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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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FORM 10-K



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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



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PAINCARE HOLDINGS, INC.

(Exact name of Registrant as specified in its charter)



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|                                                            |  |                                     
|----------------------------------------------------------- |  | ------------------------------------
|Florida                                                     |  | 06-1110906                          
|(State or other jurisdiction of incorporation organization) |  | (I.R.S. Employer Identification No.)
|                                                            | 
|1030 N. Orange Avenue, Suite 105, Orlando, Florida          |  | 32801                               
|(address of principal executive offices)                    |  | (zip code)                          

(407) 367-0944

(Registrants telephone number, including area code)

Securities registered pursuant to
Section 12(b) of the Act:



|                               |  |                                          
|------------------------------ |  | -----------------------------------------
|Title of each class            |  | Name of each exchange on which registered
|Common Stock, $.0001 par value |  | American Stock Exchange                  

Securities registered pursuant to Section 12(g) of the Act:

NONE



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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

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  x    Non-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.



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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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TABLE OF CONTENTS



|           |  |                                                                                                              |  |   
|---------- |  | ------------------------------------------------------------------------------------------------------------ |  | --
|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                                                                                                          



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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.



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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
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 at www.paincareholdings.com. Our website address is included as an inactive textual reference only.

Recent Developments

Acquisitions

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:



|                                                                                                                                                                                          |  |                           |  |                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Nature of Business                                                                                                                                                               |  | EffectiveDate 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, plus contingent payments of up to $7,500,000 in cash and common stock if certain performance
goals are met.



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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 Background

Acute 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.



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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.
| | - |  | -------------------------------------------------------------------------------------



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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 Annuloplasty orIDET, 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



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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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|                                                               |  |                 |  |                              |  |                                  |  |                                                                                                                                                 
|-------------------------------------------------------------- |  | --------------- |  | ---------------------------- |  | -------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------
|Practice Name                                                  |  | Location        |  | EffectiveDate 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               |  | OrthopedicRehabilitation         |  | 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 AmbulatorySurgical Centers |  | N/A                                                                                                                                             
|                                                               |  |                 |  |                             
|Dynamic Rehabilitation Centers (M)                             |  | Detroit, MI     |  | June 1, 2004                 |  | OrthopedicRehabilitation         |  | 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 AmbulatorySurgical Center    |  | N/A                                                                                                                                             



|                                                                      |  |                  |  |                  |  |                                 |  |                                                                                                   
|--------------------------------------------------------------------- |  | ---------------- |  | ---------------- |  | ------------------------------- |  | --------------------------------------------------------------------------------------------------
|PSHS Beta Partners, Ltd. d/b/a Gables Surgical Center (O)             |  | Miami, FL        |  | August 1, 2005   |  | One AmbulatorySurgical 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 AmbulatorySurgical 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.



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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 is www.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
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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 part of a periodic review by the Division of
Corporation Finance of the SEC of our Annual Report on Form 10-KSB for the year ended December 31, 2004, we received and responded to a number of SEC staff comments. As of May 26, 2006 certain of the SEC comments remain unresolved and pertain
to 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.



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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                                             |  | LeaseExpiration |  | Approx. Square Feet |  | Monthly RentAmount
|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.



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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 entitled Mould v. PainCare Holdings, Inc., et al., Case
No. 06-CV-00362-JA-DAB. Mr. Mould alleges material misrepresentations and omissions in connection with the Company's financial statements which appear to relate principally to the Company's previously announced intention to restate certain
past financial statements. Mr. Mould seeks unspecified damages and purports to represent a class of shareholders who purchased the Company's common stock from August 27, 2002 to March 15, 2006. 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



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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         |      | Low
|CALENDAR 2004                        |  |              |      |     |   |     
|Quarter ending March 31, 2004        |  | $            | 3.60 |     | $ | 2.48
|Quarter ending June 30, 2004         |  | $            | 3.44 |     | $ | 2.25
|Quarter ending September 30, 2004    |  | $            | 3.45 |     | $ | 1.95
|Quarter ending December 31, 2004     |  | $            | 3.19 |     | $ | 1.90
|CALENDAR 2005                        |  |              |      |     |   |     
|Quarter ending March 31, 2005        |  | $            | 5.22 |     | $ | 2.90
|Quarter ending June 30, 2005         |  | $            | 5.45 |     | $ | 3.75
|Quarter ending September 30, 2005    |  | $            | 4.49 |     | $ | 3.50
|Quarter ending December 31, 2005     |  | $            | 4.21 |     | $ | 3.05
|CALENDAR 2006                        |  |              |      |     |   |     
|Quarter ending March 31, 2006        |  | $            | 3.74 |     | $ | 1.40
|Quarter to date ending June 30, 2006 |  | $            | 2.06 |     | $ | 1.45

The last sale price of our common stock on May 26, 2006 as reported on the
American Stock Exchange was $1.42 per share.



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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:



|                                                                                                                                                                                          |  |                           |  |                                                                                                                                                                                
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name and Nature of Business                                                                                                                                                               |  | EffectiveDate 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, plus contingent 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.



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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



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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                                  |         |   | 2004 (Restated) |   |         | 2003(Restated) | 
|                                                      |  | (in thousands, expect per share data) |        
|Consolidated Statement of Operations Data:            |  |                                       |         |   |                 |   |         |                |  |   |         |  
|Revenues:                                             |  |                                       |         |   |                 |   |         |                |  |   |         |  
|Pain management                                       |  | $                                     | 43,269  |   |                 | $ | 22,317  |                |  | $ | 6,117   |  
|Surgeries                                             |  |                                       | 6,165   |   |                 |   | 5,203   |                |  |   | 3,431   |  
|Ancillary services                                    |  |                                       | 19,230  |   |                 |   | 10,398  |                |  |   | 5,433   |  
|                                                      |  |                                       |         |   |                 |   |         |                |  |   |         |  
|Total revenues                                        |  |                                       | 68,664  |   |                 |   | 37,918  |                |  |   | 14,981  |  
|                                                      |  |                                       |         |   |                 |   |         |                |  |   |         |  
|Cost of revenues                                      |  |                                       | 12,471  |   |                 |   | 6,664   |                |  |   | 4,587   |  
|                                                      |  |                                       |         |   |                 |   |         |                |  |   |         |  
|Gross profit                                          |  |                                       | 56,193  |   |                 |   | 31,254  |                |  |   | 10,394  |  
|General and administrative                            |  |                                       | 38,085  |   |                 |   | 20,052  |                |  |   | 7,782   |  
|Compensation expense                                  |  |                                       | 2,382   |   |                 |   | 357     |                |  |   | 13,533  |  
|Amortization expense                                  |  |                                       | 1,529   |   |                 |   | 549     |                |  |   | 114     |  
|Depreciation expense                                  |  |                                       | 1,616   |   |                 |   | 837     |                |  |   | 463     |  
|                                                      |  |                                       |         |   |                 |   |         |                |  |   |         |  
|                                                      |  |                                       |        
|Operating income (loss)                               |  |                                       | 12,581  |   |                 |   | 9,459   |                |  |   | (11,498 | )
|Interest expense                                      |  |                                       | (5,796  | ) |                 |   | (3,464  | )              |  |   | (531    | )
|Derivative expense                                    |  |                                       | (7,056  | ) |                 |   | (3,256  | )              |  |   | (3,174  | )
|Other income                                          |  |                                       | 445     |   |                 |   | 170     |                |  |   | 46      |  
|                                                      |  |                                       |         |   |                 |   |         |                |  |   |         |  
|                                                      |  |                                       |        
|Income (loss) before income taxes                     |  |                                       | 174     |   |                 |   | 2,909   |                |  |   | (15,157 | )
|Provision (benefit) for income taxes                  |  |                                       | 4,926   |   |                 |   | 4,410   |                |  |   | (3,674  | )
|                                                      |  |                                       |         |   |                 |   |         |                |  |   |         |  
|                                                      |  |                                       |        
|Income (loss) before minority interests               |  |                                       | (4,752  | ) |                 |   | (1,501  | )              |  |   | (11,483 | )
|Minority interests                                    |  |                                       | 587     |   |                 |   |        |                |  |   |        |  
|                                                      |  |                                       |         |   |                 |   |         |                |  |   |         |  
|Net loss                                              |  | $                                     | (5,339  | ) |                 | $ | (1,501  | )              |  | $ | (11,483 | )
|                                                      |  |                                       |         |   |                 |   |         |                |  |   |         |  
|Basic loss per common share                           |  | $                                     | (0.10   | ) |                 | $ | (0.05   | )              |  | $ | (0.55   | )
|                                                      |  |                                       |         |   |                 |   |         |                |  |   |         |  
|Basic weighted average common shares outstanding      |  |                                       | 51,317  |   |                 |   | 32,923  |                |  |   | 20,773  |  
|                                                      |  |                                       |         |   |                 |   |         |                |  |   |         |  
|                                                      |  |                                       |        
|Diluted loss per common share                         |  | $                                     | (0.10   | ) |                 | $ | (0.05   | )              |  | $ | (0.55   | )
|                                                      |  |                                       |         |   |                 |   |         |                |  |   |         |  
|                                                      |  |                                       |        
|Diluted weighted average common shares outstanding    |  |                                       | 51,317  |   |                 |   | 32,923  |                |  |   | 20,773  |  
|                                                      |  |                                       |         |   |                 |   |         |                |  |   |         |  
|                                                      |  |                                       |        
|Operating and Other Financial Data:                   |  |                                       |         |   |                 |   |         |                |  |   |         |  
|                                                      |  |                                       |        
|Cash flows provided by (used in) operating activities |  |                                       | 9,173   |   |                 |   | 4,119   |                |  |   | 15      |  
|Cash flows used in investing activities               |  |                                       | (36,474 | ) |                 |   | (18,408 | )              |  |   | (7,683  | )
|Cash flows provided by financing activities           |  |                                       | 30,913  |   |                 |   | 25,466  |                |  |   | 13,513  |  



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|                                                                                     |  |                    |         |   |                 |   |         |                |  |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------ | ------- | - | --------------- | - | ------- | -------------- |  | - | ------- | -
|                                                                                     |  | As of December 31, |        
|                                                                                     |  | 2005               |         |   | 2004 (Restated) |   |         | 2003(Restated) | 
|                                                                                     |  | (in thousands)     |        
|Consolidated Balance Sheet Data:                                                     |  |                    |         |   |                 |   |         |                |  |   |         |  
|Cash                                                                                 |  | $                  | 22,713  |   |                 | $ | 19,101  |                |  | $ | 7,924   |  
|Working capital deficiency                                                           |  |                    | (16,870 | ) |                 |   | (20,923 | )              |  |   | (14,938 | )
|                                                                                     |  |                    |         |   |                 |   |         |                |  |   |         |  
|Total assets                                                                         |  |                    | 183,109 |   |                 |   | 112,929 |                |  |   | 53,087  |  
|                                                                                     |  |                    |         |   |                 |   |         |                |  |   |         |  
|Total long-term debt and obligations under capital leases, including current portion |  |                    | 44,185  |   |                 |   | 20,280  |                |  |   | 11,968  |  
|                                                                                     |  |                    |         |   |                 |   |         |                |  |   |         |  
|Minority interests                                                                   |  |                    | 1,764   |   |                 |   |        |                |  |   |        |  
|                                                                                     |  |                    |         |   |                 |   |         |                |  |   |         |  
|Total stockholders equity                                                           |  |                    | 87,323  |   |                 |   | 41,932  |                |  |   | 12,010  |  
|                                                                                     |  |                    |         |   |                 |   |         |                |  |   |         |  

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.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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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            |  | 2003 |  | 2004 |  | 2005
|Owned physician practices                          |  | 3               |  | 6    |  | 7    |  | 7   
|                                                   |  |                 |  |     
|Managed physician practices                        |  | 0               |  | 3    |  | 8    |  | 12  
|                                                   |  |                 |  |     
|Limited Management service and equipment contracts |  | 3               |  | 8    |  | 22   |  | 34  

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 Overview

Revenue 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.



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|                                  |  |                                  |        |           |   |                   |  |           |        |  |       |         |   |  |   |         |  
|--------------------------------- |  | -------------------------------- | ------ | --------- | - | ----------------- |  | --------- | ------ |  | ----- | ------- | - |  | - | ------- | -
|                                  |  | December 31, 2005 (in thousands) |       
|                                  |  | Pain Mgmt                        |        | Surgeries |   | AncillaryServices |  | Corporate |        |  | Total |        
|Revenues                          |  | $                                | 43,269 |           | $ | 6,165             |  | $         | 19,230 |  | $     |        |   |  | $ | 68,664  |  
|Gross profit                      |  |                                  | 36,632 |           |   | 5,110             |  |           | 14,451 |  |       |        |   |  |   | 56,193  |  
|General & administrative expenses |  |                                  | 17,086 |           |   | 3,152             |  |           | 8,184  |  |       | 9,663   |   |  |   | 38,085  |  
|Compensation expense              |  |                                  |       |           |   |                  |  |           |       |  |       | 2,382   |   |  |   | 2,382   |  
|Amortization                      |  |                                  | 550    |           |   |                  |  |           |       |  |       | 979     |   |  |   | 1,529   |  
|Depreciation                      |  |                                  | 478    |           |   | 66                |  |           | 426    |  |       | 646     |   |  |   | 1,616   |  
|Operating income (loss)           |  | $                                | 18,518 |           | $ | 1,892             |  | $         | 5,841  |  | $     | (13,670 | ) |  | $ | 12,581  |  
|                                  | 
|                                  |  | December 31, 2004 (in thousands) |       
|                                  |  | Pain Mgmt                        |        | Surgeries |   | AncillaryServices |  | Corporate |        |  | Total |        
|Revenues                          |  | $                                | 22,317 |           | $ | 5,203             |  | $         | 10,398 |  | $     |        |   |  | $ | 37,918  |  
|Gross profit                      |  |                                  | 18,249 |           |   | 4,607             |  |           | 8,398  |  |       |        |   |  |   | 31,254  |  
|General & administrative expenses |  |                                  | 8,002  |           |   | 2,613             |  |           | 3,571  |  |       | 5,866   |   |  |   | 20,052  |  
|Compensation expense              |  |                                  |       |           |   |                  |  |           |       |  |       | 357     |   |  |   | 357     |  
|Amortization                      |  |                                  |       |           |   |                  |  |           |       |  |       | 549     |   |  |   | 549     |  
|Depreciation                      |  |                                  | 132    |           |   | 72                |  |           | 128    |  |       | 505     |   |  |   | 837     |  
|Operating income (loss)           |  | $                                | 10,115 |           | $ | 1,922             |  | $         | 4,699  |  | $     | (7,277  | ) |  | $ | 9,459   |  
|                                  | 
|                                  |  | December 31, 2003 (in thousands) |       
|                                  |  | Pain Mgmt                        |        | Surgeries |   | AncillaryServices |  | Corporate |        |  | Total |        
|Revenues                          |  | $                                | 6,117  |           | $ | 3,431             |  | $         | 5,433  |  | $     |        |   |  | $ | 14,981  |  
|Gross profit                      |  |                                  | 3,718  |           |   | 1,958             |  |           | 4,718  |  |       |        |   |  |   | 10,394  |  
|General & administrative expenses |  |                                  | 2,168  |           |   | 748               |  |           | 1,404  |  |       | 3,462   |   |  |   | 7,782   |  
|Compensation expense              |  |                                  |       |           |   |                  |  |           |       |  |       | 13,533  |   |  |   | 13,533  |  
|Amortization                      |  |                                  |       |           |   |                  |  |           |       |  |       | 114     |   |  |   | 114     |  
|Depreciation                      |  |                                  | 17     |           |   | 18                |  |           | 44     |  |       | 384     |   |  |   | 463     |  
|Operating income (loss)           |  | $                                | 1,533  |           | $ | 1,192             |  | $         | 3,270  |  | $     | (17,493 | ) |  | $ | (11,498 | )

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.

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



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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 |      |   |            |  |       |  



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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%.

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.



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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 or
pari 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



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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.

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.



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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 PROCEDURES

Evaluation 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 Reporting

Management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 EndedDecember 31, 2005
|Subsidiary Name                      |  | Revenue                             |           | Assets
|Colorado Pain Specialists            |  | $                                   | 1,845,682 |        | $ | 5,496,453 
|Piedmont Center for Spinal Disorders |  |                                     | 511,981   |        |   | 2,450,649 
|Floyd O. Ring, Jr., M.D., P.C.       |  |                                     | 644,613   |        |   | 2,903,118 
|PCSI                                 |  |                                     | 5,116,622 |        |   | 25,236,507
|Christopher J. Centeno, M.D., P.C.   |  |                                     | 741,441   |        |   | 8,571,854 
|                                     |  |                                     |           |        |   |           
|Totals                               |  | $                                   | 8,860,339 |        | $ | 44,658,581
|                                     |  |                                     |           |        |   |           



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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 Firm

on Internal Control Over Financial
Reporting

To the Board of Directors and Stockholders of

PainCare 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 in Internal Control  Integrated Framework issued 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.

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.

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, Florida

May 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 |  | Positions                           
|Randy Lubinsky           |  | 53  |  | 2002  |  | Chief Executive Officer and Director
|Mark Szporka             |  | 50  |  | 2002  |  | Chief Financial Officer and Director
|Ronald Riewold           |  | 58  |  | 2002  |  | President and Director              
|Merrill Reuter, M.D.     |  | 45  |  | 2002  |  | President of AOSF and Chairman      
|Jay Rosen, M.D           |  | 47  |  | 2002  |  | Director                            
|Arthur J. Hudson         |  | 54  |  | 2002  |  | Director                            
|Robert Fusco             |  | 55  |  | 2002  |  | Director                            
|Aldo F. Berti, M.D.      |  | 58  |  | 2004  |  | Director                            
|Thomas 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



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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.



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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.



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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



|                                 |  |              |  |                     |                       |           |     |                          |  |                               |                    |                                   |     |                 |  |                            |  |     |           |  |     |          
|-------------------------------- |  | ------------ |  | ------------------- | --------------------- | --------- | --- | ------------------------ |  | ----------------------------- | ------------------ | --------------------------------- | --- | --------------- |  | -------------------------- |  | --- | --------- |  | --- | ---------
|                                 |  |              |  |                     |                       |           |     |                          |  | Long Term Compensation Awards
|                                 |  |              |  | Annual Compensation |                       | Awards    |     | Payouts                 
|Name & Principal Position        |  | Year         |  | Salary ($)          |                       | Bonus ($) |     | Other AnnualCompensation |  | Restricted Stock Award(s) $   |                    | Securities Underlying Options (#) |     | LTIP Payouts($) |  | All Other Compensation ($)
|Randy Lubinsky, CEO (1)(4)       |  | 200520042003 |  | $$$                 | 296,667262,500220,833 |           | $$$ | 280,000300,00046,739     |  | $$$                           | 20,89220,60319,390 |                                   | $$$ | -0--0--0-       |  | 175,000100,0001,050,000    |  | $$$ | -0--0--0- |  | $$$ | -0--0--0-
|                                 |  |              |  |                     |                       |           |     |                         
|Mark Szporka, CFO (2)(4)         |  | 200520042003 |  | $$$                 | 271,667237,500195,833 |           | $$$ | 280,000250,00046,739     |  | $$$                           | 24,94424,52224,406 |                                   | $$$ | -0--0--0-       |  | 175,000100,0001,050,000    |  | $$$ | -0--0--0- |  | $$$ | -0--0--0-
|                                 |  |              |  |                     |                       |           |     |                         
|Ronald Riewold, President (3)(5) |  | 200520042003 |  | $$$                 | 271,667183,333175,000 |           | $$$ | 210,000125,000-0-        |  | $$$                           | 24,94424,52224,248 |                                   | $$$ | -0--0--0-       |  | 175,0001,250,000-0-        |  | $$$ | -0--0--0- |  | $$$ | -0--0--0-

---

|(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



|                  |  |                                                                                              |  |                                                           |  |                             |      |                 |        |        |   |         |  |   |        
|----------------- |  | -------------------------------------------------------------------------------------------- |  | --------------------------------------------------------- |  | --------------------------- | ---- | --------------- | ------ | ------ | - | ------- |  | - | -------
|Individual
Grants |  | Potential Realizable Value atAssumed Annual Rates of StockPrice Appreciation for Option Term
|Name              |  | Number of SecuritiesUnderlying Stock OptionsGranted (#)                                      |  | % of Total StockOptions Granted toEmployees in Fiscal2005 |  | Exercise orBase Price($/Sh) |      | Expiration Date |        | 5% ($) |   | 10% ($)
|Randy Lubinsky    |  | 175,000                                                                                      |  | 19%                                                       |  | $                           | 4.00 |                 | 8/1/10 |        | $ | 194,250 |  | $ | 427,000
|Mark Szporka      |  | 175,000                                                                                      |  | 19%                                                       |  | $                           | 4.00 |                 | 8/1/10 |        | $ | 194,250 |  | $ | 427,000
|Ronald Riewold    |  | 175,000                                                                                      |  | 19%                                                       |  | $                           | 4.00 |                 | 8/1/10 |        | $ | 194,250 |  | $ | 427,000

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.



|               |  |                            |  |                |         |                                                                                         |                   |                                                                                          |   |                     
|-------------- |  | -------------------------- |  | -------------- | ------- | --------------------------------------------------------------------------------------- | ----------------- | ---------------------------------------------------------------------------------------- | - | --------------------
|Name           |  | Shares Receivedon Exercise |  | Value Realized |         | Number of SecuritiesUnderlying UnexercisedOptions at FY-End(2)Exercisable/Unexercisable |                   | Value of Unexercised In-the- Money Options at FY-End($) (1)(2) 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



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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



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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.



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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.



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LOGO

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.



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##### Table of Contents

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) 900,000 shares of common stock at $1.93 per share; and (iii) 100,000 shares of common stock at $3.08 per share and (iv) 175,000 shares of common stock at $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) 900,000 shares of common stock at $1.93 per share; and (iii) 100,000 shares of common stock at $3.08 per share and (iv) 175,000 shares of common stock at $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) 475,000 shares of common stock at $3.02 per share; (iii) 775,000 shares of common stock at $1.90 per share; and (iv) 175,000 shares of common stock at $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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------



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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



|                                                           |  |                                                                                           |  |                                                                          |      |                                                                                                                                         |        
|---------------------------------------------------------- |  | ----------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------ | ---- | --------------------------------------------------------------------------------------------------------------------------------------- | -------
|                                                           |  | (a)                                                                                       |  | (b)                                                                      |      | (c)                                                                                                                                    
|                                                           |  | Number of securities to beissued upon exercise
ofoutstanding options, warrants and rights |  | Weighted-averageexercise price ofoutstanding options,warrants and rights |      | Number of securities remainingavailable for future issuance underequity compensation
plans(excluding securities reflected incolumn (a))
|Equity compensation plans approved by security holders     |  | 9,752,150                                                                                 |  | $                                                                        | 2.01 |                                                                                                                                         | 247,850
|Equity compensation plans not approved by security holders |  | 3,179,316                                                                                 |  | $                                                                        | 6.69 |                                                                                                                                         | 0      

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
|                   |  |      |         |      |   |        



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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



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##### Table of Contents

(b). Exhibits

INDEX TO EXHIBITS



|      |  |                                                                                                                                                      
|----- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------
|NO.   |  | 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.                                                           
|      | 
|10.09 |  | Amendment Number One to Loan and Security Agreement by and among PainCare Holdings, Inc. and HBK Investments, L.P.                                   
|      | 
|10.10 |  | Third Addendum to Second Amended and Restated Employment Agreement by and between PainCare Holdings, Inc. and Randy Lubinsky.                        
|      | 
|10.11 |  | Third Addendum to Second Amended and Restated Employment Agreement by and between PainCare Holdings, Inc. and Mark Szporka                           
|      | 
|10.12 |  | Fourth Addendum to Employment Agreement by and between PainCare Holdings, Inc. and Ronald Riewold                                                    
|      | 
|14.1  |  | Code of Ethics for PainCare Holdings, Inc.                                                                                                           
|      | 
|21.1  |  | Subsidiaries of the Company                                                                                                                          
|      | 
|23(a) |  | Consent of BPKH                                                                                                                                      
|      | 
|23(b) |  | Consent of Tschopp, Whitcomb & Orr, P.A.                                                                                                             
|      | 
|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                                                                                                                          

---

|     |  |                                                                                
|---- |  | -------------------------------------------------------------------------------
|(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  



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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: June 1, 2006 |  | By:                     |  | /s/ RANDY LUBINSKY                    
|                   |  |                         |  | Chief Executive Officer and Director  
|                   |  |                        
|Date: June 1, 2006 |  | By:                     |  | /s/ MARK SZPORKA                      
|                   |  |                         |  | Chief Financial and Accounting Officer
|                   |  |                         |  | and Director                          

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 |  | June 1, 2006
|                         |  |                       
|/s/ JAY ROSEN, M.D.      |  | Director               |  | June 1, 2006
|                         |  |                       
|/s/ MERRILL REUTER, M.D. |  | Director               |  | June 1, 2006
|                         |  |                       
|/s/ ARTHUR J. HUDSON     |  | Director               |  | June 1, 2006
|                         |  |                       
|/s/ ROBERT FUSCO         |  | Director               |  | June 1, 2006
|                         |  |                       
|/s/ ALDO F. BERTI, M.D.  |  | Director               |  | June 1, 2006
|                         |  |                       
|/s/ THOMAS J. CRANE      |  | Director               |  | June 1, 2006



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PART F/S

PAINCARE HOLDINGS, INC.

CONTENTS



|                                                                                                     |  |    
|---------------------------------------------------------------------------------------------------- |  | ---
|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



---

##### Table of Contents

Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders 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, Florida

May 12, 2006



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##### Table of Contents

TSCHOPP, WHITCOMB & ORR, P.A.

Independent Auditors Report

The Board of Directors

PainCare 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, 2006

Maitland, Florida



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##### Table of Contents

PAINCARE HOLDINGS, INC.

Consolidated Balance Sheets

December 31, 2005 and 2004



|                                                                                                                       |  |      |             |   |               |   |             |  
|---------------------------------------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ------------- | - | ----------- | -
|                                                                                                                       |  | 2005 |             |   | 2004          |  
|                                                                                                                       |  |      |             |   | (As restated) |  
|Assets                                                                                                                 |  |      |             |   |               |   |             |  
|Current assets:                                                                                                        |  |      |             |   |               |   |             |  
|Cash and cash equivalents                                                                                              |  | $    | 22,713,165  |   |               | $ | 19,100,840  |  
|Accounts receivable, net                                                                                               |  |      | 21,263,405  |   |               |   | 14,077,643  |  
|Deposits and prepaid expenses                                                                                          |  |      | 2,557,492   |   |               |   | 1,117,317   |  
|Deferred tax asset                                                                                                     |  |      | 683,391     |   |               |   | 130,000     |  
|                                                                                                                       |  |      |             |   |               |   |             |  
|Total current assets                                                                                                   |  |      | 47,217,453  |   |               |   | 34,425,800  |  
|                                                                                                                       |  |     
|Property and equipment, net                                                                                            |  |      | 11,494,656  |   |               |   | 7,119,065   |  
|Goodwill, net                                                                                                          |  |      | 111,468,292 |   |               |   | 61,817,801  |  
|Due from shareholder                                                                                                   |  |      | 427,553     |   |               |   | 406,227     |  
|Deferred tax asset                                                                                                     |  |      | 867,854     |   |               |   | 2,536,923   |  
|Other assets                                                                                                           |  |      | 11,834,822  |   |               |   | 6,623,360   |  
|                                                                                                                       |  |      |             |   |               |   |             |  
|Total assets                                                                                                           |  | $    | 183,310,630 |   |               | $ | 112,929,176 |  
|                                                                                                                       |  |      |             |   |               |   |             |  
|Liabilities and Stockholders' Equity                                                                                   |  |      |             |   |               |   |             |  
|Liabilities:                                                                                                           |  |      |             |   |               |   |             |  
|Accounts payable and accrued expenses                                                                                  |  | $    | 3,522,714   |   |               | $ | 752,045     |  
|Accrued compensation expense                                                                                           |  |      | 17,142,549  |   |               |   | 14,760,290  |  
|Derivative liabilities                                                                                                 |  |      | 12,952,455  |   |               |   | 13,364,535  |  
|Acquisition consideration payable                                                                                      |  |      | 8,011,567   |   |               |   | 17,900,833  |  
|Common stock payable                                                                                                   |  |      | 5,405,601   |   |               |   |            |  
|Income tax payable                                                                                                     |  |      | 3,003,766   |   |               |   | 3,939,972   |  
|Current portion of notes payable                                                                                       |  |      | 3,883,012   |   |               |   | 765,177     |  
|Current portion of capital lease obligations                                                                           |  |      | 1,646,378   |   |               |   | 930,117     |  
|Current portion of convertible debentures                                                                              |  |      | 8,519,131   |   |               |   | 2,935,480   |  
|                                                                                                                       |  |      |             |   |               |   |             |  
|Total current liabilities                                                                                              |  |      | 64,087,173  |   |               |   | 55,348,449  |  
|                                                                                                                       |  |     
|Notes payable, less current portion                                                                                    |  |      | 26,129,569  |   |               |   | 295,583     |  
|Convertible debentures                                                                                                 |  |      | 1,133,877   |   |               |   | 13,163,014  |  
|Capital lease obligations, less current portion                                                                        |  |      | 2,872,708   |   |               |   | 2,190,627   |  
|                                                                                                                       |  |      |             |   |               |   |             |  
|Total liabilities                                                                                                      |  |      | 94,223,327  |   |               |   | 70,997,673  |  
|                                                                                                                       |  |      |             |   |               |   |             |  
|Minority interests in consolidated subsidiaries                                                                        |  |      | 1,763,838   |   |               |   |            |  
|                                                                                                                       |  |     
|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 |  |      | 5,582       |   |               |   | 4,151       |  
|Preferred stock, $.0001 par value. Authorized 10,000,000 shares; issued and outstanding -0- shares                     |  |      |            |   |               |   |            |  
|Additional paid in capital                                                                                             |  |      | 106,253,345 |   |               |   | 55,539,687  |  
|Accumulated deficit                                                                                                    |  |      | (18,983,089 | ) |               |   | (13,643,711 | )
|Cumulative translation adjustments                                                                                     |  |      | 47,627      |   |               |   | 31,376      |  
|                                                                                                                       |  |      |             |   |               |   |             |  
|Total stockholders' equity                                                                                             |  |      | 87,323,465  |   |               |   | 41,931,503  |  
|                                                                                                                       |  |      |             |   |               |   |             |  
|                                                                                                                       |  |     
|Total liabilities and stockholders' equity                                                                             |  | $    | 183,310,630 |   |               | $ | 112,929,176 |  
|                                                                                                                       |  |      |             |   |               |   |             |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

PAINCARE HOLDINGS, INC.

Consolidated Statements of Operations

For the years ended December 31, 2005, 2004 and 2003



|                                                                |  |      |            |   |               |   |            |               |  |   |             |  
|--------------------------------------------------------------- |  | ---- | ---------- | - | ------------- | - | ---------- | ------------- |  | - | ----------- | -
|                                                                |  | 2005 |            |   | 2004          |   |            | 2003          | 
|                                                                |  |      |            |   | (As restated) |   |            | (As restated) | 
|Revenues:                                                       |  |      |            |   |               |   |            |               |  |   |             |  
|Pain management                                                 |  | $    | 43,269,382 |   |               | $ | 22,316,610 |               |  | $ | 6,116,520   |  
|Surgeries                                                       |  |      | 6,165,175  |   |               |   | 5,202,766  |               |  |   | 3,431,272   |  
|Ancillary services                                              |  |      | 19,229,240 |   |               |   | 10,398,524 |               |  |   | 5,433,075   |  
|                                                                |  |      |            |   |               |   |            |               |  |   |             |  
|Total revenues                                                  |  |      | 68,663,797 |   |               |   | 37,917,900 |               |  |   | 14,980,867  |  
|                                                                |  |      |           
|Cost of revenues                                                |  |      | 12,470,369 |   |               |   | 6,663,945  |               |  |   | 4,586,732   |  
|                                                                |  |      |            |   |               |   |            |               |  |   |             |  
|Gross profit                                                    |  |      | 56,193,428 |   |               |   | 31,253,955 |               |  |   | 10,394,135  |  
|                                                                |  |      |           
|General and administrative expense                              |  |      | 38,084,609 |   |               |   | 20,052,066 |               |  |   | 7,782,313   |  
|Compensation expense-variable stock options                     |  |      | 2,382,259  |   |               |   | 356,590    |               |  |   | 13,532,700  |  
|Amortization expense                                            |  |      | 1,529,438  |   |               |   | 549,229    |               |  |   | 113,637     |  
|Depreciation expense                                            |  |      | 1,616,316  |   |               |   | 837,484    |               |  |   | 463,190     |  
|                                                                |  |      |            |   |               |   |            |               |  |   |             |  
|Operating income (loss)                                         |  |      | 12,580,806 |   |               |   | 9,458,586  |               |  |   | (11,497,705 | )
|                                                                |  |      |           
|Interest expense                                                |  |      | (5,795,915 | ) |               |   | (3,463,677 | )             |  |   | (531,158    | )
|Derivative expense                                              |  |      | (7,055,502 | ) |               |   | (3,256,372 | )             |  |   | (3,173,763  | )
|Other income                                                    |  |      | 444,549    |   |               |   | 170,568    |               |  |   | 45,425      |  
|                                                                |  |      |            |   |               |   |            |               |  |   |             |  
|Income (loss) before income taxes                               |  |      | 173,938    |   |               |   | 2,909,105  |               |  |   | (15,157,201 | )
|                                                                |  |      |           
|Provision (benefit) for income taxes                            |  |      | 4,925,679  |   |               |   | 4,410,587  |               |  |   | (3,674,358  | )
|                                                                |  |      |            |   |               |   |            |               |  |   |             |  
|Loss before minority interests                                  |  |      | (4,751,741 | ) |               |   | (1,501,482 | )             |  |   | (11,482,843 | )
|                                                                |  |      |           
|Minority interests in net earnings of consolidated subsidiaries |  |      | (587,637   | ) |               |   |           |               |  |   |            |  
|                                                                |  |      |            |   |               |   |            |               |  |   |             |  
|                                                                |  |      |           
|Net loss                                                        |  | $    | (5,339,378 | ) |               | $ | (1,501,482 | )             |  | $ | (11,482,843 | )
|                                                                |  |      |            |   |               |   |            |               |  |   |             |  
|Basic loss per common share                                     |  | $    | (0.10      | ) |               | $ | (0.05      | )             |  | $ | (0.55       | )
|                                                                |  |      |            |   |               |   |            |               |  |   |             |  
|Basic weighted average common shares outstanding                |  |      | 51,316,562 |   |               |   | 32,923,211 |               |  |   | 20,772,620  |  
|                                                                |  |      |            |   |               |   |            |               |  |   |             |  
|Diluted loss per common share                                   |  | $    | (0.10      | ) |               | $ | (0.05      | )             |  | $ | (0.55       | )
|                                                                |  |      |            |   |               |   |            |               |  |   |             |  
|Diluted weighted average common shares outstanding              |  |      | 51,316,562 |   |               |   | 32,923,211 |               |  |   | 20,772,620  |  
|                                                                |  |      |            |   |               |   |            |               |  |   |             |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

PAINCARE HOLDINGS, INC.

Consolidated Statements of Cash Flows

For the years ended December 31, 2005, 2004 and 2003



|                                                                                |  |      |             |   |               |   |             |               |  |   |             |  
|------------------------------------------------------------------------------- |  | ---- | ----------- | - | ------------- | - | ----------- | ------------- |  | - | ----------- | -
|                                                                                |  | 2005 |             |   | 2004          |   |             | 2003          | 
|                                                                                |  |      |             |   | (As restated) |   |             | (As restated) | 
|Cash flows from operating activities:                                           |  |      |             |   |               |   |             |               |  |   |             |  
|Net loss                                                                        |  | $    | (5,339,378  | ) |               | $ | (1,501,482  | )             |  | $ | (11,482,843 | )
|Adjustments to reconcile net loss to net cash provided by operating activities: |  |      |             |   |               |   |             |               |  |   |             |  
|Depreciation and amortization                                                   |  |      | 3,145,754   |   |               |   | 1,386,713   |               |  |   | 576,827     |  
|Non-cash transactions and other                                                 |  |      | 28,143      |   |               |   | 30,415      |               |  |   | 26,290      |  
|Loss on disposal of property and equipment                                      |  |      | 88,651      |   |               |   |            |               |  |   |            |  
|Amortization of debt discount                                                   |  |      | 1,704,693   |   |               |   | 1,805,846   |               |  |   |            |  
|Stock issued for interest payments                                              |  |      | 991,146     |   |               |   | 383,053     |               |  |   |            |  
|Mark to market derivatives                                                      |  |      | 7,055,502   |   |               |   | 3,256,372   |               |  |   | 3,173,763   |  
|Compensation expense-variable stock options                                     |  |      | 2,382,259   |   |               |   | 356,590     |               |  |   | 13,532,700  |  
|Deferred income taxes                                                           |  |      | 1,113,566   |   |               |   | 748,623     |               |  |   | (3,563,544  | )
|Amortization of deferred financing costs                                        |  |      | (475,717    | ) |               |   |            |               |  |   |            |  
|Minority interests                                                              |  |      | 587,637     |   |               |   |            |               |  |   |            |  
|                                                                                |  |      |            
|Change in operating assets and liabilities, net of assets acquired:             |  |      |             |   |               |   |             |               |  |   |             |  
|Accounts receivable                                                             |  |      | (2,428,409  | ) |               |   | (5,332,692  | )             |  |   | (1,834,012  | )
|Deposits and prepaid expenses                                                   |  |      | (960,977    | ) |               |   | (448,695    | )             |  |   | (369,911    | )
|Other assets                                                                    |  |      | 139,375     |   |               |   |            |               |  |   |            |  
|Income tax payable                                                              |  |      | (908,735    | ) |               |   | 3,794,566   |               |  |   | 63,385      |  
|Accounts payable and accrued expenses                                           |  |      | 2,049,587   |   |               |   | (360,283    | )             |  |   | (108,093    | )
|                                                                                |  |      |             |   |               |   |             |               |  |   |             |  
|Net cash provided by operating activities                                       |  |      | 9,173,097   |   |               |   | 4,119,026   |               |  |   | 14,562      |  
|                                                                                |  |      |             |   |               |   |             |               |  |   |             |  
|Cash flows from investing activities:                                           |  |      |             |   |               |   |             |               |  |   |             |  
|Purchase of property and equipment                                              |  |      | (1,832,701  | ) |               |   | (1,018,597  | )             |  |   | (353,143    | )
|Cash paid for earnouts                                                          |  |      | (7,510,966  | ) |               |   | (3,108,888  | )             |  |   | (695,708    | )
|Cash used for contract rights                                                   |  |      | (202,291    | ) |               |   | (2,253,215  | )             |  |   | (325,525    | )
|Cash used for acquisitions                                                      |  |      | (27,172,913 | ) |               |   | (12,297,753 | )             |  |   | (6,346,552  | )
|Cash from acquisitions                                                          |  |      | 244,713     |   |               |   | 270,570     |               |  |   | 38,232      |  
|                                                                                |  |      |             |   |               |   |             |               |  |   |             |  
|Net cash used in investing activities                                           |  |      | (36,474,158 | ) |               |   | (18,407,883 | )             |  |   | (7,682,696  | )
|                                                                                |  |      |             |   |               |   |             |               |  |   |             |  
|Cash flows from financing activities:                                           |  |      |             |   |               |   |             |               |  |   |             |  
|Proceeds from issuance of debentures, net of offering costs                     |  |      |            |   |               |   | 12,382,315  |               |  |   | 9,367,397   |  
|Proceeds from issuance of common stock, net of capital offering costs           |  |      | 5,964,013   |   |               |   | 15,500,446  |               |  |   | 5,821,916   |  
|Payments of capital lease obligations                                           |  |      | (1,556,217  | ) |               |   | (686,734    | )             |  |   | (363,814    | )
|Payment of convertible debentures                                               |  |      |            |   |               |   | (885,000    | )             |  |   |            |  
|Notes receivable from employees                                                 |  |      | (201,353    | ) |               |   |            |               |  |   |            |  
|Cash distributions to minority interests                                        |  |      | (410,896    | ) |               |   |            |               |  |   |            |  
|Due from/to shareholders                                                        |  |      |            |   |               |   | (34,907     | )             |  |   | 134,385     |  
|Net proceeds from (payments on) notes payable                                   |  |      | (1,068,760  | ) |               |   | 328,222     |               |  |   | (210,060    | )
|Notes payable issued                                                            |  |      | 28,186,599  |   |               |   | (1,138,412  | )             |  |   | (1,236,607  | )
|                                                                                |  |      |             |   |               |   |             |               |  |   |             |  
|Net cash provided by financing activities                                       |  |      | 30,913,386  |   |               |   | 25,465,930  |               |  |   | 13,513,217  |  
|                                                                                |  |      |             |   |               |   |             |               |  |   |             |  
|Net increase in cash and cash equivalents                                       |  |      | 3,612,325   |   |               |   | 11,177,073  |               |  |   | 5,845,083   |  
|                                                                                |  |      |            
|Cash and cash equivalents at beginning of year                                  |  |      | 19,100,840  |   |               |   | 7,923,767   |               |  |   | 2,078,684   |  
|                                                                                |  |      |             |   |               |   |             |               |  |   |             |  
|Cash and cash equivalents at end of year                                        |  | $    | 22,713,165  |   |               | $ | 19,100,840  |               |  | $ | 7,923,767   |  
|                                                                                |  |      |             |   |               |   |             |               |  |   |             |  
|Supplemental disclosures of cash flow information:                              |  |      |             |   |               |   |             |               |  |   |             |  
|                                                                                |  |      |            
|Cash paid during the year for interest                                          |  | $    | 2,499,181   |   |               | $ | 1,207,049   |               |  | $ | 487,786     |  
|Cash paid during the year for income taxes                                      |  |      | 2,895,752   |   |               |   |            |               |  |   |            |  
|                                                                                |  |      |            
|Non-cash investing and financing transactions:                                  |  |      |             |   |               |   |             |               |  |   |             |  
|Common stock issued for acquisitions                                            |  |      | 25,701,467  |   |               |   | 7,846,712   |               |  |   | 13,596,867  |  
|Common stock issued for contract right purchases                                |  |      |            |   |               |   | 1,097,333   |               |  |   |            |  
|Common stock issued for convertible debentures                                  |  |      | 15,735,237  |   |               |   | 1,650,948   |               |  |   | 175,000     |  
|Common stock issued for earnouts                                                |  |      | 7,689,464   |   |               |   | 2,978,770   |               |  |   | 171,929     |  
|Common stock issued for bridge note                                             |  |      |            |   |               |   |            |               |  |   | 208,000     |  
|Acquisition consideration payable                                               |  |      | 8,011,567   |   |               |   | 17,900,833  |               |  |   | 3,000,000   |  
|Equipment financed with capital lease obligations                               |  |      | 2,355,578   |   |               |   | 928,756     |               |  |   | 641,254     |  
|Distribution rights acquired                                                    |  |      |            |   |               |   |            |               |  |   | 2,212,653   |  

See accompanying notes to consolidated financial statements.



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##### Table of Contents

PAINCARE HOLDINGS, INC.

Consolidated Statements of Stockholders Equity

For the years ended December 31, 2005, 2004 and 2003



|                                                                  |  |              |  |                            |       |  |                                      |             |   |                                             |   |             |                          |  |   |         |   |  |   |             |  
|----------------------------------------------------------------- |  | ------------ |  | -------------------------- | ----- |  | ------------------------------------ | ----------- | - | ------------------------------------------- | - | ----------- | ------------------------ |  | - | ------- | - |  | - | ----------- | -
|                                                                  |  | Common Stock |  | Additional Paid in Capital |       |  | RetainedEarnings(AccumulatedDeficit) |             |   | AccumulatedOtherComprehensive Income (Loss) |   |             | TotalStockholdersEquity | 
|                                                                  |  | Shares       |  | Amount                     |       |  |                                      |            
|Balances at December 31, 2002, as previously reported             |  | 15,576,640   |  | $                          | 1,557 |  | $                                    | 7,019,246   |   |                                             | $ | 556,487     |                          |  | $ | (23,299 | ) |  | $ | 7,553,991   |  
|Effect of prior years restatements                               |  |             |  |                            |      |  |                                      | (273,000    | ) |                                             |   | (1,215,873  | )                        |  |   |        |   |  |   | (1,488,873  | )
|                                                                  |  |              |  |                            |       |  |                                      |             |   |                                             |   |             |                          |  |   |         |   |  |   |             |  
|Balances at December 31, 2002 (as restated)                       |  | 15,576,640   |  | $                          | 1,557 |  | $                                    | 6,746,246   |   |                                             | $ | (659,386    | )                        |  | $ | (23,299 | ) |  | $ | 6,065,118   |  
|Common stock issued for earnouts                                  |  | 107,456      |  |                            | 11    |  |                                      | 171,918     |   |                                             |   |            |                          |  |   |        |   |  |   | 171,929     |  
|Common stock issued for cash                                      |  | 5,053,166    |  |                            | 505   |  |                                      | 5,405,673   |   |                                             |   |            |                          |  |   |        |   |  |   | 5,406,178   |  
|Common stock issued for conversion of convertible preferred stock |  | 455,913      |  |                            | 46    |  |                                      | 212,704     |   |                                             |   |            |                          |  |   |        |   |  |   | 212,750     |  
|Common stock issued for exercise of stock options                 |  | 200,000      |  |                            | 20    |  |                                      | 9,980       |   |                                             |   |            |                          |  |   |        |   |  |   | 10,000      |  
|Common stock issued for conversion of bridge note                 |  | 208,000      |  |                            | 21    |  |                                      | 207,979     |   |                                             |   |            |                          |  |   |        |   |  |   | 208,000     |  
|Common stock issued for conversion of convertible debenture       |  | 118,243      |  |                            | 12    |  |                                      | 174,988     |   |                                             |   |            |                          |  |   |        |   |  |   | 175,000     |  
|Common stock issued for exercise of warrants                      |  | 256,230      |  |                            | 26    |  |                                      | 192,962     |   |                                             |   |            |                          |  |   |        |   |  |   | 192,988     |  
|Common stock issued to advisory network members                   |  | 2,030        |  |                            |      |  |                                      | 2,030       |   |                                             |   |            |                          |  |   |        |   |  |   | 2,030       |  
|Common stock issued for acquisitions                              |  | 4,904,919    |  |                            | 490   |  |                                      | 13,596,377  |   |                                             |   |            |                          |  |   |        |   |  |   | 13,596,867  |  
|Tax benefit realized from stock plans                             |  |             |  |                            |      |  |                                      | 111,328     |   |                                             |   |            |                          |  |   |        |   |  |   | 111,328     |  
|Common stock share based grants for non employee consulting fees  |  |              |  |                            |       |  |                                      | 238,398     |   |                                             |   |             |                          |  |   |         |   |  |   | 238,398     |  
|Adjustment for fair value of warrants                             |  |             |  |                            |      |  |                                      | (2,921,713  | ) |                                             |   |            |                          |  |   |        |   |  |   | (2,921,713  | )
|Components of comprehensive income (loss):                        |  |              |  |                            |       |  |                                      |             |   |                                             |   |             |                          |  |   |         |   |  |   |             |  
|Translation adjustment                                            |  |             |  |                            |      |  |                                      |            |   |                                             |   |            |                          |  |   | 24,260  |   |  |   | 24,260      |  
|Net loss                                                          |  |             |  |                            |      |  |                                      |            |   |                                             |   | (11,482,843 | )                        |  |   |        |   |  |   | (11,482,843 | )
|Comprehensive loss                                                |  |             |  |                            |      |  |                                      |            |   |                                             |   |            |                          |  |   |        |   |  |   | (11,458,583 | )
|                                                                  |  |              |  |                            |       |  |                                      |             |   |                                             |   |             |                          |  |   |         |   |  |   |             |  
|Balances at December 31, 2003 (as restated)                       |  | 26,882,597   |  | $                          | 2,688 |  | $                                    | 24,148,870  |   |                                             | $ | (12,142,229 | )                        |  | $ | 961     |   |  | $ | 12,010,290  |  
|Common stock issued for earnouts                                  |  | 1,064,251    |  |                            | 107   |  |                                      | 2,978,663   |   |                                             |   |            |                          |  |   |        |   |  |   | 2,978,770   |  
|Common stock issued for contract rights                           |  | 401,617      |  |                            | 40    |  |                                      | 1,097,293   |   |                                             |   |            |                          |  |   |        |   |  |   | 1,097,333   |  
|Common stock issued for exercise of warrants                      |  | 534,466      |  |                            | 53    |  |                                      | 343,067     |   |                                             |   |            |                          |  |   |        |   |  |   | 343,120     |  
|Common stock issued for exercise of stock options                 |  | 312,673      |  |                            | 31    |  |                                      | 71,031      |   |                                             |   |            |                          |  |   |        |   |  |   | 71,062      |  
|Common stock issued for acquisitions                              |  | 2,667,747    |  |                            | 267   |  |                                      | 7,846,445   |   |                                             |   |            |                          |  |   |        |   |  |   | 7,846,712   |  
|Common stock issued for conversion of convertible debenture       |  | 530,000      |  |                            | 53    |  |                                      | 1,650,895   |   |                                             |   |            |                          |  |   |        |   |  |   | 1,650,948   |  
|Common stock issued for debenture interest payments               |  | 154,482      |  |                            | 15    |  |                                      | 383,053     |   |                                             |   |            |                          |  |   |        |   |  |   | 383,068     |  
|Common stock issued for secondary offering                        |  | 8,965,000    |  |                            | 897   |  |                                      | 15,085,366  |   |                                             |   |            |                          |  |   |        |   |  |   | 15,086,263  |  
|Common stock options issued for non employee consulting fees      |  |             |  |                            |      |  |                                      | 219,829     |   |                                             |   |            |                          |  |   |        |   |  |   | 219,829     |  
|Adjustment for fair value of warrants                             |  |             |  |                            |      |  |                                      | 1,715,175   |   |                                             |   |            |                          |  |   |        |   |  |   | 1,715,175   |  
|Components of comprehensive income (loss):                        |  |              |  |                            |       |  |                                      |             |   |                                             |   |             |                          |  |   |         |   |  |   |             |  
|Translation adjustment                                            |  |             |  |                            |      |  |                                      |            |   |                                             |   |            |                          |  |   | 30,415  |   |  |   | 30,415      |  
|Net loss                                                          |  |              |  |                            |       |  |                                      |             |   |                                             |   | (1,501,482  | )                        |  |   |        |   |  |   | (1,501,482  | )
|                                                                  |  |              |  |                            |       |  |                                      |             |   |                                             |   |             |                          |  |   |         |   |  |   |             |  
|Comprehensive loss                                                |  |             |  |                            |      |  |                                      |            |   |                                             |   |            |                          |  |   |        |   |  |   | (1,471,067  | )
|                                                                  |  |              |  |                            |       |  |                                      |             |   |                                             |   |             |                          |  |   |         |   |  |   |             |  
|Balances at December 31, 2004 (as restated)                       |  | 41,512,833   |  | $                          | 4,151 |  | $                                    | 55,539,687  |   |                                             | $ | (13,643,711 | )                        |  | $ | 31,376  |   |  | $ | 41,931,503  |  
|Common stock issued for earnouts                                  |  | 2,026,592    |  |                            | 203   |  |                                      | 7,689,261   |   |                                             |   |            |                          |  |   |        |   |  |   | 7,689,464   |  
|Common stock issued for exercise of warrants                      |  | 400,316      |  |                            | 40    |  |                                      | 474,672     |   |                                             |   |            |                          |  |   |        |   |  |   | 474,712     |  
|Common stock issued for exercise of stock options                 |  | 674,975      |  |                            | 67    |  |                                      | 83,633      |   |                                             |   |            |                          |  |   |        |   |  |   | 83,700      |  
|Common stock issued as restricted shares                          |  | 18,860       |  |                            | 2     |  |                                      | 11,890      |   |                                             |   |            |                          |  |   |        |   |  |   | 11,892      |  
|Common stock issued for acquisitions                              |  | 7,279,835    |  |                            | 727   |  |                                      | 25,700,740  |   |                                             |   |            |                          |  |   |        |   |  |   | 25,701,467  |  
|Common stock issued for conversion of convertible debenture       |  | 3,626,167    |  |                            | 364   |  |                                      | 15,734,873  |   |                                             |   |            |                          |  |   |        |   |  |   | 15,735,237  |  
|Common stock issued for debenture interest payments               |  | 283,448      |  |                            | 28    |  |                                      | 991,118     |   |                                             |   |            |                          |  |   |        |   |  |   | 991,146     |  
|Common stock options issued for non employee consulting fees      |  |             |  |                            |      |  |                                      | 27,471      |   |                                             |   |            |                          |  |   |        |   |  |   | 27,471      |  
|Components of comprehensive income (loss):                        |  |              |  |                            |       |  |                                      |             |   |                                             |   |             |                          |  |   |         |   |  |   |             |  
|Translation adjustment                                            |  |             |  |                            |      |  |                                      |            |   |                                             |   |            |                          |  |   | 16,251  |   |  |   | 16,251      |  
|Net loss                                                          |  |             |  |                            |      |  |                                      |            |   |                                             |   | (5,339,378  | )                        |  |   |        |   |  |   | (5,339,378  | )
|                                                                  |  |              |  |                            |       |  |                                      |             |   |                                             |   |             |                          |  |   |         |   |  |   |             |  
|Comprehensive loss                                                |  |             |  |                            |      |  |                                      |            |   |                                             |   |            |                          |  |   |        |   |  |   | (5,323,127  | )
|                                                                  |  |              |  |                            |       |  |                                      |             |   |                                             |   |             |                          |  |   |         |   |  |   |             |  
|Balances at December 31, 2005                                     |  | 55,823,026   |  | $                          | 5,582 |  | $                                    | 106,253,345 |   |                                             | $ | (18,983,089 | )                        |  | $ | 47,627  |   |  | $ | 87,323,465  |  
|                                                                  |  |              |  |                            |       |  |                                      |             |   |                                             |   |             |                          |  |   |         |   |  |   |             |  

See accompanying notes to consolidated financial statements.



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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.

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 Policies

Principles 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



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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.



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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.

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 amountshave 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.



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##### Table of Contents

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                            |             |   | 2004 |  
|Balance at beginning of year (including balances from purchased business combinations)   |  | $                               | 14,788,745  |   |      | $ | 5,520,213   |  
|Increase for contractual allowance in the current year (based on historical percentages) |  |                                 | 40,437,607  |   |      |   | 32,458,453  |  
|Increase (decrease) in contractual allowance for the prior years contractual allowance   |  |                                 | (173,722    | ) |      |   | (3,689,814  | )
|Decrease to the contractual allowance for the current year                               |  |                                 | (24,393,787 | ) |      |   | (19,500,107 | )
|                                                                                         |  |                                 |             |   |      |   |             |  
|Balance at end of year                                                                   |  | $                               | 30,658,843  |   |      | $ | 14,788,745  |  
|                                                                                         |  |                                 |             |   |      |   |             |  



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



|                                                    |  |                                 |            |   |      |   |          |  
|--------------------------------------------------- |  | ------------------------------- | ---------- | - | ---- | - | -------- | -
|                                                    |  | For the Year Ended December 31, |           
|                                                    |  | 2005                            |            |   | 2004 |  
|Balance, beginning of year                          |  | $                               | 335,459    |   |      | $ | 142,277  |  
|Additions charged to provision for bad debts        |  |                                 | 2,788,601  |   |      |   | 599,621  |  
|Accounts receivable written off (net of recoveries) |  |                                 | (1,360,283 | ) |      |   | (406,439 | )
|                                                    |  |                                 |            |   |      |   |          |  
|Balance, end of year                                |  | $                               | 1,763,777  |   |      | $ | 335,459  |  
|                                                    |  |                                 |            |   |      |   |          |  

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



|                                |  |                            |            |         |   |            |  |            |           |           |   |           |  |   |          
|------------------------------- |  | -------------------------- | ---------- | ------- | - | ---------- |  | ---------- | --------- | --------- | - | --------- |  | - | ---------
|Financial Class                 |  | Balance onDecember 31,2005 |            | Current |   | 31-60 Days |  | 61-90 Days |           | 91 + Days
|Medicare                        |  | $                          | 1,588,876  |         | $ | 658,177    |  | $          | 281,062   |           | $ | 117,867   |  | $ | 531,770  
|Private insurance               |  |                            | 12,738,637 |         |   | 5,276,860  |  |            | 2,253,383 |           |   | 944,989   |  |   | 4,263,405
|Self-pay                        |  |                            | 1,056,948  |         |   | 437,832    |  |            | 186,967   |           |   | 78,407    |  |   | 353,742  
|Workers compensation            |  |                            | 2,606,677  |         |   | 1,079,792  |  |            | 461,104   |           |   | 193,371   |  |   | 872,410  
|Government                      |  |                            | 2,415,551  |         |   | 1,000,618  |  |            | 427,296   |           |   | 179,193   |  |   | 808,444  
|Medicaid                        |  |                            | 262,510    |         |   | 108,742    |  |            | 46,436    |           |   | 19,474    |  |   | 87,858   
|Other                           |  |                            | 2,357,983  |         |   | 976,772    |  |            | 417,112   |           |   | 174,922   |  |   | 789,177  
|                                |  |                            |            |         |   |            |  |            |           |           |   |           |  |   |          
|                                |  |                            |            |         |  
|Total                           |  |                            | 23,027,182 |         |   | 9,538,793  |  |            | 4,073,360 |           |   | 1,708,223 |  |   | 7,706,806
|                                |  |                            |            |         |  
|Allowance for doubtful accounts |  |                            | 1,763,777  |         |   | 333,355    |  |            | 305,287   |           |   | 162,191   |  |   | 962,944  
|                                |  |                            |            |         |   |            |  |            |           |           |   |           |  |   |          
|                                |  |                            |            |         |  
|Net realizable value            |  | $                          | 21,263,405 |         | $ | 9,205,438  |  | $          | 3,768,073 |           | $ | 1,546,032 |  | $ | 6,743,862
|                                |  |                            |            |         |   |            |  |            |           |           |   |           |  |   |          

Summary



|                                                    |  |        |           |                                                       |       |                                                 |   |          
|--------------------------------------------------- |  | ------ | --------- | ----------------------------------------------------- | ----- | ----------------------------------------------- | - | ---------
|Aging category                                      |  | Amount |           | Percentageestimated forallowance fordoubtful accounts |       | Requiredbalance inallowance fordoubtfulaccounts
|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
|                                                    |  |        |           |                                                       |       |                                                 |   |          

The Companys payor mix and aging table for the year ended December 31,
2004 were as follows:



|                                |  |                            |            |         |   |            |  |            |           |           |   |           |  |   |          
|------------------------------- |  | -------------------------- | ---------- | ------- | - | ---------- |  | ---------- | --------- | --------- | - | --------- |  | - | ---------
|Financial Class                 |  | Balance onDecember 31,2004 |            | Current |   | 31-60 Days |  | 61-90 Days |           | 91 + Days
|Medicare                        |  | $                          | 1,970,228  |         | $ | 1,203,017  |  | $          | 417,291   |           | $ | 125,875   |  | $ | 224,045  
|Private insurance               |  |                            | 7,480,315  |         |   | 4,446,917  |  |            | 1,323,497 |           |   | 565,251   |  |   | 1,144,650
|Self-pay                        |  |                            | 428,160    |         |   | 205,462    |  |            | 102,273   |           |   | 33,939    |  |   | 86,486   
|Workers compensation            |  |                            | 1,237,915  |         |   | 669,298    |  |            | 261,912   |           |   | 121,777   |  |   | 184,928  
|Government                      |  |                            | 268,564    |         |   | 107,694    |  |            | 88,089    |           |   | 57,473    |  |   | 15,308   
|Medicaid                        |  |                            | 676,195    |         |   | 332,595    |  |            | 106,861   |           |   | 90,863    |  |   | 145,876  
|Other                           |  |                            | 2,351,725  |         |   | 702,059    |  |            | 457,619   |           |   | 974,047   |  |   | 218,000  
|                                |  |                            |            |         |   |            |  |            |           |           |   |           |  |   |          
|                                |  |                            |            |         |  
|Total                           |  |                            | 14,413,102 |         |   | 7,667,042  |  |            | 2,757,542 |           |   | 1,969,225 |  |   | 2,019,293
|                                |  |                            |            |         |  
|Allowance for doubtful accounts |  |                            | 335,459    |         |   | 178,447    |  |            | 64,181    |           |   | 45,833    |  |   | 46,998   
|                                |  |                            |            |         |   |            |  |            |           |           |   |           |  |   |          
|                                |  |                            |            |         |  
|Net realizable value            |  | $                          | 14,077,643 |         | $ | 7,488,595  |  | $          | 2,693,361 |           | $ | 1,923,392 |  | $ | 1,972,295
|                                |  |                            |            |         |   |            |  |            |           |           |   |           |  |   |          



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##### Table of Contents

|                                                    |  |        |           |                                                       |      |                                                 |   |        
|--------------------------------------------------- |  | ------ | --------- | ----------------------------------------------------- | ---- | ----------------------------------------------- | - | -------
|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 |  |        |           |                                                       |      |                                                 | $ | 335,459
|                                                    |  |        |           |                                                       |      |                                                 |   |        

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.

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



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##### Table of Contents

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.

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       | )



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##### Table of Contents

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.



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##### Table of Contents

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. 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. The amortization period has been determined by management based on our estimates of the useful lives of the identified intangibles.



F-16



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##### Table of Contents

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.

The Company originally recorded the acquisition of Denver Pain Management as a purchase combination on April 29,
2004. On August 27, 2004 an addendum to the management agreement modified the term of the agreement to a period of nine years. This modification required the acquisition to be treated as an intangible asset subject to quarterly amortization
charges and annual impairment testing. At the end of 2004, this was not reflected as an intangible asset on the balance sheet. The consideration paid and assets acquired totaled $1,717,560. As a result, we recorded this amount as an intangible asset
in 2004. During the years ending 2004 and 2005 the amount of amortization recorded is $160,540 and $516,584 respectively. There was no impairment charge recorded in either period.

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.

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, |             |   | June 30, |   |            | September 30, | 
|Net income, as previously reported                            |  | $         | 2,273,178   |   |          | $ | 3,364,190  |               |  | $ | 3,473,897  |  
|General and administrative expenses                           |  |           | (22,452     | ) |          |   | (5,019     | )             |  |   |           |  
|Fair value adjustments for derivative instruments             |  |           | (18,238,898 | ) |          |   | 4,992,151  |               |  |   | 3,143,397  |  
|Amortization of debt discount                                 |  |           | (470,841    | ) |          |   | (741,460   | )             |  |   | (229,811   | )
|Compensation charge (benefit) from variable option accounting |  |           | (18,138,790 | ) |          |   | 6,161,631  |               |  |   | 5,241,297  |  
|Amortization of intangibles                                   |  |           | (95,894     | ) |          |   | (194,662   | )             |  |   | (248,053   | )
|Provision for income taxes                                    |  |           | 6,930,065   |   |          |   | (2,466,003 | )             |  |   | (2,011,858 | )
|                                                              |  |           |             |   |          |   |            |               |  |   |            |  
|Net income (loss), restated                                   |  | $         | (27,763,632 | ) |          | $ | 11,110,828 |               |  | $ | 9,368,869  |  
|                                                              |  |           |             |   |          |   |            |               |  |   |            |  
|Basic earnings per common share:                              |  |           |             |   |          |   |            |               |  |   |            |  
|As previously reported                                        |  | $         | 0.05        |   |          | $ | 0.07       |               |  | $ | 0.06       |  
|As restated                                                   |  | $         | (0.63       | ) |          | $ | 0.22       |               |  | $ | 0.18       |  
|                                                              |  |           |            
|Diluted earnings per common share:                            |  |           |             |   |          |   |            |               |  |   |            |  
|As previously reported                                        |  | $         | 0.04        |   |          | $ | 0.05       |               |  | $ | 0.05       |  
|As restated                                                   |  | $         | (0.63       | ) |          | $ | 0.18       |               |  | $ | 0.14       |  





|                                                              |  |           |           |   |          |   |            |               |  |   |              |   |  |              |             |   |  |   |            |  
|------------------------------------------------------------- |  | --------- | --------- | - | -------- | - | ---------- | ------------- |  | - | ------------ | - |  | ------------ | ----------- | - |  | - | ---------- | -
|                                                              |  | 2004      |          
|                                                              |  | March 31, |           |   | June 30, |   |            | September 30, |  |   | December 31, |   |  | Year to Date |            
|Net income, as previously reported                            |  | $         | 966,335   |   |          | $ | 1,757,611  |               |  | $ | 1,541,879    |   |  | $            | 1,464,328   |   |  | $ | 5,730,153  |  
|General and administrative expenses                           |  |           | (28,220   | ) |          |   | (87,468    | )             |  |   | (50,288      | ) |  |              | (97,626     | ) |  |   | (263,602   | )
|Fair value adjustments for derivative instruments             |  |           | 1,439,619 |   |          |   | (2,885,673 | )             |  |   | 6,286,632    |   |  |              | (8,096,950  | ) |  |   | (3,256,372 | )
|Amortization of debt discount                                 |  |           | (225,217  | ) |          |   | 55,997     |               |  |   | (943,557     | ) |  |              | (642,820    | ) |  |   | (1,755,597 | )
|Compensation charge (benefit) from variable option accounting |  |           | 2,243,025 |   |          |   | (3,757,355 | )             |  |   | 8,245,813    |   |  |              | (7,088,073  | ) |  |   | (356,590   | )
|Amortization of intangibles                                   |  |           | (28,638   | ) |          |   | (32,217    | )             |  |   | (128,262     | ) |  |              | (85,769     | ) |  |   | (274,886   | )
|Provision for income taxes                                    |  |           | (925,378  | ) |          |   | 1,131,393  |               |  |   | (3,042,565   | ) |  |              | 1,511,962   |   |  |   | (1,324,588 | )
|                                                              |  |           |           |   |          |   |            |               |  |   |              |   |  |              |             |   |  |   |            |  
|Net income (loss), restated                                   |  | $         | 3,441,526 |   |          | $ | (3,817,712 | )             |  | $ | 11,909,652   |   |  | $            | (13,034,948 | ) |  | $ | (1,501,482 | )
|                                                              |  |           |           |   |          |   |            |               |  |   |              |   |  |              |             |   |  |   |            |  
|Basic earnings per common share:                              |  |           |           |   |          |   |            |               |  |   |              |   |  |              |             |   |  |   |            |  
|As previously reported                                        |  | $         | 0.04      |   |          | $ | 0.06       |               |  | $ | 0.05         |   |  | $            | 0.04        |   |  | $ | 0.14       |  
|As restated                                                   |  | $         | 0.13      |   |          | $ | (0.13      | )             |  | $ | 0.38         |   |  | $            | (0.32       | ) |  | $ | (0.05      | )
|                                                              |  |           |           |   |         
|Diluted earnings per common share:                            |  |           |           |   |          |   |            |               |  |   |              |   |  |              |             |   |  |   |            |  
|As previously reported                                        |  | $         | 0.03      |   |          | $ | 0.04       |               |  | $ | 0.04         |   |  | $            | 0.03        |   |  | $ | 0.11       |  
|As restated                                                   |  | $         | 0.11      |   |          | $ | (0.13      | )             |  | $ | 0.31         |   |  | $            | (0.32       | ) |  | $ | (0.05      | )



F-17



---

##### Table of Contents

|                                                                 |  |           |            |   |          |   |            |               |  |   |              |   |  |              |            |   |  |   |             |  
|---------------------------------------------------------------- |  | --------- | ---------- | - | -------- | - | ---------- | ------------- |  | - | ------------ | - |  | ------------ | ---------- | - |  | - | ----------- | -
|                                                                 |  | 2003      |           
|                                                                 |  | March 31, |            |   | June 30, |   |            | September 30, |  |   | December 31, |   |  | Year to Date |           
|Net income, as previously reported                               |  | $         | 323,289    |   |          | $ | 563,000    |               |  | $ | 360,605      |   |  | $            | (33,988    | ) |  | $ | 1,212,906   |  
|General and administrative expenses                              |  |           |           |   |          |   | (123,422   | )             |  |   |             |   |  |              | (114,976   | ) |  |   | (238,398    | )
|Fair value adjustments for derivative instruments                |  |           |           |   |          |   |           |               |  |   |             |   |  |              | (3,173,763 | ) |  |   | (3,173,763  | )
|Compensation charge (benefit) from amortization of debt discount |  |           |           |   |          |   |           |               |  |   |             |   |  |              | (43,372    | ) |  |   | (43,372     | )
|Compensation charge (benefit) from variable option accounting    |  |           | (4,204,050 | ) |          |   | (4,468,700 | )             |  |   | 49,800       |   |  |              | (4,909,750 | ) |  |   | (13,532,700 | )
|Amortization of intangibles                                      |  |           | (9,248     | ) |          |   | (10,740    | )             |  |   | (15,172      | ) |  |              | (17,014    | ) |  |   | (52,174     | )
|                                                                 |  |           |            |   |         
|Provision for income taxes (benefit)                             |  |           | 939,260    |   |          |   | 1,631,536  |               |  |   | (252,704     | ) |  |              | 2,026,566  |   |  |   | 4,344,658   |  
|                                                                 |  |           |            |   |          |   |            |               |  |   |              |   |  |              |            |   |  |   |             |  
|Net (loss) income, restated                                      |  | $         | (2,950,749 | ) |          | $ | (2,408,326 | )             |  | $ | 142,529      |   |  | $            | (6,266,297 | ) |  | $ | (11,482,843 | )
|                                                                 |  |           |            |   |          |   |            |               |  |   |              |   |  |              |            |   |  |   |             |  
|Basic earnings (loss) per common share:                          |  |           |            |   |          |   |            |               |  |   |              |   |  |              |            |   |  |   |             |  
|As previously reported                                           |  | $         | 0.02       |   |          | $ | 0.03       |               |  | $ | 0.02         |   |  | $            | (0.01      | ) |  | $ | 0.06        |  
|As restated                                                      |  | $         | (0.18      | ) |          | $ | (0.12      | )             |  | $ | 0.01         |   |  | $            | (0.26      | ) |  | $ | (0.55       | )
|                                                                 |  |           |            |   |         
|Diluted earnings (loss) per common share:                        |  |           |            |   |          |   |            |               |  |   |              |   |  |              |            |   |  |   |             |  
|As previously reported                                           |  | $         | 0.02       |   |          | $ | 0.02       |               |  | $ | 0.01         |   |  | $            | 0.00       |   |  | $ | 0.05        |  
|As restated                                                      |  | $         | (0.18      | ) |          | $ | (0.12      | )             |  | $ | 0.00         |   |  | $            | (0.26      | ) |  | $ | (0.55       | )



F-18



---

##### Table of Contents

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 PreviouslyReported |             |   | As Restated       |   |             | As PreviouslyReported |  |   | As Restated |  
|Assets                                                                                 |  |                       |             |   |                   |   |             |                       |  |   |             |   |  |   |             |  
|Current assets:                                                                        |  |                       |             |   |                   |   |             |                       |  |   |             |   |  |   |             |  
|Cash                                                                                   |  | $                     | 18,086,682  |   |                   | $ | 21,836,682  |                       |  | $ | 19,100,840  |   |  | $ | 19,100,840  |  
|Accounts receivable, net                                                               |  |                       | 22,909,586  |   |                   |   | 22,909,586  |                       |  |   | 14,077,643  |   |  |   | 14,077,643  |  
|Acquisition consideration paid in escrow                                               |  |                       | 14,525,761  |   |                   |   |            |                       |  |   |            |   |  |   |            |  
|Deposits and prepaid expenses                                                          |  |                       | 3,455,423   |   |                   |   | 3,455,423   |                       |  |   | 1,117,317   |   |  |   | 1,117,317   |  
|Deferred tax assets                                                                    |  |                       |            |   |                   |   | 2,731,000   |                       |  |   |            |   |  |   | 130,000     |  
|                                                                                       |  |                       |             |   |                   |   |             |                       |  |   |             |   |  |   |             |  
|Total current assets                                                                   |  |                       | 58,977,452  |   |                   |   | 50,932,691  |                       |  |   | 34,295,800  |   |  |   | 34,425,800  |  
|Property and equipment, net                                                            |  |                       | 10,935,321  |   |                   |   | 10,694,733  |                       |  |   | 7,119,065   |   |  |   | 7,119,065   |  
|Goodwill, net                                                                          |  |                       | 85,069,645  |   |                   |   | 96,957,956  |                       |  |   | 55,237,910  |   |  |   | 61,817,801  |  
|Due from shareholder                                                                   |  |                       | 2,954,580   |   |                   |   | 1,565,850   |                       |  |   | 1,794,957   |   |  |   | 406,227     |  
|Deferred tax asset                                                                     |  |                       | (715,752    | ) |                   |   | 1,766,247   |                       |  |   | (1,500,200  | ) |  |   | 2,536,923   |  
|Other assets                                                                           |  |                       | 6,522,189   |   |                   |   | 9,265,505   |                       |  |   | 4,628,770   |   |  |   | 6,623,360   |  
|                                                                                       |  |                       |             |   |                   |   |             |                       |  |   |             |   |  |   |             |  
|Total assets                                                                           |  | $                     | 163,743,435 |   |                   | $ | 171,182,982 |                       |  | $ | 101,576,302 |   |  | $ | 112,929,176 |  
|                                                                                       |  |                       |             |   |                   |   |             |                       |  |   |             |   |  |   |             |  
|Liabilities and Stockholders Equity                                                   |  |                       |             |   |                   |   |             |                       |  |   |             |   |  |   |             |  
|Current liabilities:                                                                   |  |                       |             |   |                   |   |             |                       |  |   |             |   |  |   |             |  
|Accounts payable and accrued expenses                                                  |  | $                     | 2,316,636   |   |                   | $ | 2,314,187   |                       |  | $ | 693,682     |   |  | $ | 752,045     |  
|Compensation expense                                                                   |  |                       |            |   |                   |   | 21,496,153  |                       |  |   |            |   |  |   | 14,760,290  |  
|Derivative liabilities                                                                 |  |                       |            |   |                   |   | 16,000,302  |                       |  |   |            |   |  |   | 13,364,535  |  
|Acquisition consideration payable                                                      |  |                       | 916,667     |   |                   |   | 916,667     |                       |  |   | 17,900,833  |   |  |   | 17,900,833  |  
|Income tax payable                                                                     |  |                       | 3,851,709   |   |                   |   | 4,242,929   |                       |  |   | 2,199,100   |   |  |   | 3,939,972   |  
|Current portion of notes payable                                                       |  |                       | 9,812,713   |   |                   |   | 2,786,952   |                       |  |   | 765,177     |   |  |   | 765,177     |  
|Current portion of capital lease obligations                                           |  |                       | 1,437,600   |   |                   |   | 1,437,600   |                       |  |   | 930,117     |   |  |   | 930,117     |  
|Current portion of convertible debentures                                              |  |                       |            |   |                   |   |            |                       |  |   | 3,885,000   |   |  |   | 2,935,480   |  
|                                                                                       |  |                       |             |   |                   |   |             |                       |  |   |             |   |  |   |             |  
|Total current liabilities                                                              |  |                       | 18,335,325  |   |                   |   | 49,194,790  |                       |  |   | 26,373,909  |   |  |   | 55,348,449  |  
|Notes payable, net of current portion                                                  |  |                       | 28,750,000  |   |                   |   | 28,750,000  |                       |  |   | 295,583     |   |  |   | 295,583     |  
|Convertible debentures, net of current portion                                         |  |                       | 10,456,000  |   |                   |   | 9,354,548   |                       |  |   | 17,186,000  |   |  |   | 13,163,014  |  
|Capital lease obligations, net of current portion                                      |  |                       | 2,562,850   |   |                   |   | 2,562,850   |                       |  |   | 2,190,627   |   |  |   | 2,190,627   |  
|                                                                                       |  |                       |             |   |                   |   |             |                       |  |   |             |   |  |   |             |  
|Total liabilities                                                                      |  |                       | 60,104,175  |   |                   |   | 89,862,188  |                       |  |   | 46,046,119  |   |  |   | 70,997,673  |  
|                                                                                       |  |                       |             |   |                   |   |             |                       |  |   |             |   |  |   |             |  
|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       |                       |  |   | 4,151       |   |  |   | 4,151       |  
|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 |                       |  |   | 47,995,110  |   |  |   | 55,539,687  |  
|Retained earnings (accumulated deficit)                                                |  |                       | 16,610,811  |   |                   |   | (20,927,646 | )                     |  |   | 7,499,546   |   |  |   | (13,643,711 | )
|Cumulative translation adjustments                                                     |  |                       | 46,327      |   |                   |   | 46,327      |                       |  |   | 31,376      |   |  |   | 31,376      |  
|                                                                                       |  |                       |             |   |                   |   |             |                       |  |   |             |   |  |   |             |  
|Total stockholders equity                                                             |  |                       | 101,906,531 |   |                   |   | 79,588,065  |                       |  |   | 55,530,183  |   |  |   | 41,931,503  |  
|                                                                                       |  |                       |             |   |                   |   |             |                       |  |   |             |   |  |   |             |  
|Total liabilities and stockholders equity                                             |  | $                     | 163,743,435 |   |                   | $ | 171,182,982 |                       |  | $ | 101,576,302 |   |  | $ | 112,929,176 |  
|                                                                                       |  |                       |             |   |                   |   |             |                       |  |   |             |   |  |   |             |  

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:



F-19



---

##### Table of Contents

|                                                                                       |  |                       |            |            |               |             |                       |                    |            |             |  |                       |             |            |  |   |             |  |   |             |  
|-------------------------------------------------------------------------------------- |  | --------------------- | ---------- | ---------- | ------------- | ----------- | --------------------- | ------------------ | ---------- | ----------- |  | --------------------- | ----------- | ---------- |  | - | ----------- |  | - | ----------- | -
|                                                                                       |  | March 31, 2005        |            |            | June 30, 2005 |             |                       | September 30, 2005 |           
|                                                                                       |  | As PreviouslyReported |            | AsRestated |               |             | As PreviouslyReported |                    | AsRestated |             |  | As PreviouslyReported |             | AsRestated | 
|Assets                                                                                 |  |                       |            |            |               |             |                       |                    |            |             |  |                       |             |            |  |   |             |  |   |             |  
|Current assets:                                                                        |  |                       |            |            |               |             |                       |                    |            |             |  |                       |             |            |  |   |             |  |   |             |  
|Cash                                                                                   |  | $                     | 10,272,446 |            | $             | 10,272,446  |                       |                    | $          | 12,231,091  |  | $                     | 12,231,091  |            |  | $ | 18,086,682  |  | $ | 21,836,682  |  
|Accounts receivable, net                                                               |  |                       | 14,301,134 |            |               | 14,301,134  |                       |                    |            | 19,575,037  |  |                       | 19,575,037  |            |  |   | 22,909,586  |  |   | 22,909,586  |  
|Due from shareholder                                                                   |  |                       | 2,192,800  |            |               | 804,069     |                       |                    |            | 2,290,158   |  |                       | 901,428     |            |  |   | 2,954,580   |  |   | 1,565,850   |  
|Acquisition consideration paid in escrow                                               |  |                       |           |            |               |            |                       |                    |            |            |  |                       |            |            |  |   | 14,525,761  |  |   |            |  
|Deposits and prepaid expenses                                                          |  |                       | 1,976,633  |            |               | 1,976,633   |                       |                    |            | 2,286,010   |  |                       | 2,286,010   |            |  |   | 3,455,423   |  |   | 3,455,423   |  
|Deferred tax asset                                                                     |  |                       |           |            |               | 7,135,000   |                       |                    |            |            |  |                       | 4,755,000   |            |  |   |            |  |   | 2,731,000   |  
|                                                                                       |  |                       |            |            |               |             |                       |                    |            |             |  |                       |             |            |  |   |             |  |   |             |  
|Total current assets                                                                   |  |                       | 28,743,013 |            |               | 34,489,282  |                       |                    |            | 36,382,296  |  |                       | 39,748,566  |            |  |   | 61,932,032  |  |   | 52,498,541  |  
|Property and equipment, net                                                            |  |                       | 7,190,906  |            |               | 7,190,906   |                       |                    |            | 9,614,623   |  |                       | 9,614,623   |            |  |   | 10,935,321  |  |   | 10,694,733  |  
|Goodwill, net                                                                          |  |                       | 55,675,019 |            |               | 66,141,495  |                       |                    |            | 72,745,918  |  |                       | 84,228,000  |            |  |   | 85,069,645  |  |   | 96,957,956  |  
|Other assets                                                                           |  |                       | 5,025,377  |            |               | 7,705,599   |                       |                    |            | 5,717,021   |  |                       | 8,524,248   |            |  |   | 6,522,189   |  |   | 9,265,504   |  
|Deferred tax asset                                                                     |  |                       |           |            |               | 2,354,923   |                       |                    |            |            |  |                       | 2,057,685   |            |  |   |            |  |   | 1,766,247   |  
|                                                                                       |  |                       |            |            |               |             |                       |                    |            |             |  |                       |             |            |  |   |             |  |   |             |  
|Total assets                                                                           |  | $                     | 96,634,315 |            | $             | 117,882,208 |                       |                    | $          | 124,459,858 |  | $                     | 144,173,122 |            |  | $ | 164,459,187 |  | $ | 171,182,982 |  
|                                                                                       |  |                       |            |            |               |             |                       |                    |            |             |  |                       |             |            |  |   |             |  |   |             |  
|Liabilities and Stockholders Equity                                                   |  |                       |            |            |               |             |                       |                    |            |             |  |                       |             |            |  |   |             |  |   |             |  
|Current liabilities:                                                                   |  |                       |            |            |               |             |                       |                    |            |             |  |                       |             |            |  |   |             |  |   |             |  
|Accounts payable and accrued expenses                                                  |  | $                     | 849,584    |            | $             | 930,239     |                       |                    | $          | 1,444,715   |  | $                     | 1,525,369   |            |  | $ | 2,247,741   |  | $ | 2,314,187   |  
|Accrued compensation expense                                                           |  |                       |           |            |               | 32,899,080  |                       |                    |            |            |  |                       | 26,737,450  |            |  |   |            |  |   | 21,496,153  |  
|Derivative liabilities                                                                 |  |                       |           |            |               | 27,993,686  |                       |                    |            |            |  |                       | 19,143,699  |            |  |   |            |  |   | 16,000,302  |  
|Acquisition consideration payable                                                      |  |                       | 583,333    |            |               | 583,333     |                       |                    |            | 2,154,300   |  |                       | 2,154,300   |            |  |   | 916,667     |  |   | 916,667     |  
|Income tax payable                                                                     |  |                       | 503,004    |            |               | 2,475,978   |                       |                    |            | 1,922,359   |  |                       | 4,394,981   |            |  |   | 3,851,709   |  |   | 4,242,929   |  
|Interest payable                                                                       |  |                       | 104,063    |            |               |            |                       |                    |            | 65,350      |  |                       |            |            |  |   | 68,895      |  |   |            |  
|Current portion of notes payable                                                       |  |                       | 658,603    |            |               | 658,603     |                       |                    |            |            |  |                       |            |            |  |   | 9,812,713   |  |   | 2,786,952   |  
|Current portion of capital lease obligations                                           |  |                       | 609,443    |            |               | 609,443     |                       |                    |            | 1,313,699   |  |                       | 1,313,699   |            |  |   | 1,437,600   |  |   | 1,437,600   |  
|Current portion of convertible debentures                                              |  |                       | 2,382,334  |            |               | 2,382,334   |                       |                    |            |            |  |                       |            |            |  |   |            |  |   |            |  
|                                                                                       |  |                       |            |            |               |             |                       |                    |            |             |  |                       |             |            |  |   |             |  |   |             |  
|Total current liabilities                                                              |  |                       | 5,690,364  |            |               | 68,532,696  |                       |                    |            | 6,900,423   |  |                       | 55,269,498  |            |  |   | 18,335,325  |  |   | 49,194,790  |  
|Notes payable, net of current portion                                                  |  |                       | 139,035    |            |               | 139,035     |                       |                    |            | 13,641,642  |  |                       | 13,641,642  |            |  |   | 28,750,000  |  |   | 28,750,000  |  
|Convertible debentures, net of current portion                                         |  |                       | 13,023,266 |            |               | 10,807,187  |                       |                    |            | 10,456,000  |  |                       | 9,106,972   |            |  |   | 10,456,000  |  |   | 9,354,548   |  
|Capital lease obligations, net of current portion                                      |  |                       | 2,313,341  |            |               | 2,313,341   |                       |                    |            | 2,331,563   |  |                       | 2,331,563   |            |  |   | 2,562,850   |  |   | 2,562,850   |  
|Deferred tax liability                                                                 |  |                       | 1,839,367  |            |               |            |                       |                    |            | 2,505,012   |  |                       |            |            |  |   | 715,752     |  |   |            |  
|                                                                                       |  |                       |            |            |               |             |                       |                    |            |             |  |                       |             |            |  |   |             |  |   |             |  
|Total liabilities                                                                      |  |                       | 23,005,372 |            |               | 81,792,259  |                       |                    |            | 35,834,640  |  |                       | 80,349,675  |            |  |   | 60,819,927  |  |   | 89,862,188  |  
|                                                                                       |  |                       |            |            |               |             |                       |                    |            |             |  |                       |             |            |  |   |             |  |   |             |  
|Minority interests                                                                     |  |                       |           |            |               |            |                       |                    |            |            |  |                       | 963,127     |            |  |   | 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 |  |                       | 4,879      |            |               | 4,879       |                       |                    |            | 5,216       |  |                       | 5,216       |            |  |   | 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                                                             |  |                       | 63,830,551 |            |               | 77,471,621  |                       |                    |            | 74,485,837  |  |                       | 93,117,494  |            |  |   | 85,243,879  |  |   | 100,463,972 |  
|Retained earnings (accumulated deficit)                                                |  |                       | 9,772,724  |            |               | (41,407,342 | )                     |                    |            | 13,136,914  |  |                       | (30,296,514 | )          |  |   | 16,610,811  |  |   | (20,927,646 | )
|Cumulative translation adjustment                                                      |  |                       | 20,789     |            |               | 20,789      |                       |                    |            | 34,124      |  |                       | 34,124      |            |  |   | 46,327      |  |   | 46,327      |  
|                                                                                       |  |                       |            |            |               |             |                       |                    |            |             |  |                       |             |            |  |   |             |  |   |             |  
|Total stockholders equity                                                             |  |                       | 73,628,943 |            |               | 36,089,947  |                       |                    |            | 87,662,091  |  |                       | 62,860,320  |            |  |   | 101,906,531 |  |   | 79,588,065  |  
|                                                                                       |  |                       |            |            |               |             |                       |                    |            |             |  |                       |             |            |  |   |             |  |   |             |  
|Total liabilities and stockholders equity                                             |  | $                     | 96,634,315 |            | $             | 117,882,208 |                       |                    | $          | 124,459,858 |  | $                     | 144,173,122 |            |  | $ | 164,459,187 |  | $ | 171,182,982 |  
|                                                                                       |  |                       |            |            |               |             |                       |                    |            |             |  |                       |             |            |  |   |             |  |   |             |  

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:



F-20



---

##### Table of Contents

|                                                                                                                                  |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|--------------------------------------------------------------------------------------------------------------------------------- |  | --------------------- | ---------- | - | ------------- | - | ---------- | --------------------- |  | - | ----------------- | - |  | --------------------- | ----------- | ---------- |  | - | --------------------- |  | ---------- | ---------- | - |  | - | ----------- |  | - | ----------- | -
|                                                                                                                                  |  | March 31, 2004        |            |   | June 30, 2004 |   |            | September 30, 2004    |  |   | December 31, 2004 |  
|                                                                                                                                  |  | As PreviouslyReported |            |   | AsRestated    |   |            | As PreviouslyReported |  |   | AsRestated        |   |  | As PreviouslyReported |             | AsRestated |  |   | As PreviouslyReported |  | AsRestated |           
|Assets                                                                                                                            |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|Current assets:                                                                                                                   |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|Cash                                                                                                                              |  | $                     | 10,419,527 |   |               | $ | 10,419,527 |                       |  | $ | 4,038,249         |   |  | $                     | 4,038,249   |            |  | $ | 5,031,783             |  | $          | 5,031,783  |   |  | $ | 19,100,840  |  | $ | 19,100,840  |  
|Accounts receivable, net                                                                                                          |  |                       | 6,762,493  |   |               |   | 6,762,493  |                       |  |   | 11,942,589        |   |  |                       | 11,942,589  |            |  |   | 13,328,623            |  |            | 13,328,623 |   |  |   | 14,077,643  |  |   | 14,077,643  |  
|Due from shareholder                                                                                                              |  |                       | 383,090    |   |               |   | 383,090    |                       |  |   | 28,021            |   |  |                       | 28,021      |            |  |   | 1,545,097             |  |            | 200,140    |   |  |   | 1,794,957   |  |   |            |  
|Acquisition consideration paid in escrow                                                                                          |  |                       | 284,964    |   |               |   | 284,964    |                       |  |   | 79,301            |   |  |                       | 79,301      |            |  |   | 78,810                |  |            | 78,810     |   |  |   |            |  |   |            |  
|Deposits and prepaid expenses                                                                                                     |  |                       | 599,638    |   |               |   | 599,638    |                       |  |   | 780,093           |   |  |                       | 780,093     |            |  |   | 635,506               |  |            | 635,506    |   |  |   | 1,117,317   |  |   | 1,117,317   |  
|Deferred tax asset                                                                                                                |  |                       |           |   |               |   |           |                       |  |   |                  |   |  |                       |            |            |  |   |                      |  |            |           |   |  |   |            |  |   | 130,000     |  
|                                                                                                                                  |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|Total current assets                                                                                                              |  |                       | 18,449,712 |   |               |   | 18,449,712 |                       |  |   | 16,868,253        |   |  |                       | 16,868,253  |            |  |   | 20,619,819            |  |            | 19,274,862 |   |  |   | 36,090,757  |  |   | 34,425,800  |  
|                                                                                                                                  |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|Property and equipment, net                                                                                                       |  |                       | 4,734,001  |   |               |   | 4,734,001  |                       |  |   | 6,433,246         |   |  |                       | 6,433,246   |            |  |   | 6,702,977             |  |            | 6,702,977  |   |  |   | 7,119,065   |  |   | 7,119,065   |  
|Goodwill, net                                                                                                                     |  |                       | 24,059,078 |   |               |   | 28,984,604 |                       |  |   | 37,898,540        |   |  |                       | 43,542,191  |            |  |   | 36,475,796            |  |            | 42,230,992 |   |  |   | 55,237,910  |  |   | 61,817,801  |  
|Deferred tax asset                                                                                                                |  |                       |           |   |               |   | 3,662,000  |                       |  |   |                  |   |  |                       | 4,995,000   |            |  |   |                      |  |            | 2,149,000  |   |  |   |            |  |   | 2,536,923   |  
|Due from shareholder                                                                                                              |  |                       |           |   |               |   |           |                       |  |   |                  |   |  |                       |            |            |  |   |                      |  |            |           |   |  |   |            |  |   | 406,227     |  
|Other assets                                                                                                                      |  |                       | 4,437,083  |   |               |   | 5,477,125  |                       |  |   | 4,841,698         |   |  |                       | 6,150,175   |            |  |   | 4,532,904             |  |            | 7,143,979  |   |  |   | 4,628,770   |  |   | 6,623,360   |  
|                                                                                                                                  |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|Total assets                                                                                                                      |  | $                     | 51,679,874 |   |               | $ | 61,307,442 |                       |  | $ | 66,041,737        |   |  | $                     | 77,988,865  |            |  | $ | 68,331,496            |  | $          | 77,501,810 |   |  | $ | 103,076,502 |  | $ | 112,929,176 |  
|                                                                                                                                  |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|Liabilities and Stockholders Equity                                                                                              |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|Current liabilities:                                                                                                              |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|Accounts payable and accrued expenses                                                                                             |  | $                     | 393,616    |   |               | $ | 454,617    |                       |  | $ | 671,912           |   |  | $                     | 732,913     |            |  | $ | 865,590               |  | $          | 926,591    |   |  | $ | 562,314     |  | $ | 752,045     |  
|Accrued compensation expense                                                                                                      |  |                       |           |   |               |   | 12,160,675 |                       |  |   |                  |   |  |                       | 15,918,030  |            |  |   |                      |  |            | 7,672,218  |   |  |   |            |  |   | 14,760,290  |  
|Derivative liabilities                                                                                                            |  |                       |           |   |               |   | 9,705,739  |                       |  |   |                  |   |  |                       | 11,577,842  |            |  |   |                      |  |            | 5,739,613  |   |  |   |            |  |   | 13,364,535  |  
|Acquisition consideration payable                                                                                                 |  |                       |           |   |               |   |           |                       |  |   |                  |   |  |                       |            |            |  |   |                      |  |            |           |   |  |   | 17,900,833  |  |   | 17,900,833  |  
|Income tax payable                                                                                                                |  |                       | 329,026    |   |               |   | 473,097    |                       |  |   | 891,329           |   |  |                       | 1,397,109   |            |  |   | 1,370,060             |  |            | 2,261,994  |   |  |   | 2,199,100   |  |   | 3,939,972   |  
|Interest payable                                                                                                                  |  |                       |           |   |               |   | 22,917     |                       |  |   | 62,500            |   |  |                       | 58,750      |            |  |   | 55,975                |  |            | 71,868     |   |  |   | 131,368     |  |   |            |  
|Current portion of notes payable                                                                                                  |  |                       |           |   |               |   | 867,206    |                       |  |   | 4,258,850         |   |  |                       | 4,258,850   |            |  |   | 1,242,791             |  |            | 1,242,791  |   |  |   | 765,177     |  |   | 765,177     |  
|Current portion of capital lease obligations                                                                                      |  |                       | 867,206    |   |               |   | 607,294    |                       |  |   | 611,426           |   |  |                       | 611,426     |            |  |   | 935,691               |  |            | 935,691    |   |  |   | 930,117     |  |   | 930,117     |  
|Current portion of convertible debentures                                                                                         |  |                       | 607,294    |   |               |   |           |                       |  |   | 2,490,000         |   |  |                       | 2,490,000   |            |  |   | 3,260,000             |  |            | 3,260,000  |   |  |   | 3,885,000   |  |   | 2,935,480   |  
|                                                                                                                                  |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|Total current liabilities                                                                                                         |  |                       | 2,197,142  |   |               |   | 24,291,545 |                       |  |   | 8,986,017         |   |  |                       | 37,044,920  |            |  |   | 7,730,107             |  |            | 22,110,766 |   |  |   | 26,373,909  |  |   | 55,348,449  |  
|Shareholder loans                                                                                                                 |  |                       |           |   |               |   |           |                       |  |   |                  |   |  |                       |            |            |  |   | 70,758                |  |            | 70,758     |   |  |   |            |  |   |            |  
|Notes payable, net of current portion                                                                                             |  |                       | 51,280     |   |               |   | 51,280     |                       |  |   | 471,225           |   |  |                       | 471,225     |            |  |   | 183,925               |  |            | 183,925    |   |  |   | 295,583     |  |   | 295,583     |  
|Convertible debentures, net of current portion                                                                                    |  |                       | 20,000,000 |   |               |   | 14,716,997 |                       |  |   | 17,373,600        |   |  |                       | 12,562,543  |            |  |   | 18,180,160            |  |            | 13,238,987 |   |  |   | 17,186,000  |  |   | 13,163,014  |  
|Capital lease obligations, net of current portion                                                                                 |  |                       | 2,451,850  |   |               |   | 2,451,850  |                       |  |   | 2,455,181         |   |  |                       | 2,455,181   |            |  |   | 2,318,465             |  |            | 2,318,465  |   |  |   | 2,190,627   |  |   | 2,190,627   |  
|Deferred tax liability                                                                                                            |  |                       | 874,608    |   |               |   | 1,412,455  |                       |  |   | 1,188,711         |   |  |                       | 1,686,716   |            |  |   | 1,541,300             |  |            | 1,884,077  |   |  |   | 1,500,200   |  |   |            |  
|                                                                                                                                  |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|Total liabilities                                                                                                                 |  |                       | 25,574,880 |   |               |   | 42,924,127 |                       |  |   | 30,474,734        |   |  |                       | 54,220,585  |            |  |   | 30,024,715            |  |            | 39,806,978 |   |  |   | 47,546,319  |  |   | 70,997,673  |  
|                                                                                                                                  |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|                                                                                                                                  |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|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 |  |                       | 2,796      |   |               |   | 2,796      |                       |  |   | 3,109             |   |  |                       | 3,109       |            |  |   | 3,195                 |  |            | 3,195      |   |  |   | 4,151       |  |   | 4,151       |  
|Preferred stock, par value $0.0001 per share; Authorized 10,000,000 shares; issued and outstanding -0- shares                     |  |                       |           |   |               |   |           |                       |  |   |                  |   |  |                       |            |            |  |   |                      |  |            |           |   |  |   |            |  |   |            |  
|Additional paid in capital                                                                                                        |  |                       | 23,370,697 |   |               |   | 27,085,449 |                       |  |   | 31,081,243        |   |  |                       | 36,294,273  |            |  |   | 32,256,259            |  |            | 38,288,292 |   |  |   | 47,995,110  |  |   | 55,539,687  |  
|Retained earnings (accumulated deficit)                                                                                           |  |                       | 2,735,728  |   |               |   | (8,700,703 | )                     |  |   | 4,493,339         |   |  |                       | (12,518,414 | )          |  |   | 6,035,218             |  |            | (608,764   | ) |  |   | 7,499,546   |  |   | (13,643,711 | )
|Cumulative translation adjustment                                                                                                 |  |                       | (4,227     | ) |               |   | (4,227     | )                     |  |   | (10,688           | ) |  |                       | (10,688     | )          |  |   | 12,109                |  |            | 12,109     |   |  |   | 31,376      |  |   | 31,376      |  
|                                                                                                                                  |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|Total stockholders equity                                                                                                        |  |                       | 26,104,994 |   |               |   | 18,383,315 |                       |  |   | 35,567,003        |   |  |                       | 23,768,280  |            |  |   | 38,306,781            |  |            | 37,694,832 |   |  |   | 55,530,183  |  |   | 41,931,503  |  
|                                                                                                                                  |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  
|Total liabilities and stockholders equity                                                                                        |  | $                     | 51,679,874 |   |               | $ | 61,307,442 |                       |  | $ | 66,041,737        |   |  | $                     | 77,988,865  |            |  | $ | 68,331,496            |  | $          | 77,501,810 |   |  | $ | 103,076,502 |  | $ | 112,929,176 |  
|                                                                                                                                  |  |                       |            |   |               |   |            |                       |  |   |                   |   |  |                       |             |            |  |   |                       |  |            |            |   |  |   |             |  |   |             |  



F-21



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##### Table of Contents

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 Reported        |             |   | As Restated       |   |             | As Reported       |  |   | As Restated |   |  | As Reported |             |   | As Restated |  
|Net cash provided by (used in) operating activities |  | $                  | 4,025,460   |   |                   | $ | 4,025,460   |                   |  | $ | 3,422,811   |   |  | $           | 4,119,026   |   |             | $ | (310,963   | ) |  | $ | 14,562     |  
|Net cash used in investing activities               |  | $                  | (32,001,202 | ) |                   | $ | (32,001,202 | )                 |  | $ | (16,154,668 | ) |  | $           | (18,407,883 | ) |             | $ | (7,357,171 | ) |  | $ | (7,682,696 | )
|Net cash provided by financing activities           |  | $                  | 26,961,584  |   |                   | $ | 26,961,584  |                   |  | $ | 23,908,930  |   |  | $           | 25,465,930  |   |             | $ | 13,513,217 |   |  | $ | 13,513,217 |  



|(3) | Acquisitions
|--- | ------------

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
|                         |  |   |          

Purchase price allocation of remaining 49% acquisition in March 2001:



F-22



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##### Table of Contents

|                                      |  |   |          
|------------------------------------- |  | - | ---------
|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-23



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##### Table of Contents

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 |  
|                                         |  |   |           |  



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##### Table of Contents

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-25



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##### Table of Contents

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-26



---

##### Table of Contents

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
|                                         |  |   |          



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##### Table of Contents

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
|                                         |  |   |          



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##### Table of Contents

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.

Taylor was acquired on June 7, 2004 and utilized the purchase method of accounting.

Purchase price allocation:



|                                         |  |   |          
|---------------------------------------- |  | - | ---------
|Cash Consideration                       |  | $ | 1,875,000
|Stock Consideration                      |  |   | 2,240,542
|Contingent Consideration                 |  |   | 1,217,417
|Acquisition Costs                        |  |   | 289,588  
|Deferred taxes                           |  |   | 49,353   
|Less:                                    |  |   |          
|Cash                                     |  |   | 1,000    
|Accounts receivable                      |  |   | 249,556  
|Property and equipment                   |  |   | 24,583   
|Intangible Assets                        |  |   | 123,383  
|Plus:                                    |  |   |          
|Accounts payable and accrued liabilities |  |   | 6,289    
|Note payable                             |  |   | 160,623  
|                                         |  |   |          
|Goodwill                                 |  | $ | 5,440,290
|                                         |  |   |          

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.



F-29



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##### Table of Contents

Purchase price allocation:



|                                         |  |   |          
|---------------------------------------- |  | - | ---------
|Cash Consideration                       |  | $ | 875,000  
|Stock Consideration                      |  |   | 1,060,088
|Contingent Consideration                 |  |   | 581,951  
|Acquisition Costs                        |  |   | 202,728  
|Deferred taxes                           |  |   | 34,361   
|Less:                                    |  |   |          
|Cash                                     |  |   | 72,696   
|Accounts receivable                      |  |   | 346,501  
|Property and equipment                   |  |   | 181,556  
|Intangible Assets                        |  |   | 85,904   
|Plus:                                    |  |   |          
|Accounts payable and accrued liabilities |  |   | 33,975   
|Note payable, current                    |  |   | 77,165   
|                                         |  |   |          
|Goodwill                                 |  | $ | 2,178,611
|                                         |  |   |          

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.



F-30



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##### Table of Contents

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
|                                         |  |   |          

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.



F-31



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##### Table of Contents

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

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       |  | $ | 1,000,000
|Stock Consideration      |  |   | 1,122,086
|Acquisition Costs        |  |   | 203,176  
|Deferred taxes           |  |   | 11,438   
|Less:                    |  |   |          
|Cash                     |  |   | 200      
|Accounts receivable      |  |   | 185,055  
|Property and equipment   |  |   | 132,030  
|Intangible Assets        |  |   | 28,596   
|Plus:                    |  |   |          
|Capital lease obligation |  |   | 43,020   
|                         |  |   |          
|Goodwill                 |  | $ | 2,033,839
|                         |  |   |          

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.



F-32



---

##### Table of Contents

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     |  | $ | 3,750,000
|Stock Consideration    |  |   | 3,795,317
|Acquisition Costs      |  |   | 442,276  
|Less:                  |  |   |          
|Cash                   |  |   | 1,898    
|Property and equipment |  |   | 200,000  
|Prepaids and deposits  |  |   | 2,000    
|Intangible Assets      |  |   | 87,397   
|Plus:                  |  |   |          
|Note payable           |  |   | 76,000   
|                       |  |   |          
|Goodwill               |  | $ | 7,772,298
|                       |  |   |          

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-33



---

##### Table of Contents

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)



|                                                   |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   |            |  
|-------------------------------------------------- |  | ------------------ | ---------- | - | ------- | - | ------- | -------- |  | - | --------- | - |  | ------- | --------- | - | ------- | - | ----------- | - |  | ------------------- | ------- |  | --------- | --------- | - |  | - | ---------- | ---- |  | - | ---------- | -
|                                                   |  | PainCareHistorical |            |   | CPS (4) |   |         | LWSC (5) |  |   | GSC (6)   |   |  | PCSD(7) |           |   | RING(8) |   | CENTENO (9) |   |  | Pro FormaAdjustment |         |  | Pro Forma |          
|Revenues                                           |  | $                  | 68,663,797 |   |         | $ | 722,974 |          |  | $ | 1,828,266 |   |  | $       | 2,724,346 |   |         | $ | 817,534     |   |  | $                   | 773,146 |  | $         | 2,169,806 |   |  | $ |           |      |  | $ | 77,699,869 |  
|Cost of revenues                                   |  |                    | 12,470,369 |   |         |   | 326,637 |          |  |   | 301,437   |   |  |         | 307,342   |   |         |   | 168,640     |   |  |                     | 180,000 |  |           | 87,514    |   |  |   | (621,570   | )(1) |  |   | 13,220,369 |  
|                                                   |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   |            |  
|Gross profit                                       |  |                    | 56,193,428 |   |         |   | 396,337 |          |  |   | 1,526,829 |   |  |         | 2,417,004 |   |         |   | 648,894     |   |  |                     | 593,146 |  |           | 2,082,292 |   |  |   | 621,570    |      |  |   | 64,479,500 |  
|Operating expenses:                                |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   |            |  
|General and administrative                         |  |                    | 38,084,609 |   |         |   | 398,396 |          |  |   | 687,917   |   |  |         | 752,747   |   |         |   | 333,018     |   |  |                     | 179,218 |  |           | 1,982,720 |   |  |   | (1,479,581 | )(2) |  |   | 40,939,044 |  
|Compensation expense                               |  |                    | 2,382,259  |   |         |   |        |          |  |   |          |   |  |         |          |   |         |   |            |   |  |                     |        |  |           |          |   |  |   |           |      |  |   | 2,382,259  |  
|Depreciation and amortization expense              |  |                    | 3,145,754  |   |         |   |        |          |  |   |          |   |  |         | 84,212    |   |         |   | 2,284       |   |  |                     |        |  |           |          |   |  |   |           |      |  |   | 3,232,250  |  
|                                                   |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   |            |  
|Operating income (loss)                            |  |                    | 12,580,806 |   |         |   | (2,059  | )        |  |   | 838,912   |   |  |         | 1,580,045 |   |         |   | 313,592     |   |  |                     | 413,928 |  |           | 99,572    |   |  |   | 2,101,151  |      |  |   | 17,925,947 |  
|Interest expense                                   |  |                    | (5,795,915 | ) |         |   | (2,040  | )        |  |   | (1,089    | ) |  |         | (15,092   | ) |         |   | (4,529      | ) |  |                     |        |  |           | (11,005   | ) |  |   |           |      |  |   | (5,829,670 | )
|Derivative expense                                 |  |                    | (7,055,502 | ) |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   | (7,055,502 | )
|Other income                                       |  |                    | 444,549    |   |         |   |        |          |  |   | 38,099    |   |  |         | 2,938     |   |         |   |            |   |  |                     | 2,748   |  |           |          |   |  |   |           |      |  |   | 488,334    |  
|                                                   |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   |            |  
|Income (loss) before taxes                         |  |                    | 173,938    |   |         |   | (4,099  | )        |  |   | 875,922   |   |  |         | 1,567,891 |   |         |   | 309,063     |   |  |                     | 416,676 |  |           | 88,567    |   |  |   | 2,101,151  |      |  |   | 5,529,109  |  
|Provision for income taxes                         |  |                    | 4,925,679  |   |         |   |        |          |  |   |          |   |  |         |          |   |         |   |            |   |  |                     |        |  |           |          |   |  |   | 1,138,907  | (3)  |  |   | 6,064,586  |  
|                                                   |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   |            |  
|Income (loss) before minority interests share     |  |                    | (4,751,741 | ) |         |   | (4,099  | )        |  |   | 875,922   |   |  |         | 1,567,890 |   |         |   | 309,063     |   |  |                     | 416,676 |  |           | 88,567    |   |  |   | 962,244    |      |  |   | (535,477   | )
|Minority interests share                          |  |                    | (587,637   | ) |         |   |        |          |  |   | (284,675  | ) |  |         | (423,330  | ) |         |   |            |   |  |                     |        |  |           |          |   |  |   |           |      |  |   | (1,295,642 | )
|                                                   |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   |            |  
|Net income (loss)                                  |  | $                  | (5,339,378 | ) |         | $ | (4,099  | )        |  | $ | 591,247   |   |  | $       | 1,144,561 |   |         | $ | 309,063     |   |  | $                   | 416,676 |  | $         | 88,567    |   |  | $ | 962,244    |      |  | $ | (1,831,119 | )
|                                                   |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   |            |  
|Basic loss per common share                        |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  | $ | (0.03      | )
|                                                   |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   |            |  
|Basic weighted average common shares outstanding   |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   | 53,360,077 |  
|                                                   |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   |            |  
|Diluted loss per common share                      |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  | $ | (0.03      | )
|                                                   |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   |            |  
|Diluted weighted average common shares outstanding |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   | 53,360,077 |  
|                                                   |  |                    |            |   |         |   |         |          |  |   |           |   |  |         |           |   |         |   |             |   |  |                     |         |  |           |           |   |  |   |            |      |  |   |            |  

---

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-34



---

##### Table of Contents

Pro Forma Consolidated Statement of Operations

Year Ended December 31, 2004

(Unaudited)



|                                                  |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  |   |            |  
|------------------------------------------------- |  | ------------------ | ---------- | - | ------- | - | ---------- |  | - | ----------- | - |  | --------- | --------- | - | ---------- | - | --------- | ------- |  | ------------------- | ------- | - | --------- | - | --------- |  | - | ---------- | ---- |  | - | ---------- | -
|                                                  |  | PainCareHistorical |            |   | DPM (3) |   | GPP/GSC(4) |  |   | DYNAMIC (5) |   |  | TAYLOR(6) |           |   | ZOLPER (7) |   |           | CPM (8) |  | ProFormaAdjustments |         |   | Pro Forma |  
|Revenues                                          |  | $                  | 37,917,900 |   |         | $ | 897,909    |  | $ | 749,511     |   |  | $         | 2,271,031 |   |            | $ | 1,067,205 |         |  | $                   | 671,563 |   |           | $ | 6,872,177 |  | $ |           |      |  | $ | 50,447,296 |  
|Cost of revenues                                  |  |                    | 6,663,945  |   |         |   | 148,520    |  |   | 50,394      |   |  |           | 344,613   |   |            |   | 14,086    |         |  |                     | 37,819  |   |           |   | 687,500   |  |   |            |      |  |   | 7,946,877  |  
|                                                  |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  |   |            |  
|Gross profit                                      |  |                    | 31,253,955 |   |         |   | 749,389    |  |   | 699,117     |   |  |           | 1,926,418 |   |            |   | 1,053,119 |         |  |                     | 633,744 |   |           |   | 6,184,677 |  |   |           |      |  |   | 42,500,419 |  
|Operating expenses:                               |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  |   |            |  
|General and administrative                        |  |                    | 20,052,066 |   |         |   | 385,400    |  |   | 613,586     |   |  |           | 1,728,980 |   |            |   | 619,592   |         |  |                     | 255,298 |   |           |   | 1,093,220 |  |   | (907,686   | )(1) |  |   | 23,840,456 |  
|Compensation expense                              |  |                    | 356,590    |   |         |   |           |  |   |            |   |  |           |          |   |            |   |          |         |  |                     |        |   |           |   |          |  |   |           |      |  |   | 356,590    |  
|Depreciation and amortization expense             |  |                    | 1,386,713  |   |         |   |           |  |   | 23,400      |   |  |           | 36,735    |   |            |   | 22,707    |         |  |                     |        |   |           |   | 16,500    |  |   |           |      |  |   | 1,486,055  |  
|                                                  |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  |   |            |  
|Operating income                                  |  |                    | 9,458,586  |   |         |   | 363,989    |  |   | 62,131      |   |  |           | 160,703   |   |            |   | 410,820   |         |  |                     | 378,446 |   |           |   | 5,074,957 |  |   | 907,686    |      |  |   | 16,817,318 |  
|Interest expense                                  |  |                    | (3,463,677 | ) |         |   |           |  |   | (1,724      | ) |  |           | (4,044    | ) |            |   | (5,419    | )       |  |                     | (4,049  | ) |           |   |          |  |   |           |      |  |   | (3,478,913 | )
|Derivative expense                                |  |                    | (3,256,372 | ) |         |   |           |  |   |            |   |  |           |          |   |            |   |          |         |  |                     |        |   |           |   |          |  |   |           |      |  |   | (3,256,372 | )
|Other income                                      |  |                    | 170,569    |   |         |   |           |  |   | 25,247      |   |  |           |          |   |            |   | 1,161     |         |  |                     | 73      |   |           |   | 79        |  |   |           |      |  |   | 197,128    |  
|                                                  |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  |   |            |  
|Income before taxes                               |  |                    | 2,909,105  |   |         |   | 363,989    |  |   | 85,654      |   |  |           | 156,659   |   |            |   | 406,562   |         |  |                     | 374,470 |   |           |   | 5,075,036 |  |   | 907,686    |      |  |   | 10,279,161 |  
|Provision for income taxes                        |  |                    | 4,410,587  |   |         |   |           |  |   |            |   |  |           |          |   |            |   |          |         |  |                     |        |   |           |   |          |  |   | 2,272,494  | (2)  |  |   | 6,683,081  |  
|                                                  |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  |   |            |  
|Net income (loss)                                 |  | $                  | (1,501,482 | ) |         | $ | 363,989    |  | $ | 85,654      |   |  | $         | 156,659   |   |            | $ | 406,562   |         |  | $                   | 374,470 |   |           | $ | 5,075,036 |  | $ | (1,364,808 | )    |  | $ | 3,596,020  |  
|                                                  |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  |   |            |  
|Basic earnings per common share                   |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  | $ | 0.10       |  
|                                                  |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  |   |            |  
|Basic weighted average commonshares outstanding   |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  |   | 37,905,097 |  
|                                                  |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  |   |            |  
|Diluted earnings per commonshare                  |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  | $ | 0.09       |  
|                                                  |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  |   |            |  
|Diluted weighted average commonshares outstanding |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  |   | 42,427,834 |  
|                                                  |  |                    |            |   |         |   |            |  |   |             |   |  |           |           |   |            |   |           |         |  |                     |         |   |           |   |           |  |   |            |      |  |   |            |  

---

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-35



---

##### Table of Contents

|(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
|                                |  |      |            |      |   |          



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##### Table of Contents

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:



|                                                 |  |                       |            |                                |   |                                 |  |                                |           |       |   |         |  |   |            
|------------------------------------------------ |  | --------------------- | ---------- | ------------------------------ | - | ------------------------------- |  | ------------------------------ | --------- | ----- | - | ------- |  | - | -----------
|Company Name                                     |  | Initial Consideration |            | ContingentConsideration Year 1 |   | Contingent Consideration Year
2 |  | ContingentConsideration 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-37



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##### Table of Contents

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 |   | Net Value
|MedX Distribution right               |  | $    | 2,212,673  |              | $ | 581,831   |  | $    | 1,630,842  |              | $ | 2,212,673 |  | $ | 208,975 |  | $ | 2,003,698
|Deferred acquisition costs            |  |      | 475,958    |              |   |          |  |      | 475,958    |              |   |          |  |   |        |  |   |         
|Contract Right  DPM                  |  |      | 6,026,200  |              |   | 677,124   |  |      | 5,349,076  |              |   | 1,717,600 |  |   | 160,540 |  |   | 1,557,060
|Contract Right  APG                  |  |      | 486,023    |              |   | 34,452    |  |      | 451,571    |              |   | 291,667   |  |   | 14,667  |  |   | 277,000  
|Contract Right  SPA                  |  |      | 1,433,132  |              |   | 118,657   |  |      | 1,314,475  |              |   | 1,006,000 |  |   | 50,400  |  |   | 955,600  
|Contract Right  SCPI                 |  |      | 1,051,564  |              |   | 87,095    |  |      | 964,469    |              |   | 738,333   |  |   | 37,000  |  |   | 701,333  
|Physician practice and surgery center |  |      |            |              |   |           |  |      |            |              |   |           |  |   |         |  |   |          
|acquisitions                          |  |      | 2,161,757  |              |   | 513,326   |  |      | 1,648,431  |              |   | 1,395,370 |  |   | 266,701 |  |   | 1,128,669
|                                      |  |      |            |              |   |           |  |      |            |              |   |           |  |   |         |  |   |          
|Total                                 |  | $    | 13,847,307 |              | $ | 2,012,485 |  | $    | 11,834,822 |              | $ | 7,361,643 |  | $ | 738,283 |  | $ | 6,623,360
|                                      |  |      |            |              |   |           |  |      |            |              |   |           |  |   |         |  |   |          

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



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##### Table of Contents

|(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-39



---

##### Table of Contents

|(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
currently at 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
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

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 monthly payments of $70,000 to January 2005, $150,000 from
February 2005 to January 2006, $181,667 from February 2006 to January 2007 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 monthly payments of $70,000 to February 2005, $150,000
from March 2005 to February 2006, $181,667 from March 2006 to February 2007 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 monthly payments of $25,000 to May 2005, $50,000 from June
2005 to May 2006 and $60,000 from June 2006 to May 2007; matures June 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
|                                                                                                                                                                                                                                                                                                                                       |  |      |           |      |   |           



|                                                              |  |               |           |               |   |           
|------------------------------------------------------------- |  | ------------- | --------- | ------------- | - | ----------
|                                                              |  | CarryingValue |           | OriginalTerms
|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-41



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##### Table of Contents

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 Financing Date |  | LaurusFebruary 2004 |           | LaurusMarch 2004 |   | Laurus June 2004 |  | MidsummerJune 2004 |           | MidsummerDecember 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



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##### Table of Contents

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
|$5,000,000 Face Value Convertible Secured Term Note |  | $          |           |                | $ |          
|$5,000,000 Face Value Convertible Secured Term Note |  | $          |           |                | $ |          
|$1,500,000 Face Value Convertible Secured Term Note |  | $          |           |                | $ |          
|$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.



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##### Table of Contents

The following tabular presentation reflects the components of derivative
financial instruments on the Companys balance sheet at December 31, 2005 and 2004:



|                                    |  |      |            |      |   |           
|----------------------------------- |  | ---- | ---------- | ---- | - | ----------
|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 Financing Date |  | LaurusFebruary 2004 |            |   | Laurus March 2004 |   |            | Laurus June 2004 |  |   | MidsummerJune 2004 |   |  | MidsummerDecember 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 Financing Date |  | LaurusFebruary 2004 |            |   | Laurus March 2004 |   |            | Laurus June 2004 |  |   | MidsummerJune 2004 |   |  | MidsummerDecember 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-44



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##### Table of Contents

Significant assumptions included in this model as of December 31,
2005 and 2004 are as follows:



|                         |  |                     |       |   |                  |   |       |                 |  |   |                    |   |  |                      |         |   |  |   |         |  
|------------------------ |  | ------------------- | ----- | - | ---------------- | - | ----- | --------------- |  | - | ------------------ | - |  | -------------------- | ------- | - |  | - | ------- | -
|Holder Financing Date    |  | LaurusFebruary 2004 |       |   | LaurusMarch 2004 |   |       | LaurusJune 2004 |  |   | MidsummerJune 2004 |   |  | MidsummerDecember 03 |        
|Conversion prices        |  | $                   | 3.12  |   |                  | $ | 2.70  |                 |  | $ | 2.92               |   |  | $                    | 1.90    |   |  | $ | 1.90    |  
|Actual term              |  |                     | 2.1   |   |                  |   | 2.2   |                 |  |   | 2.5                |   |  |                      | 2.51.8 |   |  |   | 1.91.2 |  
|Equivalent term          |  |                     | .9    |   |                  |   | .7    |                 |  |   | .6                 |   |  |                      | 3       |   |  |   | 3       |  
|Equivalent volatility    |  |                     | 42.00 | % |                  |   | 42.18 | %               |  |   | 42.32              | % |  |                      | 42.32   | % |  |   | 43.72   | %
|Equivalent interest rate |  |                     | 2.14  | % |                  |   | 1.92  | %               |  |   | 3.33               | % |  |                      | 3.33    | % |  |   | 2.34    | %
|Equivalent yield rate    |  |                     | 11.39 | % |                  |   | 14.76 | %               |  |   | 23.11              | % |  |                      | 15.92   | % |  |   | 11.62   | %

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:



|                                                              |  |               |           |                  |   |           
|------------------------------------------------------------- |  | ------------- | --------- | ---------------- | - | ----------
|Year-ending December 31:                                      |  | CapitalLeases |           | Operating 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.



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##### Table of Contents

|(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 | )
|                                                                                  |  |      |           |   |      |   |          |      |  |   |            |  

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 |      | $ | 2,666,978
|                                              |  |      |           |      |   |          

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.



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##### Table of Contents

|(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:



|                                 |  |           |   |          |                               |      |        |           |     |                               |   |     
|-------------------------------- |  | --------- | - | -------- | ----------------------------- | ---- | ------ | --------- | --- | ----------------------------- | - | ----
|                                 |  | Options   |   | Warrants
|                                 |  | Number    |   |          | WeightedAverageExercise Price |      | Number |           |     | WeightedAverageExercise Price
|Outstanding, December 31, 2002   |  | 4,374,000 |   |          | $                             | 0.81 |        | 1,198,186 |     |                               | $ | 1.72
|                                 |  |           |   |         
|Granted in 2003                  |  | 3,585,000 |   |          | $                             | 2.06 |        | 1,784,316 |     |                               | $ | 1.70
|Exercised in 2003                |  | (205,000  | ) |          |                               | 0.05 |        | (251,230  | )   |                               | $ | 0.86
|Forfeited in 2003                |  |          |   |          |                               |      |        |          |     |                               |   |     
|                                 |  |           |   |         
|Outstanding, December 31, 2003   |  | 7,754,000 |   |          | $                             | 1.61 |        | 2,731,272 |     |                               | $ | 1.49
|                                 |  |           |   |         
|Granted in 2004                  |  | 2,065,000 |   |          | $                             | 2.52 |        | 1,395,000 |     |                               | $ | 3.78
|Exercised in 2004                |  | (312,673  | ) |          | $                             | 0.40 |        | (534,216  | )   |                               | $ | 0.97
|Forfeited in 2004                |  | (46,577   | ) |          | $                             | 1.95 |        | (38,615   | )   |                               | $ | 1.50
|                                 |  |           |   |         
|Outstanding, December 31, 2004   |  | 9,459,750 |   |          | $                             | 1.74 |        | 3,553,441 | (a) |                               | $ | 2.55
|                                 |  |           |   |         
|Granted in 2005                  |  | 1,120,000 |   |          | $                             | 3.82 |        |          |     |                               | $ |    
|Exercised in 2005                |  | (724,975  | ) |          | $                             | 0.39 |        | (350,316  | )   |                               | $ | 1.23
|Forfeited in 2005                |  | (102,625  | ) |          | $                             | 0.81 |        | (23,809   | )   |                               | $ | 1.00
|                                 |  |           |   |         
|Outstanding, December 31, 2005   |  | 9,752,150 |   |          | $                             | 2.01 |        | 3,179,316 | (a) |                               | $ | 2.61
|                                 |  |           |   |         
|Exercisable at December 31, 2005 |  | 6,725,482 |   |          | $                             | 1.90 |        | 3,179,316 |     |                               | $ | 2.61

---

|(a) | includes 25,000 warrants issued to employees.
|--- | ---------------------------------------------



F-47



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##### Table of Contents

The following table summarizes information for options and warrants
outstanding and exercisable at December 31, 2005:



|               |  |                   |  |                              |  |                                 |  |                             
|-------------- |  | ----------------- |  | ---------------------------- |  | ------------------------------- |  | ----------------------------
|Exercise Price |  | NumberOutstanding |  | WeightedAverageRemainingLife |  | NumberOutstandingandExercisable |  | WeightedAverageRemainingLife
|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         |  | 2.50years                    |  | 6,725,482                       |  | 2.90years                   
|               |  |                   |  |                              |  |                                 |  |                             
|               |  |                   |  |                             
|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         |  | 2.87years                    |  | 3,179,316                       |  | 2.87years                   
|               |  |                   |  |                              |  |                                 |  |                             

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.



|(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 | )
|                             |  |      |            |   |      |   |            |      |  |   |             |  



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##### Table of Contents

|(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                                    |         |   | Q2 |   |        | Q3 |  | Q4 |       
|Net revenue                                        |  | $                                     | 14,237  |   |    | $ | 15,888 |    |  | $  | 20,863 |  | $ | 17,676  |  
|Income (loss) from operations                      |  |                                       | (14,191 | ) |    |   | 11,945 |    |  |    | 12,161 |  |   | 2,666   |  
|Net income (loss)                                  |  | $                                     | (27,764 | ) |    | $ | 11,111 |    |  | $  | 9,369  |  | $ | 1,945   |  
|Basic earnings (loss) per common share             |  | $                                     | (0.63   | ) |    | $ | 0.22   |    |  | $  | 0.18   |  | $ | 0.04    |  
|Diluted earnings (loss) per common share           |  | $                                     | (0.63   | ) |    | $ | 0.18   |    |  | $  | 0.14   |  | $ | 0.03    |  
|Basic weighted average common shares outstanding   |  |                                       | 44,413  |   |    |   | 51,622 |    |  |    | 53,496 |  |   | 55,700  |  
|Diluted weighted average common shares outstanding |  |                                       | 44,413  |   |    |   | 61,804 |    |  |    | 65,021 |  |   | 66,700  |  
|                                                   | 
|                                                   |  | 2004                                  |        
|                                                   |  | (In thousands, except per share data) |        
|                                                   |  | Q1                                    |         |   | Q2 |   |        | Q3 |  | Q4 |       
|Net revenue                                        |  | $                                     | 6,860   |   |    | $ | 9,117  |    |  | $  | 10,462 |  | $ | 11,479  |  
|Income (loss) from operations                      |  |                                       | 3,808   |   |    |   | (648   | )  |  |    | 11,001 |  |   | (4,702  | )
|Net income (loss)                                  |  | $                                     | 3,442   |   |    | $ | (3,818 | )  |  | $  | 11,910 |  | $ | (13,035 | )
|Basic earnings (loss) per common share             |  | $                                     | 0.13    |   |    | $ | (0.13  | )  |  | $  | 0.38   |  | $ | (0.32   | )
|Diluted earnings (loss) per common share           |  | $                                     | 0.11    |   |    | $ | (0.13  | )  |  | $  | 0.31   |  | $ | (0.32   | )
|Basic weighted average common shares outstanding   |  |                                       | 27,377  |   |    |   | 29,036 |    |  |    | 31,693 |  |   | 40,981  |  
|Diluted weighted average common shares outstanding |  |                                       | 32,663  |   |    |   | 29,036 |    |  |    | 39,266 |  |   | 40,981  |  
|                                                   | 
|                                                   |  | 2003                                  |        
|                                                   |  | (In thousands, except per share data) |        
|                                                   |  | Q1                                    |         |   | Q2 |   |        | Q3 |  | Q4 |       
|Net revenue                                        |  | $                                     | 2,498   |   |    | $ | 3,775  |    |  | $  | 4,376  |  | $ | 4,332   |  
|Income (loss) from operations                      |  |                                       | (3,625  | ) |    |   | (3,824 | )  |  |    | 526    |  |   | (4,574  | )
|Net income (loss)                                  |  | $                                     | (2,951  | ) |    | $ | (2,408 | )  |  | $  | 142    |  | $ | (6,266  | )
|Basic earnings (loss) per common share             |  | $                                     | (0.18   | ) |    | $ | (0.12  | )  |  | $  | 0.01   |  | $ | (0.26   | )
|Diluted earnings (loss) per common share           |  | $                                     | (0.18   | ) |    | $ | (0.12  | )  |  | $  | 0.00   |  | $ | (0.26   | )
|Basic weighted average common shares outstanding   |  |                                       | 16,837  |   |    |   | 20,846 |    |  |    | 23,202 |  |   | 24,453  |  
|Diluted weighted average common shares outstanding |  |                                       | 16,837  |   |    |   | 20,846 |    |  |    | 30,914 |  |   | 24,453  |  



F-49



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##### Table of Contents

|(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                             |            |   | 2004 |   |            | 2003 | 
|Basic earnings per common share:                                                                  |  |                                  |            |   |      |   |            |      |  |   |             |  
|Net income available to common shareholders                                                       |  | $                                | (5,339,378 | ) |      | $ | (1,501,482 | )    |  | $ | (11,482,843 | )
|                                                                                                  |  |                                  |           
|Basic weighted average common shares outstanding                                                  |  |                                  | 51,316,562 |   |      |   | 32,923,211 |      |  |   | 20,772,620  |  
|                                                                                                  |  |                                  |           
|Basic earnings per common share                                                                   |  | $                                | (0.10      | ) |      | $ | (0.05      | )    |  | $ | (0.55       | )
|                                                                                                  |  |                                  |           
|Diluted earnings per common share:                                                                |  |                                  |            |   |      |   |            |      |  |   |             |  
|                                                                                                  |  |                                  |           
|Net income available to common shareholders                                                       |  | $                                | (5,339,378 | ) |      | $ | (1,501,482 | )    |  | $ | (11,482,843 | )
|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 | ) |      | $ | (1,501,482 | )    |  | $ | (11,482,843 | )
|                                                                                                  |  |                                  |           
|Basic weighted average common shares outstanding plus incremental shares from assumed conversions |  |                                  | 51,316,562 |   |      |   | 32,923,211 |      |  |   | 20,772,620  |  
|                                                                                                  |  |                                  |           
|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 |   |      |   | 32,923,211 |      |  |   | 20,772,620  |  
|                                                                                                  |  |                                  |           
|Diluted earnings per common share                                                                 |  | $                                | (0.10      | ) |      | $ | (0.05      | )    |  | $ | (0.55       | )

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.



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##### Table of Contents

|(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:



|                                     |  |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                 |         |      |   |         |  |            |   |  |    
|------------------------------------ |  | --------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | ------- | ---- | - | ------- |  | ---------- | - |  | ---
|                                     |  |                 |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Expense related to the years ended December 31:
|Practice Name                        |  | Type ofPractice |  | Type of Related Party Transaction                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 2005                                            |         | 2004 |   | 2003    |  | ReportedAs
|Associated Physicians Group, Ltd.    |  | ManagedPractice |  | 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 |      | $ |        |  | $          |  |  | G&A
|The Center for Pain Management, LLC  |  | ManagedPractice |  | 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 |      | $ | 7,755   |  | $          |  |  | G&A
|                                     |  |                 |  | The Company has an agreement to outsource its billing and collections function to a limited liability company owned by certain shareholders of the Company. The Company is
charged a fee of 8% of net collections under this arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | $                                               | 836,562 |      | $ |        |  | $          |  |  | G&A
|                                     |  |                 |  | * (A)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                                                 |         |      |   |         |  |            |   |  |    
|                                     |  |                 |  | * (B)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                                                 |         |      |   |         |  |            |   |  |    
|Dynamic Rehabilitation Centers, Inc. |  | ManagedPractice |  | 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 |      | $ | 82,107  |  | $          |  |  | G&A
|                                     |  |                 |  | The Company provides services for billing, accounting and management oversight to a limited liability company owned by certain shareholders of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | $                                               | 885,471 |      | $ |        |  | $          |  |  | G&A
|                                     |  |                 |  | * (C)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                                                 |         |      |   |         |  |            |   |  |    
|Health Care Center of Tampa, Inc.    |  | OwnedPractice   |  | The Company has an agreement to outsource its billing and collections function to a limited liability company owned by a certain shareholder of the Company. The Company is
charged a fee of 10% of net collections under this arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | $                                               | 272,708 |      | $ | 242,661 |  | $          |  |  | G&A
|Rick Taylor, D.O., P.A.              |  | ManagedPractice |  | The Company has an agreement to lease an aircraft from a limited liability company owned by a certain shareholder of the Company. The lease agreement was entered into in June
2003 for a period of 60 months. Effective January 1, 2005, the lease payment was lowered to a nominal amount of $1 per year; the Company will continue to pay a third party provider for the related fuel and maintenance cost. Effective January 1, 2004
the lease fee was reduced from the original amount of $12,000 per month to $7,000 per month; maintenance, fuel, insurance recurring training, hangar rental and any other fees required to maintain the aircraft were the responsibility of the
Company. |  | $                                               | 1       |      | $ | 49,000  |  | $          |  |  | G&A
|Spine and Pain Center, P.C.          |  | ManagedPractice |  | The Company leases its office space from a limited liability company partially owned by certain shareholders of the Company. The lease commenced December 23, 2003 and expires
December 31, 2008, with no option to renew.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | $                                               | 99,996  |      | $ | 99,996  |  | $          |  |  | G&A
|                                     |  |                 |  | The Company, through a subsidiary, is the majority partner of the PSHS Alpha Partners, Ltd. Partnership Dr. Merrill Reuter , the Companys chairman, is a minority
partner of partnership. The Company owns 67.5% and Dr. Reuter owns 9.75% of the partnership. Dr. Reuter 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 distributions are 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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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##### Table of Contents

|(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.



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##### Table of Contents

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 entitled Mould v. PainCare Holdings, Inc., et al., Case No. 06-CV-00362-JA-DAB. Mr. Mould alleges material misrepresentations and omissions in connection with the Company's financial statements
which appear to relate principally to the Company's previously announced intention to restate certain past financial statements. Mr. Mould seeks unspecified damages and purports to represent a class of shareholders who purchased the Company's
common stock from August 27, 2002 to March 15, 2006. 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



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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 Mgmt                        |        | Surgeries |   | AncillaryServices |  | Corporate |        |  | Total
|Revenues                                    |  | $                                | 43,269 |           | $ | 6,165             |  | $         | 19,230 |  | $     |        |   |  | $ | 68,664
|Gross profit                                |  |                                  | 36,632 |           |   | 5,110             |  |           | 14,451 |  |       |        |   |  |   | 56,193
|General and administrative expenses         |  |                                  | 17,086 |           |   | 3,152             |  |           | 8,184  |  |       | 9,663   |   |  |   | 38,085
|Compensation expense-variable stock options |  |                                  |       |           |   |                  |  |           |       |  |       | 2,382   |   |  |   | 2,382 
|Amortization                                |  |                                  | 550    |           |   |                  |  |           |       |  |       | 979     |   |  |   | 1,529 
|Depreciation                                |  |                                  | 478    |           |   | 66                |  |           | 426    |  |       | 646     |   |  |   | 1,616 
|Operating income (loss)                     |  | $                                | 18,518 |           | $ | 1,892             |  | $         | 5,841  |  | $     | (13,670 | ) |  | $ | 12,581



|                                            |  |                                  |        |           |   |                   |  |           |        |  |       |        |   |  |   |       
|------------------------------------------- |  | -------------------------------- | ------ | --------- | - | ----------------- |  | --------- | ------ |  | ----- | ------ | - |  | - | ------
|                                            |  | December 31, 2004 (in thousands)
|                                            |  | Pain Mgmt                        |        | Surgeries |   | AncillaryServices |  | Corporate |        |  | Total
|Revenues                                    |  | $                                | 22,317 |           | $ | 5,203             |  | $         | 10,398 |  | $     |       |   |  | $ | 37,918
|Gross profit                                |  |                                  | 18,249 |           |   | 4,607             |  |           | 8,398  |  |       |       |   |  |   | 31,254
|General and administrative expenses         |  |                                  | 8,002  |           |   | 2,613             |  |           | 3,571  |  |       | 5,866  |   |  |   | 20,052
|Compensation expense-variable stock options |  |                                  |       |           |   |                  |  |           |       |  |       | 357    |   |  |   | 357   
|Amortization                                |  |                                  |       |           |   |                  |  |           |       |  |       | 549    |   |  |   | 549   
|Depreciation                                |  |                                  | 132    |           |   | 72                |  |           | 128    |  |       | 505    |   |  |   | 837   
|Operating income (loss)                     |  | $                                | 10,115 |           | $ | 1,922             |  | $         | 4,699  |  | $     | (7,277 | ) |  | $ | 9,459 



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|                                            |  |                                  |       |           |   |                   |  |           |       |  |       |         |   |  |   |         |  
|------------------------------------------- |  | -------------------------------- | ----- | --------- | - | ----------------- |  | --------- | ----- |  | ----- | ------- | - |  | - | ------- | -
|                                            |  | December 31, 2003 (in thousands) |      
|                                            |  | Pain Mgmt                        |       | Surgeries |   | AncillaryServices |  | Corporate |       |  | Total |        
|Revenues                                    |  | $                                | 6,117 |           | $ | 3,431             |  | $         | 5,433 |  | $     |        |   |  | $ | 14,981  |  
|Gross profit                                |  |                                  | 3,718 |           |   | 1,958             |  |           | 4,718 |  |       |        |   |  |   | 10,394  |  
|General and administrative expenses         |  |                                  | 2,168 |           |   | 748               |  |           | 1,404 |  |       | 3,462   |   |  |   | 7,782   |  
|Compensation expense-variable stock options |  |                                  |      |           |   |                  |  |           |      |  |       | 13,533  |   |  |   | 13,533  |  
|Amortization                                |  |                                  |      |           |   |                  |  |           |      |  |       | 114     |   |  |   | 114     |  
|Depreciation                                |  |                                  | 17    |           |   | 18                |  |           | 44    |  |       | 384     |   |  |   | 463     |  
|Operating income (loss)                     |  | $                                | 1,533 |           | $ | 1,192             |  | $         | 3,270 |  | $     | (17,493 | ) |  | $ | (11,498 | )

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.



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