##### Table of Contents



U.S. SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 FORM 10-QSB/A
 AMENDMENT
NO. 1
 QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006
 Commission
File No. 001-16587
 ORION HEALTHCORP, INC.
  Delaware
    
    58-1597246(STATE OR OTHER JURISDICTION 
OF INCORPORATION OR ORGANIZATION)
    
    (IRS EMPLOYER IDENTIFICATION NO.)1805 Old Alabama RoadSuite 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:
 NAME OF EACH EXCHANGE ONTITLE OF EACH CLASS
    
    WHICH REGISTEREDClass A Common Stock, $0.001 par value per share
    
    The American Stock Exchange
  þ o
  o þ
  Transitional Small Business Disclosure Format:
 o þ




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##### Table of Contents



ORION HEALTHCORP, INC.
  EXPLANATORY NOTE
    Item
    
    
    
    PageNumber
    
    
    
    NumberPART I - FINANCIAL INFORMATION1.
    
    Financial Statements
    
    
    12.
    
    Managements Discussion and Analysis or Plan of Operation
    
    
    13.
    
    Controls and Procedures
    
    
    25PART II - OTHER INFORMATION2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    263.
    
    Defaults Upon Senior Securities
    
    
    264.
    
    Submission of Matters to a Vote of Security Holders
    
    
    266.
    
    Exhibits
    
    
    27SIGNATURES
    
    
    28UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
    
    
    F-1INDEX OF EXHIBITSEX-10.1EX-31.1EX-31.2EX-32.1EX-32.2




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NOTE REGARDING FORWARD-LOOKING STATEMENTS
   
 PART I  FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
  
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
  Overview
  Company History
  1




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Strategic Focus
   Financial Overview
  
    
    The Company sold substantially all of the assets of Memorial Village and recorded a gain on
disposition of discontinued components of $574,321 in the first quarter of 2006;
    
    The Company sold substantially all of the assets of San Jacinto and recorded a gain on
disposition of discontinued components of $94,066 in the first quarter of 2006; and
    
    The Company paid $112,500 in satisfaction of a $778,000 debt and recognized a gain on
forgiveness of debt totaling $665,463 in the first quarter of 2006.
 Critical Accounting Policies and Estimates
  Consolidation of Physician Practice Management Companies
  2




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Revenue Recognition.
  Accounts Receivable and Allowance for Doubtful Accounts.
  Investment in Limited Partnerships.
 3




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Goodwill and Intangible Assets
 Recent Accounting Pronouncements
    Results of Operations
   4




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Three Months
    
    Six MonthsEnded
    
    EndedJune 30,
    
    June 30,2006
    
    2005
    
    2006
    
    2005(Restated)
    
    
    
    
    
    (Restated)Net operating revenues
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Total operating expenses
    
    
    105.1
    %
    
    
    117.4
    %
    
    
    105.0
    %
    
    
    117.5
    %Loss from continuing operations before other
income (expenses)
    
    
    (5.1
    %)
    
    
    (17.4
    %)
    
    
    (5.0
    %)
    
    
    (17.5
    %)Total other income (expenses), net
    
    
    (1.8
    %)
    
    
    (1.4
    %)
    
    
    3.0
    %
    
    
    (1.1
    %)Loss from continuing operations
    
    
    (6.9
    %)
    
    
    (18.8
    %)
    
    
    (2.0
    %)
    
    
    (18.6
    %)Discontinued operationsIncome (loss) from operations of discontinued
components, including net gain on disposal
    
    
    0.0
    %
    
    
    (90.2
    %)
    
    
    4.1
    %
    
    
    (47.0
    %)Net income (loss)
    
    
    (6.9
    %)
    
    
    (109.0
    %)
    
    
    2.1
    %
    
    
    (65.6
    %)
 5




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##### Table of Contents



Three Months Ended June 30, 2006 as Compared to Three Months Ended June 30, 2005
  For the Three MonthsEnded June 30,2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)(Restated)Net operating revenues
    
    $
    6,931,714
    
    
    $
    7,651,291Operating expensesSalaries and benefits
    
    
    2,773,316
    
    
    
    3,156,954Physician group distribution
    
    
    1,920,041
    
    
    
    2,270,672Facility rent and related costs
    
    
    390,890
    
    
    
    430,259Depreciation and amortization
    
    
    408,930
    
    
    
    843,979Professional and consulting fees
    
    
    361,044
    
    
    
    516,079Insurance
    
    
    158,121
    
    
    
    228,768Provision for doubtful accounts
    
    
    140,396
    
    
    
    298,326Other expenses
    
    
    1,134,022
    
    
    
    1,240,771Total operating expenses
    
    
    7,286,760
    
    
    
    8,985,808Loss from continuing operations before other income
(expenses)
    
    
    (355,046
    )
    
    
    (1,334,517
    )Other income (expenses)Interest expense
    
    
    (121,631
    )
    
    
    (94,094
    )Other expense, net
    
    
    (4,488
    )
    
    
    (16,353
    )Total other income (expenses), net
    
    
    (126,119
    )
    
    
    (110,447
    )Loss from continuing operations
    
    
    (481,165
    )
    
    
    (1,444,964
    )Discontinued operationsIncome (loss) from operations of discontinued
components
    
    
    968
    
    
    
    (6,902,825
    )Net loss
    
    $
    (480,197
    )
    
    $
    (8,347,789
    )
 Net Operating Revenues.
    6




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Operating Expenses
 Salaries and Benefits
     7




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##### Table of Contents



Physician Group Distribution
 Facility Rent and Related Costs.
    Depreciation and Amortization.
     8




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##### Table of Contents



Professional and Consulting Fees.
   Insurance.
 Provision for Doubtful Accounts.
 Other Expenses.
    Other Income and Expenses.
 Interest Expense.
 
    
    MBS Notes. On April 19, 2006, the Company executed subordinated promissory notes with the
former equity owners of MBS and DCPS for an aggregate of $714,336. This represented the
retroactive purchase price increase due to the former equity owners of MBS and DCPS based on
the financial results of the newly formed MBS, required by the merger agreement governing the
DCPS/MBS Merger. The notes bear interest at the rate of 8% per annum, payable monthly
beginning on April 30, 2006, and will mature on December 15, 2007. Interest expense related
to these notes totaled approximately $11,429 for the three months ended June 30, 2006.
    
    Line of Credit. As part of the restructuring transactions, the Company 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 the Company,
certain of its affiliates and subsidiaries, and CIT Healthcare, LLC (formerly known as
Healthcare Business Credit Corporation)(CIT), borrowing $1.6 million under this facility
concurrently with the Closing. (See Liquidity and Capital Resources
 9




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for additional discussion regarding the Loan and Security Agreement.) Interest expense
related to this line of credit totaled $51,363 for the three months ended June 30, 2006,
compared to $42,768 for the three months ended June 30, 2005. The increase in interest
expense on the line of credit facility was a direct result of interest rate increases for the
second three months of 2006 as compared to the same period in 2005. In December 2005, the
Company received notification from CIT stating that certain events of default under the Loan
and Security Agreement had occurred as a result of the Company being out of compliance with
two financial covenants. As a result of the events of default, CIT raised the interest rate
for monies borrowed under the Loan and Security Agreement to a default rate of prime rate
plus 6% as compared to the stated interest rate of prime rate plus 3% as of the Closing. (See
Part II, Item 3. Defaults Upon Senior Securities for additional discussion regarding the
Companys defaults under the Loan and Security Agreement.) The loan balance for this facility
was $998,668 and $1,681,450 at June 30, 2006 and 2005, respectively. Additionally, the
average prime rate for the second quarter of 2006 was 7.92% as compared to 5.92% for the same
three-month period in 2005.
 Discontinued Operations.
 IntegriMED.
  June 30, 2005Income statement data:Net operating revenues
    
    $
    82,155Operating expenses
    
    
    392,931Net loss
    
    $
    (310,776
    )Balance sheet data:Current assets
    
    $
    (24,496
    )Other assets
    
    
    Total assets
    
    $
    (24,496
    )Current liabilities
    
    $
    17,022Other liabilities
    
    
    Total liabilities
    
    $
    17,022
 10




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##### Table of Contents



TASC and TOM.
  June 30, 2005Income statement data:Net operating revenues
    
    $
    873,959Operating expenses
    
    
    799,418Net income
    
    $
    74,541Balance sheet data:Current assets
    
    $
    794,831Other assets
    
    
    1,487,732Total assets
    
    $
    2,282,563Current liabilities
    
    $
    709,779Other liabilities
    
    
    907,390Total liabilities
    
    $
    1,617,169
 Sutter.
  June 30, 2005Income statement data:Net operating revenues
    
    $
    107,419Operating expenses
    
    
    105,171Net income
    
    $
    2,248Balance sheet data:Current assets
    
    $
    113,819Other assets
    
    
    15,033Total assets
    
    $
    128,852Current liabilities
    
    $
    7,839Other liabilities
    
    
    Total liabilities
    
    $
    7,839
 11




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##### Table of Contents



Memorial Village.
  June 30, 2005Income statement data:Net operating revenues
    
    $
    684,676Operating expenses
    
    
    812,407Net loss
    
    $
    (127,731
    )Balance sheet data:Current assets
    
    $
    861,111Other assets
    
    
    767,497Total assets
    
    $
    1,628,608Current liabilities
    
    $
    729,567Other liabilities
    
    
    725,884Total liabilities
    
    $
    1,455,451
 San Jacinto.
 12




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Orion.
  Three Months
    
    
    Three MonthsEnded
    
    
    EndedJune 30, 2006
    
    
    June 30, 2005(Restated)CARDCGain on disposal
    
    
    
    
    
    
    (238,333
    )IntegriMEDNet loss
    
    
    
    
    
    
    (310,776
    )Loss on disposal
    
    
    
    
    
    
    (47,101
    )TASC and TOMNet income
    
    
    
    
    
    
    74,541Loss on disposal
    
    
    
    
    
    
    (2,122,445
    )SutterNet income
    
    
    
    
    
    
    2,248Memorial VillageNet loss
    
    
    
    
    
    
    (127,731
    )Loss on disposal
    
    
    
    
    
    
    (3,229,462
    )San JacintoLoss on disposal
    
    
    
    
    
    
    (734,522
    )OrionNet income (loss)
    
    
    968
    
    
    
    (169,244
    )Total income (loss) from operations of
discontinued components, including net
gain (loss) on disposal
    
    $
    968
    
    
    $
    (6,902,825
    )
 13




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##### Table of Contents



Six Months Ended June 30, 2006 as Compared to Six Months Ended June 30, 2005
  For the Six Months EndedJune 30,2006
    
    
    2005(Unaudited)
    
    
    (Unaudited)(Restated)Net operating revenues
    
    $
    14,085,728
    
    
    $
    15,281,113Operating expensesSalaries and benefits
    
    
    5,535,247
    
    
    
    6,205,856Physician group distribution
    
    
    4,023,346
    
    
    
    4,603,758Facility rent and related costs
    
    
    792,276
    
    
    
    858,099Depreciation and amortization
    
    
    818,828
    
    
    
    1,727,201Professional and consulting fees
    
    
    707,112
    
    
    
    931,640Insurance
    
    
    339,360
    
    
    
    441,272Provision for doubtful accounts
    
    
    299,146
    
    
    
    636,835Other expenses
    
    
    2,272,944
    
    
    
    2,550,096Total operating expenses
    
    
    14,788,259
    
    
    
    17,954,757Loss from continuing operations before other income
(expenses)
    
    
    (702,531
    )
    
    
    (2,673,644
    )Other income (expenses)Interest expense
    
    
    (234,144
    )
    
    
    (150,391
    )Gain on forgiveness of debt
    
    
    665,463
    
    
    
    Other expense, net
    
    
    (14,151
    )
    
    
    (18,977
    )Total other income (expenses), net
    
    
    417,168
    
    
    
    (169,368
    )Minority interest earnings in partnership
    
    
    
    
    
    
    (1,660
    )Loss from continuing operations
    
    
    (285,363
    )
    
    
    (2,844,672
    )Discontinued operationsIncome (loss) from operations of discontinued
components
    
    
    576,390
    
    
    
    (7,183,746
    )Net income (loss)
    
    $
    291,027
    
    
    $
    (10,028,418
    )
 Net Operating Revenues.
  14




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Operating Expenses
 Salaries and Benefits.
 15




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Physician Group Distribution.
     Depreciation and Amortization.
  16




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Professional and Consulting Fees.
   Insurance.
 Provision for Doubtful Accounts.
 Other Expenses.
  17




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##### Table of Contents



Other Income and Expenses.
 Interest Expense.
 
    
    Brantley Debt. In March and April 2005, the Company borrowed an aggregate of $1,250,000 from
Brantley Partners IV, L.P. (Brantley IV). (See Liquidity and Capital Resources.) Interest
expense related to these notes totaled approximately $57,000 for the six months ended June
30, 2006.
    
    MBS Notes. On April 19, 2006, the Company executed subordinated promissory notes with the
former equity owners of MBS and DCPS for an aggregate of $714,336. This represented the
retroactive purchase price increase due to the former equity owners of MBS and DCPS based on
the financial results of the newly formed MBS, as required by the merger agreement governing
the DCPS/MBS Merger. The notes bear interest at the rate of 8% per annum, payable monthly
beginning on April 30, 2006, and will mature on December 15, 2007. Interest expense related
to these notes totaled approximately $11,429 for the six months ended June 30, 2006.
    
    Line of Credit. As part of the restructuring transactions, the Company also entered into a
new secured two-year revolving credit facility pursuant to the Loan and Security Agreement
borrowing $1.6 million under this facility concurrently with the Closing. (See Liquidity and
Capital Resources for additional discussion regarding the Loan and Security Agreement.)
Interest expense related to this line of credit totaled $114,807 for the six months ended
June 30, 2006, compared to $97,825 for the six months ended June 30, 2005. The increase in
interest expense on the line of credit facility was a direct result of interest rate
increases for the first six months of 2006 as compared to the same period in 2005. In
December 2005, the Company received notification from CIT stating that certain events of
default under the Loan and Security Agreement had occurred as a result of the Company being
out of compliance with two financial covenants. As a result of the events of default, CIT
raised the interest rate for monies borrowed under the Loan and Security Agreement to a
default rate of prime rate plus 6% as compared to the stated interest rate of prime rate plus
3% as of the Closing. (See Part II, Item 3. Defaults Upon Senior Securities for additional
discussion regarding the Companys defaults under the Loan and Security Agreement.) The loan
balance for this facility was $998,668 and $1,681,450 at June 30, 2006 and 2005,
respectively. Additionally, the average prime rate for the first half of 2006 was 7.67% as
compared to 5.67% for the same six-month period in 2005.
 Gain on Forgiveness of Debt.
 18




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Discontinued Operations.
 Bellaire SurgiCare.
  June 30, 2005Income statement data:Net operating revenues
    
    $
    161,679Operating expenses
    
    
    350,097Net loss
    
    $
    (188,418
    )Balance sheet data:Current assets
    
    $
    Other assets
    
    
    Total assets
    
    $
    Current liabilities
    
    $
    Other liabilities
    
    
    Total liabilities
    
    $
    
 Capital Allergy and Respiratory Disease Center (CARDC).
  June 30, 2005Income statement data:Net operating revenues
    
    $
    848,373Operating expenses
    
    
    809,673Net income
    
    $
    38,700Balance sheet data:Current assets
    
    $
    Other assets
    
    
    Total assets
    
    $
    Current liabilities
    
    $
    Other liabilities
    
    
    Total liabilities
    
    $
    
 19




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IntegriMED.
  June 30, 2005Income statement data:Net operating revenues
    
    $
    191,771Operating expenses
    
    
    899,667Net loss
    
    $
    (707,896
    )Balance sheet data:Current assets
    
    $
    (24,496
    )Other assets
    
    
    Total assets
    
    $
    (24,496
    )Current liabilities
    
    $
    17,022Other liabilities
    
    
    Total liabilities
    
    $
    17,022
 TASC and TOM
  June 30, 2005Income statement data:Net operating revenues
    
    $
    1,670,801Operating expenses
    
    
    1,630,806Net income
    
    $
    39,995Balance sheet data:Current assets
    
    $
    794,831Other assets
    
    
    1,487,732Total assets
    
    $
    2,282,563Current liabilities
    
    $
    709,779Other liabilities
    
    
    907,390Total liabilities
    
    $
    1,617,169
 20




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Sutter
  June 30, 2005Income statement data:Net operating revenues
    
    $
    216,319Operating expenses
    
    
    210,609Net income
    
    $
    5,710Balance sheet data:Current assets
    
    $
    113,819Other assets
    
    
    15,033Total assets
    
    $
    128,852Current liabilities
    
    $
    7,839Other liabilities
    
    
    Total liabilities
    
    $
    7,839
 Memorial Village
  21




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June 30, 2006
    
    June 30, 2005Income statement data:Net operating revenues
    
    $
    17,249
    
    
    $
    1,268,852Operating expenses
    
    
    170,285
    
    
    
    1,511,624Net loss
    
    $
    (153,036
    )
    
    $
    (242,772
    )Balance sheet data:Current assets
    
    $
    
    
    
    $
    861,111Other assets
    
    
    
    
    
    
    767,497Total assets
    
    $
    
    
    
    $
    1,628,608Current liabilities
    
    $
    
    
    
    $
    729,567Other liabilities
    
    
    
    
    
    
    725,884Total liabilities
    
    $
    
    
    
    $
    1,455,451
 San Jacinto.
 Orion.
  Six Months
    
    Six MonthsEnded
    
    EndedJune 30, 2006
    
    June 30, 2005(Restated)Bellaire SurgiCareNet loss
    
    $
    
    
    
    
    (188,418
    )Loss on disposal
    
    
    
    
    
    
    (163,049
    )CARDCNet income
    
    
    
    
    
    
    38,700Gain on disposal
    
    
    
    
    
    
    268,292IntegriMEDNet loss
    
    
    
    
    
    
    (707,896
    )Loss on disposal
    
    
    
    
    
    
    (47,101
    )TASC and TOMNet loss
    
    
    
    
    
    
    39,995Loss on disposal
    
    
    
    
    
    
    (2,122,445
    )SutterNet income
    
    
    
    
    
    
    5,710Memorial VillageNet loss
    
    
    (153,036
    )
    
    
    (242,772
    )Gain (loss) on disposal
    
    
    574,321
    
    
    
    (3,229,462
    )San JacintoGain (loss) on disposal
    
    
    94,066
    
    
    
    (734,522
    )OrionNet income (loss)
    
    
    61,039
    
    
    
    (100,778
    )Total income (loss) from
operations of
discontinued components,
including net gain
(loss) on disposal
    
    $
    576,390
    
    
    $
    (7,183,746
    )
 22




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Liquidity and Capital Resources
    
    
    Net repayments on the CIT revolving credit facility totaled $718,221 in the first six months
of 2006, including approximately $300,000 in repayments related to discontinued operations;
    
    As discussed below, in March and April of 2005, the Company borrowed an aggregate of
$1,250,000 from Brantley IV.
    
    The Company made aggregate payments in the amount of $112,500 in the first quarter of 2006 in
satisfaction of a $778,000 debt, and recognized a gain on forgiveness of debt totaling
$665,463 for the six months ended June 30, 2006; and
    
    The Company repaid approximately $200,000 in satisfaction of a working capital note from the
sellers of MBS in the first quarter of 2006.
    23




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24




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ITEM 3. CONTROLS AND PROCEDURES
   25




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PART II  OTHER INFORMATION
 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
   
 ITEM 3. DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Proposal One:
    
    To elect five directors of the Company to serve until the 2007
annual meeting of stockholders or until their respective
successors are elected and qualified.The following list indicates the number of votes received by
each of the nominees for election to the Companys board of
directors in Proposal One:
 For
    
    
    WithheldTerrence L. Bauer
    
    
    16,714,716
    
    
    
    279,074Paul H. Cascio
    
    
    16,720,737
    
    
    
    273,053Michael J. Finn
    
    
    16,933,439
    
    
    
    60,351David Crane
    
    
    16,933,489
    
    
    
    60,301Joseph M. Valley
    
    
    16,948,632
    
    
    
    45,158
 26




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##### Table of Contents



Proposal Two:
    
    To ratify the the appointment of UHY Mann Frankfort Stein &
Lipp CPAs, L.L.P. as the Companys independent public
auditors. Proposal Two was approved by holders of 69.7% of the
outstanding share 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 16,949,333 shares
were voted in favor of this proposal, 31,014 shares were voted
against this proposal, and 13,443 shares abstained from voting
on this proposal.
 
 ITEM 6. EXHIBITS
 Exhibit No.
    
    DescriptionExhibit 10.1
    
    Second Amendment to Convertible Subordinated Promissory
Notes, dated as of August 8, 2006, by and between Orion
HealthCorp, Inc. and Brantley Partners IV, L.P.Exhibit 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
 27




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##### Table of Contents



SIGNATURES
  ORION HEALTHCORP, INC.
 By:
    /s/ Terrence L. BauerDated: November 9, 2006
    
    Terrence L. BauerPresident, Chief Executive Officer
and Director
(Duly Authorized Representative)  By:
    
    /s/ Terrence L. Bauer
Terrence
L. Bauer
    
    By:
    
    /s/ Michael J. Finn*

Michael J. FinnPresident, Chief Executive Officer and
    
    
    
    DirectorDirector (Principal Executive Officer)By:
    
    /s/ Paul H. Cascio*
Paul
H. Cascio
    
    By:
    
    /s/ Joseph M. Valley, Jr.*

Joseph M. Valley, Jr.Director and Non-Executive
    
    
    
    DirectorChairman of the BoardBy:
    
    /s/ David Crane*
David
Crane
    
    By:
    
    /s/ Stephen H. Murdock

Stephen H. MurdockDirector
    
    
    
    Chief Financial Officer(Principal Accountingand Financial Officer)
 /s/
Stephen H. Murdock
 28




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##### Table of Contents



Exhibit Index
 Exhibit No.
    
    DescriptionExhibit 10.1
    
    Second Amendment to Convertible Subordinated Promissory
Notes, dated as of August 8, 2006, by and between Orion
HealthCorp, Inc. and Brantley Partners IV, L.P.Exhibit 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
 29




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##### Table of Contents



ORION
    HEALTHCORP, INC.
  INDEX TO
    UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
  PageNumberConsolidated
    Condensed Balance Sheets as of June 30, 2006 (unaudited)
    and December 31, 2005


F-2Consolidated
    Condensed Statements of Operations for the Three Months Ended
    June 30, 2006 and 2005 (unaudited)


F-3Consolidated
    Condensed Statements of Operations for the Six Months Ended
    June 30, 2006 and 2005 (unaudited)


F-4Consolidated
    Condensed Statements of Cash Flows for the Three Months Ended
    June 30, 2006 and 2005 (unaudited)


F-5Consolidated
    Condensed Statements of Cash Flows for the Six Months Ended
    June 30, 2006 and 2005 (unaudited)


F-6Notes to Unaudited
    Consolidated Condensed Financial Statements


F-7  F-1




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##### Table of Contents



Orion
    HealthCorp, Inc.
 Consolidated Condensed Balance Sheets  June 30,


December 31,2006


2005(Unaudited)Current assetsCash and cash equivalents

$
328,923


$
298,807Accounts receivable, net


2,329,863



2,798,304Inventory


170,385



206,342Prepaid expenses and other current
    assets


619,853



715,671Assets held for sale






975,839Total current assets


3,449,024



4,994,963Property and equipment, net


639,617



741,966Other long-term assetsIntangible assets, excluding
    goodwill, net


13,094,246



13,797,714Goodwill


2,490,695



2,490,695Other assets, net


64,043



92,432Total other long-term assets


15,648,984



16,380,841Total assets

$
19,737,625


$
22,117,770Current LiabilitiesAccounts payable and accrued
    expenses

$
5,395,519


$
6,738,278Other current liabilities






25,000Current portion of capital lease
    obligations


92,129



92,334Current portion of long-term debt


3,439,897



4,231,674Liabilities held for sale






452,027Total current liabilities


8,927,545



11,539,313Long-term liabilitiesCapital lease obligations, net of
    current portion


168,105



213,600Long-term debt, net of current
    portion


3,794,972



3,871,593Minority interest in partnership






35,000Total long-term liabilities


3,963,077



4,120,193Commitments and contingencies






Stockholders equityPreferred 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, 12,713,776 and
    12,428,042 shares issued and outstanding at June 30,
    2006 and December 31, 2005, respectively


12,713



12,428Common Stock, Class B, par
    value $0.001; 25,000,000 shares authorized,
    10,448,470 shares issued and outstanding at June 30,
    2006 and December 31, 2005, respectively


10,448



10,448Common Stock, Class C, par
    value $0.001; 2,000,000 shares authorized,
    1,437,572 shares issued and outstanding at June 30,
    2006 and December 31, 2005, respectively


1,438



1,438Additional paid-in capital


57,025,443



56,928,016Accumulated deficit


(50,164,721
)


(50,455,748
)Treasury stock  at cost;
    9,140 shares


(38,318
)


(38,318
)Total stockholders equity


6,847,003



6,458,264Total liabilities and
    stockholders equity

$
19,737,625


$
22,117,770    F-2




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##### Table of Contents



Orion
    HealthCorp, Inc.
 Consolidated Condensed Statements of Operations  For the Three MonthsEnded June 30,2006


2005(Unaudited)


(Unaudited)(Restated)Net operating revenues

$
6,931,714


$
7,651,291Operating expensesSalaries and benefits


2,773,316



3,156,954Physician group distribution


1,920,041



2,270,672Facility rent and related costs


390,890



430,259Depreciation and amortization


408,930



843,979Professional and consulting fees


361,044



516,079Insurance


158,121



228,768Provision for doubtful accounts


140,396



298,326Other expenses


1,134,022



1,240,771Total operating expenses


7,286,760



8,985,808Loss from continuing operations
    before other income (expenses)


(355,046
)


(1,334,517
)Other income (expenses)Interest expense


(121,631
)


(94,094
)Other expense, net


(4,488
)


(16,353
)Total other income (expenses), net


(126,119
)


(110,447
)Loss from continuing operations


(481,165
)


(1,444,964
)Discontinued operationsIncome (loss) from operations of
    discontinued components, including net loss on disposal of
    $6,371,863 for the three months ended June 30, 2005


968



(6,902,825
)Net loss

$
(480,197
)

$
(8,347,789
)Weighted average common shares
    outstandingBasic


12,591,319



9,246,425Diluted


12,591,319



9,246,425Loss per shareBasicNet loss per share from continuing
    operations

$
(0.04
)

$
(0.15
)Net loss per share from
    discontinued operations






(0.75
)Net loss per share

$
(0.04
)

$
(0.90
)DilutedNet loss per share from continuing
    operations

$
(0.04
)

$
(0.15
)Net loss per share from
    discontinued operations






(0.75
)Net loss per share

$
(0.04
)

$
(0.90
)    F-3




---



##### Table of Contents



Orion
    HealthCorp, Inc.
 Consolidated Condensed Statements of Operations  For the Six Months EndedJune 30,2006


2005(Unaudited)


(Unaudited)(Restated)Net operating revenues

$
14,085,728


$
15,281,113Operating expensesSalaries and benefits


5,535,247



6,205,856Physician group distribution


4,023,346



4,603,758Facility rent and related costs


792,276



858,099Depreciation and amortization


818,828



1,727,201Professional and consulting fees


707,112



931,640Insurance


339,360



441,272Provision for doubtful accounts


299,146



636,835Other expenses


2,272,944



2,550,096Total operating expenses


14,788,259



17,954,757Loss from continuing operations
    before other income (expenses)


(702,531
)


(2,673,644
)Other income (expenses)Interest expense


(234,144
)


(150,391
)Gain on forgiveness of debt


665,463



Other expense, net


(14,151
)


(18,977
)Total other income (expenses), net


417,168



(169,368
)Minority interest earnings in
    partnership






(1,660
)Loss from continuing operations


(285,363
)


(2,844,672
)Discontinued operationsIncome (loss) from operations of
    discontinued components, including net gain (loss) on disposal
    of $668,387 and $5,293,765 for the six months ended
    June 30, 2006 and 2005, respectively


576,390



(7,183,746
)Net income (loss)

$
291,027


$
(10,028,418
)Weighted average common shares
    outstandingBasic


12,510,131



8,958,080Diluted


89,319,164



8,958,080Income (loss) per shareBasicNet loss per share from continuing
    operations

$
(0.02
)

$
(0.32
)Net income (loss) per share from
    discontinued operations


0.05



(0.80
)Net income (loss) per share

$
0.03


$
(1.12
)DilutedNet loss per share from continuing
    operations

$
(0.00
)

$
(0.32
)Net income (loss) per share from
    discontinued operations


0.01



(0.80
)Net income (loss) per share

$
0.01


$
(1.12
)    F-4




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##### Table of Contents



Orion
    HealthCorp, Inc.
 Consolidated Condensed Statements of Cash Flows  For the Three MonthsEnded June 30,2006


2005Revised(Restated)Operating activitiesNet loss

$
(480,197
)

$
(8,347,789
)Adjustments to reconcile net loss
    to net cash used in operating activities:Provision for doubtful accounts


140,396



298,326Depreciation and amortization


408,930



843,979Stock option compensation expense


49,641



Conversion of notes payable to
    common stock






31,855Impact of discontinued operations






6,828,826Changes in operating assets and
    liabilities:Accounts receivable


27,450



(307,923
)Inventory


27,553



(23,766
)Prepaid expenses and other assets


(89,095
)


174,287Other assets


12,339



(14,706
)Accounts payable and accrued
    expenses


(39,844
)


(479,198
)Deferred revenues and other
    liabilities






45,014Net cash provided by (used in)
    operating activities


57,173



(951,095
)Investing activitiesSale (purchase) of property and
    equipment


(11,743
)


12,051Net cash provided by (used in)
    investing activities


(11,743
)


12,051Financing activitiesNet repayments of capital lease
    obligations


(22,010
)


(76,073
)Net borrowings (repayments) on
    line of credit


(163,991
)


595,786Net repayments of notes payable


(5,495
)


Net borrowings (repayments) of
    other obligations


(22,561
)


118,066Net cash provided by (used in)
    financing activities


(214,057
)


637,779Net decrease in cash and cash
    equivalents


(168,627
)


(301,265
)Cash and cash equivalents,
    beginning of quarter


497,550



612,348Cash and cash equivalents, end of
    quarter

$
328,923


$
311,083Supplemental cash flow informationCash paid during the quarter forIncome taxes

$



$
Interest

$
93,194


$
62,882      F-5




---



##### Table of Contents



Orion
    HealthCorp, Inc.
 Consolidated Condensed Statements of Cash Flows  For the Six MonthsEnded June 30,2006


2005Revised(Restated)Operating activitiesNet income (loss)

$
291,027


$
(10,028,418
)Adjustments to reconcile net loss
    to net cash used in operating activities:Minority interest in earnings of
    partnerships






1,660Provision for doubtful accounts


299,146



636,835Depreciation and amortization


818,828



1,727,201Gain on forgiveness of debt


(665,463
)


Stock option compensation expense


97,712



Conversion of notes payable to
    common stock






57,886Impact of discontinued operations


230,744



6,635,059Changes in operating assets and
    liabilities:Accounts receivable


169,295



(897,899
)Inventory


35,957



(25,238
)Prepaid expenses and other assets


(85,912
)


(82,691
)Other assets


12,942



(8,594
)Accounts payable and accrued
    expenses


(628,424
)


149,951Deferred revenues and other
    liabilities






29,018Net cash provided by (used in)
    operating activities


575,852



(1,805,230
)Investing activitiesSale (purchase) of property and
    equipment


(13,010
)


32,195Impact of discontinued operations


430,244



Net cash provided by investing
    activities


417,234



32,195Financing activitiesNet repayments of capital lease
    obligations


(45,700
)


(125,650
)Net borrowings (repayments) on
    line of credit


(418,221
)


364,514Net borrowings of notes payable






1,402,460Net repayments of notes payable


(325,189
)


Net borrowings (repayments) of
    other obligations


126,140



(259,052
)Impact of discontinued operations


(300,000
)


Net cash provided by (used in)
    financing activities


(962,970
)


1,382,272Net increase (decrease) in cash
    and cash equivalents


30,116



(390,763
)Cash and cash equivalents,
    beginning of period


298,807



701,846Cash and cash equivalents, end of
    period

$
328,923


$
311,083Supplemental cash flow informationCash paid during the period forIncome taxes

$



$
Interest

$
177,581


$
119,179      F-6




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial Statements
 June 30, 2006 and 2005
  Note 1.
    General      Form 10-QSB Item 310-(b) Regulation S-B.
  Form 10-KSB
  Description
    of Business
       F-7




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
    Medical
    Billing Services
      Integrated
    Physician Solutions
    day-to-day
  day-to-day
       F-8




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
    Ambulatory
    Surgery Center Business
                   F-9




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
  and/or
                       F-10




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
    Note 2.
    Going
    Concern    and/or
     F-11




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
         F-12




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
  and/or
    and/or
  Note 3.
    Revenue
    Recognition   F-13




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
        Note 4.
    Use of
    Estimates    Note 5.
    Segment
    Reporting   F-14




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
      For the Three Months Ended


For the Six Months EndedJune 30, 2006


June 30, 2006IPS


MBS


Total


IPS


MBS


TotalNet operating revenues

$
4,468,756


$
2,361,762


$
6,830,518


$
9,149,031


$
4,756,052


$
13,905,083Income from continuing operations


229,831



149,321



379,152



488,092



338,890



826,982Depreciation and amortization


107,883



282,773



390,656



216,488



565,883



782,371Total assets


8,220,192



10,043,365



18,263,557



8,220,192



10,043,365



18,263,557   For the Three Months Ended


For the Six Months EndedJune 30, 2005


June 30, 2005IPS


MBS


Total


IPS


MBS


TotalNet operating revenues

$
4,980,618


$
2,653,017


$
7,633,635


$
10,045,992


$
5,193,532


$
15,239,524Income from continuing operations


292,174



262,225



554,399



542,512



462,898



1,005,410Depreciation and amortization


103,789



285,742



389,531



245,010



572,882



817,892Total assets


9,799,965



10,474,085



20,274,050



9,799,965



10,474,085



20,274,050  F-15




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
    Three Months Ended


Six Months EndedJune 30,


June 30,2006


2005


2006


2005(Restated)





(Restated)Net operating revenues:Total net operating revenues for
    reportable segments

$
6,830,518


$
7,633,635


$
13,905,083


$
15,239,524Corporate revenue


101,196



17,656



180,644



41,589Total consolidated net operating
    revenues

$
6,931,714


$
7,651,291


$
14,085,727


$
15,281,113Loss from continuing operations:Total income from continuing
    operations for reportable segments

$
379,152


$
554,399


$
826,982


$
1,005,410Extraordinary gain










665,463



Corporate overhead


(860,317
)


(1,999,363
)


(1,777,808
)


(3,850,082
)Total consolidated from continuing
    operations

$
(481,165
)

$
(1,444,964
)

$
(285,363
)

$
(2,844,672
)Depreciation and amortizationTotal depreciation and
    amortization for reportable segments

$
390,656


$
389,531


$
782,371


$
817,892Corporate depreciation and
    amortization


18,274



454,448



36,457



909,309Total consolidated depreciation
    and amortization

$
408,930


$
843,979


$
818,828


$
1,727,201Total assets:Total assets for reportable
    segments

$
18,263,557


$
20,274,050


$
18,263,557


$
20,274,050Corporate assets


1,474,068



785,171



1,474,068



785,171Assets held for sale or related to
    discontinued operations(1)






13,253,261







13,253,261Total consolidated assets

$
19,737,625


$
34,312,482


$
19,737,625


$
34,312,482     (1)
    
    The balance at June 30, 2005 includes $9,179,336 of
    intangible assets and goodwill that were impaired in 2005.  Note 6.
    Goodwill
    and Intangible Assets  pooling-of-interest
 F-16




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
               F-17




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
       Note 7.
    Earnings
    per Share    For the Three Months


For the Six MonthsEnded June 30,


Ended June 30,2006


2005


2006


2005Net income (loss)

$
(480,197
)

$
(8,347,789
)

$
291,027


$
(10,028,418
)Weighted average number of shares
    of Class A Common Stock outstanding for basic net income
    (loss) per share


12,591,319



9,246,425



12,510,131



8,958,080Dilutive stock options, warrants
    and restricted stock units(1)



(5)



(a)


2,612,347




(a)Convertible notes payable(2)



(5)



(b)


1,687,200




(b)Class B Common Stock(3)



(5)



(c)


57,623,732




(c)Class C Common Stock(4)



(5)



(d)


14,885,754




(d)Weighted average number of shares
    of Class A Common Stock outstanding for diluted net loss
    per share


12,591,319



9,246,425



89,319,164



8,958,080Net income (loss) per
    share  Basic

$
(0.04
)

$
(0.90
)

$
0.03


$
(1.12
)Net income (loss) per
    share  Diluted

$
(0.04
)

$
(0.90
)

$
0.01


$
(1.12
)     (1)
    
    2,612,347 options, warrants and restricted stock units were
    outstanding as of June 30, 2006.(2)
    
    $1,300,000 of notes were convertible into Class A Common
    Stock at June 30, 2006. Of the total, $50,000 was
    convertible into 349,224 shares of Class A Common
    Stock based on a conversion price equal to 75% of the average
    closing price for the 20 trading days immediately prior to
    June 30, 2006. The remaining $1,250,000 was convertible
    into 1,337,976 shares of Class A Common Stock at
    June 30, 2006. F-18




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
  (3)
    
    10,448,470 shares of Class B Common Stock were
    outstanding at June 30, 2006. 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 and a nine
    percent (9%) return on the original purchase price for the
    Class B Common Stock without compounding, from the date of
    issuance through the date of conversion. As of June 30,
    2006, each share of Class B Common Stock was convertible
    into 5.515040151157 shares of Class A Common Stock.(4)
    
    1,437,572 shares of Class C Common Stock were
    outstanding at June 30, 2006. 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 2004 Mergers. If all of the Class B Common
    Stock had been converted at June 30, 2006, the holders of
    Class C Common Stock would have been eligible to convert
    1,308,142 shares of Class C Common Stock into
    14,885,754 shares of Class A Common Stock under the
    anti-dilution provision.(5)
    
    The potentially dilutive securities listed in (1) 
    (4), above, are not included in the calculation of weighted
    average number of shares of Class A Common Stock
    outstanding for diluted net loss per share for the three months
    ended June 30, 2006, because the effect would be
    anti-dilutive due to the net loss for the quarter:         F-19




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
      Note 8.
    Employee
    Stock-Based Compensation           F-20




---



##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
        Three Months Ended June 30,


Six Months Ended June 30,2006


2005


2006


2005Net income (loss)  as
    reported

$
(480,197
)

$
(8,347,789
)

$
291,027


$
(10,028,418
)Add: Stock-based employee
    compensation included in net income (loss)


49,642







97,713



Deduct: Total stock-based employee
    compensation (expense determined under the fair value-based
    method for all awards), net of tax effect


(49,642
)


(42,775
)


(97,713
)


(69,137
)Net loss  pro forma

$
(480,197
)

$
(8,390,564
)

$
291,027


$
(10,097,555
)Net loss per share:Basic  as reported

$
(0.04
)

$
(0.90
)

$
0.03


$
(1.12
)Basic  pro forma

$
(0.04
)

$
(0.91
)

$
0.03


$
(1.13
)Diluted  as reported

$
(0.04
)

$
(0.90
)

$
0.01


$
(1.12
)Diluted  pro forma

$
(0.04
)

$
(0.91
)

$
0.00


$
(1.13
)   Note 9.
    Discontinued
    Operations  Bellaire SurgiCare.
 F-21




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##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
    Three Months Ended


Six Months EndedJune 30, 2005


June 30, 2005Income statement data:Net operating revenues

$



$
161,679Operating expenses






350,097Net loss

$



$
(188,418
)Balance sheet data:Current assets

$



$
Other assets






Total assets

$



$
Current liabilities

$



$
Other liabilities






Total liabilities

$



$
   CARDC.
 F-22




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##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
    Three Months Ended


Six Months EndedJune 30, 2005


June 30, 2005Income statement data:Net operating revenues

$



$
848,373Operating expenses






809,673Net loss

$



$
38,700Balance sheet data:Current assets

$



$
Other assets






Total assets

$



$
Current liabilities

$



$
Other liabilities






Total liabilities

$



$
   IntegriMED.
    Three Months Ended


Six Months EndedJune 30, 2005


June 30, 2005Income statement data:Net operating revenues

$
82,155


$
191,771Operating expenses


392,931



899,667Net loss

$
(310,776
)

$
(707,896
)Balance sheet data:Current assets

$
(24,496
)

$
(24,496
)Other assets






Total assets

$
(24,496
)

$
(24,496
)Current liabilities

$
17,022


$
17,022Other liabilities






Total liabilities

$
17,022


$
17,022   TASC and TOM.
 F-23




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##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
      Three Months Ended


Six Months EndedJune 30, 2005


June 30, 2005Income statement data:Net operating revenues

$
873,959


$
1,670,801Operating expenses


799,418



1,630,806Net income

$
74,541


$
39,995Balance sheet data:Current assets

$
794,831


$
794,831Other assets


1,487,732



1,487,732Total assets

$
2,282,563


$
2,282,563Current liabilities

$
709,779


$
709,779Other liabilities


907,390



907,390Total liabilities

$
1,617,169


$
1,617,169   Sutter.
 F-24




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##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
    Three Months Ended


Six Months EndedJune 30, 2005


June 30, 2005Income statement data:Net operating revenues

$
107,419


$
216,319Operating expenses


105,171



210,609Net income

$
2,248


$
5,710Balance sheet data:Current assets

$
113,819


$
113,819Other assets


15,033



15,033Total assets

$
128,852


$
128,852Current liabilities

$
7,839


$
7,839Other liabilities






Total liabilities

$
7,839


$
7,839   Memorial Village.
 F-25




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##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
    Three Months Ended


Six Months EndedJune 30, 2006


June 30, 2005


June 30, 2006


June 30, 2005Income statement data:Net operating revenues

$



$
684,676


$
17,249


$
1,268,852Operating expenses






812,407



170,285



1,511,624Net loss

$



$
(127,731
)

$
(153,036
)

$
(242,772
)Balance sheet data:Current assets

$



$
861,111


$



$
861,111Other assets






767,497







767,497Total assets

$



$
1,628,608


$



$
1,628,608Current liabilities

$



$
729,567


$



$
729,567Other liabilities






725,884







725,884Total liabilities

$



$
1,455,451


$



$
1,455,451   San Jacinto.
  Orion.
 F-26




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##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
    Three Months Ended


Six Months EndedJune 30, 2006


June 30, 2005


June 30, 2006


June 30, 2005(Restated)





(Restated)Bellaire SurgiCareNet loss

$



$



$




(188,418
)Loss on disposal














(163,049
)CARDCNet income














38,700Gain on disposal






(238,333
)






268,292IntegriMEDNet loss






(310,776
)






(707,896
)Loss on disposal






(47,101
)






(47,101
)TASC and TOMNet income






74,541







39,995Loss on disposal






(2,122,445
)






(2,122,445
)SutterNet income






2,248







5,710Memorial VillageNet loss






(127,731
)


(153,036
)


(242,772
)Gain (loss) on disposal






(3,229,462
)


574,321



(3,229,462
)San JacintoGain (loss) on disposal






(734,522
)


94,066



(734,522
)OrionNet income


968



(169,244
)


61,039



(100,778
)Total income (loss) from
    operations of discontinued components, including net gain (loss)
    on disposal

$
968


$
(6,902,825
)

$
576,390


$
(7,183,746
)  F-27




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##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
  Note 10.
    Long-Term
    Debt    As ofJune 30, 2006


December 31, 2005Promissory note due to sellers of
    MBS, bearing interest at 8%, interest payable monthly or on
    demand, matures December 15, 2007

$
1,714,336


$
1,000,000Working capital due to sellers of
    MBS, due on demand






199,697Term loan with a financial
    institution, non-interest bearing, matures November 15,
    2010, net of accretion of $654,418 and $641,467, respectively


3,095,725



3,108,677Revolving line of credit with a
    financial institution, bearing interest at 6.5%, interest
    payable monthly or on demand(1)






778,005$2,300,000 revolving line of
    credit, bearing interest at prime (8.25% at June 30,
    2006) plus 6%, interest payable monthly, matures
    December 14, 2006(2)


998,668



1,703,277Convertible notes, bearing
    interest at 18%, interest payable monthly, convertible on demand


50,000



50,000Note payable due to a related
    party, bearing interest at 6%, interest payable monthly, due on
    demand






13,611Insurance financing note payable,
    bearing interest at 5.25%, interest payable monthly


126,140



Convertible promissory notes due
    to a related party, bearing interest at 9%, matures
    October 15, 2006


1,250,000



1,250,000Total long-term debt


7,234,869



8,103,267Less: current portion of long-term
    debt


(3,439,897
)


(4,231,674
)Long-term debt, net of current
    portion

$
3,794,972


$
3,871,593     (1)
    
    As of March 13, 2006, the Company had retired approximately
    $778,000 of debt at a discounted price of $112,500.(2)
    
    As part of the Loan and Security Agreement, the Company is
    required to comply with certain financial covenants, measured on
    a quarterly basis. 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. At June 30, 2006,
    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 full
    amount of the loan as of June 30, 2006 is recorded as a
    current liability. In December 2005, the Company received
    notification from CIT stating that (i) certain events of
    default under the Loan and Security Agreement had occurred as a
    result of the Company being out of compliance with two financial
    covenants relating to its debt service coverage ratio and its
    minimum operating income level, (ii) as a result of the
    events of default, CIT raised the interest rate for monies
    borrowed under the Loan and Security Agreement to the provided
    Default Rate of prime rate plus 6%, (iii) the
    amount available under the revolving credit facility was reduced
    to $2,300,000 and F-28




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##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
  (iv) CIT reserved all additional rights and remedies
    available to it as a result of these events of default. The
    Company is currently in negotiations with CIT to obtain, among
    other provisions, a waiver of the events of default. In the
    event CIT declares the obligations under the Loan and Security
    Agreement to be immediately due and payable or exercises its
    other rights described above, the Company would not be able to
    meet its obligations to CIT or its other creditors. As a result,
    such action would have a material adverse effect on the
    Companys ability to continue as a going concern.  Note 11.
    Litigation  No. 3-00-CV-0536-L. No. 3-01CV0877-L.
  No. 2004-55688.
  No. 2005-44326.
 F-29




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##### Table of Contents



Orion
    HealthCorp, Inc.
  Notes to Unaudited Consolidated Condensed Financial
    Statements  (Continued)
      Note 12.
    Subsequent
    Events     Note 13. Restatement of Financial Statements
   F-30