|SECURITIES AND EXCHANGE
      COMMISSION                         
|-----------------------------------------------------------------
|Washington, D.C.
      20549                                     
|FORM 10-K/A                                                      
|                                                                 
|                                                                 
|Amendment No. 1                                                  
|                                                                 
|                                                                 
|ANNUAL REPORT                                                    
|PURSUANT TO SECTIONS 13 OR
    15(d)                             
|OF THE SECURITIES EXCHANGE ACT OF
      1934                     
|                                                                 
|For The Fiscal Year Ended December 31, 2005                      
|OR                                                               
|Commission File Number 0-22462                                   
|                                                                 
|                                                                 
|PAINCARE HOLDINGS,
INC.                                          
|(Exact name of Registrant as specified in its
      charter)     
|                                                                 
|                                                                 
|                                                                 
|Florida                                                          
|(State or
      other jurisdiction of                            
|incorporation
      organization)                                
|1030
      N. Orange Avenue, Suite 105, Orlando, Florida         
|(address of
      principal executive offices)                   
|                                                                 
|(407)
      367-0944                                             
|(Registrants
      telephone number, including area code)       
|Securities registered pursuant to Section 12(b) of the
      Act:
|                                                                 
|Title of
      each class                                        
|Common
      Stock, $.0001 par value                             
|                                                                 
|Securities registered pursuant to Section 12(g) of the
      Act:
|NONE                                                             

Indicate by checkmark if the registrant is a
well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes___ No X .

Indicate by checkmark if the registrant is not
required to file report pursuant to Section 13 or Section 15(d) of the Act.
Yes___ No X_ .

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

Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained herein, and will
not be contained, to the best of the Registrants knowledge, in definitive proxy
or information statements incorporated by reference in Part III of the Form 10-K
or any amendment to this Form 10-K. X

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Indicate by checkmark whether the registrant is a
large accelerated filer, an accelerated filer, or a non-accelerated filer. See
definition of (accelerated filer and large accelerated filer), an accelerated
filer, or a non-accelerated filer in Rule 12b-2 of the Exchange Act.

|Large accelerated filer __Accelerated
      filer  XNon-accelerated filer
      __                                       | 
|------------------------------------------------------------------------------------------------------------------------ | 
|Indicate by checkmark whether the registrant is a
      shell company (as defined in Rule 12b-2 of the Act).  Yes___No X

The aggregate market value of the Common Stock
outstanding and held by non-affiliates (as defined in Rule 405 under the
Securities Act of 1933) of the registrant, based upon the closing sale price of
the Common Stock on the American Stock Exchange on May 26, 2006 was
approximately $91.0 million.

As of May 26,2006 the number of common shares
outstanding was: 64,050,365.

DOCUMENTS INCORPORATED BY
REFERENCE

None.

**EXPLANATORY NOTE**

PainCare Holdings, Inc.
(the "Company") is filing this Amendment No. 1 to its Annual Report on Form 10-K
for the fiscal year ended December 31, 2005 (the "2005 10-K"), which was
originally filed on June 1, 2006. As a part of a review by the Division of
Corporation Finance of the SEC of our Annual Report on Form 10-K for the year
ended December 31, 2005 we received and responded to the SEC staff
comments. The purpose of this Amendment No. 1 to Form 10-K is to expand
certain disclosures based on the SEC request which primarily expands our
disclosure regarding the restatements as described in Note 2 of the Company's
Consolidated Financial Statements for the twelve months ended December 31, 2005.
As of September 29, 2006 we are waiting approval from the SEC for the comments
related to further clarification to Note 2 to the Company's Consolidated
Financial Statements.    This Amendment No.1 amends: Item
7, Analysis of Financial Condition and Results of Operations for the Twelve
Months Ended December 31, 2005 compared to Twelve Months Ended December 31, 2004
under Management's Discussion and Analysis of Financial Condition and Results of
Operations to clarify compensation expense - variable options was included in
general and administrative expenses; (ii) Item 7, Other Debt, under Management's
Discussion and Analysis of Financial Condition and Results of Operations to
include a table of contractual obligations; (iii) Note 2 to the Company's
Consolidated Financial Stateements to expand its disclosure regarding the
restatements noted therein; (iv) Exhibit 31.1 and Exhibit 31.2, Certification of
Chief Executive Officer and Chief Financial Officer provide language certifying
officers' responsiblity for maintaining internal control over financing
reporting for the Company and the language stating the certifying officer has
designed internal control over financial reporting as required under Item 308(a)
and(b) of Regulation S-K.    This Amendment No. 1
does not result in a change in the Company's previously reported earnings shown
in its Consolidated Statements of Operations or on any amounts previously
reported in its Consolidated Balance Sheets. Further, this Amendment No. 1 does
not reflect events occuring after the filing of the 2005 Form 10-K, and does not
modify or update the disclosures therein in any way other than as required to
reflect the amendments described above.

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FORWARD-LOOKING STATEMENTS

The terms PainCare, Company, we, our, and
us refer to PainCare Holdings, Inc. and its consolidated subsidiaries unless
the context suggests otherwise.

This annual report
contains and may incorporate by reference forward-looking statements,
including statements regarding our expectations, beliefs, intentions or
strategies regarding the future. Such statements can be identified by the use of
forward-looking terminology such as may, will, believe, intend,
expect, anticipate, estimate, continue, or other similar words.
Variations on those or similar words, or the negatives of such words, also may
indicate forward-looking statements.

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

- the acquisition of businesses or the launch of new lines of
  business, which could increase operating expenses and dilute operating
  margins;
- the inability to attract new patients by our owned practices,
  the managed practices and the limited management practices;
- increased competition, which could lead to negative pressure
  on our pricing and the need for increased marketing;
- the inability to maintain, establish or renew relationships
  with physician practices, whether due to competition or other factors;
- the inability to comply with regulatory requirements
  governing our owned practices, the managed practices and the limited
  management practices;
- that projected operating efficiencies will not be achieved
  due to implementation difficulties or contractual spending commitments that
  cannot be reduced; and
- to the general risks associated with our businesses.

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

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

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|PART I     |                                                                                                                    |   
|---------- | ------------------------------------------------------------------------------------------------------------------ | --
|Item 1.    | Business                                                                                                           | 1 
|Item 1 A.  | Risk Factors                                                                                                       | 20
|Item 1 B.  | Unresolved Staff Comments                                                                                          | 33
|Item 2.    | Properties                                                                                                         | 34
|Item 3.    | Legal Proceedings                                                                                                  | 35
|Item 4.    | Submission of Matters to a Vote of Security Holders                                                                | 35
|PART II    |                                                                                                                    |   
|Item 5.    | Market for Registrants Common Equity, Related Stockholder Matters
      and Issuer Purchases of Equity Securities | 36
|Item 6.    | Selected Consolidated Financial Data                                                                               | 39
|Item 7.    | Managements Discussion and Analysis of Financial Condition and
      Results of Operations                        | 40
|Item 7A.   | Quantitative and Qualitative Disclosures About Market Risk                                                         | 46
|Item 8.    | Financial Statements and Supplementary Data                                                                        | 47
|Item 9.    | Changes in and Disagreements with Accountants on Accounting and
      Financial Disclosure.                        | 48
|Item 9A.   | Controls and Procedures                                                                                            | 48
|Item 9B.   | Other Information                                                                                                  | 51
|PART III   |                                                                                                                    |   
|Item 10.   | Directors and Executive Officers of the Registrant                                                                 | 51
|Item 11.   | Executive Compensation                                                                                             | 55
|Item 12.   | Security Ownership of Certain Beneficial Owners and Management and
      Related Stockholder Matters               | 61
|Item 13.   | Certain Relationships and Related Transactions                                                                     | 63
|Item 14.   | Principal Accountant Fees and Services                                                                             | 63
|PART IV    |                                                                                                                    |   
|Item 15.   | Exhibits and Financial Statement Schedules                                                                         | 64
|SIGNATURES |                                                                                                                    | 66

4

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PART I

ITEM 1. BUSINESS

Overview

PainCare Holdings, Inc.
is a health care services company focused on the treatment of pain. Through our
21 pain-focused physician practices and 9 outpatient surgery centers, we offer
pain management, minimally invasive spine surgery and ancillary services,
including orthopedic rehabilitation, electrodiagnostic medicine, intra-articular
joint injections and diagnostic imaging services. Our physicians are trained in
specialties such as interventional pain management, orthopedics or physiatry,
and utilize the latest medical technologies, clinical practices and equipment to
offer cost-effective pain relief.

We have grown our
business through a combination of organic growth and acquisitions of
complementary physician practices and outpatient surgery centers. Since November
2004, we have acquired 7 physician practices and 6 surgery centers. To grow our
physician practice revenue, our strategy is to acquire or enter into management
agreements with profitable, well-established physician practices and expand the
range of services they offer. For practices we have acquired, we survey the
acquired practice and determine whether to expand the scope of services provided
by the practice, including adding additional specialists such as physicians
certified in pain management, neurosurgery, orthopedics or physiatry. By
providing these additional services within the practice, we believe each
practice can improve clinical outcomes, shorten treatment time and improve its
profitability.

In contrast to
historical physician practice management business models that forced the
implementation of common information technology systems, such as shared billing
and collection, clinical data and electronic health record systems, we deploy
only those resources necessary to support the growth of additional services.
Changes to information technology systems are kept to a minimum, and changes to
billing and collection procedures are also minimized. As a result, we strive to
achieve minimal disruption in the practices operations while at the same time
facilitating the growth of the practice from within.

Our growth strategy for
outpatient surgery centers is to identify profitable, high volume centers which
provide pain management and orthopedic procedures. Many surgical procedures for
the treatment of pain can be performed outside a traditional hospital setting,
which we believe represents a cost-effective and convenient alternative for
patients and health care payors. We believe that our surgery centers offer the
latest orthopedic and interventional pain management technology and anesthetic
techniques, contributing to improved clinical outcomes and patient satisfaction,
in addition to growing our revenue.

We also have
relationships with physician practices that we do not own, but provide limited
management services to, such as in-house physical therapy, electrodiagnostic
services and intra-articular joint injection programs. With these additional
resources, the physician practice itself is able to offer a broader range of
services to its patient base.

According to a joint
monograph published by the Joint Commission on Accreditation of Healthcare
Organizations (JCAHO) and the National Pharmaceutical Council, each year an
estimated 25 million Americans experience acute pain due to injury or surgery
and another 50 million suffer chronic pain. As the baby boom population ages,
the number of people who will require treatment for pain from back disorders,
degenerative joint diseases, rheumatologic conditions, visceral diseases and
cancer is expected to rise. A 2004 study by the American Chronic Pain
Association found that among those with chronic back pain, 56% of 18-34 year
olds, 50% of 35-64 year olds, and 49% of 65+ year olds reported that their back
was the source of the most pain. Inadequate control of pain interferes with the
pain sufferers ability to carry out activities of daily living, such as work,
and may result in psychological impairment as well. According to the same
source, the annual cost to Americans of pain suffering is estimated at $100
billion each year.

5

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The medical communitys
awareness of the need for pain management has been increasing in recent years.
In 1996, the American Pain Society proposed that pain was the fifth vital sign,
in addition to pulse, blood pressure, body temperature and respiration, and the
Veterans Health Administration has adopted pain as the fifth vital sign in their
national pain management strategy. In 2001, JCAHO published standards that
incorporated pain management into the standards for accredited health care
providers. The JCAHO standards stress patients rights to appropriate assessment
and management of pain, and require the treatment of pain along with the
underlying disease or disorder. As a result, we believe that pain management is
growing in significance as a medical specialty, which we believe will result in
an increased demand for pain treatment.

We have relationships with 64 physician practices and
ambulatory surgery centers. Through our subsidiaries, we operate three types of
practice arrangements:

- We employ licensed physicians in 7 practices which we
  own;
- We have acquired the non-medical assets and we provide
  general management services to 14 physician practices;
- We provide limited management services to 34 physician
  practices in areas such as in-house physical therapy, electrodiagnostic
  services and intra-articular joint injection
  programs.

We have acquired and operate 9 outpatient surgery
centers.

Business Strategy

Our objective is to become the leading provider of
specialty pain care services in North America. To grow our practices, we intend
to:

- Focus on pain treatment. All of our operations to date have
  been specifically focused in the area of pain treatment. We intend to continue
  to focus on the treatment of pain through acquisition,
  management, and the provision of services to practices that serve the pain
  treatment market.
- Deploy additional services to grow physician practices. We
  intend to enhance the capacity of our practices for organic growth by
  increasing the range of services offered by our practices.
  By deploying additional physicians and equipment, we can perform in-house
  those necessary procedures and services that would
  ordinarily be referred to other providers, which we believe can result in
  higher quality care and increased revenues to our practices.
- Acquire profitable, well-established physician practices and
  surgery centers. We utilize a highly disciplined approach to evaluating
  acquisitions of additional practices and surgery centers.
  We have an extensive, multi-point due diligence evaluation process that we
  perform prior to acquisition, including such criteria as
  clinical quality, physician reputation, profitability and procedure and
  revenue growth rates. We intend to only acquire practices and surgery
  centers that we believe to be well-established with the capacity
  for future profitability and organic growth.
- Utilize advanced medical technologies. Many of our physicians
  are thought leaders in their respective fields, and employ the latest clinical
  techniques and medical technologies for the treatment of
  pain. We intend to support the use of new technology in pain treatment through
  the deployment of additional specialized physicians who
  are familiar with these techniques and technologies and by providing the
  latest, state-of-the-art equipment. For example, we deploy
  MedX rehabilitation equipment to orthopedic rehabilitation facilities, which
  has demonstrated the ability to improve patient outcomes.

6

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- Develop additional services to enhance practice
  profitability. As the needs of our practices warrant we will develop
  additional programs to support their organic growth. For
  example, we may deploy imaging modalities such as mobile MRI equipment, or
  additional services such as in-office pharmaceutical dispensing, in order to provide a complete pain treatment program. In
  January 2005, we introduced a new program, called the Intra-Articular Joint
  Program, which is a nonsurgical treatment for knee pain
  and stiffness caused by osteoarthritis.

Our Executive Offices

Our principal executive
offices are located at 1030 North Orange Avenue, Suite 105, Orlando, Florida
32801, and our telephone number is (407) 367-0944. Our website is located atwww.paincareholdings.com. Our
website address is included as an inactive textual reference only.

Recent DevelopmentsAcquisitions

Since our founding in
2000, we have completed twenty-one practice acquisitions, nine surgery center
acquisitions and purchased a majority interest in one healthcare services
company. The following acquisitions (all managed unless indicated otherwise)
have been completed since January 1, 2005:

|                                                                                                                                                                                                              | Effective        |                                                                                                                                                                                                  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Nature of
      Business                                                                                                                                                                             | Date of Purchase | Purchase Price                                                                                                                                                                                   
|Colorado Pain Specialists, PC., an
      interventional pain management  practice located in
      Colorado                                                                                                   | April 13, 2005   | $2,125,000 in cash and 653,698 shares of
      common stock, plus  contingent payments of up to $4,250,000
      in cash and common stock  if certain performance goals are
      met.           
|
|
|PSHS Alpha Partners, Ltd. d/b/a Lake Worth Surgical Center., a
      fully  accredited ambulatory surgical center located in Lake
      Worth, Florida                                                        | May 12, 2005     | $6,930,940 in cash and 324,520 shares of common stock for a
      67.5%  ownership interest.                                                                                                     
|
|PSHS Beta Partners, Ltd. d/b/a Gables Surgical
      Center, a fully  accredited ambulatory surgical center located in
      Miami, Florida                                                                   | August 1, 2005   | $3,282,304 in cash and 868,624 shares of
      common stock, plus  promissory notes totaling $1,536,952,
      due one year from the closing  date, for a 73% ownership
      interest.          
|
|
|Piedmont Center for Spinal Disorders, P.C., an orthopedic spine
      surgery  practice located in Danville, Virginia                                                                                         | August 9, 2005   | $1,000,000 in cash and 263,400 shares of PainCares common
      stock,  plus contingent payments of up
      to $2,000,000 in cash and common  stock if certain
      performance goals are met.
|
|
|Floyd O. Ring, Jr., M.D., P.C., an pain
      management physician practice  located in Denver, Colorado                                                                                                      | October 3, 2005  | $1,250,000 in cash and 349,162 shares of
      PainCares common stock,  plus contingent payments of up to $2,500,000 in cash and
      common  stock if certain performance goals are met.      
|
|
|Christopher J. Centeno, M.D., P.C. and
      Therapeutic Management, Inc.,  collectively doing business as The
      Centeno Clinic, a pain management  physician practice located in
      Denver, Colorado. | October 14, 2005 | $3,750,000 in cash and 1,132,931 shares of
      PainCares common  stock, pluscontingent payments of up to $7,500,000 in cash
      and  common stock if certain performance goals are met.     
|
|

7

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|Center for Pain Management ASC, LLC, a fully
      accredited ambulatory  surgical center with four locations in
      Maryland.                                            | January 3,
      2006 | $3,750,000 in cash and 1,021,942 shares of
      common stock, plus  promissory notes totaling $7,500,000 in
      principal, due one year from  the closing
      date.                                                                                     
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
|
|REC, Inc. & CareFirst Medical Associates,  P.A.,
      co-located pain  management and orthopedic rehabilitation 
      practices located in  Whitehouse, Texas.            | January 6, 2006       | $625,000 in cash and 191,131 shares of PainCares common
      stock,  plus contingent payments of up to $1,250,000 in cash and
      common  stock if certain performance goals are
    met.                                                                
|
|
|Desert Pain Medicine Group, a pain
      management physician practice  with three locations in
      California.                                                           | January 20, 2006      | $1,500,000 in cash and 471,698 shares of
      PainCares common stock,  plus contingent payments of up to
      $3,000,000 in cash and common  stock if certain performance goals
      are met.                                                            
|
|
|Amphora, LLC, an intraoperative monitoring company based in 
      Denver, Colorado, serving medical institutions throughout
      Colorado,  Wyoming, Arizona and Nebraska | February 1, 2006      | PainCare purchased a 60% ownership interest and paid
      $3,250,000  in cash and 1,035,032 shares of PainCares common
      stock, plus  contingent payments of up to $8,500,000 in cash and
      common stock  if certain performance goals are
    met.
|
|
|

Industry BackgroundAcute and Chronic Pain

According to a joint
monograph published by JCAHO and the National Pharmaceutical Council, each year
an estimated 25 million Americans experience acute pain due to injury or surgery
and another 50 million suffer chronic pain. As the baby boom population ages,
the number of people who will require treatment for pain from back disorders,
degenerative joint diseases, rheumatologic conditions, visceral diseases and
cancer is expected to rise. Inadequate control of pain interferes with the pain
sufferers ability to carry out activities of daily living, and may result in
psychological impairment as well. According to the same source, the annual cost
to Americans of pain suffering is estimated at $100 billion each year. Depending
on the nature of the underlying disorder, the type of pain, severity and
frequency of occurrence can vary widely. Common types of acute pain are
associated with illnesses, surgical procedures, injuries, burns, or obstetrical
pain related to labor and delivery. Common types of chronic pain include back
pain, often localized in the lower back or neck regions, arthritis pain and
headache or migraine. Chronic pain is also associated with degenerative diseases
such as cancer.

Clinical awareness of
the need for pain management has been increasing in recent years. In 1996, the
American Pain Society proposed that pain was the fifth vital sign, in addition
to pulse, blood pressure, body temperature and respiration, and the Veterans
Health Administration has adopted pain as the fifth vital sign in their national
pain management strategy. In 2001, JCAHO published standards that incorporated
pain management into the standards for accredited health care providers. The
JCAHO standards stress patients rights to appropriate assessment and management
of pain, and require the treatment of pain along with the underlying disease or
disorder. As a result, we believe that pain management is growing in
significance as a medical specialty, which will result in an increased demand
for pain treatment.

Clinical Approaches to Pain
Treatment

The standard of care
for treatment of chronic or acute pain may vary greatly depending on the
underlying cause of the patients pain. A patient who is suffering from pain
generally receives a clinical assessment, including a review of the patients
medical history, to attempt to determine the cause of the patients
pain.

8

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Diagnosis. To assist in determining the pains
origin, the physician may employ one or more imaging modalities, such as x-ray,
computed tomography or CT scan, or magnetic resonance imagery or MRI. In
addition, the physician may order an electrodiagnostic medical consultation,
which can be helpful to establish an accurate diagnosis of a clinical problem
that suggests neuromuscular disorder. Electrodiagnosis involves the placement of
electrodes in proximity to the patients nervous system, and the application of
electrical pulses that stimulate nerve function. By identifying those nerves
that are generating the pain response, the physician can more accurately
determine the cause of the patients pain and determine the appropriate
treatment.

Pain
Management.Pain management has emerged as a separate
specialty in medicine. Methods used to treat chronic or acute pain are
continually evolving. Some of the more common approaches to the treatment of
pain include the following:

- Analgesics. Pharmaceutical
  treatments for pain include nonopioid analgesics, including nonsteriodial
  anti-inflammatory drugs, or NSAIDS, such as aspirin and
  acetaminophen, opioid analgesics, such as morphine, and other drugs that have
  analgesic properties that are useful in treating pain, such as certain
  antiepileptic and antidepressant drugs;
- Diagnostic Injection.Injection of
  anesthetics and anti-inflammatory agents directly into the area surrounding
  the pain generating nerve can relieve pain symptoms and
  often allow the nerve area to heal and repair itself. These injections, often
  referred to as epidural or facet blocks, allow the pain specialist to
  identify the specific anatomic structure that is generating the
  pain response;
- Implantable Pumps. Implantable
  pain pumps are devices inserted in the patients body that deliver a constant
  dose of anesthetic to a particular region of the body. The
  pain specialist can alter the level of anesthetic delivered depending on
  patient need. Implantable pumps are often used to treat cancer pain or
  severe back pain;
- Neuromodulation Devices.Neuromodulation devices such as implantable stimulators or pumps are
  used to treat chronic pain by altering nervous system activity either electrically or pharmacologically; and
- Radio Frequency Nerve Ablation. RF
  Nerve Ablation is a procedure used to temporarily deactivate minor nerves
  around the spine by heating surrounding tissue with a
  special probe to deactivate the pain generating nerve fibers.

Orthopedic
Rehabilitation.One of the most frequent causes of
chronic pain is injury or disease affecting the spine. Orthopedic rehabilitation
is often the first approach to the treatment of back pain, and is frequently
used following surgical treatment to post-operatively restore the patients
muscle function. Depending on the underlying cause of the patients back pain
and its severity, the physician may recommend orthopedic rehabilitation, which
may include:

- Hot and cold packs;
- Electric stimulation or electrotherapy;
- Massage;
- Exercise;
- Ultrasound therapy; and
- Physical therapy sessions, utilizing specialized orthopedic
  rehabilitation equipment.

9

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Inpatient Spine
Surgery.If the patient does not respond to orthopedic
rehabilitation, or if the extent of the disease or injury is too great, the
physician may elect surgical treatment for back pain. Traditional surgical
treatments for back pain include surgeries such as:

- Spinal fusion, which involves
  fusing one or more vertebrae together using screws, rods or grafts;
- Anterior discectomy, which
  involves removal of a spinal disc;
- Anterior corpectomy, which
  involves removing a portion of the entire vertebra or disc; and
- Laminectomy, where a portion of
  the entire vertebra is removed to repair a disc, access the spinal cord or
  relieve degeneration of the spine.

These techniques are
typically performed in an inpatient hospital setting, and involve exposing a
large area of the patients spine. Following the operation, a long recovery
period with extensive rehabilitation is typically required.

Minimally Invasive
Surgery.In contrast to traditional open surgery
approaches, minimally invasive surgery techniques have been developed that
require only a small incision and the use of endoscopic instruments to perform
the operation. Some of the minimally invasive surgical treatments for back pain
include:

- Discogram,a diagnostic procedure
  that involves injecting a dye into the disc of the spine, and using an x-ray
  to determine whether the disc has been damaged;
- Intra-Discal Electro-Thermal AnnuloplastyorIDET,which is used
  to treat patients with pain due to disc herniations in the lower back. Using
  an x-ray for guidance, a small thermal catheter is
  inserted into the herniated disc and gradually heated, raising the temperature
  inside the disc. The heat contracts and thickens the
  protein of the disc wall as well as deactivating many of the nerve endings
  responsible for the pain in the damaged disc;
- Percutaneous Discectomy,which
  employs a mechanical or laser-based probe inserted into a herniated spinal
  disc, which removes material from the disc to relieve
  pressure and associated pain;
- Nucleoplasty,for the treatment of
  pain from mildly herniated discs causing pressure on adjacent nerve roots.
  Using an x-ray for guidance, a needle and specialized
  device are inserted into the herniated disc applying heat to remove the excess
  tissue and seal the disc; and
- Kyphoplasty,which is used to
  treat vertebral compression fractures associated with osteoporosis. Again
  using an x-ray for guidance, the bone is drilled and a balloon is inserted and inflated in the fracture area. The space
  created by the balloon is filled with orthopedic cement, binding the fracture
  and relieving pain.

We believe that there
are many advantages to minimally invasive surgery over traditional open surgery,
including shorter time involved, reduced cost and faster patient recovery and
return to normal activities.

Growth of Existing Practices

To grow revenue, we
assist our owned and managed practices with the addition of selected specialty
physicians and treatment services. This permits the practice to offer in house
additional services that would previously be referred out to other providers. As
a result, we believe that the treating physician is better able to monitor the
patient, and respond to any specific treatment needs more rapidly and

10

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effectively than if the patient were using an outside
provider. We believe that this approach results in the opportunity for improved
clinical outcomes, shortened treatment times and increased revenue to the
physician practice.

In our experience,
physicians operating high-growth, busy practices often have limited time and
resources to evaluate the potential impact of the deployment of additional
services and equipment. Even if the physician has obvious demand for additional
services, it can be time-consuming and costly to locate, qualify, negotiate with
and incorporate additional specialists into the existing practice. Further, the
time and resources required to physically expand the practice, through purchase
or lease of additional real estate, design and construction of new facilities,
and the acquisition and deployment of capital-intensive equipment are often
significant barriers to growth for the practicing physician. Our approach is to
relieve the physician of the administrative burdens associated with expanding
the practice, which we believe allows the physician to focus more effectively on
patient care, while creating opportunities for the physicians practice to
support organic growth.

Additional Physician
Services

Depending on the size,
growth profile and type of physician practice, we may deploy additional
specialists certified in pain management, neurosurgery, orthopedics or
physiatry. For example, with regard to an existing orthopedic surgery practice,
we may add an additional spine surgeon to handle additional patients, and deploy
an interventional pain management specialist to perform pain management
procedures. Our objective is to offer complementary services to the physicians
existing patient bases based on current trends.

We currently own and
operate nine outpatient surgery centers which are located within physician
offices. By providing these centers within the physician office, we are able to
charge a technical fee for procedures performed on our premises, in addition to
the professional fee charged by the physician. As needed, we will construct
outpatient surgery centers or individual procedure rooms within our practice
offices to enable outpatient procedures to be performed. We believe that such
facilities are well suited to pain management and minimally invasive surgical
procedures, and represent a lower-cost alternative to inpatient or dedicated
surgery center facilities.

Ancillary Services

Orthopedic
Rehabilitation Services.We have a program for the
deployment of orthopedic rehabilitation services to the physician practice that
facilitates advanced strength testing and restoration of function within the
physician office environment. As needed, we will establish an in-house, fully
staffed and provisioned rehabilitation clinic, with additional physiatrists,
physical therapists or technicians as practice requirements dictate. We provide
all supplies and equipment necessary for the operation of the clinic including
state-of-the-art MedX equipment. MedX equipment has been clinically and
academically demonstrated to be efficacious in rehabilitating patients. We
believe that by providing orthopedic rehabilitation services in-house, the
physician is better able to monitor the patients progress toward recovery,
which contributes to improved clinical outcomes.

Electrodiagnostic
Services.We also have a program for the deployment of
an electrodiagnostic medicine program as a direct extension of the neurologic
portion of the physical examination. We provide electrodiagnostic equipment,
supplies, and technicians to perform procedures, and arrange for physician
over-read and review of results. We believe that by performing these procedures
in-house, we have the potential to enhance accuracy and time to
diagnosis.

Diagnostic
Imagery.We deploy magnetic resonance imagery, or MRI,
technology to selected facilities. We believe that providing diagnostic imagery
technology to pain management practices will be more convenient for patients and
allow physicians to better diagnose and treat acute and chronic pain.

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Intra-Articular
Joint Program. In January 2005, we unveiled a new
proprietary ancillary service designed to address severe knee pain and stiffness
caused by osteoarthritis, which currently affects over 21 million Americans. The
intra-articular joint program, will be integrated into the service offerings
provided by each suitable physician practice in our national healthcare
organization. In addition, the intra-articular joint program will be marketed
nationally to non-affiliated physician practice groups under a limited
management agreement, similar to our proprietary orthopedic rehabilitation and
electro diagnostic medicine programs. The intra-articular joint program is a
proprietary, technologically advanced, non-operative knee treatment protocol
that combines a five to six week series of strategically targeted injections of
Hyalgan - the first FDA-approved hyaluronan therapy to treat osteoarthritis knee
pain in the United States, with synergistic orthopedic rehabilitation procedures
specifically designed to strengthen blood flow to the knee.

Real Estate
Services.To support the growth of our physician
practices, we provide real estate services to practices which require additional
office space or a specialty installation such as a fluoroscopy suite or
in-office procedure room. Our services include:

- Locating additional office space within the practices local
  area;
- Negotiation of purchase or lease terms;
- Analysis of building codes, architectural requirements and
  design services; and
- Construction management services.

We believe that by
providing these real estate services to our practices, the physicians can devote
more time to the clinical aspects of the practices, enhancing the quality of
care delivered and the profitability of the practices.

Recent Developments

Intraoperative
Monitoring.In addition to our core business as set
forth above, we also provide advanced Intraoperative Monitoring (IOM) and
interpretation services to hospitals and surgeons through a majority-owned
subsidiary Amphora. During surgical procedures, IOM is used to continuously
assess the functional integrity of a patients nervous system, identify neural
structures in the operative field, and avoid damage to those structures. In this
regard, IOM offers protection of neural tissues and organs (brain, spinal cord
and peripheral nerves) during surgery. By measuring spontaneous or elicited
(evoked) electrical signals produced by the nervous system or attached muscle
groups during surgery, impending injury or nerve irritation can be detected.
This offers an opportunity to intervene and prevent permanent injury. IOM has
been shown to be effective in reducing operative neurological complications in
several types of surgeries, and is best documented in spinal surgeries for
protection of the spinal cord. IOM has also shown to be highly effective in ENT
craniofacial, orthopedic, and cardio- and cerebro-vascular surgeries.

Our Operations

We have acquired and
operate seven physician practices which are wholly-owned subsidiaries of ours
and we have acquired the non-medical assets and provide management services to
fourteen physician practices, in addition to acquiring a total of nine
outpatient surgery centers.

Each practice is
focused on treatment of acute or chronic pain. Services provided in our
practices include pain management, minimally invasive spine surgery, orthopedic
rehabilitation, electro diagnostic medicine and diagnostic imagery, with each
practice offering a differing mix of specific services while remaining focused
on pain treatment. The following table is a list of our owned practices (O),
managed practices (M) and outpatient surgery centers, including the original
specialty of these practices and the services that we have added to them after
we acquired the non-medical assets and entered into management agreements with
them.

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|                                                                             |                  | Effective           |                                          |                                                                                                                                                                      
|---------------------------------------------------------------------------- | ---------------- | ------------------- | ---------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Practice Name                                                                | Location         | Date of Transaction | Initial Specialty                        | Added
      Service(s)                                                                                                                                               
|Rothbart Pain Management Clinic, Inc.
      (O)                              | Toronto, Canada  | December 1, 2000    | Pain Management                          | Additional Physicians                                                                                                                                                
|Advanced Orthopedics of South  Florida II, Inc. (O)                          | Lake Worth, FL   | January 1, 2001     | Orthopedic Surgery                       | Orthopedic Rehabilitation,
      Electrodiagnostic  Medicine, Additional Physicians,
      Intra-  Articular Joint                                                   
|
|
|Pain and Rehabilitation Network, 
      Inc. (O)                             | Orange Park, FL  | December 12, 2002   | Pain Management                          | Orthopedic Rehabilitation,
      Electrodiagnostic  Medicine, Additional Physicians,
      Intra-  Articular Joint, (2) Additional Locations                         
|
|
|Medical Rehabilitation Specialists  II, Inc. (O)                             | Tallahassee, FL  | May 16, 2003        | Pain Management                          | Orthopedic Rehabilitation, Additional
      Building  Space                                                                                                          
|
|Associated Physicians Group (M)                                              | OFallon, IL     | August 6, 2003      | Orthopedic  Rehabilitation               | Orthopedic Rehabilitation,
      Intra-Articular  Joint, Additional Physicians, (1)
      Additional  Location                                                       
|
|
|Spine & Pain Center, P.C. (M)                                                | Bismarck, ND     | December 23, 2003   | Pain Management                          | Orthopedic Rehabilitation, Intra-
      Articular  Joint                                                                                                             
|
|Health Care Center of Tampa, Inc. 
      (O)                                 | Lakeland, FL     | December 30, 2003   | Pain Management                          | Orthopedic Rehabilitation,
      Electrodiagnostic  Medicine, Intra-Articular Joint
      Program                                                                    
|
|Bone & Joint Surgical Clinic, Inc. 
      (O)                                | Houma, LA        | December 31, 2003   | Orthopedic Surgery                       | Orthopedic Rehabilitation,
      Electrodiagnostic  Medicine, Additional Building Space,
      Intra-  Articular Joint                                               
|
|
|Kenneth M. Alo, M.D., P.A. (M)                                               | Houston, TX      | December 31, 2003   | Pain Management                          | Electrodiagnostic Medicine                                                                                                                                           
|Denver Pain Management, P.C. 
      (M)                                      | Denver, CO       | April 29, 2004      | Pain Management                          | Orthopedic Rehabilitaion,
      Electrodiagnostic  Medicine, Intra-Articular Joint,
      Additional  Physician                                                      
|
|
|Georgia Pain Physicians, P.C. (M)                                            | Atlanta, GA      | May 25, 2004        | Pain Management                          | Fellowship Program, Additional Physician                                                                                                                             
|Georgia Surgical Centers, Inc. (O)                                           | Atlanta, GA      | May 25, 2004        | Three Ambulatory  Surgical
      Centers | N/A                                                                                                                                                                  
|
|Dynamic Rehabilitation Centers 
      (M)                                    | Detroit, MI      | June 1, 2004        | Orthopedic  Rehabilitation               | Orthopedic Rehabilitation,
      Intra-Articular  Joint                                                                                                              
|
|Rick Taylor, D.O., P.A. (M)                                                  | Palestine, TX    | June 7, 2004        | Pain Management                          | Orthopedic Rehabilitation,
      Electrodiagnostic  Medicine, Diagnostic Imaging,
      Intra-Articular  Joint, Additional Physicians, (1)
      Additional  Location
|
|
|
|Benjamin Zolper, M.D., Inc. (O)                                              | Bangor, ME       | July 1, 2004        | Pain Management                          | Orthopedic Rehabilitation,
      Electrodiagnostic  Medicine, Office Expansion,
      Additional  NP & PT                                                            
|
|
|The Center for Pain Management 
      (M)                                    | Baltimore, MD    | December 1, 2004    | Pain Management                          | Orthopedic Rehabilitation,
      Electrodiagnostic  Medicine, Intra-Articular Joint,
      Additional  PA & PT                                                       
|
|
|Colorado Pain Specialists, P.C. 
      (M)                                   | Denver, CO       | April 15, 2005      | Pain Management                          | Electrodiagnostic Medicine,
      Intra-Articular  Joint, Additional PA                                                                                              
|
|PSHS Alpha Partners, Ltd. d/b/a  Lake
      Worth Surgical Center (O)        | Lake Worth, FL   | May 12, 2005        | One Ambulatory  Surgical Center          | N/A                                                                                                                                                                  
|
|PSHS Beta Partners, Ltd. d/b/a 
      Gables Surgical Center (O)             | Miami, FL        | August 1, 2005      | One Ambulatory  Surgical
      Center    | N/A                                                                                                                                                                  
|
|Piedmont Center for Spinal Disorders, P.C.
      (M)                         | Danville, VA     | August 9, 2005      | Orthopedic Surgery                       | Orthopedic Rehabilitation,
      Electrodiagnostic  Medicine, Intra-Articular Joint,
      Additional  Physician                                                     
|
|
|Floyd O. Ring, Jr., M.D., P.C. (M)                                           | Denver, CO       | October 3, 2005     | Pain Management                          | (1) Additional Location, Additional
      Physician                                                                                                                  
|Christopher J. Centeno, M.D., P.C. & 
      Therapeutic Management, Inc. (M) | Denver, CO       | October 14, 2005    | Pain Management                          | Orthopedic Rehabilitation,
      Electrodiagnostic  Medicine, Intra-Articular Joint,
      Additional  PA                                                            
|
|
|The Center for Pain Management  ASC,
      LLC (M)                           | Baltimore, MD    | January 3, 2006     | Four Ambulatory  Surgical
      Centers  | N/A                                                                                                                                                                  
|
|REC, Inc. & CareFirst Medical Associates (M)                                 | Whitehouse, TX   | January 6, 2006     | Pain Management                          | Orthopedic Rehabilitation, Electrodiagnostic  Medicine,
      Intra-Articular Joint                                                                                  
|
|Desert Pain Medicine Group (M)                                               | Palm Springs, CA | January 20, 2006    | Pain Management                          | Intra-Articular Joint                                                                                                                                                

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In addition to our 7
owned practices and 14 managed practices, we provide limited management services
and equipment to 34 other practices throughout the country, including orthopedic
rehabilitation, electrodiagnostic services and intra-articular joint therapy and
equipment. We also own majority interest in nine surgery centers and an
intraoperative monitoring company.

Operations Management

When we acquire or
enter into a management agreement with a practice, we focus on integrating the
practice with our operations. We have an eight-member team that is charged with
facilitating a smooth transition after closing. Our integration team, in
coordination with our consultants, legal counsel and independent accountants,
works with the existing practice administrators and staff to perform such
functions as:

- Applying for provider numbers from Medicare and other health
  care payors to ensure continuity of reimbursement;
- Performing a complete post-transaction audit of the practice
  accounting records; and
- Developing detailed budgets for operating performance with
  physicians, which are based on historical operating performance.

Once initial
integration is complete, our integration team works with the physician and
practice administrators to develop a plan for the implementation of additional
physician services and ancillary services. For example, our integration and real
estate personnel may devise a plan for the addition of an interventional pain
management specialist to the practice, and develop and implement a detailed plan
for the addition of a fluoroscopy suite to support minimally invasive surgical
treatments that require x-ray guidance.

Following the
integration and deployment of additional services, our integration team assists
PainCares management in monitoring the practice and ensuring that performance
targets are met. If the practices growth needs warrant, the integration team
may be deployed to provide additional services or assist the practice in
achieving its growth targets.

In contrast to
historical physician practice management business models that required the
implementation of common information technology systems, such as shared billing
and collection,

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clinical data and electronic health record systems,
we deploy only those resources necessary to support the growth of additional
services. Changes to information technology systems are kept to a minimum, and
changes to billing and collection procedures are also minimized, subject to our
legal, oversight and reporting requirements.

Business Strategy

Our objective is to become the leading provider of
specialty pain care services in North America. To grow our practices, we intend
to:

- Focus on pain treatment. All of our operations to date have
  been specifically focused in the area of pain treatment. We intend to continue
  to focus on the treatment of pain through acquisition,
  management, and the provision of services to practices that serve the pain
  treatment market.
- Deploy additional services to grow physician practices. We
  intend to enhance the capacity of our practices for organic growth by
  increasing the range of services offered by our practices.
  By deploying additional physicians and equipment, we can perform in-house
  those necessary procedures and services that would
  ordinarily be referred to other providers, which we believe can result in
  higher quality care and increased revenues to our practices.
- Acquire profitable, well-established physician practices and
  surgery centers. We utilize a highly disciplined approach to evaluating
  acquisitions of additional practices and surgery centers.
  We have an extensive, multi-point due diligence evaluation process that we
  perform prior to acquisition, including such criteria as
  clinical quality, physician reputation, profitability and procedure and
  revenue growth rates. We intend to only acquire practices and surgery
  centers that we believe to be well-established with the capacity
  for future profitability and organic growth.
- Utilize advanced medical technologies. Many of our physicians
  are thought leaders in their respective fields, and employ the latest clinical
  techniques and medical technologies for the treatment of
  pain. We intend to support the use of new technology in pain treatment through
  the deployment of additional specialized physicians who
  are familiar with these techniques and technologies and by providing the
  latest, state-of-the-art equipment. For example, we deploy
  MedX rehabilitation equipment to orthopedic rehabilitation facilities, which
  has demonstrated the ability to improve patient outcomes.
- Develop additional services to enhance practice
  profitability. As the needs of our practices warrant we will develop
  additional programs to support their organic growth. For
  example, we may deploy imaging modalities such as mobile MRI equipment, or
  additional services such as in-office pharmaceutical dispensing, in order to provide a complete pain treatment program. In
  January 2005, we introduced a new program, called the Intra-Articular Joint
  Program, which is a nonsurgical treatment for knee pain
  and stiffness caused by osteoarthritis. In February 2006, we purchased
  majority ownership interest in an intraoperative
  monitoring company, which we plan to expand through additional hospital
  contracts.

Business Development and
Acquisitions

As part of our growth
strategy, we intend to continue our acquisition program in which we seek to
acquire practices that have the capacity for growth through the addition of
specialized physicians and ancillary services.

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We have a dedicated
three-person business development team headed by our President. The team
identifies candidates for acquisition, management, and our ancillary services
programs. We seek to acquire or manage practices that meet our criteria,
including reputation and quality of physicians, specialty mix, opportunities for
growth and level of competition in the local market.

Our team utilizes their
extensive industry contacts, as well as referrals from our current physicians
and other sources, to identify, contact and develop potential acquisition
candidates.

The business
development team attends industry conferences, physician trade shows and medical
education seminars, and maintains active relationships in the physician
community. Another key source of business development opportunities are
references from PainCares practicing physicians, many of whom are leaders in
the areas of pain management and minimally invasive spine surgery.

We carefully evaluate
each of our acquisition opportunities through an extensive due diligence process
to determine which practices have the greatest potential for growth and
profitability improvement under our operating structure. The acquisition team
seeks to identify specific opportunities to enhance a practices productivity
post-acquisition. For example, the due diligence team may determine that an
existing pain center could benefit from the addition of an orthopedic
rehabilitation facility. Our team may also identify opportunities to recruit
additional physicians to increase the practices revenues and
profitability.

In addition to
evaluating the growth and profitability potential of a practice, we utilize the
services of an independent outside consulting firm experienced with physician
practice operations. Our consultants perform an extensive review of the
practices operations, including, but not limited to, the following:

- Physician background checks;
- Verification of physician licensing;
- Ability of physicians to participate in the Medicare
  program;
- Interviews with all practice employees and staff;
- Review of key financial indicators for practice
  operations;
- Analysis of billed charges;
- Analysis of revenue, revenue growth and payor mix;
- Review of accounts receivable, aging of receivables and
  collection efforts;
- Review of operating costs such as staffing costs, overhead
  and leases;
- Analysis of referral patterns; and
- Comparison of practice operating metrics to objective
  standards published by the Medical Group Management Association.

In addition to our
consultants, we also employ outside legal counsel and special healthcare counsel
to assist us in evaluating acquisition candidates. We also utilize the services
of an independent accounting firm to assist us in review of the candidate with
respect to financial and accounting matters. Finally, physicians and key
practice employees are interviewed by members of PainCare management to
determine operational compatibility and shared vision for success.

Competition

The health care
industry, in general, and the markets for orthopedic, rehabilitation and
minimally invasive surgery services in particular, are highly competitive. Our
owned, managed and limited management practices compete with other physicians
and rehabilitation clinics who may be better established or have greater
recognition in a particular community than the physicians in our practices.
Our

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practices also compete against hospitals and large
health care companies, such as HealthSouth, Inc. and U.S. Physical Therapy,
Inc., with respect to orthopedic and rehabilitation services, and Symbion and
AmSurg Corp, with respect to out-patient surgery centers. These hospitals and
companies have established operating histories and greater financial resources
than us. In addition, we expect competition to increase, particularly in the
market for rehabilitation services, as consolidation of the therapy industry
continues through the acquisition by hospitals and large health care companies
of physician-owned and other privately owned therapy practices. We will also
compete with our competitors in connection with acquisition
opportunities.

Relationships with Physician
Practices

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

- Owned practices, which are wholly-owned subsidiaries of
  PainCare Holdings, Inc.
- Managed practices, in states that prohibit the corporate
  practice of medicine; and
- Limited management practices, which are medical practices
  where we provide certain management services and equipment pursuant to
  specific contractual agreements.

In a typical owned
practice, we acquire all of the assets of a physician practice from the owner
physicians. We establish a wholly-owned subsidiary to own and operate this
practice. We enter into employment agreements with the selling physicians,
usually for a five year term, which provide for base compensation and incentive
compensation based upon increases in operating earnings. These contracts are
subject to earlier termination in certain circumstances. The physicians are
subject to confidentiality and non-competition provisions that typically run for
two years following the termination of the physicians employment
agreement.

In a typical managed
practice, we acquire all of the non-medical assets of a physician practice from
the owner physicians and then enter into a management agreement with the
physicians to manage the practice for a fee. The management agreement is usually
for a 40 year term and is generally only subject to termination by the physician
if we breach the agreement and fail to cure the breach upon at least 30 days
written notice from the physicians.

In a typical limited
management practice, we agree to provide a physician practice with orthopedic
rehabilitation or electrodiagnostic services and equipment under a management
agreement that is usually for an initial term of five years with two five year
renewal options on our part. We provide the equipment, supplies and our
management expertise, and the practice provides the space, personnel, billing
and collection services. We receive a percentage of the practices collections
from the service being managed by us.

Regulatory Environment

General

Our practices are
subject to substantial federal, state and local government health care laws and
regulations. In addition, laws and regulations are constantly changing and may
impose additional requirements. These changes could have the effect of impeding
our ability to continue to do business or reduce our opportunities to continue
to grow.

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Every state imposes
licensing requirements on individual physicians and health care facilities. In
addition, federal and state laws regulate HMOs and other managed care
organizations. Many states require regulatory approval, including certificates
of need, before establishing certain types of health care facilities, including
surgery centers, or offering certain services.

Many states in which we
do business have corporate practice of medicine laws which prohibit us from
owning practices or exercising control over the medical judgments or decisions
of physicians. These laws and their interpretations vary from state to state and
are enforced by state courts and regulatory authorities, each with broad
discretion. In those states, we acquire the non-medical assets of these
practices and enter into long-term management agreements with these managed
practices and with respect to our limited management practices, we enter into
shorter term limited management agreements. Under those agreements, we provide
management services and other items to the practices in exchange for a service
fee. We structure our relationships with the practices in a manner that we
believe keeps us from engaging in the corporate practice of medicine or
exercising control over the medical judgments or decisions of the practices or
their physicians. Nevertheless, state regulatory authorities or other parties
could assert that our agreements violate these laws.

The laws of many states
prohibit physicians from splitting fees with non-physicians (or other
physicians). These laws vary from state to state and are enforced by the courts
and by regulatory authorities with broad discretion. The relationship between us
on the one hand, and the managed practices and limited management practices, on
the other hand, may raise issues in some states with fee splitting prohibitions.
Although we have attempted to structure our contracts with the managed practices
and the limited management practices in a manner that keeps us from violating
prohibitions on fee splitting, state regulatory authorities or other parties may
assert that we are engaged in practices that constitute fee-splitting. This
would have a material adverse effect on us.

Medicare and Medicaid
Participation

A substantial portion
of our revenues are expected to continue to be received through third-party
reimbursement programs, including state and federal programs, primarily Medicare
as well as Medicaid, and private health insurance programs. Medicare is a
federally funded and administered health insurance program, primarily for
individuals entitled to social security benefits who are 65 or older or who are
disabled. Medicaid is a health insurance program jointly funded by state and
federal governments that provides medical assistance to qualifying low income
persons.

To participate in the
Medicare program and receive Medicare payment, the owned practices, managed
practices and limited management practices must comply with regulations
promulgated by the Department of Health and Human Services. The requirements for
certification under Medicare and Medicaid are subject to change and, in order to
remain qualified for these programs, the practices may have to make changes from
time to time in equipment, personnel or services. Although we believe these
practices will continue to participate in these reimbursement programs, we
cannot assure you that these practices will continue to qualify for
participation.

Medicare Fraud and Abuse

The anti-kickback
provisions of the Social Security Act (the "Anti-Kickback Statute") prohibit
anyone from knowingly and willfully (a) soliciting or receiving any remuneration
in return for referrals for items and services reimbursable under most federal
health care programs; or (b) offering or paying any remuneration to induce a
person to make referrals for items and services reimbursable under most federal
health care programs. The prohibited remuneration may be paid directly or
indirectly, overtly or covertly, in cash or in kind.

18

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

As the result of a congressional mandate, the Office of the Inspector General (OIG) of the Department of Health and Human Services promulgated regulations specifying certain payment practices which the OIG
determined to be at minimal risk for abuse. The OIG named these payment practices Safe Harbors. If a payment arrangement fits within a safe harbor, it will be deemed not to violate the Anti-Kickback Statute. Merely because a payment
arrangement does not comply with all of the elements of any Safe Harbor, however, does not mean that the parties to the payment arrangement are violating the Anti-Kickback Statute.

We receive fees under our agreements with the managed practices and the limited management practices for management and administrative services and equipment and supplies. We do not believe we are in a
position to make or influence referrals of patients or services reimbursed under Medicare, Medicaid or other governmental programs. Because the provisions of the Anti-Kickback Statute are broadly worded and have been broadly interpreted by federal
courts, however, it is possible that the government could take the position that we, as a result of our ownership of the owned practices, and as a result of our relationships with the limited management practices and the managed practices, will be
subject, directly and indirectly, to the Anti-Kickback Statute.

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

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

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

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Our agreements with the
limited management practices may also raise different Anti-Kickback concerns. In
April of 2003, the OIG issued a Special Advisory Bulletin which addressed
contractual joint ventures where a health care provider in one line of business
(Owner) expands into a related health care business by contracting with an
existing provider of a related item or service (Manager) to provide the new
item or service to the Owners existing patient population. In those
arrangements, the Manager not only manages the new line of business, but may
also supply it with inventory, employees, space, billing and other services. In
other words, the Owner contracts out substantially the entire operation of the
related line of business to the Manager, receiving in return the profits of the
business as remuneration for its federal program referrals to the new line of
business.

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

We have attempted to
draft our agreements with the limited management practices in a manner that
takes into account the concerns in the Special Advisory Bulletin. Specifically,
under our arrangements, the limited management practice takes business risk. It
is financially responsible for the following costs: the space required to
provide the services; employment costs of the personnel providing the services
and intake personnel; and billing and collections. We do not reimburse the
limited management practice for any of these costs. We provide solely equipment,
supplies and our management expertise. In one of our limited management business
lines we do not even provide the equipment. In return for these items and
services, we receive a percentage of the limited management practices
collections from the services being managed by us that is consistent with the
fair market value of our services. Consequently, we believe that the limited
management practice is not being compensated for or to induce its
referrals.

Although we believe
that our arrangements with the limited management practices do not violate the
Anti-Kickback Statute for the reasons specified above, we cannot guarantee that
our arrangements will be free from scrutiny by the OIG or that the OIG would not
conclude that these arrangements violate the Anti-Kickback Statute. In a recent
OIG Advisory Opinion No. 4-17, the OIG declined to issue a favorable opinion on
a limited lease/management arrangement involving physician office-based
pathology laboratory services. Although we believe that our limited management
arrangements are distinguishable from the facts in Advisory Opinion No. 4-17,
this opinion illustrates how broadly the OIG is applying its contractual joint
venture analysis. In the event the OIG were to conclude that our limited
management arrangements violate the Anti-Kickback Statute, this would have a
material adverse effect on us.

Federal Anti-Referral
Laws

Section 1877 of Title
18 of the Social Security Act, commonly referred to as the Stark Law,
prohibits a physician from making a referral to an entity for the furnishing of
Medicare-covered designated health services if the physician (or an immediate
family member of the physician) has a financial relationship with that entity.
Designated health services include clinical laboratory services; physical and
occupational therapy services; radiology services, including magnetic resonance
imaging,

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computerized axial tomography scans, and ultrasound
services (including the professional component of such diagnostic testing, but
excluding invasive procedures where the imaging modality is used to guide a
needle, probe or catheter accurately); radiation therapy services and supplies;
durable medical equipment and supplies; home health services; inpatient and
outpatient hospital services; and certain other services. A financial
relationship is defined as an ownership or investment interest in or a
compensation arrangement with an entity that provides designated health
services. Sanctions for prohibited referrals include denial of Medicare payment,
and civil money penalties of up to $15,000 for each service ordered. Designated
health services furnished pursuant to a referral that is prohibited by the Stark
Law are not covered by Medicare and payments improperly collected must be
promptly refunded.

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

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

The referral of
Medicare patients by physicians employed by or under contract with the managed
practices and the limited management practices, respectively, to their
respective practices, however, does trigger the Stark Law. We believe,
nevertheless, that the in-office ancillary exception to the Stark Law has the
effect of permitting these physician members of the respective managed practices
and limited management practices to refer patients to their respective group
practice for the provision by the respective group practice of Medicare-covered
designated health services. If the managed practices or limited management
practices fail to abide by the terms of the in-office ancillary exception, they
cannot properly bill Medicare for the designated health services provided by
them. In such an event, our business could be materially adversely affected
because the revenues we generate from these practices is dependent, at least in
part, on the revenues or profits generated by those practices.

State Anti-Referral Laws

At least some of the
states in which we do business also have prohibitions on physician
self-referrals that are similar to the Stark Law. These laws and interpretations
vary from state to state and are enforced by state courts and regulatory
authorities, each with broad discretion. As indicated elsewhere, we enter into
management agreements with the managed practices and the limited management
practices. Under those agreements, we provide management and equipment and
services to the practices in exchange for compensation. Although we believe that
the practices comply with these laws, and although we attempt to structure our
relationships with these practices in a manner that we believe keeps us from
violating these laws (or in a manner that we believe does not trigger the law),
state regulatory authorities

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or other parties could assert that the practices violate these laws and/or that our agreements with the practices violate these laws. Any such conclusion could adversely affect our financial results and operations.

A substantial portion of our business operations, including our corporate offices, are located in Florida. Floridas prohibition on self-referrals, Fla. Stat. §456.053 (Self-Referral
Act), prohibits health care providers from referring patients, regardless of payment source (not just Medicare and Medicaid beneficiaries), for the provision of certain designated health services (Florida Designated Health
Services) to an entity in which the health care provider is an investor or has an investment interest. Under the Self-Referral Act, Florida Designated Health Services are defined as clinical laboratory, physical therapy, and comprehensive
rehabilitative, diagnostic-imaging and radiation therapy services. We currently operate facilities, and plan to purchase additional practices that provide some or all of these Florida Designated Health Services. All health care products and services
not considered Florida Designated Health Services are classified as other health services. The Self-Referral Act also prohibits the referral by a physician of a patient for other health services to an entity in which that
physician is an investor, unless (i) the physicians investment interest is in the registered securities of a publicly traded corporation whose shares are traded on a national exchange or over-the-counter market and which has net equity at the
end of its most recent fiscal quarter in excess of $50,000,000; or (ii) the physicians investment interest is in an entity whereby (a) no more than 50% of the value of the investment interests in the entity may be held by investors who are
in a position to make referrals to the entity; (b) the terms under which an investment interest is offered must be the same for referring investors and non-referring investors; (c) the terms under which an investment interest is offered may not be
related to the investors volume of referrals to the entity; and (d) the investor must not be required to make referrals or be in the position to make referrals to the entity as a condition for becoming or remaining an investor (the 50%
Investor Exception).

Entities that meet either exception must also (i) not lend to or guarantee a loan to an investor who is in a position to make referrals if the investor uses any part of that loan to obtain the investment
interest, and (ii) distribute profits and losses to investors in a manner that is directly proportional to their capital investment.

The Self-Referral Act excludes from the definition of referral services by a health care provider who is a sole provider or member of a group practice (as defined by the Self-Referral Act) that
are provided solely for the referring health care providers or group practices own patients (Group Practice Exception). Referrals by our physician investors who are not employed by an owned practice to an owned practice for
other health services should qualify for the 50% Investor Exception, because physician-investors in a position to refer to our owned practice, but who are not employed by our owned practice, do not collectively own more than 50% of the
investment value of PainCare. However, physician investors who are not employed by our owned practices cannot refer to our owned practices for Florida Designated Health Services because they are not members of our owned group practices and, thus,
their referrals would not qualify for the Group Practice Exception. So long as physician investors who are not employed by our owned practices do not refer to our owned practices for Florida Designated Health Services, we believe we will be in
compliance with the Self-Referral Act. Although we will have mechanisms in place to monitor referrals from physician investors, it is the responsibility of the physician investors to comply with the Self-Referral Act and there can be no assurances
that physician investors will comply with such law. Violations thereof could adversely affect us, as well as result in regulatory action against the Company.

The Self-Referral Act also imposes certain disclosure obligations on us and physician investors who are referring physicians. Under the Self-Referral Act, a physician may not refer a patient to an entity in
which he or she is an investor, even for services that are not Florida Designated Health Services, unless, before doing so, the patient is given a written statement disclosing, among other things, the physicians investment interest in the
entity to which the referral is made. Other obligations are imposed

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on the Company as a result of the Self-Referral Act.
It is the responsibility of any referring physician investor to comply with such
statutes, regulations and professional standards. However, this law may
discourage certain physician investors from making referrals to us or encourage
patients to choose alternative health care providers. In addition, the violation
thereof could adversely affect us, as well as result in regulatory action
against us.

Violations of the
Florida self-referral laws may result in substantial civil penalties and
administrative sanctions for individuals or entities as well as the suspension
or revocation of a physicians license to practice medicine in Florida. Such
sanctions, if applied to us or any of our physician investors, would result in
significant loss of reimbursement and could have a material adverse effect on
us.

Florida also has a
criminal prohibition regarding the offering, soliciting, or receiving of
remuneration, directly or indirectly, in cash or in kind, in exchange for the
referral of patients (the Patient Brokering Act). One of the exceptions to
this prohibition is for business and compensation arrangements that do not
violate the Anti-Kickback Statute. Accordingly, so long as we are in compliance
with the Anti-Kickback Statute, then the arrangement should be in compliance
with the Patient Brokering Act.

Information Privacy
Regulations

Numerous state, federal
and international laws and regulations govern the collection, dissemination, use
and confidentiality of patient-identifiable health information, including the
federal Health Insurance Portability and Accountability Act of 1996 and related
rules, or HIPAA. In the provision of services to our patients, we may collect,
use, maintain and transmit patient information in ways that may or will be
subject to many of these laws and regulations. The three rules that were
promulgated pursuant to HIPAA that could most significantly affect our business
are the Standards for Electronic Transactions, or Transactions Rule; the
Standards for Privacy of Individually Identifiable Health Information, or
Privacy Rule; and the Health Insurance Reform Security Standards, or Security
Rule. The respective compliance dates for these rules for most entities were
October 16, 2002, April 16, 2003 and April 21, 2005. HIPAA applies to covered
entities, which include most healthcare providers and health plans that will
contract for the use of our services. HIPAA requires covered entities to bind
contractors to compliance with certain burdensome HIPAA requirements. Other
federal and state laws restricting the use and protecting the privacy of patient
information also apply to us, either directly or indirectly.

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

Federal and state
consumer protection laws are being applied increasingly by the Federal Trade
Commission, or FTC, and state attorneys general to regulate the collection, use
and disclosure of personal or patient information, through websites or
otherwise, and to regulate the presentation of website content. Courts may also
adopt the standards for fair information practices promulgated by the FTC, which
concern consumer notice, choice, security and access.

Numerous other federal
and state laws protect the confidentiality of private information. These laws in
many cases are not preempted by HIPAA and may be subject to varying
interpretations by courts

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and government agencies, creating complex compliance
issues for us and potentially exposing us to additional expenses, adverse
publicity and liability. Other countries also have, or are developing, laws
governing the collection, use and transmission of personal or patient
information and these laws, if applicable, could create liability for us or
increase our cost of doing business.

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

Employees

As of March 29, 2006,
the Company and its subsidiaries employed and leased approximately 428 persons,
of which approximately 390 are full time and 38 are licensed physicians. These
employees do not include physicians and other allied healthcare personnel
employed by our managed practices.

Our ability to provide
our services is dependent upon recruiting, hiring, and retaining qualified
technical personnel. To date, we have been able to recruit and retain sufficient
qualified personnel. None of our employees is represented by a labor union. We
have not experienced any work stoppages and consider relations with our
employees to be good.

Available Information

Our Internet address
for our corporate website iswww.paincareholdings.com. We make available free of
charge, through the Investor Information section of our corporate website,
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports
on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the Exchange Act)
as soon as reasonably practicable after such materials are electronically filed
with, or furnished to, the Securities and Exchange Commission (SEC). We have not
incorporated by reference into this Report the information on our corporate
website, and you should not consider it to be a part of this Report. The
Internet address for our corporate website is included as an inactive textual
reference only.

ITEM 1A. RISK FACTORS

You should consider the
risks described below before making an investment decision. We believe that the
risks and uncertainties described below are the principal material risks facing
our company as of the date of this Form 10-K. In the future, we may become
subject to additional risks that are not currently known to us. Our business,
financial condition or results of operations could be materially adversely
affected by any of the following risks. The trading price of our common stock
could decline due to any of the following risks.

Risks Related to Our Business

We may need to restate our consolidated financial
statements again.

Based upon comments
received from the SEC staff regarding our method of accounting for (i) certain
term notes, freestanding and embedded derivatives, and (ii) intangible assets
acquired in connection with physician practice and surgery center acquisitions,
we have restated our consolidated financial statements

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for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003, December 31, 2004 and the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005. We based the foregoing restatements on our
interpretation of applicable accounting pronouncements, notwithstanding the fact that the SEC staff comments remain unresolved. There can be no assurance that the SEC staff will agree with our interpretation of the applicable accounting
pronouncements. In the event the SEC staff disagrees with one or more of our interpretations of applicable accounting pronouncements, we may have to restate our consolidated financial statements again in the future.

A number of class action lawsuits have been filed against us and certain of our officers and directors.

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

We may need to negotiate a waiver letter with respect to our senior credit facility.

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

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

We Need to Continue to Improve and Implement our Controls and Procedures.

Requirements adopted by the SEC in response to the passage of the Sarbanes-Oxley Act of 2002 require us to (i) evaluate and report on a quarterly basis the effectiveness of our disclosure controls and
procedures, and (ii) assess and report on an annual basis the effectiveness of our internal controls over financial reporting.

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

As a result of the material weaknesses, management concluded that our disclosure controls and procedures and our internal controls over financial reporting as of December 31, 2005, the end of our most
recent fiscal year, were not effective.

In an effort to rectify the foregoing material weaknesses, we have modified our method of accounting for certain transactions and have implemented additional controls. In so doing, we restated our
consolidated financial statements for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003, December 31, 2004 and the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005.

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

Please refer to Part II. Item 9A. below for an additional discussion regarding our controls.

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The success of our growth strategy depends on the
successful identification, completion and integration of
acquisitions.

We have acquired or
entered into general management agreements with 21 physician practices and 9
ambulatory surgery centers since 2002 and we intend to pursue additional
acquisitions and management relationships. Our future success will depend on our
ability to identify and complete acquisitions and integrate the acquired
businesses with our existing operations. Our growth strategy will result in
significant additional demands on our infrastructure, and will place a
significant strain on our management, administrative, operational, financial and
technical resources, and increase demands on our systems and controls. Our
growth strategy involves numerous risks, including, but not limited
to:

- the possibility that we are not able to identify suitable
  acquisition candidates or consummate acquisitions on acceptable terms;
- possible decreases in capital resources or dilution to
  existing stockholders;
- difficulties and expenses incurred in connection with an
  acquisition;
- the difficulties of operating an acquired business;
- the diversion of managements attention from other business
  concerns;
- a limited ability to predict future operating results of
  acquired practices; and
- the potential loss of key physicians, employees and patients
  of an acquired practice.

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

In addition,
acquisitions entail an inherent risk that we could become subject to contingent
or other liabilities in connection with the acquisitions, including liabilities
arising from events or conduct pre-dating our acquisition and that were not
known to us at the time of acquisition. Although we conduct due diligence in
connection with each of our acquisitions, this does not mean that we will
necessarily identify all potential problems or issues in connection with any
given acquisition, some of which could be significant.

Our failure to
successfully identify and complete future acquisitions or to integrate and
successfully manage completed acquisitions could have a material adverse effect
on our business, financial condition and results of operations.

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

Our strategy is to
rapidly grow by acquiring, establishing and managing a network of pain
management, minimally invasive spine surgery and orthopedic rehabilitation
centers. Identifying appropriate physician groups and proposing, negotiating and
implementing economically attractive affiliations with them can be a lengthy,
complex and costly process. There can be no assurance that we will be successful
in identifying and establishing relationships with orthopedic surgery and pain
management groups. If we are successful in implementing our strategy of rapid
growth, such growth may impair our ability to efficiently provide
non-professional support services, facilities, equipment, non-professional
personnel, supplies and non-professional support staff to medical practices. Our
future financial results could be materially adversely affected if we are unable
to manage growth effectively.

There can be no
assurance that physicians, medical providers or the medical community in general
will accept our business strategy and adopt the strategy offered by us. The
extent to which, and rate at which, these services achieve market acceptance and
penetration will depend on many variables including, but not limited to, the
establishment and demonstration in the medical community of the

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clinical safety, efficacy and cost-effectiveness of
these services, the advantage of these services over existing technology, and
third-party reimbursement practices. There can be no assurance that the medical
community and third-party payors will accept our technology. Similar risks will
confront any other services developed by us in the future. Failure of our
services to gain market acceptance would have a material adverse effect on our
business, financial condition, and results of operations.

If we do not have sufficient additional capital to
finance our growth strategy, our development may be limited.

We will need to raise
additional capital in order to acquire, integrate, develop, operate and expand
our affiliated physician practices. We may finance future acquisition and
development projects through debt or equity financings and may use shares of our
capital stock for all or a portion of the consideration to be paid in
acquisitions. To the extent that we undertake these financings or use capital
stock as consideration, our stockholders may, in the future, experience
significant ownership dilution. To the extent we incur indebtedness, we may have
significant interest expense and may be subject to covenants in the related debt
agreements that affect the conduct of our business. We have convertible notes
and debentures outstanding that have anti-dilution rights and limitations on
incurring additional indebtedness that could limit our ability to obtain
financing on favorable terms, or at all.

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

There has been a lack of profitable operations in
recent periods.

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

A significant portion of our assets consists of
goodwill and other intangible assets and any impairment, reduction, or
elimination of these intangible assets could hurt our results of
operations.

As of December 31,
2005, we had an intangible asset, net goodwill, of approximately $111.5 million,
which constituted 61% of our total assets. The net goodwill reflects the amount
we pay for our acquired practices in excess of the fair value of other
identifiable intangible and tangible assets. Our net goodwill will increase in
the future as a result of our acquisitions as we pay the contingent purchase
price for the acquisitions according to the terms of the respective purchase
agreements. In addition, we expect to acquire additional goodwill in connection
with future acquisitions. As prescribed by generally accepted accounting
principles, we do not amortize goodwill; rather it is carried on our balance
sheet until it is impaired. At least annually we test net goodwill for
impairment. Any determination of impairment could require a significant
reduction, or the elimination, of goodwill, which could hurt our results of
operations. Also, the effect of a prolonged downturn in our business will be
exacerbated by the impairment, and resulting write-down, of goodwill related to
a reduction in the value of our acquired practices.

Our cash flow and financial condition may be
adversely affected by the assumption of credit risks.

Our managed and limited
management practices bill their patients insurance carriers for services
provided by the practices. By undertaking the responsibility for patient billing
and collection activities, the practices assume the credit risk presented by the
patient base, as well as the risk of payment delays attendant to reimbursement
through governmental programs or third-party payors. If our practices are
unsuccessful in collecting a substantial amount of such fees, it will have a
material adverse affect on our financial condition because our compensation from
these practices is dependent on the practices collections.

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If we are forced to repay our debentures and notes in cash, we may not have enough cash to fund our operations.

Our 7.5% convertible debentures and our secured convertible term notes contain certain provisions and restrictions, which if violated, could result in the full principal amount, $9,653,008 as of
December 31, 2005, together with interest and other amounts, becoming immediately due and payable in cash on such securities. If such an event occurred and if a holder of such securities demanded repayment, we might not have the cash resources to
repay such indebtedness. The debentures have a term of three years, with interest payable quarterly. Subject to certain conditions, the quarterly interest payments on the debentures may be paid, at our option, in cash or additional shares of our
common stock. Our secured convertible term notes are repayable in monthly installments of principal over the three year life of the notes. Subject to certain conditions, the monthly principal and interest payments on the notes may be paid, at our
option, in cash or additional shares of common stock. If we made the payments on the debentures and notes in cash rather than additional shares of common stock, it would reduce the amount of cash available to fund operations.

We rely on the services of our physicians. We may not be able to attract and retain qualified physicians we need to support our business.

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

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

If certain key employees were to leave, we may be unable to operate our business profitably, complete existing projects or undertake certain new projects.

Our key employees and consultants include Merrill Reuter, M.D., Randy Lubinsky, Mark Szporka, and Ron Riewold. We have entered into employment agreements with Randy Lubinsky (Chief Executive Officer and
Director), Ron Riewold (President and Director), Mark Szporka (Chief Financial Officer and Director), and Dr. Merrill Reuter (President of one of our subsidiaries and Chairman of the Board). Should the services of Dr. Reuter, Randy Lubinsky, Ron
Riewold, or Mark Szporka or other key personnel become unavailable to us for any reason, our business could be adversely affected. There is no assurance that we will be able to retain these key individuals and/or attract new employees of the caliber
needed to achieve our objectives. We do not maintain any key employee life insurance policies.

Our employment agreements with certain senior executive officers entitle them to individual annual bonuses equal to a minimum of $200,000 up to a maximum of 150% of salary.

Our employment agreements with our Chief Executive Officer, Chief Financial Officer and

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President, which expire on December 31, 2010, and
were amended effective January 1, 2006, entitle each officer to a minimum annual
bonus of $200,000 up to a maximum of 150% of their base salary in any one
calendar year.

Increased costs associated with corporate
governance compliance may significantly affect our results of
operations.

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

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

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

Professional liability claims could adversely
impact our business.

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

Our business is subject to substantial competition
which could have a material impact on our business and financial
condition.

The health care
industry, in general, and the markets for orthopedic, rehabilitation and
minimally invasive surgery services in particular, are highly competitive. The
practices we own or manage compete with other physicians and rehabilitation
clinics who may be better established or have greater recognition in a
particular community than the physicians in these practices. These practices
also compete against hospitals and large health care companies, such as
HealthSouth, Inc. and U.S. Physical Therapy, Inc., with respect to orthopedic
and rehabilitation services, and Symbion and AmSurg Corp, with respect to
outpatient surgery centers. These hospitals and companies have established
operating histories and greater financial resources than us. In addition, we
expect competition to increase, particularly in the market for rehabilitation
services, as consolidation of the physical therapy industry continues through
the acquisition by hospitals and large health care companies of physician-owned
and other privately owned physical therapy practices. We will also compete with
our competitors in connection with acquisition opportunities.

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Failure to obtain managed care contracts and
legislative changes could adversely affect our business.

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

Risks Related to Our Industry

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

Our owned practices,
the managed practices and the limited management practices are subject to
stringent federal, state and local government health care laws and regulations.
If we or they fail to comply with applicable laws, or if a determination is made
that in the past we or the managed practices or the limited management practices
have failed to comply with these laws, we may be subject to civil or criminal
penalties, including the loss of our license or our physicians licenses to
operate and our ability to participate in Medicare, Medicaid and other
government sponsored and third-party health care programs. In addition, laws and
regulations are constantly changing and may impose additional requirements.
These changes could have the effect of impeding our ability to continue to do
business or reduce our opportunities to continue to grow.

Periodic revisions to laws and regulations may
reduce the revenues generated by the owned practices, managed practices and the
limited management practices.

A significant amount of
the revenues generated by our owned practices, the managed practices and the
limited management practices is derived from governmental payors. These
governmental payors have taken and may continue to take steps designed to reduce
the cost of medical care. Private payors often follow the lead of governmental
payors, and private payors have been taking steps to reduce the cost to them of
medical care. A change in the makeup of the patient mix that results in a
decrease in patients covered by private insurance or a shift by private payors
to other payment structures could also adversely affect our business, financial
condition and results of operations. If reductions in reimbursement occur, the
revenues generated by the owned practices, the managed practices and the limited
management practices could shrink. This shrinkage would cause a reduction in our
revenues. Accordingly, our business could be adversely affected by reductions in
or limitations on reimbursement amounts for medical services rendered, payor mix
changes or shifts by payors to different payment structures.

Because
government-sponsored payors generally pay providers based on a fee schedule, and
the trend is for private payors to do the same, we may not be able to prevent a
decrease in our revenues by increasing the amounts the owned practices charge
for services. The same applies to the limited

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management practices and the managed practices. They cannot increase their charges in an attempt to counteract reductions in reimbursement for services. There can be no assurance that any reduced operating margins could be recouped
through cost reductions, increased volume, and introduction of additional procedures or otherwise. We believe that trends in cost containment in the health care industry will continue to result in reductions from historical levels of per-patient
revenue.

Federal and state healthcare reform may have an adverse effect on our financial condition and results of operations.

Federal and state governments have continued to focus significant attention on health care reform. A broad range of health care reform measures have been introduced in Congress and in state legislatures. It
is not clear at this time what proposals, if any, will be adopted, or, if adopted, what effect, if any, such proposals would have on our business. Currently proposed federal and state legislation could have an adverse effect on our
business.

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

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

Unfavorable changes or conditions could occur in the geographic areas where our operations are concentrated.

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

Regulatory authorities could assert that the owned practices, the managed practices or the limited management practices fail to comply with the federal Stark Law. If such a claim were successfully asserted, this would result in the
inability of these practices to bill for services rendered, which would have an adverse effect on our financial condition and results of operations. In addition, we could be required to restructure or terminate our arrangements with these practices.
This result, or our inability to successfully restructure the arrangements to comply with the Stark Law, could jeopardize our business.

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

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

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

The referral of Medicare patients by physicians employed by or under contract with the managed practices and the limited management practices, respectively, to their respective practices, however, does
trigger the Stark Law. We believe, nevertheless, that the in-office ancillary exception to the Stark Law has the effect of permitting these physician members of the respective managed practices and limited management practices to refer patients to
their respective group practice for the provision by the respective group practice of Medicare-covered designated health services. If the managed practices or limited management practices were found not to comply with the terms of the in-office
ancillary exception, they cannot properly bill Medicare for the designated health services provided by them. In such an event, our business could be materially adversely affected because the revenues we generate from these practices are dependent,
at least in part, on the revenues or profits generated by those practices.

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

At least some of the states in which we do business also have prohibitions on physician self-referrals that are similar to the Stark Law. These laws and interpretations vary from state to state and are
enforced by state courts and regulatory authorities, each with broad discretion. As indicated elsewhere, we enter into management agreements with the managed practices and the limited management practices. Under those agreements, we provide
management and other items and services to the practices in exchange for compensation. Although we believe that the practices comply with these laws, and although we attempt to structure our relationships with these practices in a manner that we
believe keeps us from violating these laws (or in a manner that we believe does not trigger the law), state regulatory authorities or other parties could assert that the practices violate these laws and/or that our agreements with the practices
violate these laws. Any such conclusion could adversely affect our financial results and operations.

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

The anti-kickback provisions of the Social Security Act prohibit anyone from knowingly and willfully (a) soliciting or receiving any remuneration in return for referrals for items and services reimbursable
under most federal health care programs; or (b) offering or paying any remuneration to induce a person to make referrals for items and services reimbursable under most federal health care programs, which we refer to as the Anti-Kickback
Statute or Anti-Kickback Law. The prohibited remuneration may be paid directly or indirectly, overtly or covertly, in cash or in kind.

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

As the result of a congressional mandate, the Office of the Inspector General (OIG) of DHHS promulgated a regulation specifying certain payment practices which the OIG determined to be at
minimal risk for abuse. The OIG named these payment practices Safe Harbors. If a payment arrangement fits within a Safe Harbor, it will be deemed not to violate the Anti-Kickback Statute. Merely because a payment arrangement does not
comply with all of the elements of any Safe Harbor, however, does not mean that the parties to the payment arrangement are violating the Anti-Kickback Statute.

We receive fees under our agreements with the managed practices and the limited management practices for management and administrative services and equipment and supplies. We do not believe we are in a
position to make or influence referrals of patients or services reimbursed under Medicare, Medicaid or other governmental programs. Because the provisions of the Anti-Kickback Statute are broadly worded and have been broadly interpreted by federal
courts, however, it is possible that the government could take the position that we, as a result of our ownership of the owned practices, and as a result of our relationships with the limited management practices and the managed practices, will be
subject, directly and indirectly, to the Anti-Kickback Statute.

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

Our management agreements with the managed practices and the limited management practices differ from the management agreement analyzed in Advisory Opinion 98-4. Significantly, we believe we are not in a
position to generate referrals for the managed practices or the limited management practices. In fact, our management agreements do not require us to negotiate managed care contracts on behalf of the managed practices or the limited management
practices, or to provide marketing, advertising, public

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relation services or practice expansion services to those practices. Because we do not undertake to generate referrals for the managed practices or the limited management practices, and the services provided to these practices differ in
scope from those provided under Advisory Opinion 98-4, we believe that our management agreements with the managed practices and limited management practices do not violate the Anti-Kickback Statute. Nevertheless, although we believe we have
structured our management agreements in such a manner as not to violate the Anti-Kickback Statute, we cannot guarantee that a regulator would not conclude that the compensation to us under the management agreements constitutes prohibited
remuneration. In such an event, our operations would be materially adversely affected.

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

Our agreements with the limited management practices may also raise different Anti-Kickback concerns, but we believe that our arrangements are sufficiently different from those deemed suspect by the OIG so
as not to violate the law. In April of 2003, the OIG issued a Special Advisory Bulletin where the OIG addressed contractual arrangements where a health care provider in one line of business (Owner) expands into a related health care
business by contracting with an existing provider of a related item or service (Manager) to provide the new item or service to the Owners existing patient population. In those arrangements, the Manager not only manages the new line
of business, but may also supply it with inventory, employees, space, billing and other services. In other words, the Owner contracts out substantially the entire operation of the related line of business to the Manager, receiving in return the
profits of the business as remuneration for its federal program referrals to the Manager.

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

We have attempted to draft our agreements with the limited management practices in a manner that takes into account the concerns in the Special Advisory Bulletin. Specifically, under our arrangements, the
limited management practice takes business risk. It is financially responsible for the following costs: the space required to provide the services; employment costs of the personnel providing the services and intake personnel; and billing and
collections. We do not reimburse the limited management practice for any of these costs. We provide solely equipment, supplies and our management expertise. In return for these items and services, we receive a percentage of the limited management
practices collections from the services being managed by us. Consequently, we believe that the limited management practice is not being compensated for its referrals.

Although we believe that our arrangements with the limited management practices do not violate the Anti-Kickback Statute for the reasons specified above, we cannot guarantee that our arrangements will be
free from scrutiny by the OIG or that the OIG would not conclude that these arrangements violate the Anti-Kickback Statute. In the event the OIG were to conclude that these arrangements violate the Anti-Kickback Statute, this would have a material
adverse effect on us.

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

Many states in which we
do business have corporate practice of medicine laws which prohibit us from
exercising control over the medical judgments or decisions of physicians. These
laws and their interpretations vary from state to state and are enforced by
state courts and regulatory authorities, each with broad discretion. We enter
into management agreements with managed practices and limited management
practices. Under those agreements, we provide management and other items and
services to the practices in exchange for a service fee. We structure our
relationships with the practices in a manner that we believe keeps us from
engaging in the corporate practice of medicine or exercising control over the
medical judgments or decisions of the practices or their physicians.
Nevertheless, state regulatory authorities or other parties could assert that
our agreements violate these laws.

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

The laws of many states
prohibit physicians from splitting fees with non-physicians (or other
physicians). These laws vary from state to state and are enforced by the courts
and by regulatory authorities with broad discretion. The relationship between us
on the one hand, and the managed practices and limited management practices, on
the other hand, may raise issues in some states with fee splitting prohibitions.
Although we have attempted to structure our contracts with the managed practices
and the limited management practices in a manner that keeps us from violating
prohibitions on fee splitting, state regulatory authorities or other parties may
assert that we are engaged in practices that constitute fee-splitting, which
would have a material adverse effect on us.

Our use and disclosure of patient information is
subject to privacy regulations.

Numerous state, federal
and international laws and regulations govern the collection, dissemination, use
and confidentiality of patient-identifiable health information, including the
federal Health Insurance Portability and Accountability Act of 1996 and related
rules, or HIPAA. In the provision of services to our patients, we may collect,
use, maintain and transmit patient information in ways that may or will be
subject to many of these laws and regulations. The three rules that were
promulgated pursuant to HIPAA that could most significantly affect our business
are the Standards for Electronic Transactions, or Transactions Rule; the
Standards for Privacy of Individually Identifiable Health Information, or
Privacy Rule; and the Health Insurance Reform; Security Standards, or Security
Rule. The respective compliance dates for these rules for most entities were
October 16, 2002, April 16, 2003 and April 21, 2005. HIPAA applies to covered
entities, which include most health care providers that will contract for the
use of our services. HIPAA requires covered entities to bind contractors to
comply with certain burdensome HIPAA requirements. Other federal and state laws
restricting the use and protecting the privacy of patient information also apply
to us, either directly or indirectly.

The HIPAA Transactions
Rule establishes format and data content standards for eight of the most common
health care transactions. When we perform billing and collection services for
our owned

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

Federal and state
consumer protection laws are being applied increasingly by the Federal Trade
Commission, or FTC, and state attorneys general, to regulate the collection, use
and disclosure of personal or patient information, through websites or
otherwise, and to regulate the presentation of website content. Courts may also
adopt the standards for fair information practices promulgated by the FTC, which
concern consumer notice, choice, security and access.

Numerous other federal
and state laws protect the confidentiality of private information. These laws in
many cases are not preempted by HIPAA and may be subject to varying
interpretations by courts and government agencies, creating complex compliance
issues for us and potentially exposing us to additional expense, adverse
publicity and liability. Other countries also have, or are developing, laws
governing the collection, use and transmission of personal or patient
information and, if applicable, these laws could create liability for us or
increase our cost of doing business.

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

Risks Related to Our Common
Stock

Because we use our common stock as consideration
for our acquisitions, your interest in our company will be significantly
diluted. In addition, if the investors in our recent financings convert their
debentures and notes, or if we elect to pay principal and/or interest on the
debentures and notes with shares of our common stock or anti-dilution rights in
these securities are triggered, our existing shareholders will experience
significant dilution.

We have used, and we
expect in the future to use, our common stock as consideration for our
acquisitions. In addition, a significant amount of our acquisitions purchase
price is contingent upon future performance. We expect to issue a significant
amount of our common stock to pay contingent purchase prices for previous
acquisitions. In addition, because the value of the stock we issue as payment of
contingent consideration is not fixed, to the extent our stock price decreases
our existing shareholders interest in our company will be even more diluted by
the payment of contingent consideration.

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

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Future sales of our common stock in the public
market, including sales by our stockholders with significant holdings, may
depress our stock price.

Most of our outstanding
shares of common stock are freely tradable. In 2004, we filed registration
statements registering the resale of 49,376,123 shares, which includes shares
issuable upon conversion of convertible notes and debentures, upon exercise of
options and warrants and shares that are issuable pursuant to the earnout
provisions of various business acquisitions. The market price of our common
stock could drop due to sales of a large number of shares or the perception that
such sales could occur, including sales or perceived sales by our directors,
officers or principal stockholders. These factors also could make it more
difficult to raise funds through future offerings of common stock.

There is a limited market for our common stock and
the market price of our common stock has been volatile.

There is a limited
market for our common stock. There can be no assurance that an active trading
market for the common stock will be developed or maintained. Historically, the
market prices for securities of companies like us have been highly volatile. In
fact, since January 1, 2002, our common stock price has ranged from a low of
$0.12 to a high of $5.45 (as determined on a reverse-split basis). The market
price of the shares could continue to be subject to significant fluctuations in
response to various factors and events, including the liquidity of the market
for the shares, announcements of potential business acquisitions, and changes in
general market conditions.

We do not expect to pay
dividends.

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

Provisions of Florida law and our charter
documents may hinder a change of control and therefore depress the price of our
common stock.

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

ITEM 1B. UNRESOLVED STAFF
COMMENTS

As a part of a review
by the Division of Corporation Finance of the SEC of our Annual Report on
Form 10-K for the year ended December 31, 2005 we received and responded to the
SEC staff comments. Refer to Explanatory Note for a detailed explanation of the
SEC requests and our response. The purpose of this Amendment No. 1 to Form 10-K
is to expand certain disclosures based on the SEC request which primarily
expands our disclosure regarding the restatements as described in Note 2 of the
Company's Consolidated Financial Statements for the twelve months ended December
31, 2005. As of September 29, 2006 we are waiting approval from the SEC for the
comments related to further clarification to Note 2 to the Company's
Consolidated Financial Statements.

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

Additional disclosure
regarding the foregoing matters is set forth in our Current Report on Form 8-K
filed with the SEC on March 15, 2006, and in our audited financial statements
for the year ended December 31, 2005.

ITEM 2. PROPERTIES

Listed below is a summary of our real property
leases.

|Subsidiary or Managed Practice                                                   | Lease 
      Expiration | Approx.  Square 
      Feet |   | Monthly   Rent 
      Amount
|-------------------------------------------------------------------------------- | ----------------------- | --------------------------- | - | ----------------------------
|
|
|PainCare
      Holdings, Inc. (Corporate Office)                                 | 2009                    | 3,887                       | $ | 6,478                       
|Advanced Orthopaedics of
      South Florida II, Inc.                            | 2007                    | 12,000                      | $ | 15,400                      
|Rothbart Pain
      Management Clinic, Inc.                                      | 2008                    | 6,000                       | $ | 9,872                       
|Pain and Rehabilitation
      Network, Inc.                                      | 2013                    | 6,067                       | $ | 7,838                       
|Medical
      Rehabilitation Specialists II, Inc.                                | 2009                    | 5,202                       | $ | 8,155                       
|Associated Physicians Group
      (4 locations)                                  | 2006-2007               | 10,283                      | $ | 11,387                      
|Spine and Pain
      Center, PC                                                  | 2006                    | 7,151                       | $ | 10,391                      
|Health Care Center of Tampa,
      Inc.                                          | 2008                    | 5,280                       | $ | 8,800                       
|Bone and Joint
      Surgical Clinic                                             | 2008                    | 8,734                       | $ | 5,266                       
|Kenneth Alo, M.D.,
      PA                                                      | 2006                    | 1,837                       | $ | 3,026                       
|Denver Pain
      Management                                                     | 2006                    | 10,175                      | $ | 20,146                      
|Georgia Surgical Centers,
      Inc. & Georgia Pain Physicians, PC (3 locations) | 2006-2014               | 22,033                      | $ | 30,508                      
|Dynamic
      Rehabilitation Centers (4 locations)                               | 2006-2010               | 15,948                      | $ | 25,803                      
|Rick Taylor, D.O., PA (4
      locations)                                        | 2006-2008               | 12,905                      | $ | 9,398                       
|Benjamin
      Zolper, M.D., Inc.                                                | 2006                    | 5,957                       | $ | 10,273                      
|The Center for Pain
      Management, LLC (4 locations)                          | 2006-2016               | 10,172                      | $ | 20,809                      
|Colorado Pain
      Specialists, PC                                              | 2006                    | 1,550                       | $ | 3,203                       
|PSHS Alpha Partners, Ltd.
      d/b/a Lake Worth Surgical Center                 | 2007                    | 4,400                       | $ | 4,049                       
|PSHS Beta
      Partners, Ltd. d/b/a Gables Surgical Center                      | 2008                    | 7,786                       | $ | 13,943                      
|Piedmont Center for Spinal
      Disorders                                       | 2007                    | 1,000                       | $ | 5,475                       
|Center for
      Pain Management ASC, LLC                                        | 2006-2010               | 7,481                       | $ | 14,569                      
|Floyd O. Ring, Jr., M.D.,
      PC                                               | 2006                    | 312                         | $ | 535                         
|Christopher J.
      Centeno, M.D., PC & Therapeutic Management, Inc.            | 2012                    | 5,322                       | $ | 7,043                       
|Desert Pain Management
      Group                                               | 2007-2015               | 8,075                       | $ | 18,124                      
|REC, Inc.
      & CareFirst Medical Associates                                   | 2011                    | 5,000                       | $ | 2,500                       

Our corporate office is
located in Orlando, Florida and currently contains approximately 3,887 square
feet of space. We are expanding the corporate office to add 2,317 square feet of
space, which is expected to be completed in June 2006. Upon completion of this
expansion, the corporate office will be adequate for our current primary office
needs.

Our physician practices
and surgery centers range in size from 312 to 22,000 square feet. We lease land
and space at all of our practice offices and surgery center locations. We
consider all of our offices and surgery centers to be well-suited to our present
requirements. However, as we expand to additional practice offices and surgery
centers, or where additional capacity is necessary, additional space will be
obtained where feasible.

38

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ITEM 3. LEGAL PROCEEDINGS

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

On March 21, 2006, Roy
Thomas Mould filed a complaint under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 against the Company, as well as the Company's chief
executive officer and chief financial officer, before the United States District
Court for the Middle District of Florida. The complaint is entitledMould v. PainCare Holdings, Inc., et al., Case No. 06-CV-00362-JA-DAB. Mr. Mould alleges material
misrepresentations and omissions in connection with the Company's financial
statements which appear to relate principally to the Company's previously
announced intention to restate certain past financial statements. Mr. Mould
seeks unspecified damages and purports to represent a class of shareholders who
purchased the Company's common stock from August 27, 2002 to March 15, 2006.
Eight additional complaints were filed shortly afterward before the same court
which recite similar allegations. (Collectively, these cases will be referred to
as the "Securities Litigation.") The Company cannot predict the outcome of the
Securities Litigation, but believes that the allegations lack merit and will
vigorously defend against them.

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

On March 30, 2006, a
purported shareholder of the Company made a demand on the Companys board of
directors. This demand raises many if not all of the same issues as the
Derivative Action, but asks the independent directors to investigate the charges
and to take legal action against those individuals responsible. The Company is
in the process of reviewing this demand and will respond shortly.

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

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

On October 4, 2005 the
Company filed and subsequently amended a Definitive Proxy Statement with the SEC
with respect to the solicitation of proxies by the Board of Directors of the
Company for use at the Annual Meeting of its

39

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stockholders (the "Annual Meeting), which was held
on November 4, 2005. With respect to the proposals set forth in the Proxy
Statement, the Company set the record date as of the close of business on
September 30, 2005 (the "Record Date") for the determination of stockholders
entitled to notice of and to vote at the Annual Meeting. As of the Record Date,
there were 55,143,884 shares issued to Company stockholders which were entitled
to vote.

At the Annual Meeting of the Company stockholders,
the following matters were approved:

1. Election of Directors. The board of directors of
the Company nominated and the stockholders elected the following individuals to
serve on the Companys board until the next annual meeting of the stockholders
or until their successors are nominated and appointed:

|VOTE 1: |                      |             |                 |           |           |       |          
|------- | -------------------- | ----------- | --------------- | --------- | --------- | ----- | ---------
|       
|        |                      | SHARES  FOR | SHARES  AGAINST | ABSTAIN  
|        |                     
|        | NAME                 | Proxy       | In Person       | Proxy     | In Person | Proxy | In Person
|        | Randy Lubinsky       | 34,697,558  | -0-             | 3,325,796 | -0-       | -0-   | -0-      
|        | Mark Szporka         | 34,433,729  | -0-             | 3,589,625 | -0-       | -0-   | -0-      
|        | Merrill Reuter, M.D. | 34,565,659  | -0-             | 3,457,695 | -0-       | -0-   | -0-      
|        | Ronald Riewold       | 34,698,058  | -0-             | 3,325,296 | -0-       | -0-   | -0-      
|        | Jay L. Rosen, M.D.   | 34,858,531  | -0-             | 3,164,823 | -0-       | -0-   | -0-      
|        | Arthur J. Hudson     | 37,066,403  | -0-             | 956,951   | -0-       | -0-   | -0-      
|        | Robert Fusco         | 36,913,533  | -0-             | 1,109,821 | -0-       | -0-   | -0-      
|        | Thomas J. Crane      | 37,183,511  | -0-             | 839,843   | -0-       | -0-   | -0-      
|        | Aldo F. Berti, M.D.  | 37,237,926  | -0-             | 785,428   | -0-       | -0-   | -0-      

PART II

ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY,
RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES

Our common stock traded
on the Over-the-Counter Bulletin Board under the symbol HELP from September 29,
1997 to March 18, 2002. On June 16, 2003 our common stock commenced trading on
the American Stock Exchange and our symbol was changed to PRZ.

(a) Market Information.
The table below sets forth, for the periods indicated, the reported high and low
sale prices of our common stock on the American Stock Exchange.

|                                                                                                                                    | Common
      Stock
|----------------------------------------------------------------------------------------------------------------------------------- | ------------------
|                                                                                                                                    | High              
|CALENDAR 2004                                                                                                                       |                   
|Quarter ending March 31, 2004                                                                                                       | $
      3.60      
|Quarter ending June 30, 2004                                                                                                        | $ 3.44            
|Quarter ending September 30, 2004                                                                                                   | $
      3.45      
|Quarter ending December 31,
    2004                                                                                                | $ 3.19            
|CALENDAR 2005                                                                                                                       |                   
|Quarter ending March 31, 2005                                                                                                       | $ 5.22            
|Quarter ending June 30, 2005                                                                                                        | $
      5.45      
|Quarter ending September 30,
    2005                                                                                               | $ 4.49            
|Quarter ending December 31, 2005                                                                                                    | $
      4.21      
|CALENDAR 2006                                                                                                                       |                   
|Quarter ending March 31, 2006                                                                                                       | $
      3.74      
|Quarter to date ending June 30,
      2006                                                                                          | $ 2.06            
|                                                                                                                                   
|The last sale price of our common stock on May
      26, 2006 as reported on the American Stock Exchange was $1.42 per
      share. |                   

40

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(b) Shareholders. As of
May 26, 2006, we had 64,050,365 shares of common stock outstanding and
approximately 10,638 common stockholders of record, including individual and
broker-dealer position listings.

(c) Dividends. Since
July 2002, we have not declared or paid any cash dividends on our common stock
and do not anticipate paying any cash dividends in the foreseeable future. Any
determination to pay dividends in the future will be at the discretion of our
Board of Directors and will be dependent upon our results of operations,
financial condition, capital requirements, contractual restrictions and other
factors deemed relevant by the Board of Directors. The Board of Directors is not
expected to declare dividends or make any other distributions in the foreseeable
future, but instead intends to retain earnings, if any, for use in business
operations. In addition, the securities purchase agreement for our convertible
notes contains restrictions on the payment of dividends. Accordingly, investors
should not rely on the payment of dividends in considering an investment in our
Company.

(d) Recent Sales of
Unregistered Securities. The following information sets forth certain
information for all securities sold by the Company during the past year without
registration under the Securities Act of 1933, as amended (the Securities
Act).

Our 2005 Acquisitions:

|                                                                                                                                                                                                              | Effective          |                                                                                                                                                                                                   
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Nature of
      Business                                                                                                                                                                             | Date of Purchase   | Purchase Price                                                                                                                                                                                    
|Colorado Pain Specialists, PC., an
      interventional pain management  practice located in
      Colorado                                                                                                   | April 15, 2005     | $2,125,000 in cash and 653,698 shares of
      common stock, plus  contingent payments of up to
      $4,250,000 in cash and common stock  if certain performance goals
      are met.            
|
|
|PSHS Alpha Partners, Ltd. d/b/a Lake Worth Surgical Center., a
      fully  accredited ambulatory surgical center located in Lake
      Worth, Florida                                                        | May
      12, 2005 | $6,930,940 in cash and 324,520 shares of common stock, for a 
      67.5% ownership interest.                                                                                                     
|
|PSHS Beta Partners, Ltd. d/b/a Gables Surgical
      Center, a fully  accredited ambulatory surgical center located in
      Miami, Florida                                                                   | August 1, 2005     | $3,282,304 in cash and 868,624 shares of
      common stock, plus  promissory notes totaling
      $1,536,952, due one year from the closing  date, for a 73%
      ownership interest.           
|
|
|Piedmont Center for Spinal Disorders, P.C., an
      orthopedic spine surgery  practice located in Danville,
      Virginia                                                                                   | August 9, 2005     | $1,000,000 in cash and 263,400 shares of
      PainCares common stock,  plus contingent payments of up to $2,000,000 in cash and
      common  stock if certain performance goals are met.       
|
|
|Floyd O. Ring, Jr., M.D., P.C., an pain
      management physician practice  located in Denver, Colorado                                                                                                      | October 3, 2005    | $1,250,000 in cash and 349,162 shares of
      PainCares common stock,  plus contingent payments of up to $2,500,000 in cash and
      common  stock if certain performance goals are met.       
|
|
|Christopher J. Centeno, M.D., P.C. and
      Therapeutic Management, Inc.,  collectively doing business as The
      Centeno Clinic, a pain management  physician practice located in
      Denver, Colorado. | October 14, 2005   | $3,750,000 in cash and 1,132,931 shares of
      PainCares common  stock, pluscontingent payments of up to $7,500,000 in
      cash and  common stock if certain performance goals are
      met.
|
|

During 2005, there were
3,687,500 shares issued to the shareholders of Center for Pain Management, LLC,
representing the stock portion of the initial consideration of this practice
acquisition, which closed on December 1, 2004.

During 2005, there were
115,340 shares issued to Andrea Trescot, M.D., representing the second of three
earn-out installments related to the acquisition of Pain and Rehabilitation
Network.

During 2005, there were
108,097 shares issued to Kirk Mauro, M.D., representing the second of three
earn-out installments related to the acquisition of Medical Rehabilitation
Specialists.

41

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During 2005, there were
108,610 shares issued to John Vick, representing the second of three earn-out
installments related to the acquisition of Associated Physicians
Group.

During 2005, there were
83,001 shares issued to Michael Martire, M.D., representing the first of three
earn-out installments related to the acquisition of Spine and Pain
Center.

During 2005, there were
226,608 shares issued to Saqib Bashir Khan, M.D., representing the first of
three earn-out installments related to the acquisition of Health Care Center of
Tampa.

During 2005, there were
130,662 shares issued to Christopher Cenac, M.D., representing the first of
three earn-out installments related to the acquisition of the Bone and Joint
Surgical Clinic.

During 2005, there were
203,252 shares issued to Kenneth Alo, M.D., representing the first of three
earn-out installments related to the acquisition of Kenneth M. Alo, M.D.,
P.A.

During 2005, there were
460,026 shares issued to Robert Wright, M.D. and Kenneth Alo, M.D., representing
a portion of the earn-out installment related to the acquisition of Denver Pain
Management.

During 2005, there were
86,806 shares issued to Robert Windsor, M.D., representing the first of three
earn-out installments related to the acquisition of Georgia Pain Physicians and
Georgia Surgical Centers.

During 2005, there were
175,644 shares issued to Michael Wayne and Jeff Wayne, representing the first of
three earn-out installments related to the acquisition of Dynamic Rehabilitation
Centers.

During 2005, there were
148,104 shares issued to Rick Taylor, D.O., representing the first of three
earn-out installments related to the acquisition of Rick Taylor, D.O.,
P.A.

During 2005, there were
69,115 shares issued to Benjamin Zolper, M.D., representing the first of three
earn-out installments related to the acquisition of Benjamin Zolper, M.D.,
P.A.

During 2005, there were
111,327 shares issued to Rehab Management Group, representing the first of three
earn-out installments related to acquisition of three EDX contracts.

During 2005, we issued
1,075,291 shares as the result of the exercise of options and warrants
previously granted.

During 2005, we issued
18,860 restricted shares, to employees at Advanced Orthopaedics of South
Florida, Inc. to replace previously granted stock options. During 2005, we
issued 3,626,167 shares to Midsummer Investments, Ltd. and Laurus Master Fund,
Ltd. for the conversion of convertible debenture principal. During 2005, we
issued 283,448 shares to Midsummer Investments, Ltd. for the payment of
convertible debenture interest.

With respect to the
foregoing offers and sale of restricted and unregistered securities, the Company
relied on the provisions of Sections 3(b) and 4(2) of the Securities Act and
rules and regulations promulgated thereunder, including, but not limited to
Rules 505 and 506 of Regulation D, in that such transaction did not involve any
public offering of securities and were exempt from registration under the
Securities Act. The offers and sale of the securities was not made by any means
of general solicitation, the securities were acquired by the investors without a
view towards distribution, and all purchasers represented to the Company that
they were sophisticated and experienced in such transactions and

42

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investments and able to bear the economic risk of
their investment. A legend was placed on the certificates or instruments, as the
case may be, they have not been registered under the Securities Act and setting
forth the restrictions on their transfer and sale. Each investor also signed a
written agreement that the securities would not be sold without registration
under the Securities Act or pursuant to an applicable exemption from such
registration.

ITEM 6. SELECTED CONSOLIDATED FINANCIAL
DATA

|                                                            |  | Year Ended December 31,                    
|----------------------------------------------------------- |  | -------------------------------------------
|                                                            |  |                                            
|                                                            |  | 2005                                       
|                                                            |  | (in thousands, expect per
      share data)
|Consolidated Statement of Operations Data:                  |  |                                            
|Revenues:                                                   |  |                                            
|Pain management                                             |  | $ 43,269                                   
|Surgeries                                                   |  | 6,165                                      
|Ancillary services                                          |  | 19,230                                     
|Total revenues                                              |  | 68,664                                     
|Cost of
      revenues                                      |  | 12,471                                     
|Gross profit                                                |  | 56,193                                     
|General and
      administrative                            |  | 38,085                                     
|Compensation expense                                        |  | 2,382                                      
|Amortization
      expense                                  |  | 1,529                                      
|Depreciation expense                                        |  | 1,616                                      
|Operating
      income (loss)                               |  | 12,581                                     
|Interest expense                                            |  | (5,796)                                    
|Derivative
      expense                                    |  | (7,056)                                    
|Other income                                                |  | 445                                        
|Income (loss)
      before income taxes                     |  | 174                                        
|Provision (benefit) for
      income taxes                  |  | 4,926                                      
|Income (loss)
      before minority interests               |  | (4,752)                                    
|Minority interests                                          |  | 587                                        
|Net loss                                                    |  | $ (5,339)                                  
|Basic loss per common
      share                           |  | $ (0.10)                                   
|Basic weighted
      average common shares outstanding      |  | 51,317                                     
|Diluted loss per common
      share                         |  | $ (0.10)                                   
|Diluted
      weighted average common shares outstanding    |  | 51,317                                     
|Operating and Other
      Financial Data:                   |  |                                            
|Cash flows
      provided by (used in) operating activities |  | 9,173                                      
|Cash flows used in investing
      activities               |  | (36,474)                                   
|Cash flows
      provided by financing activities           |  | 30,913                                     

---

|                                                                                           |  | As of December 31,
|------------------------------------------------------------------------------------------ |  | ------------------
|                                                                                           |  |                   
|                                                                                           |  | 2005              
|                                                                                           |  | (in thousands)    
|Consolidated Balance Sheet Data:                                                           |  |                   
|Cash                                                                                       |  | $ 22,713          
|Working capital deficiency                                                                 |  | (16,870)          
|Total assets                                                                               |  | 183,109           
|Total long-term debt and obligations under capital leases,
      including current portion |  | 44,185            
|Minority interests                                                                         |  | 1,764             
|Total stockholders equity                                                                 |  | 87,323            

ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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

Outlook

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

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

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

44

---

We currently have two
owned practices primarily providing surgery services, five owned practices
primarily providing pain management services, one managed practice primarily
providing surgery services, eleven managed practices primarily providing pain
management services, two managed practices providing ancillary services, and 34
limited management services and equipment contracts.

We had a number of
acquisitions since we began our current business in 2000. The following table
presents the changes in the number of practices we own and manage at December
31, 2005, 2004, 2003, and 2002.

|                                                         | At December
      31,
|-------------------------------------------------------- | ---------------------
|                                                         | 2002                 
|Owned physician practices                                | 3                    
|Managed physician practices                              | 0                    
|Limited Management service and equipment
      contracts | 3                    

We manage fourteen
practices in states with laws governing the corporate practice of medicine. In
those states, a corporation is precluded from owning the medical assets and
practicing medicine. Therefore, contractual arrangements are effected to allow
us to manage the practice. Emerging Issues Task Force (EITF) No. 97-2 states
that financial consolidation can occur when a physician practice management
entity establishes an other than temporary controlling financial interest in a
physician practice through contractual arrangements. In all cases but one, the
management services agreement between PainCare and our managed practices
satisfies each of the EITF issues. Except for one of our managed practices, we
recognize all of the revenue and expenses of these practices in our consolidated
financials in accordance with EITF No. 97-2. With respect to the one managed
practice for which we do not recognize all of the revenue and expenses and in
all of our limited managed practices, we recognize only the management fees
earned and expenses incurred by us with respect to such practices.

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

Financial OverviewRevenue and Operating Income

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

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

45

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|                                  | December 31, 2005 (in thousands)      
|--------------------------------- | --------------------------------------
|                                  |                                       
|                                  | Pain Mgmt                             
|Revenues                          | $                                     
|Gross profit                      |                                       
|General & administrative expenses |                                       
|Compensation expense              |                                       
|Amortization                      |                                       
|Depreciation                      |                                       
|Operating income (loss)           | $                                     
|                                  | December 31, 2004 (in
      thousands)
|                                  |                                       
|                                  | Pain Mgmt                             
|Revenues                          | $                                     
|Gross profit                      |                                       
|General & administrative expenses |                                       
|Compensation expense              |                                       
|Amortization                      |                                       
|Depreciation                      |                                       
|Operating income (loss)           | $                                     
|                                  | December 31, 2003 (in thousands)      
|                                  |                                       
|                                  | Pain Mgmt                             
|Revenues                          | $                                     
|Gross profit                      |                                       
|General & administrative expenses |                                       
|Compensation expense              |                                       
|Amortization                      |                                       
|Depreciation                      |                                       
|Operating income (loss)           | $                                     

Analysis of Results of Operations from Segment
Reporting for the Twelve Months Ended December 31, 2005 Compared to the Twelve
Months Ended December 31, 2004

Revenues from pain
management practices increased by approximately $20,952,000, representing an
increase of 93.9% . Revenues from surgery practices increased by approximately
$962,000, representing an increase of 18.5% . Revenues from ancillary services
increased by approximately $8,832,000, representing an increase of 84.9% . These
increases are a result of new practice and surgery center acquisitions, new
limited managed programs and growth in existing practices.

Operating income from
pain management practices increased by approximately $8,403,000, representing an
increase of 83.1% . Operating income from surgery practices decreased by
approximately $30,000, representing a decrease of 1.6% . This decrease is
related to two surgery practices affected by hurricanes during 2005. Operating
income from ancillary services increased by approximately $1,142,000,
representing an increase of 24.3% . The increases from pain management practices
and ancillary services are a result of new practice and surgery center
acquisitions, new limited managed programs and growth in existing
practices.

46

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Analysis of Results of Operations from Segment
Reporting for the Twelve Months Ended December 31, 2004 Compared to the Twelve
Months Ended December 31, 2003

Revenues from pain
management practices increased by approximately $16,200,000, representing an
increase of 264.8% . Revenues from surgery practices increased by approximately
$1,772,000, representing an increase of 51.6% . Revenues from ancillary services
increased by approximately $4,965,000, representing an increase of 91.4% . These
increases are a result of new practice acquisitions, new limited managed
programs and growth in existing practices.

Operating income from
pain management practices increased by approximately $8,582,000, representing an
increase of 559.8% . Operating income from surgery practices increased by
approximately $730,000, representing an increase of 61.2% . Operating income
from ancillary services increased by approximately $1,429,000, representing an
increase of 43.7% . These increases are a result of new practice acquisitions,
new limited managed programs and growth in existing practices.

Pain management
revenue, expense and income are attributable to five owned and nine managed
practices that primarily offer physician services for pain management and
physiatry. With respect to one of our managed practices, we only include the
revenue recognized from management fees earned. Surgery revenue, expense and
income are attributable to two owned and one managed practice that offer
surgical physician services, including minimally invasive spine surgery.
Ancillary services revenue, expense and income are attributable to two managed
practices that primarily offer orthopedic rehabilitation services and 34
practices under limited management agreements, including orthopedic
rehabilitation, electrodiagnostic medicine, intra-articular joint therapy and
real estate services. We do not separate financial results for our Canadian
subsidiary, since our operations outside of the U.S. are immaterial to our total
operations.

Expenses

Our expenses consist
primarily of medical supplies, training and general and administrative expenses.
Expenses for our service and equipment contracts consist primarily of training
and equipment leases. Amortization expense consists of contract rights
amortization. Depreciation expense consists of medical equipment, leasehold
improvements and office equipment depreciation.

Significant Accounting Policies and
Estimates

Managements Discussion
and Analysis of Financial Condition and Results of Operations discusses our
consolidated financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States. The preparation
of these financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and the

47

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reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and
judgments, including those related to bad debts, intangible assets, income
taxes, financing operations, contractual obligations, restructuring costs,
retirement benefits, and contingencies and litigation. Management bases its
estimates and judgments on historical experience and on various other factors
that it believes to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates under different assumptions or
conditions.

Our significant
accounting policies are more fully described in Note 1 to our consolidated
financial statements. However, certain of our accounting policies are
particularly important to the portrayal of our financial position and results of
operations and require the application of significant judgment by our
management; as a result, they are subject to an inherent degree of uncertainty.
In applying those policies, our management uses its judgment to determine the
appropriate assumptions to be used in the determination of certain estimates.
Those estimates are based on our historical experience, terms of existing
contracts, our observance of trends in the industry, information provided by our
customers and information available from other outside sources, as appropriate.
Management believes the following critical accounting policies, among others,
affect its more significant judgments and estimates used in the preparation of
its consolidated financial statements.

Our significant accounting estimates
include:

Revenue
Recognition.Our consolidated practice revenue is
recognized at the time the service is performed at the estimated net realizable
amounts from patients, third-party payors and others for services rendered.
Revenue from limited management fees is recognized as the services are performed
under the terms of the contract. We are a provider under the Medicare program
and various other third-party payor arrangements which provide for payments to
us at amounts different from its established rates. Provisions for estimated
third-party payor settlements, if necessary, are provided in the period the
related services are rendered.

Intangible
Assets.Intangible assets determined to have definite
lives are amortized over their useful lives. In accordance with SFAS No. 142, if
conditions exist that indicate that the carrying value may not be recoverable,
we review those intangible assets with definite lives to ensure they are
appropriately valued. Goodwill is not amortized.

Analysis of Financial Condition and Results of
Operations For The Twelve Months Ended December 31, 2005 Compared To Twelve
Months Ended December 31, 2004

Total revenues
increased to $68,663,797 for fiscal 2005, from $37,917,900 in fiscal 2004,
representing an increase of 81.1% . This increase was primarily the result of
$36,339,637 in revenue from New-Practices acquired since December 31, 2004.
There was an increase in revenues of $2,588,755 or 11.42%, from practices
acquired/managed prior to January 1, 2005 (Same-Practices). Net revenue for
all practices on a year over year basis is reflected in the chart
below.

|               | 2005         |  | 2004               |  | % Increase
|-------------- | ------------ |  | ------------------ |  | ----------
|Same-Practices |              |  |                    |  |           
|Revenues       | $ 25,263,720 |  | $
      22,674,965 |  | 11.42%    
|New-Practices  |              |  |                    |  |           
|Revenues       | $ 36,339,637 |  |                    |  |           

48

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Gross profit increased
to $56,193,428 for fiscal 2005, from $31,253,955 in fiscal 2004, representing an
increase of 79.8% . This increase is primarily the result of New-Practices
acquired/managed since December 31, 2004 and growth in
Same-Practices.

Operating income increased to $12,580,806 for fiscal
2005, from $9,458,586 in fiscal 2004, representing an increase of 33.0%
..

Operating expenses
increased by $21,817,253 to $43,612,622 for fiscal 2005, from $21,795,369 for
fiscal 2004, representing an increase of approximately 100.1% . General and
administrative expenses increased to $38,084,609 from $20,052,066, representing
an increase of 90.0% . This increase is primarily the result of New-Practices
acquired/managed since December 31, 2004. General and administrative expenses at
corporate increased to $9,663,000 from $5,866,000, representing an increase of
64.7% . This increase is primarily comprised of the following expenses: $846,954
for salaries and payroll taxes, $988,092 for Sarbanes-Oxley consulting and
travel expenses, $590,283 for EDX and IAJP servicing fees, $421,204 for
consulting fees, $487,199 for legal fees and $149,346 for accounting and audit
fees. In addition, compensation expense related to our variable stock option
plan increased to $2,382,259 from $356,590, representing an increase of 568%,
was included in general and administrative expenses.

Net interest expense
increased by $2,332,238 in fiscal 2005, as the result of new debt which
commenced during 2005 and non-cash interest charges related to derivative
instruments.

The provision for income taxes increased to
$4,925,679 in fiscal 2005 from $4,410,587 in fiscal 2004.

Analysis of Financial Condition and Results of
Operations For The Twelve Months Ended December 31, 2004 Compared To Twelve
Months Ended December 31, 2003

Total revenues
increased to $37,917,900 for fiscal 2004, from $14,980,867 in fiscal 2003,
representing an increase of 153.1% . This increase was primarily the result of
$25,544,013 in revenue from New-Practices acquired since December 31, 2003.
There was an increase in revenues of $943,937 or 11.87% from practices
acquired/managed prior to January 1, 2004 (Same-Practices). Net revenue for
all practices on a year over year basis is reflected in the chart
below.

|               | 2004         |  | 2003        |  | % Increase
|-------------- | ------------ |  | ----------- |  | ----------
|Same-Practices |              |  |             |  |           
|Revenues       | $ 8,898,933  |  | $ 7,954,996 |  | 11.87%    
|New-Practices  |              |  |             |  |           
|Revenues       | $ 25,544,013 |  |             |  |           

Gross profit increased
to $31,253,955 for fiscal 2004, from $10,394,135 in fiscal 2003, representing an
increase of 200.7% . This increase is primarily the result of New-Practices
acquired/managed since December 31, 2003 and growth in
Same-Practices.

Operating income increased to $9,458,586 for fiscal
2004, from $(11,497,705) in fiscal 2003, representing an increase of
182.3%

Operating expenses
decreased by $96,471 to $21,795,369 for fiscal 2004, from $21,891,840 for fiscal
2003, representing a decrease of approximately 0.05% . This decrease is
primarily due to a decrease of $13,176,110 in compensation expense related to
our variable stock option plan.

Net interest expense
increased by $2,932,519 in fiscal 2004, as the result of new debt which
commenced during 2004 and non-cash interest charges related to derivative
instruments.

49

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The provision for income taxes increased to
$4,410,587 in fiscal 2004 from $(3,674,358) in fiscal 2003.

Liquidity and Capital Resources

Our cash and cash
equivalents equaled $22,713,165 at December 31, 2005, compared to $19,100,840 at
December 31, 2004. The net cash provided by our operations was $9,173,097 for
fiscal 2005, compared to net cash provided in fiscal 2004 of
$4,119,026.

Cash used in investing
activities was $36,474,158 during fiscal 2005, compared with a use of
$18,407,883 in fiscal 2004. This increase is primarily due to the acquisition of
non-medical assets and new practices during fiscal 2005.

Cash provided from
financing activities was $30,913,386 in fiscal 2005, compared with $25,465,930
during fiscal 2004. The increased financing activity was the result of capital
raised during fiscal 2005, including the proceeds of a combined $30.0 million
senior secured credit facility.

Management believes the
current cash position will be sufficient to provide us with capital sufficient
to fund working capital needs for 2006. Also, we have significant indebtedness,
as described under Convertible Debt and Other Debt. We are obligated to make
$11,206,000 in principal payments under this indebtedness in 2006 and $6,750,000
in 2007. We may not have adequate funds from operations to repay the debt when
it comes due. It will be necessary, in order to expand the business, consummate
acquisitions and refinance indebtedness, to incur additional debt and/or raise
additional capital. No assurance can be given at this time that such funds will
be available, or, if available, will be sufficient in the near term or that
future funds will be sufficient to meet growth. In the event of such
developments, attaining financing under such conditions may not be possible, or
even if such funds are available, the terms on such capital may not be
commercially feasible or advantageous.

Convertible Debt

On December 18, 2003,
we completed a private placement offering of $10 million in 7.5% convertible
debentures to two institutional investors, Midsummer Investments Ltd. and
Islandia, L.P. The debentures are due December 17, 2006 and are convertible by
the investors at any time into shares of common stock at an adjusted fixed price
of $1.90 per share. Interest on the debentures is payable (in cash or stock, at
our election) in quarterly installments, which commenced in March 2004. Interest
paid in shares is based upon 90% of the market value for the shares as defined
in the debentures. The investors also received warrants to purchase 1,263,316
shares of common stock. The warrants have a term of four years ending on
December 17, 2007 and are exercisable at an adjusted fixed exercise price of
$1.90 per share. The debentures and the warrants have full ratchet anti-dilution
protection, which means that, with certain exceptions, if we issue common stock
or securities convertible or exercisable for common stock, with a purchase,
conversion or exercise price below the conversion price of the debentures and
the exercise price of the warrants, such conversion and exercise prices are
automatically reduced to the lower price. The debenture holders also have a
right of first refusal to participate in future equity financings of PainCare.
With certain exceptions, PainCare is not permitted to incur debt that would be
senior to orpari passuwith the
debentures. The securities purchase agreement pursuant to which the debentures
were sold provides that we shall not effect any conversion of debentures or
issue any shares upon exercise of the warrants, and holder shall not have the
right to convert any portion of debentures or exercise the warrants, to the
extent that after giving effect to such conversion or exercise, the holder
(together with the holders affiliates), would beneficially own in excess of
4.99% of the number of shares of the common stock outstanding immediately after
giving effect to such conversion.

On July 1, 2004, we
completed an institutional private placement offering with aggregate proceeds of
$1.5 million from Midsummer Investments Ltd. Pursuant to a separate securities
purchase

50

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agreement with Midsummer, we issued and sold a $1.5
million fixed price 7.5% Convertible Debenture. Midsummer also received warrants
to purchase 165,000 shares of our common stock. The 7.5% convertible debenture
is due July 1, 2007 and is convertible into shares of our common stock at an
adjusted price of $1.90 per share. Interest on the debenture is payable in
quarterly installments commencing in September 2004 in cash or stock, at our
election. The warrants issued to Midsummer have a term of four years ending on
July 1, 2008 and have an adjusted exercise price of $1.90 per share. The
conversion terms and other terms, including anti-dilution protections, are
otherwise substantially the same as the December 17, 2003 debenture issued to
Midsummer.

Other Debt

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

On September 15, 2005,
the Company entered into an amendment to the HBK credit facility that increased
the amount of the credit facility from $25 million to $30 million. The terms,
conditions and date of maturity of the credit facility were not changed pursuant
to the amendment.

The outstanding balance under the credit facility was
$30,000,000 at March 29, 2006.

On May 2, 2006 we
entered into a letter agreement with the lenders under the credit facility
pursuant to which the lenders waived certain historic breaches of the terms of
the credit facility in consideration for which we paid a $300,000 waiver fee to
the lenders. Subsequent to the date of the letter agreement we may have failed
to comply with certain covenants set forth in the credit facility. To date we
have not received a notice letter from the lenders with respect to any breaches
or defaults under the terms of the credit facility after the date of the letter
agreement.

A summary of our contractual obligations and
commercial commitments at December 31, 2005 were as follows:

|Contractual
      Obligations | Total               | Less than 1
      Year | 1 - 3 Years | 3 - 5 Years | 5 + Years
|----------------------------- | ------------------- | ---------------------- | ----------- | ----------- | ---------
|Long-term debt                | 30,012,581          | 3,883,012              | 26,129,569  | -           | -        
|Convertible debentures        | 9,653,008           | 8,519,131              | 1,133,877   | -           | -        
|Capital leases1               | 4,519,086           | 1,646,378              | 2,731,808   | 140,900     | -        
|Operating leases              | 15,995,028          | 3,267,612              | 6,669,816   | 3,580,056   | 2,477,544
|Acquisition consideration2    | 47,389,067          | 8,011,567              | 39,377,500  | -           | -        
|                             
|Total contractual obligations | $
      110,064,441 |                        |             |             |          

|1) | Includes the total minimum lease payments
      due in each year.                                                                                                                                                                                                                                                
|-- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|2) | Includes both the cash and stock components
      of the acquisition earnouts. One half of the contractual obligation is a
      payment in cash while the remaining half is payable in common stock priced
      at fair market value. This assumes the practice meets all earnings
      threshold obligations.
|3) | Refer to Note 9 of Notes to
      Consolidated Statements for information regarding long-term
  debt.                                                                                                                                                                                                            
|4) | Refer to Note 10 of Notes to
      Consolidated Statements for information regarding convertible
    debt.                                                                                                                                                                                                       

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Recent Accounting
Pronouncements

In December 2004, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard No. 123 (revised 2004) Share-Based Payment (SFAS 123R),
which requires companies to begin to expense the estimated fair value of
employee stock options and similar awards. The accounting provisions of SFAS
123R will be effective for the Companys first quarter of 2006. The Company will
adopt the provisions of SFAS 123R using the Black-Scholes option pricing formula
or other fair value model. Modified prospective application recognizes
compensation expense for outstanding awards for which the requisite service had
not been rendered as of the effective date over the remaining service period
using the compensation cost calculated for pro forma disclosure purposes under
SFAS 123. As disclosed in Note (1) to the financial statements had the Company
recognized compensation expense in accordance with the fair-value-based
provisions of SFAS 123 for equity instruments, earnings would have been reduced
by approximately $0.00 and $0.03 per diluted share for the years ended December
31, 2005 and 2004, respectively. Compensation cost for stock options for which
the requisite future service has not yet taken place is estimated for future
years. During 2006, 2007 and 2008, the Company estimates under SFAS 123R
compensation expense will increase by $722,160, $315,045 and $92,706,
respectively.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK

Market risk generally
represents the risk of loss that may result from the potential change in value
of a financial instrument as a result of fluctuations in interest rates and
market prices. We do not currently have any trading derivatives nor do we expect
to have any in the future. We have established policies and internal processes
related to the management of market risks, which we use in the normal course of
our business operations.

Interest Rate Risk

We have interest rate
risk, in that borrowings under our credit facility are based on variable market
interest rates. As of December 31, 2005, we had $30 million of variable rate
debt outstanding under our credit facility. Presently, the revolving credit line
bears interest at a rate of either LIBOR plus 7.25% or prime plus 4.25%, with a
term of 48 months. A hypothetical 10% increase in our credit facilitys weighted
average interest rate of 10.92% per annum for the twelve months ended December
31, 2005 would correspondingly decrease our pre-tax earnings and operating cash
flows by approximately $31,550 and $103,509, respectively.

Intangible Asset Risk

We have a substantial
amount of intangible assets. We are required to perform goodwill impairment
tests whenever events or circumstances indicate that the carrying value may not
be recoverable from estimated future cash flows. As a result of our periodic
evaluations, we may determine that the intangible asset values need to be
written down to their fair values, which could result in material charges that
could be adverse to our operating results and financial position. Although at
December 31, 2005 we believed our intangible assets were recoverable, changes in
the economy, the business in which we operate and our own relative performance
could change the assumptions used to evaluate intangible asset recoverability.
We continue to monitor those assumptions and their effect on the estimated
recoverability of our intangible assets.

Equity Price Risk

We do not own any equity investments, other than in
our subsidiaries. As a result, we do not currently have any direct equity price
risk.

Commodity Price Risk

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

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA

Financial Statements. The Financial Statements
required by this Item are included at the end of this report beginning on Page
F-1 as follows:

|Index to Financial Statements                                                                              | F-1
|---------------------------------------------------------------------------------------------------------- | ---
|Reports of Independent Registered Public Accounting Firms                                                  | F-2
|Consolidated Balance Sheets As of December 31, 2005 and 2004                                               | F-4
|Consolidated Statements of Operations For The Years Ended December
      31, 2005, 2004 and 2003           | F-5
|Consolidated Statements of Cash Flows For The Years Ended December
      31, 2005, 2004 and 2003           | F-6
|Consolidated Statements of Stockholders Equity For The Years Ended
      December 31, 2005, 2004 and 2003 | F-7
|Notes to Consolidated Financial Statements                                                                 | F-8

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

Effective as of
November 16, 2005, the resignation of Tschopp, Whitcomb & Orr, P.A. was
accepted by our Audit Committee as our independent auditing firm. During
Tschopp, Whitcomb & Orr, P.A.s retention as our independent auditing firm,
there were no disagreements with Tschopp, Whitcomb & Orr, P.A. on any matter
of accounting principle or practice, financial statement disclosure, or auditing
scope or procedure which, is not resolved to Tschopp, Whitcomb & Orr, P.A.s
satisfaction, would have caused them to make reference to the subject matter of
the disagreement in connection with their reports. Similarly, none of the
reportable events described under Item 304(a)(1)(v) of Regulation S-K have
occurred during the time that Tschopp, Whitcomb & Orr, P.A. had been engaged
as our independent auditing firm.

None of Tschopp,
Whitcomb & Orr, P.A.s audit reports on our consolidated financial
statements contained any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope or accounting
principles.

Effective as of
November 16, 2005, our Audit Committee retained Beemer, Pricher, Kuehnhackl
& Heidbrink, P.A. as our independent auditing firm for our fiscal 2005.
During the years ended December 31, 2004 and 2003 and through November 16, 2005,
we did not, nor did anyone acting on our behalf, consult with Beemer, Pricher,
Kuehnhackl & Heidbrink, P.A. regarding the application principles to a
specified transaction, either completed or proposed, the type of audit opinion
that might be rendered on our financial statements, or any reportable events
described under Items 304(a)(2)(ii) of Regulation S-K.

ITEM 9A. CONTROLS AND
PROCEDURESEvaluation of Disclosure Controls and
Procedures

The management of the
Company, with the participation of our chief executive officer and our chief
financial officer, evaluated the effectiveness of the Companys disclosure
controls and procedures (as defined in the Rules 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934) as of the end of the period covered by this
annual report.

Based upon, and as of
the date of this evaluation, the chief executive officer and the chief financial
officer concluded that the Companys disclosure controls and procedures were not
effective as of December 31, 2005, because of the material weaknesses in the
Companys internal control over financial reporting discussed below.

The required
certifications of our principal executive officer and principal financial
officer are included as exhibits to this Annual Report on Form 10-K. The
disclosures set forth in this Item 9A contain information concerning the
evaluation of our disclosure controls and procedures, internal control over
financial reporting and changes in internal control over financial reporting
referred to in those certifications. Those certifications should be read in
conjunction with this Item 9A for a more complete understanding of the matters
covered by the certifications.

Internal Controls Over Financial
ReportingManagements Annual Report on
Internal Control Over Financial Reporting

Management is
responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and
15d-15(f). There are inherent limitations to the effectiveness of any system of
internal control over financial reporting, including the possibility of human
error and the circumvention or overriding of the controls and procedures.
Accordingly, even an effective system of internal control over financial
reporting can only provide reasonable assurance with respect to financial
statement preparation and presentation in accordance with generally accepted
accounting principles. Also, projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.

A material weakness is
a significant deficiency (within the meaning of Public Company Accounting
Oversight Board Auditing [PCAOB] Standard No. 2), or combination of
significant deficiencies, that results in more than a remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis by employees in the normal course of
their work.

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Management conducted an assessment of the effectiveness of the Companys internal control over financial reporting as of December 31, 2005 based on the framework published by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO), referred to as the Internal Control - Integrated Framework. The objective of this assessment is to determine whether the Companys internal control over financial reporting was
effective as of December 31, 2005. As a result of ongoing communications with the SEC, the activities of our auditors, and from the results of managements Sarbanes Oxley work, management has concluded that there is an ineffective control
environment over the Companys financial reporting.

Management has identified the following specific material weaknesses in the Companys internal control over financial reporting as of December 31, 2005:

(i) The Company is restating its consolidated financial statements for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003, December 31, 2004, and for the quarterly periods ended March 31, 2005,
June 30, 2005 and September 30, 2005 (collectively, the financial statements) to correct the Companys financial statements for the following matters: (a) the accounting used for term notes, certain freestanding and embedded
derivates related to shares of the Registrants common stock issued to Midsummer Investments, Ltd., Islandia, L.P. and Laurus Master Fund Ltd., (b) the accounting used in connection with physician practice and surgery center acquisitions,
including the values recorded for tangible and intangible assets, recording deferred taxes, and correcting the value of shares issued, and (c) accounting for the Registrants existing stock option plans, including the use of variable accounting
for employee option grants per APB 25, and to use fair value accounting for non-employee option grants. The Companys provision for income taxes and its recording of deferred taxes was also restated for each period.

In light of the facts and circumstances relating to the restatement and significant adjustments generated from the year-end audit (described in subsequent items below), the Company concluded that the
inability of the Company to prepare its financial statements without material misstatements is a material weakness in the Companys internal control over financial reporting caused by inadequate control over the process for the identification
and implementation of the proper accounting for complex and non-routine transactions.

Management of the Company is evaluating steps to enhance the operation and effectiveness of our internal controls over the identification of, and accounting for, complex and non-routine transactions. We
have identified a need for additional staff and or consultants with expertise in identifying accounting issues, and in preparing required disclosures in the notes to the financial statements. We have identified a need to develop greater internal
resources for identifying, researching and evaluating the appropriateness of complex accounting principles and for evaluating the effects of new accounting pronouncements on us. Our growth during and since 2004 as a result of our acquisitions and
the increased complexity surrounding our financing arrangements are major contributors to the need for additional resources in financial reporting and enhanced post-closing procedures and analysis.

(ii) Management has identified that there are lack of adequate segregation of duties in field locations in the purchasing and disbursement function, and in certain field locations for cash receipts and payroll. In addition, we noted
that there was a lack of compliance with established procedures regarding approval of invoices. In most locations the Company has attempted to segregate the responsibilities, however due to either the size of the financial staff or the existence of
related parties there are inherent limitations in the segregation of duties. Therefore, management has concluded that there were deficiencies in the design at certain locations due to lack of personnel. In addition, at these and at other locations,
there was a failure to comply with established policies and procedures.

The Company is in the process of recruiting additional skilled accounting staff to assist in the monitoring and reconciliation process related to field operations.

(iii) The Company has executed agreements with related parties for billing, managerial and administrative services and facility leases. Management has identified that the Company did not have appropriate controls to timely identify,
analyze, record, and properly disclose all transactions with related parties. The Company is seeking to enhance its disclosure process by improving its procedures to properly capture, analyze, record, and disclose all related party transactions
including the use of an extensive disclosure checklist.

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(iv) Management identified deficiencies in the
operation of the Companys policies and procedures associated with a lack of
access controls, operating knowledge or training, adequate backup and security
of certain critical financial systems. These systems included billing, payroll,
accounts payable, general ledger and electronic spreadsheets used in the
compilation and presentation of the Companys financial information. Although,
there are manual controls designed to identify material errors, the systems
identified affect a significant number of account balances and disclosures, and
therefore management has concluded that there is a material weakness related to
controls in this area. In regard to these deficiencies, during the fourth
quarter of 2005 the Company began developing new information management and
security procedures. In addition, the Company intends to implement a process in
2006 to monitor and test compliance with such policies and
procedures.

(v) Management has identified a deficiency in the
timeliness and accuracy of the monthly close process. This deficiency is
specifically related to accuracy and review of key account reconciliations,
analysis of changes in debt/capital leases, appropriate support and second party
review of journal entries, and consolidation of field location financial
statements. The accounting function is decentralized throughout the field
locations, and these location lacked personnel with adequate experience in
accounting matters to analyze and interpret accounting data in a timely
manner.

The company is in the process of recruiting
additional skilled accounting staff to assist in the monitoring and
reconciliation process.

(vi) The Companys management did not have adequate
technical expertise with respect to income tax accounting and tax compliance to
effectively oversee these areas. This lack of adequate technical expertise
resulted in errors in the Companys accounting for income taxes, which have been
corrected in the restatements. The errors related to inappropriate accounting
for deferred taxes, errors in the calculation of the current income tax
accruals, and in the preparation of fully compliant tax returns. The Company is
in the process of recruiting additional skilled accounting staff and has engaged
consultants to assist in this area.

(vii) Managements evaluation of internal control
over financial reporting as of December 31, 2005 excluded an evaluation of the
internal control over financial reporting of the following subsidiaries which
were acquired during 2005 and included in the consolidated financial statements
as of and for the year ended December 31, 2005:

|                                     |  | For the Year Ended
|------------------------------------ |  | ------------------
|                                     |  | December 31, 2005 
|Subsidiary
      Name                |  | Revenue           
|Colorado Pain Specialists            |  | $
      1,845,682 
|Piedmont Center for Spinal Disorders |  | 511,981           
|Floyd O. Ring, Jr., M.D., P.C.       |  | 644,613           
|PCSI                                 |  | 5,116,622         
|Christopher J. Centeno, M.D., P.C.   |  | 741,441           
|Totals                               |  | $ 8,860,339       

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Beemer, Pricher, Kuehnhackl & Heidbrink, P.A., the Companys independent registered public accounting firm, has issued a report on managements assessment of the Companys internal
control over financial reporting, which is included herein.

Attestation Report of Independent Registered Public Accounting Firm

Report of Independent Registered Public Accounting Firmon Internal Control Over Financial Reporting

To the Board of Directors and Stockholders ofPainCare Holdings, Inc.

We have audited managements assessment, included in the accompanying Managements Report on Internal Control over Financial Reporting appearing under Item 9A, that PainCare Holdings, Inc. did not
maintain effective internal control over financial reporting as of December 31, 2005, because of the effect of the material weaknesses identified in managements assessment, based on the criteria established inInternal
Control  Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). The management of PainCare Holdings, Inc. and its subsidiaries (the Company)
is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on managements assessment
and an opinion on the effectiveness of the Companys internal control over financial reporting based on our audit.

We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial
reporting, evaluating managements assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit
provides a reasonable basis for our opinions.

A companys internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with generally accepted accounting principles. A companys internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable
detail accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of the companys assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to
the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

56

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A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements
will not be prevented or detected. As of December 31, 2005, the following material weaknesses were identified and included in managements assessment:

Management has concluded that the Company was not able to prepare its financial statements without material misstatements because of an inadequate control over the process for the identification and implementation of the proper
accounting for complex and non-routine transactions. Transactions that were misstated included the following: (1) the accounting used for term notes and certain freestanding and embedded derivates related to financing transactions; (2) the
application of purchase accounting used in connection with physician practice and surgery center acquisitions, including the values recorded for tangible and intangible assets, goodwill, recording deferred taxes, and measuring the value of shares
issued; and (3) accounting for the Companys existing stock option plans, including the use of variable accounting for employee option grants and the use of fair value accounting for non-employee option grants.

Management has identified a lack of adequate segregation of duties in field locations in the purchasing and disbursement function, and in certain field locations for cash receipts and payroll. In addition, management noted a lack of
compliance with established procedures regarding approval of invoices. Therefore, management has concluded that there were deficiencies in the design of controls at certain locations, and a failure to comply with established policies and
procedures.

Management has identified that the Company did not have appropriate controls to timely identify, analyze, record, and properly disclose all transactions with related parties.

Management has identified deficiencies in controls over the operation of critical financial systems, including billing, payroll, accounts payable, general ledger, and electronic spreadsheets used in the compilation and presentation of
the Companys financial information.

Management has identified a deficiency in the timeliness and accuracy of the monthly close process, which is specifically related to accuracy and review of key account reconciliations, analysis of changes in debt/capital leases,
appropriate support and second party review of journal entries, and consolidation of field location financial statements.

Management has identified deficiencies in controls with respect to income tax accounting and tax compliance, as the Company did not have adequate technical expertise to effectively oversee these areas. This resulted in errors in the
Companys accounting for income taxes, including inappropriate accounting for deferred taxes, errors in the calculation of the current income tax accruals, and in the preparation of fully compliant tax returns.

The control deficiencies described above resulted in the Company restating its consolidated financial statements for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31,
2003, December 31, 2004, and for the quarterly periods ended March 31, 2005, June 30, 2005 and September 30, 2005. In addition, these control deficiencies could result in other misstatements to the aforementioned financial statement accounts and
disclosures that would result in a material misstatement to the annual or interim financial statements of the Company that would not be prevented or detected. Accordingly, management of the Company has concluded that these control deficiences
constitute material weaknesses.

57

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These material
weaknesses were considered in determining the nature, timing, and extent of
audit tests applied in our audit of the 2005 consolidated financial statements
of the Company, and our opinion regarding the effectiveness of the Companys
internal control over financial reporting does not affect out report dated May
12, 2006 on those consolidated financial statements.

In our opinion,
managements assessment that PainCare Holdings, Inc. did not maintain effective
internal control over financial reporting as of December 31, 2005, is fairly
stated, in all material respects, based on the COSO criteria. Also, in our
opinion, because of the effects of the material weaknesses described above on
the achievement of the objectives of the control criteria, PainCare Holdings,
Inc. has not maintained effective internal control over financial reporting as
of December 31, 2005, based on the COSO criteria.

/s/ Beemer, Pricher, Kuehnhackl & Heidbrink,
P.A.

Winter Park, FloridaMay 12,
2006

Changes in Internal Control Over Financial
Reporting

There were no changes
in the Companys internal control over financial reporting that occurred during
the Companys last fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE
REGISTRANT

Board of Directors and Executive
Officers

The following table
sets forth the directors and executive officers of the Company as of December
31, 2005. Directors are elected for a period of one year and thereafter serve
until the next annual meeting at which their successors are duly elected by the
stockholders. Officers and other employees serve at the will of the Board of
Directors.

Board Member

Executive Officers
      Name
    Age
    Since
    PositionsRandy Lubinsky
    53
    2002
    Chief Executive Officer and DirectorMark Szporka
    50
    2002
    Chief Financial Officer and DirectorRonald Riewold
    58
    2002
    President and DirectorMerrill Reuter, M.D.
    45
    2002
    President of AOSF and ChairmanJay Rosen, M.D
    47
    2002
    DirectorArthur J. Hudson
    54
    2002
    DirectorRobert Fusco
    55
    2002
    DirectorAldo F. Berti, M.D.
    58
    2004
    DirectorThomas J. Crane
    48
    2004
    Director


Randy
Lubinsky, Chief Executive Officer and Director of
the Company, joined the Company on August 1, 2000 and has served as a Director
of the Company since 2000. Mr. Lubinsky has over 25

58

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years experience as a healthcare entrepreneur and investment banker. He has built businesses from the start-up phase in the healthcare and real estate industries, and has assisted several public companies in implementing roll-up
strategies. In March of 2000, Mr. Lubinsky co-founded Quest Capital Partners, LC in Orlando, Florida, an investment banking firm specializing in healthcare where he acted as Managing Director until he joined PainCare in August of 2000. From
September of 1999 until March of 2000, Mr. Lubinsky served as a Director of Cloverleaf Capital Advisors, L.L.C., an investment banking firm specializing in healthcare and e-learning, located in Ocoee, Florida. Mr. Lubinsky received a BA degree in
finance from Florida International University.

Mark Szporka,Chief Financial Officer and Director of the Company joined the Company on August 1, 2000 and has served as a Director of the
Company since 2000. Mr. Szporka has in excess of 25 years experience as an investment banker, chief financial officer and strategic planner. In March of 2000, he co-founded Quest Capital Partners, LC in Orlando, Florida, an investment banking firm
specializing in healthcare where he acted as a Director until he joined PainCare in August of 2000. From September of 1999 until March of 2000, Mr. Szporka served as a Director of Cloverleaf Capital Advisors, L.L.C., an investment banking firm
specializing in healthcare and e-learning, located in Ocoee, Florida. Mr. Szporka received a MBA from the University of Michigan and a BBA from the University of Notre Dame. He is a Certified Public Accountant (non-active) in New York.

Ronald L. Riewold,is the Companys President and Director and has served as a Director of the Company since 2002. Effective February 7,
2003, the Board elected Mr. Riewold to succeed Dr. Rosen as President of the Company. From December 1999 until January 2001, Mr. Riewold served as a consultant for American Enterprise Solutions, Inc. (AESI), a healthcare delivery system
and internet utility located in Tampa, Florida which focused on the connectivity of the Internet in the healthcare industry. Mr. Riewold later became Executive Vice President, then President and Chief Operating Officer of AESI. Mr. Riewold has a BA
degree from Florida State University and a MBA from Temple University.

Merrill Reuter,M.D.,is the Companys Chairman of the Board and is the
President of Advanced Orthopaedics of South Florida, Inc. and has served as a Chairman of the Board of Directors since 2002. Dr. Reuter founded Advanced Orthopaedics of South Florida, Inc. in Lake Worth, Florida in 1992 and from that date until the
present has served as its President and Medical Director. He received a BS degree from Tulane University in 1982 and a Masters in Medical Science and a Medical Degree from Brown University in 1986. Dr. Reuter completed his General Surgical
Internship and Orthopedic Surgery Residency Training Program at the University of Texas Medical Branch in Galveston, Texas.

Jay L. Rosen, M.D.,has served as a Director of the Company since 2000. Dr. Rosen has over 15 years experience as a healthcare entrepreneur.
Since 1992, he has and continues to serve as Chief Executive Officer and Executive Director of Tampa Bay Surgery Center, Inc., an outpatient surgical facility that specializes in minimally invasive spinal surgery and pain management procedures in
Tampa, Florida. During his tenure with Tampa Bay Surgery Center, Dr. Rosen has successfully developed and managed outpatient surgery, diagnostic, specialized ambulatory treatment and physical rehabilitation centers. He also is active in managing
Seven Springs Surgery Center in New Port Richey, Florida. Dr. Rosen received a BS degree from Fordham University and Medical Degree from Cetec University. He performed graduate medical research at Hahnemann University in Philadelphia and the Medical
Center at SUNY at Stony Brook. Dr. Rosen is a Diplomat of the American Board of Quality Assurance and Utilization Review Physicians. He currently serves on the Board of Directors for Tampa Bay Surgery Center, Inc., Tampa Bay Surgery Associates,
Inc., Rehab One, Inc., Open MRI & Diagnostic Center, Inc., Immuvac, Inc., and Intellicare, Inc.

Arthur J. Hudson,has served as a Director of the Company since November 2002. Mr. Hudson has been employed with Fidelitone, Inc. of Wauconda, Illinois since 1974. He
currently serves as Senior Vice President of Corporate Development for the full service inventory management, distribution and logistics company. From 1998 to 2001, he also served as head of international sales for Aero Products International, Inc.,
a wholly owned subsidiary of Fidelitone. Mr. Hudson is a member of the board of directors of Fidelitone. He received a B.S. degree in economics from Colorado State University.

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Robert
Fusco,has served as a
Director of the Company since November 2002. Mr. Fusco has over twenty years
experience in the healthcare industry and was responsible for building Olsten
Corporation into one of the largest home health and specialty pharmaceutical
distribution services companies in North America. Since March 2000 when Olsten
Corporation was sold to Addecco Corporation, Mr. Fusco has been an independent
consultant. From January 1985 to April 2000, Mr. Fusco served in various
capacities including President of Olsten Health Services and Executive Vice
President of Olsten Corporation. From 1979 to 1985, he served as Executive Vice
President of Bio-Medical Applications, inc., a subsidiary of National Medical
Care, Inc., and had profit and loss responsibility for over 180 dialysis clinics
nationally. Mr. Fusco received a BS degree from Manhattan College.

Aldo F. Berti,
M.D.,has served as a
Director of the Company since November 2004.Since 1980, Dr. Berti has owned and provided
physician and neurosurgical services to Aldo F. Berti, M.D. P.A. located in
Miami, Florida. Additionally, Dr. Berti is an international medical and
neurosurgical consultant, having published numerous academic articles and
presented extensively at Medical Conferences worldwide. Dr. Berti has developed
an expertise, and has a special interest, in complex spinal surgery, pain
management, and spine rehabilitation. Dr. Berti is the Associate Director for
Latin America at the Gamma Knife Institute at Jackson Memorial Medical Center at
the University of Miami School of Medicine. Dr. Berti is a Fellow at the
American College of Surgeons and the American Academy of Pediatrics. Dr. Berti
has pioneered the field of CyberKnife Radiosugery in the State of Florida by
having performed the first procedure in December of 2003. In the past Dr. Berti
has been elected as chief of neurosurgery and chief of the department of surgery
at Cedars Medical Center of Miami. Dr. Berti is affiliated with the following
hospitals: Cedars Medical Center, Miami, Florida; Jackson Memorial Medical
Center -Gamma Knife Institute, Miami, Florida; North Shore Medical Center,
Miami, Florida; Palm Springs Hospital, Miami, Florida; and South Miami Hospital,
Miami, Florida.

Thomas J.
Crane,has served as a
Director of the Company since November 2004.Since January 1991, Mr. Crane has owned and
operated a specialized law practice located in Naples, Florida. Beginning in
2000, Mr. Crane formed, and currently acts as the Managing Director, of
Cloverleaf Capital International, LLC, an investment banking firm focused on
media, technology, and health care. In 1990, Mr. Crane founded and became
President/CEO of Southwestern Broadcasting Corporation (SBC), a Naples, Florida
based radio station group owner. In August of 1998, SBC sold its assets to
Broadcast Entertainment Corporation (BEC), an affiliated company operating radio
stations in Texas, New Mexico, and California. Mr. Crane was, at the time of the
sale, and remains a principal shareholder and Chairman of the Board of Directors
of BEC, with its corporate offices located in Clovis, New Mexico. Mr. Crane also
sits on the Boards of Compass Knowledge Holdings, Inc. based in Ocoee, Florida
and XTEL, Inc., a telecommunications network based in Miami, Florida, and has
published several legal articles concerning media, broadcasting, and
communications. Mr. Crane holds a Juris Doctor degree from the University of
Miami, School of Law, Miami, Florida, a Bachelor of Arts degree from Florida
State University, Tallahassee, Florida and a Certificate of Languages from the
University of Paris (Sorbonne), Paris, France. Mr. Crane is licensed to practice
law in the States of Florida and Texas.

Committees and Meetings

The Board of Directors
held 6 meetings in 2005 and a quorum of directors attended either in person or
via teleconference. All directors hold office until the next annual meeting of
stockholders and the election and qualification of their successors. Directors
receive compensation for serving on the Board of Directors as described
below.

60

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Committees of the Board of
Directors

The Company has
established a standing Audit Committee, Compensation Committee and Stock Option
Committee. The Company has not established a Nominating Committee.

Audit Committee

The Audit Committee
retains and oversees the Companys independent accountants, reviews the scope
and results of the annual audit of the Companys consolidated financial
statements, reviews non-audit services provided to the Company by its
independent accountants and monitors transactions among the Company and its
affiliates, if any. The Audit Committee currently consists of Mr. Fusco, the
chairman of the Audit Committee, Mr. Hudson and Mr. Crane, who are all
independent under American Stock Exchange and SEC rules. The Board of Directors
has determined that Mr. Fusco, chairman of the Audit Committee, is qualified as
an Audit Committee Financial Expert. During fiscal 2005, the Audit Committee
held three meetings at which all of the members of the Committee were
present.

Compensation Committee

The Compensation
Committee is responsible for supervising the Companys compensation policies,
administering the employee incentive plans, reviewing officers salaries and
bonuses, approving significant changes in employee benefits and recommending to
the Board such other forms of remuneration as it deems appropriate. The
Compensation Committee currently consists of Mr. Crane, the chairman of the
Compensation Committee, Dr. Berti and Mr. Hudson, who are all independent.
During fiscal 2005, the Compensation Committee held 1 meeting, at which all of
the members of the Committee were present.

Stock Option Committee

The Stock Option
Committee is responsible for supervising and administering the Companys Stock
Option Plans, approving significant changes in the Plans and recommending to the
Board such other forms of remuneration as it deems appropriate. The Stock Option
Committee currently consists of Mr. Crane, the Chairman of the Stock Option
Committee, and Mr. Hudson, who are independent. During fiscal 2005, the Stock
Option Committee did not hold any meetings.

Section 16(A) Beneficial Ownership
Reporting

Section 16(a) of the
Securities Exchange Act of 1934 requires the Companys directors and executive
officers, and persons who own more than 10% of the Companys common stock, to
file with the Securities and Exchange Commission initial reports of ownership
and reports of changes in ownership, and to furnish the Company with copies of
all Section 16(a) reports they file. To the Company's knowledge, based solely on
review of the copies of such reports and written statements from officers and
directors furnished to the Company, all Section 16(a) filing requirements
applicable to its officers, directors and beneficial owners of more than 10% of
our common stock were complied with during the year.

Code of Ethics

We have adopted a Code
of Conduct and Ethics and it applies to all Directors, Officers and employees. A
copy of the Code of Conduct and Ethics is posted on our website and we will
provide a copy to any person without charge. If you require a copy, you can
download it from our website or alternatively, contact us by facsimile or email
and we will send you a copy.

61

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ITEM 11. EXECUTIVE COMPENSATION

The following table
sets forth compensation paid by the Company to each person who served in the
capacity of Chief Executive Officer during 2005, 2004 and 2003, and other
officers of the Company whose total annual salary and bonus for the fiscal years
ended December 31, 2005, December 31, 2004 and December 31, 2003 exceeded
$100,000 (collectively, the Named Executive Officers).

|SUMMARY COMPENSATION TABLE     
|-------------------------------
|                               
|                               
|                               
|                               
|                               
|                               
|                               
|Name & Principal
      Position
|Randy Lubinsky, CEO            
|(1)(4)                         
|                               
|Mark Szporka, CFO              
|(2)(4)                         
|                               
|Ronald Riewold, President      
|(3)(5)                         
|                               

|(1) | Randy Lubinsky has served as our Director
      and the Chief Executive Officer since our reorganization on August 1,
      2000. Pursuant to an employment agreement entered into in August 2000 and
      amended on August 1, 2002, Mr. Lubinsky received annual salary payments
      equal to $200,000 and certain perquisites and other benefits. This
      employment agreement was subsequently amended on August 1, 2003,
      increasing Mr. Lubinskys annual salary to $250,000. This employment
      agreement was amended again on August 1, 2004, increasing Mr. Lubinskys
      annual salary to $280,000 and subsequently amended on August 1, 2005,
      increasing Mr. Lubinskys annual salary to $320,000. For the fiscal year
      ended December 31, 2005, the Company paid Mr. Lubinsky a car allowance of
      $12,000 and paid health and dental insurance premiums of $8,892. See
      Employment Agreements.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) | Mark Szporka has served as a Director and
      Chief Financial Officer since our reorganization on August 1, 2000.
      Pursuant to an employment agreement entered into in August 2000 and
      amended August 1, 2002, Mr. Szporka received annual salary payments equal
      to $175,000 and certain perquisites and other benefits.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|    | This employment agreement was subsequently
      amended on August 1, 2003, increasing Mr. Szporkas annual salary to
      $225,000. This employment agreement was amended again on August 1, 2004,
      increasing Mr. Szporkas annual salary to $255,000 and subsequently
      amended on August 1, 2005, increasing Mr. Szporkas annual salary to
      $295,000. For the fiscal year ended December 31, 2005, the Company paid
      Mr. Szporka a car allowance of $12,000 and paid health and dental
      insurance premiums of $12,944. See Employment Agreements.                                                                                                                                                                                                                                                                                                                                                                 
|   
|(3) | Ronald Riewold has served as a Director
      since November 8, 2002 and President since February 7, 2003. Pursuant to
      an employment agreement entered into in February 2003, Mr. Riewold
      received annual salary payments equal to $175,000 and certain perquisites
      and other benefits. This employment agreement was amended on November 2,
      2004, increasing Mr. Riewolds annual salary to $225,000. This employment
      agreement was amended again on August 1, 2005, increasing Mr. Riewolds
      annual salary to $295,000. For the fiscal year ended December 31, 2005,
      the Company paid Mr. Riewold a car allowance of $12,000 and paid health
      and dental insurance premiums of $12,944. See Employment
      Agreements.                                                                                                                                                                       
|   

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|(4) | Two hundred thousand (200,000) options were
      granted to Mr. Lubinsky and 200,000 options were granted to Mr. Szporka on
      August 1, 2000 under the Company's 2000 Stock Option Plan. One million
      (1,000,000) options were granted to Mr. Lubinsky and 1,000,000 options
      were granted to Mr. Szporka on August 1, 2002 under the Companys 2001
      Stock Option Plan. One Hundred Fifty thousand (150,000) options were
      granted to Mr. Lubinsky and 150,000 options were granted to Mr. Szporka on
      June 2, 2003 under the Companys 2001 Stock Option Plan. Nine Hundred
      thousand (900,000) options were granted to Mr. Lubinsky and 900,000
      options were granted to Mr. Szporka on September 11, 2003 under the
      Companys 2001 Stock Option Plan. One hundred thousand (100,000) options
      were granted to Mr. Lubinsky and 100,000 options were granted to Mr.
      Szporka on August 1, 2004. One hundred seventy-five thousand (175,000)
      options were granted to Mr. Lubinsky and 175,000 options were granted to
      Mr. Szporka on August 1, 2005. Except for the initial 200,000 options
      granted to Messrs. Lubinsky and Szporka which were exercised by these
      individuals in February 2005, none of these options have been exercised to
      date.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(5) | Seven hundred seventy-five thousand
      (775,000) options previously granted to Mr. Riewold immediately vested
      upon the execution of his employment agreement in February 2003. Four
      hundred seventy-five thousand (475,000) options were granted to Mr.
      Riewold on February 7, 2004 and seven hundred seventy-five thousand
      (775,000) options were granted to Mr. Riewold on October 16, 2004. One
      hundred seventy-five thousand (175,000) options were granted to Mr.
      Riewold on August 1, 2005. None of these options have been exercised to
      date.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|   

Stock Option Grants

The following table
sets forth information regarding grants of stock options during the fiscal year
ending December 31, 2005 made to the Named Executive Officers who have received
Company option grants.

Stock Option Grants In 2005

|                  |                            |                                          |                           |  |                   |  |                 |  | Potential Realizable Value at
|----------------- | -------------------------- | ---------------------------------------- | ------------------------- |  | ----------------- |  | --------------- |  | -----------------------------
|                  |                            |                                          |                           |  |                   |  |                 |  | Assumed Annual Rates of Stock
|Individual Grants |                            | Price Appreciation for Option
      Term
|                  |                            |                                          |                           |  |                   |  |                 |  |                              
|                  | Number of
      Securities |                                          | % of Total
      Stock    |  |                   |  |                 |  |                              
|                  | Underlying                 |                                          | Options
      Granted to  |  | Exercise
      or |  |                 |  |                              
|                  | Stock
      Options        |                                          | Employees
      in Fiscal |  | Base  Price       |  |                 |  |                              
|Name              | Granted (#)                |                                          | 2005                      |  | ($/Sh)            |  | Expiration Date |  | 5% ($)                       
|Randy Lubinsky    | 175,000                    |                                          | 19%                       |  | $ 4.00            |  | 8/1/10          |  | $ 194,250                    
|Mark Szporka      | 175,000                    |                                          | 19%                       |  | $
      4.00      |  | 8/1/10          |  | $
      194,250              
|Ronald Riewold    | 175,000                    |                                          | 19%                       |  | $ 4.00            |  | 8/1/10          |  | $ 194,250                    

Aggregate Option Exercises in Last Fiscal Year and
Fiscal Year-End Option Values

The following table
sets forth information with respect to the executive officers named in the
Summary Compensation Table concerning the exercise of options during the year
ended December 31, 2005 and unexercised options held as of the end of fiscal
2005.

|               |  |                       |  |                |  | Number of
      Securities   |  | Value of Unexercised In-the-
|-------------- |  | --------------------- |  | -------------- |  | ---------------------------- |  | ----------------------------
|               |  |                       |  |                |  | Underlying
      Unexercised |  | Money Options at FY-End     
|               |  | Shares
      Received |  |                |  | Options at FY-End(2)         |  | ($)
      (1)(2)            
|Name           |  | on Exercise           |  | Value Realized |  | Exercisable/Unexercisable    |  | Exercisable/Unexercisable   
|Randy Lubinsky |  | 197,531               |  | $634,075       |  | 1,575,000/750,000            |  | $4,564,000/$2,445,000       
|Mark Szporka   |  | 197,531               |  | $634,075       |  | 1,575,000/750,000            |  | $4,564,000/$2,445,000       
|Ronald Riewold |  | 0                     |  | $0             |  | 1,450,000/750,000            |  | $4,156,500/$2,445,000       

|(1) | Calculated based on the fair market value of
      $3.26 per share at the close of trading on December 30, 2005 as reported
      by the AMEX, minus the exercise price of the option.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | The unvested portion of the unexercised
      options, vested on January 1, 2006.                                                                                                     

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Employment Agreements

Randy Lubinsky,
CEO.Mr. Lubinsky serves as Chief Executive Officer of
the Company for a term expiring on December 31, 2010. The principal terms of Mr.
Lubinskys employment agreement, as amended, are as follows: (i) an annual
salary of $320,000, which may be increased from time to time at the discretion
of the board of directors; (ii) stock options to purchase 175,000 (exercisable
at $4.00 per share) shares of the Companys common stock; (iii) health and
dental insurance coverage; (iv) term life insurance; (v) an annual bonus of
$200,000, plus a discretionary bonus up to 150% of salary and (vi) such other
benefits as the Company may provide for its officers in the future.

Mark Szporka,
CFO.Mr. Szporka serves as Chief Financial Officer for
the Company for a term expiring on December 31, 2010. The principal terms of Mr.
Szporkas current employment agreement, as amended, are as follows: (i) an
annual salary of $295,000, which may be increased from time to time at the
discretion of the board of directors; (ii) stock options to purchase 175,000
(exercisable at $4.00 per share) shares of the Companys common stock; (iii)
health and dental insurance coverage; (iv) term life insurance; (v) an annual
bonus of $200,000, plus a discretionary bonus up to 150% of salary and (vi) such
other benefits as the Company may provide for its officers in the
future.

Ronald Riewold,
President.Mr. Riewold serves as President for the
Company for a term expiring on December 31, 2010. The principal terms of Mr.
Riewolds current employment agreement, as amended, are as follows: (i) an
annual salary of $295,000, which may be increased from time to time at the
discretion of the board of directors; (ii) stock options to purchase 175,000
(exercisable at $4.00 per share) shares of the Companys common stock; (iii)
health and dental insurance coverage; (iv) term life insurance; (v) an annual
bonus of $200,000, plus a discretionary bonus up to 150% of salary and (vi) such
other benefits as the Company may provide for its officers in the
future.

Merrill Reuter,
M.D.Advanced Orthopaedics of South Florida II, Inc.
(AOSF), a wholly-owned subsidiary of the Company, entered into an employment
agreement with Merrill Reuter, M.D. to serve as its President and Medical
Director for an initial term expiring on December 31, 2009. This employment
agreement was amended during 2004, which extended the term through December 31,
2011. The principal terms of Dr. Reuters amended employment agreement are as
follows: (i) an annual salary of $300,000 during fiscal year 2004, $500,000
during fiscal year 2005 and $750,000 per year for each year thereafter; (ii)
stock options to purchase shares of the Companys common stock as approved by
the stock option committee of the Company; and (iii) health and disability
insurance coverage. In the event that AOSF terminates the agreement Without
Cause or Dr. Reuter terminates the agreement For Cause, Dr. Reuter will
receive a lump sum severance payment of $1,000,000.

Compensation Committee Report on Executive
Compensation

Compensation Governance

This report describes
our executive compensation program and the basis on which the 2005 fiscal year
compensation determinations were made by us for the executive officers of the
Company, including our Chief Executive Officer and the Named Executives. We
establish all components of executive pay and recommend or report our decisions
to the Board of Directors for approval.

Our duties include
recommending to the Board of Directors the base salary levels for all executive
officers as well as the design of awards in connection with all other elements
of the executive pay program. We also evaluate executive performance and address
other matters related to executive compensation.

Compensation Policy and Overall
Objectives

In developing recommendations regarding the amount
and composition of executive

64

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compensation, our goal is to provide a compensation
package that will enable the Company to attract and retain highly qualified
individuals for its executive positions. In addition, our objectives include
rewarding outstanding performance and linking the interests of our executives to
the interests of our stockholders. In determining actual compensation levels, we
consider all elements of the program in total rather than any one element in
isolation.

We believe that each
element of the compensation program should target compensation levels at rates
that take into account current market practices. Offering market-comparable pay
opportunities allows us to maintain a stable, successful management
team.

The key elements of our
executive compensation are base salary, discretionary annual bonuses, long-term
incentives, and various other benefits, including medical insurance, which are
generally available to all employees of the Company. Each of these is addressed
separately below.

Base Salaries

We regularly review
each executives base salary. The base salary ranges of the Company's executives
are targeted to be in the range of the median base pay ranges of similarly
positioned executives in the group of comparable companies selected for
compensation comparison purposes.

Base salaries for
executives are initially determined by evaluating executives' levels of
responsibility, prior experience, breadth of knowledge, internal equity issues
and external pay practices. Increases to base salaries are driven primarily by
performance, which is evaluated based on sustained levels of contribution to the
Company, and/or salary increases in the industry for similar companies with
similar performance profiles.

Annual Bonuses

Annual bonus
opportunities allow the Company to communicate specific goals that are of
primary importance during the coming year and motivate executives to achieve
these goals. The Companys employment agreements with its Chief Executive
Officer, Chief Financial Officer, and President, provide for the payment of an
annual bonus to said individuals in the total amount of 11% of the Companys
EBITDA. For the year ended December 31, 2005, the foregoing senior executives
agreed to accept an annual bonus in the total amount of $770,000, which is less
than 11% of the Companys EBITDA. Effective January 1, 2006, this bonus
structure was amended providing the above named officers minimum bonuses of
$200,000 up to a maximum of 150% of their base salary in any one calendar
year.

Long-Term Incentives

Our stock option
program is designed to align the long-term interest of executives, certain
middle managers and other key personnel to the long-term interests of our
stockholders and, therefore, are typically granted upon commencement of
employment. Stock options are granted at an option price not less than the fair
market value of the Company's Common Stock on the date of grant. Accordingly,
stock options have value only if the stock price appreciates following the date
the options are granted. Further, stock options are typically subject to a
36-month vesting period. The Committee awards stock options on the basis of
individual performance and/or achievement of internal strategic objectives. This
approach focuses executives on the creation of stockholder value over the long
term and encourages equity ownership in the Company.

Tax Considerations

Section 162(m) of the Internal Revenue Code of 1986,
as amended, generally disallows a tax

65

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deduction to public companies for certain
compensation in excess of $1 million paid to the Company's Chief Executive
Officer and the four other most highly compensated executive officers. Certain
compensation, including qualified performance-based compensation, will not be
subject to the deduction limit if certain requirements are met. The Compensation
Committee reviews the potential effect of Section 162(m) periodically and uses
its judgment to authorize compensation payments that may be subject to the limit
when the Compensation Committee believes such payments are appropriate and in
the best interests of the Company and its stockholders, after taking into
consideration changing business conditions and the performance of its
employees.

Conclusion

We believe that
attracting and retaining management and employees of high caliber is essential
to maintaining a high-performing organization that creates long-term value for
its stockholders. We also believe that offering a competitive, performance-based
compensation program with a large equity component helps to achieve this
objective by aligning the interests of officers and other key employees with
those of stockholders. We believe that the Company's 2005 fiscal year
compensation program met these objectives.

By the Compensation Committee of the Board of
Directors of PainCare Holdings, Inc. Thomas Crane Aldo Berti, M.D.

Arthur Hudson

Compensation Committee Interlocks and Insider
Participation

Randy Lubinsky, the Companys Chief Executive Officer
and Director, served on the Compensation Committee until November
2004.

Director Compensation

Cash fees and stock
options will be paid to non-employee directors of the Company by the Company for
service on the Board of Directors. For being elected to serve during the term
year of November 2004 to November 2005 on the Board of Directors, Arthur Hudson,
Robert Fusco, Jay Rosen, M.D., Thomas Crane and Aldo Berti, M.D. have each
received 25,000 options, exercisable at $2.97 per share and cash compensation of
$5,000. In addition, they will receive cash compensation based on the committees
they serve on as follows: $5,000 for the Audit Committee, $2,500 for the Stock
Option Committee and $2,500 for the Compensation Committee. Directors of the
Company who are also officers of the Company receive no additional compensation
for their service as directors. All directors are entitled to reimbursement for
reasonable expenses incurred in the performance of their duties as members of
the board of directors.

66

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Performance Graph

The following graph
shows the change in our cumulative total stockholder return for the period from
July 17, 2002, the effective date of our merger with HelpMate Robotics, Inc.,
through the end of our fiscal year ending December 31, 2005, based upon the
market price of our common stock, compared with the cumulative total return on
the American Stock Exchange and AMEX Health Products and Services Index. The
graph assumes a total initial investment of $100 as of July 17, 2002, and shows
a Total Return that assumes reinvestment of dividends, if any, and is based on
market capitalization at the beginning of each period. The performance on the
following graph is not necessarily indicative of future stock price
performance.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

The following table
sets forth certain information as of May 26, 2006 as to the number of shares of
the Company common stock that will be beneficially owned by: (i) each person
that beneficially owns more than 5% of the outstanding shares of the Company
common stock; (ii) each director of the Company; (iii) the Chief Executive
Officer and the four other most highly compensated executive officers of the
Company; and (iv) the Company executive officers and directors as a
group.

67

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The holders listed
below will have sole voting power and investment power over the shares
beneficially held by them. The table below includes shares subject to options,
warrants and convertible notes.

|Beneficial Ownership
      (1)                           |  |            |  |         |  |                                              
|-------------------------------------------------------- |  | ---------- |  | ------- |  | ---------------------------------------------
|Name of Beneficial Owner                                 |  | Shares     |  | Percent |  | Current Position                             
|Merrill
      Reuter, M.D. (2)                           |  | 1,914,810  |  | 3.0%    |  | Chairman of
      the Board, President - AOSF
|Randy Lubinsky (3)
      (11)                            |  | 3,351,970  |  | 5.2%    |  | CEO and
  Director                           
|Mark Szporka
      (4) (11)                              |  | 3,299,871  |  | 5.2%    |  | CFO and
      Director                       
|Ronald Riewold
    (5)                                   |  | 2,350,000  |  | 3.7%    |  | President and
      Director                 
|Jay Rosen,
      M.D. (6)                                |  | 425,000    |  | 0.7%    |  | Director                                     
|Arthur J. Hudson (7)
      (11)                          |  | 570,000    |  | 0.9%    |  | Director                                     
|Robert Fusco
      (8)                                   |  | 120,000    |  | *       |  | Director                                     
|Thomas J. Crane
    (9)                                  |  | 29,000     |  | *       |  | Director                                     
|Aldo F. Berti,
      M.D. (10)                           |  | 25,000     |  | *       |  | Director                                     
|All officers, directors, and
      affiliates as a group |  |            |  |         |  |                                              
|(9
      persons)                                        |  | 12,085,651 |  | 18.9%   |  |                                              
|                                                        
|* Less than
      0.2%                                   |  |            |  |         |  |                                              

|(1) | Based on an aggregate of 64,050,365 shares of
      the Companys common stock outstanding as of May 26, 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) | Includes the impact of the merger on January 1,
      2001 between the Companys subsidiary, PainCare Acquisition Company I,
      Inc., and Advanced Orthopaedics of South Florida, Inc., of which Dr.
      Reuter was a stockholder, at which time a trust controlled by Dr. Reuter
      received 1,850,000 shares of common stock and $1,239,000 in convertible
      debentures, which were paid in full in February of 2004. Dr. Reuter
      received 62,810 shares of common stock as partial consideration for the
      Companys purchase of 50% of his ownership interest in the Lake Worth
      Surgical Center in May of 2005. In addition, Pamela Reuter, Dr. Reuters
      wife, owns 2,000 shares of our common stock.
|   
|(3) | Includes options issued pursuant to the
      Companys stock option plans (the Plans) to acquire (i) 1,000,000 shares
      of common stock at $1.00 per share;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | (ii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | $4.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(4) | Includes options issued pursuant to the
      Companys stock option plans (the Plans) to acquire (i) 1,000,000 shares
      of common stock at $1.00 per share;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|    | (ii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | $4.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(5) | Includes options issued pursuant to the
      Companys stock option plans (the Plans) to acquire (i) 775,000 shares
      of common stock at $1.00 per share;                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|    | (ii)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|    | $4.00 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(6) | Includes Plan options to acquire (i) 200,000
      shares of common stock at $0.05 per share; and (ii) 25,000 shares of
      common stock at $2.97 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   

68

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|(7)  | Includes Plan options to acquire (i) 70,000 shares of common stock
      at $0.70 per share; (ii) 25,000 shares of common stock at $2.40 per share;
      and (iii) 25,000 shares of common stock at $2.97 per share.                                                                                                                                                                                                      
|---- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(8)  | Includes Plan options to acquire (i) 70,000 shares of common stock
      at $0.70 per share; (ii) 25,000 shares of common stock at $2.40 per share
      and (iii) 25,000 shares of common stock at $2.97 per share.                                                                                                                                                                                                       
|    
|(9)  | Includes Plan options to acquire (i) 25,000 shares of common stock
      at $2.97 per share.                                                                                                                                                                                                                                                                                                                               
|    
|(10) | Includes Plan options to acquire (i) 25,000 shares of common stock
      at $2.97 per share.                                                                                                                                                                                                                                                                                                                               
|    
|(11) | Includes Plan options to acquire 150,000 shares of common stock at
      $2.25 per share, which were granted and fully vested in accordance with a
      personal guarantee provided by each Messrs. Lubinsky, Szporka and Hudson
      with respect to the guarantee of a line of credit with Merrill Lynch
      Business Financial Services, Inc. This line of credit was subsequently
      closed in February of 2004.
|    

|EQUITY COMPENSATION PLAN INFORMATION                       
|-----------------------------------------------------------
|                                                           
|                                                           
|                                                           
|
|
|
|
|Equity compensation plans approved by
      securityholders
|
|Equity compensation plans not approved by securityholders  
|

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS

In 2004 the Company
entered into a contract with Merill Reuter, M.D., chairman of the Companys
board of directors and an approximately 3.0% shareholder. Under the terms of the
contract, which are similar to those entered into with other physicians, the
Company is providing real estate development and construction oversight services
to Dr. Reuter related to a planned medical facility that is intended to be owned
by Dr. Reuter and leased to the Company and others. As of December 31, 2005 and
2004, $427,553 and $406,227, respectively, is due from Dr. Reuter under this
contract.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND
SERVICES

The following table shows the audit fees we were
billed by our auditors during fiscal 2005 and 2004.

|                   |  | 2005      |  | 2004     
|------------------ |  | --------- |  | ---------
|Audit fees         |  | $ 92,400  |  | $ 51,120 
|Audit related fees |  | 159,346   |  | 99,504   
|Tax fees           |  | 42,780    |  | 9,210    
|Total              |  | $ 294,526 |  | $ 159,834

69

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Audit fees were for the
audit of our annual financial statements, review of financial statements
included in our Forms 10-Q and 10-QSB quarterly reports, and services that are
normally provided by independent auditors in connection with our other filings
with the SEC. This category also includes advice on accounting matters that
arose during, or as a result of, the audit or review of our interim financial
statements.

Audit related fees
include due diligence in connection with acquisitions, consultation on
accounting and internal control matters and audits in connection with proposed
or consummated acquisitions.

Tax fees related to services for tax consultation,
tax compliance and submitting tax returns.

As part of its duties,
our Audit Committee pre-approves audit and non-audit services performed by our
independent auditors in order to assure that the provision of such services does
not impair the auditors independence. Our Audit Committee does not delegate to
management its responsibilities to pre-approve services performed by our
independent auditors.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT
SCHEDULES(a) Documents filed as part of this
Report.1. Financial Statements (appearing at the end of
this Report)

|Index to Financial Statements                                                                              | F-1
|---------------------------------------------------------------------------------------------------------- | ---
|Reports of Independent Registered Public Accounting Firms:                                                 |    
|Report of Beemer, Pricher, Kuehnhackl & Heidbrink, P.A.                                                    | F-2
|Report of Tschopp, Whitcomb & Orr, P.A.                                                                    | F-3
|Consolidated Balance Sheets As of December 31, 2005 and 2004                                               | F-4
|Consolidated Statements of Operations For The Years Ended December
      31, 2005, 2004 and 2003           | F-5
|Consolidated Statements of Cash Flows For The Years Ended December
      31, 2005, 2004 and 2003           | F-6
|Consolidated Statements of Stockholders Equity For The Years Ended
      December 31, 2005, 2004 and 2003 | F-7
|Notes to Consolidated Financial Statements December 31, 2005, 2004
      and 2003                          | F-8

70

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(b). ExhibitsINDEX TO
EXHIBITSNO.       
 DESCRIPTION OF EXHIBIT

|3.01  | Articles of Incorporation (1)                                                                                                                                    
|----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.02  | By Laws(1)                                                                                                                                                       
|3.03  | Amendment to Bylaws (2)                                                                                                                                          
|3.04  | Amendment to Articles of Incorporation (3)                                                                                                                       
|4.1   | 2000 Stock Option Plan of PainCare, Inc. (1)                                                                                                                     
|4.2   | 2001 Stock Option Plan of PainCare, Inc. (1)                                                                                                                     
|10.01 | Merger Agreement and plan of Reorganization by and among PainCare
      Holdings, Inc. and CPS Merger Corp., Scott Brandt, M.D. and Bradley
      Vilims, M.D.(4)
|10.02 | Securities Purchase Agreement by and Among PSHS Partnership
      Ventures, PainCare Holdings, Inc. and PainCare Surgery Centers I, Inc.
      (5)               
|10.03 | Securities Purchase Agreement by and among PSHS Partnership
      Ventures, Inc., PainCare Holdings, Inc. and PainCare Surgery Centers II,
      Inc. (6)        
|10.04 | Merger Agreement and Plan of Reorganization by and among PainCare
      Holdings, Inc. and Piedmont Center for Spinal Disorders, P.C.
  (7)                      
|10.05 | Asset Purchase Agreement by and among PainCare Holdings, Inc.,
      PainCare Surgery Centers III, Inc. and The Center for Pain Management ASC,
      LLC. (8)   
|10.06 | Merger Agreement and Plan of Reorganization by and among PainCare
      Holdings, Inc. and Floyd O. Ring, Jr., M.D., P.C. (9)                                    
|10.07 | Asset Purchase by and among PainCare Holdings, Inc. and Christopher
      J. Centeno, M.D., P.C. (10)                                                            
|10.08 | Loan and Security Agreement by and among PainCare Holdings, Inc.
      and HBK Investments, L.P.(11)                                                             
|10.09 | Amendment Number One to Loan and Security Agreement by and among
      PainCare Holdings, Inc. and HBK Investments, L.P.(11)                                     
|10.10 | Third Addendum to Second Amended and Restated Employment Agreement
      by and between PainCare Holdings, Inc. and Randy
Lubinsky.(11)                          
|10.11 | Third Addendum to Second Amended and Restated Employment Agreement
      by and between PainCare Holdings, Inc. and Mark Szporka(11)                             
|10.12 | Fourth Addendum to Employment Agreement by and between PainCare
      Holdings, Inc. and Ronald Riewold(11)                                                      
|14.1  | Code of Ethics for PainCare Holdings, Inc.(11)                                                                                                                   
|21.1  | Subsidiaries of the Company(11)                                                                                                                                  

|23(a) | Consent of BPKH(11)                           
|----- | ----------------------------------------------
|23(b) | Consent of Tschopp, Whitcomb & Orr,
  P.A.(11)

|31.1 | Certification of Chief Executive Officer
      pursuant to Rule 13a-14(a)/15d-14(a)
|---- | -----------------------------------------------------------------------------------
|31.2 | Certification of Chief Financial Officer pursuant to Rule
      13a-14(a)/15d-14(a)
|32.1 | Section 1350 Certifications(11)                                                    

|(1)  | Previously filed with the SEC with the
      Companys Form S-4 on January 4, 2002   
|---- | -------------------------------------------------------------------------------------
|(2)  | Previously filed with the SEC with the
      Companys Form 8-K on July 12, 2005     
|(3)  | Previously filed with the SEC with the
      Companys Form 8-K on August 11, 2005   
|(4)  | Previously filed with the SEC with the
      Companys Form 8-K on April 18, 2005    
|(5)  | Previously filed with the SEC with the
      Companys Form 8-K on May 17, 2005      
|(6)  | Previously filed with the SEC with the
      Companys Form 8-K on August 8, 2005    
|(7)  | Previously filed with the SEC with the
      Companys Form 8-K on August 11, 2005   
|(8)  | Previously filed with the SEC with the
      Companys Form 8-K on September 27, 2005
|(9)  | Previously filed with the SEC with the
      Companys Form 8-K on October 7, 2005   
|(10) | Previously filed with the SEC with the Companys Form 8-K on
      October 14, 2005  
|(11) | Previously filed with the SEC with the
      Company's Form 10-K on June 1, 2006     

71

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d)
of the Securities and Exchange Act, the Registrant has duly caused this Report
to be signed on its behalf by the undersigned thereunto duly
authorized.

|                          | PAINCARE HOLDINGS, INC.
|------------------------- | -----------------------
|Date: September 29 , 2006 | By:                    
|                          |                        
|                          |                        
|Date: September 29, 2006  | By:                    
|                          |                        
|                          |                        

Pursuant to the requirements of the Securities and
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates
indicated.

|Signature                      | Title                        | Date                    
|------------------------------ | ---------------------------- | ------------------------
|/s/ RONALD RIEWOLD             | President and
      Director | September 29,
      2006
|/s/ JAY ROSEN,
      M.D.      | Director                     | September 29, 2006      
|/s/ MERRILL REUTER,
      M.D. | Director                     | September 29, 2006      
|/s/ ARTHUR J.
      HUDSON     | Director                     | September 29, 2006      
|/s/ ROBERT FUSCO               | Director                     | September 29, 2006      
|/s/ ALDO F. BERTI,
      M.D.  | Director                     | September 29, 2006      
|/s/ THOMAS J.
      CRANE      | Director                     | September 29, 2006      

72

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|PART F/S                                                                                                        
|----------------------------------------------------------------------------------------------------------------
|PAINCARE HOLDINGS, INC.                                                                                         
|CONTENTS                                                                                                        
|                                                                                                                
|Index to Financial
      Statements                                                                             
|Reports of Independent
      Registered Public Accounting Firms:                                                
|Report of Beemer,
      Pricher, Kuehnhackl, & Heidbrink, P.A.                                                  
|Report of Tschopp,
      Whitcomb & Orr, P.A.                                                                   
|Consolidated Balance
      Sheets As of December 31, 2005 and 2004                                              
|Consolidated
      Statements of Operations For The Years Ended December 31, 2005, 2004 and
      2003          
|Consolidated
      Statements of Cash Flows For The Years Ended December 31, 2005, 2004 and
      2003          
|Consolidated
      Statements of Stockholders Equity For The Years Ended December 31, 2005,
      2004 and 2003
|Notes to Consolidated
      Financial Statements December 31, 2005, 2004 and 2003                               



F-1

---

Report of Independent Registered Public
Accounting Firm

To the Board of Directors andStockholders of PainCare Holdings, Inc.

We have audited the accompanying consolidated balance
sheet of PainCare Holdings, Inc. and subsidiaries as of December 31, 2005, and
the related consolidated statements of operations, stockholders equity, and
cash flows for the year then ended. These financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audit.

We conducted our audit in accordance with the
standards of the Public Company Accounting Oversight Board (United States).
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.

In our opinion, the financial statements referred to
above present fairly, in all material respects, the consolidated financial
position of PainCare Holdings, Inc. and subsidiaries as of December 31, 2005 and
the consolidated results of their operations and their cash flows for the year
then ended in conformity with accounting principles generally accepted in the
United States of America.

We also have audited, in accordance with the
standards of the Public Company Accounting Oversight Board (United States), the
effectiveness of PainCare Holdings, Inc. and subsidiaries internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report dated May 12,
2006 expressed an unqualified opinion on managements assessment of internal
control over financial reporting and an adverse opinion on the effectiveness of
internal control over financial reporting.

/s/ Beemer, Pricher, Kuehnhackl & Heidbrink,
P.A.

Winter Park, FloridaMay 12,
2006

F-2

---

TSCHOPP, WHITCOMB & ORR, P.A.

The Board of DirectorsPainCare Holdings, Inc.

We have audited the accompanying consolidated balance
sheets of PainCare Holdings, Inc. as of December 31, 2004 and 2003, and the
related consolidated statements of operations, stockholders equity, and cash
flows for the years then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express an
opinion on these consolidated financial statements based on our
audits.

We conducted our audits in accordance with the
standards of the Public Company Accounting Oversight Board (United States of
America). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall consolidated
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

As discussed in note 2 of the consolidated financial
statements, the Company has restated its 2004 and 2003 consolidated financial
statements.

In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of PainCare Holdings, Inc., as of December 31, 2004 and 2003,
and the results of its consolidated operations and its cash flows for the years
then ended, in conformity with accounting principles generally accepted in the
United States of America.

/s/ Tschopp, Whitcomb & Orr, P.A.March 4, 2005, except for note 2 as to which the date is April 17,
2006Maitland, Florida

F-3

---

|PAINCARE HOLDINGS, INC.                                                                                                           
|----------------------------------------------------------------------------------------------------------------------------------
|Consolidated Balance Sheets                                                                                                       
|December 31, 2005 and 2004                                                                                                        
|                                                                                                                                  
|                                                                                                                                  
|                                                                                                                                  
|Assets                                                                                                                            
|Current assets:                                                                                                                   
|Cash and cash equivalents                                                                                                         
|Accounts receivable,
      net                                                                                                    
|Deposits and prepaid expenses                                                                                                     
|Deferred tax asset                                                                                                                
|Total current assets                                                                                                              
|Property and equipment, net                                                                                                       
|Goodwill, net                                                                                                                     
|Due from stockholderr                                                                                                             
|Deferred tax asset                                                                                                                
|Other assets                                                                                                                      
|Total assets                                                                                                                      
|Liabilities and Stockholders' Equity                                                                                              
|Liabilities:                                                                                                                      
|Accounts payable and
      accrued expenses                                                                                       
|Accrued
      compensation expense                                                                                                
|Derivative
      liabilities                                                                                                      
|Acquisition
      consideration payable                                                                                           
|Common stock
      payable                                                                                                        
|Income tax payable                                                                                                                
|Current portion of notes
      payable                                                                                            
|Current portion of
      capital lease obligations                                                                                
|Current portion of
      convertible debentures                                                                                   
|Total
      current liabilities                                                                                                   
|Notes payable, less current portion                                                                                               
|Convertible debentures                                                                                                            
|Capital lease obligations, less current portion                                                                                   
|Total liabilities                                                                                                                 
|Minority interests in consolidated subsidiaries                                                                                   
|Commitments and contingencies                                                                                                     
|Stockholders' equity:                                                                                                             
|Common stock, $.0001 par
      value. Authorized 200,000,000 shares; issued and outstanding 55,823,026
      and 41,512,833 shares
|
|Preferred stock, $.0001 par value. Authorized 10,000,000 shares; issued
      and outstanding -0- shares                          
|Additional paid in capital                                                                                                        
|Accumulated deficit                                                                                                               
|Cumulative translation adjustments                                                                                                
|Total stockholders' equity                                                                                                        
|Total liabilities and stockholders' equity                                                                                        
|                                                                                                                                  
|See
      accompanying notes to consolidated financial statements.                                                                

F-4

---

|PAINCARE HOLDINGS, INC.                                              
|---------------------------------------------------------------------
|Consolidated Statements
      of Operations                          
|For the years ended
      December 31, 2005, 2004 and 2003           
|                                                                     
|                                                                     
|                                                                     
|Revenues:                                                            
|Pain management                                                      
|Surgeries                                                            
|Ancillary services                                                   
|Total revenues                                                       
|Cost of
      revenues                                               
|Gross profit                                                         
|General and
      administrative expense                             
|Amortization
      expense                                           
|Depreciation
      expense                                           
|Operating income
      (loss)                                        
|Interest
      expense                                               
|Derivative
      expense                                             
|Other
      income                                                   
|Income (loss) before
      income taxes                              
|Provision
      (benefit) for income taxes                           
|Loss before
      minority interests                                 
|Minority interests in net earnings of consolidated
      subsidiaries
|Net loss                                                             
|Basic loss per
      common share                                    
|Basic weighted
      average common shares outstanding               
|Diluted loss
      per common share                                  
|Diluted weighted average common shares outstanding                   
|                                                                     
|See
      accompanying notes to consolidated financial statements.   

F-5

---

|PAINCARE HOLDINGS, INC.                                                              
|-------------------------------------------------------------------------------------
|Consolidated Statements of Cash Flows                                                
|For the years ended December 31, 2005, 2004 and 2003                                 
|                                                                                     
|                                                                                     
|Cash flows from operating activities:                                                
|Net loss                                                                             
|Adjustments to reconcile net loss to net cash provided by operating
      activities:
|Depreciation and amortization                                                        
|Non-cash transactions and other                                                      
|Loss on disposal of property and equipment                                           
|Amortization
      of debt discount                                                  
|Stock issued for interest payments                                                   
|Mark to market derivatives                                                           
|Compensation expense-variable stock options                                          
|Deferred income taxes                                                                
|Amortization of deferred financing costs                                             
|Minority
      interests                                                             
|Change in operating assets and liabilities, net of assets acquired:                  
|Accounts receivable                                                                  
|Deposits and prepaid expenses                                                        
|Other assets                                                                         
|Income
      tax payable                                                             
|Accounts payable and accrued expenses                                                
|Net
      cash provided by operating activities                                      
|Cash flows from investing activities:                                                
|Purchase of property and
      equipment                                             
|Cash paid for
      earnouts                                                         
|Cash used for
      contract rights                                                  
|Cash used for acquisitions                                                           
|Cash from
      acquisitions                                                         
|Net cash used in investing activities                                                
|Cash flows from financing activities:                                                
|Proceeds
      from issuance of debentures, net of offering costs                    
|Proceeds
      from issuance of common stock, net of capital offering costs          
|Payments of
      capital lease obligations                                          
|Payment of
      convertible debentures                                              
|Notes
      receivable from employees                                                
|Cash
      distributions to minority interests                                       
|Due from/to
      shareholders                                                       
|Net proceeds
      from (payments on) notes payable                                  
|Notes
      payable issued                                                           
|Net cash provided by financing activities                                            
|Net increase in cash and cash equivalents                                            
|Cash and cash equivalents at beginning of year                                       
|Cash and cash equivalents at end of year                                             
|Supplemental disclosures of cash flow information:                                   
|Cash paid during the year for interest                                               
|Cash paid during the
      year for income taxes                                     
|Non-cash investing and financing transactions:                                       
|Common stock issued for acquisitions                                                 
|Common stock issued for contract right purchases                                     
|Common stock issued for convertible debentures                                       
|Common stock issued for earnouts                                                     
|Common stock issued for bridge note                                                  
|Acquisition consideration payable                                                    
|Equipment
      financed with capital lease obligations                              
|Distribution rights acquired                                                         
|                                                                                     
|See accompanying notes to consolidated
      financial statements.                   

F-6

---

|PAINCARE HOLDINGS, INC.                                                   
|--------------------------------------------------------------------------
|Consolidated Statements of Stockholders Equity                           
|For the years ended December 31, 2005, 2004 and 2003                      
|                                                                          
|                                                                          
|                                                                          
|                                                                          
|Balances at December 31, 2002, as previously
      reported               
|Effect of prior years restatements                                       
|Balances at December 31, 2002 (as
      restated)                         
|Common stock issued for earnouts                                          
|Common stock issued for cash                                              
|Common stock issued for conversion of convertible  
      preferred  stock
|Common stock issued for exercise of stock
      options                   
|Common stock issued for conversion of bridge note                         
|Common stock issued for conversion of
      convertible  debenture        
|
|Common stock issued for exercise of
      warrants                        
|Common stock issued to advisory network members                           
|Common stock issued for acquisitions                                      
|Tax benefit realized from stock plans                                     
|Common stock share based grants for non
      employeeconsulting fees     
|
|Adjustment for fair value of warrants                                     
|Components of comprehensive income
      (loss):                          
|Translation
      adjustment                                              
|Net loss                                                                  
|Comprehensive loss                                                        
|Balances at December 31, 2003 (as restated)                               
|Common stock issued for earnouts                                          
|Common stock issued for contract rights                                   
|Common stock issued for exercise of
      warrants                        
|Common stock issued for exercise of stock options                         
|Common stock issued for acquisitions                                      
|Common stock issued for conversion of convertibledebenture                
|
|Common stock issued for debenture interest
      payments                 
|Common stock issued for secondary
      offering                          
|Common stock options issued for non employee
      consulting  fees       
|Adjustment for fair value of warrants                                     
|Components of comprehensive income
      (loss):                          
|Translation adjustment                                                    
|Net loss                                                                  
|Comprehensive
      loss                                                  
|Balances at December 31, 2004 (as
      restated)                         
|Common stock issued for earnouts                                          
|Common stock issued for exercise of
      warrants                        
|Common stock issued for exercise of stock
      options                   
|Common stock issued as restricted shares                                  
|Common stock issued for acquisitions                                      
|Common stock issued for conversion of
      convertibledebenture          
|
|Common stock issued for debenture interest
      payments                 
|Common stock options issued for non employee
      consultingfees         
|
|Components of comprehensive income
      (loss):                          
|Translation
      adjustment                                              
|Net loss                                                                  
|Comprehensive loss                                                        
|Balances at December 31, 2005                                             
|                                                                          
|See accompanying notes to consolidated
      financial statements.        

F-7

---

PAINCARE HOLDINGS, INC.Notes to Consolidated Financial Statements

(1)Organization and
Summary of Significant Accounting Policies

History of the Company

PainCare Holdings, Inc.
(the Company) was initially incorporated in the State of Connecticut in May,
1984 under the name of HelpMate Robotics, Inc. ("HelpMate"). Prior to the sale
of its business in December 1999, HelpMate was primarily engaged in the design,
manufacture, and sale of HelpMate's flagship product, the HelpMate courier
system, a trackless robotic courier used primarily in the health care industry
to transport materials. On December 30, 1999, HelpMate sold substantially all of
its assets to Pyxis Corporation ("Pyxis").

Following the sale to
Pyxis in December 1999, HelpMates business plan was to effect a business
combination with an operating business, which HelpMate believed to have the
potential to increase stockholder value.

On December 20, 2001,
HelpMate entered in an Agreement and Plan of Merger with PainCare, Inc., a
Nevada corporation (the Merger Agreement), which was consummated on July 17,
2002 (the Merger). Pursuant to the Merger, PainCare, Inc. became a
wholly-owned subsidiary of HelpMate. In connection with the Merger, the
shareholders of PainCare, Inc. received voting common stock of
HelpMate.

History of PainCare, Inc.

PainCare, Inc. was
incorporated in the State of Nevada on February 19, 1997, under the name of
Hi-Profile Corporation. PainCare, Inc. was reorganized in the fall of 2000 for
the purpose of establishing a North American network of pain management,
minimally invasive surgery and orthopedic rehabilitation centers.

On July 17, 2002
PainCare, Inc. consummated a Merger with HelpMate, as described below. PainCare,
Inc. had approximately 128 shareholders of record prior to the Merger with
HelpMate. As of December 31, 2005, the combined Company has approximately 10,638
shareholders of record.

The Merger

As indicated above, on
December 20, 2001, HelpMate Robotics, Inc. entered into a Merger Agreement with
PainCare, Inc. whereby a wholly-owned subsidiary of HelpMate, formed for the
purpose of the Merger, merged into PainCare, Inc. and PainCare, Inc. became a
subsidiary of HelpMate. The shareholders of PainCare, Inc. received voting
common stock of HelpMate. In connection with the Merger, the companies filed a
Form S-4 with the SEC which was effective on July 12, 2002. Immediately
thereafter, a Certificate of Merger was filed with the Secretary of State of the
State of Connecticut and Articles of Merger were filed with the Secretary of
State of the State of Nevada. The Merger became effective on July 17,
2002.

The Merger was
accounted for in accordance with accounting principles generally accepted in the
United States. No goodwill or intangibles were recorded because the merger was
essentially a recapitalization transaction and was accounted for in a manner
similar to a reverse acquisition, identifying PainCare, Inc. as the accounting
acquirer.

F-8

---

Holders of PainCare,
Inc. common stock received shares of HelpMate common stock at a conversion rate
of one (1) share of HelpMate common stock for each one share of PainCare, Inc.
common stock surrendered. As of the date the Merger was consummated there were
7,555,357 shares of PainCares common stock issued and outstanding. Holders of
PainCare, Inc. options, warrants and other derivatives have the right to
exercise those derivatives for HelpMates common stock.

HelpMate had 900,122
shares of common stock outstanding as of the date of the Merger. There were no
other shares of HelpMate capital stock or derivatives issued or
outstanding.

In summary, PainCare,
Inc. security holders received an aggregate of 11,789,816 shares of HelpMate
common stock in the merger, or approximately 93% of the issued and outstanding
shares of HelpMate common stock, assuming the exercise or conversion of all
issued and outstanding PainCare, Inc. stock options, warrants and convertible
notes.

On November 8, 2002,
the Board of Directors and shareholders approved an amendment to the Companys
Certificate of Incorporation for the purpose of changing the name of the Company
from HelpMate Robotics, Inc. to PainCare Holdings, Inc. This name change
reflects the revised strategic vision and marketing strategy of the Company. In
conjunction with the Company name change, the trading symbol for the Companys
common stock changed from HMRB to PANC in December 2002 and on November 8,
2002, the Board of Directors and shareholders approved a proposal to change the
Companys state of incorporation from Connecticut to Florida. On June 16, 2003,
the Companys stock symbol was changed to PRZ.

Summary of Significant Accounting
PoliciesPrinciples of
Consolidation

The accompanying
financial statements include the accounts of PainCare Holdings, Inc. and its
wholly-owned subsidiaries. The Company consolidates PSHS Alpha Partners as it
has a 67.5% ownership interest in this entity, and it consolidates PSHS Beta
Partners as it has a 73% ownership interest. The other parties interest in
these entities are reported as minority interests in the consolidated financial
statements. All significant intercompany balances and transactions have been
eliminated in consolidation.

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

Property and Equipment

Property and equipment
are recorded at cost. Depreciation is computed using the straight-line method
over the estimated useful lives of the respective assets. Leasehold improvements
are depreciated

F-9

---

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

Advertising Costs

Advertising
expenditures relating to marketing efforts consisting primarily of marketing
material, brochure preparation, printing and trade show expenses are expensed as
incurred. Advertising expense was $1,478,285, $866,557 and $250,133 for the
years ended December 31, 2005, 2004 and 2003, respectively, and is included in
general and administrative expense in the accompanying consolidated statements
of operations.

Income Taxes

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

The recording of a net
deferred tax asset assumes the realization of such asset in the future,
otherwise a valuation allowance must be recorded to reduce this asset to its net
realizable value. The Company considers future pretax income and, if necessary,
ongoing prudent and feasible tax planning strategies in assessing the need for
such a valuation allowance. In the event that the Company determines that it may
not be able to realize all or part of the net deferred tax asset in the future,
a valuation allowance for the deferred tax asset is charged against income in
the period such determination is made. The Company has not recorded any
valuation allowances as of December 31, 2005 or 2004. The Company anticipates
that it will generate sufficient pretax income in the future to realize its
deferred tax assets.

Fair Value Disclosures

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

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

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

F-10

---

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

Concentration of Credit
Risk

Financial instruments
that potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents and trade accounts receivable. The
Company maintains its cash and cash equivalents in deposit accounts with high
quality, credit-worthy financial institutions. Funds with these institutions
exceeded the federally-insured limits by approximately $18,761,000 on December
31, 2005.

Credit risk with
respect to accounts receivable is limited due to the large number of customers
comprising the Companys customer base. The Company controls credit risk
associated with its receivables through credit checks and approvals, credit
limits, and monitoring procedures. Generally, the Company requires no collateral
from its customers.

Use of Estimates

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

Cash and Cash
Equivalents

All short-term
investments with original maturities of three months or less when purchased are
considered to be cash equivalents. At December 31, 2005 and 2004, the Company
had cash and cash equivalents denominated in Canadian dollars that translate to
U.S. dollar amounts of approximately $147,239 and $232,961,
respectively.

As of December 31,
2005, the Company had $3,750,000 held in escrow representing the initial cash
payment of the closing consideration for the acquisition of the Center for Pain
Management ASC, LLC. This acquisition closed on January 3, 2006 and the cash
held in escrow was disbursed on that date.

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

F-11

---

Preferred Stock

The Board of Directors
is expressly authorized at any time to provide for the issuance of shares of
Preferred Stock in one or more series, with such voting powers, full or limited,
but not to exceed one vote per share, or without voting powers, and with such
designations, preferences and relative participating, optional or other special
rights and qualifications, limitations or restrictions, as shall be fixed and
determined in the resolution or resolutions providing for the issuance thereof
adopted by the Board of Directors.

Reclassifications

The presentation of
certain prior year amounts have been reclassified to conform to the year 2005
presentation. In addition, certain current and long-term assets, as well as
current and non-current liabilities, have been reclassified on the consolidated
balance sheet as of December 31, 2004 to conform to the current year
presentation.

Comprehensive Income
(Loss)

As reflected in the
consolidated statements of stockholders equity, comprehensive income is a
measure of net income (loss) and all other changes in equity that result from
transactions other than with shareholders. Comprehensive income (loss) consists
of net income (loss) and foreign currency translation adjustments. Comprehensive
losses for the years ended December 31, 2005, 2004 and 2003 were $(5,323,127),
$(1,471,067) and $(11,458,583), respectively.

Foreign Currency

The Company operates a
subsidiary in Canada, which is subject to different monetary, economic and
regulatory risks than our domestic operations. The subsidiary uses a functional
currency other than U.S. dollars, and the balance sheet accounts are translated
into U.S. dollars at exchange rates in effect at the end of each reporting
period. The foreign entitys revenue and expenses are translated into U.S.
dollars at the average rates that prevailed during the reporting period. The
resulting net translation gains and losses are reported as foreign currency
translation adjustments in shareholders equity as a component of other
accumulated comprehensive income. Exchange gains and losses on transactions and
equity investments denominated in a currency other than their functional
currency are included in results of operations as incurred.

Deferred Financing Costs

Deferred financing
costs related to the Companys various credit facilities and are amortized over
the related terms of the debt using the effective interest method. Net deferred
financing costs were $1,688,431 and $691,139 at December 31, 2005 and 2004,
respectively.

F-12

---

Revenue Recognition

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

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

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

Changes in contractual allowances for the years ended
December 31, 2005 and 2004 were as follows:

|                                                                                                     | For the Year Ended December 31,
|---------------------------------------------------------------------------------------------------- | -------------------------------
|                                                                                                     | 2005                           
|Balance at beginning of year
      (including balances from purchased business combinations)         | $ 14,788,745                   
|Increase for
      contractual allowance in the current year (based on historical
      percentages) | 40,437,607                     
|Increase (decrease) in
      contractual allowance for the prior years contractual allowance         | (173,722)                      
|Decrease to
      the contractual allowance for the current year                                     | (24,393,787)                   
|Balance at end of year                                                                               | $ 30,658,843                   

F-13

---



A summary of the activity in the allowance
for uncollectible accounts is as follows:

|                                                          |   | For the Year Ended December
      31,
|--------------------------------------------------------- | - | -------------------------------------
|                                                          |   | 2005                                 
|Balance, beginning of year                                | $ | 335,459                              
|Additions charged to
      provision for bad debts        |   | 2,788,601                            
|Accounts receivable written off (net of
      recoveries) |   | (1,360,283)                          
|Balance, end of
      year                                |   | 1,763,777                            

The Company's payor mix and aging table for the year ended
December 31, 2005 were as follows:



|Financial Class                 | Balance on
      December 31, 2005 |            | Current |   | 31-60 Days |  | 61-90 Days |           | 91 + Days
|------------------------------- | ---------------------------------- | ---------- | ------- | - | ---------- |  | ---------- | --------- | ---------
|Medicare                        | $                                  | 1,588,876  |         | $ | 658,177    |  | $          | 281,062   |          
|Private insurance               |                                    | 12,738,637 |         |   | 5,276,860  |  |            | 2,253,383 |          
|Self-pay                        |                                    | 1,065,948  |         |   | 437,832    |  |            | 186,967   |          
|Workers compensation            |                                    | 2,606,677  |         |   | 1,079,792  |  |            | 461,104   |          
|Government                      |                                    | 2,415,551  |         |   | 1,000,618  |  |            | 427,296   |          
|Medicaid                        |                                    | 262,510    |         |   | 108,742    |  |            | 46,436    |          
|Other                           |                                    | 2,357,983  |         |   | 976,772    |  |            | 417,112   |          
|Total                           |                                    | 23,027,182 |         |   | 9,538,793  |  |            | 4,073,360 |          
|Allowance for doubtful accounts |                                    | 1,763,777  |         |   | 333,355    |  |            | 305,287   |          
|Net
      realizable value      |                                    | 21,263,405 |         |   | 9,205,438  |  |            | 3,768,073 |          



|Aging Category                                            |   | Amount    |  | Percentage estimated for allowance for
      doubtful accounts |  |   | Required balance in allowance for doubtful
      accounts
|--------------------------------------------------------- | - | --------- |  | -------------------------------------------------------------- |  | - | ---------------------------------------------------------
|Current                                                   | $ | 9,538,793 |  | 3.5%                                                           |  | $ | 333,355                                                  
|31-60 days                                                |   | 4,073,360 |  | 7.5%                                                           |  |   | 305,287                                                  
|61-90 days                                                |   | 1,708,223 |  | 9.5%                                                           |  |   | 162,191                                                  
|Over 91 days                                              |   | 7,706,806 |  | 12.5%                                                          |  |   | 962,944                                                  
|Year end balance
      of allowance for doubtful accounts |   |           |  |                                                                |  |   | 1,763,777                                                



F-14

---

|The Companys payor mix and aging table for
      the year ended December 31, 2004 were as follows: |                               |                                                             |                                                 |         
|--------------------------------------------------------------------------------------------------- | ----------------------------- | ----------------------------------------------------------- | ----------------------------------------------- | --------
|                                                                                                   
|                                                                                                   
|                                                                                                   
|                                                                                                    | Balance on December
      31, |                                                             |                                                 |         
|Financial Class                                                                                     | 2004                          | Current                                                     | 31-60 Days                                      |         
|Medicare                                                                                            | $1,970,228                    | $ 1,203,017                                                 | $ 417,291                                       |         
|Private insurance                                                                                   | 7,480,315                     | 4,446,917                                                   | 1,323,497                                       |         
|Self-pay                                                                                            | 428,160                       | 205,462                                                     | 102,273                                         |         
|Workers compensation                                                                                | 1,237,915                     | 669,298                                                     | 261,912                                         |         
|Government                                                                                          | 268,564                       | 107,694                                                     | 88,089                                          |         
|Medicaid                                                                                            | 676,195                       | 332,595                                                     | 106,861                                         |         
|Other                                                                                               | 2,351,725                     | 702,059                                                     | 457,619                                         |         
|Total                                                                                               | 14,413,102                    | 7,667,042                                                   | 2,757,542                                       |         
|Allowance for doubtful accounts                                                                     | 335,459                       | 178,447                                                     | 64,181                                          |         
|Net realizable value                                                                                | $14,077,643                   | $ 7,488,595                                                 | $ 2,693,361                                     |         
|                                                                                                   
|                                                                                                   
|                                                                                                   
|Summary                                                                                            
|Aging category                                                                                      | Amount                        | Percentageestimated
      forallowance fordoubtful accounts | Requiredbalance inallowance fordoubtfulaccounts
|
|
|
|
|Current                                                                                             |                               | $
      7,667,042                                           | 2.3%                                            | $178,447
|31-60 days                                                                                          |                               | 2,757,542                                                   | 2.3%                                            | 64,181  
|61-90 days                                                                                          |                               | 1,969,225                                                   | 2.3%                                            | 45,833  
|over 91 days                                                                                        |                               | 2,019,293                                                   | 2.3%                                            | 46,998  
|Year end balance of allowance for doubtful accounts                                                 |                               |                                                             |                                                 |         

Goodwill and Other Intangible
Assets

The value of goodwill
is stated at the lower of cost or fair value. At December 31, 2005 and 2004, the
Company had $111.5 million and $61.8 million, respectively, of goodwill related
to acquiring physician practices and surgery centers. The Company adopted the
provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142"), as of January 1, 2002. SFAS 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead be tested for impairment at least annually. Under SFAS
No. 142, goodwill and other intangible assets with an indefinite useful life are
no longer amortized as expenses of operations, but rather carried on the balance
sheet as permanent assets.

F-15

---

The Company evaluates
goodwill, at a minimum, on an annual basis and whenever events and changes in
circumstances suggest that the carrying amount may not be recoverable in
accordance with SFAS No. 142. Goodwill is allocated to the Company's individual
practices. Impairment of goodwill is tested at the practice level by comparing
the practices net carrying amount, including goodwill, to the fair value of the
practice. The fair values of the practices are estimated using a combination of
the income or discounted cash flows approach and the market approach, which uses
comparable market data. If the carrying amount of the practice exceeds its fair
value, goodwill is potentially impaired and a second test is performed to
measure the amount of impairment loss, if any. The fair value of each of the
Companys practices exceeded their individual carrying values and, consequently,
no impairment was recorded for the years ended December 31, 2005 and
2004.

Other intangible assets
primarily consist of patient referral networks acquired in conjunction with our
physician and surgery center acquisitions, which are amortized on a
straight-line basis over their estimated useful lives, which range from seven to
twelve years.

Recent Accounting
Pronouncements

In December 2004, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard No. 123 (revised 2004) Share-Based Payment (SFAS 123R),
which requires companies to begin to expense the estimated fair value of
employee stock options and similar awards. The accounting provisions of SFAS
123R will be effective for the Companys first quarter of 2006. The Company will
adopt the provisions of SFAS 123R using the Black-Scholes option pricing formula
or other fair value model. Modified prospective application recognizes
compensation expense for outstanding awards for which the requisite service had
not been rendered as of the effective date over the remaining service period
using the compensation cost calculated for pro forma disclosure purposes under
SFAS 123. As disclosed in the following paragraphs, had the Company recognized
compensation expense in accordance with the fair-value-based provisions of SFAS
123 for equity instruments, earnings would have increased by approximately
$0.00, $(0.02) and $0.21 per diluted share for the years ended December 31,
2005, 2004 and 2003, respectively. Compensation cost for stock options for which
the requisite future service has not yet taken place is estimated for future
years. During 2006, 2007, and 2008, the Company estimates additional
compensation expense of $722,160, $315,045 and $92,706, respectively.

In May 2005, the FASB
issued SFAS No. 154, Accounting Changes and Error Corrections (SFAS 154),
which supersedes APB Opinion No. 20, Accounting Changes and SFAS No. 3,
Reporting Accounting Changes in Interim Financial Statements. SFAS 154 changes
the requirements for the accounting for and reporting of changes in accounting
principle. The statement requires the retroactive application to prior periods
financial statements of changes in accounting principles, unless it is
impracticable to determine either the period specific effects or the cumulative
effect of the change. SFAS 154 does not change the guidance for reporting the
correction of an error in previously issued financial statements or the change
in an accounting estimate. SFAS 154 is effective for accounting changes and
corrections or errors made in fiscal years beginning after December 15, 2005.
The Company does not expect the adoption of SFAS 154 to have a material impact
on the Companys results of operations or financial condition.

F-16

---

Share-Based Payments

The Company accounts
for share-based payments to employees using the provisions of Accounting
Principles Board No. 25, Accounting for Stock Issued to Employees (APB 25)
and related interpretations, which provides for the measurement of compensation
from share-based payments in the form of common stock or equity-indexed
instruments based upon the intrinsic value of the instruments, among other
provisions. As further described in Note 2, the Company originally recorded
stock options granted to employees as a fixed plan under the provisions of APB
25. However, the fixed plan accounting was inappropriate in our circumstances,
as the terms of our plan required variable accounting pursuant to APB 25. The
following information in this footnote, for the years ended December 31, 2004
and 2003, has been restated to correct the accounting treatment.

The Company accounts
for its issued employee stock options using the intrinsic value method. For
those employee stock options that are exercisable, at the holder's option, in a
cashless manner by surrendering options held on appreciated shares of common
stock, the Company uses variable accounting and records estimates of
compensation (benefit) expense based upon the estimated fair value of the stock
at each intervening financial statement date.

The Company accounts
for share-based payments to non-employees using the provisions of SFAS No. 123,
Accounting for Stock-Based Compensation (SFAS 123), which provides for the
measurement of compensation from share-based payments in the form of common
stock or equity-indexed instruments based upon the fair value of instruments as
determined on the grant date. The Company uses managements best estimate of the
fair value of common stock in measuring compensation cost, which generally takes
into account the trading prices of the shares in the open trading market. The
Company uses the Black-Scholes-Merton option-pricing model to determine the fair
value of each option or warrant award as of the date of grant for purposes of
recording compensation expense.

Had total employee
stock-based compensation expense been calculated using the fair value
recognition provisions of SFAS 123, the Companys net loss and basic and diluted
loss per common share for the years ended December 31, 2005, 2004 and 2003 would
have been as follows, on a pro forma basis:

|                                                                                                                            |   | 2005        |   | 2004        |   | 2003        
|--------------------------------------------------------------------------------------------------------------------------- | - | ----------- | - | ----------- | - | ------------
|Net loss, as reported                                                                                                       | $ | (5,339,378) | $ | (1,501,482) | $ | (11,482,843)
|Stock-based employee compensation included in reported net loss,
      net of tax                                           |   | 901,904     |   | 87,736      |   | 5,351,580   
|Stock-based employee compensation expense as
      determined under the fair value method for all  awards, net of
      tax |   | (837,183)   |   | (925,307)   |   | (1,021,797) 
|
|Net loss, pro forma                                                                                                         | $ | (5,274,657) | $ | (2,339,053) | $ | (7,153,060) 
|Loss per common share:                                                                                                      |   |             |   |             |   |             
|Basic  as reported                                                                                                         | $ | (0.10)      | $ | (0.05)      | $ | (0.55)      
|Basic  pro forma                                                                                                           | $ | (0.10)      | $ | (0.07)      | $ | (0.34)      
|Diluted  as reported                                                                                                       | $ | (0.10)      | $ | (0.05)      | $ | (0.55)      
|Diluted  pro forma                                                                                                         | $ | (0.10)      | $ | (0.07)      | $ | (0.34)      

F-16

---

The fair value of each
employee stock option included in the table above was computed as follows: the
weighted average fair value of options and warrants granted to employees were
estimated on the date of grant using the Black-Scholes-Merton option pricing
model for employees and non-employee options with the following assumptions for
the years ended December 31, 2005, 2004 and 2003:

|                              | 2005       |  | 2004    |  | 2003   
|----------------------------- | ---------- |  | ------- |  | -------
|Risk-free
      interest rate | 3.98%      |  | 4.5%    |  | 4.5%   
|Expected life                 | 2.73 years |  | 5 years |  | 5 years
|Volatility                    | 48.895%    |  | 50%     |  | 50%    
|Dividend yield                | 0.0%       |  | 0.0%    |  | 0.0%   

The same assumptions
were used to compute the fair value of non-employee options. The amount of
non-employee consulting expense recorded as a result of share-based payment in
the years ended December 31, 2005, 2004 and 2003 totaled $27,471, $219,829 and
$238,398, respectively. The net tax benefit of non employee option exercises is
recorded as an adjustment to additional paid in capital. This amount was
$111,328 in 2003.

(2)Restatement and
Reclassifications of Previously Issued Financial Statements

The Companys
previously issued consolidated financial statements as of and for the years
ended December 31, 2000 through 2004 have been restated to give effect to the
correction of certain errors that were discovered subsequent to December 31,
2005. All quarterly financial information for each of these years have also been
restated to give effect to the correction of these errors. A discussion of each
of the corrections is as follows:

Accounting for derivative financial
instruments:

The Company originally
recorded convertible debentures issued in 2003 and 2004 as conventional debt
instruments with no separate recognition given to the derivative values of
certain embedded conversion features or free-standing warrants.

The consolidated
financial statements for the years ended December 31, 2003 and 2004 and each of
the interim periods from March 31, 2005 through September 30, 2005 have been
corrected and restated to recognize all features of the derivative financial
instruments including the host instruments, the embedded conversion features and
the free-standing warrants in accordance with Statement of Financial Accounting
Standards No. 133, Accounting for Derivative Instruments and Hedging
Activities (SFAS 133) and EITF 00-19, Accounting for Derivative Financial
Instruments Indexed to, and Potentially Settled in, a Companys Own Stock
(EITF 00-19).

Host instrument:

The proceeds from each
financing arrangement were allocated to the various elements of the financing
resulting in discounts to the face values of the debt instruments. These
discounts were then amortized over the debt terms (in all instances three-years)
using the effective interest method.

Free-standing warrants:

Proceeds from the
financing were allocated to the fair value of the warrants issued using the
Black-Scholes-Merton model. These instruments will be carried as current
liabilities, and their carrying values adjusted to fair value at the end of each
reporting period.

F-17

---

Embedded conversion features:

Each hybrid instrument
was analyzed in accordance with the guidance in SFAS 133 for features that
possessed the characteristics of derivative instruments. Those instruments whose
economic characteristics and risks of the embedded derivative instrument were
not clearly and closely related to the host instrument were bifurcated and
treated as derivatives under the guidance of SFAS 133 and recorded at fair value
with adjustments to fair value at the end of each reporting period.

Other derivative instruments:

Other warrants and
convertible debt were outstanding that were indexed to our common stock and were
previously classified as equity. We considered the application of EITF 00-19 to
these instruments and determined that they were derivatives because, although we
had sufficient authorized/unissued common stock to settle all equity instruments
on the date the first EITF 00-19 applicable instrument was issued, features of
that financing arrangement rendered the number of shares necessary to settle the
instrument indeterminate. As a result, physical settlement of the other
derivatives was not within our control. Accordingly, the fair value of the other
derivatives has been reclassified from equity to liabilities and we will
continue to carry those derivatives as current liabilities and at fair value
until our control of share settlement is reacquired.

Accounting for stock options:

The Company originally
recorded stock options granted to employees as a fixed plan under the intrinsic
value method provisions of APB No. 25. While the intrinsic value method under
APB 25 is appropriate, the fixed plan accounting was inappropriate in our
circumstances because our plan allowed for cashless exercises. With a cashless
exercise feature, the number of shares to be issued is indeterminable as it is
dependent on the stock price on the exercise date. As a result, we have a
variable stock option plan and are required to record estimates of compensation
expense (benefit) based on the fair value of the stock at the end of each
reporting period.

The Companys financial
statements for the years ended December 31, 2003 and 2004 have been restated to
reflect non-cash charges of $13,532,700 and $356,590, respectively, for
additional compensation expense resulting from the correction in the accounting
for the Companys stock option plans. In addition, the interim consolidated
financial information for each of the periods from March 31, 2002 through
September 30, 2005 have also been restated to give effect to the correction of
this error.

The Company originally
recorded stock option grants to non-employees without valuing the options and
recording that value as an expense. The grants were to consultants and should
have been recorded in accordance with SFAS 123. SFAS 123 requires all
non-employee stock option grants to have a fair value calculation prepared on
the grant date. The value of the non-employee stock option grant should then be
recorded in the appropriate expense item. The Company will use the Black-Scholes
option pricing model to estimate the fair value of stock option grants to
non-employees.

The Companys financial
statements for the years ended December 31, 2003, 2004, and 2005 have been
restated to reflect charges of $238,398, $219,829, and $27,471, respectively,
for additional consulting expense resulting from the correction in the
accounting for stock options issued to non-employees. The financial statements
for the interim periods from March 31, 2003 through September 30, 2005 have been
restated to give effect to this correction of an error.

Accounting for purchase acquisition
transactions:

The Company has
corrected the accounting used for acquisitions so as to be in compliance with
generally accepted accounting principles. We have adjusted the purchase prices
of each of our business acquisitions by correcting the value of our shares
issued to their fair value at the date of the acquisitions. We also re-assessed
the value of intangible assets acquired and the recording of deferred income
taxes. An acquisition previously reported in September 2005 was reassessed and
will be accounted for as a January 2006 acquisition when the transaction was
completed. We have determined that there are other identifiable intangible
assets that have an associated value. The separately identifiable intangible
asset is the physicians referral network. The referral network represents other
doctors in the community who refer their patient base to the Companys
physicians who practice in a discipline to meet their patients needs. The
referral network is clearly linked to the physicians employment agreements. The
amortization term is seven years which represents the five year employment
agreement the Company enters into with each physician plus the two years of an
additional non-compete agreement. The value of the referral network should be
amortized over the employment term and the non-compete period of the physician
since that represents the period of time the Company benefits from the
arrangement. As such, we have adjusted the allocation of the purchase price and
the recording of net assets for each of our acquisitions. The valuation of these
identifiable intangibles was determined by a third-party valuation expert.

Goodwill changed as part of the restatement due to an
allocation for specifically identifiable intangibles and subsequent recording of
the difference between book and tax to deferred taxes, and for adjustments
associated with recorded equity issued for acquisition consideration. Please see
the table below outlining the changes by practice:

F-18

---

|                                                   | Total
      at12/31/03 | Adjustments for 
      identifiableintangibles | Adjustments forequity
      analysisinitial acq. | Adjustments forequity
      analysiscontingent paymentsduring 2003 | Restated Total at
      12/31/03
|-------------------------------------------------- | ---------------------- | ---------------------------------------------- | ------------------------------------------------ | ------------------------------------------------------------------ | --------------------------------
|
|
|
|
|
|
|Advanced Orthopedics of South Florida
      (AOSF) | $ 3,055,028            | $(66,586)                                      | $           
      -                             | $           
      -                                               | $ 2,988,442                     
|Rothbart Pain Clinic (RPC)                         | 1,916,294              | (96,738)                                       | -                                                | (64,403)                                                           | 1,755,153                       
|Pain & Rehabilitation Network
      (PRN)          | 1,043,271              | (19,786)                                       | (200,000)                                        | -                                                                  | 823,485                         
|Medical Rehabilitation Specialists (MRS)           | 2,679,947              | (37,590)                                       | 825,000                                          | -                                                                  | 3,467,357                       
|Associated Physicians Group
    (APG)              | 2,977,918              | (92,893)                                       | 2,145,000                                        | -                                                                  | 5,030,025                       
|Spine & Pain Center (SPC)                          | 1,281,722              | (28,670)                                       | 122,222                                          | -                                                                  | 1,375,274                       
|Health Care Center of Tampa
    (HCCT)             | 3,087,144              | (58,096)                                       | 895,102                                          | -                                                                  | 3,924,150                       
|Bone & Joint Surgical Clinic (BJSC)                | 2,494,459              | (139,272)                                      | 558,154                                          | -                                                                  | 2,913,341                       
|Kenneth M. Alo, M.D., P.A.
    (KMA)               | 3,410,952              | (24,937)                                       | 738,889                                          | -                                                                  | 4,124,904                       
|Total Goodwill                                     | $21,946,735            | $(564,568)                                     | $5,084,367                                       | $(64,403)                                                          | $26,402,131                     



|                                                   | Total
      at12/31/04 | Adjustments
      foridentifiable intangibles | Adjustmentsfor equity analysisinitial
    acq. | Adjustmentsfor
      equity analysiscontingent paymentsduring
    2003 | Adjustmentsfor equity analysiscontingent payments
      during 2004 | RestatedTotal
      at12/31/04
|-------------------------------------------------- | ---------------------- | --------------------------------------------- | ---------------------------------------------- | ---------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------
|
|
|
|
|
|
|
|
|Advanced Orthopedics of South Florida
      (AOSF) | $3,980,153             | $(66,586)                                     | $            
      -                          | $          
      -                                                    | $          
      -                                                 | $3,913,567                    
|Rothbart Pain Clinic (RPC)                         | 2,364,667              | (96,738)                                      | -                                              | (64,403)                                                               | 3,464                                                               | 2,206,990                     
|Pain & Rehabilitation Network
      (PRN)          | 2,420,248              | (19,786)                                      | (200,000)                                      | -                                                                      | 466,666                                                             | 2,667,128                     
|Medical Rehabilitation Specialists (MRS)           | 3,596,615              | (37,590)                                      | 825,000                                        | -                                                                      | (60,109)                                                            | 4,323,916                     
|Associated Physicians Group
    (APG)              | 3,894,585              | (92,893)                                      | 2,145,000                                      | -                                                                      | 985,416                                                             | 6,932,108                     
|Spine & Pain Center (SPC)                          | 1,729,830              | (28,670)                                      | 122,222                                        | -                                                                      | -                                                                   | 1,823,382                     
|Health Care Center of Tampa
    (HCCT)             | 4,465,410              | (58,096)                                      | 895,102                                        | -                                                                      | -                                                                   | 5,302,416                     
|Bone & Joint Surgical Clinic (BJSC)                | 3,546,143              | (139,272)                                     | 558,154                                        | -                                                                      | -                                                                   | 3,965,025                     
|Kenneth M. Alo, M.D., P.A.
    (KMA)               | 4,695,879              | (24,937)                                      | 738,889                                        | -                                                                      | -                                                                   | 5,409,831                     
|Denver Pain Management (DPM)                       | -                      | -                                             | (22,000)                                       | -                                                                      | -                                                                   | (22,000)                      
|Georgia Surgical Centers, Inc.(GSC)                | 1,921,227              | (18,059)                                      | 157,197                                        | -                                                                      | -                                                                   | 2,060,365                     
|Dynamic Rehabilitation Centes,
      Inc.(Dynamic  | 3,883,103              | (88,301)                                      | 435,885                                        | -                                                                      | -                                                                   | 4,230,687                     
|Rick Taylor, D.O., P.A. (Taylor)                   | 3,931,361              | (74,030)                                      | 365,542                                        | -                                                                      | -                                                                   | 4,222,873                     
|Benjamin Zolper, M.D., P.A. (Zolper)               | 1,463,115              | (51,543)                                      | 185,088                                        | -                                                                      | -                                                                   | 1,596,660                     
|Center for Pain Management (CPM)                   | 13,345,574             | (160,721)                                     | -                                              | -                                                                      | -                                                                   | 13,184,853                    
|Total Goodwill                                     | $55,237,910            | $(957,222)                                    | $6,206,079                                     | $(64,403)                                                              | $1,395,437                                                          | $61,817,801                   

F-19

---

|Adjustments to Goodwill for the period
      ending September 30, 2005 |                  |                                       |                                                 |                                                 
|---------------------------------------------------------------------- | ---------------- | ------------------------------------- | ----------------------------------------------- | ------------------------------------------------
|                                                                       | Total at 9/30/05 | Adjustmentsforidentifiableintangibles | Adjustmentsfor
      equityanalysisinitial acq. | Adjustmentsanalysiscontingentpayments during2003
|
|
|
|
|
|
|Advanced Orthopedics of South 
      Florida (AOSF)                    | $3,980,153       | $(66,586)                             | $         
    -                                | $         
    -                                
|
|Rothbart Pain Clinic (RPC)                                             | 2,364,660        | (96,738)                              | -                                               | (64,403)                                        
|Pain & Rehabilitation Network 
      (PRN)                             | 2,420,248        | (19,786)                              | (200,000)                                       | -                                               
|
|Medical Rehabilitation  Specialists (MRS)                              | 4,513,281        | (37,590)                              | 825,000                                         | -                                               
|
|Associated Physicians Group 
      (APG)                               | 4,811,251        | (92,893)                              | 2,145,000                                       | -                                               
|
|Spine & Pain Center (SPC)                                              | 1,729,830        | (28,670)                              | 122,222                                         | -                                               
|Health Care Center of Tampa
    (HCCT)                                 | 4,465,410        | (58,096)                              | 895,102                                         | -                                               
|Bone & Joint Surgical Clinic (BJSC)                                    | 3,546,143        | (139,272)                             | 558,154                                         | -                                               
|Kenneth M. Alo, M.D.,
P.A.(KMA)                                        | 4,695,879        | (24,937)                              | 738,889                                         | -                                               
|Denver Pain Management (DPM)                                           | 4,308,600        | -                                     | (22,000)                                        |                                                 
|Georgia Surgical Centers,
    Inc(GSC)                                 | 2,758,379        | (18,059)                              | 157,197                                         | -                                               
|Dyamic Rehabilitation Centers, Inc. (Dynamic)                          | 5,383,103        | (88,301)                              | 435,885                                         | -                                               
|Rick Taylor, D.O., P.A.
    (Taylor)                                   | 5,181,361        | (74,030)                              | 365,542                                         | -                                               
|Benjamin Zolper, M.D., P.A.(Zolper)                                    | 2,046,448        | (51,543)                              | 185,088                                         | -                                               
|Center for Pain Management 
      (CPM)                                | 13,184,696       | (160,721)                             | 3,687,500                                       | -                                               
|Colorado Pain Specialists (CPS)                                        | 4,465,670        | (67,856)                              | 1,202,804                                       | -                                               
|Lake Worth Surgery Center 
      (Alpha)                               | 7,045,958        | (208,573)                             | 126,563                                         | -                                               
|Gables Surgery Center (Beta)                                           | 6,252,840        | (224,550)                             | 286,646                                         | -                                               
|Piedmont Center for Spinal  Disorders
      (Cohen)                    | 1,915,735        | (17,158)                              | 122,086                                         | -                                               
|                                                                      
|Total Goodwill                                                         | $85,069,645      | $(1,475,359)                          | $11,631,678                                     | $(64,403)                                       

F-20

---

The Companys financial
statements for the years ended December 31, 2003 and 2004 and each of the
interim periods from March 31, 2005 through September 30, 2005 have been
restated to reflect net intangible assets and amortization expense on those
intangibles.

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

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

|Adjustments due from shareholder are as
      follows: |                        |                                         
|------------------------------------------------------ | ---------------------- | ----------------------------------------
|                                                       |                        | Accounting for DenverPain Management (a)
|Period ending                                          | As previously reported | As restated                             
|December 31, 2004                                      | 1,794,957              | (1,388,731)                             
|September 30, 2005                                     | 2,954,586              | (1,388,731)                             

|(a) | This adjustment is for the correction in
      accounting for this entity as an intangible contract right instead of as a
      consolidated practice acquisition.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company originally
recorded the acquisition consideration paid into escrow for the Center for Pain
Management ASC into a separate account in the financials at September 26, 2005.
This item was reflected on the balance sheet ending September 30, 2005 as
acquisition consideration paid in escrow. This transaction should not have been
recorded as such because the escrow agreement allowed for either party to walk
away from the agreement before consummation. As a result, the cash and stock
consideration placed into the escrow account were reversed. Cash increased by
$3,750,000, common stock decreased by $3,750,000, and promissory notes decreased
by $7,500,000. There are no income statement effects regarding this
transaction.

The Companys restated
financial statements all reflect the changes as described above for the
derivative instruments, accounting for stock options, and accounting for
purchase acquisitions. These changes all required an adjustment to the prior
period tax provisions. The change in the provision for the years ended December
31, 2003, 2004 and 2005 reflect an income tax expense (benefit) of $4,344,658,
($1,324,588), and ($2,011,858), respectively for the additional (reduced) tax
provision computation.

Due to the large volume of restatements affecting
numerous line items, a revision for each line item is included in tabular format
as follows:

|(a) | Restatement for the accounting for
      derivative financial instruments 
|--- | --------------------------------------------------------------------------
|(b) | Restatement for the accounting for stock
      options                    
|(c) | Restatement for the accounting for purchase
      acquisition transactions

The following tables present the effect of the
changes to the balance sheets for the years ended December 31, 2003 and 2004 and
the nine months ended September 30, 2005.

F-21

---

|December 31,
      2003                      
|---------------------------------------------
|                                             
|                                             
|Accrued
      compensation expense           
|Other assets                                 
|Goodwill                                     
|Deferred taxes, asset -
      current        
|Deferred taxes,
      asset - non current    
|Deferred taxes,
      liability - non current
|Additional paid
      in capital             
|Retained
    earnings                        
|Accounts payable and accrued expenses        
|Income tax
      payable                     
|Convertible
      debentures                 
|Derivative
      instruments                 
|                                             
|December 31,
      2004                      
|                                             
|                                             
|Accrued
      compensation expense           
|Other assets                                 
|Goodwill                                     
|Deferred taxes, asset -
      current        
|Deferred taxes,
      asset - non            
|current                                      
|Deferred taxes,
      liability - non        
|current                                      
|Additional paid
      in capital             
|Retained
    earnings                        
|Accounts
      payable and accrued           
|expenses                                     
|Income tax
      payable                     
|Convertible
      debentures                 
|Derivative
      instruments                 
|Due from
      shareholder                   
|Current portion
      of convertible         
|debentures                                   

F-22

---

|September 30, 2005                              
|------------------------------------------------
|                                                
|                                                
|                                                
|Cash                                            
|Accrued compensation expense                    
|Other assets                                    
|Goodwill                                        
|Deferred taxes, asset - current                 
|Deferred taxes, asset - non  current            
|
|Deferred taxes, liability -
      non current   
|
|Additional paid in capital                      
|Retained earnings                               
|Accounts payable and accrued expenses           
|Income tax payable                              
|Convertible
      debentures                    
|Derivative instruments                          
|Due from
      shareholder                      
|Acquisition consideration paid  in
      escrow 
|Property and equipment, net                     
|Current portion of notes  payable               
|Common stock                                    
|Current portion of convertible 
      debentures

F-23

---

|The following table presents the effect of
      the restatement on the income statement: |                              |                  |            
|----------------------------------------------------------------------------------------- | ---------------------------- | ---------------- | -----------
|                                                                                         
|December 31, 2000                                                                        
|                                                                                          |                              |                  | Adjustment 
|                                                                                          | As Previously Reported       | Adjustments      | Description
|Amortization                                                                              | $             
      -       | $          1,919 | (c)        
|                                                                                         
|December 31,
      2001                                                                  
|                                                                                          |                              |                  | Adjustment 
|                                                                                          | As Previously
      Reported | Adjustments      | Description
|Amortization                                                                              | $            
      -        | $         32,281 | (c)        
|General and administrative                                                                | 2,151,046                    | 16,000           | (b)        
|Income tax provision                                                                      | -                            | 128,000          | (c),(b)    
|                                                                                         
|December 31, 2002                                                                        
|                                                                                          |                              |                  | Adjustment 
|                                                                                          | As Previously Reported       | Adjustments      | Description
|Amortization                                                                              | $            
      -        | $         32,673 | (c)        
|General and administrative                                                                | 3,468,515                    | 855,000          | (b)        
|Income tax provision                                                                      | 234,440                      | 150,000          | (c),(b)    
|                                                                                         
|December 31,
      2003                                                                  
|                                                                                          |                              |                  | Adjustment 
|                                                                                          | As Previously
      Reported | Adjustments      | Description
|Amortization                                                                              | $    61,463                  | $       52,174   | (c)        
|General and administrative                                                                | 7,543,915                    | 13,771,098       | (b)        
|Income tax provision                                                                      | 670,300                      | (4,344,658)      | (c),(b),(a)
|Interest expense                                                                          | 487,786                      | 43,372           | (a)        
|Derivative expense                                                                        | -                            | 3,173,763        | (a)        
|                                                                                         
|December 31, 2004                                                                        
|                                                                                          |                              |                  | Adjustment 
|                                                                                          | As Previously Reported       | Adjustments      | Description
|Amortization                                                                              | $     274,345                | $     274,884    | (c)        
|General and administrative                                                                | 19,832,237                   | 576,419          | (b)        
|Income tax provision                                                                      | 3,086,000                    | 1,324,587        | (c),(b),(a)
|Interest expense                                                                          | 1,708,077                    | 1,755,600        | (a)        
|Derivative expense                                                                        | -                            | 3,256,372        | (a)        
|Revenues                                                                                  | 37,961,673                   | ( 43,773)        | (c)        
|                                                                                         
|September 30, 2005                                                                       
|                                                                                          |                              |                  | Adjustment 
|                                                                                          | As Previously Reported       | Adjustments      | Description
|Amortization                                                                              | $     333,661                | $      538,610   | (c)        
|General and administrative                                                                | 24,218,347                   | 6,763,331        | (b)        
|Income tax provision                                                                      | 5,608,200                    | (2,452,204)      | (c),(b),(a)
|Interest expense                                                                          | 2,355,325                    | 1,442,113        | (a)        
|Derivative expense                                                                        | -                            | 10,103,350       | (a)        

F-24

---

The following tables
present the effect on results of operations for each of the interim periods
during 2005, 2004 and 2003 resulting from the corrections described
above:

|                                                                    | 2005             
|------------------------------------------------------------------- | -----------------
|                                                                    | March 31,        
|Net income, as previously reported                                  | $
      2,273,178
|General and administrative
      expenses                           | (22,452)         
|Fair value adjustments for derivative instruments                   | (18,238,898)     
|Amortization of debt discount                                       | (470,841)        
|Compensation charge (benefit) from variable option
      accounting | (18,138,790)     
|Amortization of intangibles                                         | (95,894)         
|Provision for income taxes                                          | 6,930,065        
|Net income (loss), restated                                         | $ (27,763,632)   
|Basic earnings per common share:                                    |                  
|As
      previously reported                                        | $                
|As
      restated                                                   | $                
|Diluted earnings per common
    share:                              |                  
|As
      previously reported                                        | $                
|As
      restated                                                   | $                

|The following tables present the effect on results of operations
      for the nine months ending September 30, 2005: |                   
|--------------------------------------------------------------------------------------------------------------------- | ------------------
|                                                                                                                     
|Pain Care
      Holdings, Inc.                                                                                        |                   
|Consolidated Statement of Operations                                                                                  |                   
|For the
      Nine Months Ending September 30, 2005                                                                   |                   
|                                                                                                                     
|                                                                                                                      | September 30, 2005
|                                                                                                                      | (As restated)     
|Pain Management                                                                                                       | $                 
|Surgeries                                                                                                             |                   
|Ancillary Services                                                                                                    |                   
|                                                                                                                     
|Total Revenues                                                                                                        |                   
|                                                                                                                     
|Cost of Sales                                                                                                         |                   
|Gross Profit                                                                                                          |                   
|General and administrative                                                                                            |                   
|Amortization expense                                                                                                  |                   
|Depreciation expense                                                                                                  |                   
|                                                                                                                     
|Operating Income                                                                                                      |                   
|Interest expense                                                                                                      |                   
|Derivative expense                                                                                                    |                   
|Other income                                                                                                          |                   
|                                                                                                                     
|Income before income taxes                                                                                            |                   
|Provision for income taxes                                                                                            |                   
|                                                                                                                     
|Income before minority interests' share                                                                               |                   
|Less: Minority interest's
    share                                                                                   |                   
|                                                                                                                     
|Net income                                                                                                            | $                 

F-25

---

|                                                                       |   | 2004       
|---------------------------------------------------------------------- | - | -----------
|                                                                       |   | March 31,  
|Net income, as previously reported                                     | $ | 966,335    
|General and administrative expenses                                    |   | (28,220)   
|Fair value adjustments for derivative instruments                      |   | 1,439,619  
|Amortization of debt discount                                          |   | (225,217)  
|Compensation charge (benefit) from variable option accounting          |   | 2,243,025  
|Amortization of intangibles                                            |   | (28,638)   
|Provision for income taxes                                             |   | (925,378)  
|Net income (loss), restated                                            | $ | 3,441,526  
|Basic earnings per common share:                                       |   |            
|As previously reported                                                 | $ |            
|As
      restated                                                      | $ |            
|Diluted earnings per common share:                                     |   |            
|As
      previously reported                                           | $ |            
|As restated                                                            | $ |            
|                                                                      
|                                                                      
|                                                                       |   | 2003       
|                                                                       |   | March 31,  
|Net income, as previously reported                                     | $ | 323,289    
|General and administrative expenses                                    |   |            
|Fair value adjustments for derivative instruments                      |   |            
|Compensation charge (benefit) from
      amortization of debt discount |   |            
|Compensation charge (benefit) from variable option accounting          |   | (4,204,050)
|Amortization of intangibles                                            |   | (9,248)    
|Provision for income taxes (benefit)                                   |   | 939,260    
|Net (loss) income, restated                                            | $ | (2,950,749)
|Basic earnings (loss) per common share:                                |   |            
|As previously reported                                                 | $ |            
|As
      restated                                                      | $ |            
|Diluted earnings (loss) per common
      share:                        |   |            
|As
      previously reported                                           | $ |            
|As restated                                                            | $ |            

F-26

---

The following table presents the balance sheet
effects as of September 30, 2005 and December 31, 2004 for the corrections noted
above:

|                                                                                                                  | September 30, 2005  | December 31, 2004  
|----------------------------------------------------------------------------------------------------------------- | ------------------- | -------------------
|                                                                                                                  | As
      Previously | As                 
|                                                                                                                  | Reported            | Restated           
|Assets                                                                                                            |                     |                    
|Current assets:                                                                                                   |                     |                    
|Cash                                                                                                              | $ 18,086,682        | $ 21,836,682       
|Accounts receivable, net                                                                                          | 22,909,586          | 22,909,586         
|Acquisition consideration paid in escrow                                                                          | 14,525,761          |                   
|Deposits and prepaid expenses                                                                                     | 3,455,423           | 3,455,423          
|Deferred tax assets                                                                                               |                    | 2,731,000          
|Total current
      assets                                                                                        | 58,977,452          | 50,932,691         
|Property and equipment, net                                                                                       | 10,935,321          | 10,694,733         
|Goodwill, net                                                                                                     | 85,069,645          | 96,957,956         
|Due from shareholder                                                                                              | 2,954,580           | 1,565,850          
|Deferred tax asset                                                                                                | (715,752)           | 1,766,247          
|Other assets                                                                                                      | 6,522,189           | 9,265,505          
|Total assets                                                                                                      | $ 163,743,435       | $ 171,182,982      
|Liabilities and Stockholders
      Equity                                                                        |                     |                    
|Current liabilities:                                                                                              |                     |                    
|Accounts payable and accrued expenses                                                                             | $ 2,316,636         | $ 2,314,187        
|Compensation expense                                                                                              |                    | 21,496,153         
|Derivative liabilities                                                                                            |                    | 16,000,302         
|Acquisition consideration payable                                                                                 | 916,667             | 916,667            
|Income tax payable                                                                                                | 3,851,709           | 4,242,929          
|Current portion of notes payable                                                                                  | 9,812,713           | 2,786,952          
|Current portion of capital lease
      obligations                                                                | 1,437,600           | 1,437,600          
|Current portion of convertible debentures                                                                         |                    |                   
|Total current liabilities                                                                                         | 18,335,325          | 49,194,790         
|Notes payable, net of current portion                                                                             | 28,750,000          | 28,750,000         
|Convertible debentures, net of current
      portion                                                              | 10,456,000          | 9,354,548          
|Capital lease obligations, net of current portion                                                                 | 2,562,850           | 2,562,850          
|Total liabilities                                                                                                 | 60,104,175          | 89,862,188         
|Minority interests                                                                                                | 1,732,729           | 1,732,729          
|Stockholders Equity:                                                                                             |                     |                    
|Common stock, par value
      $0.0001 per share:                                                                  |                     |                    
|Authorized 200,000,000
      shares; issued and outstanding 55,823,026 and 
             
      41,512,833 shares | 5,514               | 5,412              
|Preferred stock, par value $0.0001 per share:                                                                     |                     |                    
|Authorized 10,000,000 shares; issued and outstanding -0- shares                                                   |                    |                   
|Additional paid in capital                                                                                        | 85,243,879          | 100,463,972        
|Retained earnings (accumulated deficit)                                                                           | 16,610,811          | (20,927,646)       
|Cumulative translation adjustments                                                                                | 46,327              | 46,327             
|Total stockholders equity                                                                                        | 101,906,531         | 79,588,065         
|Total liabilities and stockholders
      equity                                                                  | $
      163,743,435 | $
      171,182,982

F-27

---

The following table presents the balance sheet
effects as of March 31, 2005, June 30, 2005 and September 30, 2005 for the
corrections noted above:

|                                                                                                                         | March 31, 2005      | June 30, 2005       | September 30, 2005 
|------------------------------------------------------------------------------------------------------------------------ | ------------------- | ------------------- | -------------------
|                                                                                                                         | As
      Previously | As                  | As
      Previously
|                                                                                                                         | Reported            | Restated            | Reported           
|Assets                                                                                                                   |                     |                     |                    
|Current assets:                                                                                                          |                     |                     |                    
|Cash                                                                                                                     | $ 10,272,446        | $ 10,272,446        | $ 12,231,091       
|Accounts receivable, net                                                                                                 | 14,301,134          | 14,301,134          | 19,575,037         
|Due from shareholder                                                                                                     | 2,192,800           | 804,069             | 2,290,158          
|Acquisition consideration paid in escrow                                                                                 |                    |                    |                   
|Deposits and prepaid expenses                                                                                            | 1,976,633           | 1,976,633           | 2,286,010          
|Deferred tax asset                                                                                                       |                    | 7,135,000           |                   
|Total current
      assets                                                                                               | 28,743,013          | 34,489,282          | 36,382,296         
|Property and equipment, net                                                                                              | 7,190,906           | 7,190,906           | 9,614,623          
|Goodwill, net                                                                                                            | 55,675,019          | 66,141,495          | 72,745,918         
|Other assets                                                                                                             | 5,025,377           | 7,705,599           | 5,717,021          
|Deferred tax asset                                                                                                       |                    | 2,354,923           |                   
|Total assets                                                                                                             | $ 96,634,315        | $ 117,882,208       | $ 124,459,858      
|Liabilities and Stockholders
      Equity                                                                               |                     |                     |                    
|Current liabilities:                                                                                                     |                     |                     |                    
|Accounts payable and accrued expenses                                                                                    | $ 849,584           | $ 930,239           | $ 1,444,715        
|Accrued compensation expense                                                                                             |                    | 32,899,080          |                   
|Derivative liabilities                                                                                                   |                    | 27,993,686          |                   
|Acquisition consideration payable                                                                                        | 583,333             | 583,333             | 2,154,300          
|Income tax payable                                                                                                       | 503,004             | 2,475,978           | 1,922,359          
|Interest payable                                                                                                         | 104,063             |                    | 65,350             
|Current portion of notes payable                                                                                         | 658,603             | 658,603             |                   
|Current portion of capital lease obligations                                                                             | 609,443             | 609,443             | 1,313,699          
|Current portion of convertible
      debentures                                                                          | 2,382,334           | 2,382,334           |                   
|Total current liabilities                                                                                                | 5,690,364           | 68,532,696          | 6,900,423          
|Notes payable, net of current portion                                                                                    | 139,035             | 139,035             | 13,641,642         
|Convertible debentures, net of current portion                                                                           | 13,023,266          | 10,807,187          | 10,456,000         
|Capital lease obligations, net of current
      portion                                                                  | 2,313,341           | 2,313,341           | 2,331,563          
|Deferred tax liability                                                                                                   | 1,839,367           |                    | 2,505,012          
|Total
      liabilities                                                                                                  | 23,005,372          | 81,792,259          | 35,834,640         
|Minority interests                                                                                                       |                    |                    |                   
|Stockholders equity:                                                                                                    |                     |                     |                    
|Common stock, par value $0.0001 per
      share;                                                                         |                     |                     |                    
|Authorized
      200,000,000 shares; issued and         
             outstanding 55,823,026 and 41,512,833
      shares | 4,879               | 4,879               | 5,216              
|
|
|Preferred stock, par value $0.0001 per
      share;                                                                      |                     |                     |                    
|Authorized 10,000,000
      shares; issued
      and                 outstanding
      -0- shares                        |                    |                    |                   
|
|Additional paid in capital                                                                                               | 63,830,551          | 77,471,621          | 74,485,837         
|Retained earnings (accumulated deficit)                                                                                  | 9,772,724           | (41,407,342)        | 13,136,914         
|Cumulative translation adjustment                                                                                        | 20,789              | 20,789              | 34,124             
|Total stockholders
      equity                                                                                         | 73,628,943          | 36,089,947          | 87,662,091         
|Total liabilities and stockholders
      equity                                                                         | $
      96,634,315  | $
      117,882,208 | $
      124,459,858

F-28

---

The following table
presents the balance sheet effects as of March 31, 2004, June 30, 2004,
September 30, 2004 and December 31, 2004 for the corrections noted
above:

|                                                                                                                                                              | March 31, 2004      | June 30, 2004 | September 30, 2004  | December 31, 2004
|------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------- | ------------- | ------------------- | -----------------
|                                                                                                                                                              | As
      Previously | As            | As
      Previously | As               
|                                                                                                                                                              | Reported            | Restated      | Reported            | Restated         
|Assets                                                                                                                                                        |                     |               |                     |                  
|Current assets:                                                                                                                                               |                     |               |                     |                  
|Cash                                                                                                                                                          | $10,419,527         | $10,419,527   | $4,038,249          | $4,038,249       
|Accounts receivable, net                                                                                                                                      | 6,762,493           | 6,762,493     | 11,942,589          | 11,942,589       
|Due from shareholder                                                                                                                                          | 383,090             | 383,090       | 28,021              | 28,021           
|Acquisition consideration paidin escrow                                                                                                                       | 284,964             | 284,964       | 79,301              | 79,301           
|
|Deposits and prepaid expenses                                                                                                                                 | 599,638             | 599,638       | 780,093             | 780,093          
|
|Deferred tax asset                                                                                                                                            |                    |              |                    |                 
|Total current assets                                                                                                                                          | 18,449,712          | 18,449,712    | 16,868,253          | 16,868,253       
|Property and equipment, net                                                                                                                                   | 4,734,001           | 4,734,001     | 6,433,246           | 6,433,246        
|Goodwill, net                                                                                                                                                 | 24,059,078          | 28,984,604    | 37,898,540          | 43,542,191       
|Deferred tax asset                                                                                                                                            |                    | 3,662,000     |                    | 4,995,000        
|Due from shareholder                                                                                                                                          |                    |              |                    |                 
|Other assets                                                                                                                                                  | 4,437,083           | 5,477,125     | 4,841,698           | 6,150,175        
|Total assets                                                                                                                                                  | $51,679,874         | $61,307,442   | $66,041,737         | $77,988,865      
|Liabilities and StockholdersEquity                                                                                                                           |                     |               |                     |                  
|                                                                                                                                                              |                     |               |                     |                  
|Current liabilities:                                                                                                                                          |                     |               |                     |                  
|Accounts payable and accruedexpenses                                                                                                                          | $393,616            | $454,617      | $671,912            | $732,913         
|
|Accrued compensationexpense                                                                                                                                   |                    | 12,160,675    |                    | 15,918,030       
|
|Derivative liabilities                                                                                                                                        |                    | 9,705,739     |                    | 11,577,842       
|Acquisition considerationpayable                                                                                                                              |                    |              |                    |                 
|
|Income tax payable                                                                                                                                            | 329,026             | 473,097       | 891,329             | 1,397,109        
|Interest payable                                                                                                                                              |                    | 22,917        | 62,500              | 58,750           
|Current portion of notes                                                                                                                                      |                    | 867,206       | 4,258,850           | 4,258,850        
|Current payable portion of capitallease obligations                                                                                                           | 867,206             | 607,294       | 611,426             | 611,426          
|
|Current portion of convertibledebentures                                                                                                                      | 607,294             |              | 2,490,000           | 2,490,000        
|
|Total current liabilities                                                                                                                                     | 2,197,142           | 24,291,545    | 8,986,017           | 37,044,920       
|Shareholder loans                                                                                                                                             |                    |              |                    |                 
|Notes payable, net of
      currentportion                                                                                                                    | 51,280              | 51,280        | 471,225             | 471,225          
|Convertible debentures, net
      ofcurrent portion                                                                                                           | 20,000,000          | 14,716,997    | 17,373,600          | 12,562,543       
|Capital lease obligations, netof current
      portion                                                                                                        | 2,451,850           | 2,451,850     | 2,455,181           | 2,455,181        
|Deferred tax liability                                                                                                                                        | 874,608             | 1,412,455     | 1,188,711           | 1,686,716        
|Total liabilities                                                                                                                                             | $25,574,880         | $42,924,127   | $30,474,734         | $54,220,585      
|Stockholders equity:Common stock, par value$0.0001 per share;authorized
      200,000,000shares;
      issued andoutstanding 55,823,026and 41,512,833 shares | 2,796               | 2,796         | 3,109               | 3,109            
|
|
|
|
|
|
|Preferred stock, par value$0.0001 per share;Authorized
      10,000,000shares;
      issued andoutstanding -0- shares                                         |                    |              |                    |                 
|
|
|
|
|Additional paid in capital                                                                                                                                    | 23,370,697          | 27,085,449    | 31,081,243          | 36,294,273       
|Retained earnings(accumulated
      deficit)                                                                                                                  | 2,735,728           | (8,700,703)   | 4,493,339           | (12,518,414)     
|Cumulative translationadjustment                                                                                                                              | (4,227)             | (4,227)       | (10,688)            | (10,688)         
|Total stockholders equity                                                                                                                                    | 26,104,994          | 18,383,315    | 35,567,003          | 23,768,280       
|Total liabilities andstockholders equity                                                                                                                     | $51,679,874         | $61,307,442   | $66,041,737         | $77,988,865      

F-29

---

The changes in retained earnings are due to the
derivative instruments, accounting for stock options, accounting for purchase
acquisitions, and provision for income taxes. The table below reflects these
changes in summary form:

|For the period
      ending: | Retained Earnings (Accumulated
      Deficit)
|---------------------------- | ---------------------------------------------
|                             |                                              
|                             |                                              
|                             | As
      Previously Reported                 
|12/31/2000                   | $    (494,351)                               
|12/31/2001                   | (148,547)                                    
|12/31/2002                   | 556,487                                      
|12/31/2003                   | 1,769,393                                    
|12/31/2004                   | 7,499,546                                    
|9/30/2005                    | 16,610,811                                   

The changes to additional paid in capital are due to
the derivative instruments, accounting for purchase acquisitions, and provision
for income taxes. The table below reflects these changes in summary
form:

|For the period
      ending: | Additional Paid
      in Capital
|---------------------------- | --------------------------------
|                             |                                 
|                             |                                 
|                             | As Previously
      Reported    
|12/31/2001                   | $      2,640,689                
|12/31/2002                   | 7,019,246                       
|12/31/2003                   | 21,700,894                      
|12/31/2004                   | 47,995,110                      
|9/30/2005                    | 85,243,879                      

The following table
presents cash flow effects for the nine months ended September 30, 2005 and the
year-ended December 31, 2004 and 2003 for the corrections noted
above:

|                                                | September 30,
      2005 | December 31,
      2004 | December 31,
      2003
|----------------------------------------------- | ------------------------ | ----------------------- | -----------------------
|                                                | As                       | As                      | As                     
|                                                | Reported                 | Restated                | Reported               
|Net cash provided by (used in) operating        |                          |                         |                        
|activities                                      | $ 4,025,460              | $ 4,025,460             | $ 3,422,811            
|Net cash used in investing activities           | $
      (32,001,202)     | $
      (32,001,202)    | $
      (16,154,668)   
|Net cash provided by financing
      activities | $ 26,961,584             | $ 26,961,584            | $ 23,908,930           

F-30

---

The variable option
compensation expense for the three months ending December 31, 2005 reflected a
benefit of $4,353,603 due to changes in fair value under variable
accounting.

The derivative expense
for the three months ending December 31, 2005 reflected a benefit of $3,097,848
due to changes in fair value to the derivative.

The amounts for Accrued
compensation expense on the balance sheet do not agree with the Statements of
Operations because not all periods were presented for the Statement of
Operations. Please see the chart below for the year by year amount of
adjustments that were necessary for the fair value computation.

|                             |  | Accrued
      compensation
|---------------------------- |  | --------------------------
|For the period
      ending: |  | Adjustments               
|                            
|12/31/2001                   |  | $       
  16,000         
|12/31/2002                   |  | 855,000                   
|12/31/2003                   |  | 13,532,700                
|12/31/2004                   |  | 356,590                   
|9/30/2005                    |  | 6,735,863                 
|                             |  | $
      21,496,153        
|                            

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

On December 1, 2000 the
Company acquired 51% of the outstanding shares of Rothbart Pain Management
Clinic, Inc. (Rothbart), which is incorporated in Ontario, Canada. PainCare
purchased 51% of the outstanding stock of Rothbart from certain shareholders in
exchange for $510,000 in a convertible debenture with an interest rate of 7% and
convertible at the fair market value of outstanding shares at the time of
conversion. The interest and principal on the convertible debenture will be paid
over a three-year period in equal monthly installments after an initial payment
of $100,000 was paid on December 1, 2000. The 51% shareholders of Rothbart
earned $726,280 in additional consideration based on the future earnings of
Rothbart. The remaining 49% of the outstanding shares of Rothbart was acquired
from Naomi Investments Limited (Naomi) on March 1, 2001 in exchange for $490,000
in a convertible debenture with an interest rate of 7% and a conversion feature
equal to fair market value. The interest and principal on the convertible
debenture will be paid over a three-year period in equal monthly installments.
The Naomi shareholders earned $697,798 in additional consideration based on the
future earnings of Rothbart. Rothbart is one of the largest providers of pain
management services in Canada with over 14 pain management physicians practicing
in the center.

Purchase price allocation of initial 51% acquisition
in December 2000:

|Consideration            |  | $ 510,000        
|------------------------ |  | -----------------
|Contingent Consideration |  | 686,132          
|Deferred taxes           |  | 32,890           
|Less:                    |  |                  
|Intangible Assets        |  | 82,227           
|Net assets of Rothbart   |  | 59,411           
|Goodwill                 |  | $
      1,105,522

F-31

---

|Purchase price allocation of remaining 49% acquisition in March
      2001: |  |                  
|--------------------------------------------------------------------------- |  | -----------------
|                                                                           
|                                                                           
|Consideration (convertible
      debenture)                                 |  | $ 490,000        
|Contingent Consideration                                                    |  | 667,938          
|Deferred taxes                                                              |  | 31,601           
|Less:                                                                       |  |                  
|Intangible Assets                                                           |  | 79,002           
|Goodwill                                                                    |  | $
      1,110,537

On January 1, 2001, the
Company closed a merger pursuant to a Merger Agreement with its wholly-owned
subsidiary, PainCare Acquisition Company I, Inc. (PNAC I), and Advanced
Orthopaedics of South Florida, Inc. (AOSF), a Florida corporation. The Merger
Agreement provides for the merger of AOSF into PNAC I, a Florida corporation. In
exchange for all of the capital stock of AOSF, the AOSF shareholders received
1,850,000 shares of common stock, $75,000 in cash and $1,200,000 in Convertible
Debentures with an interest rate of 9% and a conversion feature at $2.00 per
share. The principal and interest on the Convertible Debentures will be paid
monthly over four years in equal installments. In addition, the former owner of
AOSF earned $1,456,909 in additional consideration based on the future earnings
of AOSF. The convertible debenture and additional consideration was paid in full
in February 2004. The physician owner of AOSF received a ten-year employment
agreement with an annual salary of $300,000 per year for the first four years,
$500,000 for year five and $700,000 per year for the next five years, plus
incentives based on AOSF earnings. AOSF is an orthopedic surgery, pain
management and orthopedic rehabilitation center located in Lake Worth, Florida.
The center is run by Merrill Reuter, M.D., a board certified orthopedic surgeon
who specializes in minimally invasive spine surgery.

Advanced Orthopaedics of South Florida, Inc. was
acquired on January 1, 2001 and was accounted for using the purchase method of
accounting.

Purchase price allocation:

|Consideration ($1,200,000 convertible
      debenture) |  | $
      1,200,000
|------------------------------------------------------ |  | -----------------
|Cash Consideration                                     |  | 75,000           
|Stock Consideration                                    |  | 1,850,000        
|Contingent Consideration                               |  | 1,456,909        
|Deferred taxes                                         |  | 44,391           
|Less:                                                  |  |                  
|Intangible Assets                                      |  | 110,977          
|Net assets of AOSF                                     |  | 601,756          
|Goodwill                                               |  | $
      3,913,567

On August 31, 2001,
PainCare entered into an Asset Purchase Agreement with Perry Haney, M.D. to
acquire certain assets used by Dr. Haney in his pain management practice in
Aurora, Colorado. As consideration for the assets, Dr. Haney received 250,000
shares of PainCare common stock. In addition, PainCare entered into a Business
Management Agreement on August 31, 2001 with SpineOne, P.C. (SpineOne), a
Colorado professional corporation, and Colorado Musculoskeletal Center, Inc.
(CMCI), a Colorado business corporation (collectively, the Practice). Both of
these entities are owned by Dr. Haney. PainCare and SpineOne terminated the
Management Agreement on or about March 15, 2004 and in connection with such
termination PainCare transferred to SpineOne all right, title and interests in
and to the assets it acquired from Dr. Haney.

On December 12, 2002,
the Company closed a merger pursuant to a Merger Agreement with its wholly-owned
subsidiary, PainCare Acquisition Company II, Inc. (PNAC II), and Pain and
Rehabilitation Network, Inc. (PRNI), a Florida corporation. The Merger Agreement
provides for the merger of PRNI into PNAC II, a Florida corporation. In exchange
for all of the capital stock of PRNI, the PRNI

F-32

---

shareholder received 1,000,000 shares of common stock
and $1,000,000 in cash. As of March 24, 2006, the Company has paid a total of
$666,666 in cash and issued 448,673 shares, representing additional payments
earned during the two fiscal years following the closing. In addition, the
former owner of PRNI may receive up to $666,667 in additional consideration
based on the future earnings of PRNI. The physician owner of PRNI received a
five-year employment agreement with an annual salary of $360,000 per year for
the next five years, plus incentives based on PRNI earnings. PRNI is a pain
management center located in Orange Park, Florida. The center is run by Andrea
Trescot, M.D., a board certified pain management physician.

Pain and Rehabilitation Network, Inc. was acquired on
December 12, 2002 and was accounted for using the purchase method of
accounting.

Purchase price allocation:

|Cash Consideration       |  | $ 1,000,000      
|------------------------ |  | -----------------
|Stock Consideration      |  | 800,000          
|Contingent Consideration |  | 2,086,234        
|Deferred taxes           |  | 13,190           
|Less:                    |  |                  
|Intangible Assets        |  | 32,976           
|Net assets of PRNI       |  | 913,085          
|Goodwill                 |  | $
      2,953,363

On May 16, 2003, the
Company closed a merger pursuant to a Merger Agreement with its wholly-owned
subsidiary, PainCare Acquisition Company IV, Inc. (PNAC IV), and Medical
Rehabilitation Specialists II, P.A. (MRS), a Florida corporation. The Merger
Agreement provides for the merger of MRS into PNAC IV, a Florida corporation. In
exchange for all of the capital stock of MRS, the MRS shareholder received
1,100,000 shares of common stock and $1,375,000 in cash. As of March 24, 2006,
the Company has paid a total of $916,666 in cash and issued 258,370 shares,
representing additional payments earned during the two fiscal years following
the closing. In addition, the former owner of MRS may receive up to $916,667 in
additional consideration based on the future earnings of MRS. The physician
owner of MRS received a five-year employment agreement with an annual salary of
$400,000 per year for the next five years, plus incentives based on MRS
earnings. MRS is a pain management practice located in Tallahassee, Florida. The
center is run by Kirk Mauro, M.D., a physiatrist.

Medical Rehabilitation
Specialists II, P.A. was acquired on May 16, 2003 and utilized the purchase
method of accounting. The Company has included financial results for MRS in 2003
financial statements from April 17, 2003.

Purchase price allocation:

|Cash Consideration                       |  | $ 1,375,000      
|---------------------------------------- |  | -----------------
|Stock Consideration                      |  | 2,200,000        
|Contingent Consideration                 |  | 1,816,463        
|Acquisition Costs                        |  | 70,559           
|Deferred taxes                           |  | 25,060           
|Less:                                    |  |                  
|Cash                                     |  | (4,600)          
|Accounts receivable                      |  | 262,914          
|Property and equipment                   |  | 2,043            
|Intangible assets                        |  | 62,650           
|Plus:                                    |  |                  
|Accounts payable and accrued liabilities |  | 119,747          
|Goodwill                                 |  | $
      5,283,822

F-33

---

On August 6, 2003, the
Company closed a merger pursuant to a Merger Agreement with its wholly-owned
subsidiary, PainCare Acquisition Company V, Inc. (PNAC V), and Industrial &
Sport Rehabilitation, Ltd. d/b/a/ Associated Physicians Group (APG), an Illinois
corporation. The Merger Agreement provides for the acquisition of the
non-medical assets of APG by PNAC V, a Florida corporation. In exchange for the
non-medical assets the APG shareholder received 1,375,000 shares of common stock
and $1,375,000 in cash. As of March 24, 2006, the Company has paid a total of
$916,666 in cash and issued 566,943 shares, representing additional payments
earned during the two fiscal years following the closing. In addition, the
former owner of APG may receive up to $916,667 in additional consideration if
certain net earnings goals are achieved in the third fiscal year following the
closing. APG is comprised of three rehabilitation centers located in the St.
Louis-metro area. The centers are run by John Vick.

Industrial & Sport
Rehabilitation, Ltd. d/b/a Associated Physicians Group was acquired on August 6,
2003 and utilized the purchase method of accounting. The Company has included
APG financial results in its 2003 financial statements from April 25, 2003 in
accordance EITF 97-2 as the result of the execution of a definitive management
agreement on April 25, 2003.

Purchase price allocation:

|Cash
      Consideration                       |  | $ 1,375,000
|---------------------------------------------- |  | -----------
|Stock Consideration                            |  | 3,520,000  
|Contingent
      Consideration                 |  | 2,815,491  
|Acquisition Costs                              |  | 646,866    
|Deferred
      taxes                           |  | 61,928     
|Less:                                          |  |            
|Cash                                           |  | 12,591     
|Accounts receivable                            |  | 624,163    
|Property and
      equipment                   |  | 135,661    
|Deposits and prepaid
      expenses            |  | 5,499      
|Intangible
      Assets                        |  | 154,821    
|Plus:                                          |  |            
|Accounts
      payable and accrued liabilities |  | 25,868     
|Note payable                                   |  | 333,099    
|Goodwill                                       |  | $ 7,845,517

On December 23, 2003,
the Company closed a merger pursuant to a Merger Agreement with its wholly-owned
subsidiary, PainCare Acquisition Company VI, Inc. (PNAC VI), and Spine and Pain
Center, P.C. (SPC), a North Dakota corporation. The Merger Agreement provides
for the acquisition of the non-medical assets of SPC by PNAC VI, a Florida
corporation. In exchange for the non-medical assets the SPC shareholder received
277,778 shares of common stock and $625,000 in cash. As of March 24, 2006, the
Company has paid a total of $416,667 in cash and issued 141,195 shares,
representing additional payments earned during the two fiscal years following
the closing. In addition, the former owner of SPC may receive up to $416,667 in
additional consideration if certain net earnings goals are achieved in the third
fiscal year following the closing. SPC is a pain management practice located in
Bismarck, North Dakota. The center is run by Michael Martire, M.D., a board
certified pain management physician.

Spine and Pain Center,
P.C. was acquired on December 23, 2003 and utilized the purchase method of
accounting. The Company has only included December 31, 2003 balance sheet
results for SPC in its 2003 financial statements.

F-34

---

|Purchase price allocation:               |  |                  
|---------------------------------------- |  | -----------------
|                                        
|Cash Consideration                       |  | $ 625,000        
|Stock Consideration                      |  | 747,222          
|Contingent Consideration                 |  | 863,213          
|Acquisition Costs                        |  | 137,709          
|Deferred taxes                           |  | 19,113           
|Less:                                    |  |                  
|Cash                                     |  | 3,784            
|Accounts receivable                      |  | 152,029          
|Property and equipment                   |  | 8,564            
|Intangible Assets                        |  | 47,783           
|Plus:                                    |  |                  
|Accounts payable and accrued liabilities |  | 89,832           
|Goodwill                                 |  | $
      2,269,929

On December 30, 2003,
the Company closed a merger pursuant to a Merger Agreement with its wholly-owned
subsidiary, PainCare Acquisition Company VII, Inc. (PNAC VII), and Health Care
Center of Tampa, Inc. (HCCT), a Florida corporation. The Merger Agreement
provides for the merger of HCCT into PNAC VII, a Florida corporation. In
exchange for all of the capital stock of HCCT, the HCCT shareholder received
809,315 shares of common stock and $1,937,500 in cash. As of March 24, 2006, the
Company has paid a total of $1,291,667 in cash and issued 226,608 shares,
representing additional payments earned during the first two years following the
closing. The stock portion of the second year payment has been earned but not
issued as of March 24, 2006. In addition, the former owner of HCCT may receive
up to $1,291,667 in additional consideration based on the future earnings of
HCCT. The physician owner of HCCT received a five-year employment agreement with
an annual salary of $400,000 per year for the next five years, plus incentives
based on HCCT earnings. HCCT is a pain management practice located in Lakeland,
Florida. The center is run by Saqib Bashir Khan, M.D., a board certified pain
management physician.

Health Care Center of
Tampa, Inc. was acquired on December 30, 2003 and utilized the purchase method
of accounting. The Company has only included December 31, 2003 balance sheet
results for HCCT in its 2003 financial statements.

|Purchase price allocation: |  |                  
|-------------------------- |  | -----------------
|                          
|Cash Consideration         |  | $ 1,937,500      
|Stock Consideration        |  | 2,832,602        
|Contingent Consideration   |  | 2,653,583        
|Acquisition Costs          |  | 206,753          
|Liabilities                |  | 16,746           
|Deferred taxes             |  | 38,730           
|Less:                      |  |                  
|Cash                       |  | 24,370           
|Accounts receivable        |  | 432,088          
|Property and equipment     |  | 458,322          
|Note receivable            |  | 9,977            
|Intangible Assets          |  | 96,826           
|Goodwill                   |  | $
      6,664,331

On December 31, 2003,
the Company closed an asset purchase pursuant to an Asset Purchase Agreement
with PainCare Holdings, Inc. (PCH), and Bone and Joint Surgical Clinic (BJSC), a
Louisiana corporation. The Asset Purchase Agreement provides for the acquisition
of the assets of BJSC by PCH, a Florida corporation. In exchange for the assets
the BJSC shareholder received 565,048 shares of common stock and $1,250,000 in
cash. As of March 24, 2006, the Company has paid a total of $593,333 in cash and
issued 190,316 shares, representing additional payments earned during the two
fiscal years following the closing. In addition, the former

F-35

---

owner of BJSC may receive up to $1,313,334 in
additional consideration if certain net earnings goals are achieved in the third
and fourth fiscal years following the closing. BJSC is an orthopedic practice
located in Houma, Louisiana. The center is run by Christopher Cenac, M.D., an
orthopedic surgeon.

Bone and Joint Surgical
Clinic was acquired on December 31, 2003 and utilized the purchase method of
accounting. The Company has only included December 31, 2003 balance sheet
results for BJSC in its 2003 financial statements.

Purchase price allocation:

|Cash Consideration       |  | $ 1,250,000      
|------------------------ |  | -----------------
|Stock Consideration      |  | 1,808,154        
|Contingent Consideration |  | 1,214,105        
|Acquisition Costs        |  | 62,137           
|Less:                    |  |                  
|Cash                     |  | 2,631            
|Accounts receivable      |  | 356,877          
|Property and equipment   |  | 5,485            
|Intangible Assets        |  | 139,272          
|Plus:                    |  |                  
|Note Payable             |  | 599,000          
|Goodwill                 |  | $
      4,429,131

On December 31, 2003,
the Company closed a merger pursuant to a Merger Agreement with its wholly-owned
subsidiary, PainCare Acquisition Company IX, Inc. (PNAC IX), and Kenneth M. Alo,
M.D., P.A. (ALO), a Texas corporation. The Merger Agreement provides for the
acquisition of the non-medical assets of ALO by PNAC IX, a Florida corporation.
In exchange for the non-medical assets the ALO shareholder received 777,778
shares of common stock and $1,750,000 in cash. As of March 24, 2006, the Company
has paid a total of $1,166,667 in cash and issued 362,633 shares, representing
additional payments earned during the two fiscal years following the closing. In
addition, the former owner of ALO may receive up to $1,166,667 in additional
consideration if certain net earnings goals are achieved in the third fiscal
year following the closing. ALO is a pain management practice located in
Houston, Texas. The center is run by Kenneth Alo, M.D., a board certified pain
management physician.

Kenneth M. Alo, M.D.,
P.A. was acquired on December 31, 2003 and utilized the purchase method of
accounting. The Company has only included December 31, 2003 balance sheet
results for ALO in its 2003 financial statements.

|Purchase price allocation:                     |  |                  
|---------------------------------------------- |  | -----------------
|                                              
|Cash Consideration                             |  | $ 1,750,000      
|Stock Consideration                            |  | 2,488,889        
|Contingent Consideration                       |  | 2,376,016        
|Acquisition Costs                              |  | 306,984          
|Deferred taxes                                 |  | 16,624           
|Less:                                          |  |                  
|Cash                                           |  | 100              
|Accounts receivable                            |  | 426,133          
|Property and equipment                         |  | 13,963           
|Other assets                                   |  | 128              
|Intangible Assets                              |  | 41,561           
|Plus:                                          |  |                  
|Accounts payable and accrued
      liabilities |  | 17,553           
|Note Payable                                   |  | 145,000          
|Goodwill                                       |  | $
      6,619,181

F-36

---

On January 17, 2004,
the Company purchased from Rehab Management Group, Inc., a South Carolina based
corporation (RMG) all rights, title and interest that RMG owns or acquires and
all management fees, revenues, compensation and payments of any kind with
respect to three electro-diagnostic management agreements with the named
physicians practice:

|Name of
      Physicians Practices                                                |                                                                                                                                                                               | Purchase
      Price                                                                                                                                                           
|---------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Associated Physicians Group,
      Ltd., a fully integrated treatment practice     | $107,500 in cash and 48,643
      shares of common stock, plus contingent payments  of up to
      $215,000 in cash and common stock if certain earnings goals are
      met.
|
|Statesville Pain Associates,
      P.C., a North Carolina professional corporation |                                                                                                                                                                               | $375,000 in cash and 169,683
      shares of common stock, plus contingent  payments of up to
      $750,000 in cash and common stock if certain earnings goals  are
      met.
|
|
|Space Coast Pain Institute,
      P.C., a Florida professional corporation         |                                                                                                                                                                               | $275,000 in cash and 124,434
      shares of common stock, plus contingent  payments of up to
      $550,000 in cash and common stock if certain earnings goals  are
      met.
|
|

On May 25, 2004, the
Company acquired capital stock of Georgia Surgical Centers, Inc. (GSC), which
operates three ambulatory surgery centers and acquired the non-medical assets of
Georgia Pain Physicians, P.C. (GPP), a pain management physician practice all
headquartered in Atlanta, Georgia. GSC was acquired pursuant to a merger
agreement from Robert E. Windsor, M.D., the sole shareholder and the non-medical
assets of GPP were acquired pursuant to an asset purchase agreement. The
combined purchase price for GSC and the assets of GPP consisted of $1,125,000 in
cash and 462,344 shares of common stock. As of March 24, 2006, the Company has
paid a total of $375,000 in cash and issued 86,806 shares, representing
additional payments earned during the first fiscal year following the closing.
In addition, the former owner of GSC/GPP may receive up to $1,500,000 in
additional consideration if certain net earnings goals are achieved in the
second and third fiscal years following the closing. Both GSC and GPP are run by
Robert Windsor, M.D., a board certified pain management physician.

GSC and GPP were acquired on May 25, 2004 and
utilized the purchase method of accounting.

Purchase price allocation:

|Cash
      Consideration                       |  | $ 1,125,000      
|---------------------------------------------- |  | -----------------
|Stock Consideration                            |  | 1,282,197        
|Contingent Consideration                       |  | 723,090          
|Acquisition Costs                              |  | 256,197          
|Deferred taxes                                 |  | 12,040           
|Less:                                          |  |                  
|Cash                                           |  | 46,494           
|Accounts receivable                            |  | 438,539          
|Property and equipment                         |  | 186,317          
|Deposits and prepaid expenses                  |  | 1,300            
|Note receivable                                |  | 7,869            
|Intangible Assets                              |  | 30,099           
|Plus:                                          |  |                  
|Accounts payable and accrued
      liabilities |  | 182,702          
|Goodwill                                       |  | $
      2,870,608

---

On June 3, 2004, the
Company closed a merger pursuant to a Merger Agreement with its wholly-owned
subsidiary, PainCare Acquisition Company XI, Inc. (PNAC XI), and Dynamic
Rehabilitation Centers, Inc. (Dynamic), a Michigan corporation. The Merger
Agreement provides for the acquisition of the non-medical assets of Dynamic by
PNAC XI, a Florida corporation. In exchange for the non-medical assets the
shareholders of Dynamic received 927,414 shares of common stock and $2,250,000
in cash. As of March 24, 2006, the Company has paid a total of $750,000 in cash
and issued 175,644 shares, representing additional payments earned during the
first fiscal year following the closing. In addition, the former owners of
Dynamic may receive up to $3,000,000 in additional consideration if certain net
earnings goals are achieved in the second and third fiscal years following the
closing. Dynamic is a spinal rehabilitation practice with four locations in
Southeast Michigan.

Dynamic was acquired on June 3, 2004 and utilized the
purchase method of accounting.

Purchase price allocation:

|Cash Consideration                       |  | $ 2,350,000
|---------------------------------------- |  | -----------
|Stock Consideration                      |  | 2,685,885  
|Contingent Consideration                 |  | 1,478,923  
|Acquisition Costs                        |  | 292,574    
|Deferred taxes                           |  | 58,868     
|Less:                                    |  |            
|Cash                                     |  | 50,380     
|Accounts receivable                      |  | 573,366    
|Property and equipment                   |  | 612,251    
|Deposits and prepaid expenses            |  | 53,060     
|Intangible Assets                        |  | 147,169    
|Plus:                                    |  |            
|Accounts payable and accrued liabilities |  | 130,600    
|Note payable, current                    |  | 23,713     
|Note Payable, long term                  |  | 125,273    
|Goodwill                                 |  | $ 5,709,610

On June 7, 2004, the
Company closed a merger pursuant to a Merger Agreement with its wholly-owned
subsidiary, PainCare Acquisition Company XIII, Inc. (PNAC XIII), and Rick
Taylor, D.O., P.A. (Taylor), a Texas corporation. The Merger Agreement provides
for the acquisition of the non-medical assets of Taylor by PNAC XIII, a Florida
corporation. In exchange for the non-medical assets the shareholder of Taylor
received 761,545 shares of common stock and $1,875,000 in cash. As of March 24,
2006, the Company has paid a total of $625,000 in cash and issued 148,104
shares, representing additional payments earned during the first fiscal year
following the closing. In addition, the former owner of Taylor may receive up to
$2,500,000 in additional consideration if certain net earnings goals are
achieved in the second and third fiscal years following the closing. Taylor is a
pain management physician practice with three locations in Texas.

F-38

---

|Taylor was acquired on June 7, 2004 and utilized the purchase
      method of accounting.
|-----------------------------------------------------------------------------------------
|                                                                                         
|Purchase price allocation:                                                               
|                                                                                         
|Cash Consideration                                                                       
|Stock Consideration                                                                      
|Contingent Consideration                                                                 
|Acquisition Costs                                                                        
|Deferred taxes                                                                           
|Less:                                                                                    
|Cash                                                                                     
|Accounts receivable                                                                      
|Property and equipment                                                                   
|Intangible Assets                                                                        
|Plus:                                                                                    
|Accounts payable and accrued liabilities                                                 
|Note payable                                                                             
|Goodwill                                                                                 

Effective July 1, 2004,
the Company closed a merger pursuant to a Merger Agreement with its wholly-owned
subsidiary, PainCare Acquisition Company XIV, Inc. (PNAC XIV), and Ben Zolper,
M.D., L.L.C. (Zolper), a Maine corporation. The Merger Agreement provides for
the merger of Zolper into PNAC XIV, a Florida corporation. In exchange for all
of the capital stock of Zolper, the Zolper shareholder received 316,444 shares
of common stock and $875,000 in cash. As of March 24, 2006, the Company has paid
a total of $291,667 in cash and issued 69,115 shares, representing additional
payments earned during the first fiscal year following the closing. In addition,
the former owner of Zolper may receive up to $1,166,667 in additional
consideration if certain net earnings goals are achieved in the second and third
fiscal years following the closing. The physician owner of Zolper received a
five-year employment agreement with an annual salary of $200,000 per year for
the next five years, plus incentives based on Zolper earnings. Zolper is a pain
management practice located in Bangor, Maine. The center is run by Benjamin
Zolper, M.D., a board certified pain management physician.

|Zolper was acquired on July 1, 2004
      and utilized the purchase method of accounting.
|-----------------------------------------------------------------------------------------
|                                                                                         
|                                                                                         
|Purchase price
      allocation:                                                         
|                                                                                         
|Cash Consideration                                                                       
|Stock Consideration                                                                      
|Contingent Consideration                                                                 
|Acquisition Costs                                                                        
|Deferred taxes                                                                           
|Less:                                                                                    
|Cash                                                                                     
|Accounts receivable                                                                      
|Property and equipment                                                                   
|Intangible Assets                                                                        
|Plus:                                                                                    
|Accounts payable and accrued
      liabilities                                           
|Note payable, current                                                                    
|Goodwill                                                                                 

F-39

---

On December 1, 2004,
the Company closed an asset purchase pursuant to an Asset Purchase Agreement
with The Center for Pain Management (CPM), a Maryland corporation. The Asset
Purchase Agreement provides for the acquisition of the assets of CPM by PCH, a
Florida corporation. In exchange for the assets the CPM shareholders received
3,687,500 shares of common stock and $6,375,000 in cash. As of March 24, 2006,
the Company has paid a total of $2,291,667 in cash and issued 626,139 shares,
representing additional payments earned during the first fiscal year following
the closing. In addition, the former owners of CPM may receive up to $9,166,667
in additional consideration if certain net earnings goals are achieved in the
second and third fiscal years following the closing. CPM is a pain management
practice with four locations in Maryland.

CPM was acquired on December 1, 2004 and utilized the
purchase method of accounting.

Purchase price allocation:

|Cash Consideration                             |  | $ 6,375,000       
|---------------------------------------------- |  | ------------------
|Stock Consideration                            |  | 11,062,500        
|Contingent Consideration                       |  | 4,583,334         
|Acquisition Costs                              |  | 856,859           
|Less:                                          |  |                   
|Cash                                           |  |                  
|Accounts receivable                            |  | 1,200,000         
|Property and equipment                         |  | 500,000           
|Intangible Assets                              |  | 160,721           
|Plus:                                          |  |                   
|Accounts payable and accrued
      liabilities |  | 277,837           
|Goodwill                                       |  | $
      21,294,809

On April 13, 2005, the
Company closed a merger pursuant to a Merger Agreement with its wholly-owned
subsidiary, PainCare Acquisition Company XVII, Inc. (PNAC XVII), and Colorado
Pain Specialists, P.C. (CPS). The Merger Agreement provides for the acquisition
of the non-medical assets of CPS by PNAC XVII, a Florida corporation. In
exchange for the non-medical assets the shareholders of CPS received 653,698
shares of common stock of the Company priced at $3.25 per share and $2,125,000
in cash. In addition, the former owners of CPS may receive up to $4,250,000 in
additional consideration if certain net earnings goals are achieved in each of
the first three fiscal years following the closing. CPS is a pain management
physician practice located in Denver, Colorado.

CPS was acquired on April 13, 2005 and utilized the
purchase method of accounting.

Purchase price allocation:

|Cash
      Consideration                       |  | $
  2,125,000
|---------------------------------------------- |  | -------------
|Stock
      Consideration                      |  | 3,327,805    
|Contingent
      Consideration                 |  |             
|Acquisition
      Costs                        |  | 623,861      
|Deferred
      taxes                           |  | 45,238       
|Less:                                          |  |              
|Cash                                           |  | 27,311       
|Accounts
      receivable                      |  | 322,467      
|Property and
      equipment                   |  | 207,495      
|Prepaid and
      deposits                     |  | 7,555        
|Intangible
      Assets                        |  | 113,094      
|Plus:                                          |  |              
|Accounts
      payable and accrued liabilities |  | 32,748       
|Note payable                                   |  | 180,764      
|Goodwill                                       |  | $
  5,657,494

F-40

---

On May 12, 2005, the
Company closed a securities purchase pursuant to a Securities Purchase Agreement
with its wholly-owned subsidiary, PainCare Surgery Centers I, Inc. (PCSC I), and
the partners of PSHS Alpha Partners, Ltd. d/b/a Lake Worth Surgical Center
(LWSC). Dr. Merrill Reuter, Chairman of the Board of Directors, was a minority
owner of this surgery center prior to the Companys majority interest purchase
and remains a minority owner following the Companys majority interest purchase.
The Securities Purchase Agreement provides for the purchase of 67.5% ownership
of LWSC by PCSC I, a Florida corporation. In exchange for the majority interest
purchase the partners of LWSC received 324,520 shares of common stock and
$6,930,940 in cash. LWSC is a fully accredited ambulatory surgery center located
in Lake Worth, Florida.

Majority interest in LWSC was purchased on May 12,
2005 and utilized the purchase method of accounting.

Purchase price allocation:

|Cash
      Consideration                       |  | $
      6,685,388
|---------------------------------------------- |  | -----------------
|Stock
      Consideration                      |  | 1,531,734        
|Net Working
      Capital Adjustment           |  | 245,552          
|Acquisition
      Costs                        |  | 286,507          
|Less:                                          |  |                  
|Cash                                           |  | 100,401          
|Accounts
      receivable                      |  | 2,090,919        
|Property and
      equipment                   |  | 651,837          
|Prepaids and
      deposits                    |  | 238,079          
|Intangible
      Assets                        |  | 208,573          
|Plus:                                          |  |                  
|Accounts payable and accrued
      liabilities |  | 240,767          
|Lease
      payable                            |  | 175,686          
|Minority
      interests                       |  | 866,054          
|Goodwill                                       |  | $
  6,741,879    

On August 1, 2005, the
Company closed a securities purchase pursuant to a Securities Purchase Agreement
with its wholly-owned subsidiary, PainCare Surgery Centers II, Inc. (PCSC II),
and the partners of PSHS Beta Partners, Ltd. d/b/a Gables Surgical Center (GSC).
The Securities Purchase Agreement provides for the purchase of 73% ownership of
GSC by PCSC II, a Florida corporation. In exchange for the majority interest
purchase the partners of GSC received 868,624 shares of common stock and
$3,282,304 in cash. In addition, the former partners of GSC will receive the
remaining balance of the purchase price in the form of promissory notes for
$1,536,952 plus interest, due in August 2006. GSC is a fully accredited
ambulatory surgery center located in Miami, Florida.

Majority interest in GSC was purchased on August 1,
2005 and utilized the purchase method of accounting.

F-41

---

|Purchase price allocation:                     |  |                  
|---------------------------------------------- |  | -----------------
|                                              
|Cash Consideration                             |  | $ 3,282,304      
|Promissory Notes                               |  | 1,536,952        
|Stock Consideration                            |  | 3,539,740        
|Net Working Capital Adjustment                 |  | 440,259          
|Acquisition Costs                              |  | 287,901          
|Less:                                          |  |                  
|Cash                                           |  | 104,903          
|Accounts receivable                            |  | 2,195,484        
|Property and equipment                         |  | 370,388          
|Inventory                                      |  | 139,375          
|Prepaid and deposits                           |  | 30,209           
|Intangible Assets                              |  | 224,550          
|Deferred taxes                                 |  | 96,235           
|Plus:                                          |  |                  
|Accounts payable and accrued
      liabilities |  | 227,822          
|Lease payable                                  |  | 182,598          
|Minority interests                             |  | 721,043          
|Goodwill                                       |  | $
      7,057,475

On August 9, 2005, the
Company closed a merger pursuant to a Merger Agreement with its wholly-owned
subsidiary, PainCare Acquisition Company XVIII, Inc. (PNAC XVIII), and Piedmont
Center for Spinal Disorders, P.C. (PCSD). The Merger Agreement provides for the
acquisition of the non-medical assets of PCSD by PNAC XVIII, a Florida
corporation. In exchange for the non-medical assets the shareholder of PCSD
received 263,400 shares of common stock and $1,000,000 in cash. In addition, the
former owner of PCSD may receive up to $2,000,000 in additional consideration if
certain net earnings goals are achieved in each of the first three fiscal years
following the closing. PCSD is an orthopedic spine surgery physician practice
located in Danville, Virginia.

|PCSD was
      acquired on August 9, 2005 and utilized the purchase method of
      accounting.
|-----------------------------------------------------------------------------------------------
|                                                                                               
|Purchase price
      allocation:                                                               
|                                                                                               
|Cash
      Consideration                                                                       
|Stock
      Consideration                                                                      
|Acquisition
      Costs                                                                        
|Deferred
    taxes                                                                             
|Less:                                                                                          
|Cash                                                                                           
|Accounts
      receivable                                                                      
|Property and
      equipment                                                                   
|Intangible
      Assets                                                                        
|Plus:                                                                                          
|Capital lease
      obligation                                                                 
|Goodwill                                                                                       

F-42

---

On October 3, 2005, the
Company closed a merger pursuant to a Merger Agreement with its wholly-owned
subsidiary, PainCare Acquisition Company XXIII, Inc. (PNAC XXIII), and Floyd O.
Ring, Jr., M.D., P.C. (RING). The Merger Agreement provides for the acquisition
of the non-medical assets of RING by PNAC XXIII, a Florida corporation. In
exchange for the non-medical assets the shareholder of RING received 349,162
shares of common stock and $1,250,000 in cash. In addition, the former owner of
RING may receive up to $2,500,000 in additional consideration if certain net
earnings goals are achieved in each of the first three fiscal years following
the closing. RING is a pain management physician practice located in Denver,
Colorado.

RING was acquired on October 3, 2005 and utilized the
purchase method of accounting.

Purchase price allocation:

|Cash Consideration     |  | $ 1,250,000      
|---------------------- |  | -----------------
|Stock Consideration    |  | 1,309,358        
|Acquisition Costs      |  | 175,682          
|Deferred taxes         |  | 41,671           
|Less:                  |  |                  
|Cash                   |  | 10,000           
|Accounts receivable    |  | 127,517          
|Property and equipment |  | 400              
|Intangible assets      |  | 104,177          
|Goodwill               |  | $
      2,534,617

On October 14, 2005,
the Company closed a merger pursuant to a Merger Agreement with its wholly-owned
subsidiary, PainCare Acquisition Company XXI, Inc. (PNAC XXI), and Christopher
J. Centeno, M.D., P.C. and Therapeutic Management, Inc., collectively doing
business as The Centeno Clinic (CENTENO). The Merger Agreement provides for the
acquisition of the non-medical assets of CENTENO by PNAC XXI, a Florida
corporation. In exchange for the non-medical assets the shareholder of CENTENO
received 1,132,931 shares of common stock and $3,750,000 in cash. In addition,
the former owner of CENTENO may receive up to $7,500,000 in additional
consideration if certain net earnings goals are achieved in each of the first
three fiscal years following the closing. CENTENO is a pain management physician
practice located in Denver, Colorado.

|CENTENO
      was acquired on October 14, 2005 and utilized the purchase method of
      accounting.
|----------------------------------------------------------------------------------------------------
|                                                                                                    
|Purchase price
      allocation:                                                                    
|                                                                                                    
|Cash
      Consideration                                                                            
|Stock
      Consideration                                                                           
|Acquisition
      Costs                                                                             
|Less:                                                                                               
|Cash                                                                                                
|Property and
      equipment                                                                        
|Prepaids and
      deposits                                                                         
|Intangible
      Assets                                                                             
|Plus:                                                                                               
|Note payable                                                                                        
|Goodwill                                                                                            

During fiscal year
2005, the Company closed six acquisitions with physician practices and
ambulatory surgery centers. The combined goodwill amount resulting from these
six transactions is $31,797,602.

F-43

---

Following are the
summarized unaudited pro forma results of operations for the years ended
December 31, 2005 and 2004 (as restated), assuming all of the acquisitions had
taken place at the beginning of the year. The unaudited pro forma results are
not necessarily indicative of future earnings or earnings that would have been
reported had the acquisitions been completed when assumed.

|Pro Forma Consolidated Statement of Operations            
|----------------------------------------------------------
|Year Ended December 31, 2005                              
|(Unaudited)                                               
|                                                          
|                                                          
|                                                          
|                                                          
|Revenues                                                  
|Cost of revenues                                          
|Gross profit                                              
|Operating expenses:                                       
|General and administrative                                
|Compensation expense                                      
|Depreciation and  amortization
      expense              
|                                                          
|Operating income (loss)                                   
|Interest expense                                          
|Derivative expense                                        
|Other income                                              
|Income (loss) before taxes                                
|Provision for income taxes                                
|Income (loss) before  minority interests
      share     
|Minority interests share                                 
|Net income (loss)                                         
|Basic loss per common  share                              
|Basic weighted average  common shares  outstanding        
|Diluted loss per common  share                            
|Diluted weighted average  common shares 
      outstanding

Footnotes to Unaudited Pro Forma Financial
Statements:

|1) | Adjustment for non-recurring cost of
      sales.                                                          
|-- | -----------------------------------------------------------------------------------------------------------
|2) | Adjustment for non-recurring general and
      administrative expenses.                                    
|3) | Represents the provision for income taxes at
      an effective rate of 35%.                               
|4) | Represents the results from the period
      beginning on January 1, 2005 and ending on March 31, 2005.    
|5) | Represents the results from the period
      beginning on January 1, 2005 and ending on April 30, 2005.    
|6) | Represents the results from the period
      beginning on January 1, 2005 and ending on July 31, 2005.     
|7) | Represents the results from the period
      beginning on January 1, 2005 and ending on July 31, 2005.     
|8) | Represents the results from the period
      beginning on January 1, 2005 and ending on September 30, 2005.
|9) | Represents the results from the period
      beginning on January 1, 2005 and ending on September 30, 2005.

F-44

---

|Pro Forma Consolidated Statement of Operations           
|---------------------------------------------------------
|Year Ended December 31, 2004                             
|(Unaudited)                                              
|                                                         
|                                                         
|                                                         
|                                                         
|Revenues                                                 
|Cost of revenues                                         
|Gross profit                                             
|Operating expenses:                                      
|General and administrative                               
|Compensation expense                                     
|Depreciation and amortization expense                    
|Operating
      income                                   
|Interest expense                                         
|Derivative expense                                       
|Other income                                             
|Income before taxes                                      
|Provision for income taxes                               
|Net income (loss)                                        
|Basic earnings per common share                          
|Basic weighted  average  common shares
      outstanding 
|Diluted earnings per common share                        
|Diluted weighted average  common shares
      outstanding

Footnotes to Unaudited Pro Forma Financial
Statements:

|1) | Adjustment for non-recurring general and
      administrative expenses.                                     
|-- | ------------------------------------------------------------------------------------------------------------
|2) | Represents the provision for income taxes at
      an effective rate of 35%.                                
|3) | Represents the results from the period
      beginning on January 1, 2004 and ending on March 31, 2004.     
|4) | Represents the results from the period
      beginning on January 1, 2004 and ending on April 30, 2004.     
|5) | Represents the results from the period
      beginning on January 1, 2004 and ending on May 31, 2004.       
|6) | Represents the results from the period
      beginning on January 1, 2004 and ending on May 31, 2004.       
|7) | Represents the results from the period
      beginning on January 1, 2004 and ending on June 30, 2004.      
|8) | Represents the results from the period
      beginning on January 1, 2004 and ending on November 30,
  2004.

F-45

---

(4) Due from Shareholder

In 2004 the Company
entered into a contract with Merill Reuter, M.D., chairman of the Companys
board of directors and an approximately 3.0% shareholder. Under the terms of the
contract, which are similar to those entered into with other physicians, the
Company is providing real estate development and construction oversight services
to Dr. Reuter related to a planned medical facility that is intended to be owned
by Dr. Reuter and leased to the Company and others. As of December 31, 2005 and
2004, $427,553 and $406,227, respectively, is due from Dr. Reuter under this
contract.

|(5) | Property and Equipment, net                                     |                    |                  
|--- | --------------------------------------------------------------- | ------------------ | -----------------
|   
|    | Property and equipment, net at December 31, consisted
      of: |                    |                  
|   
|    |                                                                 | 2005               | 2004             
|    | Furniture, fixtures &
      equipment                           | $ 10,744,044       | $ 4,054,017      
|    | Medical equipment                                               | 7,895,215          | 5,334,541        
|    | Total cost                                                      | 18,639,259         | 9,388,558        
|    | Less accumulated depreciation                                   | 7,144,603          | 2,269,493        
|    | Property and equipment, net                                     | $
      11,494,656 | $
      7,119,065

Depreciation expense for the years ended December 31,
2005, 2004 and 2003 amounted to $1,616,316, $837,484 and $463,190,
respectively.

(6)    
Goodwill     In
connection with our acquisitions through December 31, 2005, acquisition
consideration paid exceeded fair value of the assets acquired (including
estimated liabilities assumed as part of the transaction) by $111,468,292. The
excess of the consideration paid over the fair value of the net assets acquired
has been recorded as goodwill. At each balance sheet date, management assesses
whether there has been any permanent impairment in the value of goodwill. The
factors considered by management include trends and prospects as well as the
effects of obsolescence, demand, competition and other economic factors. No
impairment losses have been recognized in any of the periods presented. The
additional goodwill for each consideration payment was as follows:

|                                                   |   |               |   | Contingent    |   | Contingent    |   | Contingent    |   |            
|-------------------------------------------------- | - | ------------- | - | ------------- | - | ------------- | - | ------------- | - | -----------
|                                                   |   | Initial       |   | Consideration |   | Consideration |   | Consideration |   |            
|Company
      Name                                 |   | Consideration |   | Year 1        |   | Year 2        |   | Year 3        |   | Total      
|Advanced Orthopaedics of S. Florida II,
      Inc. | $ | 2,456,658     | $ | 350,000       | $ | 639,834       | $ | 467,075       | $ | 3,913,567  
|Rothbart Pain Management Clinic, Inc.              |   | 834,788       |   | 260,290       |   | 348,330       |   | 754,513       |   | 2,197,921  
|Pain and Rehabilitation Network,
      Inc.        |   | 690,478       |   | 1,133,333     |   | 872,152       |   | 257,400       |   | 2,953,363  
|Medical Rehabilitation Specialists II, Inc.        |   | 3,467,358     |   | 856,558       |   | 959,906       |   | N/A           |   | 5,283,822  
|Associated Physicians Group                        |   | 5,030,025     |   | 1,902,083     |   | 913,409       |   | N/A           |   | 7,845,517  
|Spine and Pain Center                              |   | 1,406,715     |   | 446,547       |   | 416,667       |   | N/A           |   | 2,269,929  
|Health Care Center of Tampa,
      Inc.            |   | 4,010,749     |   | 1,361,915     |   | 1,291,667     |   | N/A           |   | 6,664,331  
|Bone and Joint Surgical Clinic                     |   | 3,215,025     |   | 777,439       |   | 436,667       |   | N/A           |   | 4,429,131  
|Kenneth M. Alo, MD, PA                             |   | 4,243,164     |   | 1,209,350     |   | 1,166,667     |   | N/A           |   | 6,619,181  
|Georgia Pain Physicians & Surgical Centers,
Inc.   |   | 2,147,518     |   | 723,090       |   | N/A           |   | N/A           |   | 2,870,608  
|Dynamic Rehabilitation
    Centers                 |   | 4,230,687     |   | 1,478,923     |   | N/A           |   | N/A           |   | 5,709,610  
|Rick Taylor, DO, PA (Pain Care Clinics)            |   | 4,222,873     |   | 1,217,417     |   | N/A           |   | N/A           |   | 5,440,290  
|Benjamin Zolper, MD, Inc.                          |   | 1,596,660     |   | 581,951       |   | N/A           |   | N/A           |   | 2,178,611  
|The Center for Pain Management                     |   | 16,711,475    |   | 4,583,334     |   | N/A           |   | N/A           |   | 21,294,809 
|Colorado Pain Specialists                          |   | 5,657,494     |   | N/A           |   | N/A           |   | N/A           |   | 5,657,494  
|Lake Worth Surgical Center                         |   | 6,741,879     |   | N/A           |   | N/A           |   | N/A           |   | 6,741,879  
|Gables Surgical Center                             |   | 7,057,475     |   | N/A           |   | N/A           |   | N/A           |   | 7,057,475  
|Piedmont Center for Spinal Disorders               |   | 2,033,839     |   | N/A           |   | N/A           |   | N/A           |   | 2,033,839  
|Floyd O. Ring, Jr., MD, PC                         |   | 2,534,617     |   | N/A           |   | N/A           |   | N/A           |   | 2,534,617  
|Christopher J. Centeno, MD & Therapeutic Mgmt      |   | 7,772,298     |   | N/A           |   | N/A           |   | N/A           |   | 7,772,298  
|Total
      Goodwill                               |   |               |   |               |   |               |   |               | $ | 111,468,292

F-46

---

|The changes in the carrying amount of goodwill for the years ended
      December 31, 2005 and 2004 are as follows: |  |                    |  |                   
|------------------------------------------------------------------------------------------------------------------- |  | ------------------ |  | ------------------
|                                                                                                                   
|                                                                                                                    |  | 2005               |  | 2004              
|Balance, beginning of year                                                                                          |  | $
      61,817,801 |  | $
      26,402,131
|Goodwill acquired during
year                                                                                       |  | 31,797,602         |  | 25,295,437        
|Additional consideration paid for goodwill during the
      year                                                    |  | 17,852,889         |  | 10,120,233        
|Balance, end of year                                                                                                |  | $ 111,468,292      |  | $ 61,817,801      

(7) Other
assets

The Company is a
distributor for the sale of MedX equipment in North America under an agreement
expiring on July 28, 2013. MedX equipment is used to provide orthopedic
rehabilitation services in our owned, managed and limited managed physician
practices. The agreement provides for the Company to repurchase MedXs right to
15% of the gross collections generated by the limited managed orthopedic
rehabilitation practices. In addition, the Company receives a 25% commission on
all MedX products purchased for resale. This contract right is being amortized
over the contract term of ten years. An impairment charge of $47,102 was
recorded during 2005.

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

The Company has costs
associated with closing acquisitions. These costs are on the balance sheet an as
asset until the acquisition is closed, when it is allocated to the acquisition
costs or expensed when a potential acquisition is not closed.

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

|Name of Physicians
      Practice                                                               |  | Purchase Price                                                                                                                                                               
|------------------------------------------------------------------------------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Associated Physicians Group,
      Ltd. (APG), a fully integrated treatment
    practice       |  | $107,500 in cash and 48,643
      shares of common stock, plus contingent payments of up to $215,000 in cash
      and common stock if certain earnings goals are met.       
|
|Statesville Pain Associates,
      P.C. (SPA), a North Carolina professional
      corporation |  | $375,000 in cash and 169,683
      shares of common stock, plus contingent payments of up to
      $750,000 in cash and common stock if certain earnings goals are
      met.
|
|
|Space Coast Pain Institute,
      P.C. (SCPI), a Florida professional
      corporation        |  | $275,000 in cash and 124,434
      shares of common stock, plus contingent payments of up to
      $550,000 in cash and common stock if certain earnings goals are
      met.
|
|

---

|These
      contract rights are being amortized over the contract term of twelve
      years. |                    |                   |                    |                   |                
|--------------------------------------------------------------------------------------------- | ------------------ | ----------------- | ------------------ | ----------------- | ---------------
|                                                                                             
|The table below summarizes the other assets at December 31, 2005
      and 2004:              |                    |                   |                    |                   |                
|                                                                                             
|                                                                                              | 2005               | 2004             
|Asset                                                                                         | Cost               | Amortization      | Net
      Value    | Cost              | Amortization   
|MedX Distribution right                                                                       | $ 2,212,673        | $ 581,831         | $ 1,630,842        | $ 2,212,673       | $ 208,975      
|Deferred acquisition costs                                                                    | 475,958            |                  | 475,958            |                  |               
|Contract Right  DPM                                                                          | 6,026,200          | 677,124           | 5,349,076          | 1,717,600         | 160,540        
|Contract Right  APG                                                                          | 486,023            | 34,452            | 451,571            | 291,667           | 14,667         
|Contract Right  SPA                                                                          | 1,433,132          | 118,657           | 1,314,475          | 1,006,000         | 50,400         
|Contract Right  SCPI                                                                         | 1,051,564          | 87,095            | 964,469            | 738,333           | 37,000         
|Physician practice and surgery
      center                                                   |                    |                   |                    |                   |                
|acquisitions                                                                                  | 2,161,757          | 513,326           | 1,648,431          | 1,395,370         | 266,701        
|Total                                                                                         | $
      13,847,307 | $
      2,012,485 | $
      11,834,822 | $
      7,361,643 | $
      738,283

Amortization of
intangible assets for the years ended December 31, 2005, 2004 and 2003 were
$513,326, $266,701 and $119,047 respectively, and is included in amortization in
the accompanying statement of operations.

|     | Estimated amortization of intangible assets for each of the next
      five years is as follows: |                  
|---- | ------------------------------------------------------------------------------------------------ | -----------------
|     |                                                                                                  | Amortization of  
|     |                                                                                                  | intangible
assets
|2006 |                                                                                                  | 1,472,207        
|2007 |                                                                                                  | 1,470,287        
|2008 |                                                                                                  | 1,449,174        
|2009 |                                                                                                  | 1,448,781        
|2010 |                                                                                                  | 1,429,281        

|(8) | Acquisition Consideration Payable                                                                                              |             |            |                  
|--- | ------------------------------------------------------------------------------------------------------------------------------ | ----------- | ---------- | -----------------
|   
|    | The Company is obligated at December 31, 2005 to pay initial
      and contingent consideration on the following
acquisitions: |            
|   
|    | Company
      Name                                                                                                             | Stock Value | Cash Value | Total            
|    | Pain and Rehabilitation
Network                                                                                                | $ 128,700   | $ 128,700  | $ 257,400        
|    | Center for Pain Management                                                                                                     | 2,291,667   | 2,291,666  | 4,583,333        
|    | Spine and Pain Center                                                                                                          | 208,333     | 208,334    | 416,667          
|    | Health Care Center of Tampa                                                                                                    | 645,833     |           | 645,833          
|    | Bone and Joint Surgical Clinic                                                                                                 | 218,333     | 218,334    | 436,667          
|    | Kenneth M. Alo, M.D., P.A.                                                                                                     | 583,333     | 583,334    | 1,166,667        
|    | Contract Right  APG                                                                                                           | 35,833      | 35,834     | 71,667           
|    | Contract Right  SPA                                                                                                           | 125,000     | 125,000    | 250,000          
|    | Contract Right - SCPI                                                                                                          | 91,667      | 91,666     | 183,333          
|    | Total                                                                                                                          |             |            | $
      8,011,567
|   
|    | The contingent consideration paid in stock represents the
      dollar value of the stock to be paid to the seller.            |             |           

F-48

---

|(9) Long-Term Debt                                                                                                                                                                                                 |                    |                
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ------------------ | ---------------
|                                                                                                                                                                                                                  
|Long-term debt
      consists of the following on December 31:                                                                                                                                                     |                    |                
|                                                                                                                                                                                                                  
|                                                                                                                                                                                                                   | 2005               | 2004           
|                                                                                                                                                                                                                   |                    |                
|Promissory note for Bone and Joint Surgical
      Clinic to financial institution, dated April 13, 2004. Variable interest
      rate currentlyat 7.25%. Originally due on January 20, 2006. Repaid in
      2005. | $         
       | $ 364,715      
|Line of credit for Dr. Kenneth M. Alo to financial institution,
      dated October 17, 2003. Interest is 4% annually.                                                                                             |                   | 145,000        
|Promissory note for PainCare, Inc. to
      financial institution due in monthly payments of $791.49 bearing 6.07%
      interest.Originally due on June 24, 2007. Repaid in 2005.                                 |                   | 25,117         
|Note payable for Dynamic Rehabilitation Centers, Inc. to financial
      institution with monthly payments of $2,535, including principal and
      interest at 8% through July, 2006. Repaid in 2005.             |                   | 36,237         
|Note payable for Dynamic Rehabilitation
      Centers, Inc. to financial institution with monthly payments of $1,928,
      including principal and interest at 5.25% through January, 2009.
      Repaid in 2005. |                   | 77,583         
|Line of credit
      for Rothbart Pain Management Clinic, Inc. to financial institution due on
      demand. Interest rate is Prime plus 2%.                                                                       |                   | 46,393         
|Note payable to vendor that is non-secured for
      Georgia Pain Physicians. Due on demand with 4% interest.                                                                                                      |                   | 79,808         
|Note payable to bank for Rick Taylor, D.O., P.A. with monthly
      payments of $8,761, including principal and interest at 7.0% through
      July, 2007, due upon demand and secured by medical
    equipment.   |                   | 247,737        
|Note payable at Associated Physicians Group
      secured by equipment. Due on demand with 4% interest.                                                                                                            |                   | 38,170         
|Note payable to PSHS Partnership Ventures, Inc. (a)                                                                                                                                                                | 1,305,284          |               
|Note payable to Gary J. Lustgarten Profit
      Sharing and Trust (b)                                                                                                                                              | 271,934            |               
|Note payable to HBK Investments L.P. (c)                                                                                                                                                                           | 28,367,363         |               
|Line of credit payable to Wells Fargo
      (d)                                                                                                                                                                    | 68,000             |               
|                                                                                                                                                                                                                   | 30,012,581         | 1,060,760      
|Less current installments                                                                                                                                                                                          | 3,883,012          | 765,177        
|                                                                                                                                                                                                                   | $26,129,569        | $
      295,583

At December 31, 2005, the aggregate annual principal
payments with respect to the obligations existing at that date as described
above, are as follows:

|Year ending December
      31: |   |           
|------------------------------ | - | ----------
|2006                           | $ | 3,883,012 
|2007                           |   | 4,568,000 
|2008                           |   | 11,750,000
|2009                           |   | 11,500,000
|Thereafter                     |   |          
|Less unamortized discount      |   | 1,688,431 
|                               | $ | 30,012,581

|(a) | Note payable to PSHS Beta Partners, Ltd. due
      on August 1, 2006 without a stated interest rate. Interest is imputed at
      6.25% over the period. The face value is $1,351,458 with unamortized
      discount of $46,174. The total amount amortized to interest expense in
      2005 was $33,324. The note is secured by the Companys interest in PSHS
      Beta Partners, Ltd. The Companys carrying amount of the partnership is
      $1,949,486.             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(b) | Note payable to Gary J. Lustgarten Profit
      Sharing & Trust due on August 1, 2006 without a stated interest rate.
      Interest is imputed at 6.25% over the period. The face value is $281,554
      with unamortized discount of $9,620. The total amount amortized to
      interest expense in 2005 was $6,942. The note is secured by the Companys
      interest in PSHS Beta Partners, Ltd. The Companys carrying amount of the
      partnership is $1,949,486.
|(c) | Note payable to HBK Investments L.P. due on
      November 10, 2006. Interest is either LIBOR + 7.25% or prime + 4.5% at the
      discretion of the Company. Interest payments are due monthly with
      quarterly principal repayments beginning on April 1, 2006. Certain
      mandatory prepayments must be made upon the occurrence of any indebtedness
      other than indebtedness permitted by the                                                                 

F-49

---

agreement, including equipment leases and notes. The
agreement requires compliance with various financial and non-financial covenants
for the Company starting in the second quarter of 2005. The primary financial
covenants pertain to, among other things, minimum EBITDA, minimum Free Cash
Flow, Leverage ratio, and Market Capitalization. The Company for the year end
2005 is in violation of five sections of the agreement. The Company has
financial restatements that violate the No Material Adverse Change clause. This
also caused a violation of the complete disclosure clause. The disclosures over
internal control report one or more material weaknesses. The restatement also
caused a violation of meeting certain SEC laws regarding disclosure obligations.
The Company failed to meet the EBITDA covenant for the quarter ended December
31, 2005. On May 1, 2006, a waiver between the Company and HBK was executed
related to the events of default. The face value of the note is $30,000,000 with
unamortized discount of $1,632,637. The total amount amortized to interest
expense during 2005 was $366,500.

(d) Line of credit payable to Wells Fargo for
equipment at The Centeno Clinic due on January 25, 2007 with prime + 2% interest
payable monthly. The unused portion of the credit line is $82,000. The line of
credit is secured by property for use in the practice.

|(10) Convertible Debt                                                                                                                                                                                                                                                                                                                                              |   |           |   |           |   |           
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | - | --------- | - | --------- | - | ----------
|                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                  
|Convertible debentures consist of the following at December 31,
      2005 and December 31, 2004:                                                                                                                                                                                                                                                                  |   |           |   |           |   |           
|                                                                                                                                                                                                                                                                                                                                                                   |   |           |   | 2005      |   | 2004      
|Face value none and
      $5,000,000 Secured Convertible Term Note, variable rate of prime plus 2%
      (7.5%), due in stated monthlypayments of
      $70,000 to January 2005, $150,000 from February 2005 to January 2006,
      $181,667 from February 2006 to January2007
      and a final payment of $500,000 at maturity on February 24, 2007 (a, c, d, e) | $ |          | $ | 3,478,365
|
|
|Face value none and $5,000,000 Secured
      Convertible Term Note, variable rate of prime plus 2% (7.5%) due in stated
      monthlypayments of $70,000 to February
      2005, $150,000 from March 2005 to February 2006, $181,667 from March 2006
      to February2007 and a final payment of
      $500,000 at maturity on March 22, 2007 (a, c, d, e)        |   |          |   | 3,267,051
|
|
|Face value none and
      $1,500,000 Secured Convertible Term Note, variable rate of prime plus 2%
      (7.5%), due in stated monthlypayments of
      $25,000 to May 2005, $50,000 from June 2005 to May 2006 and $60,000 from
      June 2006 to May 2007; maturesJune 30, 2007
      (a, c, d, e)                                                              |   |          |   | 823,506  
|
|
|Face value $1,500,000 Convertible Debenture, 7.5%, interest due
      quarterly, maturing June 30, 2007 (b, c, d)                                                                                                                                                                                                                                                  |   |           |   | 1,133,877 |   | 1,126,508 
|Face value $8,955,160 and
      $10,000,000 Convertible Debenture, 7.5%, interest due quarterly, maturing
      December 17, 2006(b,
      c,d, e)                                                                                                                                                                                                                 |   | 8,519,131 |   | 7,403,064
|
|                                                                                                                                                                                                                                                                                                                                                                   |   |           |   | 9,653,008 |   | 16,098,494
|Less current maturities                                                                                                                                                                                                                                                                                                                                            |   |           |   | 8,519,131 |   | 2,935,480 
|Convertible debentures                                                                                                                                                                                                                                                                                                                                             |   |           | $ | 1,133,877 | $ | 13,163,014
|                                                                                                                                                                                                                                                                                                                                                                  
|                                                                                                                                                                                                                                                                                                                                                                   |   |           |   | Carrying  |   | Original  
|                                                                                                                                                                                                                                                                                                                                                                   |   |           |   | Value     |   | Terms     
|Scheduled maturities as of December 31,
      2005, are as follows:                                                                                                                                                                                                                                                                                                |   |           |   |           |   |           
|2006                                                                                                                                                                                                                                                                                                                                                               |   |           | $ | 8,519,131 | $ | 14,935,007
|2007                                                                                                                                                                                                                                                                                                                                                               |   |           |   | 1,133,877 |   | 2,731,493 
|                                                                                                                                                                                                                                                                                                                                                                   |   |           | $ | 9,653,008 | $ | 17,666,500

(a)Laurus Financings:
During 2004, the Company entered into a series of three separate financing
agreements (the Laurus Financings) with Laurus Master Fund, Ltd. (Laurus)
whereby the Company issued: (i) Secured Convertible Term Notes in the amounts of
$5,000,000, $5,000,000 and $1,500,000, in February, March and June 2004,
respectively; and (ii) warrants with seven-year terms to

F-50

---

purchase 450,000 (at fixed exercise prices ranging
from $4.24 -$4.92), 550,000 (at fixed exercise prices ranging from $2.88 -$4.18)
and 165,000 (at fixed exercise prices ranging from $3.15 -$3.76) shares of
common stock, in February, March and June 2004, respectively. The Secured
Convertible Term Notes are convertible into common stock at conversion rates of
$3.39, $2.88 and $3.15, relative to the $5,000,000, $5,000,000 and $1,500,000
Secured Convertible Term Notes referred to above.

(b)Midsummer Financings: During 2003 and 2004, the Company entered into a series of two
financing agreements (the Midsummer Financings) with Midsummer Investment,
Ltd. (Midsummer) whereby the Company issued: (i) Convertible Debentures in the
amounts of $10,000,000 and $1,500,000 in December 2003 and June 2004,
respectively,(ii) warrants with four-year terms to purchase 1,263,316 shares of
common stock (at fixed exercise prices ranging from $2.73 -$2.85) and 165,000
shares of common stock (also at fixed exercise prices ranging from $2.73
-$2.85), in December 2003 and June 2004, respectively. The Convertible
Debentures are convertible into common stock at conversion rates of $2.61 and
$3.15, relative to the $10,000,000 and $1,500,000 Convertible Debenture referred
to above.

(c)The Laurus and Midsummer Financings included registration rights and
certain other terms and conditions related to share settlement of the embedded
conversion features and the warrants that the Company has determined are not
within its control. In addition, certain features associated with the
financings, such as anti-dilution protection afforded to Laurus and Midsummer
financing agreements render the number of shares issuable under the Financings
to be indeterminate. In these instances, EITF 00-19, Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Companys Own
Stock, requires allocation of the proceeds between the various instruments and
the derivative elements carried at fair values. The following tabular
presentation reflects the allocation of the proceeds on the financings
dates:

|Holder             |   | Laurus        |   | Laurus     |   | Laurus    |   | Midsummer |   | Midsummer  
|------------------ | - | ------------- | - | ---------- | - | --------- | - | --------- | - | -----------
|Financing Date     |   | February 2004 |   | March 2004 |   | June 2004 |   | June 2004 |   | December 03
|Allocation:        |   |               |   |            |   |           |   |           |   |            
|Warrants           | $ | 583,800       | $ | 718,651    | $ | 270,600   | $ | 196,763   | $ | 1,027,708  
|Conversion feature |   | 781,711       |   | 961,806    |   | 271,905   |   | 201,905   |   | 1,405,000  
|Debt instrument    |   | 3,634,489     |   | 3,319,543  |   | 957,495   |   | 1,101,332 |   | 7,567,292  
|Total proceeds     | $ | 5,000,000     | $ | 5,000,000  | $ | 1,500,000 | $ | 1,500,000 | $ | 10,000,000 

See Note 11 for additional information about the
Companys financial instruments.

The discount to the
debt instruments resulting from the aforementioned allocation is being amortized
through periodic charges to interest expense using the effective interest
method. Effective interest rates used to amortize the Laurus Financing discounts
amounted to 10.13%, 11.28%, and 12.92% for the February, March and June 2004
financings, respectively. Effective interest rates used to amortize the
Midsummer Financing, discounts amounted to 10.94%, and 12.13% for the December
2003 and June 2004 financings, respectively.

The following tabular presentation reflects the
amortization of the debt discounts included in interest for each
instrument:

|Holder                       |   |                     |   |                  |   |                 |   |                    |   |                        |   |          
|---------------------------- | - | ------------------- | - | ---------------- | - | --------------- | - | ------------------ | - | ---------------------- | - | ---------
|Financing Date               |   | LaurusFebruary 2004 |   | LaurusMarch 2004 |   | LaurusJune 2004 |   | MidsummerJune 2004 |   | MidsummerDecember 2003 |   | Total    
|Year ended December 31, 2005 | $ | 248,981             | $ | 244,380          | $ | 141,428         | $ | 105,660            | $ | 956,166                | $ | 1,696,615
|Year ended December 31, 2004 | $ | 497,999             | $ | 477,142          | $ | 94,954          | $ | 56,289             | $ | 764,159                | $ | 1,890,543

(d)During October 2004, the Company sold common stock at values that
activated certain anti-dilution protection reset adjustments to the conversion
features of the Laurus and Midsummer financing

F-51

---

arrangements. On the date of activation, the
conversion prices for the February, March and June 2004 Laurus instruments
adjusted to $3.12, $2.70 and $2.92, respectively. On the date of activation, the
conversion prices for both Midsummer financings adjusted to $1.90. The Company
accounted for the resets as modifications to the debt agreements that did not
require extinguishment and, accordingly, recorded a charge to income in the
amount of $413,123 representing the increase in the values of the embedded
derivative financial instruments arising from the reset.

(e)During the years ended December 31, 2005 and 2004, Laurus converted face
value of $10,520,000 and $374,000, respectively, of Secured Convertible Term
Notes into 3,628,095 and 129,861 common shares, respectively. During the year
ended December 31, 2004, Midsummer converted face value of $1,044,840 into
400,000 shares of common stock.

(11)Derivatives

Fair Value of Financial
Instruments

The fair values of debt
instruments for disclosure purposes only are estimated based upon the present
value of the estimated cash flows at credit risk adjusted interest rates,
ranging from 9.22% to 10.09% for convertible instruments. As of December 31,
2005, estimated fair values and respective carrying values for debt instruments
are as follows:

|Debt Instrument                                   |   | Fair Value |   | Carrying Value
|------------------------------------------------- | - | ---------- | - | --------------
|$1,500,000 Face Value Convertible
      Debenture | $ | 1,554,718  | $ | 1,133,877     
|$8,955,160 Face Value Convertible Debenture       | $ | 9,530,899  | $ | 8,519,131     
|Other indebtedness                                | $ | 39,171,909 | $ | 39,171,909    

Derivative Financial
Instruments

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

The caption Derivative
Liabilities consists of (i) the fair values associated with derivative features
embedded in the Laurus Convertible Secured Term Notes and the Midsummer
Convertible Debentures and (ii) the fair values of the detachable warrants that
were issued in connection with those financing arrangements. In addition, this
caption includes the fair values of other pre-existing derivative financial
instruments that were reclassed from stockholders equity when net-share
settlement was no longer within the Companys control.

F-52

---

The following tabular presentation reflects the
components of derivative financial instruments on the Companys balance sheet at
December 31, 2005 and2004:

|Liabilities:                        |   | 2005       | 2004              
|----------------------------------- | - | ---------- | ------------------
|Embedded derivative instruments     | $ | 6,351,194  | $ 7,239,523       
|Freestanding derivatives (warrants) |   | 6,601,261  | 6,125,012         
|                                    | $ | 12,952,455 | $
      13,364,535

The following tabular presentation reflects the
number of common shares into which the aforementioned derivatives are
indexed:

|Common shares
      indexed:    | 2005      | 2004      
|------------------------------- | --------- | ----------
|Embedded derivative instruments | 5,502,716 | 9,198,875 
|Warrants                        | 2,593,316 | 2,593,316 
|                                | 8,096,032 | 11,792,191

The following tabular presentation reflects the
income (expense) associated with adjustments recorded to reflect the
aforementioned derivatives at fair value:

|Income (expense):               |   | 2005        | 2004         
|------------------------------- | - | ----------- | -------------
|Embedded derivative instruments | $ | (6,579,253) | $ (2,547,803)
|Warrants                        |   | (127,729)   | (846,839)    
|Other warrants                  |   | (348,520)   | 138,270      
|                                | $ | (7,055,502) | $ (3,256,372)

Fair value considerations for derivative financial
instruments:

Freestanding financial
instruments, consisting of warrants are valued using the Black-Scholes-Merton
valuation methodology because that model embodies all of the relevant
assumptions that address the features underlying these instruments. Significant
assumptions included in this model as of December 31, 2005 are as
follows:

|Holder                                                                                       | Laurus             | Laurus             | Laurus             | Midsummer | Midsummer  
|-------------------------------------------------------------------------------------------- | ------------------ | ------------------ | ------------------ | --------- | -----------
|Financing Date                                                                               | February 2004      | March 2004         | June 2004          | June 2004 | December 03
|Exercise prices                                                                              | $ 4.24$4.92       | $ 3.60$4.18       | $ 3.60$3.76       | $ 1.90    | $ 1.90     
|Term (years)                                                                                 | 5.4                | 5.5                | 5.8                | 2.8       | 2.2        
|Volatility                                                                                   | 42.69%             | 42.69%             | 42.69%             | 43.41%    | 41.17%     
|Risk-free rate                                                                               | 4.5%               | 4.5%               | 4.5%               | 4.5%      | 4.5%       
|                                                                                            
|Significant assumptions included in this model as of December 31,
      2004 are as follows: |                    |                    |                   
|                                                                                            
|Holder                                                                                       | Laurus             | Laurus             | Laurus             | Midsummer | Midsummer  
|Financing
      Date                                                                         | February 2004      | March 2004         | June 2004          | June 2004 | December 03
|Exercise prices                                                                              | $
      4.24$4.92 | $
      3.60$4.18 | $
      3.60$3.76 | $ 1.90    | $ 1.90     
|Term (years)                                                                                 | 6.1                | 6.2                | 6.5                | 3.5       | 2.9        
|Volatility                                                                                   | 42.69%             | 42.69%             | 42.69%             | 43.41%    | 41.17%     
|Risk-free rate                                                                               | 4.5%               | 4.5%               | 4.5%               | 4.5%      | 4.5%       

Embedded derivative
instruments consist of multiple individual features that were embedded in the
convertible debt instruments, and compounded into one derivative financial
instrument for financial reporting purposes. These financial instruments are
valued using the Flexible Monte Carlo Simulation methodology because that model
embodies certain other relevant assumptions (including, but not limited to,
interest rate risk, credit risk, and Company-controlled redemption privileges)
that are necessary to value these complex derivatives.

F-53

---

|Significant assumptions included in this model as of December 31,
      2005 and 2004 are as follows: |                     |           
|----------------------------------------------------------------------------------------------------- | ------------------- | ----------
|                                                                                                     
|Holder                                                                                                | Laurus              | Laurus    
|Financing
      Date                                                                                  | February
      2004 | March 2004
|Conversion prices                                                                                     | $  3.12             | $ 2.70    
|Actual term                                                                                           | 2.1                 | 2.2       
|Equivalent term                                                                                       | .9                  | .7        
|Equivalent volatility                                                                                 | 42.00%              | 42.18%    
|Equivalent interest rate                                                                              | 2.14%               | 1.92%     
|Equivalent yield rate                                                                                 | 11.39%              | 14.76%    

Equivalent amounts reflect the net results of
multiple modeling simulations that the Monte Carlo Simulation methodology
applies to underlying assumptions.

(12) Leases

The Company is
currently leasing its MEDX equipment, EDX equipment and IAJP equipment under
capital lease agreements and its offices and clinics under operating leases
which expire at various dates. The capitalized asset cost and accumulated
depreciation at December 31, 2005 and 2004 were:

|                         | 2005        | 2004       
|------------------------ | ----------- | -----------
|Capitalized cost         | $ 4,519,086 | $ 3,120,745
|Accumulated depreciation | (398,832)   | (278,379)  
|Net book value           | $ 4,120,254 | $ 2,842,366

These amounts are included in property and equipment,
net.

Depreciation expense for the leased equipment was
$398,832, $278,379 and $307,453 for the years ended December 31, 2005, 2004 and
2003, respectively.

At December 31, 2005, future minimum annual rental
commitments under noncancellable lease obligations are as follows:

|                                                                    | Capital     | Operating     
|------------------------------------------------------------------- | ----------- | --------------
|Year-ending December
31:                                            | Leases      | Leases        
|2006                                                                | $ 1,880,346 | $
3,267,612   
|2007                                                                | 1,444,492   | 2,701,812     
|2008                                                                | 804,565     | 2,266,080     
|2009                                                                | 399,866     | 1,701,924     
|2010                                                                | 154,464     | 1,526,328     
|Thereafter                                                          |            | 4,531,272     
|Total minimum
      lease payments                                  | $ 4,683,733 | $
  15,995,028
|                                                                   
|Less amounts
      representing interest (at rates of 5.0% to 9.9%) | 591,425     |               
|Present value of net minimum
      lease payments                   | 4,519,086   |               
|Less current
      portion                                          | 1,646,378   |               
|Capital lease obligations 
      long-term                         | $ 2,872,708 |               

Rent expense under
operating leases was $3,252,326, $1,524,888 and $593,616 for the years ended
December 31, 2005, 2004 and 2003, respectively, and is included in general and
administrative expense in the accompanying statement of operations.

F-54

---

|(13)Income Taxes                                                                                                     |             |             |              
|-------------------------------------------------------------------------------------------------------------------- | ----------- | ----------- | -------------
|                                                                                                                    
|The
      income tax provision for the years ended December 31, 2005, 2004 and 2003
      consists of the following: |             |            
|                                                                                                                    
|                                                                                                                     | 2005        | 2004        | 2003         
|Current:                                                                                                             |             |             |              
|Federal                                                                                                              | $ 2,947,496 | $ 3,228,401 | $ 38,785     
|State                                                                                                                | 862,450     | 716,224     | 8,586        
|                                                                                                                     | 3,809,946   | 3,944,625   | 47,371       
|Deferred:                                                                                                            |             |             |              
|Federal                                                                                                              | 243,837     | 381,505     | (3,047,154)  
|State                                                                                                                | 871,896     | 84,457      | (674,575)    
|                                                                                                                     | 1,115,733   | 465,962     | (3,721,729)  
|Total                                                                                                                | $ 4,925,679 | $ 4,410,587 | $ (3,674,358)

Income tax expense
attributable to income before income tax differed from the amount computed by
applying the U.S. Federal income tax rate of 34% to income from operations
before income taxes as a result of the following:

|                                                                 | 2005        | 2004        | 2003         
|---------------------------------------------------------------- | ----------- | ----------- | -------------
|Computed
      expected tax expense                            | $ 59,139    | $ 989,096   | $ (5,153,448)
|Increase (reduction) in
      income tax expense resulting from: |             |             |              
|Derivative
      expense                                         | 2,398,871   | 1,107,166   | 1,079,079    
|Derivative interest
      expense                                | 576,849     | 634,981     | 14,746       
|State income
      taxes, net of federal income tax benefit      | 730,150     | 528,450     | (439,553)    
|Compensation  incentive
      stock options                     | 570,163     | 261,345     | 717,698      
|Assets
      acquired with no tax basis                          | 323,104     | 544,698     |             
|Other, net                                                       | 211,620     | 174,851     | 107,120      
|Other state
      taxes                                          | 50,742      |            |             
|Unamortized deferred
      taxes                                 | 26,055      |            |             
|Penalties and
      interest on amended returns                  |            | 170,000     |             
|Income for foreign
      subsidiary, net                         | (73,935)    |            |             
|Amortization
      of acquisition intangibles                    | 56,922      |            |             
|Total                                                            | $ 4,925,679 | $ 4,410,587 | $ 3,674,358  

The tax effects of
temporary differences that give rise to significant portions of the deferred tax
expense for the years ended December 31, 2005, 2004 and 2003 are presented
below:

|                                                                                        | 2005        | 2004        | 2003         
|--------------------------------------------------------------------------------------- | ----------- | ----------- | -------------
|Deferred tax
      expense (benefit):                                                   |             |             |              
|Non-cash accrued
      compensation expense                                             | $ 378,974   | $ (171,152) | $ (4,682,948)
|Property and
      equipment, primarily due to accelerated depreciation                 | 268,680     | 438,630     | 262,593      
|Amortization of the excess
      of purchase price over fair value of assets acquired   | 918,477     | 164,053     | 185,067      
|Amortization
      of unstated interest on deferred, contingent purchase price payments | 147,497     | 118,701     |             
|Net operating loss
      carryforward                                                   |            |            | 202,202      
|Allowance for
      doubtful accounts                                                   | (613,446)   | (137,555)   |             
|Other                                                                                   | 98,456      | 82,000      | 82,001       
|Deferred state
      income taxes                                                       | (82,905)    | (28,715)    | 229,356      
|Total                                                                                   | $ 1,115,733 | $ 465,962   | $ (3,721,729)

F-55

---

Significant components of the Companys net deferred
tax asset at December 31, 2005 and 2004 are presented in the following
table:

|                                                    | 2005       | 2004       
|--------------------------------------------------- | ---------- | -----------
|Deferred tax
      assets                           |            |            
|Allowance for doubtful
      accounts               | $624,638   | $ 130,000  
|Employee
      compensation and retirement benefits | 3,945,886  | 4,163,327  
|Gross deferred tax
      assets                     | 4,570,524  | 4,293,327  
|Deferred tax
      liabilities                      |            |            
|Fixed assets                                        | 1,182,294  | 939,308    
|Intangibles                                         | 1,058,900  | 294,831    
|State income taxes                                  | 95,603     | 84,021     
|Other                                               | 682,482    | 308,189    
|Gross deferred tax
      liabilities                | 3,019,279  | 1,626,349  
|Net deferred
      tax assets                       | $1,551,245 | $ 2,666,923

In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will be
realized. Management considers the projected future taxable income and tax
planning strategies in making this assessment. The Company believes that future
earnings in addition to the amount of the taxable differences, which will
reverse in future periods, will be sufficient to offset recorded deferred tax
assets and, accordingly, a valuation allowance is not considered necessary at
December 31, 2005, 2004 and 2003.

(14)Stock Options
and Warrants

The Companys Board of
Directors has adopted the 2000 Stock Option Plan and the 2001 Stock Option Plan
(the Plans) which authorize the issuance of up to 10,000,000 shares of the
Companys common stock to employees, non-employees and Directors. Options
granted under the Plans are exercisable up to 10 years from the grant date at an
exercise price of not less than the fair market value of the common stock on the
date of grant.

Notwithstanding, the
term of an incentive stock option granted under the Plan to a shareholder owning
more than 10% of the voting rights may not exceed 5 years, and the exercise
price of an incentive stock option granted to such shareholder may not be less
than 110% of the fair market value of the common stock on the date of
grant.

The number of shares,
terms, vesting and exercise period of options and warrants granted under the
Plans are determined by the Companys Board of Directors on a case-by-case
basis.

Stock options and warrants granted, exercised and
expired during the years ended December 31, 2005, 2004 and 2003 are as
follows:

F-56

---

|                                       | Options   | Warrants
|-------------------------------------- | --------- | --------
|                                      
|                                       |           |         
|                                       |           |         
|                                       | Number    |         
|Outstanding,
      December 31, 2002   | 4,374,000 | $       
|Granted in
    2003                    | 3,585,000 | $       
|Exercised in
      2003                | (205,000) |         
|Forfeited in
      2003                |          |         
|Outstanding,
      December 31, 2003   | 7,754,000 | $       
|Granted in
    2004                    | 2,065,000 | $       
|Exercised in
      2004                | (312,673) | $       
|Forfeited in
      2004                | (46,577)  | $       
|Outstanding,
      December 31, 2004   | 9,459,750 | $       
|Granted in
    2005                    | 1,120,000 | $       
|Exercised in
      2005                | (724,975) | $       
|Forfeited in
      2005                | (102,625) | $       
|Outstanding,
      December 31, 2005   | 9,752,150 | $       
|Exercisable at December 31,
      2005 | 6,725,482 | $       

|(a)                                                                                                                               | includes 25,000 warrants issued to employees.
|--------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------
|The following table summarizes
      information for options and warrants outstanding and exercisable at
      December 31, 2005:
|                                                                                                                                 

|                     |             | Weighted         | Number      | Weighted        
|-------------------- | ----------- | ---------------- | ----------- | ----------------
|                     |             | Average          | Outstanding | Average         
|                     | Number      | Remaining        | and         | Remaining       
|Exercise Price       | Outstanding | Life             | Exercisable | Life            
|Stock
      Options: |             |                  |             |                 
|$0.25-$1.00          | 3,177,150   | 1.60 years       | 3,177,150   | 1.60
years      
|$1.01-$2.00          | 3,070,000   | 2.89
      years | 1,015,000   | 2.95
      years
|$2.01-$3.00          | 1,805,000   | 2.88 years       | 1,270,000   | 3.49
years      
|$3.01-$4.00          | 1,385,000   | 3.84
      years | 1,043,332   | 3.79
      years
|$4.01-$5.00          | 290,000     | 4.25 years       | 195,000     | 4.18
years      
|$5.01-$6.00          | 25,000      | 4.01
      years | 25,000      | 4.01
      years
|Total                | 9,752,150   | 2.50
      years | 6,725,482   | 2.90
      years
|Warrants:            |             |                  |             |                 
|$0.25-$1.00          | 163,500     | 1.17 years       | 163,500     | 1.17
years      
|$1.01-$2.00          | 1,760,816   | 1.80
      years | 1,760,816   | 1.80
      years
|$2.01-$3.00          | 25,000      | 1.17 years       | 25,000      | 1.17
years      
|$3.01-$4.00          | 646,000     | 5.37
      years | 646,000     | 5.37
      years
|$4.01-$5.00          | 584,000     | 5.44 years       | 584,000     | 5.44
years      
|$5.01-$6.00          |            | 
      years    |            | 
      years   
|Total                | 3,179,316   | 2.87 years       | 3,179,316   | 2.87 years      

The weighted-average
grant-date fair value of options and warrants granted during the years ended
December 31, 2005, 2004 and 2003 approximated $3.82, $2.52 and $2.06,
respectively.

F-57

---

(15) Commitments and
Contingencies

The Company has entered
into amended five-year employment agreements with its Chief Executive Officer,
Chief Financial Officer and President requiring aggregate annual salaries of
$910,000 beginning in August 2005.

(16) Comprehensive
Income (Loss)

SFAS No. 130,
Reporting Comprehensive Income, establishes a standard for reporting and
displaying comprehensive income and its components within the financial
statements. Comprehensive income includes charges and credits to stockholders
equity that are not the result of transactions with shareholders. Comprehensive
income is composed of two subsets  net income and other comprehensive income.
Included in other comprehensive income (loss) for the Company are cumulative
translation adjustments. These adjustments are accumulated within stockholders
equity.

Comprehensive income is as follows:

|                                   | 2005          | 2004          | 2003              
|---------------------------------- | ------------- | ------------- | ------------------
|Net
      loss                     | $
(5,339,378) | $
(1,501,482) | $
    (11,482,843)
|Foreign currency
      translation | 16,251        | 30,415        | 24,260            
|Comprehensive
      income         | $ (5,323,127) | $ (1,471,067) | $ (11,458,583)    

F-58

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(17) Summarized Quarterly Data
(Unaudited)

Following is a summary
of the quarterly results from operations for the years ending December 31, 2005,
2004 and 2003. All amounts, except per share data, are in thousands.

|                                                         | 2005                                       
|-------------------------------------------------------- | -------------------------------------------
|                                                         | (In thousands, except per
      share data)
|                                                         | Q1                                         
|Net
      revenue                                        | $ 14,237                                   
|Income (loss) from
      operations                      | (14,191)                                   
|Net income
      (loss)                                  | $ (27,764)                                 
|Basic earnings (loss) per
      common share             | $ (0.63)                                   
|Diluted
      earnings (loss) per common share           | $ (0.63)                                   
|Basic weighted average
      common shares outstanding   | 44,413                                     
|Diluted
      weighted average common shares outstanding | 44,413                                     
|                                                         | 2004                                       
|                                                         | (In
      thousands, except per share data)
|                                                         | Q1                                         
|Net
      revenue                                        | $ 6,860                                    
|Income (loss) from
      operations                      | 3,808                                      
|Net income
      (loss)                                  | $ 3,442                                    
|Basic earnings (loss) per
      common share             | $ 0.13                                     
|Diluted
      earnings (loss) per common share           | $ 0.11                                     
|Basic weighted average
      common shares outstanding   | 27,377                                     
|Diluted
      weighted average common shares outstanding | 32,663                                     
|                                                         | 2003                                       
|                                                         | (In
      thousands, except per share data)
|                                                         | Q1                                         
|Net
      revenue                                        | $ 2,498                                    
|Income (loss) from
      operations                      | (3,625)                                    
|Net income
      (loss)                                  | $ (2,951)                                  
|Basic earnings (loss) per
      common share             | $ (0.18)                                   
|Diluted
      earnings (loss) per common share           | $ (0.18)                                   
|Basic weighted average
      common shares outstanding   | 16,837                                     
|Diluted
      weighted average common shares outstanding | 16,837                                     

F-59

---

(18) Earnings Per Share

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

|                                                                                            | For the Years Ended
|------------------------------------------------------------------------------------------- | -------------------
|                                                                                            | December 31,       
|                                                                                            | 2005               
|Basic earnings per common share:                                                            |                    
|Net income available to common shareholders                                                 | $
      (5,339,378)
|Basic weighted average common shares
      outstanding                                      | 51,316,562         
|Basic earnings per common share                                                             | $
      (0.10)     
|Diluted earnings per common share:                                                          |                    
|Net income available to common shareholders                                                 | $
      (5,339,378)
|Plus impact of assumed conversions                                                          |                    
|Interest expense on 7.5% convertible note due 2006, net of
      tax                        |                   
|Interest expense on 7.5% convertible note due
      2007, net of tax                        |                   
|Interest expense on 7.5% convertible note due 2007, net of
      tax                        |                   
|Net income available to common shareholders
      plus assumed conversions                  | $ (5,339,378)      
|Basic weighted average common shares outstanding plus incremental
      shares from assumed |                    
|conversions                                                                                 | 51,316,562         
|7.5% convertible note due 2006                                                              |                   
|7.5% convertible note due 2007                                                              |                   
|7.5% convertible note due 2007                                                              |                   
|Employee stock option plan for vested, in the
      money options                           |                   
|Warrants issued, outstanding, and in the money                                              |                   
|Contingent shares for acquisitions                                                          |                   
|Initial shares for acquisitions, weighted                                                   |                   
|Diluted weighted average common shares
      outstanding                                    | 51,316,562         
|Diluted earnings per common share                                                           | $
      (0.10)     

Potentially dilutive
shares for the years ended December 31, 2005, 2004 and 2003, of approximately
13,000,220 shares, 9,975,416 shares and 3,194,810 shares, respectively, were not
included diluted weighted average common shares outstanding for the diluted per
share calculation because their effect would be anti-dilutive.

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

(19)Related Party
Transactions

During the years ended
December 31, 2005, 2004 and 2003, the Company had transactions with companies
owned by certain shareholders of the Company. The following is a summary of
transactions with these entities:

F-60

---

|                                            |                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | Expense related to the years ended December 31:
|------------------------------------------- | ----------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -----------------------------------------------
|Practice Name                               | Type of Practice        | Type of Related Party Transaction                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | 2005                                           
|Associated
      Pysicians  Group, Ltd      | Managed 
      Practice | The Company leases its office
      space from a limited liability company partially owned by a certain
      shareholder of the Company. The lease commenced January 1, 2005 for
      an initial term of ten years with the option to renew for two five
      year periods.                                                                                                                                                                                                                                                                                                                                                                                                                                                                            | $
      108,255                                
|The Center for Pain 
      Management, LLC  | Managed  Practice       | The Company leases certain employees from a
      limited liability company owned by certain shareholders of the
      Company. The Company also charged this entity for the use of its
      equipment and certain services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             | $ 674,432                                      
|                                            |                         | The Company has an agreement
      to outsource its billing and collections function to a limited
      liability company owned by certain shareholders of the Company. The
      Company is charged a fee of 8% of net collections under this
      arrangement.  * (A)  * (B)                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | $ 836,562                                      
|Dynamic
      Rehabilitation  Centers, Inc. | Managed 
      Practice | The Company leases its office space from a
      limited liability company partially owned by certain shareholders of
      the Company. The lease associated with the Redford location has a ten
      year term commencing January 1, 2000 with no option to renew.The
      lease associated with the Clinton Township location commenced October
      8, 2004 and expires December 31, 2014.The lease was amended in July
      2005 for the occupancy of additional space by the Company.                                                                                                                                                                                                                                                           | $ 182,751                                      
|                                            |                         | The Company provides services
      for billing, accounting and management oversight to a limited
      liability company owned by certain shareholders of the Company. 
      * (C)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      | $
      885,471                                
|Health Care Center
      of  Tampa, Inc     | Owned 
      Practice   | The Company has an agreement to outsource its
      billing and collections function to a limited liability
      company owned by a certain shareholderof the Company. The
      Company is charged a fee of 10% of net collections under
      this arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        | $ 272,708                                      
|Rick
      Taylor, D.O., P.A.               | Managed  Practice       | The Company has an agreement
      to lease an aircraft from a limited liability company
      owned by a certain shareholder of the Company.The lease
      agreement was entered into in June 2003 for a period of 60 months. Effective January 1, 2005, the lease payment was lowered to
      anominal amount of $1 per year; the Company will continue to
      pay a  third party provider for the related fuel and maintenance
      cost. Effective January 1, 2004 the lease fee was
      reduced from the originalamount of $12,000 per month to
      $7,000 per month; maintenance, fuel, insurance recurring
      training, hangar rental and any other fees requiredto
      maintain the aircraft were the responsibility of the Company | $
      1                                      
|Spine and Pain
      Center,  P.C.          | Managed 
      Practice | The Company leases its office space from a
      limited liability company partially owned by certain
      shareholders of the Company. The leasecommenced December 23,
      2003 and expires December 31, 2008, with no option to
      renew.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         | $ 99,996                                       
|                                            |                         | The Company, through a
      subsidiary, is the majority partner of the PSHS Alpha
      Partners, Ltd. Partnership Dr. Merrill Reuter , theCompanys
      chairman, is a minority partner of partnership. The Company owns 67.5% and Dr. Reuter owns 9.75% of the
      partnership.Dr. Reuter received distributions from the
      partnership of $131,625  representing his share of the profits of
      the surgery center for the period between May 12, 2005
      and December 31, 2005. These distributionsare reported as
      minority interest on the balance sheet.                                                                                                                                                                       | $
      131,625                                

---

|(A) | The Company has the option to purchase a
      Competitive Business Opportunity (CBO) from shareholders of the Company
      who are currently operating a competitive rehabilitation clinic that fall
      outside a ten mile radius from the Center for Pain Management, LLC
      clinics. The Company has an option to purchase the CBO at market rates
      similar to the original acquisition. There is no guarantee that the option
      will be exercised by the Company, nor is the purchase price discounted for
      the Company should they chose to execute the option to purchase.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(B) | The Company has the option to purchase a
      Competitive Business Opportunity (CBO) from shareholders of the Company
      who are currently operating a competitive surgery center that fall outside
      a ten mile radius from the Center for Pain Management, LLC clinics. The
      Company has an option to purchase the CBO at market rates similar to the
      original acquisition. There is no guarantee that the option will be
      exercised by the Company, nor is the purchase price discounted for the
      Company should they chose to execute the option to purchase.       
|(C) | The Company has the option to purchase a
      Competitive Business Opportunity (CBO) from shareholders of the Company
      who are currently operating competitive rehabilitation clinics that fall
      outside a ten mile radius from the Dynamic Rehabilitation Centers, Inc.
      The Company has an option to purchase the CBO at market rates similar to
      the original acquisition. There is no guarantee that the option will be
      exercised by the Company, nor is the purchase price discounted for the
      Company should they chose to execute the option to purchase.     

(20)Subsequent
Events

Acquisitions

On February 1, 2006,
the Company acquired controlling interest of Amphora, LLC (Amphora), an
intraoperative monitoring company located in Denver, Colorado. The initial
portion of the purchase price consisted of $3,250,000 plus 1,035,032 common
shares. In addition, the Company will pay the shareholders of Amphora an
additional $8,500,000 in four annual payments (50% cash and 50% common stock
priced at market) subject to the satisfaction of certain earnings
goals.

All acquisition earnout
payments earned in fiscal 2005 were paid by December 31, 2005, except the
following: Andrea Trescot, M.D., Christopher Cenac, M.D., Kenneth Alo, M.D.,
Michael Martire, M.D., Saqib Bashir Khan, M.D., Prabaal Dey, M.D., Marc Loev,
M.D., Lester Zuckerman, M.D., Michael Daly, M.D., Mark Coleman, M.D., and Ali
El-Mohandes, M.D. These amounts are included in Note 9, Acquisition
Consideration Payable.

On January 3, 2006, the
Company acquired Center for Pain Management ASC, LLC (CPMASC), a fully
accredited ambulatory surgical center with four locations in Maryland. The
initial portion of the purchase price consisted of $3,750,000 plus 1,021,942
common shares. The Company will pay the balance of the consideration, $7,500,000
in cash, one year from the acquisition date.

On January 6, 2006, the
Company acquired the non-medical assets of REC, Inc. and CareFirst Medical
Associates, P.A. (CMA), a pain management and orthopedic rehabilitation practice
with two locations in East Texas. The initial portion of the purchase price
consisted of $625,000 plus 191,131 common shares. In addition, the Company will
pay the shareholders of CMA an additional $1,250,000 in three equal annual
payments (50% cash and 50% common stock priced at market) subject to the
satisfaction of certain earnings goals and the payment of the management fee to
the Company.

On January 20, 2006,
the Company acquired the non-medical assets of Desert Pain Medicine Group
(DPMG), a pain management practice with three locations in California. The
initial portion of the purchase price consisted of $1,500,000 plus 471,698
common shares. In addition, the Company will pay the shareholders of DPMG an
additional $3,000,000 in three equal annual payments (50% cash and 50% common
stock priced at market) subject to the satisfaction of certain earnings goals
and the payment of the management fee to the Company.

F-62

---

Private Placement

On January 30, 2006,
the Company and a group of accredited investors closed a private placement of
3,305,033 shares of the Company's common stock at a purchase price of $3.10 per
share, for gross proceeds of approximately $10,245,602. In addition, the private
placement investors were granted warrants to purchase up to an additional
1,349,884 shares of common stock at $3.45 per share.

(21)Litigation

Securities Litigation and Derivative
Actions

On March 21, 2006, Roy
Thomas Mould filed a complaint under Sections 10(b) and 20(a) of the Securities
Exchange Act of 1934 against the Company, as well as the Company's chief
executive officer and chief financial officer, before the United States District
Court for the Middle District of Florida. The complaint is entitledMould v. PainCare Holdings, Inc., et al., Case No. 06-CV-00362-JA-DAB. Mr. Mould alleges material
misrepresentations and omissions in connection with the Company's financial
statements which appear to relate principally to the Company's previously
announced intention to restate certain past financial statements. Mr. Mould
seeks unspecified damages and purports to represent a class of shareholders who
purchased the Company's common stock from August 27, 2002 to March 15, 2006.
Eight additional complaints were filed shortly afterward before the same court
which recite similar allegations. (collectively, the "Securities Litigation").
The Company cannot predict the outcome of the Securities Litigation, but
believes that the allegations lack merit and will vigorously defend against
them.

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

On March 30, 2006, a
purported shareholder of the Company made a demand on the Companys board of
directors. This demand raises many if not all of the same issues as the
Derivative Action, but asks the independent directors to investigate the charges
and to take "legal action against those individuals responsible." The Company is
in the process of reviewing this demand.

Other Matters

The Company and one of
its subsidiaries are defendants in a lawsuit arising from business operations.
It is the opinion of management that the final outcome of this matter will not
materially affect the consolidated financial position of the Company.

All of the above legal
actions have been referred to outside legal counsel. Counsel has advised the
Company that it is unable to opine on the likelihood of an unfavorable outcome;
therefore, the Companys

F-63

---

financial statements are affected by an uncertainty
the outcome of which is not susceptible of reasonable estimation. Consequently
the accompanying consolidated financial statements do not include an accrual for
any loss that may result from the ultimate outcome of these actions. The
ultimate outcome of these matters may have a material effect on the financial
position and/or the results of operations for the Company.

(22)     Retirement
Plans

Some of the physician
practices that have management contracts with the Company sponsor separate
tax-qualified retirement plans benefiting their employees. Contributions made by
the physician practices to these plans for the years ended December 31, 2005,
2004 and 2003 were $541,298, $19,564 and $1,291, respectively. A possibility
exists that changes in employee demographics may require the Company to make
additional retirement contributions in order to maintain the qualified status of
these plans. Management is unable to ascertain the amount of a loss accrual that
may be needed, or whether such losses, if any, could be material.

(23)Operating
Segment and Geographic Information

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

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

|                                                  | December 31, 2005 (in thousands)      
|------------------------------------------------- | --------------------------------------
|                                                  |                                       
|                                                  | Pain Mg mt                            
|Revenues                                          | $ 43,269                              
|Gross profit                                      | 36,632                                
|General and
      administrative expenses         | 17,086                                
|Compensation
      expense-variable stock options |                                      
|Amortization                                      | 550                                   
|Depreciation                                      | 478                                   
|Operating
      income (loss)                     | $ 18,518                              
|                                                 
|                                                  | December 31, 2004 (in
      thousands)
|                                                  |                                       
|                                                  | Pain Mgmt                             
|Revenues                                          | $ 22,317                              
|Gross
      profit                                | 18,249                                
|General and administrative
      expenses         | 8,002                                 
|Compensation
      expense-variable stock options |                                      
|Amortization                                      |                                      
|Depreciation                                      | 132                                   
|Operating income
      (loss)                     | $ 10,115                              

F-64

---

|                                            | December 31, 2003 (in
      thousands)
|------------------------------------------- | --------------------------------------
|                                            |                                       
|                                            | Pain Mgmt                             
|Revenues                                    | $ 6,117                               
|Gross profit                                | 3,718                                 
|General and administrative expenses         | 2,168                                 
|Compensation expense-variable stock options |                                      
|Amortization                                |                                      
|Depreciation                                | 17                                    
|Operating income (loss)                     | $ 1,533                               

Pain management
revenue, expense and income are attributable to five owned and nine managed
practices that primarily offer physician services for pain management and
physiatry. With respect to one of our managed practices, we only include the
revenue recognized from management fees earned. Surgery revenue, expense and
income are attributable to two owned and one managed practice that offer
surgical physician services, including minimally invasive spine surgery.
Ancillary services revenue, expense and income are attributable to two managed
practices that primarily offer orthopedic rehabilitation services and 34
practices under limited management agreements, including orthopedic
rehabilitation, electrodiagnostic medicine, intra-articular joint therapy and
real estate services. We do not separate financial results for our Canadian
subsidiary, since our operations outside of the U.S. are immaterial to our total
operations.

F-65

---