**Table
          of Contents**





**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


Washington,
      D.C. 20549


________________





**FORM
      10-QSB**


________________




þ
            QUARTERLY
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934




For
      the
      quarterly period ended September 30, 2006





o
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
                ACT





Commission
      File Number: 000-30556




________________




**PATIENTS
      & PHYSICIANS, INC.**


(Exact
      Name of Small Business Issuer as Specified in Its Charter)




________________




**Delaware**
            **11-3210792**(State
                or Other Jurisdiction of
            (I.R.S.
                EmployerIncorporation
                or Organization)
            Identification
                No.)





220
      West
      42 nd Street,
      23 rd Floor,
      New York, NY 10036


(Address
      of Principal Executive Offices)





(212)
      340-9100


(Issuer's
      Telephone Number, Including Area Code)





432
      Park
      Avenue South, 13 th Floor,
      New York, NY 10016


(Former
      Name, Former Address and Former Fiscal Year, if Changed


Since
      Last Report)








Check
      whether the issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Exchange Act during the past 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 þ  No  ̈





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of The Exchange Act)


Yes  ̈ No þ







APPLICABLE
      ONLY TO CORPORATE ISSUERS




State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date: 57,384,385  shares
      of
      common stock, $0.001 par value, outstanding as of November 17, 2006.




Transitional
      Small Business Disclosure Format (check one):     Yes  ̈ No þ





**Table
        of Contents**




**PATIENTS
      & PHYSICIANS, INC.**





INDEX




**Page****PART
                I.  FINANCIAL
                INFORMATION****Item
                1.**
            **Financial
                Statements.**Condensed
                Consolidated Balance Sheets, as of September 30, 2006
                (unaudited) and December 31, 2005
            1Condensed
                Consolidated Statements of Operations, for the three
                and nine months ended September 30, 2006 and 2005 and for the period
                from
                inception (July 9, 2002) to September 30, 2006
                (unaudited)
            2Condensed
                Consolidated Statement of Stockholders’ Equity
                (Deficit), for the period from inception (July 9, 2002) to September
                30,
                2006 (unaudited)
            3Condensed
                Consolidated Statements of Cash Flows, for the nine
                months ended September 30, 2006 and 2005 and for the period from
                inception
                (July 9, 2002) to September 30, 2006 (unaudited)
            4Notes
                to Condensed Consolidated Financial Statements
                (unaudited)
            5**Item
                2.**
            **Management’s
                Discussion and Analysis or Plan of
                Operation.**
            20**Item
                3.**
            **Controls
                and Procedures.**
            31**PART
                II.  OTHER INFORMATION****Item
                1.**
            **Legal
                Proceedings.**
            33**Item
                2.**
            **Unregistered
                Sales of Equity Securities and Use of
                Proceeds.**
            33**Item
                3.**
            **Defaults
                Upon Senior
                Securities.**
            33**Item
                4.**
            **Submission
                of Matters to a Vote of Security
                Holders.**
            33**Item
                5.**
            **Other
                Information.**
            33**Item
                6.**
            **Exhibits.**
            33




-i-
 **Table
          of Contents**


**PART
        I**
 **FINANCIAL
        INFORMATION**
  **Item
        1. Financial Statements.**


**Patients
                & Physicians, Inc. and Subsidiary****(formerly
                known as Finity Holdings, Inc.)****(A
                Development Stage Company)****Condensed
                Consolidated Balance
                Sheets****As
                of September 30, 2006 (unaudited) and December 31,
                2005**




September
                30, 2006
              (Unaudited)
            
            December
                31, 2005
              (Note
                2)**ASSETS****Current
                Assets:**Cash
                and cash equivalents
            
            $
            1,288,202
            
            $
            138,344Prepaid
                expenses and other current assets
            
            
            102,674
            
            
            327,978Total
                current assets
            
            
            1,390,876
            
            
            466,322Property
                and equipment, net
            
            
            862,917
            
            
            581,165Debt
                issuance costs, net
            
            
            181,343
            
            
            58,379Restricted
                cash
            
            
            756,003
            
            
            135,000**Total
                assets**
            
            $
            3,191,139
            
            $
            1,240,866**LIABILITIES
                AND STOCKHOLDERS' DEFICIT****Current
                Liabilities:**Accounts
                payable
            
            $
            176,420
            
            $
            534,651Accrued
                liabilities
            
            
            580,686
            
            
            354,748Bank
                overdraft
            
            
            78,184
            
            
            68,478Due
                to stockholder
            
            
            —
            
            
            18,130Notes
                payable, current portion
            
            
            5,348,018
            
            
            2,850,000Total
                current liabilities
            
            
            6,183,308
            
            
            3,826,007Notes
                payable, net of current portion
            
            
            1,300,905
            
            
            —**Total
                liabilities**
            
            
            7,484,213
            
            
            3,826,007**COMMITMENTS
                AND CONTINGENCIES****Redeemable
                Series A Convertible Preferred Stock;**$0.001
                par value, 0 shares authorized, 0 shares issued and outstanding
                atSeptember
                30, 2006 and 10,948,906 shares authorized, 7,255,042
                sharesissued
                and outstanding(liquidation
                value of $1,987,881)at
                December 31, 2005
            
            
            —
            
            
            1,827,639**Redeemable
                Series B Convertible Preferred Stock;**$0.001
                par value, 0 shares authorized, 0 shares issued and outstanding
                atSeptember
                30, 2006 and 7,692,308 shares authorized, 5,205,768 sharesissued
                and outstanding(liquidation
                value of $3,383,748)at
                December 31, 2005
            
            
            —
            
            
            3,350,988**Stockholders'
                Deficit:**Preferred
                stock, $0.001 par value: 5,000,000 shares authorized, 0
                sharesissued
                and outstanding at September 30, 2006 and 11,358,786
                sharesauthorized,
                0 shares issued and outstanding at December 31, 2005
            
            
            —
            
            
            —Common
                stock, $0.001 par value: 125,000,000 shares authorized,57,384,385
                shares issued and outstanding at September 30, 2006, and70,000,000
                shares authorized, 34,567,560 shares issued andoutstanding
                at December 31, 2005
            
            
            57,384
            
            
            34,567Additional
                paid-in capital
            
            
            17,111,876
            
            
            3,652,905Deficit
                accumulated during the development stage
            
            
            (21,462,334
            )
            
            (11,451,240
            )Total
                stockholders' deficit
            
            
            (4,293,074
            )
            
            (7,763,768
            )**Total
                liabilities and stockholders' deficit**
            
            $
            3,191,139
            
            $
            1,240,866See
                Notes to Condensed Consolidated Financial Statements




-1-
 **Table
          of Contents**




**Patients
                & Physicians, Inc. and Subsidiary****(formerly
                known as Finity Holdings, Inc.)****(A
                Development Stage Company)****Condensed
                Consolidated Statements of
                Operations****For
                the three and nine months ended September 30, 2006 and 2005 and for
                the
                period from inception (July 9, 2002) to September 30,
                2006****(unaudited)**




For
                the period from inception (July 9, 2002) to September 30,
                2006Three
                Months Ended
            
            Nine
                Months EndedSeptember
                30
            
            September
                302006
            
            2005
            
            2006
            
            2005Subscription
                revenue
            
            $
            12,062
            
            $
            1,625
            
            $
            29,248
            
            $
            1,625
            
            $
            34,442Costs
                of revenue
            
            
            5,588
            
            
            974
            
            
            9,309
            
            
            974
            
            
            11,959Gross
                profit
            
            
            6,474
            
            
            651
            
            
            19,939
            
            
            651
            
            
            22,483Operating
                expenses:Membership
                services
            
            
            852,699
            
            
            636,851
            
            
            2,362,949
            
            
            1,761,921
            
            
            5,576,249Selling,
                general and administrative
            
            
            1,335,120
            
            
            868,493
            
            
            4,337,596
            
            
            3,720,279
            
            
            11,751,266Depreciation
                and amortization
            
            
            73,802
            
            
            53,321
            
            
            158,921
            
            
            211,848
            
            
            449,208Impairment
                of long-lived assets
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            492,054Total
                operating expenses
            
            
            2,261,621
            
            
            1,558,665
            
            
            6,859,466
            
            
            5,694,048
            
            
            18,268,777Loss
                from operations
            
            
            (2,255,147
            )
            
            (1,558,014
            )
            
            (6,839,527
            )
            
            (5,693,397
            )
            
            (18,246,294
            )Interest
                income
            
            
            23,733
            
            
            1,022
            
            
            49,640
            
            
            6,141
            
            
            62,376Amortization
                of debt discounts anddebt
                issuance costs
            
            
            (1,019,534
            )
            
            —
            
            
            (2,692,902
            )
            
            —
            
            
            (2,692,902
            )Interest
                expense
            
            
            (250,957
            )
            
            (16,293
            )
            
            (528,305
            )
            
            (18,193
            )
            
            (585,514
            )Loss
                before provision for income taxes
            
            
            (3,501,905
            )
            
            (1,573,285
            )
            
            (10,011,094
            )
            
            (5,705,449
            )
            
            (21,462,334
            )Provision
                for income taxes
            
            
            —
            
            
            —
            
            
            —
            
            
            —
            
            
            —Net
                loss
            
            
            (3,501,905
            )
            
            (1,573,285
            )
            
            (10,011,094
            )
            
            (5,705,449
            )
            $
            (21,462,334
            )Accretion
                of preferred stock
            
            
            —
            
            
            (5,365
            )
            
            (193,858
            )
            
            (16,922
            )Net
                loss attributable to common stockholders
            
            $
            (3,501,905
            )
            $
            (1,578,650
            )
            $
            (10,204,952
            )
            $
            (5,722,371
            )Weighted
                average number of shares outstanding,basic and diluted
            
            
            56,151,014
            
            
            34,567,310
            
            
            46,400,701
            
            
            32,875,900Net
                loss per share, basic and diluted
            
            $
            (0.06
            )
            $
            (0.05
            )
            $
            (0.22
            )
            $
            (0.17
            )See
                Notes to Condensed Consolidated Financial Statements




-2-
 **Table
          of Contents**




**Patients
                & Physicians, Inc. and Subsidiary****(formerly
                known as Finity Holdings, Inc.)****(A
                Development Stage Company)****Condensed
                Consolidated Statements of Stockholders' Equity
                (Deficit)****For
                the period from inception (July 9, 2002) to September 30, 2006
                (unaudited)**




DeficitAccumulated
            
            TotalAdditional
            
            During
                the
            
            Stockholders'Common
                stock
            
            Paid-in
            
            Development
            
            EquityShares
            
            Amount
            
            Capital
            
            Stage
            
            (Deficit)**Balances
                at July 9, 2002 (inception)**
            
            
            —
            
            $
            —
            
            $
            —
            
            $
            —
            
            $
            —Issuance
                of common stock to founders at $0.001 per share in August
                2002
            
            
            16,000,000
            
            
            16,000
            
            
            —
            
            
            —
            
            
            16,000Sale
                of common stock at $0.044 per share in August 2002
            
            
            2,857,150
            
            
            2,857
            
            
            122,143
            
            
            —
            
            
            125,000Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (107,271
            )
            
            (107,271
            )**Balances
                at December 31, 2002**
            
            
            18,857,150
            
            
            18,857
            
            
            122,143
            
            
            (107,271
            )
            
            33,729Issuance
                of common stock in exchange for goods and services at $0.056 per
                share in
                August 2003
            
            
            13,678,910
            
            
            13,679
            
            
            746,321
            
            
            
            
            
            760,000Issuance
                of common stock to employees at $0.056 per share in August
                2003
            
            
            1,510,000
            
            
            1,510
            
            
            82,386
            
            
            
            
            
            83,896Cancellation
                of founders' shares at $0.001 per share in August 2003
            
            
            (3,510,000
            )
            
            (3,510
            )
            
            3,510
            
            
            —
            
            
            —Issuance
                of options to purchase common stock to employees for
                services
            
            
            —
            
            
            —
            
            
            37,243
            
            
            —
            
            
            37,243Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (495,895
            )
            
            (495,895
            )**Balances
                at December 31, 2003**
            
            
            30,536,060
            
            
            30,536
            
            
            991,603
            
            
            (603,166
            )
            
            418,973Exercise
                of stock options at $0.035 per share in August 2004
            
            
            1,000,000
            
            
            1,000
            
            
            34,000
            
            
            —
            
            
            35,000Value
                of warrants issued in connection with the sale of Redeemable Series
                A
                Convertible Preferred Stock
            
            
            —
            
            
            —
            
            
            143,066
            
            
            —
            
            
            143,066Accretion
                of Redeemable Series A Convertible Preferred Stock
            
            
            —
            
            
            —
            
            
            (16,223
            )
            
            —
            
            
            (16,223
            )Issuance
                of options to purchase common stock to employees for
                services
            
            
            —
            
            
            —
            
            
            95,162
            
            
            —
            
            
            95,162Issuance
                of options to purchase common stock to non-employees for
                services
            
            
            —
            
            
            —
            
            
            275,951
            
            
            —
            
            
            275,951Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (3,248,897
            )
            
            (3,248,897
            )**Balances
                at December 31, 2004**
            
            
            31,536,060
            
            
            31,536
            
            
            1,523,559
            
            
            (3,852,063
            )
            
            (2,296,968
            )Exercise
                of stock options at $0.20 per share in September 2005
            
            
            250
            
            
            —
            
            
            50
            
            
            —
            
            
            50Accretion
                of Redeemable Series A Convertible Preferred Stock
            
            
            —
            
            
            —
            
            
            (19,473
            )
            
            —
            
            
            (19,473
            )Accretion
                of Redeemable Series B Convertible Preferred Stock
            
            
            —
            
            
            —
            
            
            (4,255
            )
            
            —
            
            
            (4,255
            )Stock
                issued in lieu of compensation at $0.525 per share in March
                2005
            
            
            3,031,250
            
            
            3,031
            
            
            1,588,375
            
            
            —
            
            
            1,591,406Issuance
                of options to purchase common stock to employees for
                services
            
            
            —
            
            
            —
            
            
            243,470
            
            
            —
            
            
            243,470Issuance
                of options to purchase common stock to non-employees for
                services
            
            
            —
            
            
            —
            
            
            321,179
            
            
            —
            
            
            321,179Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (7,599,177
            )
            
            (7,599,177
            )**Balances
                at December 31, 2005**
            
            
            34,567,560
            
            
            34,567
            
            
            3,652,905
            
            
            (11,451,240
            )
            
            (7,763,768
            )Allocation
                of value to common stock, issued in connection with convertible debt
                financings
            
            
            7,968,950
            
            
            7,969
            
            
            3,215,420
            
            
            —
            
            
            3,223,389Allocation
                of value to warrants issuedin
                connection with convertible debt financings
            
            
            —
            
            
            —
            
            
            522,289
            
            
            —
            
            
            522,289Allocation
                of value to beneficial conversion feature in connection with convertible
                debt financings
            
            
            —
            
            
            —
            
            
            3,043,692
            
            
            —
            
            
            3,043,692Conversion
                of Redeemable Series A Preferred Stock to common stock
            
            
            7,755,481
            
            
            7,755
            
            
            2,117,244
            
            
            —
            
            
            2,124,999Conversion
                of Redeemable Series B Preferred Stock to common stock
            
            
            5,205,764
            
            
            5,206
            
            
            3,379,400
            
            
            —
            
            
            3,384,606Issuance
                of shares in connection with share exchange
            
            
            174,130
            
            
            174
            
            
            (250
            )
            
            —
            
            
            (76
            )Issuance
                of shares in connection with the share exchange
            
            
            1,200,000
            
            
            1,200
            
            
            (1,200
            )
            
            —
            
            
            —Exercise
                of vested options at $0.89 per share in January 2006
            
            
            2,500
            
            
            2
            
            
            2,223
            
            
            —
            
            
            2,225Exercise
                of vested options at $0.10 per share in May 2006
            
            
            75,000
            
            
            75
            
            
            7,425
            
            
            —
            
            
            7,500Exercise
                of vested options at $0.20 per share in May 2006
            
            
            12,500
            
            
            13
            
            
            2,487
            
            
            —
            
            
            2,500Exercise
                of vested options at $0.10 per share in June 2006
            
            
            110,000
            
            
            110
            
            
            10,890
            
            
            —
            
            
            11,000Exercise
                of vested options at $0.20 per share in June 2006
            
            
            12,500
            
            
            13
            
            
            2,487
            
            
            —
            
            
            2,500Accretion
                of Redeemable Series A Convertible Preferred Stock
            
            
            —
            
            
            —
            
            
            (160,241
            )
            
            —
            
            
            (160,241
            )Accretion
                of Redeemable Series B Convertible Preferred Stock
            
            
            —
            
            
            —
            
            
            (33,617
            )
            
            —
            
            
            (33,617
            )Issuance
                of shares in connection with acquisition
            
            
            300,000
            
            
            300
            
            
            269,700
            
            
            —
            
            
            270,000Issuance
                of options to purchase common stock to employees for
                services
            
            
            —
            
            
            —
            
            
            852,513
            
            
            —
            
            
            852,513Issuance
                of options to purchase common stock to non-employees for
                services
            
            
            —
            
            
            —
            
            
            228,509
            
            
            —
            
            
            228,509Net
                loss
            
            
            —
            
            
            —
            
            
            —
            
            
            (10,011,094
            )
            
            (10,011,094
            )**Balances
                at September 30, 2006 (unaudited)**
            
            
            57,384,385
            
            $
            57,384
            
            $
            17,111,876
            
            $
            (21,462,334
            )
            $
            (4,293,074
            )See
                Notes to Condensed Consolidated Financial Statements




-3-
 **Table
          of Contents**




**Patients
                & Physicians, Inc. and Subsidiary****(formerly
                known as Finity Holdings, Inc.)****(A
                Development Stage Company)****Condensed
                Consolidated Statements of Cash
                Flows****For
                the nine months ended September 30, 2006 and 2005 and for the period
                from
                inception (July 9, 2002) to September 30, 2006
                (unaudited)**




For
                the period from inception
              (July
                9, 2002) to
              September
                30,
              2006
              (Unaudited)For
                the Nine
            
            For
                the NineMonths
                Ended
            
            Months
                EndedSeptember
                30,
            
            September
                30,2006
              (Unaudited)
            
            2005
              (Unaudited)**OPERATING
                ACTIVITIES**Net
                loss
            
            $
            (10,011,094
            )
            $
            (5,705,449
            )
            $
            (21,462,334
            )Adjustments
                to reconcile net loss to net cash used in operating activities:Share-based
                compensation expense
            
            
            1,081,022
            
            
            447,974
            
            
            2,054,027Amortization
                of debt discounts and debt issuance costs
            
            
            2,692,902
            
            
            —
            
            
            2,692,902Depreciation
                and amortization expense
            
            
            158,921
            
            
            211,848
            
            
            449,208Common
                stock issued in exchange for services
            
            
            —
            
            
            —
            
            
            252,084Preferred
                stock issued in exchange for services
            
            
            —
            
            
            —
            
            
            85,000Common
                stock issued to employees
            
            
            —
            
            
            —
            
            
            83,896Common
                stock issued to founders
            
            
            —
            
            
            —
            
            
            16,000Common
                stock issued to employees in lieu of compensation
            
            
            —
            
            
            985,157
            
            
            1,591,406Note
                payable in lieu of compensation
            
            
            —
            
            
            —
            
            
            165,000Impairment
                of long-lived assets
            
            
            —
            
            
            —
            
            
            492,054Changes
                in operating assets and liabilities:Prepaid
                expenses and other current assets
            
            
            129,245
            
            
            (245,993
            )
            
            (215,129
            )Restricted
                cash
            
            
            (621,003
            )
            
            —
            
            
            (756,003
            )Accounts
                payable and accrued liabilities
            
            
            (132,289
            )
            
            83,994
            
            
            757,108Net
                cash used in operating activities
            
            
            (6,702,296
            )
            
            (4,222,469
            )
            
            (13,794,781
            )**INVESTING
                ACTIVITIES**Purchases
                of property and equipment
            
            
            (72,741
            )
            
            (458,125
            )
            
            (1,011,693
            )Net
                cash used in investing activities
            
            
            (72,741
            )
            
            (458,125
            )
            
            (1,011,693
            )**FINANCING
                ACTIVITIES**Proceeds
                from (payments to) stockholders
            
            
            (18,130
            )
            
            (31,216
            )
            
            83,761Proceeds
                from issuance of common stock
            
            
            6,017
            
            
            —
            
            
            131,017Proceeds
                from exercise of stock options
            
            
            25,725
            
            
            50
            
            
            60,775Proceeds
                from issuance of Redeemable Series A ConvertiblePreferred
                Stock
            
            
            —
            
            
            —
            
            
            1,735,000Costs
                associated with issuance of Redeemable Series A Convertible Preferred
                Stock
            
            
            —
            
            
            —
            
            
            (52,871
            )Proceeds
                from exercise of warrants to purchase Redeemable Series B Convertible
                Preferred Stock
            
            
            137,120
            
            
            —
            
            
            305,001Proceeds
                from issuance of Redeemable Series B ConvertiblePreferred
                Stock
            
            
            —
            
            
            3,383,748
            
            
            3,383,748Costs
                associated with issuance of Redeemable Series B Convertible Preferred
                Stock
            
            
            —
            
            
            (37,015
            )
            
            (37,015
            )Proceeds
                from issuance of notes payable
            
            
            4,000,000
            
            
            1,510,000
            
            
            6,935,000Bank
                overdraft, net
            
            
            9,706
            
            
            —
            
            
            78,184Debt
                issuance costs
            
            
            (166,943
            )
            
            —
            
            
            (209,324
            )Repayments
                of notes payable
            
            
            (250,000
            )
            
            —
            
            
            (500,000
            )Proceeds
                from issuance of convertible term notes, net
            
            
            4,181,400
            
            
            —
            
            
            4,181,400**Net
                cash provided by financing activities**
            
            
            7,924,895
            
            
            4,825,567
            
            
            16,094,676**Net
                increase in cash and cash equivalents**
            
            
            1,149,858
            
            
            144,973
            
            
            1,288,202**Cash
                and cash equivalents at beginning of period**
            
            
            138,344
            
            
            3,018
            
            
            —**Cash****and
                cash equivalents****at
                end of period**
            
            $
            1,288,202
            
            $
            147,991
            
            $
            1,288,202**Supplemental
                cash flow information**Cash
                payments for interest
            
            $
            370,179
            
            $
            —
            
            $
            427,338Cash
                payments for taxes
            
            
            —
            
            
            —
            
            
            —See
                Notes to Condensed Consolidated Financial Statements




-4-
 **Table
          of Contents**


**Patients
        & Physicians, Inc. and Subsidiary**
 **(Formerly
        known as Finity Holdings, Inc.)**
 **(A
        Development Stage Company)**
 **Notes
        to Condensed Consolidated Financial Statements
        (unaudited)**
  **1.**
              **Nature
                  of Business and Basis of
                  Presentation**





Patients
      & Physicians, Inc. (formerly known as Finity Holdings, Inc.) (“P&P”),
      was organized on February 5, 1993. Finity Holdings, Inc. formerly operated
      through two wholly owned subsidiaries, Finity Corporation, a Texas corporation,
      and Fi-Scrip, Incorporated, a Nevada corporation ("Fi-Scrip"). Finity Holdings,
      Inc. sold all of its stock in Finity Corporation and Fi-Scrip effective June
      5,
      2001.




On
      June
      27, 2006, P&P closed an Exchange Agreement (the "Share Exchange") with all
      of the stockholders of Flagship Patient Advocates, Inc. (formerly known as
      Flagship Healthcare Management, Inc.) ("Flagship") whereby P&P acquired all
      of the issued and outstanding capital stock of Flagship and Flagship became
      a
      wholly-owned subsidiary of P&P. Upon completion of the Share Exchange,
      Flagship’s stockholders controlled approximately 99% of the then issued and
      outstanding common stock. Prior to the Share Exchange, P&P was a shell
      company. Post the Share Exchange, Flagship’s business activities were the
      activities of P&P. As a result of these factors, this transaction has been
      treated as a reverse merger, and a capital transaction, equivalent to the
      issuance of stock by Flagship for P&P’s net assets and, accordingly, the
      historical financial statements prior to June 27, 2006 are those of Flagship.
      All shares and per share data prior to the Share Exchange have been restated
      to
      reflect the stock issuances and the effect of the closing of the Share
      Exchange.




U.S.
      Open
      Healthcare Management, Inc. (“USOH”) was incorporated under the laws of the
      State of New York on July 9, 2002. Flagship was incorporated under the laws
      of
      the State of Delaware on February 11, 2004. On February 18, 2004, USOH entered
      into an Agreement and Plan of Merger (the “Merger”) with Flagship. All of the
      outstanding shares of USOH common stock were converted into Flagship common
      stock, and the net assets of USOH were contributed to Flagship.




P&P’s
      activities to date have been focused on developing a membership-based specialty
      healthcare advocacy company providing physician referrals, on a priority basis,
      emergent care needs and air evacuation to its members, all linked by a
      sophisticated management system.




As
      P&P has not yet generated significant revenues through September 30, 2006,
      the Company is considered to be a development stage company and as such the
      financial statements presented herein are presented in accordance with Statement
      of Financial Accounting Standards (“SFAS”) No. 7.




The
      accompanying condensed consolidated financial statements have been prepared
      on a
      going concern basis. As shown in the accompanying financial statements, P&P
      has incurred losses in the development stage totaling $21,462,334 for the period
      from inception (July 9, 2002) to September 30, 2006. These factors, among
      others, indicate that there is substantial doubt about P&P’s ability to
      continue as a going concern. The condensed consolidated financial statements
      do
      not include any adjustments that might result from the outcome of this
      uncertainty.




Management
      recognizes that P&P’s continuation as a going concern is dependent upon its
      ability to generate sufficient cash flow to allow P&P to continue the
      development of its business plan and satisfy its obligations on a timely basis.
      Management believes that such


-5-
 **Table
          of Contents**


**Patients
        & Physicians, Inc. and Subsidiary**
 **(Formerly
        known as Finity Holdings, Inc.)**
 **(A
        Development Stage Company)**
 **Notes
        to Condensed Consolidated Financial Statements (unaudited)**


cash
      flows will be funded by additional equity and/or debt financings through the
      time in which P&P evolves from the development stage and generates
      sufficient positive cash flows from its operations, if ever. However, there
      can
      be no assurance that management’s plans will be able to be
      achieved.




All
      references to “Company”, “our”, “us”, or “we” shall apply to Patients &
Physicians, Inc. and Flagship Patient Advocates, Inc.





**2.**
            **Summary
                of Significant Accounting
                Policies**





**Interim
      financial statements**





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared pursuant to the rules and regulations of the Securities and Exchange
      Commission ("SEC"). Certain information and footnote disclosures normally
      included in financial statements prepared in accordance with accounting
      principles generally accepted in the United States of America have been omitted
      pursuant to such rules and regulations. However, the Company believes that
      the
      disclosures are adequate to make the information presented not misleading.
      The
      unaudited condensed consolidated financial statements reflect all adjustments
      (consisting only of normal recurring adjustments) that are, in the opinion
      of
      management, necessary for a fair presentation of the Company's financial
      position and results of operations. The operating results for the three and
      nine
      months ended September 30, 2006 and 2005 are not necessarily indicative of
      the
      results to be expected for any other interim period of any future year. The
      accompanying unaudited condensed consolidated financial statements should be
      read in conjunction with the Company's audited financial statements for the
      year
      ended December 31, 2005 included in the Company’s Form SB-2 filed with the SEC
      on August 23, 2006 and declared effective on September 11, 2006.





**Consolidation**





The
      condensed consolidated financial statements include the accounts of the Company
      and Flagship, its wholly-owned subsidiary. All significant intercompany
      transactions and balances have been eliminated.




**Use
      of Estimates**




The
      preparation of the Company’s condensed consolidated financial statements in
      conformity with accounting principles generally accepted in the United States
      of
      America (“GAAP”) requires management to make estimates and assumptions that
      affect the reported amounts of assets and liabilities and disclosure of
      contingent assets and liabilities at the date of the financial statements and
      the reported amounts of revenues, if any, and expenses during the reporting
      period. The accounting estimates that require management’s most difficult and
      subjective judgments include capitalization of certain assets,
      depreciable/amortizable lives, impairment of long-lived assets, fair value
      and
      allocation of assets acquired, and the fair value of common stock and options
      issued for services as well as the allocation of proceeds from the issuance
      of
      debt and equity instruments. Because of the uncertainty inherent in such
      estimates, actual results may differ from these estimates.


-6-
 **Table
          of Contents**




**Patients
        & Physicians, Inc. and Subsidiary**
 **(Formerly
        known as Finity Holdings, Inc.)**
 **(A
        Development Stage Company)**
 **Notes
        to Condensed Consolidated Financial Statements (unaudited)**
 **Loss
          Per Share**
 
 Basic
          loss per share is computed by dividing net loss by the weighted average
          number
          of common shares outstanding for the period.
  The
          Company has excluded all convertible preferred stock and outstanding stock
          options from the calculation of diluted loss per share because all such
          securities are considered anti-dilutive. Accordingly, diluted loss per
          share
          equals basic loss per share. The total number of potential common shares
          excluded from the calculation of diluted loss per share for the
          three and nine months ended September 30, 2006 was
          2,838,250 and for the three and nine months ended September 30, 2005 was
          14,348,810.


**Reclassifications**




Certain
      reclassifications have been made in the prior period financial statements to
      conform to the current period presentation.


**Cash
        and Cash Equivalents**
  The
        Company considers all short-term, highly liquid investments purchased with
        a
        maturity at the time of purchase of three months or less to be cash
        equivalents.




**Restricted
      Cash**




The
      accompanying condensed consolidated balance sheets as of September 30, 2006
      and
      December 31, 2005 includes restricted cash of  $756,003 and
      $135,000, respectively, which is being held to secure letters of credits,
      related to the Company’s office space operating leases.


**Property
        and Equipment**
 
 Property
        and equipment, consisting principally of computer equipment and capitalized
        purchased and internally developed software programs, are recorded at cost.
        Depreciation and amortization are provided, using straight-line methods,
        in
        amounts sufficient to relate the cost of depreciable and amortizable assets
        to
        operations over their estimated useful lives. Repairs and maintenance are
        charged to operations as incurred.
 
 The
        Company has adopted Statement of Position 98-1, *Accounting
        for the Costs of Computer Software Developed or Obtained for Internal
        Use* .
        This
        statement requires that certain costs incurred in purchasing or developing
        software for internal use be capitalized as internal use software development
        costs and included in fixed assets. Amortization of the software will begin
        when
        the software is ready for its intended use.
 
 The
        Company has adopted the SEC’s Staff Accounting Bulletin No. 48, *Transfers
        of Nonmonetary Assets by Promoters or Shareholders* .
        This
        bulletin requires that transfers of nonmonetary assets or services to the
        Company by its shareholders in exchange for stock be recorded as the
        transferors’ historical cost basis determined under GAAP.




-7-
 **Table
          of Contents**




**Patients
        & Physicians, Inc. and Subsidiary**
 **(Formerly
        known as Finity Holdings, Inc.)**
 **(A
        Development Stage Company)**
 **Notes
        to Condensed Consolidated Financial Statements (unaudited)**
  **Long-Lived
          Assets**
  The
          Company periodically assesses the likelihood of recovering the cost of
          long-lived assets based on its expectations of future profitability and
          undiscounted cash flows. These factors, along with management’s plans with
          respect to the operations, are considered in assessing the recoverability
          of
          long-lived assets.
  **Concentrations
          of Credit Risk**
  Financial
          instruments that potentially subject the Company to concentrations of credit
          risk consist of cash and cash equivalents. The Company reduces credit risk
          by
          placing its cash and cash equivalents with major financial institutions
          with
          high credit ratings. At times, such amounts may exceed federally insured
          limits.
  **Fair
          Value of Financial Instruments**
  The
          fair
          values of the Company’s assets and liabilities that qualify as financial
          instruments under Statement of Financial Accounting Standards No.
          107,*Disclosures
          About Fair Value of Financial Instruments* (“SFAS 107”), approximate
          their carrying amounts presented in the accompanying condensed consolidated
          balance sheets at September 30, 2006 and December 31, 2005. The Company
          had
          accounted for redeemable preferred stock in accordance with the provisions
          of
          SFAS No. 150, *Accounting
          for Certain Financial Instruments with Characteristics of Both Liabilities
          and
          Equity* (“SFAS
          No. 150”). SFAS No. 150 requires the classification of certain financial
          instruments as liabilities, including instruments issued in the form of
          shares
          that are mandatorily redeemable. As the Redeemable Series A and Series
          B
          Convertible Preferred Stock issued by the Company were not mandatorily
          redeemable at a specified or determinable date, or upon an event that is
          certain
          to occur, the Company was not required to account for these instruments
          as
          liabilities under the provisions of SFAS No. 150 and as such has presented
          the
          Redeemable Series A and Series B Convertible Preferred Stock in the mezzanine
          section ,
          which
          is outside the liabilities and stockholders’ deficit sections, of
          the accompanying condensed consolidated balance sheet at December 31, 2005.
          All
          of the outstanding shares of the Redeemable Series A and Series B Convertible
          Preferred Stock were exchanged for newly issued Patients & Physicians,
          Inc.’s common stock as a result of the Share Exchange (Note
          6).


The
      Company accounts for derivative instruments in accordance with SFAS No. 133 *Accounting
      for Derivative Instruments and Hedging Activities* ,
      as
      amended, (“SFAS No. 133”) which establishes accounting and reporting standards
      for derivative instruments and hedging activities, including certain derivative
      instruments embedded in other financial instruments or contracts and requires
      recognition of all derivatives on the balance sheet at fair value. Accounting
      for the changes in the fair value of the derivative instruments depends on
      whether the derivatives qualify as hedge relationships and the types of the
      relationships designated are based on the exposures hedged. Changes in the
      fair
      value of derivative instruments which are not designated as hedges are
      recognized in earnings as other income (loss).




The
      Company had issued financial instruments which required a determination of
      the
      fair value of certain related derivatives, where quoted market prices were
      not
      published or readily available at the date of issuance. The Company bases its
      fair value determinations on an evaluation of the facts and circumstances and
      valuation techniques that require judgments and estimates. As of September
      30,
      2006 and December 31, 2005, the Company had no derivatives which are classified
      as assets or liabilities.




-8-
 **Table
          of Contents**




**Patients
        & Physicians, Inc. and Subsidiary**
 **(Formerly
        known as Finity Holdings, Inc.)**
 **(A
        Development Stage Company)**
 **Notes
        to Condensed Consolidated Financial Statements (unaudited)**
  **Revenue
          Recognition**
  The
          Company recognizes revenues in accordance with SEC Staff Accounting Bulletin
          No.
          101, *Revenue
          Recognition in Financial Statements* (“SAB
          No. 101”) as amended by SEC Staff Accounting Bulletin No. 104, *Revenue
          Recognition* ,
          revised
          and updated (“SAB No. 104”), which stipulates that revenue generally is realized
          or realizable and earned, once persuasive evidence of an arrangement exists,
          delivery has occurred or services have been rendered, the fee is fixed
          or
          determinable and collectibility is reasonably assured. The Company sells
          memberships to individuals and institutions for access to its healthcare
          service
          offerings. The Company recognizes revenue ratably, over the life of the
          membership. The Company recognized $12,062 and $1,625 of revenue for the
          three
          months ended September 30, 2006 and 2005, respectively, and $29,248 and
          $1,625
          of revenue for the nine months ended September 30, 2006 and 2005,
          respectively.
  **Stock-Based
          Compensation**
  The
          Company accounts for share-based compensation to employees and directors
          in
          accordance with SFAS No. 123(R) (revised 2004), *Share
          Based Payment* (“SFAS
          No. 123(R)”), which requires the recognition of compensation expense for
          employee stock options and other share-based payments. Under this method,
          expense related to employee stock options and other share-based payments
          is
          recognized over the relevant service period based on the fair value of
          each
          stock option grant.
 
 The
          Company has accounted for non-employee compensation expense in accordance
          with
          Emerging Issues Task Force (“EITF”) Issue No. 96-18, *Accounting
          for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
          or
          in Conjunction with Selling, Goods or Services* (“EITF
          96-18”), which requires non-employee stock options to be measured at their fair
          value as of the earlier of the date at which a commitment for performance
          to
          earn the equity instruments is reached (“performance commitment date”) or the
          date
          at which performance is complete (“performance completion date”). Accounting for
          non-employee stock options which involve only performance conditions when
          no
          performance commitment date or performance completion date has occurred
          as of
          the interim financial reporting date requires measurement at the instruments
          then-current fair value.




The
      Company has followed the guidance outlined in the Financial
      Accounting Standards Board (“ FASB”)
      in
      FASB interpretation (“FIN”)
      No. 28, *Accounting
      for Stock Appreciation Rights and Other Variable Stock Option or Award
      Plans* (“FIN
      28”) as it relates to computing expense when appreciation rights vest over time.
      As of September 30, 2006 the Company accounted for 2,355,000 options under
      the
      guidance of EITF 96-18.




-9-
 **Table
          of Contents**




**Patients
        & Physicians, Inc. and Subsidiary**
 **(Formerly
        known as Finity Holdings, Inc.)**
 **(A
        Development Stage Company)**
 **Notes
        to Condensed Consolidated Financial Statements (unaudited)**
  **Income
          Taxes**
 
 Deferred
          income tax assets and liabilities are recognized for the future tax consequences
          attributable to differences between the financial statement carrying amounts
          of
          existing assets and liabilities and their respective tax bases and operating
          loss and tax credit carryforwards. Deferred tax assets and liabilities
          are
          measured using enacted tax rates expected to apply to taxable income in
          the
          years in which those temporary differences are expected to be recovered
          or
          settled. Deferred tax assets are reduced by a valuation allowance if it
          is more
          likely than not that the tax benefits will not be realized. The ultimate
          realization of deferred tax assets depends upon the generation of future
          taxable
          income during the periods in which those temporary differences become
          deductible.
  **Comprehensive
          Income (Loss)**
 
 SFAS
          No.
          130, *Reporting
          Comprehensive Income* ,
          establishes standards for reporting and presentation of comprehensive income
          (loss) and its components in a full set of financial statements. The statement
          requires additional disclosures in the financial statements for certain
          items;
          it does not affect the Company’s financial position or results of operations.
          The Company had no comprehensive income (loss) items for the period from
          inception (July 9, 2002) to September 30, 2006.
  **Recent
          Accounting Pronouncements Issued, Not Yet Adopted**
  In
          June
          2006, the FASB issued Interpretation No.48, *Accounting
          for Uncertainty in Income Taxes* (“FIN
          48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized
          in an enterprise's financial statements in accordance with SFAS No. 109, *Accounting
          For Income Taxes* and
          prescribes a recognition threshold and measurement attribute for the financial
          statement recognition and measurement of a tax position taken or expected
          to be
          taken in a tax return. FIN 48 also provides guidance on derecognition,
          classification, interest and penalties, accounting in interim periods,
          disclosure and transition. FIN 48 will be effective for the Company beginning
          January 1, 2007. The Company is not evaluating the effect, if any, that
          FIN 48
          will have on its consolidated financial statements and related
          disclosures.
 
 In
          September 2006, the FASB issued FASB Statement No. 157, *Fair
          Value Measurements* (“SFAS
          No. 157”), which defines fair value, establishes a framework for measuring fair
          value under GAAP, and expands disclosures about fair value measurements. 
SFAS No. 157 applies to other accounting pronouncements that require or
          permit
          fair value measurements. The new guidance is effective for financial statements
          issued for fiscal years beginning after November 15, 2007, and for interim
          periods within those fiscal years. The Company will evaluate the potential
          impact, if any, of the adoption of SFAS No. 157 on its consolidated financial
          position, results of operations and cash flows.
 
 Management
          does not believe that any other recently issued, but not yet effected,
          accounting standards if currently adopted would have a material effect
          on the
          Company’s consolidated financials statements .
  -10-
 **Table
              of Contents**
  **Patients
              & Physicians, Inc. and Subsidiary**
 **(Formerly
              known as Finity Holdings, Inc.)**
 **(A
              Development Stage Company)**
 **Notes
              to Condensed Consolidated Financial Statements
              (unaudited)**
 **3.**
                **Stock-Based
                    Compensation**
  *Stock
          Option and Grant Plan*
  Under
          the
          2004 Stock Option and Grant Plan (the “Stock Option Plan”), the Company issues
          stock-based compensation to its officers, directors, employees and consultants.
          There are 9,000,000 shares authorized under the Stock Option Plan. The
          maximum
          life of options granted is generally 10 years and generally options vest
          over a
          period of four years. However, the Board of Directors of the Company may
          approve
          other vesting schedules. The Company has issued options to employees
          and non-employees under stock option agreements. Vested options may be
          exercised
          in whole or in part.




The
      exercise price of the stock options granted is determined by the Board of
      Directors on the date of grant, considering factors such as recent sales of
      stock, results of operations and the state of the Company’s business and
      industry.




The
      Company recognized compensation expense of $121,656 and $52,369 for the three
      months ended September 30, 2006 and 2005, respectively, $767,530 and $134,874
      for the nine months ended September 30, 2006 and 2005, respectively, and
      $1,095,712 for the period from inception (July 9, 2002) to September 30, 2006
      as
      a result of issuing options to employees, which is included in selling, general
      and administrative in the accompanying condensed consolidated statements of
      operations. In addition, the Company recognized compensation expense of $21,136
      and $9,058 for the three months ended September 30, 2006 and 2005, respectively,
      $84,982 and $21,753 for the nine months ended September 30, 2006 and 2005,
      respectively, and $132,675 for the period from inception (July 9, 2002) to
      September 30, 2006 as a result of issuing options to employees, which is
      included in membership services in the accompanying condensed consolidated
      statements of operations.




The
      Company recognized compensation expense of $83,169 and $128,412 for the three
      months ended September 30, 2006 and 2005, respectively, $228,510 and $291,347
      for the nine months ended September 30, 2006 and 2005, respectively, and
      $825,640 for the period from inception (July 9, 2002) to September 30, 2006
      as a
      result of issuing options to non-employees, which is included in membership
      services in the accompanying condensed consolidated statements of
      operations.




The
      fair
      value of each stock option grant to non-employees is estimated on the applicable
      performance commitment date, performance completion date or interim financial
      reporting date.




A
      summary
      of options activity as of December 31, 2005, and changes during the nine months
      ended September 30, 2006 is presented below:





Options
            
            Weighted
                Average
              Exercise
                PriceOutstanding
                December 31, 2005
            
            
            5,082,000
            
            $
            0.14Granted
            
            
            2,451,000
            
            
            0.90Exercised
            
            
            (212,500
            )
            
            0.12Forfeited
                or expired
            
            
            (417,500
            )
            
            0.68Outstanding,
                September 30, 2006
            
            
            6,903,000
            
            $
            0.39Exercisable,
                September 30, 2006
            
            
            2,838,250
            
            $
            0.36


-11-
 **Table
          of Contents**
 **Patients
          & Physicians, Inc. and Subsidiary**
 **(Formerly
          known as Finity Holdings, Inc.)**
 **(A
          Development Stage Company)**
 **Notes
          to Condensed Consolidated Financial Statements (unaudited)**
  The
            fair
            value of each stock option grant to employees is estimated on the date
            of grant.
            A Black Scholes
            option pricing model, applying the following weighted average assumptions,
            was
            used to estimate the fair value for employee stock options
            issued:





Nine
                months ended September 30, 2006
            
            Nine
                months ended September 30, 2005Dividend
                yield
            
            
            0.00
            %
            
            0.00
            %Expected
                volatility
            
            
            68.83
            %
            
            80.67
            %Risk-free
                rate
            
            
            4.58%
                to 5.15
            %
            
            3.91%
                to 4.50
            %Expected
                life of options
            
            
            10
                years
            
            
            10
                years




The
      weighted average grant-date fair value of the options granted were $0.90 per
      share and $0.47 per share for the nine months ended September 30, 2006 and
      2005,
      respectively.





The
      options outstanding at September 30, 2006 have a weighted average remaining
      contractual life of approximately 8.48 years, and an intrinsic value of
      $6,104,850.





The
      options which are exercisable at September 30, 2006 have a weighted average
      remaining contractual life of approximately 7.9 years.




As
      of
      September 30, 2006, there was $1,206,650 of total deferred compensation cost
      related to options issued to employees that will be recognized in expense over
      a
      weighted average period of 1.73 years.




**4.**
            **Debt**





Debt
      financings consist of the following as of September 30, 2006:




September
                30, 2006 (Unaudited)Principal
            
            Unamortized
                Debt Discount
            
            NetLaurus
                Convertible Notes, payable in installments commencing on
              February
                1, 2007
            
            $
            4,100,000
            
            $
            (2,576,836
            )
            $
            1,523,164Junior
                Notes, payable in installments commencing on February 1,
                2007
            
            
            3,000,000
            
            
            (1,874,241
            )
            
            1,125,759Apollo
                Medical Partners, LP payable in full June 7, 2007
            
            
            2,700,000
            
            
            —
            
            
            2,700,000Apollo
                Medical Offshore Partners, LP payable in full June 7, 2007
            
            
            1,300,000
            
            
            —
            
            
            1,300,000Total
            
            $
            11,100,000
            
            $
            (4,451,077
            )
            $
            6,648,923Less
                current portion
            
            
            
            
            
            
            
            $
            5,348,018Long
                term portion
            
            
            
            
            
            
            
            $
            1,300,905




-12-
 **Table
          of Contents**




**Patients
      & Physicians, Inc. and Subsidiary**


**(Formerly
        known as Finity Holdings, Inc.)**
 **(A
        Development Stage Company)**
 **Notes
        to Condensed Consolidated Financial Statements (unaudited)**


Convertible
      Notes




*Laurus
      Notes*




On
      January 30, 2006 Flagship entered into a securities purchase agreement (the
      “Laurus Securities Agreement”) with Laurus Master Fund, Ltd. (“Laurus”). Under
      the Laurus Securities Agreement, Laurus purchased from Flagship a secured
      convertible term note (the “Laurus Convertible Note”) in an aggregate principal
      amount of $4,100,000, which is collateralized by substantially all the assets
      of
      Flagship. The Laurus Convertible Note bears interest at 1.0% above the prime
      rate, with a minimum interest rate of 7%, and is convertible in whole or in
      part
      into common stock of the Company at a fixed conversion price of $0.90 per share
      at the election of Laurus.




*Junior
      Notes*


During
        2005, Flagship issued an aggregate of $3,100,000 in short-term notes, of
        which
        $2,050,000 were issued
        to officers and directors of the Company. Of the aggregate amount issued,
        $165,000 was issued to an officer of the Company in lieu of compensation.
        In
        February 2005, $250,000 of the amounts due to an officer was repaid. Of the
        aggregate amount issued, $2,850,000 was outstanding at December 31, 2005.
        During
        January 2006 Flagship issued an additional $400,000 in short-term
        notes .
        During
        2006, the Company repaid
        $ 250,000 of the
        notes issued in 2005.




On
      January 30, 2006 Flagship entered into a securities purchase agreement (the
      “Junior Securities Agreement”) with certain holders of Flagship’s short-term
      notes. Under the Junior Securities Agreement the note holders (the “Junior Note
      Holders”) agreed to convert $3,000,000 of the short-term notes previously issued
      into secured convertible term notes (the “Junior Notes”) in Flagship. The Junior
      Notes have substantially the same terms as the Laurus Convertible Note. The
      Junior Notes bear interest at 1.0% above the prime rate, with a minimum interest
      rate of 7% and are convertible into common stock of the Company at a fixed
      conversion price of $0.90 per share at the election of each of the Junior Note
      Holders.




*Laurus
      and Junior Notes*




In
      connection with the Laurus Convertible Note and the Junior Notes (collectively
      the “Notes”), Flagship issued 7,968,950 shares of common stock to the investors
      for consideration of $7,969 and issued warrants to purchase 1,902,174 shares
      of
      common stock at an exercise price of $0.92 per share. The warrants have a term
      of seven years. The aforementioned common stock and warrants include 1,951,596
      shares of common stock and warrants to purchase 465,839 shares of common stock
      issued to certain shareholders and officers (the “Guarantors”) who have provided
      a limited guarantee of the Company’s obligation to Laurus.




The
      Company allocated the $7,100,000 of proceeds from the Notes based on the
      computed relative fair values of the debt, stock and warrant instruments issued
      to Laurus, the Junior Note Holders and the Guarantors. The common stock issued
      was valued based on management’s estimate of the fair value of the Company’s
      common stock of $0.90 per share which resulted in a fair value of $7,164,086
      and
      relative fair value of $3,215,419 for the common stock. The warrants were valued
      using a Black-Scholes pricing model with the following assumptions: (1) common
      stock fair value of $0.90 per share, (2) expected volatility of 67.63%, (3)
      risk-free interest rate of 4.39%, (4) life of 7 years and (5) no


-13-
 **Table
          of Contents**




**Patients
        & Physicians, Inc. and Subsidiary**
 **(Formerly
        known as Finity Holdings, Inc.)**
 **(A
        Development Stage Company)**
 **Notes
        to Condensed Consolidated Financial Statements (unaudited)**


dividend,
      which resulted in a fair value of $1,163,680 and a relative fair value of
      $522,289 for the warrants. Accordingly, the resulting relative fair value
      allocated to the debt component of $3,043,692 was used to measure the intrinsic
      value of the embedded conversion option of the Notes which resulted in a
      beneficial conversion feature of $3,043,692 recorded to additional paid-in
      capital. The value of the beneficial conversion feature was limited to the
      amount of the proceeds allocated to the debt component of the Notes. The
      aggregate amounts allocated to the warrants, equity instruments and beneficial
      conversion feature of $7,100,000 were recorded as a debt discount at the date
      of
      issuance of the Notes and are being amortized to interest expense using the
      interest method over the stated maturities of the Notes. The initial aggregate
      carrying value of the Notes at the time of closing was $0 after the debt
      discounts.




Transaction
      fees totaling $318,600 paid to Laurus, or its affiliates, and the Junior Note
      Holders in connection with this financing were netted against the proceeds
      and
      considered in the calculation of the beneficial conversion feature. Financing
      costs of $225,321 paid to third parties associated with this financing are
      recorded as debt issuance costs and included on the accompanying condensed
      consolidated balance sheet at September 30, 2006. These costs are being
      amortized over the life of the Notes.




During
      the three and nine months ended September 30, 2006, $1,002,884 and $2,648,923,
      respectively, of the discount on the Notes has been amortized and included
      in
      amortization of debt discounts and debt issuance costs on the accompanying
      condensed consolidated statement of operations. Debt issuance costs allocated
      are amortized over the term of the debt using the interest method, which
      produces a constant periodic rate of return. During the three and nine months
      ended September 30, 2006, $16,650 and $43,979, respectively, of debt issuance
      costs have been amortized and are included in amortization of debt discounts
      and
      debt issuance costs on the accompanying condensed consolidated statement of
      operations.




Commencing
      on February 1, 2007, Flagship is required to repay the Notes on a monthly basis
      over the following 24 months. In the event that any of the principal is
      converted into common stock, the amount converted shall be credited against
      the
      next monthly payment. Flagship has the option, but not the obligation, of
      prepaying any outstanding principal of the Notes by paying the principal amount,
      accrued interest and a redemption premium of 30%.




The
      Company entered into a registration rights agreement with both Laurus and the
      Junior Note Holders covering the registration of the common stock issued to
      Laurus, the Guarantors and the Junior Note Holders, the common stock underlying
      the Notes and the warrants issued to Laurus, the Guarantors and the Junior
      Note
      Holders. The Company filed a registration statement on Form SB-2 which was
      effective on September 11, 2006.




Promptly
      after the closing of the Share Exchange, P&P assumed all the outstanding
      obligations of Flagship under the Convertible Notes.




*Apollo
      Short Term Convertible Notes*




On
      June
      7, 2006 the Company issued notes payable to Apollo Medical Partners, LP and
      Apollo Medical Offshore Partners, LP in the amounts of $2,700,000 and
      $1,300,000, respectively (the “Apollo Notes”). Interest accrues at 8% and is
      calculated based on a 365


-14-
 **Table
          of Contents**




**Patients
      & Physicians, Inc. and Subsidiary**


**(Formerly
        known as Finity Holdings, Inc.)**
 **(A
        Development Stage Company)**
 **Notes
        to Condensed Consolidated Financial Statements (unaudited)**


day
      year
      and will be paid at maturity of the Apollo Notes. Any unpaid interest plus
      remaining principal on the Apollo Notes is due and payable on June 7, 2007.
      The
      Apollo Notes, including all accrued interest, will convert into the form of
      securities issued in the next round of financing on the same terms and
      conditions as such financing, provided, however, that such financing results
      in
      an additional $4 million in funding.




As
      of
      September 30, 2006 there was $103,397 of accrued interest expense associated
      with the Apollo Notes which is included in accrued liabilities on the
      accompanying condensed consolidated balance sheets.





**5.**
            **Redeemable
                Convertible Preferred
                Stock**





In
      January 2006, 500,439 warrants to purchase Redeemable Series A Convertible
      Preferred Stock were exercised at $0.274 for an aggregate purchase price of
      $137,120.





In
      connection with the Exchange Agreement (Note 6), all of Flagship’s outstanding
      Redeemable Series A and Series B Convertible Preferred Stock was exchanged
      on a
      one-for-one basis for newly issued common stock of P&P. As a result, all
      remaining discounts on the Company’s Redeemable Convertible Preferred Stock were immediately
      charged to
      additional paid-in capital. At September 30, 2006 there were no shares of
      Redeemable Series A and Series B Convertible Preferred Stock authorized and
      no
      shares issued and outstanding.





**6.**
            **Exchange
                Agreement**





On
      January 30, 2006, Flagship entered into a Share Exchange Agreement (the
      "Exchange Agreement") with P&P. The closing of this agreement took place on
      June 27, 2006. After the closing of the Exchange Agreement, the minority P&P
      shareholders own 174,130 shares of P&P’s common stock, less than 1%. P&P
      acquired all of the issued and outstanding capital stock of Flagship from the
      Flagship stockholders on a one-for-one basis in exchange for an aggregate of
      55,710,255 newly-issued shares of P&P’s common stock (the “Exchange”). In
      connection with the exchange the Company also issued 1,200,000 shares of common
      stock to the finder of P&P. The value of such shares of $1,200,000 has been
      charged to additional paid-in capital with a corresponding increase in
      additional paid-in capital and common stock. Upon completion of the Exchange,
      P&P ceased to be a shell company and the operations of Flagship are the only
      operations of P&P. Since the stockholders of Flagship received the majority
      of the voting shares of P&P, P&P will carry on the business of Flagship,
      and the officers and directors of Flagship are the officers and directors of
      P&P, the transaction has been accounted for as Flagship being the accounting
      acquirer and P&P being the accounting acquiree. Since P&P is a
      non-operating shell corporation no longer meeting the definition of a business
      as defined in EITF Consensus 98-3, *Determining
      Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or
      of a
      Business* ,
      (“EITF
      98-3”) the transaction is equivalent to Flagship issuing stock for the net
      liabilities of P&P accompanied by a recapitalization. The accounting is
      identical to that resulting from a reverse acquisition, except that there are
      no
      adjustments to the historic carrying values of the assets and
      liabilities.


-15-
 **Table
          of Contents**


**Patients
        & Physicians, Inc. and Subsidiary**
 **(Formerly
        known as Finity Holdings, Inc.)**
 **(A
        Development Stage Company)**
 **Notes
        to Condensed Consolidated Financial Statements (unaudited)**


**7.**
            **Commitments
                and contingencies**




*Pending
      litigation*





A
      former
      independent contractor (the “Plaintiff”) has filed a lawsuit against the Company
      and Flagship, among others. The Plaintiff alleges that he was promised
      employment with the Company and performed services to Flagship based on these
      promises. The Plaintiff is seeking compensatory and punitive damages, including
      the issuance of additional shares of stock for these services and attorney
      fees
      in an aggregate amount of approximately $1,800,000. The Company believes this
      lawsuit is without merit and intends to defend it vigorously. In management’s
      opinion the final resolution of this matter will not have material impact on
      the
      financial position or results of operations of the Company.





*Leases*





The
      Company entered into a new noncancelable operating lease for office space
      commencing on August 31, 2006 which expires on December 31, 2016. Minimum
      aggregate future payments under such lease are approximately
      $4,900,000.





**8.**
            **Acquisition**





On
      July
      12, 2006, Flagship entered into an Asset Purchase Agreement (the “PEMMS
      Agreement”) with PEMMS Limited (“PEMMS”), an early-stage technology company
      focusing on the personal health market. Pursuant to the PEMMS Agreement Flagship
      acquired certain assets, including principally the software and intellectual
      property for a proprietary secure web-based repository wherein an individual
      can
      store and retrieve, among other things, his/her own medical records. The Company
      also acquired certain contracts and equipment belonging to PEMMS. In exchange
      for the assets the Company issued PEMMS 300,000 newly issued shares of its
      common stock.





The
      Company has evaluated the guidance outlined in EITF 98-3 in determining whether
      the PEMMS transaction is the purchase of a business or assets. EITF 98-3
      provides that if the transfer is comprised of (a) inputs, (b) processes applied
      to those inputs, and (c) resulting outputs that are used to generate revenues
      of
      a business it is considered a business combination and not an asset purchase.
      Considering the assets transferred in the PEMMS Agreement included all of the
      elements necessary to allow the Company to continue to conduct operations and
      that all the employees of PEMMS have been hired by the Company, the transaction
      has been treated as a business combination.





Under
      the
      purchase method of accounting, the assets and liabilities acquired by the
      Company from PEMMS are recorded as of the acquisition date at their respective
      fair values, and added to those of the Company. Further, the results of
      operations of such assets have been included with those of the Company since
      the
      date of acquisition.





The
      estimated purchase price of approximately $368,000 consists of $270,000 of
      common stock and $98,000 of estimated obligations associated with customer
      contracts acquired. The fair value of P&P's common stock issued in exchange
      for the assets was based on the management's estimate of the fair value of
      the
      Company's common stock, considering the price per share inherent in recent
      financing transactions, including rights and privileges included with such
      shares issued, the status of the Company’s operations and the quoted market
      price share.


-16-
 **Table
          of Contents**




**Patients
      & Physicians, Inc. and Subsidiary**


**(Formerly
        known as Finity Holdings, Inc.)**
 **(A
        Development Stage Company)**
 **Notes
        to Condensed Consolidated Financial Statements (unaudited)**


The
      estimated $368,000 fair value of the net assets assumed in the purchase have
      been preliminarily allocated to internal use software and included in property
      and equipment on the accompanying unaudited condensed consolidated balance
      sheet
      at September 30, 2006. The determination of the purchase price allocated to
      the
      estimated fair values of the assets acquired and liabilities assumed as
      reflected in the unaudited condensed consolidated financial statements are
      preliminary and subject to change based on finalization of the Company's
      valuation. The actual purchase price and its allocation, to reflect the fair
      values of assets acquired and liabilities assumed will be based upon
      management's ongoing evaluation and final assessment which is expected to be
      completed during the Company’s fiscal quarter ending December 31, 2006.
      Accordingly, the final purchase price and its allocation may differ
      significantly from the preliminary amount and such allocation may include the
      recognition of goodwill and impact the recognition of amortization on the
      Company’s consolidated statement of operations.


Summarized
        below are the pro forma unaudited results of operations for the three and
        nine
        months ended September 30, 2006 and 2005 as if the results of PEMMS were
        included for the entire periods presented. The pro forma results may not
        be
        indicative of the results that would have occurred if the acquisition had
        been
        completed at the beginning of the period presented or which may be obtained
        in
        the future:


Three
                  Months Ended
              
              Nine
                  Months EndedSeptember
                  30
              
              September
                  302006
              
              2005
              
              2006
              
              2005Revenue
              
              $
              12,062
              
              $
              9,117
              
              $
              29,248
              
              $
              24,100Total
                  costs and expenses
              
              
              (3,510,124
              )
              
              (1,638,619
              )
              
              (10,089,534
              )
              
              (5,899,503
              )Net
                  loss
              
              
              (3,498,062
              )
              
              (1,629,502
              )
              
              (10,060,286
              )
              
              (5,875,403
              )Accretion
                  of preferred stock
              
              
              -
              
              
              (5,365
              )
              
              (193,858
              )
              
              (16,922
              )Net
                  loss attributable tocommon
                  stockholders
              
              $
              (3,498,062
              )
              $
              (1,634,867
              )
              $
              (10,254,144
              )
              $
              (5,892,325
              )Weighted
                  average number of shares outstanding, basic and diluted
              
              
              56,397,680
              
              
              34,867,310
              
              
              46,683,183
              
              
              34,194,622Net
                  loss per share, basic and diluted
              
              $
              (0.06
              )
              $
              (0.05
              )
              $
              (0.22
              )
              $
              (0.17
              )




-17-
 **Table
          of Contents**




**Patients
        & Physicians, Inc. and Subsidiary**
 **(Formerly
          known as Finity Holdings, Inc.)**
 **(A
          Development Stage Company)**
 **Notes
          to Condensed Consolidated Financial Statements
          (unaudited)**




After
      the
      acquisition of PEMMS assets, all intercompany balances and activities between
      PEMMS and the Company eliminate in consolidation.





**9.**
            **Warrants**





Outstanding
      warrants issued in connection with financings consist of the following at
      September 30, 2006:





Warrants
            
            Exercise
                Price
            
            ExpirationLaurus
                warrants to purchase common stock
            
            
            621,118
            
            $
            0.92
            
            
            1/31/2013Guarantor
                warrants to purchase common stock
            
            
            465,839
            
            $
            0.92
            
            
            1/31/2013Junior
                Note Holder warrants to purchase common stock
            
            
            815,217
            
            $
            0.92
            
            
            1/31/20131,902,174


All
      of
      the Series A Preferred Stock Warrants that were outstanding as of the Exchange
      (Notes 5 and 6) were cancelled pursuant to the warrant agreements and
      accordingly, the historical value allocated to such Warrants at the dates of
      issuance of the Redeemable Series A Convertible Preferred Stock will remain
      in
      additional paid-in capital.





**10.**
            **Supplemental
                disclosure of non-cash investing and financing
                activities.**




Nine
                Months Ended September 30, 2006 (Unaudited)
            
            Nine
                Months Ended September 30, 2005 (Unaudited)
            
            For
                the period from inception (July 9, 2002) to September 30,
                2006
              (Unaudited)Value
                of contributions in-kind relating to Redeemable Series AConvertible
                Preferred Stock issued
            
            $
            —
            
            $
            —
            
            $
            85,000Value
                of contributions in-kind relating to common stock issued
            
            $
            —
            
            $
            —
            
            $
            760,000Value
                of warrants issued in connection with Redeemable Series A Convertible
                Preferred Stock
            
            $
            —
            
            $
            —
            
            $
            143,066Common
                stock issued to founders
            
            $
            —
            
            $
            —
            
            $
            16,000Accretion
                of Redeemable Series A Convertible Preferred Stock
            
            $
            160,241
            
            $
            14,452
            
            $
            195,937Accretion
                of Redeemable Series B Convertible Preferred Stock
            
            $
            33,617
            
            $
            2,470
            
            $
            37,872Common
                stock issued in lieu of compensation
            
            $
            —
            
            $
            —
            
            $
            1,591,406Conversion
                of Redeemable Series A Convertible Preferred Stock and Redeemable
                Series B
                Convertible Preferred Stock to common stock
            
            $
            5,509,605
            
            $
            —
            
            $
            5,509,605Issuance
                of common stock in connection with share
                exchange
            
            $
            (76
            )
            $
            —
            
            $
            (76
            )Issuance
                of common stock in connection with financing
            
            $
            1,952
            
            $
            —
            
            $
            1,952Issuance
                of common stock in connection with the share exchange
            
            $
            1,200
            
            $
            —
            
            $
            1,200Cancellation
                of founders’ shares
            
            $
            —
            
            $
            —
            
            $
            3,510Common
                stock issued in connection with the acquisition
            
            $
            270,000
            
            $
            —
            
            $
            270,000Allocation
                of value to common stock issued in connection with convertible debt
                financings
            
            $
            3,223,389
            
            $
            —
            
            $
            3,223,389Allocation
                of warrants issued in connection with convertible debt
                financings
            
            $
            522,289
            
            $
            —
            
            $
            522,289Allocation
                of value to beneficial conversion feature in connection with convertible
                debt financings
            
            $
            3,043,692
            
            $
            —
            
            $
            3,043,692




-18-
 **Table
          of Contents**


**Patients
        & Physicians, Inc. and Subsidiary**
 **(Formerly
        known as Finity Holdings, Inc.)**
 **(A
        Development Stage Company)**
 **Notes
        to Condensed Consolidated Financial Statements (unaudited)**


**11.**
            **Subsequent
                Events.**




*Financing
      and Apollo Note Conversion*





On
      October 24, 2006, the Company entered into a term sheet (the “Term Sheet”) for
      an equity financing (the “Financing”) with certain current stockholders and with
      new investors. The Term Sheet provides for a total investment of up to $8.0
      million in exchange for newly issued shares of the Company’s common stock at a
      price of $2.00 per share. The Term Sheet also provides that the investors will
      receive warrants with a term of seven years to purchase shares of the Company’s
      common stock at an exercise price equal to $1.00 per share. The total amount
      of
      warrants issued will equal 25% of the amount invested by each investor. As
      of
      November 20, 2006, the Company had received $2.2 million of the Financing.
      There
      can be no assurance that the Company will be able to complete the
      Financing.




If
      the
      Company is able to complete the Financing of at least $4.0 million, the Apollo
      Notes (see Note 4) will automatically convert into shares of the Company’s
      common stock on the same terms and conditions as the other investors in the
      Financing.




*Additional
      Lease Space*




The
      Company has amended its new noncancelable operating lease for office space
      as of
      October 24, 2006 to include additional space for which the Company is obligated
      through October 23, 2012. Total future cash payments associated with this
      additional office space are approximately $1,740,000.


-19-
 **Table
          of Contents**




**Item
      2. Management's Discussion and Analysis or Plan of
      Operation.**





This Management's **** Discussion
      and Analysis or Plan of Operation contains
      forward-looking statements that involve known and unknown risks, significant
      uncertainties and other factors that may cause our actual results, levels of
      activity, performance or achievements to be materially different from any future
      results, levels of activity, performance or achievements expressed, or implied,
      by those forward-looking statements. You can identify forward-looking statements
      by the use of the words “may,” “will,” “should,” “could,” “expects,” “plans,”
“anticipates,” “believes,” “estimates,” “predicts,” “intends,” “potential,”
“proposed,” or “continue” or the negative of those terms. These statements are
      only predictions. In evaluating these statements, you should specifically
      consider various factors, including the risk factors outlined above and below.
      These factors may cause our actual results to differ materially from any
      forward-looking statements. Although we believe that the exceptions reflected
      in
      the forward-looking statements are reasonable, we cannot guarantee future
      results, levels of activity, performance or achievements. Therefore, actual
      results may differ materially and adversely from those expressed in any
      forward-looking statements. We undertake no obligation to revise or update
      publicly any forward-looking statements for any reason.





All
      references to “Company”, “our”, “us”, or “we” shall apply to Patients &
Physicians, Inc. and Flagship Patient Advocates, Inc.




**Risk
      Factors**





Our
      financial condition, business, operation and prospects involve a high degree
      of
      risk. You should carefully read and consider the risks and uncertainties
      described below as well as the other information in this report before deciding
      to invest in our Company. If any of the following risks are realized, our
      business, operating results and financial condition could be harmed and the
      value of our stock could go down. This means that our stockholders could lose
      all or a part of their investment.




**Risks
      Relating To Our Business**




***The
      Company’s business is difficult to evaluate because it has a limited operating
      history.***




The
      Company has a limited operating history and participates in a relatively new
      and
      rapidly evolving market. The business has undergone significant transformation
      during its short history as a result of changes in the services and products
      offered, changes in market conditions, and changes in our targeted membership,
      and is expected to continue to change for similar reasons. We cannot assure
      you
      that our current business strategy will be successful in the long
      term.




Many
      companies with business plans based on providing similar healthcare products
      and
      services have failed to be successful. We have experienced significant losses
      since inception and, even if demand from members exists, we cannot assure you
      that our business will be successful.




***The
      Company has a history of significant losses and may not be profitable in the
      future and has going concern considerations.***




Flagship
      has a history of net losses and has an accumulated deficit of $21,462,334 from
      inception through September 30, 2006. This amount does not include losses of
      P&P prior to the Share Exchange, as defined herein. Furthermore, developing
      the Company’s business strategy and expanding the Company’s services will
      require additional capital and other expenditures. Accordingly, if the Company
      is not able to increase its revenue, it may never achieve or sustain
      profitability. You should not rely on the results for any particular period
      as
      an indication of our future performance. It is possible that, in future periods,
      our results of operations may be below the expectations of public market
      analysts and investors. Fluctuations in our quarterly operating results or
      our
      inability to achieve or maintain profitability may cause volatility in the
      price
      of our common stock in the public market. In light of these factors, among
      others, our independent registered public accounting firm has stated that there
      is substantial doubt about our ability to continue as a going concern in their
      opinion dated


-20-
 **Table
          of Contents**




March
      31,
      2006 on our audited financial statements. The financial statements do not
      include any adjustments that might result from the outcome of this
      uncertainty.




***The
      Company may be unable to fund future growth.***




The
      Company’s business strategy calls for expansion through an increase in sales of
      membership by its internal and external sales forces. To this end, the Company
      has decided to invest substantial funds to increase its sales and marketing
      resources in order to grow revenues .
      In
      order to implement this strategy, the
      Company will require funding for additional personnel, capital expenditures
      and
      other expenses, as well as for working capital purposes. Financing may not
      be
      available to the Company on favorable terms ,
      if at all.
      If adequate funds are not available on acceptable terms, then the Company may
      not be able to meet its business objectives for expansion. This, in turn, could
      harm the Company’s business, results of operations and financial condition. In
      addition, if the Company raises additional funds through the issuance of equity
      or convertible debt securities, or a combination thereof, then the shareholders
      will suffer dilution, and any new securities may have
      rights, preferences and privileges senior to those of our common stock.
      Furthermore, if the Company raises capital or acquires businesses by incurring
      indebtedness, the
      Company will become subject to the risks associated with indebtedness, including
      interest rate fluctuations and any financial or other covenants that the
      Company’s lender may require. Moreover, if the Company’s strategy to increase
      its sales and marketing resources in order to grow revenues does not produce
      the
      desired result, then the Company may incur significant ,
      unrecoverable expenses .




***The
      Company’s growth*** ***may*** ***be limited if it is unable to attract and retain qualified
      personnel.***




The
      Company’s business is largely dependent on the skills, experience and
      performance of key members of the Company’s senior management team. The Company
      plans to increase its sales and marketing personnel ,
      as well
      as enter into agreements with independent third parties to sell products and
      services in
      order
      to grow revenue. The Company believes that its success depends largely on its
      ability to attract and retain highly-skilled and qualified technical, managerial
      and marketing personnel and enter into agreements with third parties. The
      market for
      highly skilled engineering, sales, marketing and support personnel is highly
      competitive as a result of the limited availability of technically-qualified
      personnel with the requisite understanding of the markets which the Company serves. The inability to hire
      or
      retain qualified personnel may hinder
      the Company’s ability to implement its business strategy and may harm its
      business.




***Lengthy
      sales and implementation cycles for the Company’s product makes it difficult to
      forecast revenues and, as a result, may have an adverse impact on the Company’s
      business.***




The
      period from the Company’s initial contact with potential corporate buyers to the
      consummation of an agreement to offer the Company’s product to its employees is
      difficult to predict. These sales may be subject to delays due to a client’s
      internal procedures for approving such expenditures and other factors beyond
      the
      Company’s control. Implementation may be subject to delays based on the
      availability of the internal resources of the client that are needed, acceptance
      by potential members and other factors outside of the Company’s control. As a
      result, the Company has limited ability to forecast the timing of revenue from
      new members. This, in turn, makes it more difficult to predict the Company’s
      financial performance from quarter to quarter.




During
      the sales cycle and the implementation period, the Company may expend
      substantial time, effort and money preparing contract proposals and negotiating
      contracts without receiving any related revenue. In addition, many of the
      expenses related to providing the Company’s services are relatively fixed in the
      short term, including personnel costs, fixed overhead, and technology and
      infrastructure costs. As a result, the Company may be unable to adjust spending
      quickly enough to offset any unexpected revenue shortfall or delay, in which
      case the Company’s results of operations would suffer. In addition, in an
      attempt to enhance the Company’s long-term competitive position, the Company may
      from time to time make decisions regarding pricing, marketing, services and
      technology that could have a near-term adverse effect on the Company’s operating
      results.


-21-
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          of Contents**




***The
      Company faces significant competition for its products and
      services.***




The
      markets in which the Company operates are intensely competitive, continually
      evolving and, in some cases, subject to rapid change. The Company expects the
      intensity of competition and the pace of change either to be maintained or
      at
      least be increased in the future. Many of the Company’s potential competitors
      may have greater financial, technical, product development, marketing and other
      resources than the Company. These organizations may be better known than the
      Company and may have more customers or users than the Company does. The Company
      cannot provide assurance that the Company will be able to compete successfully
      against these organizations or any alliances they have formed or may
      form.




***If
      the Company is unable to provide priority access to high quality healthcare
      that
      attracts and retains members, the Company’s revenues will be
      reduced.***




Interest
      in the Company’s products and services is based upon the Company’s ability to
      provide members with referrals and priority access to the Company’s network
      physicians. Although the Company has been able to continue to maintain and
      expand this network, if the Company is unable to continue to do so for any
      reason, the value of a membership would diminish and membership interest in
      the
      Company products and services would be adversely affected. Similarly, the
      Company’s ability to maintain or increase the number of highly qualified
      physicians in its network is based upon the Company’s ability to provide the
      physicians with incentive to continue to participate in the network. We cannot
      assure you that the Company will be able to retain qualified physicians to
      provide referral and priority access to members. If the Company is unable to
      provide high quality physicians to its members, the quality of the Company’s
      products and services will be reduced.




***The
      Company is exposed to the general condition of the healthcare
      market.***




The
      Company’s business is subject to global economic conditions, and in particular,
      market conditions in the healthcare industry. The Company’s operations may be
      adversely affected by
      the
      continued declines
      in employee benefit spending by large corporations and small to medium sized
      businesses .
      If
      global economic conditions worsen, or a prolonged slowdown in providing such
      benefits exists, then the Company may experience adverse operating
      results.




***The
      Company’s products may not achieve acceptance in the
      marketplace.***




The
      Company intends to offer its membership based products and services to large
      corporations, small to medium sized businesses and individuals. The markets
      for
      these products are relatively new, unpredictable and rapidly evolving. Lack
      of
      acceptance in the marketplace for these new products and services could have
      a
      material adverse effect on the Company’s business, results of operations and
      financial condition.




**Risks
      Related to Our Stock Being Publicly Traded**




***We
      will incur increased costs as a result of being a publicly traded
      company.***




As
      a
      publicly traded company, we will incur legal, accounting and other expenses
      that
      we did not incur as a privately held company, including costs associated with
      the periodic reporting requirements applicable to a company whose securities
      are
      registered under the Securities Exchange Act of 1934, or the Exchange Act,
      recently adopted corporate governance requirements, including requirements
      under
      the Sarbanes-Oxley Act of 2002, and other rules implemented relatively recently
      by the SEC and The NASDAQ National Market. We expect these rules and regulations
      to substantially increase our legal and financial compliance costs and to make
      some activities more time-consuming and costly. We also expect that these rules
      and regulations will make it more difficult and more expensive for us to obtain
      directors and officers’ liability insurance.




***We
      do not intend to pay dividends on our common stock.***




We
      have
      never declared or paid any cash dividend on our common stock. We currently
      intend to retain any


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future
      earnings and do not expect to pay any dividends in the foreseeable
      future.




***Penny
      stock rules could make it hard to resell your shares.***




The
      Company’s common stock does not meet the listing requirements for any trading
      market other than the Pink Sheets .
      We have
      applied for a listing on the Over the Counter Bulletin Board (the “OTCBB”),
      however, OTCBB may not accept the application of the market maker to initiate
      quotations in our common stock.  An investor may find it more difficult to
      dispose of shares or obtain accurate quotations as to the market value of our
      common stock. In addition, rules promulgated by the SEC impose various practice
      requirements on broker-dealers who sell securities that fail to meet certain
      criteria set forth in those rules to persons other than established customers
      and accredited investors. Consequently, the liquidity of the Company’s
      securities could be impaired, not only in the number of securities which could
      be bought and sold, but also through delays in the timing of transactions,
      reduction in security analysts' and the news media's coverage of the Company,
      and lower prices for the Company’s securities than might otherwise be
      attained.




***Future
      Sales By Our Stockholders May Negatively Affect Our Stock Price And Our Ability
      To Raise Funds In New Stock Offerings.***




Sales
      of
      our common stock in the public market could lower the market price of our common
      stock. Sales may also make it more difficult for us to sell equity securities
      or
      equity-related securities in the future at a time and price that our management
      deems acceptable or at all. Of the 57,384,385 shares of common stock outstanding
      as of November 17, 2006, 9,343,080 shares are freely tradable without
      restriction, unless held by our "affiliates". The remaining 48,041,305 shares
      of
      common stock, which will be held by existing stockholders, including the
      officers and directors, are "restricted securities" and may be resold in the
      public market only if registered or pursuant to an exemption from registration.
      Some of these shares may be resold under Rule 144.




***Our
      Common stock May Be Affected By Limited Trading Volume And May Fluctuate
      Significantly, Which May Affect Our Shareholders' Ability To Sell Shares Of
      Our
      Common stock.***




Prior
      to
      this filing, there has been a limited public market for our common stock and
      there can be no assurance that a more active trading market for our common
      stock
      will develop. An absence of an active trading market could adversely affect
      our
      shareholders' ability to sell our common stock in short time periods, or
      possibly at all. Our common stock has experienced, and is likely to experience
      in the future, significant price and volume fluctuations, which could adversely
      affect the market price of our common stock without regard to our operating
      performance. In addition, we believe that factors such as quarterly fluctuations
      in our financial results and changes in the overall economy or the condition
      of
      the financial markets could cause the price of our common stock to fluctuate
      substantially. These fluctuations may also cause short sellers to enter the
      market from time to time in the belief that we will have poor results in the
      future. We cannot predict the actions of market participants and, therefore,
      can
      offer no assurances that the market for our common stock will be stable or
      appreciate over time. The factors may negatively impact shareholders' ability
      to
      sell shares of our common stock.




***The
      Company may be subject to litigation.***




The
      Company may be subject to claims involving how the Company conducts its
      business. Any such claims against the Company may affect its business, results
      of operations and financial conditions. Such claims, including those without
      merit, could require the Company to pay damages or settlement amounts and would
      require a substantial amount of time and attention from the Company’s senior
      management as well as considerable legal expenses. Although the Company does
      not
      anticipate that its activities would warrant such claims, there can be no
      assurances that such claims will not be made.




***The
      Company lacks accounting and reporting controls.***




The
      Company’s Chief Financial Officer (the “CFO”) is solely responsible for the
      accounting and reporting


-23-
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          of Contents**




functions
      for the Company and outsources certain of its accounting and finance functions
      to an independent third party. As a result, the Company currently has limited
      segregation of duties regarding the Company’s accounting and reporting
      functions. Management recognizes this limited segregation of duties as a
      potential deficiency in the Company’s internal controls and is implementing
      procedures to mitigate this deficiency.




***Government
      regulation of healthcare creates risks and challenges with respect to the
      Company’s compliance efforts and business strategies.***




The
      healthcare industry is highly regulated and is subject to changing political,
      legislative, regulatory and other influences. Existing and new Federal and
      state
      laws and regulations affecting the healthcare industry could create unexpected
      liabilities for the Company, cause the Company to incur additional costs and
      restrict the Company’s operations. Many healthcare laws are complex and their
      application to specific products and services may not be clear. In particular,
      many existing healthcare laws and regulations, when enacted, did not anticipate
      the healthcare products and services that the Company provides. However, these
      laws and regulations may nonetheless be applied to the Company’s products and
      services. As an international company, the Company may conduct business in
      a
      number of countries and thus may be subjected to local business practices,
      laws and regulations. The Company's increasing penetration into the Chinese
      market in particular is a significant risk to our business. Management’s failure
      to accurately anticipate the application of these laws and regulations, or
      other
      failures to comply, could create liability, result in adverse publicity and
      negatively affect our businesses. Some of the risks the Company faces from
      healthcare regulation are as follows:




·
            *Anti-kickback
                Laws*




There
      are
      federal and state laws that govern patient referrals, physician financial
      relationships and inducements to healthcare providers and patients. The federal
      healthcare programs anti-kickback law prohibits any person or entity from
      offering, paying, soliciting or receiving anything of value, directly or
      indirectly, for the referral of patients covered by Medicare, Medicaid and
      other
      federal healthcare programs or the leasing, purchasing, ordering or arranging
      for or recommending the lease, purchase or order of any item, good, facility
      or
      service covered by these programs. Many states also have similar anti-kickback
      laws that are not necessarily limited to items or services for which payment
      is
      made by a federal healthcare program.




The
      laws
      in this area are broadly written and it is often difficult to determine
      precisely how the laws will be applied in specific circumstances. Penalties
      for
      violating the federal anti-kickback law include imprisonment, fines and
      exclusion from participating, directly or indirectly, in Medicare, Medicaid
      and
      other federal healthcare programs. Any determination by a state or federal
      regulatory agency that any of the
      Company’s practices violate any of these laws could subject the
      Company to civil
      or criminal penalties and require the Company to change or terminate some
      portions of its business and could have an adverse effect on the
      Company’s business. Even an unsuccessful challenge by regulatory authorities of the
      Company’s practices could result in adverse publicity and be costly for the
      Company to
      defend.




·
            *Medical
                Professional Regulation*




The
      practice of most healthcare professions requires licensing under applicable
      state law. In addition, the laws in some states prohibit business entities
      from
      practicing medicine. If a state determines that some portion of the
      Company’s business
      violates these laws, it may seek to have the Company discontinue those portions
      or subject the
      Company to
      penalties or licensure requirements. Any determination that the
      Company is a
      healthcare provider and has acted improperly as a healthcare provider may result
      in liability to the
      Company .


-24-
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          of Contents**


***The
      Company faces potential liability related to the privacy and security of
      personal information it collects from consumer and healthcare professionals
      through its Web sites.***




Internet
      user privacy has become a major issue both in the United States and abroad. The
      Company has
      privacy policies posted on its website that the
      Company believes
      comply with applicable laws requiring notice to users about the
      Company’s information collection, use and disclosure practices. However, whether and
      how
      existing privacy and consumer protection laws in various jurisdictions apply
      to
      the Internet is still uncertain and may take years to resolve. Any legislation
      or regulation in the area of privacy of personal information could affect the
      way the
      Company operates
      its website and could harm its business. Further, the
      Company cannot
      assure you that the privacy policies and other statements on its website or
      its
      practices will be found sufficient to protect the
      Company from
      liability or adverse publicity relating to the privacy and security of personal
      information.




Under
      the
      Health Insurance Portability and Accountability Act of 1996, or HIPAA, Congress
      established a set of federal national privacy standards for the protection
      by
      health plans, healthcare clearinghouses, healthcare providers and their business
      associates of individually identifiable health records. While the
      Company’s members
      own and control their own personal health records, the
      Company’s maintenance of these records using MyMedVault TM may
      subject the
      Company to HIPAA
      regulations. Furthermore, legislation regarding HIPAA is evolving and often
      confusing as it applies to new businesses such as the
      Company .
      Violation of HIPAA could result in substantial penalties that could adversely
      affect the
      Company’s future.




**Additional
      Information**





We
      are
      obligated to file reports with the SEC pursuant to the Securities Exchange
      Act
      of 1934, as amended, (the “Exchange Act”). The public may read and copy any
      materials that we file with the SEC at the SEC’s Public Reference Room at 100 F
      Street, N.E., Washington, D.C. 20549. The public may obtain information on
      the
      operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
      The
      SEC maintains an Internet site that contains reports, proxy and information
      statements, and other information regarding issuers that file electronically
      with the SEC. We file electronically with the SEC. The address of that site
      is http://www.sec.gov .


-25-
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          of Contents**




**General
      Discussion on Results of Operations and Analysis of Financial
      Condition**




**Overview**




**Corporate
      History**




Patients
      & Physicians, Inc. (formerly known as Finity Holdings, Inc.) (“P&P”),
      was organized on February 5, 1993. Finity Holdings, Inc. formerly operated
      through two wholly owned subsidiaries, Finity Corporation, a Texas corporation,
      and Fi-Scrip, Incorporated, a Nevada corporation ("Fi-Scrip"). Finity Holdings,
      Inc. sold all of its stock in Finity Corporation and Fi-Scrip effective June
      5,
      2001.





U.S.
      Open
      Healthcare Management, Inc. (“USOH”) was incorporated under the laws of the
      State of New York on July 9, 2002. Flagship Patient Advocates, Inc. (formerly
      known as Flagship Healthcare Management, Inc.) (“Flagship”) was incorporated
      under the laws of the State of Delaware on February 11, 2004. On February 18,
      2004, USOH entered into an Agreement and Plan of Merger (the “Merger”) with
      Flagship. All of the outstanding shares of USOH common stock were converted
      into
      Flagship common stock, and the net assets of USOH were contributed to
      Flagship.




*Exchange*





On
      June
      27, 2006, P&P closed an Exchange Agreement (the "Share Exchange") with all
      of the stockholders of Flagship whereby P&P acquired all of the issued and
      outstanding capital stock of Flagship and Flagship became a wholly-owned
      subsidiary of P&P. Upon completion of the Share Exchange, Flagship’s
      stockholders controlled approximately 99% of the then issued and outstanding
      common stock. Prior to the Share Exchange, P&P was a shell company.
      Subsequent to the Share Exchange (see below), Flagship’s business activities
      were the activities of P&P. As a result of these factors, this transaction
      has been treated as a reverse merger, and a capital transaction, equivalent
      to
      the issuance of stock by Flagship for P&P’s net assets and, accordingly, the
      historical financial statements prior to June 27, 2006 are those of Flagship.
      All shares and per share data prior to the Share Exchange have been restated
      to
      reflect the stock issuances and the effect of the closing of the Share
      Exchange.





In
      connection with the Share Exchange, the stockholders of Flagship acquired the
      majority of the voting shares of P&P, P&P will carry on the business of
      Flagship, and the officers and directors of Flagship became the officers and
      directors of P&P. Therefore, the transaction is being accounted for as
      Flagship being the accounting acquirer (legal acquiree) and P&P being the
      accounting acquiree (legal acquirer). Since at the closing P&P was a
      non-operating shell corporation no longer meeting the definition of a business
      as defined in Emerging
      Issues Task Force (“ EITF ”) Consensus
      98-3, Determining Whether a Nonmonetary Transaction Involves Receipt of
      Productive Assets or of a Business, the transaction is equivalent to Flagship
      issuing stock for the net liabilities of P&P, accompanied by a
      recapitalization. The accounting will be identical to that resulting from a
      reverse acquisition, except that there will be no adjustments to the historic
      carrying values of the assets and liabilities.




*Acquisition*




On
      July
      12, 2006, Flagship entered into an Asset Purchase Agreement (the “PEMMS
      Agreement”) with PEMMS Limited (“PEMMS”), an early-stage technology company
      focusing on the personal health market. Pursuant to the PEMMS Agreement Flagship
      acquired certain assets, including principally the software and intellectual
      property for a proprietary secure web-based repository wherein an individual
      can
      store and retrieve, among other things, his/her own medical records. In exchange
      for the assets, we issued PEMMS 300,000 newly issued shares of our common stock.
      Under the purchase method of accounting, the assets and liabilities acquired
      by
      the Company from PEMMS are recorded as of the acquisition date at their
      respective fair values, and added to those of the Company. The purchase price
      of
      approximately $368,000 consists of $270,000 of common stock


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          of Contents**




and
      $98,000 of estimated obligations associated with customer contracts acquired.





Prior
      to
      the transaction, Flagship had an agreement with PEMMS to license PEMMS
      proprietary software. Simultaneously, Flagship also entered into an agreement
      with PEMMS wherein PEMMS would provide all maintenance, support and hosting
      services for the software.




**Going
      Concern**




Our
      consolidated financial statements have been prepared assuming we will continue
      as a going concern. We have experienced net losses from operations of
      $21,462,334 since inception (July 9, 2002) and $10,011,094 for the nine months
      ended September 30, 2006. In addition, we had a working capital deficit of
      $4,792,432 at September 30, 2006. These factors, among others, raise substantial
      doubt about our ability to continue as a going concern. Our financial statements
      do not include any adjustment that might result from the outcome of this
      uncertainty. Assurances cannot be given that adequate financing can be obtained
      to meet our capital needs. If we are unable to generate profits and unable
      to
      continue to obtain financing to meet our working capital requirements, we may
      have to curtail our business sharply or cease operations altogether. Our
      continuation as a going concern is dependent upon our ability to generate
      sufficient cash flow to meet our obligations on a timely basis to retain our
      current financing, to obtain additional financing, and, ultimately, to attain
      profitability. Should any of these events not occur, we will be adversely
      effected and we may have to cease operations.




**Critical
      Accounting Policies**




**Revenue
      Recognition**




We
      derive
      revenue from the sale of memberships to individuals and institutions for access
      to our healthcare service offerings.




We
      recognize revenues in accordance with SEC Staff Accounting Bulletin No. 101, *Revenue
      Recognition in Financial Statements* (“SAB
      No. 101”) as amended by SEC Staff Accounting Bulletin No. 104, *Revenue
      Recognition* ,
      revised
      and updated (“SAB No. 104”). SAB No. 104 stipulates that revenue generally is
      realized or realizable and earned, once persuasive evidence of an arrangement
      exists, delivery has occurred or services have been rendered, the fee is fixed
      or determinable and collectibility is reasonably assured. We sell memberships
      to
      individuals and institutions for access to our healthcare service
      offerings. We recognize revenue ratably over the life of the membership.




To
      date,
      our memberships have been marketed only through our in-house sales force and
      a
      network of independent brokers.




In
      the
      broker channel, we recognize revenue when the broker distributor sells our
      memberships, provided we have satisfied all other terms and conditions.




**Stock-Based
      Compensation**




We
      have
      adopted SFAS No. 123(R) (revised 2004), *Share-Based
      Payment* (“SFAS
      No. 123(R)”), which requires the recognition of compensation expense for
      employee stock options and other share-based payments. Under this method of
      adoption, expense related to employee stock options and other share-based
      payments is recognized over the relevant service period based on the fair value
      of each stock option grant.




We
      have
      accounted for non-employee compensation expense in accordance with EITF Issue
      No. 96-18, *Accounting
      for Equity Instruments That Are Issued to Other Than Employees for Acquiring,
      or
      in Conjunction with Selling, Goods or Services* (“EITF
      96-18”), which requires non-employee stock options to be measured at their fair
      value as of the earlier of the date at which a commitment for


-27-
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          of Contents**




performance
      to earn the equity instruments is reached (“performance commitment date”) or the
      date at which performance is complete (“performance completion date”).
      Accounting for non-employee stock options, which involve only performance
      conditions when no performance commitment date or performance completion date
      has occurred as of the interim financial reporting date, requires measurement
      at
      the instruments then-current fair value.




We
      have
      followed the guidance outlined in FASB Interpretations (“FIN”) No. 28, *Accounting
      for Stock Appreciation Rights and Other Variable Stock Option or Award
      Plans* (“FIN
      28”), as it relates to computing expense when appreciation rights vest over
      time. As of September 30, 2006, we accounted for 2,355,000 options under the
      guidance of EITF 96-18.




The
      fair
      value of each stock option grant to employees is estimated on the date of grant.
      The fair value of each stock option grant to non-employees is estimated on
      the
      applicable performance commitment date, performance completion date, or interim
      financial reporting date.




**Results
      Of Operations For The Three Months Ended September 30, 2006 Compared To The
      Three Months Ended September 30, 2005**





Our
      activities to date have been focused on developing a membership-based specialty
      healthcare advocacy company providing physician referrals, on a priority basis,
      and emergent care needs to our members, all linked by a sophisticated management
      system and is still a development stage company. Our operating activities to
      date have consisted primarily of developing our membership and physician
      databases and establishing our physician network. We had revenues of $12,062
      and
      total net expenses of $3,508,379 for the three months ended September 30, 2006
      compared to revenues of $1,625 and total net expenses of $1,573,936 for the
      three months ended September 30, 2005.




**Revenues**





Our
      total
      revenue increased to $12,062 for the three months ended September 30, 2006
      versus $1,625 for the three months ended September 30, 2005. The increase is
      a
      result of sales of memberships which began in late 2005. We are still in the
      stages of early product and services development and we do not expect to
      generate significant revenue from our various product lines until 2007.




**Costs
      of Revenue**





Our
      total
      costs of revenue increased to $5,588 for the three months ended September 30,
      2006 versus $974 for the three months ended September 30, 2005. The increase
      is
      directly related to costs associated with membership sales which began in late
      2005.




**Total
      Expenses**





Total
      operating expenses for the three months ended September 30, 2006 were $2,261,261
      compared to $1,558,665 for the three months ended September 30, 2005, an
      increase of $702,596 or 45.1% These expenses incurred during the three months
      ended September 30, 2006 and 2005 are set forth below in further detail.





Membership
      services expenses. Membership services expenses increased by $215,848, or 33.9%,
      to $852,699 for the three months ended September 30, 2006 versus $636,851 for
      the three months ended September 30, 2005. This increase was principally due
      to
      the recognition
      of share-based compensation,
      the issuance of a stock grant and an increase in stipends paid to Network
      Specialty Chiefs and Regional Medical Directors in the three months ended
      September 30, 2006 over the three months ended September 30, 2005. In addition,
      there were increased travel costs incurred during the three months ended
      September 30, 2006 related to expanding the network and business overseas.


-28-
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Selling,
      general and administrative expenses. Selling, general and administrative
      expenses increased by $466,627, or 53.7%, to $1,335,120 for the three months
      ended September 30, 2006 as compared to $868,493 for the three months ended
      September 30, 2005. This increase was principally attributable to the recognition
      of share based compensation ,
      travel
      costs related to our involvement in two projects in China and additional rent
      incurred in connection with the move to new office space. There were increases
      in costs related to computer backup and storage. In addition, in 2006, we
      incurred substantial costs related to being a public company. These included
      legal and accounting expenses related to certain filings with the SEC including
      a Proxy and a Registration Statement.





Depreciation
      and amortization expense. Depreciation and amortization expense increased by
      $20,481, or 38.4%, to $73,802 for the three months ended September 30, 2006
      versus $53,321 for the three months ended September 30, 2005. This increase
      is a
      result of the amortization of the software received in the acquisition of PEMMS,
      offset by a decrease in depreciation related to the write off of long-lived
      assets at the end of 2005.





Interest
      income. Interest income increased by $22,711 to $23,733 for the three months
      ended September 30, 2006 as compared to $1,022 for the three months ended
      September 30, 2005. This increase was a result of having cash on hand during
      the
      current three months ended September 30, 2006 related to the Convertible Note
      financing that closed in January 2006 and the short term convertible notes
      that
      closed in June 2006.





Amortization
      of debt discounts and debt issuance costs. Amortization of debt discounts and
      debt issuance costs increased to $1,019,534 for the three months ended September
      30, 2006 versus $0 for the same period last year. This increase was due to
      the
      amortization of the discounts on the Convertible Note financing that closed
      in
      January 2006. The costs allocated to the debt are charged to operations over
      the
      life of the debt using the interest method, which produces a constant periodic
      rate of return.





Interest
      expense. Interest expense increased to $250,957 for the three months ended
      September 30, 2006 versus $16,293 for the three months ended September 30,
      2005.
      This increase is due to interest expense incurred in the current period related
      to the Convertible Notes and the short term convertible notes, which did not
      exist in 2005.





**Net
      loss**





As
      a
      result of the foregoing, for the three months ended September 30, 2006, net
      loss
      increased by $1,928,620 or 122.6%, to a net loss of $3,501,905, compared to
      a
      net loss of $1,573,285 for the corresponding period in 2005.





**Results
      of Operations For The Nine months Ended September 30, 2006 Compared To The
      Nine
      months Ended September 30, 2005**





We
      had
      revenues of $29,248 and total net expenses of $10,031,033 for the nine months
      ended September 30, 2006 and revenues of $1,625 and total net expenses of
      $5,706,100 for the nine months ended September 30, 2005.




**Revenue**





For
      the
      nine months ended September 30, 2006, we generated $29,248 in revenue compared
      to $1,625 for the nine months ended September 30, 2005. This increase is due
      to
      the commencement of sales of memberships during 2005 and the first nine months
      of 2006. We are still in the stages of early product and services development
      and we do not expect to generate significant revenue from our various product
      lines until 2007.


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          of Contents**




**Costs
      of Revenue**




Our
      total
      costs of revenue increased to $9,309 for the nine months ended September 30,
      2006 versus $974 for the nine months ended September 30, 2005. The increase
      is
      directly related to costs associated with membership sales which began in 2005
      and the first half of 2006.




**Total
      Expenses**





Total
      operating expenses for the nine months ended September 30, 2006 were $6,859,466,
      compared to $5,694,048 for the nine months ended September 30, 2005, an increase
      of $1,165,418 or 20.5%. The expenses incurred for 2006, as compared to 2005,
      are
      set forth in greater detail below and in the accompanying condensed consolidated
      financial statements attached.





**Costs
      and Expenses**




Membership
      services. Membership services expenses increased by $601,028, or 34.1%, to
      $2,362,949 for the nine months ended September 30, 2006, versus $1,761,921
      for
      the nine months ended September 30, 2005. This increase was principally due
      to
      the increased wages and benefits related to an increase in call center
      personnel. We increased staff in order to provide service to our members as
      we
      begin to sell memberships. In addition, there was an increase in stipends to
      Medical Specialty Chiefs and Regional Medical Directors in the nine months
      ended
      September 30, 2006. We also incurred increased travel costs associated with
      expanding the network internationally as well as the issuance of a stock grant.




Selling,
      general and administrative. Selling, general and administrative expenses
      increased by $617,317, or 16.6%, to $4,337,596 for the nine months ended
      September 30, 2006, as compared to $3,720,279 for the nine months ended
      September 30, 2005. In addition, there was an increase in expenses related
      to
      the recognition
      of share based compensation in
      2006.
      In addition, selling, general and administrative expenses included a significant
      increase in legal and professional costs incurred associated with being a public
      company as well as an increase in directors and officers insurance and the
      acquisition cost of the shell company in the amount of $240,000, which under
      accounting principles generally accepted in the United States, was charged
      to
      operations in the period acquired. There was an increase in office rent due
      to
      the move to new office space and moving expenses related to the relocation
      of
      certain employees. These increases were more than offset by certain compensation
      charges incurred in 2005 not incurred in 2006.




Depreciation
      and amortization. Depreciation and amortization decreased by $52,927, or 25.0%,
      to $158,921 for the nine months ended September 30, 2006, versus $211,848 for
      the nine months ended September 30, 2005. This decrease is due a
      reduction in depreciation expense, related to to
      the
      write off of certain assets no longer in use in 2005.




Interest
      income. Interest income increased by $43,499 to $49,640 for the nine months
      ended September 30, 2006, as compared to $6,141 for the nine months ended
      September 30, 2005. This increase was due to having cash on hand during the
      current year related to the Convertible Notes and the short term convertible
      notes.




Amortization
      of debt discounts and debt issuance costs. Amortization of debt discounts and
      debt issuance costs increased to $2,692,902 for the nine months ended September
      30, 2006, versus $0 for the same period last year. This increase was due to
      the
      amortization of the discounts on the Convertible Note financing. The costs
      allocated to the debt are charged to operations over the life of the debt using
      the interest method, which produces a constant periodic rate of
      return.







Interest
      expense. Interest expense increased to $528,305 for the nine months ended
      September 30, 2006 versus $18,193 for the nine months ended September 30, 2005.
      This increase is due to accrued interest expense related to the Convertible
      Notes and the short term convertible notes.




**Net
      Loss**





For
      the
      nine months ended September 30, 2006, we had a net loss of $10,011,094, as
      compared to a net loss of $5,705,449 for the same period in 2005, an increase
      of
      $4,305,645, or 75.5%. The loss increased as we


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 **Table
          of Contents**


expanded
      operations in 2006, and increased our employee headcount, operating expenses
      and
      legal and professional fees. Net loss per common share increased from $0.17
      in
      2005 to $0.21 in 2006.




**Liquidity
      And Capital Resources**





At
      September 30, 2006, we had a working capital deficit of $4,792,432, compared
      to
      a working capital deficit of $3,359,685 at December 31, 2005. The increase
      in
      the deficit is primarily the result of the Convertible Notes and $4,000,000
      of
      short term convertible notes provided to us by a current investor in June 2006
      (the “Term Notes”) entered into during the nine months ended September 30, 2006,
      as more fully described below, offset by the allocation of the proceeds from
      the
      Convertible Notes financing to equity, due to the equity related features issued
      in connection with such debt, resulting in debt discounts at the date of
      issuance, and are being amortized to interest expense over the life of the
      Convertible Notes.





At
      September 30, 2006 current liabilities include the current portion of the
      Convertible Notes as well as the Term Notes. The principal amount of the
      Convertible Notes, $7.1 million, is payable in installments over twenty-four
      months, commencing in February 2007. The principal amount of the Term Notes,
      $4.0 million, is due in full on June 7, 2007. The Term Notes bear interest
      at
      8%.





We
      have
      entered into a term sheet (the “Term Sheet”) for an equity financing. The Term
      Sheet provides for a total investment of up to $8.0 million in exchange for
      newly issued shares of our common stock at a price of $2.00 per share (the
      “Financing”). The Term Sheet also provides that the investors in the Financing
      will receive warrants with a term of seven years to purchase shares of our
      common stock at an exercise price equal to $1.00 per share. The total amount
      of
      warrants issued will equal 25% of the amount invested by each investor. As
      of
      November 20, 2006, we have received $2.2 million of the Financing. Upon entering
      into such Financing, the Term Notes will convert into shares of our common
      stock
      on the same terms and conditions as the Financing, provided, however, that
      we
      receive at least an additional $4.0 million of new funding.





Net
      cash
      used in investing activities was $72,741 for the nine months ended September
      30,
      2006, versus $458,125 for the nine months ended September 30, 2005. For the
      nine
      months ended September 30, 2005, investing activities included a one time
      purchase of IT equipment for the new office space, including computers for
      new
      personnel and our computer systems to meet the increased demands as the sale
      of
      memberships increase. The purchases of equipment in the nine months ended
      September 30, 2006 consisted primarily of additional computers.





Net
      cash
      provided by financing activities during the nine months ended September 30,
      2006
      was $7,924,895, versus $4,825,567 during the nine months ended September 30,
      2005. The increase of $3,099,328 resulted from the net proceeds of $4,014,457
      from the closing of the Convertible Notes and proceeds of $4,000,000 from the
      Term Notes versus net proceeds of $3,346,733 from the closing of the Redeemable
      Series B Convertible Preferred Stock financing and the receipt of $1,510,000
      of
      notes, of which $1,500,000 converted into the Convertible Notes, during the
      nine
      months ended September 30, 2005.




**Item
      3. Controls and Procedures.**




**A.**
            **Evaluation
                of Disclosure Controls and
                Procedures:**





Our
      disclosure controls and procedures are designed to ensure that material
      information relating to the Company are made known by others within the Company
      to our Chief Executive Officer (“CEO”), CFO and others in the Company involved
      in the preparation of our annual report and our quarterly reports. The Company
      has evaluated, with the participation of the Company’s CEO and CFO, the
      effectiveness of the design and operation of the Company’s disclosure controls
      and procedures as of September 30, 2006, pursuant to Exchange Act Rule 15d-15
      and were determined not to be effective. Based upon that evaluation, the CEO
      and
      CFO identified


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          of Contents**




deficiencies
      that existed in the design or operation of our internal control over financial
      reporting that it considered to be "material weaknesses." The Public Company
      Accounting Oversight Board defined a material weakness as a "significant
      deficiency 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."





The
      material weakness identified relate to:





·
            the
                lack of sufficient knowledge and experience among the internal accounting
                personnel regarding the application of US GAAP and SEC
                requirements;




·
            insufficient
                written policies and procedures for accounting and financial reporting
                with respect to the current requirements and application of US GAAP
                and
                SEC disclosure requirements; and




·
            segregation
                of duties, in that we had only one person performing all
                accounting-related duties.




Notwithstanding
      the existence of this material weakness in our internal control over financial
      reporting, our management believes, including our Chief Executive Officer and
      Chief Financial Officer that the condensed consolidated financial statements
      included in this report fairly present in all material respects our financial
      condition, results of operations and cash flows for the periods presented.





**B.**
            **Changes
                in Internal Control over Financial
                Reporting:**





There
      were no changes in our internal controls over financial reporting identified
      in
      connection with our evaluation of these controls during the period covered
      by
      this report that could have significantly affected those controls subsequent
      to
      the date of the evaluation referred to in the previous paragraph, including
      any
      correction action with regard to significant deficiencies and material
      weaknesses.


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          of Contents**




**PART
      II**


**OTHER
      INFORMATION**





**Item
      1. Legal Proceedings.**





A
      former
      independent contractor (the “Plaintiff”) has filed a lawsuit against the
      Company, among others. The Plaintiff alleges that he was promised employment
      with Flagship and performed services for Flagship based on these promises.
      The
      Plaintiff is seeking compensatory and punitive damages, including the issuance
      of additional shares of stock for these services and attorney fees in an
      aggregate amount of approximately $1,800,000. The Company believes this lawsuit
      is without merit and intends to defend it vigorously. In management’s opinion
      the final resolution of this matter will not have material impact on the
      consolidated financial position or results of operations of the
      Company.




**Item
      2. Unregistered Sales of Equity Securities and Use of
      Proceeds.**





None.





**Item
      3. Defaults Upon Senior Securities.**





None.





**Item
      4. Submission of Matters to a Vote of Security
      Holders.**





None.




**Item
      5. Other Information.**





None.





**Item
      6. Exhibits.**





ExhibitNumber
            
            Description
                of Document31.1
            
            Rule
                13a-14(a)/15d-14(a) Certification (CEO)**31.2
            
            Rule
                13a-14(a)/15d-14(a) Certification (CFO)**32.1
            
            Section
                1350 Certification (CEO)**32.2
            
            Section
                1350 Certification (CFO)**





**
            Filed
                herewith.




-33-
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          of Contents**




**SIGNATURES**





In
      accordance with the requirements of the Exchange Act, the registrant caused
      this
      report to be signed on its behalf by the undersigned, thereunto duly
      authorized.








**PATIENTS
      & PHYSICIANS, INC.**


Date:
      November 21, 2006


By: 
      /s/ Fred F. Nazem


Fred
      F.
      Nazem, Chief Executive Officer and Chariman




Date:
      November 21, 2006


By: 
      /s/ Philip E. Barak


Philip
      E.
      Barak, Chief Financial Officer


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