly Report on Form 10-QSB filed on May 13, 2005)Exhibit
                10.3
            
            Amended
                and Restated Guaranty Agreement, dated as of March 22, 2005, provided
                by
                Brantley Capital Corporation to Healthcare Business Credit Corporation
                (Incorporated by reference to Exhibit 10.3 filed with the Company’s
                Quarterly Report on Form 10-QSB filed on May 13, 2005)Exhibit
                10.4
            
            Convertible
                Subordinated Promissory Note, dated as of June 1, 2005, by and among
                Orion
                HealthCorp, Inc. and Brantley Partners IV, L.P. (Incorporated by
                reference
                to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed
                on June 7, 2005)Exhibit
                10.5
            
            Convertible
                Subordinated Promissory Note, dated as of June 1, 2005, by and among
                Orion
                HealthCorp, Inc. and Brantley Partners IV, L.P. (Incorporated by
                reference
                to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K filed
                on June 7, 2005)Exhibit
                10.6
            
            Amendment
                No. 1 to Orion HealthCorp, Inc. 2004 Incentive Plan, dated as of
                June 1,
                2005Exhibit
                10.7
            
            Form
                of Orion HealthCorp, Inc. Stock Option Agreement (Incentive Stock
                Option),
                dated as of June 17, 2005Exhibit 31.1
            
            Rule 13a-14(a)/15d-14(a)
                CertificationExhibit 31.2
            
            Rule 13a-14(a)/15d-14(a)
                CertificationExhibit 32.1
            
            Section 1350
                CertificationExhibit 32.2
            
            Section 1350
                Certification
 
  -28-
   **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.
   ORION
                HEALTHCORP, INC.Date: August
                12, 2005
              By:
              /s/ Terrence
                L. BauerTerrence
                  L. Bauer
                Chief
                  Executive Officer and Director
                (Duly
                  Authorized
                  Representative)
 **POWER
      OF ATTORNEY**
 
 KNOW
      ALL MEN BY THESE PRESENTS, that each person whose signature appears on the
      signature page to this Report constitutes and appoints Terrence L. Bauer and
      Stephen H. Murdock, and each of them, his true and lawful attorneys-in-fact
      and
      agents, with full power of substitution and resubstitution, for him and in
      his
      name, place and stead, in any and all capacities, to sign any and all amendments
      to this Report, and to file the same, with all exhibits hereto, and other
      documents in connection herewith with the Securities and Exchange Commission,
      granting unto said attorneys-in-fact and agents and each of them, full power
      and
      authority to do and perform each and every act and thing requisite and necessary
      to be done in and about the premises, as fully to all intents and purposes
      as he
      might or could do in person, hereby ratifying and confirming all that said
      attorneys-in-fact and agents or any of the, or their or his substitutes, may
      lawfully do or cause to be done by virtue hereof.
 
 In
      accordance with the Exchange Act, this report has been signed below by the
      following persons on behalf of the registrant and in the capacities indicated
      on
      August 12, 2005.
  /s/ Terrence
              L. Bauer
            
            
            /s/ Michael
              J. FinnTerrence
                L. Bauer
              Chief Executive Officer and
              Director (Principal Executive Officer)
            
            
            Michael
              J. FinnDirector
  /s/ Paul
              H. Cascio
            
            
            /s/ Gerald
              M. McIntoshPaul
                H. Cascio
              Director and Non-Executive Chairman of the
                Board
            
            
            Gerald
              M. McIntoshDirector
  /s/ Keith
                G. LeBlanc
              
              
              /s/ Joseph
                M. Valley, Jr.Keith
                  G. LeBlanc
                President and Director
              
              
              Joseph
                  M. Valley, Jr.
                Director
  /s/ David
                Crane
              
              
              /s/ Stephen
                H. MurdockDavid
                  Crane
                Director
              
              
              Stephen
                  H. Murdock
                Chief Financial Officer (Principal
                  Accounting
                and Financial
                  Officer)
   -29-
 
   ****ORION
        HEALTHCORP, INC.****
 **INDEX
        TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**
 
 **Page****Number**Consolidated
                  Condensed Balance Sheets as of June 30, 2005 (unaudited) and December
                  31,
                  2004
              
              F-2Consolidated
                  Condensed Statements of Operations for the Three Months Ended June
                  30,
                  2005 and 2004 (unaudited)
              
              F-3Consolidated
                  Condensed Statements of Operations for the Six Months Ended June
                  30, 2005
                  and 2004 (unaudited)
              
              F-4Consolidated
                  Condensed Statements of Cash Flows for the Three Months Ended June
                  30,
                  2005 and 2004 (unaudited)
              
              F-5Consolidated
                  Condensed Statements of Cash Flows for the Six Months Ended June
                  30, 2005
                  and 2004 (unaudited)
              
              F-6Notes
                  to Unaudited Consolidated Condensed Financial Statements
              
              F-7
 
  
  **Orion
                    HealthCorp, Inc.****Consolidated
                    Condensed Balance Sheets****June
                    30,**
                
                **December
                    31,****2005**
                
                **2004***(Unaudited)***Current
                    assets**Cash
                    and cash equivalents
                
                $
                311,083
                
                $
                701,846Accounts
                    receivable, net
                
                
                3,718,445
                
                
                4,469,240Inventory
                
                
                477,472
                
                
                519,509Prepaid
                    expenses and other current assets
                
                
                531,978
                
                
                519,843Assets
                    held for sale
                
                
                2,282,564Total
                    current assets
                
                
                7,321,542
                
                
                6,210,438**Property
                    and equipment, net**
                
                
                1,236,577
                
                
                3,370,928**Other
                    long-term assets**Intangible
                    assets, including goodwill
                
                
                25,284,008
                
                
                32,250,640Other
                    assets, net
                
                
                470,353
                
                
                534,314Total
                    other long-term assets
                
                
                25,754,362
                
                
                32,784,954Total
                    assets
                
                $
                34,312,481
                
                $
                42,366,320**Current
                    liabilities**Accounts
                    payable and accrued expenses
                
                $
                6,844,434
                
                $
                6,784,950Deferred
                    revenue
                
                
                -
                
                
                304,144Income
                    taxes payable
                
                
                116,943
                
                
                116,943Current
                    portion of capital lease obligation
                
                
                111,071
                
                
                258,478Current
                    portion of long-term debt
                
                
                4,148,175
                
                
                2,762,334Liabilities
                    held for sale
                
                
                1,617,168Total
                    current liabilities
                
                
                12,837,791
                
                
                10,226,849**Long-term
                    liabilities**Capital
                    lease obligation, net of current portion
                
                
                99,737
                
                
                540,274Long-term
                    debt, net of current portion
                
                
                3,645,826
                
                
                4,238,839Deferred
                    tax liability
                
                
                620,977
                
                
                620,977Minority
                    interest in partnership
                
                
                238,801
                
                
                169,500Total
                    long-term liabilities
                
                
                4,605,341
                
                
                5,569,590**Stockholders'
                    equity**Preferred
                    stock, par value $0.001; 20,000,000 shares authorized; no shares
                    issued
                    and outstanding
                
                
                -
                
                
                -Common
                    stock, Class A, par value $0.001; 70,000,000 shares authorized,
                    10,934,652
                    and 8,602,149 shares issued and outstanding at June 30, 2005
                    and
                  December
                    31, 2004, respectively
                
                
                10,935
                
                
                8,602Common
                    stock, Class B, par value $0.001; 25,000,000 shares authorized,
                    10,685,381
                    and 11,482,261 shares issued and outstanding at June 30, 2005
                    and
                  December
                    31, 2004, respectively
                
                
                10,685
                
                
                11,482Common
                    stock, Class C, par value $0.001; 2,000,000 shares authorized,
                    1,555,137
                    and 1,575,760 shares issued and outstanding at June 30, 2005
                    and
                  December
                    31, 2004, respectively
                
                
                1,556
                
                
                1,576Additional
                    paid-in capital
                
                
                56,929,156
                
                
                56,602,786Accumulated
                    deficit
                
                
                (40,044,665
                )
                
                (30,016,247
                )Treasury
                    stock - at cost; 9,140 shares at June 30, 2005 and December 31,
                    2004,
                    respectively
                
                
                (38,318
                )
                
                (38,318
                )Total
                    stockholders' equity
                
                
                16,869,349
                
                
                26,569,881Total
                    liabilities and stockholders' equity
                
                $
                34,312,481
                
                $
                42,366,320
 
 **The
        accompanying notes are an integral part of these financial
        statements.**
  F-2
  **Orion
                    HealthCorp, Inc.****Consolidated
                    Condensed Statements of Operations****For
                    the Three Months**
                  **Ended
                    June 30,****2005**
                
                **2004***(Unaudited)*
                
                *(Unaudited)***Net
                    operating revenues**
                
                $
                8,421,649
                
                $
                4,124,692**Direct
                    cost of revenues**
                
                
                3,786,846
                
                
                2,573,503**Gross
                    margin**
                
                
                4,634,803
                
                
                1,551,189**Operating
                    expenses:**Salaries
                    and benefits
                
                
                2,777,112
                
                
                752,510Facility
                    rent and related costs
                
                
                460,248
                
                
                296,791Depreciation
                    and amortization
                
                
                960,360
                
                
                136,609Professional
                    and consulting fees
                
                
                453,797
                
                
                113,935Insurance
                
                
                247,815
                
                
                132,939Provision
                    for doubtful accounts
                
                
                335,458
                
                
                255,845Other
                    expenses
                
                
                722,759
                
                
                244,454Charge
                    for impairment of intangible assets
                
                
                6,362,849
                
                
                -Total
                    operating expenses
                
                
                12,320,397
                
                
                1,933,083**Loss
                    from continuing operations before other income (expenses)**
                
                
                (7,685,595
                )
                
                (381,894
                )**Other
                    income (expenses):**Interest
                    expense
                
                
                (113,503
                )
                
                (228,811
                )Equity
                    in earnings of limited partnerships
                
                
                17,376
                
                
                -Other
                    expense, net
                
                
                2,165
                
                
                (7,079
                )Total
                    other income (expenses), net
                
                
                (93,961
                )
                
                (235,890
                )Minority
                    interest earnings in partnership
                
                
                (22,355
                )
                
                -**Loss
                    from continuing operations**
                
                
                (7,801,910
                )
                
                (617,784
                )**Discontinued
                    operations**Income
                    from operations of discontinued components, including net loss
                    on disposal
                    of $285,434 for the three months ended June 30, 2005
                
                
                (545,878
                )
                
                (314,622
                )**Net
                    loss**
                
                
                (8,347,788
                )
                
                (932,406
                )Preferred
                    stock dividends
                
                
                -
                
                
                (165,300
                )**Net
                    loss attributable to common stockholders**
                
                $
                (8,347,788
                )
                $
                (1,097,706
                )**Weighted
                    average common shares outstanding:**Basic
                
                
                9,244,850
                
                
                8,602,149Diluted
                
                
                9,244,850
                
                
                8,602,149**Earnings
                    (loss) per share:****Basic:**Net
                    loss per share from continuing operations
                
                $
                (0.844
                )
                $
                (0.072
                )Net
                    income per share from discontinued operations
                
                $
                (0.059
                )
                $
                (0.037
                )Net
                    loss per share
                
                $
                (0.903
                )
                $
                (0.108
                )**Diluted:**Net
                    loss per share from continuing operations
                
                $
                (0.844
                )
                $
                (0.072
                )Net
                    income per share from discontinued operations
                
                $
                (0.059
                )
                $
                (0.037
                )Net
                    loss per share
                
                $
                (0.903
                )
                $
                (0.108
                )
 **The
        accompanying notes are an integral part of these financial
        statements.**
  F-3
  **Orion
                    HealthCorp, Inc.****Consolidated
                    Condensed Statements of Operations****For
                    the Six Months**
                  **Ended
                    June 30,****2005**
                
                **2004***(Unaudited)*
                
                *(Unaudited)***Net
                    operating revenues**
                
                $
                16,725,495
                
                $
                8,293,691**Direct
                    cost of revenues**
                
                
                7,568,571
                
                
                5,106,968**Gross
                    margin**
                
                
                9,156,924
                
                
                3,186,723**Operating
                    expenses:**Salaries
                    and benefits
                
                
                5,454,081
                
                
                1,529,818Facility
                    rent and related costs
                
                
                944,651
                
                
                586,574Depreciation
                    and amortization
                
                
                1,951,026
                
                
                269,736Professional
                    and consulting fees
                
                
                801,437
                
                
                290,554Insurance
                
                
                479,291
                
                
                271,969Provision
                    for doubtful accounts
                
                
                678,545
                
                
                510,766Other
                    expenses
                
                
                1,497,676
                
                
                523,167Charge
                    for impairment of intangible assets
                
                
                6,362,849
                
                
                -Total
                    operating expenses
                
                
                18,169,556
                
                
                3,982,584**Loss
                    from continuing operations before other income (expenses)**
                
                
                (9,012,633
                )
                
                (795,861
                )**Other
                    income (expenses):**Interest
                    expense
                
                
                (191,921
                )
                
                (468,861
                )Equity
                    in earnings of limited partnerships
                
                
                17,376
                
                
                -Other
                    expense, net
                
                
                4,246
                
                
                (12,523
                )Total
                    other income (expenses), net
                
                
                (170,299
                )
                
                (481,384
                )Minority
                    interest earnings in partnership
                
                
                (61,801
                )**Loss
                    from continuing operations**
                
                
                (9,244,733
                )
                
                (1,277,245
                )**Discontinued
                    operations**Income
                    from operations of discontinued components, including net gain
                    on disposal
                    of $58,141 for the six months ended June 30, 2005
                
                
                (783,686
                )
                
                (429,602
                )**Net
                    loss**
                
                
                (10,028,418
                )
                
                (1,706,847
                )Preferred
                    stock dividends
                
                
                -
                
                
                (330,600
                )**Net
                    loss attributable to common stockholders**
                
                $
                (10,028,418
                )
                $
                (2,037,447
                )**Weighted
                    average common shares outstanding:**Basic
                
                
                9,149,828
                
                
                8,602,149Diluted
                
                
                9,149,828
                
                
                8,602,149**Earnings
                    (loss) per share:****Basic:**Net
                    loss per share from continuing operations
                
                $
                (1.010
                )
                $
                (0.148
                )Net
                    income per share from discontinued operations
                
                $
                (0.086
                )
                $
                (0.050
                )Net
                    loss per share
                
                $
                (1.096
                )
                $
                (0.198
                )**Diluted:**Net
                    loss per share from continuing operations
                
                $
                (1.010
                )
                $
                (0.148
                )Net
                    income per share from discontinued operations
                
                $
                (0.086
                )
                $
                (0.050
                )Net
                    loss per share
                
                $
                (1.096
                )
                $
                (0.198
                )
 
 **The
        accompanying notes are an integral part of these financial
        statements.**
  F-4
  **Orion
                      HealthCorp, Inc.****Consolidated
                      Condensed Statements of Cash Flows****For
                      the Three Months Ended**
                    **June
                      30,****2005**
                  
                  **2004****Operating
                      activities**Net
                      loss
                  
                  $
                  (8,347,788
                  )
                  $
                  (932,406
                  )Adjustments
                      to reconcile net loss to net cash used in operating
                      activities:Charge
                      for impairment of intangible assets
                  
                  
                  6,362,849
                  
                  
                  -Minority
                      interest in earnings of partnerships
                  
                  
                  22,355
                  
                  
                  -Provision
                      for doubtful accounts
                  
                  
                  335,458
                  
                  
                  264,634Depreciation
                      and amortization
                  
                  
                  960,360
                  
                  
                  143,385Assets
                      held for sale
                  
                  
                  4,673
                  
                  
                  -Conversion
                      of notes payable to common stock
                  
                  
                  31,855
                  
                  
                  -Loss
                      on disposition of discontinued components
                  
                  
                  285,435
                  
                  
                  -Changes
                      in operating assets and liabilities:Accounts
                      receivable
                  
                  
                  (307,923
                  )
                  
                  (275,724
                  )Inventory
                  
                  
                  (23,766
                  )
                  
                  (66,921
                  )Prepaid
                      expenses and other assets
                  
                  
                  174,287
                  
                  
                  (39,602
                  )Other
                      assets
                  
                  
                  (14,706
                  )
                  
                  8,040Accounts
                      payable and accrued expenses
                  
                  
                  (479,198
                  )
                  
                  347,468Deferred
                      revenues
                  
                  
                  45,014
                  
                  
                  21,412Net
                      cash used in operating activities
                  
                  
                  (951,095
                  )
                  
                  (529,714
                  )**Investing
                      activities**Purchase
                      of property and equipment
                  
                  
                  12,051
                  
                  
                  (117,400
                  )Net
                      cash provided by (used in) investing activities
                  
                  
                  12,051
                  
                  
                  (117,400
                  )**Financing
                      activities**Net
                      borrowings (repayments) of capital lease obligations
                  
                  
                  (76,073
                  )
                  
                  62,266Net
                      borrowings (repayments) on line of credit
                  
                  
                  595,786
                  
                  
                  (35,613
                  )Net
                      borrowings of notes payable
                  
                  
                  472,296
                  
                  
                  423,796Net
                      borrowings (repayments) of other obligations
                  
                  
                  (354,230
                  )
                  
                  149,295Net
                      cash provided by financing activities
                  
                  
                  637,780
                  
                  
                  599,744Net
                      decrease in cash and cash equivalents
                  
                  
                  (301,265
                  )
                  
                  (47,370
                  )**Cash
                      and cash equivalents, beginning of period**
                  
                  
                  612,348
                  
                  
                  183,449**Cash
                      and cash equivalents, end of period**
                  
                  $
                  311,083
                  
                  $
                  136,079
 
 **The
        accompanying notes are an integral part of these financial
        statements.**
  F-5
  **Orion
                      HealthCorp, Inc.****Consolidated
                      Condensed Statements of Cash Flows****For
                      the Six Months Ended**
                    **June
                      30,****2005**
                  
                  **2004****Operating
                      activities**Net
                      loss
                  
                  $
                  (10,028,418
                  )
                  $
                  (1,706,847
                  )Adjustments
                      to reconcile net loss to net cash used in operating
                      activities:Charge
                      for impairment of intangible assets
                  
                  
                  6,362,849
                  
                  
                  -Minority
                      interest in earnings of partnerships
                  
                  
                  61,801
                  
                  
                  -Provision
                      for doubtful accounts
                  
                  
                  678,545
                  
                  
                  526,543Depreciation
                      and amortization
                  
                  
                  1,951,026
                  
                  
                  281,294Assets
                      held for sale
                  
                  
                  4,673
                  
                  
                  -Conversion
                      of notes payable to common stock
                  
                  
                  57,886
                  
                  
                  -Gain
                      on disposition of discontinued components
                  
                  
                  (58,140
                  )
                  
                  -Changes
                      in operating assets and liabilities:Accounts
                      receivable
                  
                  
                  (897,899
                  )
                  
                  (226,841
                  )Inventory
                  
                  
                  (25,238
                  )
                  
                  (58,141
                  )Prepaid
                      expenses and other assets
                  
                  
                  (82,691
                  )
                  
                  (51,154
                  )Other
                      assets
                  
                  
                  (8,594
                  )
                  
                  8,040Accounts
                      payable and accrued expenses
                  
                  
                  149,951
                  
                  
                  386,952Deferred
                      revenues
                  
                  
                  29,018
                  
                  
                  69,257Net
                      cash used in operating activities
                  
                  
                  (1,805,230
                  )
                  
                  (770,896
                  )**Investing
                      activities**Purchase
                      of property and equipment
                  
                  
                  32,195
                  
                  
                  (151,630
                  )Net
                      cash used in investing activities
                  
                  
                  32,195
                  
                  
                  (151,630
                  )**Financing
                      activities**Net
                      borrowings (repayments) of capital lease obligations
                  
                  
                  (125,650
                  )
                  
                  47,570Net
                      borrowings (repayments) on line of credit
                  
                  
                  364,514
                  
                  
                  (70,885
                  )Net
                      borrowings of notes payable
                  
                  
                  1,402,460
                  
                  
                  1,050,002Net
                      repayments of other obligations
                  
                  
                  (259,052
                  )
                  
                  (17,614
                  )Net
                      cash provided by financing activities
                  
                  
                  1,382,273
                  
                  
                  1,009,073Net
                      increase (decrease) in cash and cash equivalents
                  
                  
                  (390,763
                  )
                  
                  86,547**Cash
                      and cash equivalents, beginning of period**
                  
                  
                  701,846
                  
                  
                  49,532**Cash
                      and cash equivalents, end of period**
                  
                  $
                  311,083
                  
                  $
                  136,079
 
 **The
        accompanying notes are an integral part of these financial
        statements.**
  F-6
  **NOTES
        TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS**
 
 **Note
        1. General**
  Orion
            HealthCorp, Inc. (formerly SurgiCare, Inc. “SurgiCare”) (“Orion” or the
“Company”) and its subsidiaries maintain their accounts on the accrual method
            of
            accounting in accordance with accounting principles generally accepted
            in the
            United States of America. The consolidated financial statements include
            the
            accounts of the Company and all of its majority-owned subsidiaries. As
            described
            in Note 3, Acquisition and Restructuring Transactions, Orion’s results include
            the results of Integrated Physician Solutions, Inc. (“IPS”) for the three months
            and six months ended June 30, 2004 and the results of the IPS, the Company’s
            surgery and diagnostic center business and Medical Billing Services,
            Inc.
            (“MBS”) (which includes Dennis Cain Physician Solutions, Ltd. (“DCPS”))) for the
            three months and six months ended June 30, 2005. The descriptions of
            the
            business and results of operations of MBS set forth in these notes include
            the
            business and results of operations of DCPS. All material intercompany
            balances
            and transactions have been eliminated in consolidation.
 
 These
            financial statements have been prepared in accordance with generally
            accepted
            accounting principles (“GAAP”) for interim financial reporting and in accordance
            with Securities and Exchange Commission (“SEC”) Rule 310-(b) of Regulation S-B.
            In the opinion of management, the accompanying unaudited consolidated
            condensed
            financial statements include all adjustments consisting of only normal
            recurring
            adjustments necessary for a fair presentation of the Company’s financial
            position and results of operations and cash flows of the interim periods
            presented. The results of operations for any interim period are not necessarily
            indicative of results for the full year.
 
 The
            accompanying unaudited consolidated condensed financial statements should
            be
            read in conjunction with the financial statements and related notes therein
            included in the Company’s 2004 Annual Report on Form 10-KSB.
 
 **Description
            of Business**
 
 ***Surgery
            and Diagnostic Centers***
 
 SurgiCare,
            Inc. was incorporated in Delaware on February 24, 1984 as Technical
            Coatings Incorporated. On September 10, 1984, its name was changed
            to
            Technical Coatings, Inc. (“TCI”). Immediately prior to July 1999, TCI was
            an inactive company. On July 11, 1999, TCI changed its name to
            SurgiCare,
            Inc., and at that time changed its business strategy to developing, acquiring
            and operating freestanding ambulatory surgery centers (“ASCs”). On July 21,
            1999, SurgiCare acquired all of the issued and outstanding shares of
            common
            stock of Bellaire SurgiCare, Inc. a Texas corporation (“Bellaire SurgiCare”), in
            exchange for the issuance of 9.86 million shares of SurgiCare’s common
            stock (now 986,000 shares of Class A Common Stock after giving
            effect to
            the Reverse Stock Split and Reclassification, as discussed in Note 3.
            Acquisition and Restructuring Transactions) and 1.35 million shares
            of
            SurgiCare’s Series A Redeemable Preferred Stock, par value $.001 per share,
            to the holders of Bellaire SurgiCare’s common stock. For accounting purposes,
            this reverse acquisition was effective July 1, 1999. On December
            15, 2004,
            the Company changed its name to Orion HealthCorp, Inc.
 
 As
            of
            June 30, 2005, Orion owned a majority interest in two surgery centers
            and a
            minority interest as general partner in one additional center. Two of
            the
            centers are located in Texas and one is located in Ohio. In limited
            circumstances, Orion, or its subsidiaries, may also furnish anesthesia
            services
            in support of the activities of the surgery centers. The Company’s ASCs perform
            various types of procedures including: orthopedic surgery, colonoscopy,
            ophthalmic laser surgery, pain injections and various pediatric surgeries.
            The
            most common procedures performed in our ASCs include knee arthroscopy,
            lumbar
            nerve block and sacral injection, colonoscopy, hammertoe correction,
            sinus
            endoscopic biopsy, cataract removal, breast biopsy, Mitchell procedures
            and
            cystourethroscopy. Orion also owns a 41% interest in an open magnetic
            resonance
            imaging (“MRI”) center in Ohio, which opened in July 2004. The open MRI
            center performs diagnostic procedures using MRI technology. On June 13,
            2005,
            the Company announced that it has accepted an offer to purchase its interests
            in
            the ambulatory surgery center and the open MRI facility in Dover, Ohio.
            Under
            the terms of the offer letter, the Company’s interests in these facilities would
            be sold to a local hospital for cash and assumption of debt. In addition,
            the
            Company would continue to operate the facilities under a long-term management
            agreement. This transaction has not yet closed.
 
 ***Integrated
            Physician Solutions***
 
 IPS,
            a
            Delaware corporation, was founded in 1996 as a business development company
            to
            provide physician practice management services to general and subspecialty
            pediatric practices. IPS commenced its business activities upon consummation
            of
            several medical group business combinations effective January 1,
            1999. The
            Pediatric Physician Alliance (“PPA”) division of IPS manages pediatric medical
            clinics. As of June 30, 2005, PPA managed ten practice sites, representing
            six
            medical groups in Illinois, Ohio and New Jersey.
 
 On
            June
            7, 2005, InPhySys, Inc. (f/k/a IntegriMED, Inc.) (“IntegriMED”), a wholly-owned
            subsidiary of IPS, executed an Asset Purchase Agreement (the “Agreement”) with
            eClinicalWeb, LLC (“eClinicalWeb”) to sell substantially all of the assets of
            IntegriMED. The Agreement was deemed to be effective as of midnight on
            June 6,
            2005. The property sold by IntegriMED to eClinicalWeb (hereinafter collectively
            referred to as the “Acquired Assets”) includes the machinery, equipment,
            supplies, materials, computers, software, software licenses, and other
            personal
            property owned by IntegriMED and used exclusively in the operation of
            IntegriMED's business, IntegriMED's goodwill and all of the business
            conducted
            under the name "IntegriMED" and "InPhySys", sales and customer lists,
            account
            lists, records, manuals, and telephone numbers used exclusively in the
            operation
            of IntegriMED's business, and all of IntegriMED's rights and interests
            in all
            contracts, open customer purchase orders, quotations or similar agreements
            to
            the extent entered into by IntegriMED or assigned to IntegriMED. Additionally,
            eClinicalWeb agreed to assume and to thereafter perform and pay when
            due all
            liabilities related to the Acquired Assets but only to the extent such
            liabilities arise from and after the Closing Date (as defined below).
            eClinicalWeb also agreed to sublease certain space from IPS that was
            occupied by
            employees of IntegriMED as of the Closing Date. As consideration for
            the
            purchase of the Acquired Assets, eClinicalWeb issued to IntegriMED the
            following: (i) a two percent (2%) ownership interest in eClinicalWeb;
            and (ii)
            $69,033.90, for the payoff of certain leases and purchase of certain
            software,
            via wire transfer at the closing of the transfer and delivery of all
            documents
            and instruments necessary to consummate the transactions contemplated
            by the
            Agreement (the "Closing Date"), which occurred concurrently with the
            execution
            of the Agreement. In addition to the consideration listed above, IntegriMED
            retained the following assets related to IntegriMED's business: (i) all
            cash and
            cash equivalents relating to IntegriMED's business as of the Closing
            Date; (ii)
            all accounts receivable relating to IntegriMED's business as of the Closing
            Date; and (iii) other assets of IntegriMED not used exclusively in IntegriMED's
            business.
  F-7
 
 
  ***Medical
              Billing Services***
 
 MBS
            is
            based in Houston, Texas and was incorporated in Texas on October 16,
            1985.
            DCPS is based in Houston, Texas and was organized as a Texas limited
            liability
            company on September 16, 1998. DCPS reorganized as a Texas limited
            partnership on August 31, 2003. Orion acquired MBS and DCPS in
            the DCPS/MBS
            Transaction, which is described in Note 3. Acquisition and Restructuring
            Transactions. Subsequent to the DCPS/MBS Transaction, DCPS has operated
            as a
            subsidiary of MBS. MBS and DCPS provide practice management, billing
            and
            collection, managed care consulting and coding/reimbursement services
            to
            hospital-based physicians and clinics. Any descriptions of MBS include
            the
            business and operations of DCPS.
 
 **Note
            2. Going Concern**
 
 The
            accompanying consolidated condensed financial statements have been prepared
            in
            conformity with accounting principles generally accepted in the United
            States of
            America, which contemplate the continuation of the Company as a going
            concern.
            However, the Company incurred substantial operating losses during 2004
            and in
            the first and second quarters of 2005. In addition, the Company has used
            substantial amounts of working capital in its operations. These conditions
            raise
            substantial doubt about the Company’s ability to continue as a going concern.
 
 The
            Company has financed its growth primarily through the issuance of equity,
            secured and/or convertible debt, most recently by completing a series
            of
            acquisition and restructuring transactions (the “Closing”), which occurred in
            December 2004 and are described in Note 3. Acquisition and Restructuring
            Transactions. In connection with the closing of these transactions, the
            Company
            entered into a new secured two-year revolving credit facility pursuant
            to a Loan
            and Security Agreement (the “Loan and Security Agreement”), dated December 15,
            2004, by and among Orion, certain of its affiliates and subsidiaries,
            and
            Healthcare Business Credit Corporation (“HBCC”). In connection with entering
            into this new facility, Orion also restructured its previously-existing
            debt
            facilities, which resulted in a decrease in aggregate debt owed to DVI
            Business
            Credit Corporation and DVI Financial Services, Inc. (collectively, “DVI”) from
            approximately $10.1 million to a combined principal amount of
            approximately
            $6.5 million, of which approximately $2 million was paid
            at the
            Closing.
 
 In
            addition to the Closing, on March 16, 2005, Brantley Partners
            IV, L.P.
            (“Brantley IV”) loaned Orion an aggregate of $1,025,000 (the “First Loan”). On
            June 1, 2005, the Company executed a convertible subordinated promissory
            note in
            the principal amount of $1,025,000 (the "First Note") payable to Brantley
            IV to
            evidence the terms of the First Loan. The material terms of the First
            Note are
            as follows: (i) the First Note is unsecured; (ii) the First Note is subordinate
            to the Company's outstanding loan from HBCC and other indebtedness for
            monies
            borrowed, and ranks pari passu with general unsecured trade liabilities;
            (iii)
            principal and interest on the First Note is due April 19, 2006 (the "First
            Note
            Maturity Date"); (iv) the interest accrues from and after March 16, 2005,
            at a
            per annum rate equal to nine percent (9.0%) and is non-compounding; (v)
            if an
            event of default occurs and is continuing, Brantley IV, by notice to
            the
            Company, may declare the principal of the First Note to be due and immediately
            payable; and (vi) on or after the First Note Maturity Date, Brantley
            IV, at its
            option, may convert all or a portion of the outstanding principal and
            interest
            due of the First Note into shares of Class A Common Stock of the Company
            at a
            price per share equal to $1.042825 (the "First Note Conversion Price").
            The
            number of shares of Class A Common Stock issuable upon conversion of
            the First
            Note shall be equal to the number obtained by dividing (x) the aggregate
            amount
            of principal and interest to be converted by (y) the First Note Conversion
            Price
            (as defined above); provided, however, the number of shares issuable
            upon
            conversion of the First Note shall not exceed the lesser of: (i) 1,159,830
            shares of Class A Common Stock, or (ii) 16.3% of the then outstanding
            Class A
            Common Stock. On April 19, 2005, Brantley IV loaned the Company
            an
            additional $225,000 (the “Second Loan”). On June 1, 2005, the Company executed a
            convertible subordinated promissory note in the principal amount of $225,000
            (the "Second Note") payable to Brantley IV to evidence the terms of the
            Second
            Loan. The material terms of the Second Note are as follows: (i) the Second
            Note
            is unsecured; (ii) the Second Note is subordinate to the Company's outstanding
            loan from HBCC and other indebtedness for monies borrowed, and ranks
            pari passu
            with general unsecured trade liabilities; (iii) principal and interest
            on the
            Second Note is due April 19, 2006 (the "Second Note Maturity Date");
            (iv) the
            interest accrues from and after April 19, 2005, at a per annum rate equal
            to
            nine percent (9.0%) and is non-compounding; (v) if an event of default
            occurs
            and is continuing, Brantley IV, by notice to the Company, may declare
            the
            principal of the Second Note to be due and immediately payable; and (vi)
            on or
            after the Second Note Maturity Date, Brantley IV, at its option, may
            convert all
            or a portion of the outstanding principal and interest due of the Second
            Note
            into shares of Class A Common Stock of the Company at a price per share
            equal to
            $1.042825 (the "Second Note Conversion Price"). The number of shares
            of Class A
            Common Stock issuable upon conversion of the Second Note shall be equal
            to the
            number obtained by dividing (x) the aggregate amount
            of
            principal and interest to be converted by (y) the Second Note Conversion
            Price
            (as defined above); provided, however, the number of shares issuable
            upon
            conversion of the Second Note shall not exceed the lesser of: (i) 254,597
            shares
            of Class A Common Stock, or (ii) 3.6% of the then outstanding Class A
            Common
            Stock. Paul H. Cascio, the Chairman of the board of directors of Orion,
            and
            Michael J. Finn, a director of Orion, are affiliates of Brantley IV.
            Additionally, in connection with the First Loan and the Second Loan,
            the Company
            entered into a First Amendment to the Loan and Security Agreement (the
“First
            Amendment”), dated March 22, 2005, with certain of the Company’s affiliates and
            subsidiaries, and HBCC whereby its $4,000,000 secured two-year revolving
            credit
            facility has been reduced by the amount of the loans from Brantley IV
            to
            $2,750,000. As a result of the First Amendment, the Brantley IV Guaranty,
            which
            is discussed in Note 3. Acquisition and Restructuring Transactions, was
            amended
            by the Amended and Restated Guaranty Agreement (the “Amended Brantley IV
            Guaranty”), dated March 22, 2005, which reduces the deficiency guaranty provided
            by Brantley IV by the amount of the First Loan to $2,247,727. Also as
            a result
            of the First Amendment, the Brantley Capital Guaranty, which is discussed
            in
            Note 3. Acquisition and Restructuring Transactions, was amended by the
            Amended
            and Restated Guaranty Agreement (the “Amended Brantley Capital Guaranty”), dated
            March 22, 2005, which reduces the deficiency guaranty provided by Brantley
            Capital by the amount of the Second Loan to $502,273.
  F-8
 As
            part
            of the Loan and Security Agreement, the Company is required to comply
            with
            certain financial covenants, measured on a quarterly basis, beginning
            as of and
            for the six months ended June 30, 2005. The financial covenants include
            maintaining a required debt service coverage ratio and meeting a minimum
            operating income level for the surgery and diagnostic centers before
            corporate
            overhead allocations. As of and for the six months ended June 30, 2005,
            the
            Company was out of compliance with both of these financial covenants
            and has
            notified the lender as such. Under the terms of the Loan and Security
            Agreement,
            failure to meet the required financial covenants constitutes an event
            of
            default. Under an event of default, the lender may (i) accelerate and
            declare
            the obligations under the credit facility to be immediately due and payable;
            (ii) withhold or cease to make advances under the credit facility; (iii)
            terminate the credit facility; (iv) take possession of the collateral
            pledged as
            part of the Loan and Security Agreement; (v) reduce or modify the revolving
            loan
            commitment; and/or (vi) take necessary action under the Guaranties. The
            loan is
            secured by the Company’s healthcare accounts receivable. As of August 11, 2005,
            the outstanding principal under the revolving credit facility was $2,605,203.
            The full amount of the loan as of June 30, 2005 is recorded as a current
            liability. The Company is currently in negotiations with the lender and
            is
            seeking to obtain a waiver of the financial covenants as of and for the
            six
            months ended June 30, 2005. In the event the lender declares the obligations
            under the credit facility to be immediately due and payable or exercises
            its
            other rights described above, the Company would not be able to meet its
            obligations to the lender or its other creditors. As a result, such action
            would
            have a material adverse effect on the Company and on its ability to continue
            as
            a going concern.
 
 As
            of
            June 30, 2005, the Company’s existing credit facility with HBCC has limited
            availability to provide for working capital shortages. Although the Company
            believes that it will generate cash flows from operations in the future,
            there
            is substantial doubt as to whether it will be able to fund its operations
            solely
            from its cash flows. On April 28, 2005, the Company announced the initiation
            of
            a strategic plan designed to accelerate the Company’s growth and enhance its
            future earnings potential. The plan focuses on the Company’s strengths, which
            include providing billing, collections and complementary business management
            services to physician practices in addition to the provision of development
            and
            management services to ambulatory surgery centers. A fundamental component
            of
            the Company’s plan is the selective consideration of accretive acquisition
            opportunities in these core business sectors. In addition, the Company
            will
            cease investment in business lines that do not complement the Company’s
            strategic plans and will redirect financial resources and Company personnel
            to
            areas that management believes enhances long-term growth potential. On
            June 7,
            2005, as described in Note 1. General - Description of Business, IPS
            executed an
            Asset Purchase Agreement with eClinicalWeb to sell substantially all
            of the
            assets of IntegriMED. Additionally, on June 13, 2005, the Company announced
            that
            it has accepted an offer to purchase its interests in the ambulatory
            surgery
            center and the MRI facility in Dover, Ohio. Under the terms of the offer
            letter,
            the Company’s interests in these facilities would be sold to a local hospital
            for cash and assumption of debt. In addition, the Company would continue
            to
            operate the facilities under a long-term management agreement. This transaction
            has not yet closed. The Company does not anticipate a significant reduction
            of
            revenue as a result of the implementation of these strategic initiatives.
            However, the Company anticipates a substantial reduction of annual expenses
            attributable to a combination of these initiatives and the consolidation
            of
            corporate functions currently duplicated at the Company’s Houston and Atlanta
            facilities.
 
 The
            Company intends to continue to manage its use of cash. However, the Company’s
            business is still faced with many challenges. If cash flows from operations
            and
            borrowings are not sufficient to fund the Company’s cash requirements, the
            Company may be required to further reduce its operations and/or seek
            additional
            public or private equity financing or financing from other sources or
            consider
            other strategic alternatives, including possible additional divestitures
            of
            specific assets or lines of business. There can be no assurances that
            additional
            financing or strategic alternatives will be available, or that, if available,
            the financing or strategic alternatives will be obtainable on terms acceptable
            to the Company or that any additional financing would not be substantially
            dilutive to the Company’s existing stockholders.
 
 **Note
            3. Acquisition and Restructuring Transactions**
 
 On
            November 18, 2003, the Company entered into an agreement and plan
            of merger
            with IPS, which was amended and restated on February 9, 2004,
            and further
            amended on July 16, 2004 and on September 9, 2004 (the “IPS Merger
            Agreement”), relating to the Company’s acquisition of IPS (the “IPS Merger”). On
            February 9, 2004, the Company entered into an agreement and plan
            of merger
            with DCPS and MBS, which was amended and restated on July 16,
            2004, and
            further amended on September 9, 2004 and on December 15,
            2004 (the
“DCPS/MBS Merger Agreement”), relating to the Company’s acquisition of MBS and
            DCPS (the “DCPS/MBS Transaction” and together with the IPS Merger, the
“Acquisitions”). The Company completed the IPS Merger and the DCPS/MBS
            Transaction on December 15, 2004. As a result of the IPS Merger
            and the
            DCPS/MBS Transaction, IPS, MBS and DCPS became wholly-owned subsidiaries
            of the
            Company.
  F-9
 
 On
            December 15, 2004, and simultaneous with the consummation of the
            IPS Merger
            and DCPS/MBS Transaction, the Company consummated the Closing, which
            included
            issuances of new equity securities for cash and contribution of outstanding
            debt, and the restructuring of its debt facilities. The Company also
            completed a
            one-for-ten reverse stock split (the “Reverse Stock Split”), created three new
            classes of common stock (Class A, Class B and Class C Common Stock) and
            changed
            its name. The Company’s common stock was converted to Orion Class A Common
            Stock (the “Reclassification”).
 
 Also
            on
            December 15, 2004, the Company issued 11,482,261 shares of its
            Class B
            Common Stock (the “Investment Transaction”) to various investors for $13,200,000
            in cash plus cash in the amount of $128,350, which amount equaled the
            accrued
            but unpaid interest immediately prior to the Closing owed to a subsidiary
            of
            Brantley IV by SurgiCare and IPS on amounts advanced prior to October 24,
            2003. At the Closing, Orion used $5,908,761 to pay off the debt owed
            to a
            subsidiary of Brantley IV. The Company also granted to Brantley IV the
            right to
            purchase shares of Class A Common Stock for cash in an amount
            up to an
            aggregate of $3,000,000 after the Closing (the “Purchase Right”). Brantley IV
            may exercise the Purchase Right at any time after December 15,
            2004. Each
            additional investment will be: (i) subject to the approval of
            a majority of
            the members of the board of directors of the Company that are not affiliated
            with Brantley IV, (ii) consummated on a date mutually agreed by
            the Company
            and Brantley IV, and (iii) accomplished with documentation reasonably
            satisfactory to the Company and Brantley IV. Pursuant to the terms of
            the
            Purchase Right, the purchase price per share of the Class A Common
            Stock
            will be equal to the lesser of (a) $1.25, and (b) 70% multiplied
            by the
            average of the daily average of the high and low price per share of the
            Class A Common Stock on the American Stock Exchange (“AMEX”) or a similar
            system on which the Class A Common Stock shall be listed at the
            time, for
            the twenty trading days immediately preceding the date of the closing
            of the
            exercise of the Purchase Right.
 
 Additionally,
            the Company used $3,683,492 of the proceeds of the Investment Transaction
            to
            repay a portion of the indebtedness to unaffiliated third parties and
            restructured additional existing indebtedness.
 
 The
            IPS
            Merger has been treated as a “reverse acquisition” for accounting purposes.
            Statement of Financial Accounting Standards (“SFAS”) No. 141 requires that, in a
            business combination effected through the issuance of shares or other
            equity
            interests, as in the case of the IPS Merger, a determination be made
            as to which
            entity is the accounting acquirer. This determination is principally
            based on
            the relative voting rights in the combined entity held by existing stockholders
            of each of the combining companies, the composition of the board of directors
            of
            the combined entity, and the expected composition of the executive management
            of
            the combined entity. Based on an assessment of the relevant facts and
            circumstances existing with respect to the IPS Merger, it has been determined
            that IPS is the acquirer for accounting purposes, even though IPS is
            a
            subsidiary of Orion.
  Accordingly,
            the IPS Merger has
            been treated as a reverse acquisition, meaning that the purchase price,
            comprised of the fair value of the outstanding shares of the Company
            prior to
            the transaction, plus applicable transaction costs, has been allocated
            to the
            fair value of the Company’s tangible and intangible assets and liabilities prior
            to the transaction, with any excess being considered goodwill. IPS is
            being
            treated as the continuing reporting entity, and thus IPS’s historical results
            have become those of the combined company. Orion’s results include the results
            of IPS for the three months and six months ended June 30, 2004 and the
            results
            of IPS, the Company’s surgery and diagnostic center business and MBS (which
            includes DCPS) for the three months and six months ended June 30,
            2005.
 
 *New
            Line of Credit*
 
 Orion
            also entered into a new secured two-year revolving credit facility pursuant
            to
            the Loan and Security Agreement. Under this facility, up to $4,000,000
            of loans
            may be made available to Orion, subject to a borrowing base. Orion borrowed
            $1,600,000 under this facility concurrently with the Closing. The interest
            rate
            under this facility is the prime rate plus 3%. Upon an event of default,
            HBCC
            can accelerate the loans or call the Guaranties described below. In connection
            with entering into this new facility, Orion also restructured its
            previously-existing debt facilities, which resulted in a decrease in
            aggregate
            debt owed to DVI from approximately $10.1 million to a combined
            principal
            amount of approximately $6.5 million, of which approximately
            $2 million was paid at the Closing.
 
 Pursuant
            to a Guaranty Agreement (the “Brantley IV Guaranty”), dated as of
            December 15, 2004, provided by Brantley IV to HBCC, Brantley IV
            agreed to
            provide a deficiency guaranty in the amount of $3,272,727. Pursuant to
            a
            Guaranty Agreement (the “Brantley Capital Guaranty”), dated as of
            December 15, 2004, provided by Brantley Capital Corporation (“Brantley
            Capital”) to HBCC, Brantley Capital agreed to provide a deficiency guarantee
            in
            the amount of $727,273. In consideration for the Guaranties, Orion issued
            warrants to purchase 20,455 shares of Class A Common Stock, at
            an exercise
            price of $0.01 per share, to Brantley IV, and issued warrants to purchase
            4,545
            shares of Class A Common Stock, at an exercise price of $0.01
            per share, to
            Brantley Capital.
 
 On
            March 16, 2005, Brantley IV loaned the Company an aggregate of
            $1,025,000.
            On April 19, 2005, Brantley IV loaned the Company an additional
            $225,000.
            (See Note 2. Going Concern.) Additionally, as part of these loan transactions,
            the Company entered into the First Amendment, dated March 22, 2005, with
            HBCC
            whereby its $4,000,000 secured two-year revolving credit facility has
            been
            reduced by the amount of the loans from Brantley IV to $2,750,000. As
            a result
            of the First Amendment, the Brantley IV Guaranty was amended by the Amended
            Brantley IV Guaranty, which reduces the deficiency guaranty provided
            by Brantley
            IV by the amount of the First Loan to $2,247,727. Also as a result of
            the First
            Amendment, the Brantley Capital Guaranty was amended by the Amended Brantley
            Capital Guaranty, which reduces the deficiency guaranty provided by Brantley
            Capital by the amount of the Second Loan to $502,273.
  F-10
 
 **Note
            4. Revenue Recognition**
 
 The
            Company’s surgery and diagnostic center business recognizes revenue on the date
            the procedures are performed, and accounts receivable are recorded at
            that time.
            Revenues are reported at the estimated realizable amounts from patients
            and
            third-party payers. If such third-party payers were to change their
            reimbursement policies, the effect on revenue could be significant. Earnings
            are
            charged with a provision for contractual adjustments and doubtful accounts
            based
            on such factors as historical trends of billing and cash collections,
            established fee schedules, accounts receivable agings and contractual
            relationships with third-party payers. Contractual allowances are estimated
            primarily using each surgery center’s collection experience. Contractual rates
            and fee schedules are also helpful in this process. On a rolling average
            basis,
            the Company tracks collections as a percentage of related billed charges.
            This
            percentage, which is adjusted on a quarterly basis, has proved to be
            the best
            indicator of expected realizable amounts from patients and third-party
            payers.
            Contractual adjustments and accounts deemed uncollectible are applied
            against
            the allowance account. The Company is not aware of any material claims,
            disputes
            or unsettled matters with third-party payers and there have been no material
            settlements with third party payers for the three months and six months
            ended
            June 30, 2005.
 
 IPS
            records revenue based on patient services provided by its affiliated
            medical
            groups and for services provided by IntegriMED to its customers. Net
            patient
            service revenue is impacted by billing rates, changes in current procedural
            terminology (“CPT”) code reimbursement and collection trends. IPS reviews
            billing rates at each of its affiliated medical groups on at least an
            annual
            basis and adjusts those rates based on each insurer’s current reimbursement
            practices. Amounts collected by IPS for treatment by its affiliated medical
            groups of patients covered by Medicaid and other contractual reimbursement
            programs, which may be based on cost of services provided or predetermined
            rates, are generally less than the established billing rates of IPS’ affiliated
            medical groups. IPS estimates the amount of these contractual allowances
            and
            records a reserve against accounts receivable based on historical collection
            percentages for each of the affiliated medical groups, which include
            various
            payer categories. When payments are received, the contractual adjustment
            is
            written off against the established reserve for contractual allowances.
            The
            historical collection percentages are adjusted quarterly based on actual
            payments received, with any differences charged against net revenue for
            the
            quarter. Additionally, IPS tracks cash collection percentages for each
            medical
            group on a monthly basis, setting quarterly and annual goals for cash
            collections, bad debt write-offs and aging of accounts receivable. IPS
            is not
            aware of any material claims, disputes or unsettled matters with third
            party
            payers and there have been no material settlements with third party payers
            for
            the three months and six months ended June 30, 2005 and 2004, respectively.
 
 MBS
            earns
            revenues based on the collection of MBS’s customers’ receivables. Revenues are
            recognized during the period in which collections were received.
 
 **Note
            5. Use of Estimates**
 
 The
            preparation of financial statements in conformity with accounting principles
            generally accepted in the United States of America requires management
            to make
            estimates and assumptions that affect the reported amounts of assets
            and
            liabilities and disclosure of contingent assets and liabilities at the
            date of
            the financial statements and the reported amounts of revenues and expenses
            during the reporting period. Actual results could differ from those estimates.
 
 **Note
            6. Segments and Related Information**
 
 In
            accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise
            and Related Information,” the Company has determined that it has three
            reportable segments for the six months ended June 30, 2005 - PPA, the
            Company’s
            surgery and diagnostic centers and MBS. The reportable segments are strategic
            business units that offer different products and services. They are managed
            separately because each business requires different technology, operational
            support and marketing strategies. The Company’s reportable segments consist of:
            (i) PPA, the pediatric medical groups that provide patient care
            operating
            under management services agreements (“MSAs”); (ii) the Company’s surgery
            and diagnostic centers; and (iii) MBS, which provides practice
            management,
            billing and collection, managed care consulting and coding/reimbursement
            services to hospital-based physicians and clinics. Management chose to
            aggregate
            the MSAs into a single operating segment consistent with the objective
            and basic
            principles of SFAS No. 131 based on similar economic characteristics,
            including the nature of the products and services, the type of customer
            for
            their services, the methods used to provide their services and in consideration
            of the regulatory environment under Medicare and the Health Insurance
            Portability and Accountability Act (“HIPAA”).
 
 The
            following table summarizes key financial information, by reportable segment,
            as
            of and for the six months ended June 30, 2005 and 2004, respectively.
 
 **For
                            the Six Months Ended June 30, 2005****PPA**
                        
                        
                        **Surgery
                            and diagnostic**
                          **centers**
                        
                        **MBS**
                        
                        **Total**Net
                            operating revenues
                        
                        $
                        10,262,311
                        
                        
                        $
                        1,267,842
                        
                        $
                        5,153,753
                        
                        $
                        16,683,906Income
                            (loss) from continuing operations
                        
                        
                        548,222
                        
                        
                        
                        (8,329,689
                        )
                        
                        462,898
                        
                        
                        (7,318,569Depreciation
                            and amortization (including charge for impairment of
                            intangible
                            assets)
                        
                        
                        245,965
                        
                        
                        
                        7,471,881
                        
                        
                        572,882
                        
                        
                        8,290,728Total
                            assets
                        
                        
                        9,799,965
                        
                        
                        
                        11,423,560
                        
                        
                        10,474,085
                        
                        
                        31,697,610
  **For
                            the Six Months Ended June 30, 2004****PPA**
                        
                        
                        
                        **Surgery
                            and diagnostic**
                          **centers**
                        
                        
                        **MBS**
                        
                        
                        **Total**Net
                            operating revenues
                        
                        $
                        8,274,458
                        
                        
                        $
                        -
                        
                        $
                        -
                        
                        $
                        8,274,458Loss
                            from continuing operations
                        
                        
                        568,038
                        
                        
                        
                        -
                        
                        
                        -
                        
                        
                        568,038Depreciation
                            and amortization (including charge for impairment of
                            intangible
                            assets)
                        
                        
                        52,726
                        
                        
                        
                        -
                        
                        
                        -
                        
                        
                        52,726Total
                            assets
                        
                        
                        10,076,379
                        
                        
                        
                        -
                        
                        
                        -
                        
                        
                        10,076,379
 
 The
            following schedules provide a reconciliation of the key financial information
            by
            reportable segment to the consolidated totals found in Orion’s consolidated
            condensed balance sheets and statements of operations as of and for the
            six
            months ended June 30, 2005 and 2004, respectively.
  F-11
 
 **Six
                          Months Ended June 30,****2005**
                      
                      **2004****Net
                          operating revenues:**Total
                          net operating revenues for reportable segments
                      
                      $
                      16,683,906
                      
                      $
                      8,274,458Corporate
                          revenue
                      
                      
                      41,589
                      
                      
                      19,233Elimination
                          of intercompany transactions
                      
                      
                      -
                      
                      
                      -Total
                          consolidated net operating revenues
                      
                      $
                      16,725,495
                      
                      $
                      8,293,691*-*
                      
                      
                      
                      
                      
                      *-***Loss
                          from continuing operations:**Total
                          loss from continuing operations for reportable segments
                      
                      $
                      (7,318,569
                      )
                      $
                      568,038Corporate
                          overhead
                      
                      
                      (1,129,901
                      )
                      
                      (1,135,945
                      )Elimination
                          of intercompany transactions
                      
                      
                      (796,263
                      )
                      
                      (709,338
                      )Total
                          consolidated loss from continuing operations
                      
                      $
                      (9,244,733
                      )
                      $
                      (1,277,245
                      )*-*
                      
                      
                      
                      
                      
                      *-***Depreciation
                          and amortization (including charge for impairment of intangible
                          assets):**Total
                          depreciation and amortization for reportable segments
                      
                      $
                      8,290,728
                      
                      $
                      52,726Charge
                          for impairment of intangible assets
                      
                      
                      (6,362,849
                      )
                      
                      -Corporate
                          depreciation and amortization
                      
                      
                      23,147
                      
                      
                      217,010Total
                          consolidated depreciation and amortization
                      
                      $
                      1,951,026
                      
                      $
                      269,736*-*
                      
                      
                      
                      
                      
                      *-***Total
                          assets:**Total
                          assets for reportable segments
                      
                      $
                      31,697,610
                      
                      $
                      10,076,379Corporate
                          assets
                      
                      
                      332,308
                      
                      
                      560,328Assets
                          held for sale
                      
                      
                      2,282,563
                      
                      
                      -Total
                          consolidated assets
                      
                      $
                      34,312,481
                      
                      $
                      10,636,707
 
  F-12
  **Note
            7. Goodwill and Intangible Assets**
 
 Goodwill
            represents the excess of cost over the fair value of net assets of companies
            acquired in business combinations accounted for using the purchase method.
            In
            July 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS
            No. 141, “Business Combinations,” and SFAS No. 142, “Goodwill and
            Other Intangible Assets.” SFAS No. 141 eliminates pooling-of-interest
            accounting and requires that all business combinations initiated after
            June 30, 2001, be accounted for using the purchase method. SFAS
            No. 142 eliminates the amortization of goodwill and certain other
            intangible assets and requires the Company to evaluate goodwill for impairment
            on an annual basis by applying a fair value test. SFAS No. 142
            also
            requires that an identifiable intangible asset that is determined to
            have an
            indefinite useful economic life not be amortized, but separately tested
            for
            impairment using a fair value-based approach at least annually.
 
 On
            June
            13, 2005, the Company announced that it has accepted an offer to purchase
            its
            interests in the Tuscarawas ASC and the Tuscarawas open MRI facility
            in Dover,
            Ohio. Under the terms of the offer letter, the Company’s interests in these
            facilities would be sold to a local hospital for cash and assumption
            of debt. In
            addition, the Company would continue to operate the facilities under
            a long-term
            management agreement. In preparation for this pending transaction, the
            Company
            tested the identifiable intangible assets and goodwill related to the
            surgery
            center business using the present value of cash flows method. Based on
            the
            pending sales transaction involving the Tuscarawas ASC and Open MRI,
            as well as
            the uncertainty of future cash flows related to the Company’s surgery center
            business, the Company has recorded a charge for impairment of intangible
            assets
            of $6,362,849 for the six months ended June 30, 2005.
 
 **Note
            8. Earnings per Share**
 
 Basic
            earnings per share are calculated on the basis of the weighted average
            number of
            Class A Common Stock outstanding. Diluted earnings per share,
            in addition
            to the weighted average determined for basic loss per share, include
            common
            stock equivalents, which would arise from the exercise of stock options
            and
            warrants using the treasury stock method, conversion of debt and conversion
            of
            Class B and Class C Common Stock.
 
 **For
                      the Three Months Ended****June
                      30,****2005**
                  
                  **2004****Basic
                      loss per share:**Net
                      loss
                  
                  $
                  (8,347,788
                  )
                  $
                  (932,406
                  )Weighted
                      average common shares outstandingDilutive
                      stock options and warrants
                  
                  
                  (a
                  )
                  
                  (a
                  )Convertible
                      notes
                  
                  
                  (b
                  )
                  
                  (b
                  )Class B
                      Common Stock
                  
                  
                  (c
                  )
                  
                  (c
                  )Class C
                      Common Stock
                  
                  
                  (d
                  )
                  
                  (d
                  )Weighted
                      average common shares outstanding for diluted net loss per
                      share
                  
                  
                  9,244,850
                  
                  
                  8,602,149Net
                      loss per share from continuing operations
                  
                  $
                  (0.844
                  )
                  $
                  (0.072
                  )Net
                      loss per share from discontinued operations
                  
                  $
                  (0.059
                  )
                  $
                  (0.037
                  )Net
                      loss per share — basic
                  
                  $
                  (0.903
                  )
                  $
                  (0.108
                  )Net
                      loss per share — diluted
                  
                  $
                  (0.903
                  )
                  $
                  (0.108
                  )
  
 **For
                      the Six Months Ended****June
                      30,****2005**
                  
                  **2004****Basic
                      loss per share:**Net
                      loss
                  
                  $
                  (10,028,418
                  )
                  $
                  (1,706,847
                  )Weighted
                      average common shares outstandingDilutive
                      stock options and warrants
                  
                  
                  (a
                  )
                  
                  (a
                  )Convertible
                      notes
                  
                  
                  (b
                  )
                  
                  (b
                  )Class B
                      Common Stock
                  
                  
                  (c
                  )
                  
                  (c
                  )Class C
                      Common Stock
                  
                  
                  (d
                  )
                  
                  (d
                  )Weighted
                      average common shares outstanding for diluted net loss per
                      share
                  
                  
                  9,149,828
                  
                  
                  8,602,149Net
                      loss per share from continuing operations
                  
                  $
                  (1.010
                  )
                  $
                  (0.148
                  )Net
                      loss per share from discontinued operations
                  
                  $
                  (0.086
                  )
                  $
                  (0.050Net
                      loss per share — basic
                  
                  $
                  (1.096
                  )
                  $
                  (0.198
                  )Net
                      loss per share — diluted
                  
                  $
                  (1.096
                  )
                  $
                  (0.198
                  )
  (a)
                  2,146,841
                      and 803,317 options and warrants were outstanding at June 30,
                      2005 and
                      2004, respectively. The information for 2004 relates to SurgiCare
                      prior to
                      the acquisition and restructuring transactions.
 (b)
                  $50,000
                      and $470,000 of notes were convertible into Class A Common
                      Stock as of
                      June 30, 2005 and 2004, respectively. The conversion price
                      was equal to
                      $3.50 per share until January 31, 2004. Subsequent to that
                      date, the
                      conversion price is equal to the lower of $2.50 or 75% of the
                      average
                      closing price for the 20 trading days immediately prior to
                      the conversion
                      date. The information for 2004 relates to SurgiCare prior to
                      the
                      acquisition and restructuring transactions.
 (c)
                  10,685,381
                      shares of Class B Common Stock were outstanding at June 30,
                      2005.
 (d)
                  1,555,137
                      shares of Class C Common Stock were outstanding at June 30,
                      2005.
  F-13
  **Note
            9. Preferred Stock**
 
 On
            December 15, 2004, as part of the acquisition and restructuring
            transactions described in Note 3. Acquisition and Restructuring Transactions,
            the Company redesignated its common stock as Class A Common Stock and
            created
            two new classes of common stock and one new class of preferred stock.
            The
            Company is authorized to issue 20,000,000 shares of preferred stock,
            par value
            $0.001 (the “Preferred Stock”). Subject to the limitations prescribed by law and
            the provisions of the Amended and Restated Certificate of Incorporation
            of the
            Company, the board of directors is authorized to issue the Preferred
            Stock from
            time to time in one or more series, each of such series to have such
            number of
            shares, voting powers, full or limited, or no voting powers, and such
            designations, preferences and relative, participating, optional or other
            special
            rights, and such qualifications, limitations or restrictions thereof,
            as shall
            be determined by the board of directors in a resolution or resolutions
            providing
            for the issue of such Preferred Stock. Subject to the powers and rights
            of any
            Preferred Stock, including any series thereof, having any preference
            or priority
            over, or rights superior to, the common stock, the holders of the common
            stock
            shall have and possess all powers and voting and other rights pertaining
            to the
            stock of the Company.
 
 Also
            on
            December 15, 2004, all of IPS’s outstanding redeemable convertible
            preferred stock, including accrued and unpaid dividends, was converted
            to common
            stock and exchanged for shares of Orion.
 
 **Note
            10. Discontinued Operations**
 
 On
            September 19, 2003, IPS entered into a Mutual Release and Settlement
            Agreement (the “Settlement Agreement”) with Dr. Jane Kao and PediApex Heart
            Center for Children (the “Heart Center”) to settle disputes as to the existence
            and enforceability of certain contractual obligations. As part of the
            Settlement
            Agreement, Dr. Kao, the Heart Center and IPS agreed that, until
            December 31, 2004, each party would conduct their operations under
            the
            terms established by the MSA. Additionally, among other provisions, after
            December 31, 2004, Dr. Kao and the Heart Center were released
            from any
            further obligation to IPS arising from any previous agreement, and Dr. Kao
            purchased the accounts receivable related to the Heart Center and IPS
            terminated
            its ownership and management agreement with the Heart Center. The operating
            results of the Heart Center were not included in the consolidated statements
            of
            operations of IPS after September 19, 2003 because this medical
            group did
            not meet the criteria for consolidation after that date in accordance
            with
            Emerging Issues Task Force (“EITF”) 97-2. The operations of this component are
            reflected in the Company’s consolidated statements of operations as ‘income from
            operations of discontinued components’ for the three months and six months ended
            June 30, 2004. IPS recorded a loss on disposal of this discontinued component
            of
            $12,366 for the year ended December 31, 2004. There were no operations
            for
            this component in 2005.
 
 The
            following table contains selected financial statement data related to
            the Heart
            Center as of and for the three and six months ended June 30, 2004:
  **Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30, 2004**
                  
                  **June
                      30, 2004**Income
                      statement data:Net
                      operating revenues
                  
                  $
                  496,566
                  
                  $
                  1,225,707Direct
                      cost of revenues
                  
                  
                  178,149
                  
                  
                  503,651Operating
                      expenses
                  
                  
                  299,622
                  
                  
                  657,257Net
                      income
                  
                  $
                  18,795
                  
                  $
                  64,799Balance
                      sheet data:Current
                      assets
                  
                  $
                  112,826
                  
                  $
                  112,826Other
                      assets
                  
                  
                  93,287
                  
                  
                  93,287Total
                      assets
                  
                  $
                  206,113
                  
                  $
                  206,113Current
                      liabilities
                  
                  $
                  596,992
                  
                  $
                  596,992Other
                      liabilities
                  
                  
                  —
                  
                  
                  —Total
                      liabilities
                  
                  $
                  596,992
                  
                  $
                  596,992
 
 As
            part
            of the acquisition and restructuring transactions that closed on
            December 15, 2004, the Company recorded intangible assets related
            to the
            IPS Merger and the DCPS/MBS Transaction. As of the Closing, the Company’s
            management expected the case volumes at Bellaire SurgiCare to improve
            in 2005.
            However, by the end of February 2005, it was determined that the expected
            case
            volume increases were not going to be realized. On March 1, 2005,
            the
            Company closed Bellaire SurgiCare and consolidated its operations with
            the
            operations of SurgiCare Memorial Village. The Company tested the identifiable
            intangible assets and goodwill related to the surgery and diagnostic
            center
            business using the present value of cash flows method. As a result of
            the
            decision to close Bellaire SurgiCare and the resulting impairment of
            the joint
            venture interest and management contracts related to the surgery centers,
            the
            Company recorded a charge for impairment of intangible assets of $4,090,555
            for
            the year ended December 31, 2004. The Company also recorded a
            loss on
            disposal of this discontinued component (in addition to the charge for
            impairment of intangible assets) of $163,050 for the quarter ended March
            31,
            2005. There were no operations for this component in the second quarter
            of
            2005.
  F-14
 
 The
            following table contains selected financial statement data related to
            Bellaire
            SurgiCare as of and for the three months and six months ended June 30,
            2005:
 
 **Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30, 2005**
                  
                  **June
                      30, 2005**Income
                      statement data:Net
                      operating revenues
                  
                  $
                  —
                  
                  $
                  161,679Direct
                      cost of revenues
                  
                  
                  —
                  
                  
                  235,993Operating
                      expenses
                  
                  
                  —
                  
                  
                  114,104Net
                      income
                  
                  $
                  —
                  
                  $
                  (188,418
                  )Balance
                      sheet data:Current
                      assets
                  
                  $
                  —
                  
                  $
                  —Other
                      assets
                  
                  
                  —
                  
                  
                  —Total
                      assets
                  
                  $
                  —
                  
                  $
                  —Current
                      liabilities
                  
                  $
                  —
                  
                  $
                  —Other
                      liabilities
                  
                  
                  —
                  
                  
                  —Total
                      liabilities
                  
                  $
                  —
                  
                  $
                  —
 
 On
            April 1, 2005, IPS entered into a Mutual Release and Settlement
            Agreement
            (the “Settlement”) with Dr. Bradley E. Chipps, M.D. and Capital Allergy and
            Respiratory Disease Center, a Medical Corporation (“CARDC”) to settle disputes
            as to the existence and enforceability of certain contractual obligations.
            As
            part of the Settlement, Dr. Chipps, CARDC, and IPS agreed that
            CARDC would
            purchase the assets owned by IPS as shown on the balance sheet on March 31,
            2005 in exchange for termination of the MSA. Additionally, among other
            provisions, after April 1, 2005, Dr. Chipps and CARDC have
            been
            released from any further obligation to IPS arising from any previous
            agreement.
            As a result of the Settlement, the Company recorded a charge for impairment
            of
            intangible assets related to CARDC of $704,927 for the year ended
            December 31, 2004. The Company also recorded a gain on disposal
            of this
            discontinued component (in addition to the charge for impairment of intangible
            assets) of $506,625 for the quarter ended March 31, 2005. For the quarter
            ended
            June 30, 2005, the Company reduced the gain on disposal of this discontinued
            component by $238,333 as the result of post-settlement adjustments related
            to
            the reconciliation of balance sheet accounts. The operations of this
            component
            are reflected in the Company’s consolidated statements of operations as ‘income
            from operations of discontinued components’ for the three months and six months
            ended June 30, 2005 and 2004, respectively. There were no operations
            for this
            component in the second quarter of 2005.
 
 The
            following table contains selected financial statement data related to
            CARDC as
            of and for the three months and six months ended June 30, 2005 and 2004,
            respectively:
 
 **Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30, 2005**
                  
                  **June
                      30, 2004**
                  
                  **June
                      30, 2005**
                  
                  **June
                      30, 2004**Income
                      statement data:Net
                      operating revenues
                  
                  $
                  —
                  
                  $
                  913,934
                  
                  $
                  848,373
                  
                  $
                  1,679,416Direct
                      cost of revenues
                  
                  
                  —
                  
                  
                  644,113
                  
                  
                  523,255
                  
                  
                  1,140,087Operating
                      expenses
                  
                  
                  —
                  
                  
                  231,122
                  
                  
                  286,418
                  
                  
                  462,830Net
                      income
                  
                  $
                  —
                  
                  $
                  38,699
                  
                  $
                  38,700
                  
                  $
                  76,499Balance
                      sheet data:Current
                      assets
                  
                  $
                  —
                  
                  $
                  282,901
                  
                  $
                  —
                  
                  $
                  282,901Other
                      assets
                  
                  
                  —
                  
                  
                  12,863
                  
                  
                  —
                  
                  
                  12,863Total
                      assets
                  
                  $
                  —
                  
                  $
                  295,764
                  
                  $
                  —
                  
                  $
                  295,764Current
                      liabilities
                  
                  $
                  —
                  
                  $
                  314,419
                  
                  $
                  —
                  
                  $
                  314,419Other
                      liabilities
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Total
                      liabilities
                  
                  $
                  —
                  
                  $
                  314,419
                  
                  $
                  —
                  
                  $
                  314,419
  
 F-15
  On
            June
            7, 2005, as described in Note 1. General - Description of Business, the
            Company,
            via its IPS subsidiary executed an Asset Purchase Agreement with eClinicalWeb
            to
            sell substantially all of the assets of IntegriMED. As a result of this
            transaction, the Company recorded a loss on disposal of this discontinued
            component of $47,101 for the quarter ended June 30, 2005. The operations
            of this
            component are reflected in the Company’s consolidated statements of operations
            as ‘income from operations of discontinued components’ for the three months and
            six months ended June 30, 2005 and 2004, respectively.
 
 The
            following table contains selected financial statement data related to
            IntegriMED
            as of and for the three months and six months ended June 30, 2005 and
            2004,
            respectively:
 
 **Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30, 2005**
                  
                  **June
                      30, 2004**
                  
                  **June
                      30, 2005**
                  
                  **June
                      30, 2004**Income
                      statement data:Net
                      operating revenues
                  
                  $
                  82,155
                  
                  $
                  65,553
                  
                  $
                  191,771
                  
                  $
                  109,864Direct
                      cost of revenues
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Operating
                      expenses
                  
                  
                  392,931
                  
                  
                  437,669
                  
                  
                  899,667
                  
                  
                  680,764Net
                      income
                  
                  $
                  (310,776
                  )
                  $
                  (372,116
                  )
                  $
                  (707,896
                  )
                  $
                  (570,900
                  )Balance
                      sheet data:Current
                      assets
                  
                  $
                  (24,496
                  )
                  $
                  210,400
                  
                  $
                  (24,496
                  )
                  $
                  210,400Other
                      assets
                  
                  
                  —
                  
                  
                  39,138
                  
                  
                  —
                  
                  
                  39,138Total
                      assets
                  
                  $
                  (24,496
                  )
                  $
                  249,538
                  
                  $
                  (24,496
                  )
                  $
                  249,538Current
                      liabilities
                  
                  $
                  17,022
                  
                  $
                  278,383
                  
                  $
                  17,022
                  
                  $
                  278,383Other
                      liabilities
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —
                  
                  
                  —Total
                      liabilities
                  
                  $
                  17,022
                  
                  $
                  278,383
                  
                  $
                  17,022
                  
                  $
                  278,383
 
 On
            June
            13, 2005, the Company announced that it has accepted an offer to purchase
            its
            interests in the Tuscarawas ASC and the Tuscarawas open MRI facility
            in Dover,
            Ohio. Under the terms of the offer letter, the Company’s interests in these
            facilities would be sold to a local hospital for cash and assumption
            of debt. In
            addition, the Company would continue to operate the facilities under
            a long-term
            management agreement. Although this transaction has not yet been consummated,
            pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of
            Long-Lived Assets,” the assets and liabilities of the Tuscarawas ASC and
            Tuscarawas open MRI facility have been reclassified as assets held for
            sale and
            liabilities held for sale on the Company’s consolidated balance sheet as of June
            30, 2005. The operations of this component are reflected in the Company’s
            consolidated statements of operations as ‘income from operations of discontinued
            components’ for the three months and six months ended June 30,
            2005.
 
 The
            following table contains selected financial statement data related to
            the
            Tuscarawas ASC and Open MRI as of and for the three months and six months
            ended
            June 30, 2005:
 
 **Three
                      Months Ended**
                  
                  **Six
                      Months Ended****June
                      30, 2005**
                  
                  **June
                      30, 2005**Income
                      statement data:Net
                      operating revenues
                  
                  $
                  873,949
                  
                  $
                  1,670,801Direct
                      cost of revenues
                  
                  
                  394,402
                  
                  
                  774,156Operating
                      expenses
                  
                  
                  429,225
                  
                  
                  880,858Net
                      income
                  
                  $
                  50,332
                  
                  $
                  15,787Balance
                      sheet data:Cash
                  
                  $
                  (4,673
                  )
                  $
                  (4,673
                  )Accounts
                      receivable, net
                  
                  
                  718,490
                  
                  
                  718,490Other
                      current assets
                  
                  
                  81,014
                  
                  
                  81,014Property
                      and equipment, net
                  
                  
                  1,416,356
                  
                  
                  1,416,356Other
                      long-term assets
                  
                  
                  71,376
                  
                  
                  71,376Total
                      assets held for sale
                  
                  $
                  2,282,564
                  
                  $
                  2,282,564Accounts
                      payable and accrued expenses
                  
                  $
                  709,779
                  
                  $
                  709,779Capital
                      lease obligation
                  
                  
                  462,295
                  
                  
                  462,295Long-term
                      debt
                  
                  
                  445,095
                  
                  
                  445,095Total
                      liabilities held for sale
                  
                  $
                  1,617,168
                  
                  $
                  1,617,168
 
  F-16
  The
            following table summarizes the components of income from operations of
            discontinued components:
 
 **Three
                      Months Ended June 30,**
                  
                  **Six
                      Months Ended June 30,****2005**
                  
                  **2004**
                  
                  **2005**
                  
                  **2004**Income
                      from operations of discontinued components:CARDCNet
                      income
                  
                  $
                  -
                  
                  $
                  38,699
                  
                  $
                  38,700
                  
                  $
                  76,499Gain
                      (loss) on disposal
                  
                  
                  (238,333
                  )
                  
                  
                  
                  
                  268,292Heart
                      CenterNet
                      income
                  
                  
                  -
                  
                  
                  18,795
                  
                  
                  -
                  
                  
                  64,799Bellaire
                      SurgiCareNet
                      loss
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (188,418
                  )
                  
                  -Loss
                      on disposal
                  
                  
                  -
                  
                  
                  -
                  
                  
                  (163,050
                  )
                  
                  -IntegriMEDNet
                      loss
                  
                  
                  (310,776
                  )
                  
                  (372,116
                  )
                  
                  (707,896
                  )
                  
                  (570,900
                  )Loss
                      on disposal
                  
                  
                  (47,101
                  )
                  
                  -
                  
                  
                  (47,101
                  )
                  
                  -Tuscarawas
                      ASC and Open MRINet
                      income
                  
                  
                  50,332
                  
                  
                  -
                  
                  
                  15,787
                  
                  
                  -Total
                      income from operations of discontinued components
                  
                  $
                  (545,878
                  )
                  $
                  (314,622
                  )
                  $
                  (783,686
                  )
                  $
                  (429,602
                  )
 
 **Note
            11. Litigation**
 
 On
            January 1, 1999, IPS acquired Children’s Advanced Medical Institutes, Inc.
            (“CAMI”) in a merger transaction. On that same date, IPS began providing
            management services to the Children’s Advanced Medical Institutes, P.A. (the
“P.A.”), an entity owned by the physicians affiliated with CAMI. The parties’
            rights and obligations were memorialized in a merger agreement, a management
            services agreement and certain other agreements. On February 7,
            2000, the
            P.A., certain physicians affiliated with the P.A., and the former shareholders
            of CAMI filed suit against IPS in the U.S. District Court for the Northern
            District of Texas, Dallas Division, Civil Action File No. 3-00-CV-0536-L.
            On
            May 9, 2001, IPS (which was formerly known as Pediatric Physician
            Alliance,
            Inc.) filed suit against the P.A., certain physicians who were members
            of the
            P.A., and Patrick Solomon as Escrow Agent of CAMI. The case was filed
            in the
            U.S. District Court for the Northern District of Texas, Dallas Division,
            Civil
            Action File No. 3-01CV0877-L. Certain settlements were reached
            in the
            cases. The two cases were referred to arbitration pursuant to the arbitration
            clauses in the agreements between the parties. The arbitration includes
            all
            remaining claims in both lawsuits. The P.A., the physicians and the former
            shareholders of CAMI sought recovery of pre-merger accounts receivable
            they
            claim were collected by IPS after the merger, but belong to CAMI under
            the
            merger agreement and agreements between CAMI and the affiliated physicians.
            IPS
            asserted a right of set-off for over-payments that it made after the
            merger to
            the physicians. IPS also asserted a claim against the physicians for
            breach of
            the management services agreement and other agreements. In their complaint,
            the
            P.A., the former shareholders of CAMI and the physicians sought a claim
            against
            IPS for approximately $500,000 (which includes interest and attorneys’ fees).
            IPS asserted a claim against the physicians for over $5,000,000 due to
            the
            overpayments and their alleged breach of the agreements. An arbitration
            hearing
            was held on the claim filed by the former shareholders of CAMI in
            January 2004, and the Arbitrator issued an award against IPS.
            The award was
            confirmed by the U.S. District Court in the amount of $548,884 and judgment
            was
            entered. On June 1, 2005, IPS and the physicians executed a settlement
            agreement
            under which $300,000 of the judgment was paid to the physicians with
            the
            remaining amount of the judgment being returned to IPS. All claims asserted
            in
            the lawsuit and arbitration have been dismissed with prejudice.
 
 On
            July
            12, 2005, Orion was named as a defendant in a suit entitled American
            International Industries, Inc. vs. Orion HealthCorp, Inc., previously
            known as
            SurgiCare, Inc., Keith G. LeBlanc, Paul Cascio, Brantley Capital Corporation,
            Brantley Venture Partners III, L.P., and Brantley Venture Partners IV,
            L.P. in
            the 80 th Judicial
            District Court of Harris County, Texas, Cause No. 2005-44326. This case
            involves
            allegations that the Company made material and intentional misrepresentations
            regarding the financial condition of the parties to the acquisition and
            restructuring transactions effected on December 15, 2004 for the purpose
            of
            inducing American International Industries, Inc. (“AII”) to convert its
            SurgiCare Class AA convertible preferred stock (“Class AA Preferred Stock”) into
            shares of Orion’s Class A Common Stock. AII asserts that the value of its Class
            A Common Stock of Orion has fallen as a direct result of the alleged
            material
            misrepresentations by the Company. AII is seeking actual damages of $3,800,000,
            punitive damages of $3,800,000, and rescission of the agreement to convert
            the
            Class AA Preferred Stock into Class A Common Stock. The Company and the
            other
            defendants filed an Answer denying the allegations set forth in the
            Complaint.
 
 In
            addition, the Company is involved in various other legal proceedings
            and claims
            arising in the ordinary course of business. The Company’s management believes
            that the disposition of these additional matters, individually or in
            the
            aggregate, is not expected to have a materially adverse effect on the
            Company’s
            financial condition. However, depending on the amount and timing of such
            disposition, an unfavorable resolution of some or all of these matters
            could
            materially affect the Company’s future results of operations or cash flows in a
            particular period.
  F-17
 
 **Note
            12. Employee Stock-Based Compensation**
 
 SFAS
            No. 123, “Accounting for Stock-Based Compensation” encourages, but does not
            require, companies to record compensation cost for stock-based employee
            compensation plans at fair value. In December 2002, the FASB issued
            SFAS
            No. 148, “Accounting for Stock-Based Compensation-Transition and
            Disclosure- an amendment of SFAS No. 123,” to provide alternative methods
            of transition for a voluntary change to the fair value based method of
            accounting for stock-based employee compensation. The statement also
            amends the
            disclosure requirements of SFAS No. 123 to require prominent disclosures
            in
            both annual and interim financial statements about the method of accounting
            for
            stock-based compensation and the effect of the method used on reported
            results.
 
 The
            Company has chosen to continue to account for stock-based compensation
            issued to
            employees using the intrinsic value method prescribed in Accounting Principles
            Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,”
            and related interpretations. Accordingly, compensation cost for stock
            options is
            measured as the excess, if any, of the quoted market price of the Company’s
            stock at the date of the grant over the amount an employee must pay to
            acquire
            the stock. The Company grants options at or above the market price of
            its common
            stock at the date of each grant.
 
 The
            fair
            value of options is calculated using the Black-Scholes option-pricing
            model. Had
            the Company adopted the fair value method of accounting for stock based
            compensation, compensation expense would have been higher, and net loss
            and net
            loss attributable to common shareholders would have increased for the
            periods
            presented. No change in cash flows would occur. The effects of applying
            SFAS
            No. 123 in this pro forma disclosure are not indicative of future
            amounts.
 
 **For
                      the Three Months Ended June
                      30,****2005**
                  
                  **2004**Net
                      loss — as reported
                  
                  $
                  (8,347,788
                  )
                  $
                  (932,406
                  )Deduct:
                      Total stock-based employee compensation (expense determined
                      under the fair
                      value based method for all awards), net of tax effect
                  
                  
                  (41,857
                  )
                  
                  (49,795
                  )Net
                      loss — pro forma
                  
                  $
                  (8,389,645
                  )
                  $
                  (982,201
                  )Net
                      Loss per share:Basic
                      — as reported
                  
                  $
                  (0.903
                  )
                  $
                  (0.108
                  )Basic
                      — pro forma
                  
                  $
                  (0.907
                  )
                  $
                  (0.114
                  )Diluted
                      — as reported
                  
                  $
                  (0.903
                  )
                  $
                  (0.108
                  )Diluted
                      — pro forma
                  
                  $
                  (0.907
                  )
                  $
                  (0.114
                  )
 
 
 **For
                      the Six Months Ended June 30,****2005**
                  
                  **2004**Net
                      loss — as reported
                  
                  $
                  (10,028,418
                  )
                  $
                  (1,706,847
                  )Deduct:
                      Total stock-based employee compensation (expense determined
                      under the fair
                      value based method for all awards), net of tax effect
                  
                  
                  (68,220
                  )
                  
                  (102,520
                  )Net
                      loss — pro forma
                  
                  $
                  (10,096,638
                  )
                  $
                  (1,809,367
                  )Net
                      Loss per share:Basic
                      — as reported
                  
                  $
                  (1.096
                  )
                  $
                  (0.198
                  )Basic
                      — pro forma
                  
                  $
                  (1.103
                  )
                  $
                  (0.210
                  )Diluted
                      — as reported
                  
                  $
                  (1.096
                  )
                  $
                  (0.198
                  )Diluted
                      — pro forma
                  
                  $
                  (1.103
                  )
                  $
                  (0.210
                  )
 
 On
            June
            17, 2005, the Company granted 1,357,000 stock options to certain employees,
            officers, directors and former directors of the Company. No options were
            granted
            to employees for the first six months of 2004. The information for 2004
            relates
            to SurgiCare prior to the acquisition and restructuring
            transactions.
  F-18
  **Note
            13. Long-Term Debt and Lines of Credit**
 
 Future
            aggregate maturities of long-term debt are as follows:
 
 **As
                          of June 30,****2005**
                      
                      **2004**Promissory
                          note due to sellers of MBS, bearing interest at 8%, interest
                          payable
                          monthly or on demand, matures December 15, 2007
                      
                      $
                      1,000,000
                      
                      $
                      -Working
                          capital loan due to sellers of MBS, non-interest bearing,
                          due on demand
                      
                      
                      299,545
                      
                      
                      -Term
                          loan with a financial institution, non-interest bearing,
                          matures November
                          15, 2010
                      
                      
                      3,117,088
                      
                      
                      -Revolving
                          line of credit with a financial institution, bearing interest
                          at 6.5%,
                          interest payable monthly or on demand, $500,000 matures
                          December 2005 and
                          $287,650 matures June 2006
                      
                      
                      787,650$2,750,000
                          revolving line of credit, bearing interest at prime (6.25%
                          at June
                          30, 2005) plus 3%, interest payable monthly, matures December
                          14, 2006
                      
                      
                      1,681,450
                      
                      
                      -Convertible
                          notes, bearing interest at 18%, interest payable monthly,
                          matured October
                          2004
                      
                      
                      50,000
                      
                      
                      -Note
                          payable due to a related party, bearing interest at 6%,
                          interest payable
                          monthly, matures November 24, 2005
                      
                      
                      35,896
                      
                      
                      -Insurance
                          financing note payable, bearing interest at 5.25%, interest
                          payable
                          monthly, matures January 2006
                      
                      
                      17,467
                      
                      
                      12,700Convertible
                          promissory notes due to a related party, bearing interest
                          at 9%, matures
                          April 19, 2006
                      
                      
                      1,250,000Demand
                          notes due to a related party, bearing interest at 15%
                      
                      
                      -
                      
                      
                      1,271,171Demand
                          notes due to a related party, bearing interest at 15%
                      
                      
                      -
                      
                      
                      667,447Demand
                          notes due to a related party, bearing interest at 10%
                      
                      
                      -
                      
                      
                      1,318,000Demand
                          notes due to a related party, bearing interest at 8%
                      
                      
                      -
                      
                      
                      2,040,000Term
                          loan with a financial institution, bearing interest at
                          the 31-day treasury
                          note rate, interest payable monthly, originally scheduled
                          to mature on
                          March 25, 2008
                      
                      
                      -
                      
                      
                      2,710,623$5,000,000
                          revolving line of credit with a financial institution,
                          secured by accounts
                          receivable bearing interest at prime (4.00% at December
                          31, 2003) plus
                          2.35%, interest payable monthly
                      
                      
                      -
                      
                      
                      2,383,545Total
                      
                      $
                      8,239,096
                      
                      $
                      10,403,486Less:
                          current portion
                      
                      
                      (4,148,176
                      )
                      
                      (8,272,589
                      )Less:
                          liability held for sale
                      
                      
                      (445,095
                      )
                      
                      -Total
                          long-term debt
                      
                      $
                      3,645,826
                      
                      $
                      2,130,897F-19
 **Exhibit Index**
  Exhibit
                No.
            
            DescriptionExhibit
                2.1
            
            Asset
                Purchase Agreement, dated as of June 6, 2005, by and among InPhySys,
                Inc.
                (f/k/a IntegriMED, Inc.) and eClinicalWeb, LLC (Incorporated by reference
                to Exhibit 2.1 filed with the Company’s Current Report on Form 8-K filed
                on June 13, 2005)Exhibit
                10.1
            
            First
                Amendment to Loan and Security Agreement, dated as of March 22, 2005,
                by
                and among Orion HealthCorp, Inc., certain affiliates and subsidiaries
                of
                Orion HealthCorp, Inc., and Healthcare Business Credit Corporation
                (Incorporated by reference to Exhibit 10.1 filed with the Company’s
                Quarterly Report on Form 10-QSB filed on May 13, 2005)Exhibit
                10.2
            
            Amended
                and Restated Guaranty Agreement, dated as of March 22, 2005, provided
                by
                Brantley Partners IV, L.P. to Healthcare Business Credit Corporation
                (Incorporated by reference to Exhibit 10.2 filed with the Company’s
                Quarterly Report on Form 10-QSB filed on May 13, 2005)Exhibit
                10.3
            
            Amended
                and Restated Guaranty Agreement, dated as of March 22, 2005, provided
                by
                Brantley Capital Corporation to Healthcare Business Credit Corporation
                (Incorporated by reference to Exhibit 10.3 filed with the Company’s
                Quarterly Report on Form 10-QSB filed on May 13, 2005)Exhibit
                10.4
            
            Convertible
                Subordinated Promissory Note, dated as of June 1, 2005, by and among
                Orion
                HealthCorp, Inc. and Brantley Partners IV, L.P. (Incorporated by
                reference
                to Exhibit 10.1 filed with the Company’s Current Report on Form 8-K filed
                on June 7, 2005)Exhibit
                10.5
            
            Convertible
                Subordinated Promissory Note, dated as of June 1, 2005, by and among
                Orion
                HealthCorp, Inc. and Brantley Partners IV, L.P. (Incorporated by
                reference
                to Exhibit 10.2 filed with the Company’s Current Report on Form 8-K filed
                on June 7, 2005)Exhibit
                10.6
            
            Amendment
                No. 1 to Orion HealthCorp, Inc. 2004 Incentive Plan, dated as of
                June 1,
                2005Exhibit
                10.7
            
            Form
                of Orion HealthCorp, Inc. Stock Option Agreement (Incentive Stock
                Option),
                dated as of June 17, 2005Exhibit 31.1
            
            Rule 13a-14(a)/15d-14(a)
                CertificationExhibit 31.2
            
            Rule 13a-14(a)/15d-14(a)
                CertificationExhibit 32.1
            
            Section 1350
                CertificationExhibit 32.2
            
            Section 1350
                Certification
 
 F-20