##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2006
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the Transition period from  to
 Commission file number 000-31249
 ARCADIA RESOURCES, INC.
  NEVADA
    
    88-0331369(State of Incorporation)
    
    (I.R.S. Employer I.D. Number)26777 CENTRAL PARK BLVD., SUITE 200
SOUTHFIELD, MI
(Address of principal executive offices)
    
    48076
(Zip Code)
  þ o
  o o þ
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Table of Contents
 Page No.Part I: Financial InformationItem 1. Financial Statements
    
    
    3Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26Part II: Other InformationItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    28Item 4.
Submission of Matters to a Vote of Security Holders
    
    
    28Item 5. Other Information
    
    
    28Item 6. Exhibits
    
    
    28Signatures
    
    
    29Description of Chief Executive Officer and Chief Operating Officer Compensation ArrangementsCertification of the Chief Executive Officer by Rule 13a-14(a)Certification of the Principal Accounting and Financial Officer by Rule 13a-14(a)Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350Principal Accounting and Financial Officer Certification Pursuant to 18 U.S.C. Section 1350
  2




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PART I: Financial Information
 
 Item 1. Financial Statements
    3




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##### Table of Contents



Arcadia Resources, Inc.
Consolidated Balance Sheets
 September 30,
    
    
    March 31,2006
    
    
    2006(Unaudited)
    
    
    (Audited)Assets (Note 7)Current AssetsCash
    
    $
    1,599,735
    
    
    $
    530,344Accounts receivable, net of allowance of $2,691,000 and $1,891,000, respectively
    
    
    33,134,172
    
    
    
    27,109,601Inventory, net of allowance of $80,000
    
    
    2,472,421
    
    
    
    1,502,276Prepaid expenses and other current assets
    
    
    3,561,490
    
    
    
    3,140,764Income taxes receivable
    
    
    186,568
    
    
    
    39,238Total Current Assets
    
    
    40,954,386
    
    
    
    32,322,223Fixed Assets (Notes 2 and 8)Equipment
    
    
    8,234,139
    
    
    
    5,883,779Software
    
    
    805,355
    
    
    
    564,419Furniture and fixtures
    
    
    935,273
    
    
    
    810,053Vehicles
    
    
    1,184,447
    
    
    
    799,793Leasehold improvements
    
    
    490,015
    
    
    
    391,58811,649,229
    
    
    
    8,449,632Accumulated depreciation and amortization
    
    
    (3,315,543
    )
    
    
    (2,224,589
    )Net Fixed Assets
    
    
    8,333,686
    
    
    
    6,225,043Other Assets (Notes 4 and 5)Goodwill
    
    
    38,852,554
    
    
    
    28,263,208Trade name, net of accumulated amortization of $644,000 and $511,000, respectively
    
    
    7,355,556
    
    
    
    7,488,889Customer relationships, net of accumulated amortization of $1,528,000 and
$1,128,000, respectively
    
    
    12,437,264
    
    
    
    9,854,012Non-competition agreements, net of accumulated amortization of $261,000 and
$152,000, respectively
    
    
    1,199,023
    
    
    
    708,386Technology, net of accumulated amortization of $612,000 and $486,000, respectively
    
    
    147,778
    
    
    
    274,445Deferred financing costs, net of accumulated amortization of $138,000 and
$80,000, respectively
    
    
    257,500
    
    
    
    14,940Total Other Assets
    
    
    60,249,675
    
    
    
    46,603,880$
    109,537,747
    
    
    $
    85,151,146Liabilities and Stockholders EquityCurrent LiabilitiesLine of credit, current portion (Note 7)
    
    $
    2,612,996
    
    
    $
    2,000,000Accounts payable
    
    
    3,488,285
    
    
    
    1,912,860Accrued expenses:Compensation and related taxes
    
    
    2,593,242
    
    
    
    2,417,832Commissions
    
    
    346,976
    
    
    
    279,262Other
    
    
    1,103,503
    
    
    
    1,266,598Accrued Interest
    
    
    736,479
    
    
    
    141,463Payable to affiliated agencies, current portion (Note 6)
    
    
    1,693,382
    
    
    
    2,163,954Long-term debt, current portion (Note 8)
    
    
    4,760,595
    
    
    
    2,405,866Total Current Liabilities
    
    
    17,335,458
    
    
    
    12,587,835Payable to affiliate, less current portion (Note 6)
    
    
    109,434
    
    
    
    152,750Long-term debt, less current portion (Notes 8 and 14)
    
    
    17,541,753
    
    
    
    878,501Line of credit, less current portion (Note 7)
    
    
    15,634,446
    
    
    
    14,487,967Total Liabilities
    
    
    50,621,091
    
    
    
    28,107,053Commitments and Contingencies (Notes 6, 7, 8, 9 and 13)Stockholders Equity (Note 9, 10, 13 and 14)Common stock $.001 par value, 200,000,000 shares authorized, 100,045,929
shares and 96,403,036 shares issued
    
    
    100,046
    
    
    
    96,403Additional paid-in capital
    
    
    72,318,150
    
    
    
    69,555,678Accumulated deficit
    
    
    (13,501,540
    )
    
    
    (12,607,988
    )Preferred stock, $.001 par value, 5,000,000 shares authorized, none issued
    
    
    
    
    
    
    Total Stockholders Equity
    
    
    58,916,656
    
    
    
    57,044,093$
    109,537,747
    
    
    $
    85,151,146
 See accompanying summary of accounting policies and notes to consolidated financial statements.
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Arcadia Resources, Inc.
 Consolidated Statements of Operations
(Unaudited)
 Quarter
    
    
    QuarterEnded
    
    
    EndedSept. 30, 2006
    
    
    Sept. 30, 2005Net Sales (Note 15)
    
    $
    41,418,687
    
    
    $
    32,665,292Cost of Sales
    
    
    26,852,195
    
    
    
    21,964,338Gross Profit
    
    
    14,566,492
    
    
    
    10,700,954General and Administrative Expenses
    
    
    13,630,036
    
    
    
    10,359,241Depreciation and Amortization
    
    
    714,896
    
    
    
    716,156Operating Income (Loss)
    
    
    221,560
    
    
    
    (374,443
    )Other Expenses:Interest expense, net
    
    
    912,529
    
    
    
    554,878Amortization of debt discount
    
    
    
    
    
    
    509,404Total Other Expenses
    
    
    912,529
    
    
    
    1,064,282Net Loss Before Income Tax Expense
    
    
    (690,969
    )
    
    
    (1,438,725
    )Income Tax Expense (Note 11)
    
    
    44,650
    
    
    
    40,000Net Loss
    
    $
    (735,619
    )
    
    $
    (1,478,725
    )Loss Per Share (Note 9):Basic
    
    $
    (0.01
    )
    
    $
    (0.02
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.02
    )Weighted average number of shares (in thousands):Basic
    
    
    90,130
    
    
    
    83,782Diluted
    
    
    90,130
    
    
    
    83,782
 See accompanying summary of accounting policies and notes to consolidated financial statements.
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Arcadia Resources, Inc.
 Consolidated Statements of Operations
(Unaudited)
 Two Quarters
    
    
    Two QuartersEnded
    
    
    EndedSeptember 30, 2006
    
    
    September 30, 2005Net Sales (Note 15)
    
    $
    78,973,810
    
    
    $
    63,404,332Cost of Sales
    
    
    51,225,321
    
    
    
    42,807,360Gross Profit
    
    
    27,748,489
    
    
    
    20,596,972General and Administrative Expenses
    
    
    25,957,150
    
    
    
    20,132,674Depreciation and Amortization
    
    
    1,283,785
    
    
    
    1,131,130Operating Income (Loss)
    
    
    507,554
    
    
    
    (666,832
    )Other ExpensesInterest expense, net
    
    
    1,317,656
    
    
    
    1,029,773Amortization of debt discount (Note 6)
    
    
    
    
    
    
    933,185Total Other Expenses
    
    
    1,317,656
    
    
    
    1,962,958Net Loss Before Income Tax Expense
    
    
    (810,102
    )
    
    
    (2,629,790
    )Income Tax Expense (Note 11)
    
    
    83,450
    
    
    
    100,000Net Loss
    
    $
    (893,552
    )
    
    $
    (2,729,790
    )Loss Per Share (Note 8):Basic
    
    $
    (0.01
    )
    
    $
    (0.03
    )Diluted
    
    $
    (0.01
    )
    
    $
    (0.03
    )Weighted average number of shares (in thousands):Basic
    
    
    88,238
    
    
    
    83,138Diluted
    
    
    88,238
    
    
    
    83,138
 See
accompanying summary of accounting policies and notes to consolidated financial statements.
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Arcadia Resources, Inc.
 Consolidated Statements of Cash Flows
(Unaudited)
 Two Quarters
    
    
    Two QuartersEnded
    
    
    EndedSept. 30, 2006
    
    
    Sept. 30, 2005CASH FLOWS FROM OPERATING ACTIVITIESNet Loss
    
    $
    (893,552
    )
    
    $
    (2,729,790
    )Adjustments to reconcile net loss to net cash used in operating
activities net of impact of acquisitions:Provision for doubtful accounts
    
    
    745,952
    
    
    
    367,264Depreciation and amortization
    
    
    1,530,472
    
    
    
    642,358Amortization of debt discount and deferred financing costs
    
    
    52,045
    
    
    
    1,358,818Issuance of stock for services
    
    
    271,690
    
    
    
    42,713Accrual of stock option expense
    
    
    29,499
    
    
    
    87,612Amortization of intangibles
    
    
    804,705
    
    
    
    614,193Recording of expected release of stock from escrow
    
    
    
    
    
    
    410,000Changes in operating assets and liabilities:Accounts receivable
    
    
    (6,427,061
    )
    
    
    (2,386,353
    )Inventory
    
    
    (1,047,539
    )
    
    
    (78,586
    )Prepaid expenses and other current assets
    
    
    (679,553
    )
    
    
    (2,012,904
    )Income taxes receivable
    
    
    (147,330
    )
    
    
    38,398Accounts payable
    
    
    1,217,531
    
    
    
    (317,480
    )Accrued expenses and other current liabilities
    
    
    240,322
    
    
    
    909,987Due to affiliated agencies
    
    
    (244,746
    )
    
    
    (218,374
    )NET CASH (USED IN) OPERATING ACTIVITIES
    
    
    (4,547,565
    )
    
    
    (3,272,144
    )CASH FLOWS FROM INVESTING ACTIVITIESPurchases of businesses
    
    
    (7,064,875
    )
    
    
    (4,134,396
    )Purchases of property and equipment
    
    
    (1,629,462
    )
    
    
    (2,122,215
    )NET CASH (USED IN) INVESTING ACTIVITIES
    
    
    (8,694,337
    )
    
    
    (6,256,611
    )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from sale of common stock warrants
    
    
    223,840
    
    
    
    29,180,000Proceeds from issuance of note payable
    
    
    15,000,000
    
    
    
    5,000,000Proceeds from issuance of common stock
    
    
    
    
    
    
    1,980,065Proceeds from exercise of stock option
    
    
    50,750
    
    
    
    37,500Net advances (payments) on line of credit
    
    
    1,719,475
    
    
    
    (12,092,353
    )Payments on acquisition debt
    
    
    (547,093
    )
    
    
    (1,383,882
    )Payments on notes payable
    
    
    (2,135,679
    )
    
    
    (10,493,176
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    14,311,293
    
    
    
    12,228,154NET INCREASE IN CASH AND EQUIVALENTS
    
    
    1,069,391
    
    
    
    2,699,399CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
    
    
    530,344
    
    
    
    1,412,268CASH AND CASH EQUIVALENTS, END OF PERIOD
    
    $
    1,599,735
    
    
    $
    4,111,667Supplementary information:Cash paid during the period for:Interest paid
    
    $
    353,419
    
    
    $
    929,220Income taxes
    
    
    83,771
    
    
    
    24,500Non cash investing activities:Issuance of common stock for the purchases of businesses
    
    $
    1,800,000
    
    
    $
    3,086,925Issuance of note payable and purchase price payable on acquisition
    
    
    5,400,000
    
    
    
    Assumption of line of credit in purchase of a business
    
    
    40,000
    
    
    
    Non cash financing activities:Issuance of
common stock for services
    
    $
    572,000
    
    
    $
    1,161,727Exercise of cashless warrants
    
    
    255,106
    
    
    
    132,600Payment of note payable with issuance of common stock
    
    
    339,168
    
    
    
    119,231
 See accompanying summary of accounting policies and notes to consolidated financial statements
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Arcadia Resources, Inc. and Subsidiaries
 Summary of Accounting Policies (Unaudited)
          8




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Recent Accounting Pronouncements
  9




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Arcadia Resources, Inc. and Subsidiaries
 Notes to Consolidated Financial Statements (Unaudited)
 NOTE 1  BASIS OF PRESENTATION OF CONSOLIDATED FINANCIAL STATEMENTS AND DESCRIPTION OF
BUSINESS
    DESCRIPTION OF BUSINESS
  NOTE 2  LEASES
  Capital
    
    
    OperatingLeases
    
    
    LeasesYear ending March 31:2007
    
    $
    673,000
    
    
    $
    1,425,0002008
    
    
    857,000
    
    
    
    963,0002009
    
    
    430,000
    
    
    
    215,0002010
    
    
    72,000
    
    
    
    58,0002011
    
    
    63,000
    
    
    
    40,000Total
    
    $
    2,095,000
    
    
    $
    2,701,000Interest
    
    
    102,000Capital Lease Obligation Payable
    
    $
    1,993,000
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NOTE 3  EMPLOYEE BENEFIT PLANS
  NOTE 4  ACQUISITIONS
     (in thousands)Current Assets
    
    $
    589Property and Equipment
    
    
    1,549Liabilities
    
    
    (1,940
    )Goodwill
    
    
    14,204Total Consideration
    
    $
    14,402
  NOTE 5  GOODWILL AND OTHER INTANGIBLE ASSETS
   11




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Sept. 30, 2006
    
    
    March 31, 2006Services
    
    $
    13,888
    
    
    $
    13,953Products
    
    
    23,795
    
    
    
    13,160Retail
    
    
    1,170
    
    
    
    1,150TOTAL GOODWILL
    
    $
    38,853
    
    
    $
    28,263
   (in thousands)Year ended:2007
    
    $
    1,4242008
    
    
    1,1772009
    
    
    1,1562010
    
    
    1,1562011
    
    
    1,004
 NOTE 6  AFFILIATED AGENCIES PAYABLE
   NOTE 7  LINES OF CREDIT
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NOTE 8  LONG-TERM OBLIGATIONS
  September 30,2006Note payable to Jana Master Fund, Ltd. dated June
29, 2006, bearing simple interest at the one year LIBOR
rate plus 7.5%, effectively 13.27% at September 30, 2006,
with interest payable quarterly beginning on September
30, 2006 and the principal due in full on December 26,
2007  See Note 14.
    
    $
    15,000,000Purchase price payable to the selling share holder of
Alliance Oxygen & Medical Equipment, Inc., dated July 12,
2006, bearing simple interest of 8% per year payable in
equal quarterly payments of principal and interest
beginning October 12, 2006 with final payment due on July
12, 2007.
    
    
    2,000,000Purchase price payable to the selling shareholder of
Wellscripts, LLC dated June 30, 2006, bearing simple
interest of 8% per year payable in equal quarterly
payments of principal and interest beginning September
30, 2006 with final payment due on June 30, 2007.
    
    
    1,000,000Purchase price payable to Remedy Therapeutics, Inc. dated
January 27, 2006, bearing simple interest of 8% per year
payable in equal quarterly payments of principal and
interest beginning April 27, 2006 with final payment due
on January 27, 2009.
    
    
    679,512Purchase price payable to the selling stockholders of
Trinity Healthcare
dated September 23, 2004, bearing simple interest of 8%
per year due October 15, 2006. The note payable was paid
in full in October 2006.
    
    
    100,090Purchase price payable (non-interest bearing) to the
selling shareholders of Lovell Medical Supply, Inc.,
dated August 25, 2006, payable in shares of the Companys
common stock in equal amounts on February 25, 2007 and
August 25, 2007, subject to offset for potential
indemnified claims.
    
    
    400,000Other purchase price payables (non-interest bearing) to
be paid over time to the selling stockholders or selling
entities of various acquired entities, due dates ranging
from October 2006 to March 2007.
    
    
    364,106
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September 30,2006Capital lease obligations due through 2012
    
    
    1,992,738Other interest-bearing obligations with interest charged
at various rates ranging from 4% to 18% to be paid over
time based on respective terms, due dates ranging from
October 2006 to 2011.
    
    
    765,902Total long term obligations
    
    
    22,302,348Less: Current portion of long-term obligations
    
    
    (4,760,595
    )LONG-TERM DEBT OBLIGATIONS
    
    $
    17,541,753
  NOTE 9  STOCKHOLDERS EQUITY
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NOTE 10  STOCK-BASED COMPENSATION
  For the two
    
    
    For the twoQuarters Ended
    
    
    Quarter EndedSeptember 30, 2006
    
    
    September 30, 2005Net  loss as reported
    
    $
    (893,552
    )
    
    $
    (2,729,790
    )Add: Stock-based employee compensation expense
included in income, net of related tax effects
    
    
    
    
    
    
    Less: Total stock-based employee compensation
expense determined under the fair value method, net
of related tax effects
    
    
    
    
    
    
    Pro Forma net income (loss)
    
    $
    (893,552
    )
    
    $
    (2,729,790
    )Net  loss per share:Basic and diluted income (loss) per share as reported
    
    $
    (0.01
    )
    
    $
    (0.03
    )Pro Forma basic and diluted income (loss) per share
    
    $
    (0.01
    )
    
    $
    (0.03
    )
   15




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OPTIONS
FISCAL 2007 ACTIVITY & ROLLFORWARD
 RANGE OF
    
    RANGE OF3/31/2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    9/30/2006
    
    PRICE
    
    EXPIRATION
    
    VESTINGOUTSTANDING
    
    GRANTS
    
    FORFEITURES
    
    EXERCISES
    
    OUTSTANDING
    
    PER SHARE
    
    DATES
    
    DATESIssued to officers
    
    
    8,323,343
    
    
    
    72,098
    
    
    
    0
    
    
    
    0
    
    
    
    8,395,441
    
    
    $
    0.25 to $2.92
    
    
    
    2013
    
    
    
    2005-2008Issued to other
management
    
    
    700,000
    
    
    
    0
    
    
    
    0
    
    
    
    35,000
    
    
    
    665,000
    
    
    $
    1.45
    
    
    
    2011
    
    
    
    2005From prior entity
    
    
    500,000
    
    
    
    0
    
    
    
    0
    
    
    
    0
    
    
    
    500,000
    
    
    $
    0.25
    
    
    
    2014
    
    
    
    2004Total
    
    
    9,523,343
    
    
    
    72,098
    
    
    
    0
    
    
    
    35,000
    
    
    
    9,560,441
 As of March 31,
    
    2006
    
    2007
    
    2008Cumulative Vested Options
    
    
    1,488,343
    
    
    
    5,560,441
    
    
    
    9,560,441
  2007
    
    2006Expected volatility
    
    
    20
    %
    
    
    45
    %Weighted-average volatility
    
    
    20
    %
    
    
    45
    %Expected dividends
    
    
    0
    %
    
    
    0
    %Expected terms (in years)
    
    
    7
    
    
    
    7Risk-free rate
    
    
    5.11
    %
    
    
    3.92
    %
  Weighted Average
    
    
    AggregateWeighted Average
    
    
    Remaining
    
    
    IntrinsicOptions
    
    Shares
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    ValueOutstanding at March 31, 2006
    
    
    9,523,343
    
    
    $
    0.37Granted
    
    
    72,098
    
    
    $
    2.92Exercised
    
    
    (35,000
    )
    
    $
    1.45Forfeited or expired
    
    
    0
    
    
    $
    0.00Outstanding at September 30, 2006
    
    
    9,560,441
    
    
    $
    0.39
    
    
    
    5.6
    
    
    $
    27,347,727Exercisable at September 30, 2006
    
    
    1,560,441
    
    
    $
    1.10
    
    
    
    5.6
    
    
    $
    3,347,727
   16




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WEIGHTED AVERAGENON-VESTED SHARES
    
    SHARES
    
    
    GRANT-DATE FAIR VALUEOutstanding at March 31, 2006
    
    
    8,000,000
    
    
    $
    0.25Granted
    
    
    72,098
    
    
    
    2.92Vested
    
    
    (72,098
    )
    
    
    2.92Forfeited
    
    
    0
    
    
    
    0.00Non-vested at September 30, 2006
    
    
    8,000,000
    
    
    $
    0.25
    NOTE 11  INCOME TAXES
     17




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NOTE 12  COMMITMENTS AND CONTINGENCIES
   NOTE 13  SUBSEQUENT EVENTS
           18




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Quarter Ended
    
    
    Quarter EndedSept. 30, 2006
    
    
    Sept. 30, 2005Net Sales:Services
    
    $
    30,734
    
    
    $
    27,850Products Rentals
    
    
    5,923
    
    
    
    2,335Products Sales
    
    
    3,787
    
    
    
    1,492Retail
    
    
    975
    
    
    
    988Total Sales
    
    
    41,419
    
    
    
    32,665Operating Income (Loss):Services
    
    
    1,289
    
    
    
    1,076Products
    
    
    713
    
    
    
    (52
    )Retail
    
    
    (475
    )
    
    
    (211
    )Unallocated Corporate Overhead
    
    
    (1,305
    )
    
    
    (1,188
    )Total Operating Income (Loss)
    
    
    222
    
    
    
    (375
    )Interest Expense
    
    
    913
    
    
    
    555Amortization of Debt Discount
    
    
    
    
    
    
    509Net Loss before Income Tax Expense
    
    
    (691
    )
    
    
    (1,439
    )Income Tax Expense
    
    
    45
    
    
    
    40Net Loss
    
    $
    (736
    )
    
    $
    (1,479
    )
 Two
    
    
    TwoQuarters Ended
    
    
    Quarters EndedSept. 30, 2006
    
    
    Sept. 30, 2005Net Sales:Services
    
    $
    60,652
    
    
    $
    54,601Products Rentals
    
    
    9,984
    
    
    
    4,487Products Sales
    
    
    6,383
    
    
    
    2,869Retail
    
    
    1,955
    
    
    
    1,447Total Sales
    
    
    78,974
    
    
    
    63,404Operating Income (Loss):Services
    
    
    2,394
    
    
    
    2,306Products
    
    
    1,433
    
    
    
    202Retail
    
    
    (862
    )
    
    
    (113
    )Unallocated Corporate Overhead
    
    
    (2,457
    )
    
    
    (3,062
    )Total Operating Income (Loss)
    
    
    508
    
    
    
    (667
    )Interest Expense
    
    
    1,318
    
    
    
    1,030Amortization of Debt Discount
    
    
    
    
    
    
    933Net Loss before Income Tax Expense
    
    
    (810
    )
    
    
    (2,630
    )Income Tax Expense
    
    
    84
    
    
    
    100Net Loss
    
    $
    (894
    )
    
    $
    (2,730
    )Assets:Services
    
    $
    49,496
    
    
    $
    47,960Products
    
    
    53,391
    
    
    
    17,782Retail
    
    
    2,471
    
    
    
    2,094Unallocated Corporate Assets
    
    
    4,180
    
    
    
    7,707Total Assets
    
    $
    109,538
    
    
    $
    75,543
 19




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
 MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     Overview
  20




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Results of Operations
 Quarter Ended September 30, 2006 Compared to Quarter Ended September 30, 2005
 Quarter
    
    
    QuarterEnded
    
    
    EndedConsolidated Statements of Operations (in thousands, except per share data)
    
    Sept 30, 2006
    
    
    Sept. 30, 2005Net Sales
    
    $
    41,418
    
    
    $
    32,665Cost of Sales
    
    
    26,852
    
    
    
    21,964Gross Profit
    
    
    14,566
    
    
    
    10,701General and Administrative Expenses
    
    
    13,630
    
    
    
    10,359Depreciation and Amortization
    
    
    714
    
    
    
    716Operating Income (Loss)
    
    
    222
    
    
    
    (374
    )Oher ExpensesInterest Expense, Net
    
    
    913
    
    
    
    555Amortization of Debt Discount
    
    
    
    
    
    
    510Total Other Expenses
    
    
    913
    
    
    
    1,065Net Loss Before Income Tax Expense
    
    
    (691
    )
    
    
    (1,439
    )Income Tax Expense
    
    
    45
    
    
    
    40Net Loss
    
    $
    (736
    )
    
    $
    (1,479
    )Net Loss per Share  Basic and Diluted
    
    $
    (0.01
    )
    
    $
    (0.02
    )Weighted average number of shares  Basic and Diluted
    
    
    90,130
    
    
    
    83,782
  Results of Operations Liquidity and Capital Resources
 Increase from prior
    
    Increase from sameNet sales by quarter:
    
    (in millions)
    
    Quarter
    
    quarter prior yearFirst quarter ended June 30, 2004
    
    $
    23.1
    
    
    
    11.5
    %
    
    
    26.9
    %Second quarter ended September 30, 2004
    
    
    25.5
    
    
    
    10.4
    %
    
    
    30.5
    %Third quarter ended December 31, 2004
    
    
    28.1
    
    
    
    10.2
    %
    
    
    41.4
    %Fourth quarter ended March 31, 2005
    
    
    28.6
    
    
    
    1.8
    %
    
    
    38.1
    %First quarter ended June 30, 2005
    
    
    30.7
    
    
    
    7.4
    %
    
    
    33.0
    %Second quarter ended September 30, 2005
    
    
    32.7
    
    
    
    6.5
    %
    
    
    28.2
    %Third quarter ended December 31, 2005
    
    
    33.3
    
    
    
    1.8
    %
    
    
    18.5
    %Fourth quarter ended March 31, 2006
    
    
    34.2
    
    
    
    2.7
    %
    
    
    19.6
    %First quarter ended June 30, 2006
    
    
    37.6
    
    
    
    9.9
    %
    
    
    22.5
    %Second quarter ended September 30, 2006
    
    
    41.4
    
    
    
    10.3
    %
    
    
    26.8
    %
  21




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22




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##### Table of Contents



Two Quarters Ended September 30, 2006 Compared to Two Quarters Ended September 30, 2005
 Two Quarters
    
    
    Two QuartersEnded
    
    
    EndedConsolidated Statements of Operations (in thousands, except per share data)
    
    September 30, 2006
    
    
    September 30, 2005Net Sales
    
    $
    78,974
    
    
    $
    63,404Cost of Sales
    
    
    51,225
    
    
    
    42,807Gross Profit
    
    
    27,749
    
    
    
    20,597General and Administrative Expenses
    
    
    25,957
    
    
    
    20,133Impairment of Goodwill
    
    
    
    
    
    
    Depreciation and Amortization
    
    
    1,284
    
    
    
    1,131Operating Income (Loss)
    
    
    508
    
    
    
    (667
    )Other ExpensesInterest Expense, Net
    
    
    1,318
    
    
    
    1,030Amortization of Debt Discount
    
    
    
    
    
    
    933Total Other Expenses
    
    
    1,318
    
    
    
    1,963Net Loss Before Income Tax Expense
    
    
    (810
    )
    
    
    (2,630
    )Income Tax Expense
    
    
    84
    
    
    
    100Net Loss
    
    $
    (894
    )
    
    $
    (2,730
    )Net Loss per Share  Basic and Diluted
    
    $
    (0.01
    )
    
    $
    (0.03
    )Weighted average number of shares  Basic and Diluted
    
    
    88,238
    
    
    
    83,138
    23




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##### Table of Contents



Liquidity and Capital Resources
  Two Quarters
    
    Two QuartersSUMMARY CONSOLIDATED
    
    Ended
    
    EndedSTATEMENTS OF CASH FLOWS (in millions)
    
    September 30, 2006
    
    September 30, 2005Net loss
    
    $
    (0.9
    )
    
    $
    (2.7
    )Net cash (used in) operating activities
    
    $
    (4.5
    )
    
    $
    (3.3
    )Net cash (used in) investing activities
    
    $
    (8.7
    )
    
    $
    (6.2
    )Net cash provided by financing activities
    
    $
    14.3
    
    
    $
    12.2Net increase in cash and cash equivalents
    
    $
    1.1
    
    
    $
    2.7Cash and cash equivalents at the end of the period
    
    $
    1.6
    
    
    $
    4.1
   24




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##### Table of Contents



Government-funded
    
    
    28
    %Institutions
    
    
    43
    %Commercial Insurance
    
    
    12
    %Private Pay
    
    
    17
    %
 Financing Transactions
      25




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##### Table of Contents



Contractual Obligations and Commercial Commitments
  Payments due by March 31,Total
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    2011Operating Leases
    
    $
    2,701
    
    
    $
    1,425
    
    
    $
    963
    
    
    $
    215
    
    
    $
    58
    
    
    $
    40Debt Maturities
    
    
    22,772
    
    
    
    2,406
    
    
    
    19,992
    
    
    
    242
    
    
    
    75
    
    
    
    57Employment Agreements
    
    
    1,257
    
    
    
    867
    
    
    
    390
    
    
    
    
    
    
    
    
    
    
    
    Interest Expense
    
    
    4,219
    
    
    
    2,158
    
    
    
    2,031
    
    
    
    30
    
    
    
    
    
    
    
    Total
    
    $
    30,949
    
    
    $
    6,856
    
    
    $
    23,376
    
    
    $
    487
    
    
    $
    133
    
    
    $
    97
 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  
 Item 4. Controls and Procedures.
 Disclosure Controls and Procedures.
 26




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##### Table of Contents



Changes
in Internal Controls.
 27




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##### Table of Contents



Part II: Other Information
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  
 Item 5. Other Information.
  
 Item 6. Exhibits.
  28




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##### Table of Contents



SIGNATURES
  November 14, 2006
    By:
    /s/ John E. Elliott, IIJohn E. Elliott, IIChairman and Chief Executive Officer
(Principal Executive Officer) November 14, 2006
    By:
    /s/ Rebecca R. IrishRebecca R. IrishSecretary, Treasurer and Chief Financial Officer
(Principal Financial and Accounting Officer) 29




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##### Table of Contents



EXHIBIT INDEX
  ExhibitNo.
    
    Exhibit Description10.1
    
    Description of Chief Executive Officer and Chief Operating Officer Compensation Arrangements approved November
14, 2006.31.1
    
    Certification of the Chief Executive Officer required by rule 13a  14(a) or rule 15d  14(a).31.2
    
    Certification of the Principal Accounting and Financial Officer required by rule 13a  14(a) or rule 15d  14(a).32.1
    
    Chief Executive Officer Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to §206 of the Sarbanes 
Oxley Act of 2002.32.2
    
    Principal Accounting and Financial Officer Certification Pursuant to 18 U.S.C. §1350, as Adopted Pursuant to
§206 of the Sarbanes  Oxley Act of 2002.
 30