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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q





(Mark One)



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

FOR THE QUARTERLY PERIOD ENDED June 28, 2008



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

FOR THE TRANSITION PERIOD FROM
            TO

Commission File Number: 000-13858





MEDICAL SOLUTIONS MANAGEMENT
INC.

(Exact Name Of Registrant As Specified In Its Charter)







|                                                               |  |                                     
|-------------------------------------------------------------- |  | ------------------------------------
|Nevada                                                         |  | 86-0214815                          
|(State or other jurisdiction of Incorporation or organization) |  | (I.R.S. Employer Identification No.)

237 Cedar Hill Street, Marlborough, Massachusetts 01752

(Address of principal executive offices) (Zip Code)

(508) 597-6300

(Registrants telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)





Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the 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  x    No   ̈

Indicate by check mark whether the registrant is
a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule
12b-2 of the Exchange Act.



|                                                                       |  |                             
|---------------------------------------------------------------------- |  | ----------------------------
|Large accelerated filer   ̈                                             |  | Accelerated filer   ̈        
|Non-accelerated filer   ̈ (Do not check if a smaller reporting company) |  | Smaller reporting company  x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act).    Yes   ̈    No  x

As of August 7, 2008, there were 58,218,007 shares of the issuers common stock issued and outstanding.









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TABLE OF CONTENTS



|        |  |                       |  |                                                                                       |  |     
|------- |  | --------------------- |  | ------------------------------------------------------------------------------------- |  | ----
|        |  |                       |  |                                                                                       |  | Page
|PART I  |  | FINANCIAL INFORMATION |  | 4                                                                                    
|        |  |                       | 
|        |  | ITEM 1.               |  | FINANCIAL STATEMENTS                                                                  |  | 4   
|        |  |                       | 
|        |  | ITEM 2.               |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |  | 21  
|        |  |                       | 
|        |  | ITEM 3.               |  | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                            |  | 25  
|        |  |                       | 
|        |  | ITEM 4T.              |  | CONTROLS AND PROCEDURES                                                               |  | 26  
|        |  |                      
|PART II |  | OTHER INFORMATION     |  | 28                                                                                   
|        |  |                       | 
|        |  | ITEM 1.               |  | LEGAL PROCEEDINGS                                                                     |  | 28  
|        |  |                       | 
|        |  | ITEM 1A.              |  | RISK FACTORS                                                                          |  | 28  
|        |  |                       | 
|        |  | ITEM 2.               |  | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                           |  | 28  
|        |  |                       | 
|        |  | ITEM 3.               |  | DEFAULTS UPON SENIOR SECURITIES                                                       |  | 28  
|        |  |                       | 
|        |  | ITEM 4.               |  | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                                   |  | 28  
|        |  |                       | 
|        |  | ITEM 5.               |  | OTHER INFORMATION                                                                     |  | 28  
|        |  |                       | 
|        |  | ITEM 6.               |  | EXHIBITS                                                                              |  | 28  



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Special Note Regarding Forward-Looking Information

This Quarterly Report on Form 10-Q, including the information incorporated by reference herein, contains forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which include information concerning our plans, objectives, goals, strategies, future revenues or
performance, and other information that is not historical information. Many of these statements appear, in particular, under the heading Managements Discussion and Analysis of Financial Condition and Results of Operations in
ITEM 2 of Part I of this report. When used in this report, the words estimates, expects, anticipates, projects, plans, intends, believes and variations of such
words or similar expressions are intended to identify forward-looking statements. These forward-looking statements are based upon our current expectations and various assumptions. There can be no assurance that we will realize our expectations or
that our beliefs will prove correct.

There are a number of risks and uncertainties that could cause our actual results to differ
materially from the forward-looking statements contained in this report. Important factors that could cause our actual results to differ materially from those expressed as forward-looking statements are set forth in this report, including under the
heading Risk Factors under ITEM 1A of Part I of our Form 10-KSB for the year ended December 31, 2007. There may be other factors that may cause our actual results to differ materially from the forward-looking statements.

All forward-looking statements attributable to us apply only as of the date of this Quarterly Report on Form 10-Q and are expressly
qualified in their entirety by the cautionary statements included in this Quarterly Report on Form 10-Q. Except as may be required by law, we undertake no obligation to publicly update or revise any of the forward-looking statements, whether as a
result of new information, future events, or otherwise.

Explanatory Notes

Unless the context otherwise requires, in this Quarterly Report on Form 10-Q the term MSMI refers Medical Solutions Management Inc., the term
OrthoSupply refers to MSMIs wholly-owned subsidiary, OrthoSupply Management, Inc., and the terms the Company, we, us and our refer to MSMI and OrthoSupply collectively.



3



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PART I FINANCIAL INFORMATION



|ITEM 1 | FINANCIAL STATEMENTS
|------ | --------------------

Medical Solutions
Management Inc.

Consolidated Balance Sheets



|                                                                                                                                                     |  |                          |              |   |                            |   |              |  
|---------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------ | ------------ | - | -------------------------- | - | ------------ | -
|                                                                                                                                                     |  | June 28, 2008(unaudited) |              |   | December 31, 2007(audited) |  
|Assets                                                                                                                                               |  |                          |              |   |                            |   |              |  
|Current Assets:                                                                                                                                      |  |                          |              |   |                            |   |              |  
|Cash and cash equivalents                                                                                                                            |  | $                        | 36,462       |   |                            | $ | 1,091,939    |  
|Trade accounts receivable, net                                                                                                                       |  |                          | 1,188,041    |   |                            |   | 1,254,483    |  
|Other receivables, net                                                                                                                               |  |                          | 5,574,586    |   |                            |   | 3,603,681    |  
|Inventory                                                                                                                                            |  |                          | 206,756      |   |                            |   | 129,152      |  
|Prepaid expenses                                                                                                                                     |  |                          | 50,405       |   |                            |   | 26,317       |  
|                                                                                                                                                     |  |                          |              |   |                            |   |              |  
|Total current assets                                                                                                                                 |  |                          | 7,056,250    |   |                            |   | 6,105,572    |  
|Property and equipment, net                                                                                                                          |  |                          | 87,547       |   |                            |   | 110,420      |  
|Debt issuance costs, net                                                                                                                             |  |                          | 63,746       |   |                            |   | 159,362      |  
|                                                                                                                                                     |  |                          |              |   |                            |   |              |  
|Total Assets                                                                                                                                         |  | $                        | 7,207,543    |   |                            | $ | 6,375,354    |  
|                                                                                                                                                     |  |                          |              |   |                            |   |              |  
|Liabilities and Stockholders Deficiency                                                                                                             |  |                          |              |   |                            |   |              |  
|Current Liabilities:                                                                                                                                 |  |                          |              |   |                            |   |              |  
|Accounts payable                                                                                                                                     |  | $                        | 1,468,120    |   |                            | $ | 650,394      |  
|Accrued expenses                                                                                                                                     |  |                          | 867,738      |   |                            |   | 636,024      |  
|Borrowings under revolving line of credit                                                                                                            |  |                          | 3,000,000    |   |                            |   | 3,000,000    |  
|Advances payable                                                                                                                                     |  |                          | 2,260,205    |   |                            |   |             |  
|Convertible notes payable due in less than one year (net of discounts of $538,226 and $599,650 at June 28, 2008 and December 31,
2007, respectively) |  |                          | 5,252,774    |   |                            |   | 3,925,350    |  
|                                                                                                                                                     |  |                          |              |   |                            |   |              |  
|Total current liabilities                                                                                                                            |  |                          | 12,848,837   |   |                            |   | 8,211,768    |  
|Long-term Debt:                                                                                                                                      |  |                          |              |   |                            |   |              |  
|Convertible notes payablelong term (net of discounts of $0 and $316,061 at June 28, 2008 and December 31, 2007, respectively)                       |  |                          |             |   |                            |   | 949,939      |  
|                                                                                                                                                     |  |                          |              |   |                            |   |              |  
|Total Liabilities                                                                                                                                    |  |                          | 12,848,837   |   |                            |   | 9,161,707    |  
|                                                                                                                                                     |  |                          |              |   |                            |   |              |  
|Commitments and contingencies                                                                                                                        |  |                          |              |   |                            |   |              |  
|Stockholders Deficiency:                                                                                                                            |  |                          |              |   |                            |   |              |  
|Preferred stock5,000,000 authorized, $0.001 par value, none issued and outstanding                                                                  |  |                          |             |   |                            |   |             |  
|Common stock200,000,000 authorized, $0.0001 par value, 58,218,007 issued and outstanding at June 28, 2008 and December 31,
2007                     |  |                          | 5,822        |   |                            |   | 5,822        |  
|Additional paid in-capital                                                                                                                           |  |                          | 150,940,385  |   |                            |   | 150,674,080  |  
|Accumulated deficit                                                                                                                                  |  |                          | (156,587,501 | ) |                            |   | (153,466,255 | )
|                                                                                                                                                     |  |                          |              |   |                            |   |              |  
|Total Stockholders Deficiency                                                                                                                       |  |                          | (5,641,294   | ) |                            |   | (2,786,353   | )
|                                                                                                                                                     |  |                          |              |   |                            |   |              |  
|Total Liabilities and Stockholders Deficiency                                                                                                       |  | $                        | 7,207,543    |   |                            | $ | 6,375,354    |  
|                                                                                                                                                     |  |                          |              |   |                            |   |              |  

See Notes to Unaudited Interim Financial Statements.



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Medical Solutions Management Inc.

Consolidated Statements of Operations for the Three and

Six Months Ended June 28,
2008 and June 30, 2007

(unaudited)



|                                                               |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|-------------------------------------------------------------- |  | ---------------- | ---------- | - | ------------------ | - | ----------- | ------------- |  | - | ------------- | - |  | - | ----------- | -
|                                                               |  | Six Months Ended |            |   | Three Months Ended |  
|                                                               |  | June 28, 2008    |            |   | June 30, 2007      |   |             | June 28, 2008 |  |   | June 30, 2007 |  
|Revenue:                                                       |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|Sales of Medical Products                                      |  | $                | 1,456,589  |   |                    | $ | 1,104,721   |               |  | $ | 734,026       |   |  | $ | 454,786     |  
|Service Revenue                                                |  |                  | 951,274    |   |                    |   | 411,298     |               |  |   | 367,177       |   |  |   | 329,399     |  
|                                                               |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|Total revenue                                                  |  |                  | 2,407,863  |   |                    |   | 1,516,019   |               |  |   | 1,101,203     |   |  |   | 784,185     |  
|                                                               |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|Cost of Revenue:                                               |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|Cost of Medical Products                                       |  |                  | 987,873    |   |                    |   | 716,526     |               |  |   | 507,356       |   |  |   | 313,231     |  
|Cost of Services                                               |  |                  | 969,810    |   |                    |   | 414,506     |               |  |   | 400,009       |   |  |   | 267,763     |  
|                                                               |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|Total Cost of Revenue                                          |  |                  | 1,957,683  |   |                    |   | 1,131,032   |               |  |   | 907,365       |   |  |   | 580,994     |  
|                                                               |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|Gross Profit                                                   |  |                  | 450,180    |   |                    |   | 384,987     |               |  |   | 193,838       |   |  |   | 203,191     |  
|Selling, General and Administrative Expenses                   |  |                  | 2,831,949  |   |                    |   | 2,291,041   |               |  |   | 1,311,096     |   |  |   | 1,211,618   |  
|                                                               |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|Operating Loss                                                 |  |                  | (2,381,769 | ) |                    |   | (1,906,054  | )             |  |   | (1,117,258    | ) |  |   | (1,008,427  | )
|                                                               |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|Other Income (Expense)                                         |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|Interest Income                                                |  |                  | 3,267      |   |                    |   | 2,390       |               |  |   | 271           |   |  |   | 1,504       |  
|Interest Expense, net                                          |  |                  | (738,102   | ) |                    |   | (429,631    | )             |  |   | (375,721      | ) |  |   | (259,777    | )
|Revolving line of credit financing expense                     |  |                  |           |   |                    |   | (21,494,876 | )             |  |   |              |   |  |   | (10,023,853 | )
|Note extension expense                                         |  |                  |           |   |                    |   | (8,676,888  | )             |  |   |              |   |  |   |            |  
|Warrant revaluation expense                                    |  |                  |           |   |                    |   |            |               |  |   |              |   |  |   |            |  
|                                                               |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|Other Income (Expense), net                                    |  |                  | (734,835   | ) |                    |   | (30,599,005 | )             |  |   | (375,450      | ) |  |   | (10,282,126 | )
|                                                               |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|Net Loss Before Income Taxes                                   |  |                  | (3,116,604 | ) |                    |   | (32,505,059 | )             |  |   | (1,492,708    | ) |  |   | (11,290,553 | )
|Provision for Income Taxes                                     |  |                  | 4,641      |   |                    |   | 3,162       |               |  |   |              |   |  |   |            |  
|                                                               |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|Net Loss                                                       |  | $                | (3,121,245 | ) |                    | $ | (32,508,221 | )             |  | $ | (1,492,708    | ) |  | $ | (11,290,553 | )
|                                                               |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|Basic and Diluted Net Loss Per Common Share                    |  | $                | (0.05      | ) |                    | $ | (1.59       | )             |  | $ | (0.03         | ) |  | $ | (0.55       | )
|                                                               |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  
|Weighted Average Common Shares Outstanding (Basic and Diluted) |  |                  | 58,218,007 |   |                    |   | 20,452,254  |               |  |   | 58,218,007    |   |  |   | 20,457,718  |  
|                                                               |  |                  |            |   |                    |   |             |               |  |   |               |   |  |   |             |  

See Notes to Unaudited Interim Financial Statements.



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Medical Solutions Management Inc.

Consolidated Statements of Cash Flows for the

Six Months Ended June 28, 2008 and
June 30, 2007

(unaudited)



|                                                                                            |  |                  |            |   |               |   |             |  
|------------------------------------------------------------------------------------------- |  | ---------------- | ---------- | - | ------------- | - | ----------- | -
|                                                                                            |  | Six Months Ended |           
|                                                                                            |  | June 28, 2008    |            |   | June 30, 2007 |  
|Cash Flows from Operating Activities:                                                       |  |                  |            |   |               |   |             |  
|Net Loss                                                                                    |  | $                | (3,121,245 | ) |               | $ | (32,508,221 | )
|Adjustments required to reconcile net loss to cash flows used by operating activities:      |  |                  |            |   |               |   |             |  
|Increase in allowance for doubtful accounts                                                 |  |                  | 108,075    |   |               |   | 50,843      |  
|Depreciation and amortization                                                               |  |                  | 35,339     |   |               |   | 28,885      |  
|Non-cash interest expense related to amortization of debt discounts and debt issuance costs |  |                  | 473,101    |   |               |   | 311,247     |  
|Fair value of warrants issued for revolving line of credit financing                        |  |                  |           |   |               |   | 21,494,876  |  
|Fair value of warrants issued for extension on maturity of convertible notes                |  |                  |           |   |               |   | 8,676,888   |  
|Fair value of warrants issued as part of separation agreement                               |  |                  | 266,304    |   |               |   |            |  
|Changes in Operating Assets and Liabilities:                                                |  |                  |            |   |               |   |             |  
|Trade accounts receivable                                                                   |  |                  | (41,633    | ) |               |   | (606,412    | )
|Other receivables                                                                           |  |                  | (1,970,905 | ) |               |   | (1,477,492  | )
|Inventory                                                                                   |  |                  | (77,604    | ) |               |   | (3,578      | )
|Prepaid expenses                                                                            |  |                  | (24,088    | ) |               |   | 25,054      |  
|Accounts payable                                                                            |  |                  | 817,726    |   |               |   | 162,402     |  
|Accrued expenses                                                                            |  |                  | 231,714    |   |               |   | 212,342     |  
|Other Payable                                                                               |  |                  |           |   |               |   |            |  
|                                                                                            |  |                  |            |   |               |   |             |  
|Net cash used by operating activities                                                       |  |                  | (3,303,216 | ) |               |   | (3,633,166  | )
|                                                                                            |  |                  |            |   |               |   |             |  
|Cash Flows from Investing Activities:                                                       |  |                  |            |   |               |   |             |  
|Purchases of property and equipment                                                         |  |                  | (12,466    | ) |               |   | (46,811     | )
|                                                                                            |  |                  |            |   |               |   |             |  
|Cash Flows from Financing Activities:                                                       |  |                  |            |   |               |   |             |  
|Proceeds from convertible notes payable                                                     |  |                  |           |   |               |   | 650,000     |  
|Proceeds from borrowings under revolving line of credit                                     |  |                  |           |   |               |   | 2,900,000   |  
|Proceeds from other advances payable                                                        |  |                  | 2,260,205  |   |               |   |            |  
|Proceeds from the exercise of common stock options                                          |  |                  |           |   |               |   | 249         |  
|                                                                                            |  |                  |            |   |               |   |             |  
|Net cash provided by financing activities                                                   |  |                  | 2,260,205  |   |               |   | 3,550,249   |  
|                                                                                            |  |                  |            |   |               |   |             |  
|Net Increase (Decrease) in Cash and Cash Equivalents                                        |  |                  | (1,055,477 | ) |               |   | (129,728    | )
|Cash and Cash EquivalentsBeginning                                                         |  |                  | 1,091,939  |   |               |   | 353,058     |  
|                                                                                            |  |                  |            |   |               |   |             |  
|Cash and Cash EquivalentsEnding                                                            |  | $                | 36,462     |   |               | $ | 223,330     |  
|                                                                                            |  |                  |            |   |               |   |             |  
|Supplemental disclosure of cash flow information:                                           |  |                  |            |   |               |   |             |  
|Cash paid for interest                                                                      |  | $                | 61,750     |   |               | $ | 12,000      |  
|                                                                                            |  |                  |            |   |               |   |             |  
|Cash paid for income taxes                                                                  |  | $                | 4,641      |   |               | $ | 3,162       |  
|                                                                                            |  |                  |            |   |               |   |             |  
|Supplemental disclosure of non-cash transactions:                                           |  |                  |            |   |               |   |             |  
|Discounts on convertible notes payable recorded as additional paid-in-capital               |  | $                |           |   |               | $ | 1,266,000   |  
|                                                                                            |  |                  |            |   |               |   |             |  

See Notes to Unaudited Interim Financial Statements



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MEDICAL SOLUTIONS MANAGEMENT INC.

NOTES TO UNAUDITED INTERIM FINANCIAL STATEMENTS



|1. | Basis of Presentation and Summary of Significant Accounting Policies
|-- | --------------------------------------------------------------------

The financial statements presented herein have been prepared by us in accordance with the accounting policies described in the Companys Annual Report on Form 10-KSB for fiscal year ended December 31, 2007
filed with the SEC on April 15, 2008 and should be read in conjunction with the notes to consolidated financial statements which appear in that report.

The preparation of these financial statements in conformity with accounting principles generally accepted in the United States (GAAP) requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. Amounts from the Companys fiscal year 2007 may also be reclassified to conform to current fiscal year 2008 classifications. On
an on going basis, the Company evaluates its estimates, including those related intangible assets, income taxes, insurance obligations and contingencies and litigation. The Company bases its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other resources. Actual results
may differ from these estimates under different assumptions or conditions.

In the opinion of management, the information furnished in this
Quarterly Report on Form 10-Q reflects all adjustments necessary for a fair statement of the financial position and results of operations and cash flows as of and for the six-month month periods ended June 28, 2008 and June 30, 2007. All
such adjustments are of a normal recurring nature. The consolidated financial statements have been prepared in accordance with the instructions to Quarterly Report on Form 10-Q and therefore do not include some information and notes necessary to
conform to annual reporting requirements.

The consolidated financial statements include the accounts of Medical Solutions Management Inc.
and its wholly-owned subsidiary, OrthoSupply Management, Inc. (collectively, the Company). All significant inter-company balances and transactions have been eliminated in consolidation.

Accounting Period: The Companys fiscal year is on a calendar year basis consisting of four thirteen week quarters with the last month
in each quarter being five weeks. The fiscal years ending December 31, 2008 and 2007 include 52 weeks.

Use of
Estimates: The preparation of financial statements in conformity with GAAP requires the Companys management to make estimates and assumptions that affect reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statement and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from the estimates.

Cash and Cash Equivalents: For financial statement presentation purposes, the Company considers those short-term, highly liquid investments
with original maturities of three months or less to be cash or cash equivalents.

Fair Value of Financial Instruments: The
Companys financial instruments consists of cash and cash equivalents, trade accounts receivable, other receivables, accounts payable, accrued expenses, and long and short-term borrowings. The fair value of these instruments approximates their
recorded value. The Company does not have financial instruments with off-balance sheet risk. The fair value estimates were based on market information available to management as of June 28, 2008.

Financial instruments that potentially subject the Company to concentrations of market/credit risk consist principally of cash and cash equivalents and
trade accounts receivables. The Company invests cash through a high credit-quality financial institution, which, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts.



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A concentration of credit risk may exist with respect to trade receivables. The Company performs ongoing
credit evaluations of customers and generally do not require collateral from its customers. The Company reviews accounts receivable on a regular basis to determine if any such amounts may be potentially uncollectible. The Company establishes a
general reserve based on percentages applied to certain customers and accounts receivable aging categories. These percentages are based on managements judgment and historical collection and write-off experience. The Company includes any
balances that are determined to be uncollectible, along with the general reserve, in the overall allowance for doubtful accounts. After all attempts to collect a receivable have failed, the receivable is written off against the allowance. Based on
its best estimate, the Company believes the allowance for doubtful accounts of $311,508 is adequate as presented. Historically, the Company has not experienced significant losses related to receivables from individual customers or groups of
customers in any particular discipline or geographic area.

The Company does not manufacture the products that it provides to its
customers. Instead, the Company relies on manufacturers and other suppliers for these products. The Company submits purchase orders for the products to one of its manufacturers or suppliers. The Companys manufacturers and suppliers have no
written contractual obligation to accept any purchase order that it submits for customer product orders. If any of these parties are unable or unwilling to supply these products, the Company would be unable to distribute its products until a
replacement supplier could be found.

Other Receivables:Other receivables consist of third party claims for pharmaceuticals
dispensed by physicians under workers compensation. These claims are acquired from a management company which aggregates the claims on behalf of a group of physician clinics that dispense the pharmaceuticals to their patients. The Company advances
funds to the management company at a discounted percentage from the face amount of the claims being transferred. In return, the ownership and all rights to full payment of the claims from third party payers are assigned exclusively to the Company.
The Company is free to pledge or exchange the transferred assets, and the transferor is not entitled to repurchase or redeem the claims. For claims with differences of billed amount against collected amount and all claims outstanding at sixty days
after billed date, the Company has fullrecourse and has the right to deduct the amount paid by the Company for such claims from any payments due hereunder with respect to other claims. The claims are recorded at cost to the Company.

Inventories: Inventories are valued at the lower of cost (determined by the first-in, first-out method) or market and
consist of finished goods.

Revenue Recognition:The Companys principal sources of revenues are from the sale of
medical products and from providing related management services. The Companys revenue recognition policies are in compliance with Staff Accounting Bulletin (SAB) No. 104, Revenue Recognition, SAB No. 101, Revenue
Recognition in Financial Statements, Emerging Issues Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables, and EITF Issue No. 99-19, Reporting Revenue Gross as a Principal versus
Net as an Agent. Revenue is recognized when persuasive evidence of an agreement with the customer exists, products are shipped or title passes pursuant to the terms of the agreement with the customer, the amount due from the customer is fixed
or determinable, collectibility is reasonably assured, and there are no significant future performance obligations. Service revenues are recognized at the time of performance is completed usually billed monthly. Revenues from separate service
maintenance agreements are recognized ratably over the term of the agreements.

The Companys sources of revenue are generated from
the sale of products and services.

Sales of productssales of durable medical equipment (DME), primarily to orthopedic and
podiatry clinical practices:



| |  |  | Direct Purchase ModelUnder this arrangement the clinic places an order with the Company, which then places the actual DME product order to one of its
suppliers. Title to the product is transferred to the Company upon shipment from the supplier. The Company bills the clinic upon confirmation of receipt and acceptance of the delivered products. Upon billing, the Companys performance
obligation is considered fulfilled and, accordingly, revenue is recognized at that time.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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| |  |  | Purchase as Dispensed ModelUnder the purchase as dispensed model, the order and shipping process, payment terms, and pricing is the same as
described above. However, in this model, the product remains the property of the Company upon delivery to the clinic. The product is included in the Companys inventory held at the clinic site until it is dispensed to a patient. Once dispensed,
it becomes billable to the clinic. Upon billing, the Companys performance obligation is considered fulfilled and, accordingly, revenue is recognized at that time.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company has evaluated the gross sales reporting criteria set forth in paragraphs 7-14 of EITF 99-19. The Company has determined that the following
criteria are applicable to its specific facts and circumstances:



| |  |  | The Company is the primary obligor in the arrangement with clinics.
| | - |  | -------------------------------------------------------------------



| |  |  | The Company has general inventory risk.
| | - |  | ---------------------------------------



| |  |  | The Company has discretion in supplier selection.
| | - |  | -------------------------------------------------



| |  |  | The Company has physical loss inventory risk.
| | - |  | ---------------------------------------------



| |  |  | The amount the Company earns is not fixed.
| | - |  | ------------------------------------------

Based on the Companys consideration of all relevant facts and circumstances, the Company accounts for sales of products on a gross basis.

Product sales are made without the right of return. However, the Company has established a business practice of accepting product returns under certain circumstances. The Company provides for estimated sales returns
when the underlying sale is made, based upon historical experience and known events or trends, in accordance with SFAS No. 48, Revenue Recognition when Right of Return Exists. The Company is able to reasonably estimate returns due
to the relatively short time period during which the Company generally accepts returns, the Companys historical experience with similar types of sales of similar products and a large volume of homogenous transactions. For all periods
presented, actual returns and reserves for estimated returns have been immaterial.

Sales of servicessales of third party billing and
collection services and Physician Extenders services:



| |  |  | Billing and Collection services modelThe Company also provides certain clinics with third party billing and collection services. Under this program,
the Company provides clinics with patient agreements which are filled in with DME product information dispensed to a patient along with proper coding. The Company periodically receives this information from the clinic and inputs it into an
electronic billing system for transmittal, on behalf of the clinic, to the appropriate third party payers. The Company charges a fee for this service equal to a fixed percentage of the amounts actually collected by the clinic. The service fee
revenue is recognized, on a net basis, upon collection of the third party billings and is invoiced to clinics on a monthly basis. The Company has evaluated the net sales reporting criteria set forth in paragraph 16 of EITF 99-19 and determined all
its billing and collection services are required to be reported on a net basis. Billing and collection contract terms are for one to two years with termination subject to thirty days notice for cause, and 90 to 120 day notice without cause.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Physician Extenders (PE) services modelPEs are generally Certified Athletic Trainers. These health care professionals are employed by the Company
but work on site at one or more clinics. They assist the clinic in DME dispensing, inventory management, injury evaluation, prevention and rehabilitation. The Company charges a contractually agreed upon flat fee to the clinic for this service. The
fee is invoiced monthly. Related fee revenue is recognized at the end of each month that the service has been provided and costs are included in cost of sales. Contract terms are generally the same as those of Billing and Collecting services.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Pharmacy Claims Servicing RevenueThe Company acquires dispensed workers compensation pharmaceutical claims from a management company which aggregates
the claims on behalf of a group of physician clinics that dispense the pharmaceuticals to their patients. Under the arrangement, the Company advances funds to the management company at a discounted percentage from the face amount of the claims being
transferred. In return, the ownership and all rights to full payment of the claims from third party payers are assigned exclusively to the Company. The Company is free to pledge or exchange the transferred assets, and the transferor is not entitled
to repurchase or redeem the claims. The Company has full responsibility for servicing the claims, including submission of the claims to third party payers (such as insurance companies and state workers compensation funds) and follow-up until
settlement occurs. For claims with differences of billed amount against collected amount and all claims outstanding at sixty days after billed date, the Company has fullrecourse and has the right to deduct the amount paid by the Company for
such claims from any payments due hereunder with respect to other claims.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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The Company evaluated the accounting for the acquisition and disposition of the pharmacy claims in
accordance with SFAS 140,Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, as amended by SFAS 156, Accounting for Servicing of Financial Assets (as amended). In accordance with paragraph 9
of SFAS 140, the Company has treated the acquisition of the claims as a purchase since the management company (transferor) has surrendered control over these assets to OrthoSupply, MSMIs wholly owned operating company. The claim assets are
recorded in Other Receivables, separately from its trade receivables, at the Companys cost. The Company earns servicing revenue by processing, submitting and collecting the claims as described above. Servicing revenue is recognized at the time
the claim is collected, and is calculated as the difference between the amount actually collected on the claim from third party payers and the amount paid by the Company for that claim.

Reclassifications: Certain amounts reported in the previous periods have been reclassified to conform to the 2007 presentation.



|2. | Going Concern and Managements Plan
|-- | -----------------------------------

The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Companys losses have resulted in an accumulated deficit of $156,587,501 as of June 28, 2008. Operating activities
consumed $3,303,216 in cash in the six months ended June 28, 2008. In addition, the Company has negative working capital of $5,792,587 as of June 28, 2008. These conditions raise substantial doubt about the Companys ability to
continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Companys plan for organic growth for fiscal year 2008 includes increasing its sales with existing customers through on-site assessments of their operations along with expanding the Companys client base in the markets the
Company currently operates. The plan includes support programs for the sales efforts including marketing, communications and program literature. The Company plans to increase its current sales force to 5 regional sales people and maximizing growth
in their respective regions.

The Company plans to hire additional field support resources to enhance the effectiveness of its services and
support the growth in new clinics during 2008. From time to time, the Company also engages outside consultants to assist the Company with marketing, advertising and web development. The Company expects these additional resources to drive the
continuous improvement of the billing and inventory processes that support the clinics. The Company also plans to increase its resources in accounting and administration, including hiring additional employees to assist with transaction processing
and internal control over financial reporting.

The Company does not anticipate devoting its resources to research and development in
fiscal year 2008. The Company intends to continue adding to its product and service offerings that will generate new revenue opportunities, including but not limited to strategic acquisitions and mergers (see Note 8, Subsequent Events).



|3. | New Accounting Standards
|-- | ------------------------

In May 2008, the
Financial Accounting Standards Board (FASB) issued FASB Staff Position (FSP) APB 14-1, Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement). FSP
APB 14-1 clarifies that convertible debt instruments that may be settled in cash upon either mandatory or optional conversion (including partial cash settlement) are not addressed by paragraph 12 of APB Opinion No. 14, Accounting for Convertible
Debt and Debt issued with Stock Purchase Warrants. Additionally, FSP APB 14-1 specifies that issuers of such instruments should separately account for the liability and equity components in a manner that will reflect the entitys
nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years.
We will adopt FSP APB 14-1 beginning in the first quarter of fiscal 2010, and this standard must be applied on a retrospective basis. We are evaluating the impact the adoption of FSP APB 14-1 will have on our consolidated financial position and
results of operations.

In May 2008, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 162, The
Hierarchy of Generally Accepted Accounting Principles. This standard is intended to improve financial reporting by identifying a consistent framework, or hierarchy, for selecting accounting principles to be used in preparing financial statements
that are presented in conformity with generally accepted accounting principles in the United States for non-governmental entities. SFAS No. 162 is effective 60 days following approval by the U.S. Securities and Exchange Commission (SEC)
of the Public Company Accounting Oversight Boards amendments to AU Section 411, The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles. We do not expect SFAS No. 162 to have a material impact on
the preparation of our consolidated financial statements.

In March 2008, the FASB issued Statement No. 161, Disclosures about
Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133. This Statement changes the disclosure requirements for derivative instruments and hedging activities. Entities are required to provide enhanced
disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS 133 and its related interpretations, and (c) how derivative instruments and
related hedged items affect an entitys financial position, financial performance, and cash flows. This Statement is effective for fiscal years and interim periods beginning after November 15, 2008 and is not expected to have a material
impact on the consolidated financial statements of the Company.

In December 2007, the Financial Accounting Standards Board
(FASB) issued Statement No. 141 (revised) (No. 141 R), Business Combinations. This Statement replaces FASB Statement No. 141, and applies to all business entities that previously used the pooling-of-interests method
of accounting for some business combinations.



10



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Under Statement No. 141R, an acquirer is required to recognize, at fair value, the assets acquired, liabilities assumed, and any non-controlling
interest in the entity acquired at the acquisition date. Further, it requires that acquisition costs and expected restructuring costs be recognized separately from the acquisition, and that the acquirer, in a business combination executed in stages,
recognize the identifiable assets and liabilities as well as the non-controlling interest in the entity acquired, at the full amounts of their fair values. SFAS No. 141R also requires an acquirer to recognize the assets acquired and liabilities
assumed arising from contractual contingencies as of the acquisition date. Also under this Statement, an acquirer is required to recognize contingent consideration as of the acquisition date and eliminates the concept of negative goodwill and
requires gain recognition in instances in which the fair value of the identifiable net assets exceeds the fair value of the consideration plus any non-controlling interest in the entity acquired as of the acquisition date. SFAS No. 141R makes
significant amendments to other Statements and other authoritative guidance, and applies prospectively to business combinations on or after the acquiring entities first fiscal year that begins after December 15, 2008. It may not be applied
prior to that date.

In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115. SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial
reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is expected
to expand the use of fair value measurement, which is consistent with the FASBs long-term measurement objectives for accounting for financial instruments. The fair value option established will permit all entities to choose to measure eligible
items at fair value at specified election dates. An entity shall record unrealized gains and losses on items for which the fair value option has been elected through net income in the statement of operations at each subsequent reporting date. SFAS
No. 159 is effective as of the beginning of an entitys first fiscal year that begins after November 15, 2007. The adoption of SFAS No. 159 did not have a material impact on the consolidated financial statements of the Company.

In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 defines fair value,
establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. The pronouncement is applicable in cases when assets or liabilities are to be measured at fair
value. It does not establish new circumstances in which fair value would be used to measure assets or liabilities. The provisions of SFAS No.157 are effective as of an entitys first fiscal year that begins after November 15, 2007. The
adoption of SFAS No. 157 did not have a material impact on the consolidated financial statements of the Company.



|4. | Earnings (Loss) Per Share
|-- | -------------------------

Basic earnings (loss)
per share are computed by dividing net income (loss) (the numerator) by the weighted-average number of common shares outstanding (the denominator) for the period. Diluted earnings per share assume that any dilutive convertible securities outstanding
were converted, with related preferred stock dividend requirements and outstanding common shares adjusted accordingly. It also assumes that outstanding common shares were increased by shares issuable upon exercise of those stock options for which
market price exceeds the exercise price, less shares which could have been purchased by us with the related proceeds. In periods of losses, diluted loss per share is computed on the same basis as basic loss per share as the inclusion of any other
potential shares outstanding would be anti-dilutive.



|5. | Revolving Line of Credit
|-- | ------------------------

The Company has a
Revolving Line of Credit Agreement (the Line of Credit Agreement) with Sovereign Bank (Sovereign Bank) pursuant to which Sovereign Bank established a revolving line of credit in favor of the Company in the aggregate principal
amount of $3,000,000. The Companys right to request loans under this Line of Credit Agreement terminates 120 days prior to expiration of the letter of credit described below. Any loans made to the Company under the Line of Credit Agreement
bear interest at a fluctuating rate per annum equal to, at the election of the Company, (i) the sum of the then LIBOR rate plus a margin ranging from .75% to 1.25% or (ii) the then Prime rate less 200 basis points. At June 28, 2008,
the interest rate on the revolving line of credit was 3.00%. The Company is required to pay to Sovereign Bank a monthly fee on any unused amounts under the line of credit equal to the product obtained by multiplying the average unused amount for a
given month by a fraction, the numerator of which ranges from .125% to .25% and the denominator of which is 12.



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In connection with the transactions consummated with the Line of Credit Agreement, (i) Custodial
Trust Company (CTC) issued an irrevocable letter of credit in favor of Sovereign Bank up to an aggregate amount of $3,060,000, which the letter of credit expires on March 15, 2009, and (ii) the Company, CTC and Vicis Capital
Master Fund (Vicis) entered into a Letter of Credit Reimbursement, Guarantee, Security and Pledge Agreement (the CTC Agreement) pursuant to which the Company agreed to reimburse CTC for any payments CTC is required to make
under the letter of credit it issued in favor of Sovereign Bank. Vicis guaranteed the Companys performance of such obligations and in connection therewith deposited with CTC certain of its assets.

Medical Solutions Management Inc., Vicis and OrthoSupply Management, Inc. (OrthoSupply), a wholly-owned subsidiary of Medical Solutions
Management Inc., entered into a Guarantee Fee, Reimbursement and Indemnification Agreement pursuant to which the Company agreed to reimburse Vicis for any payment Vicis is required to make under the CTC Agreement. OrthoSupply guaranteed the
Companys performance of its obligations under this agreement. In the event Vicis is required to make any payment under the CTC Agreement or any assets of Vicis deposited with CTC are foreclosed or otherwise taken, the Company is obligated to
immediately reimburse Vicis for the amount paid or the value of the assets taken. If the Company does not timely reimburse Vicis it is obligated to issue to Vicis and Midtown warrants to purchase a number of shares of common stock equal to 200% (in
the case of Vicis) and 10% (in the case of Midtown) of the value of the Vicis assets taken, which warrants shall be exercisable for five years at a per share exercise price of $1.00.

Interest expense on the Sovereign Bank revolving line of credit was approximately $55,000 and $28,000 for the six months ended June 28, 2008 and
June 30, 2007, respectively. Interest expense on the Sovereign Bank revolving line of credit was approximately $19,000 and $28,000 for the three months ended June 28, 2008 and June 30, 2007, respectively. At June 28, 2008, the
Company had an outstanding balance of $3,000,000 under this revolving line of credit.



|6. | Notes Payable
|-- | -------------

Convertible Notes Payable - $2,000,000 Vicis
Capital Master Fund

On June 28, 2006, the Company entered into a Securities Purchase and Exchange Agreement (the SPA)
with Vicis. This SPA affirmed that the financing was a private placement to accredited investors and accordingly exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, as amended. Pursuant to the SPA, Vicis purchased a
Senior Secured Convertible Note (2006 Note) in aggregate the principal amount of which was $2,000,000 together with warrants (Warrants) to purchase an aggregate of 16,000,000 shares of its common stock. The Company also
entered into a Security Agreement dated June 28, 2006 by and between the Company and Vicis (the Security Agreement), pursuant to which the 2006 Note is secured by substantially all of the assets of the Company, including its
intellectual property.

The Warrants, as amended, permitted Vicis to purchase 16,000,000 shares of common stock at an exercise price of
$0.01 per share and were exercisable from June 28, 2006 until June 28, 2011. The Warrants contain anti-dilution provisions similar to the convertible debt and are required to be reduced to an exercise price not less than amounts received
for new issues of common stock or rates granted to newly issued convertible securities, or exercise prices of options in an equity financing.

The 2006 Note, as amended, is convertible at the option of the holder at any time and from time to time into common stock of the Company at a conversion price of $0.10 per share, subject to certain anti-dilution adjustments. Pursuant to the
terms of the 2006 Note, the conversion price will be reset (the Reset Provision) in the event the Company issues shares, convertible securities or options entitling the recipient to subscribe for or purchase shares at a price per share
less than the fixed conversion price then in effect.

Interest is payable, in cash, at maturity and accrues at 6% per annum. The
entire principal amount of the 2006 Note is payable on its maturity date of June 28, 2008, subject to its earlier conversion, acceleration or redemption. However, the 2006 Note was not repaid, Vicis has not requested repayment and has not
notified the



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##### Table of Contents

Company of an event of default. Currently, the Company is working with Vicis on an extension of the Note. At the option of the Company, interest payable upon
conversion of all or a portion of the converted principal amount may be settled either in cash or in registered common stock (at a conversion price equal to the then current debt conversion price).

The terms of the convertible debentures include a reset conversion feature which provides for a reduction in conversion price of the debentures into
shares of the Companys common stock at a rate equal to the terms of any future offering. The Company has determined that the current conversion rate is fixed and determinate and will change only in circumstances under managements
control. Also, because the conversion option is indexed to its own stock and a separate instrument with the same terms would be classified in stockholders equity in the statement of financial position, the written option is not considered to
be a derivative instrument for the issuer under SFAS 133 paragraph 11(a) and, accordingly, was not separated from the host contract.

The
2006 Note contains customary negative covenants for loans of this type, including limitations on the Companys ability to incur indebtedness, issue securities, make loans and investments, make capital expenditures, dispose of assets and enter
into mergers and acquisition transactions. Events of default under the 2006 Note are described below and include breaches of the Companys obligations under the 2006 Note and other agreements relating to the transaction, certain defaults under
any other indebtedness of at least $250,000 and certain bankruptcy events. Upon an event of default, all outstanding principal plus all accrued and unpaid interest become immediately due and payable.

Material events that would cause default under the 2006 Note include:



| |  |  | failure to pay principal or any premium on any 2006 Note when due;
| | - |  | ------------------------------------------------------------------



| |  |  | failure to pay any interest, late fees or liquidated damages on any 2006 Note after a period of ten business days;
| | - |  | ------------------------------------------------------------------------------------------------------------------



| |  |  | failure to perform other covenants under any 2006 Note that is not cured by thirty-five days after notice;
| | - |  | ----------------------------------------------------------------------------------------------------------



| |  |  | any representation or warranty under the financing documents that is untrue or incorrect in any material respect;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | certain events such as bankruptcy or assignment for the benefit of creditors of the Company or any of its subsidiaries;
| | - |  | -----------------------------------------------------------------------------------------------------------------------



| |  |  | any default by the Company or its subsidiaries under any instrument in excess of $250,000 that results in such obligation becoming due and payable prior to
maturity;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company becoming party to a change of control transaction; and
| | - |  | ------------------------------------------------------------------



| |  |  | failure to maintain the required reservation of additional shares of authorized common stock.
| | - |  | ---------------------------------------------------------------------------------------------

In connection with issuance of the 2006 Note and Warrants, on June 28, 2006 the Company entered into an Amended and Restated Investor Rights
Agreement (the Investor Rights Agreement) with Vicis and certain other stockholders, pursuant to which the Company is obligated to register with the SEC the shares of common stock underlying the 2006 Note, Warrants and shares held by
certain other stockholders. Under the Investor Rights Agreement, the Company is required to file a registration statement with respect to certain securities within thirty days of the date of the Investor Rights Agreement and to have the registration
statement declared effective by the SEC within 120 days of the date of the Investor Rights Agreement. Additionally, the Company is required to keep the registration statement effective at all times until all of the shares registered have been sold
or may be resold pursuant to Rule 144(k) under the Securities Act of 1933, as amended. If the Company does not satisfy these registration obligations, it would constitute an event of default, and the Company would have to pay Vicis an amount in cash
or unregistered stock, as partial liquidated damages, as provided in the Investor Rights Agreement, as discussed further below.



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The Investor Rights Agreement provides for liquidated damages for failure to register or maintain an
effective registration statement for the shares underlying the 2006 Notes and Warrants. If the Company fails to have the registration statement declared effective within the specified period, the Company would be required to pay liquidated damages
to the investor(s) until:



| |  |  | the registration statement is declared effective;
| | - |  | -------------------------------------------------



| |  |  | effectiveness is maintained for a prescribed period; or
| | - |  | -------------------------------------------------------



| |  |  | the purchasers are no longer incurring damages for the Companys failure to register the securities (e. g., if the securities become freely transferable after
a holding period under Rule 144(k) of the Securities Act of 1933).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Liquidated damages are paid in cash or unregistered
shares, at the Companys discretion and the amount is determined by a formula in the Investor Rights Agreement. The liquidated damages are 1% per month of the aggregate purchase price paid by the holder of the 2006 Note and are capped at
8% and a maximum period of eight (8) months. In accordance with FSP EITF 00-19-2, at December 31, 2006, the Company determined the transfer of consideration under the registration payment arrangement was probable and could be reasonably
estimated. The Company estimated the penalty amount to be $160,000, the maximum penalty that could be payable in the event of a breach of the Investor Rights Agreement, and recognized the related contingent liability and expense for this amount. As
of June 28, 2008, accrued expenses include $160,000 related to this and no liquidated damages have been paid.

A schedule of the
carrying value of the 2006 Note, as amended, and corresponding amortization of the discount is as follows:



|                                               |  |   |           |  
|---------------------------------------------- |  | - | --------- | -
|Face amount of note                            |  | $ | 2,000,000 |  
|Discount on face value                         |  |   | (163,720  | )
|                                               |  |   |           |  
|Carrying value after the July 2007 Agreement   |  |   | 1,836,280 |  
|Amortization of discount through June 28, 2008 |  |   | 163,720   |  
|                                               |  |   |           |  
|Current carrying value at June 28, 2008        |  | $ | 2,000,000 |  
|                                               |  |   |           |  

Interest expense on the 2006 Note was approximately $66,000 and $63,000 for the six months ended
June 28, 2008 and June 30, 2007, respectively. Interest expense on the 2006 Note was approximately $33,000 and $32,000 for the three months ended June 28, 2008 and June 30, 2007, respectively.

Convertible Notes Payable - $1,266,000 Vicis and Apogee Financial Investments

On April 17, 2007, the Company entered into a Securities Purchase and Exchange Agreement (Purchase Agreement) with Vicis and Apogee Financial Investments Inc. (Apogee). Pursuant to the
Purchase Agreement, the Company issued (1) 6% convertible senior secured debentures in the aggregate principal amount of $1,050,000 to Vicis, as amended, convertible into shares of the Companys common stock at a conversion price of $0.10
per share (the Vicis Debentures) and $216,000 to Apogee convertible into shares of the Companys common stock at a conversion price of $0.30 (the Apogee Debentures and collectively with the Vicis Debentures, the
Debentures), (2) warrants to purchase an aggregate of 7,500,000 shares of the Companys common stock to Vicis, as amended, at an exercise price of $0.01 per share and (3) warrants to purchase an aggregate of 1,440,000
shares of the Companys common stock to Apogee, as amended, at an exercise price of $0.20 per share. The Debentures mature on April 17, 2009 and are secured by a lien on all the personal property and assets of the Company. The warrants are
exercisable for a period of five years.

In connection with this transaction, the Company, Vicis and Apogee entered into a Subordination
Agreement whereby the lien on all the personal property and assets of the Company securing the obligations of the Company under the Debentures is subordinated to the lien granted by the Company to Vicis to secure the obligations of the Company under
a separate debenture previously issued by the Company to Vicis on June 28, 2006 (see Convertible Notes Payable  $2,000,000 Vicis Capital Master Fund above).



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A schedule of the carrying value of the Vicis Debentures, as amended, and corresponding amortization of
the discount is as follows:



|                                               |  |   |           |  
|---------------------------------------------- |  | - | --------- | -
|Face amount of note                            |  | $ | 1,050,000 |  
|Discount on face value                         |  |   | (156,820  | )
|                                               |  |   |           |  
|Carrying value                                 |  |   | 893,180   |  
|Amortization of discount through June 28, 2008 |  |   | 83,141    |  
|                                               |  |   |           |  
|Current carrying value at June 28, 2008        |  | $ | 976,321   |  
|                                               |  |   |           |  

A schedule of accretion of the carrying value of the Apogee Debentures and corresponding
amortization of the discounts is as follows:



|                                               |  |   |          |  
|---------------------------------------------- |  | - | -------- | -
|Face amount of note                            |  | $ | 216,000  |  
|Discount on face value                         |  |   | (209,311 | )
|                                               |  |   |          |  
|Carrying value                                 |  |   | 6,689    |  
|Amortization of discount through June 28, 2008 |  |   | 38,546   |  
|                                               |  |   |          |  
|Carrying value at June 28, 2008                |  | $ | 45,235   |  
|                                               |  |   |          |  

Interest expense on the Debentures was approximately $40,000 and $13,000 for the six months ended
June 28, 2008 and June 30, 2007, respectively. Interest expense on the Debentures was approximately $20,000 and $13,000 for the three months ended June 28, 2008 and June 30, 2007, respectively.

Convertible Notes Payable - $1,500,000 Vicis

On
October 18, 2007, the Company issued a convertible note in the principal amount of $1,500,000 to Vicis. The maturity date of the note is October 12, 2008 and bears interest on the principal amount outstanding and unpaid from time to time
at a rate of 10% per annum from the date hereof until paid in full. Interest shall be calculated on the basis of a 360-day year and paid for the actual number of days elapsed, and shall accrue and be payable upon the maturity date or,
thereafter, if any amounts are due and owing by the Company under this Note, then upon demand. The Company received $1,500,000 as consideration for the convertible note. If the Company completes a subsequent financing of convertible debentures and
warrants, the convertible note issued to Vicis shall be converted into securities issuable in such financing. This note is only convertible upon the occurrence of a future financing, the price at which any such financing would occur is not known and
the number of shares into which the note will convert is not known as of the date of issuance. Therefore, the Company is unable to determine if a beneficial conversion feature exists. Any contingent beneficial conversion feature will be recognized
in the period in which these contingencies are resolved. Subsequent to June 30, 2008, this note and related accrued interest was converted into Series D Convertible Preferred Stock and no beneficial conversion resulted (see Note 8).

Interest expense on the note was approximately $40,000 and $78,000 for the three and six months ended June 28, 2008, respectively.

Convertible Notes Payable - $1,000,000 Vicis

On
December 16, 2007, the Company entered into a note purchase agreement with Vicis pursuant to which the Company issued a promissory note in the principal amount of $1,000,000 in favor of Vicis and a warrant for 2,500,000 shares of the
Companys common stock. The Company received $1,000,000 in cash in consideration for the issuance of the promissory note and the warrant. The maturity date of the promissory note is December 16, 2008. Interest accrues under the note at the
rate of 5% per annum. The Company is not permitted to prepay principal or interest under the promissory note. Under the note purchase agreement, Vicis has the option to convert the promissory note into equity or convertible debt securities sold
by the Company in connection with a future financing



15



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on the terms and conditions of such financing, subject to a discount of 16.67% of the price per security offered by the Company. Upon such conversion, the
Company shall have no obligations under the promissory note. The exercise price of the warrant is $0.40 per share (subject to adjustment upon the occurrence of certain events) and will be exercisable for 5 years. The Company and Vicis also entered
into a Registration Rights Agreement with respect to the shares to be issued upon exercise of the warrant, whereby Vicis would be allowed to participate in any future registration of the Companys shares of common stock, subject to the
limitations in the agreement.

The Debentures are only convertible upon the occurrence of a future financing, the price at which any such
financing would occur is not known and the number of shares into which the Debentures will convert is not known as of the date of issuance. Therefore, the Company is unable to determine if a beneficial conversion feature exists. Any contingent
beneficial conversion feature will be recognized in the period in which these contingencies are resolved. Subsequent to June 30, 2008, this note and related accrued interest was converted into Series D Convertible Preferred Stock and no
beneficial conversion resulted (see Note 8).

A schedule of the carrying value of the Vicis Debentures and corresponding amortization of
the discount is as follows:



|                                               |  |   |           |  
|---------------------------------------------- |  | - | --------- | -
|Face amount of note                            |  | $ | 1,000,000 |  
|Discount on face value                         |  |   | (529,190  | )
|                                               |  |   |           |  
|Carrying value                                 |  |   | 470,810   |  
|Amortization of discount through June 28, 2008 |  |   | 235,410   |  
|                                               |  |   |           |  
|Current carrying value at June 28, 2008        |  | $ | 706,220   |  
|                                               |  |   |           |  

Interest expense on the note was approximately $13,000 and $25,000 for the three and six months
ended June 28, 2008, respectively.

Advances Payable - Vicis

In the quarter ended June 28, 2008, Vicis made advances to the Company of $655,000, totaling $2,260,205 (the Advances Payable). These advances have no stated interest rate and are due on demand.
Subsequent to June 28, 2008, these advances were converted into Series D Convertible Preferred Stock and no beneficial conversion resulted (see Note 8).



|7. | Stock Option Plan And Warrants
|-- | ------------------------------

Stock Option Plan

On July 31, 2006, the Company adopted the 2006 Equity Incentive Plan (the Plan). The Plan is intended to encourage
ownership of common stock by employees, consultants and directors of the Company and its affiliates and to provide additional incentive for them to promote the success of the Companys business. The term of the Plan is ten years from the date
of its adoption unless earlier terminated by the Board. The number of shares of common stock to be issued pursuant to incentive stock options may not exceed three million (3,000,000) shares of common stock. Both incentive stock options and
non-qualified options, as well as restricted stock awards, may be issued under the Plan. The Plan shall be administered by the Committee, however, the Board may itself exercise any of the powers and responsibilities assigned the Committee. The
Committee may grant awards to any employee or consultant to the Company and its affiliates or to any non-employee member of the Board. However, only employees of the Company are eligible for the grant of an incentive stock option. Further, in no
event shall the number of shares of common stock covered by options or other awards granted to any one person in any one calendar year (or portion of a year) ending after such date exceed fifty percent (50%) of the aggregate number of shares of
common stock subject to the Plan.



16



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Summary of Option Activity

In estimating the fair value of share-based compensation, the Company uses the quoted market price of common stock as determined in the most active market for stock awards, and the Black Scholes Option Pricing Model
for stock options. The Company estimates future volatility based on historical volatility of its common stock; and the Company estimates the expected term of the option on several criteria, including the vesting period of the grant, and the
contractual term. In computing fair value, the Company used the following assumptions:



|                         |  |                  |   |  |               |  
|------------------------ |  | ---------------- | - |  | ------------- | -
|                         |  | Six Months Ended |  
|                         |  | June 28, 2008    |   |  | June 30, 2007 |  
|Risk-free interest rate  |  | 3.34             | % |  | 4.92          | %
|Dividend yield           |  | 0.00             | % |  | 0.00          | %
|Expected volatility      |  | 100              | % |  | 100           | %
|Expected term (in years) |  | 5.0              |   |  | 5.0           |  



|                                         |  |                                               |  |                              |      |                                                |     |                         |   |        
|---------------------------------------- |  | --------------------------------------------- |  | ---------------------------- | ---- | ---------------------------------------------- | --- | ----------------------- | - | -------
|                                         |  | All Plan & Non-Plan Compensatory Type Options
|                                         |  | Shares                                        |  | Weightedaverageexerciseprice |      | Weightedaverageremainingcontractualterm(years) |     | Aggregateintrinsicvalue
|Options outstanding at December 31, 2007 |  | 500,000                                       |  | $                            | 0.01 |                                                | 7.6 |                         |   |        
|Granted                                  |  |                                              |  |                              |     |                                                |     |                         |   |        
|Exercised                                |  |                                              |  |                              |     |                                                |     |                         |   |        
|Lapsed/forfeited                         |  |                                              |  |                              |     |                                                |     |                         |   |        
|                                         |  |                                               |  |                              |      |                                                |     |                         |   |        
|Options outstanding at June 28, 2008     |  | 500,000                                       |  | $                            | 0.01 |                                                | 7.3 |                         | $ | 595,000
|                                         |  |                                               |  |                              |      |                                                |     |                         |   |        
|Options exercisable at June 28, 2008     |  | 375,000                                       |  | $                            | 0.01 |                                                | 7.3 |                         | $ | 446,250
|                                         |  |                                               |  |                              |      |                                                |     |                         |   |        

As of June 28, 2008, there was no unrecognized compensation costs related to options.

Summary of Warrant Activity

In
estimating the fair value of warrants, the Company uses the Black Scholes option pricing model. The Company uses the quoted market price of common stock as determined in the most active market for stock awards; future volatility is estimated based
on historical volatility of its common stock; and the Company uses the contractual term of the warrant. In computing the fair value of warrants issued in the six months ended June 28, 2008, the Company used the following assumptions:



|                            |  |      |  
|--------------------------- |  | ---- | -
|Risk-free interest rate     |  | 2.81 | %
|Dividend yield              |  | 0    |  
|Expected volatility         |  | 107  | %
|Contractual term (in years) |  | 3    |  



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In connection with a Separation Agreement (the Agreement) dated January 24, 2008 with
Brian Lesperance, the Companys former President and Chief Executive Officer, on February 23, 2008 the Company issued to Mr. Lesperance a warrant (the Warrant) to purchase an aggregate of 500,000 shares of the
Companys common stock, exercisable in whole or in part for three (3) years after the date of grant at an exercise price of $0.55 per share (subject to adjustment in the event of stock splits, stock dividends and other similar events
affecting Companys common stock). The Company estimated the fair value of the warrant to be $266,304 which is included in Selling, General and Administration expense in the six months ended June 28, 2008.

The following table summarizes the warrant activity in the six months ended June 28, 2008:



|                                          |  |           |  |                              |     
|----------------------------------------- |  | --------- |  | ---------------------------- | ----
|                                          |  | Shares    |  | Weightedaverageexerciseprice
|Warrants outstanding at December 31, 2007 |  | 8,754,736 |  | $                            | 0.36
|Granted                                   |  | 500,000   |  |                              | 0.55
|Exercised                                 |  |          |  |                              |    
|Lapsed/forfeited                          |  |          |  |                              |    
|                                          |  |           |  |                              |     
|Warrants outstanding at June 28, 2008     |  | 9,254,736 |  | $                            | 0.37
|                                          |  |           |  |                              |     
|Warrants exercisable at June 28, 2008     |  | 9,254,736 |  | $                            | 0.37
|                                          |  |           |  |                              |     
|Weighted average years remaining          |  |           |  |                              | 3.9 
|                                          |  |           |  |                              |     

The following table summarizes the status of the Companys aggregate warrants as of
June 28, 2008:



|                         |  |                      |  |                              |      |                                       |     |        |           |                              |   |     
|------------------------ |  | -------------------- |  | ---------------------------- | ---- | ------------------------------------- | --- | ------ | --------- | ---------------------------- | - | ----
|                         |  | Warrants Outstanding |  |                              |      | Warrants Exercisable                 
|Range of exercise prices |  | Shares               |  | weightedaverageexerciseprice |      | Weightedaverageremaininglife in years |     | Shares |           | weightedaverageexerciseprice
|$0.55                    |  | 500,000              |  | $                            | 0.55 |                                       | 2.7 |        | 500,000   |                              | $ | 0.55
|$0.50                    |  | 3,060,000            |  | $                            | 0.50 |                                       | 4.4 |        | 3,060,000 |                              | $ | 0.50
|$0.40                    |  | 2,500,000            |  | $                            | 0.40 |                                       | 4.5 |        | 2,500,000 |                              | $ | 0.40
|$0.20                    |  | 2,894,736            |  | $                            | 0.20 |                                       | 3.3 |        | 2,894,736 |                              | $ | 0.20
|$0.01                    |  | 300,000              |  | $                            | 0.01 |                                       | 2.8 |        | 300,000   |                              | $ | 0.01
|                         |  |                      |  |                              |      |                                       |     |        |           |                              |   |     
|Total Shares             |  | 9,254,736            |  | $                            | 0.37 |                                       | 3.9 |        | 9,254,736 |                              | $ | 0.37
|                         |  |                      |  |                              |      |                                       |     |        |           |                              |   |     



|8. | Subsequent Event
|-- | ----------------

Reorganization Agreement

On July 25, 2008, the Company, Andover Medical, Inc., a Delaware corporation (Andover) and Certified Diabetics Services, Inc., a Delaware
corporation (CDIP) entered into an Asset Purchase Agreement and Plan of Reorganization (the Reorganization Agreement), pursuant to which the Company will acquire substantially all of the assets of Andover and CDIP, including
Andovers and CDIPs subsidiaries. Andover and CDIP are collectively referred to as the Target Companies.

Pursuant
to the Reorganization Agreement, the Company will acquire the following subsidiaries of the Target Companies: (i) Certified Diabetic Supplies, Inc., (ii) CDS Health Management, Inc., (iii) CDS Medical Supplies, Inc., (iv) CDS
Pharmacies, Inc., (v) Diabetic Plus, Inc., (vi) Ortho-Medical Products, Inc. and (vii) Rainier Surgical Incorporated.

The
Reorganization Agreement provides that in exchange for substantially all of the assets of the Target Companies, including all of the capital stock of the above referenced subsidiaries, the Target Companies shareholders will receive shares of
the Companys common stock and preferred stock, as described below. As a result, the percentage of beneficial ownership of the Company common stock owned by each of the parties shall be



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##### Table of Contents

as follows: (i) CDIP shareholders will own forty-five (45%) percent of the outstanding the Company common stock, (ii) existing the Company
shareholders will own twenty (20%) percent of the outstanding the Company common stock, and (iii) Andover shareholders will own thirty-five (35%) percent of the outstanding the Company common stock (calculated on an as-converted
basis, inclusive of common stock, preferred stock and convertible debentures, but exclusive of options and warrants which will be assumed by the Company). An additional eight (8%) percent of the issued and outstanding shares of common
stock of the Company (calculated on the date of the closing of the transactions under the Reorganization Agreement (the Closing Date) in the same manner as set forth in the prior sentence) shall be placed in escrow to be issued to the
former common and preferred shareholders of Andover and CDIP following the Closing Date based upon the respective performances of Andover and CDIP in achieving revenue and earnings targets during calendar year 2008.

The closing of the proposed transactions is conditioned upon and subject to respective shareholder approval, the effectiveness of a registration
statement covering the shares of the Company common stock and preferred stock to be issued to the shareholders of the Target Companies, as well as shares of the Company common stock issuable upon the exercise of new warrants to be issued by the
Company to former warrant holders of the Target Companies, all third-party consents and waivers being obtained, no material adverse change having occurred with respect to any of the three parties to the Reorganization Agreement, and other customary
closing conditions.

The Company is in the process of determining the appropriate accounting for the Reorganization Agreement.

Series D Convertible Preferred Stock Financing

On
July 29, 2008, the Company filed a Certificate of Designations with the Nevada Secretary of State to create a new class of preferred stock, the Series D Convertible Preferred Stock, $0.0001 par value per share (the Series D Preferred
Stock). The number of authorized shares of Series D Preferred Stock is 798,906. As of July 31, 2008, the Company had 798,906 shares of its Series D Preferred Stock issued and outstanding, which, in the aggregate, converts into 7,989,062
shares of Common Stock. The Series D Preferred Stock has the following rights, preferences, privileges and restrictions:



| |  |  | Stated Value$10.00 per share of Series D Preferred Stock.
| | - |  | ----------------------------------------------------------



| |  |  | DividendsA holder of Series D Preferred Stock is entitled to receive a dividend at a rate per annum equal to ten percent (10%) of the
stated value (initially $10.00 per share), payable semi-annually, at the option of the Company in cash, to the extent funds are legally available, or in shares of Common Stock at a ten percent (10%) discount to the market price (as such price
is determined pursuant to the designations for the Series D Preferred Stock).
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Voting RightsThe holders of Series D Preferred stock have the right to vote on an as-converted basis with the Companys holders of Common
Stock on all matters submitted to a vote of common stockholders. In addition, as long as twenty percent (20%) of the shares of Series D Preferred Stock issued and outstanding on the original issue date remain issued and outstanding, the Company
cannot, without the prior approval of at least a majority of the holders of the then issued and outstanding shares of Series D Preferred Stock, voting as a separate class, take the following actions:
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | amend or otherwise restate the Companys articles of incorporation in any manner that adversely affects the rights of the holders of Series D Preferred Stock;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | alter or change adversely the voting or other powers, preferences, rights, privileges or restrictions of the Series D Preferred Stock;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------



| |  |  | increase the authorized number of shares of preferred stock;
| | - |  | ------------------------------------------------------------



| |  |  | redeem, purchase or otherwise acquire directly or indirectly any shares junior or pari passu with the Series D Preferred Stock;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------



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| |  |  | directly or indirectly pay or declare any dividend or make any distribution in respect of any junior stock, or set aside any monies for the purchase or redemption
(through a sinking fund or otherwise) of any junior stock or any shares pari passu with the Series D Preferred Stock;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | authorize or create any class of stock ranking as to dividends, redemption or distribution of assets upon a liquidation senior to or otherwise pari passu with the
Series D Preferred Stock; and
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | enter into any agreement with respect to the foregoing.
| | - |  | -------------------------------------------------------



| |  |  | Election of DirectorsAs long as fifty percent (50%) of the shares of Series D Preferred Stock issued and outstanding on the original issue
date remain issued and outstanding, the holders of a majority of the shares of Series D Preferred Stock are entitled to nominate and elect four (4) members to the Companys board of directors.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Liquidation RightsIn the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company, the holders of shares of
Series D Preferred Stock are entitled to be paid out of the assets available for distribution, before any payment shall be made to the holders of common stock or any other class or series of stock ranking on liquidation junior to the Series D
Preferred Stock, an amount equal to the stated value of the Series D Preferred Stock (initially $10.00 per share), plus accrued, unpaid dividends.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | RedemptionUpon the occurrence of any of the following events, the holders of not less than a majority of the then issued and outstanding shares
of Series D Preferred Stock may require the Company to redeem the Series D Preferred Stock at an amount equal to the stated value of the Series D Preferred Stock (initially $10.00 per share), plus accrued, unpaid dividends:
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | a transaction in which (a) the Company merges or consolidates with or into another entity and, after giving effect to such transaction, the stockholders of the
Company own less than sixty-six percent (66%) of the aggregate voting power of the company or the successor entity of such transaction; (b) the Company sells all or substantially all of its assets in one transaction or a series of related
transactions, and the stockholders of the Company own less than sixty-six percent (66%) of the aggregate voting power of the acquiring entity immediately after the transaction; or (c) the execution of an agreement to provide for the events
in (a) through (b);
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company fails to have available a sufficient number of authorized and unreserved shares of Common Stock to issue to the holders of the Series D Preferred Stock
upon a conversion of the Series D Preferred Stock;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company fails to observe or perform any other covenant, agreement or warranty contained in its articles of incorporation (as amended by the Series D
designation), and such failure or breach, if subject to the possibility of a cure by the Company, is not cured within twenty (20) calendar days after the date on which written notice of such failure or breach is delivered;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the Company files bankruptcy; or
| | - |  | --------------------------------



| |  |  | any monetary judgment shall be entered or filed against the Company or its assets for greater than $100,000.
| | - |  | ------------------------------------------------------------------------------------------------------------

ConversionEach share of Series D Preferred Stock, at its stated value of $10.00 per share, together with any accrued and unpaid dividends, is
convertible at the option of the holder at any time into common stock at a price of $0.10 per share of Common Stock; provided, however, the holder is not entitled to convert any Series D Preferred Stock to the extent that, after such conversion, the
sum of the number of shares of Common Stock beneficially owned by such holder and its affiliates, will result in beneficial ownership of more than 4.99% of the outstanding shares of the Common Stock.



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##### Table of Contents

|ITEM 2. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|------- | --------------------------------------------------------------------------------------

The following discussion and analysis of our financial condition and plan of operation should be read in conjunction with the financial statements and the
related notes contained herein. This discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Our actual results and the timing
of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including set forth in Part I, Item 1A of our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2007 under the headings Risk Factors, Managements Discussion and Analysis or Plan of Operations and Business.

Our Business

We are a provider of orthopedic and podiatric durable medical equipment,
specializing in the provision of products to clinics using our turnkey program. Through our turnkey program, we enable orthopedic and podiatric practices to dispense an array of orthotics and limited durable medical equipment directly to their
patients during office visits. The system, which is transportable to other types of medical practices, also provides billing services, inventory management and insurance verifications.

Background

Our wholly-owned subsidiary and operating company, OrthoSupply Management, Inc.,
has generated revenue from its operation since February 2005. Prior to February 2005, OrthoSupply had no operations, but the management team was in the research and development phase of determining a market need for the services intended to be
offered by OrthoSupply. Prior to December 30, 2005, Medical Solutions Management Inc. held no assets, generated no revenue and existed solely as a shell corporation.

On December 30, 2005, Medical Solutions Management Inc. consummated a merger transaction with its then wholly-owned subsidiary, CMNW Acquisition Corporation, OrthoSupply Management, Inc., Thunderbird Global
Corporation and Mark L. Baum. Pursuant to the merger, CMNW Acquisition Corporation merged with and into OrthoSupply Management, Inc, CMNW Acquisition Corporation ceased to exist, and OrthoSupply continued as the surviving corporation and
wholly-owned subsidiary of Medical Solutions Management Inc. OrthoSupply Management, Inc. acts as our operating company and Medical Solutions Management Inc. is the parent holding company, and sole stockholder, of OrthoSupply Management, Inc.

The discussion below focuses upon Medical Solutions Management Inc.s and Ortho Supply Management, Inc.s financial condition,
results of operations and liquidity and capital resources for the three and six months ended June 28, 2008 and June 30, 2007. The terms Company, we, us or our refer to Medical Solutions
Management Inc. and OrthoSupply Management, Inc. collectively.

Results of Operations

We operate our business on a calendar year basis, consisting of four thirteen week quarters with the last month in each quarter being five weeks and with
our fiscal year ending on December 31.

Three Months Ended June 28, 2008 Compared to Three Months Ended June 30, 2007

Revenue. Set forth below are our net revenues.



|                          |  |                    |           |              |   |          |  |           |         |  |     
|------------------------- |  | ------------------ | --------- | ------------ | - | -------- |  | --------- | ------- |  | ----
|                          |  | Three Months Ended |           |              |   |         
|                          |  | June 28,2008       |           | June 30,2007 |   | Increase |  | %Increase
|Sales of Medical Products |  | $                  | 734,026   |              | $ | 454,786  |  | $         | 279,240 |  | 61.4
|Service Revenue           |  |                    | 367,177   |              |   | 329,399  |  |           | 37,778  |  | 11.5
|                          |  |                    |           |              |   |          |  |           |         |  |     
|Total Revenue             |  | $                  | 1,101,203 |              | $ | 784,185  |  | $         | 317,018 |  | 40.4
|                          |  |                    |           |              |   |          |  |           |         |  |     



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Revenue increased in the three months ended June 28, 2008 primarily due to the increase in the
number of clinics under agreement from approximately 46 in the second quarter of 2007 to approximately 71 in the second quarter of 2008. An increase in market share throughout our operating regions in the United States has been the driving factor
for the increase in clinics as we continue to grow our operations. Four clinics were added during the three months ended June 28, 2008. Service revenue increased from $329,399 in the second quarter of 2007 to $367,177 in the second quarter of
2008 mainly due to the increase in clinics driving billing and collection revenue from $32,452 in the second quarter of 2007 to $59,442 in the second quarter of 2008. The remaining increase relates to additional service revenue of $117,420 in the
second quarter of 2008 compared to $92,057 in the second quarter of 2007 due to new clinics requiring on-site personnel.

Cost of Revenue.
Set forth below are our cost of revenue.



|                         |  |                    |         |             |       |               |   |             |  |          |  |           |         |  |     
|------------------------ |  | ------------------ | ------- | ----------- | ----- | ------------- | - | ----------- |  | -------- |  | --------- | ------- |  | ----
|                         |  | Three Months Ended |         |             |       |              
|                         |  | June 28, 2008      |         | % ofRevenue |       | June 30, 2007 |   | % ofRevenue |  | Increase |  | %Increase
|Cost of Medical Products |  | $                  | 507,356 |             | 69.1  |               | $ | 313,231     |  | 68.9     |  | $         | 194,125 |  | 62.0
|Cost of Services         |  |                    | 400,009 |             | 108.9 |               |   | 267,763     |  | 81.3     |  |           | 132,246 |  | 49.4
|                         |  |                    |         |             |       |               |   |             |  |          |  |           |         |  |     
|Costs of Revenue         |  | $                  | 907,365 |             | 82.4  |               | $ | 580,994     |  | 74.1     |  | $         | 326,371 |  | 56.2
|                         |  |                    |         |             |       |               |   |             |  |          |  |           |         |  |     

Cost of revenue increased in the second quarter 2008 primarily due to higher revenue from the
increase in operating clinics over the comparative period in 2007. Cost of medical products as a percentage of revenue was slightly higher over the comparative period in 2007 due to product mix within the expansion into new regions. Cost of services
increased as a percentage of service revenue due to an increase in personnel expenses of $308,338 for the second quarter of 2008 compared to $234,235 for the second quarter of 2007.

Selling, General and Administrative Expenses. Set forth below are the selling, general and administrative expenses.



|                                             |  |                    |           |             |       |               |   |             |  |                    |  |   |                      |   |  |       |  
|-------------------------------------------- |  | ------------------ | --------- | ----------- | ----- | ------------- | - | ----------- |  | ------------------ |  | - | -------------------- | - |  | ----- | -
|                                             |  | Three Months Ended |           |             |       |               |   |            
|                                             |  | June 28, 2008      |           | % ofRevenue |       | June 30, 2007 |   | % ofRevenue |  | Increase(Decrease) |  |   | % Increase(Decrease) |  
|Salaries and benefits                        |  | $                  | 317,685   |             | 28.8  |               | $ | 438,325     |  | 55.9               |  | $ | (120,640             | ) |  | (27.5 | )
|Legal, consulting and insurance              |  |                    | 246,983   |             | 22.4  |               |   | 289,453     |  | 36.9               |  |   | (42,470              | ) |  | (14.7 | )
|All other                                    |  |                    | 746,428   |             | 67.8  |               |   | 483,840     |  | 61.7               |  |   | 262,588              |   |  | 54.3  |  
|                                             |  |                    |           |             |       |               |   |             |  |                    |  |   |                      |   |  |       |  
|Selling, General and Administrative Expenses |  | $                  | 1,311,096 |             | 119.1 |               | $ | 1,211,618   |  | 154.5              |  | $ | 99,478               |   |  | 8.2   |  
|                                             |  |                    |           |             |       |               |   |             |  |                    |  |   |                      |   |  |       |  

Salaries and Benefits Expense.

Salaries and benefits expense decreased during the second quarter 2008 due to a decrease in sales and administrative staff. Total employees for these two
departments for the three months ended June 28, 2008 were 8 compared to 16 in the comparative period in 2007. We expect to add additional sales, administrative and service support staff as we expand our operation.

Legal, Consulting and Insurance Expenses.

Legal
expenses were $147,651 for the three months ended June 28, 2008, compared to $118,985 for the comparative period in 2007. The legal expenses incurred in the three months ended June 28, 2008 are primarily related to review of our periodic
filings, general counsel services, as well as future financings. This compares to costs incurred in 2007 relating to securing new financing, review of our periodic filings, and general counsel expenses. Consulting expenses were $67,585 for the three
months ended June 28, 2008 which consists of $40,000



22



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##### Table of Contents

for settlement on investment consulting services from the Gagnon Group and the balance related to independent contractors performing on-site customer service
and support. This compares to $103,087 in the three month period ended June 30, 2007, which included services to obtain financing, marketing, and strategic services related to potential acquisitions and partnerships. Insurance costs were
$31,747 for the three months ended June 28, 2008, compared to $67,381 in the comparative period in 2007 primarily due to the allocation of costs over an extended period of time in 2008 compared to that in 2007.

All Other Expenses.

Other significant operating
expenses that comprise the increase in Other Expenses include printing and postage expenses of $43,790 for the three months ended June 28, 2008, or an increase of $3,405 compared to the three months ended June 30, 2007; billing services
charges of $71,803 or an increase of $8,051 compared to the three months ended June 30, 2007; personnel fees related to temporary staffing of $111,317 or an increase of $111,l49 compared to the three months ended June 30, 2007; marketing
program expenses of $24,138 or an increase of $9,947; recruitment expense of $1,500 or a decrease of $51,625; telephone and data expense of $14,671 or a decrease of $6,716; and bad debt expense related to uncollectible pharmaceutical claims of
$100,595 compared to none for the same period in 2007 . The increase in operating expenses in 2008 over the comparable period in 2007 are mainly driven by higher sales volume, additional personnel support costs and other costs required to support a
growing operation.

Other Income (Expense)

For the three months ended June 28, 2008, interest expense was $375,721 compared to $259,777 for the same period in 2007. The increased expense is a direct result of additional debt instruments in place as of the
period ended June 28, 2008 compared to the same period in 2008. In the three months ended June 30, 2007, the Company recognized revolving line of credit financing expense of approximately $10,000,000.

Net Loss. Set forth below is our Net loss.



|         |  |                    |            |   |             |        |   |               |   |             |             |  |          |          |  |           |           |  |     
|-------- |  | ------------------ | ---------- | - | ----------- | ------ | - | ------------- | - | ----------- | ----------- |  | -------- | -------- |  | --------- | --------- |  | ----
|         |  | Three Months Ended |            |   |             |        |  
|         |  | June 28, 2008      |            |   | % ofRevenue |        |   | June 30, 2007 |   |             | % ofRevenue |  |          | Decrease |  | %Decrease
|Net Loss |  | $                  | (1,492,708 | ) |             | (135.6 | ) |               | $ | (11,290,553 | )           |  | (1,439.9 | )        |  | $         | 9,797,844 |  | 86.8

The net loss for the three months ended June 28, 2008 was primarily attributable to interest
expense and the bad debt expense related to the uncollectible pharmaceutical claims. Operationally, our loss was driven mainly from selling, general and administrative costs incurred to continue to grow revenue and support our operations. We
continue to invest in additional service support personnel to drive additional revenue growth in the future.

Six Months Ended June 28, 2008
Compared to Six Months Ended June 30, 2007

Revenue. Set forth below are our net revenues.



|                          |  |                  |           |               |   |           |  |          |         |  |      
|------------------------- |  | ---------------- | --------- | ------------- | - | --------- |  | -------- | ------- |  | -----
|                          |  | Six Months Ended |           |               |   | %        
|                          |  | June 28, 2008    |           | June 30, 2007 |   | Increase  |  | Increase
|Sales of Medical Products |  | $                | 1,456,589 |               | $ | 1,104,721 |  | $        | 351,868 |  | 31.9 
|Service Revenue           |  |                  | 951,274   |               |   | 411,298   |  |          | 539,976 |  | 131.3
|                          |  |                  |           |               |   |           |  |          |         |  |      
|Total Revenue             |  | $                | 2,407,863 |               | $ | 1,516,019 |  | $        | 891,844 |  | 58.8 
|                          |  |                  |           |               |   |           |  |          |         |  |      

Revenue from medical products increased in the six months ended June 28, 2008 primarily due
to the increase in the number of clinics under agreement from approximately 46 in the six months ended June 30, 2007 to approximately 71 in the six months ended June 28, 2008. Expansion into new regions throughout the United States has
been the driving factor for the increase in clinics as we continue to grow our operations. A total of twelve clinics



23



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##### Table of Contents

were added during the six months ended June 28, 2008. Service revenue increased mainly due to the increase in pharmaceutical claims acquisition, and
processing the claims from $231,979 in the six months ended June 30, 2007 to approximately $600,000 in the six months ended June 28, 2008. Additionally, service revenue increased due to the increase in the number of clinics resulting in
the increase of billing and collection revenue to $105,792 in the six months ended June 28, 2008 from $53,204 in the six months ended June 30, 2007, plus additional revenue from physician extenders of $227,987, an increase of $101,873 over
the comparable period in 2007.

Cost of Revenue. Set forth below are the cost of revenue.



|                               |  |                  |           |             |       |               |   |             |  |       |  |   |         |  |      
|------------------------------ |  | ---------------- | --------- | ----------- | ----- | ------------- | - | ----------- |  | ----- |  | - | ------- |  | -----
|                               |  | Six Months Ended |           | Increase    |       | %Increase    
|                               |  | June 28, 2008    |           | % ofRevenue |       | June 30, 2007 |   | % ofRevenue |  |      
|Cost of Medical Products       |  | $                | 987,873   |             | 67.8  |               | $ | 716,526     |  | 64.9  |  | $ | 271,347 |  | 37.9 
|Cost of services               |  |                  | 969,810   |             | 101.9 |               |   | 414,506     |  | 100.8 |  |   | 555,304 |  | 134.0
|                               |  |                  |           |             |       |               |   |             |  |       |  |   |         |  |      
|Costs of Products and Services |  | $                | 1,957,683 |             | 81.3  |               | $ | 1,131,032   |  | 74.6  |  | $ | 826,651 |  | 73.1 
|                               |  |                  |           |             |       |               |   |             |  |       |  |   |         |  |      

Cost of revenue increased primarily due to higher revenue from the increase in the number of
operating clinics over the comparative period in 2007. Cost of medical products sales increased as a percentage of revenue over the comparative period in 2007 due to product mix within the expansion into new regions. Cost of services revenue
increased slightly as a percentage of revenue over the comparative period in 2007 mainly due to the additional revenue recognized for the pharmaceutical claims processed, which was 40% of the current revenue of $600,084 for the comparative period in
2007. As discussed more fully in the notes to our financial statements, pharmaceutical claim revenue is recognized on a net basis and as collected.

Selling, General and Administrative Expenses. Set forth below are our selling, general and administrative expenses.



|                                             |  |                  |           |                    |       |               |                     |             |  |       |  |   |          |   |  |       |  
|-------------------------------------------- |  | ---------------- | --------- | ------------------ | ----- | ------------- | ------------------- | ----------- |  | ----- |  | - | -------- | - |  | ----- | -
|                                             |  | Six Months Ended |           | Increase(Decrease) |       |               | %Increase(Decrease) |            
|                                             |  | June 28, 2008    |           | % ofRevenue        |       | June 30, 2007 |                     | % ofRevenue |  |      
|Salaries and benefits                        |  | $                | 890,951   |                    | 37.0  |               | $                   | 852,786     |  | 56.3  |  | $ | 38,165   |   |  | 4.5   |  
|Legal, consulting and insurance              |  |                  | 387,661   |                    | 16.1  |               |                     | 498,507     |  | 32.9  |  |   | (110,846 | ) |  | (22.2 | )
|All other                                    |  |                  | 1,553,337 |                    | 64.5  |               |                     | 939,748     |  | 61.9  |  |   | 613,589  |   |  | 65.3  |  
|                                             |  |                  |           |                    |       |               |                     |             |  |       |  |   |          |   |  |       |  
|Selling, General and Administrative Expenses |  | $                | 2,831,949 |                    | 117.6 |               | $                   | 2,291,041   |  | 151.1 |  | $ | 540,908  |   |  | 23.6  |  
|                                             |  |                  |           |                    |       |               |                     |             |  |       |  |   |          |   |  |       |  

Salaries and Benefits Expense.

Salaries and benefits expense increased primarily due to the severance agreement related to the departure of our President and Chief Executive Officer,
Brian Lesperance, during the first quarter of 2008. Total employees for the six months ended June 28, 2008 were 36, the same for the comparative period in 2007. We expect to continue to add additional sales and service support staff as we
expand our operations.

Legal, Consulting and Insurance Expenses.

Legal expense was $224,429 and consulting expense was $108,761 for the six months ended June 28, 2008 compared to $237,899 and $175,647 respectively for the comparative period in the six months ended
June 30, 2007. The expenses incurred in the six months ended June 28, 2008, as well as the six months ended June 30, 2007, are primarily related to services rendered to secure additional financing, review of our periodic and other
filings, as well as general counsel services. Consulting expenses are lower for the six months ended June 28, 2008 due to the absence of specific independent contractor arrangements compared to the six months ended June 30, 2007. Insurance
costs were $54,471 for the six months ended June 28, 2008 compared to $84,961 in the comparative period in 2007 due to the allocation of costs over an extended period of time in 2008 compared to that in 2007.



24



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##### Table of Contents

All Other Expenses.

Expense of $266,304 was recognized related to the fair value of warrants issued to Brian Lesperance as part of the separation agreement between Mr. Lesperance and the Company. Other expenses for the six months
ended June 28, 2008 include office supplies, printing and postage expenses of $111,063, or an increase of $13,445 from the six months ended June 30, 2007; software and IT support of $33,363 or a decrease of $21,715; accounting and audit
fees of $104,371 or an increase of $49,312; recruitment expenses of $2,000 or a decrease of $53,223; billing service charges of $159,597 or an increase of $58,420; travel of $117,670 or a decrease of $46,990; personnel services of $188,159 or an
increase of $186,791 due to an increase of our temporary personnel compared to direct labor; telephone and data communications expense of $33,542 or a decrease of $12,367; bad debt expense of $120,984 compared to none in the comparative period in
2007 for uncollectible pharmaceutical claims; doubtful allowance reserve expense of $108,075 or an increase of $57,232; rent expense of $40,008 or an increase of $16,822 due to additional office space leased beginning in the fourth quarter of 2007;
and bank charges of $16,904 or an increase of $14,512 due to increased usage of lockbox accounts. The increase in expenses over the comparable six month period reflects the increase in personnel support costs, higher sales volume and other expenses
required to support a growing operation.

Other Income (Expense)

For the six months ended June 28, 2008, interest expense was $738,102 compared to $429,631 for the same period in 2007. The increased expense is a
direct result of additional debt instruments in place as of the period ended June 28, 2008 compared to the same period in 2007. In the three months ended June 30, 2007, we recognized revolving line of credit financing expense of
approximately $21,500,000 and approximately $8,700,000 of note extension expense.

Net Loss. Set forth below is our net loss.



|         |  |                  |            |   |             |        |           |               |   |             |             |  |          |   |  |   |            |  |     
|-------- |  | ---------------- | ---------- | - | ----------- | ------ | --------- | ------------- | - | ----------- | ----------- |  | -------- | - |  | - | ---------- |  | ----
|         |  | Six Months Ended |            |   | Decrease    |        | %Decrease
|         |  | June 28, 2008    |            |   | % ofRevenue |        |           | June 30, 2007 |   |             | % ofRevenue |  |          |  
|Net Loss |  | $                | (3,121,245 | ) |             | (129.6 | )         |               | $ | (32,508,221 | )           |  | (2,144.3 | ) |  | $ | 29,386,975 |  | 90.4

Approximately one-third of the net loss for the six months ended June 28, 2008 was
attributable to interest expense and the cash and non-cash charges in relation to the separation agreement with Brian Lesperance. Operationally, our loss was driven mainly from selling, general and administrative costs incurred to continue to grow
revenue and support our operations. We continue to invest in additional service support personnel to drive additional revenue growth in the future.

Liquidity and Capital Resources

During the six months ended June 28, 2008, cash used in operating activities
was $3,303,216, compared to $3,633,166 in the comparative period in 2007. Financing activities including advances from Vicis totaling $2,260,205 offset the overall net decrease in cash to $1,055,477. As of June 28, 2008, we had $7,207,543 in
total assets, compared to $6,375,354 as of December 31, 2007. Total liabilities at the end of the period were $12,848,837 compared to $ 9,161,107 as of December 31, 2007.

Off Balance Sheet Arrangements

We do not have any offbalance sheet arrangements that
have or are reasonably likely to have a material impact of our financial condition or results of operations.



|ITEM 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|------- | -----------------------------------------------------------

Not applicable.



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##### Table of Contents

|ITEM 4T. | CONTROLS AND PROCEDURES.
|-------- | ------------------------

Evaluation of disclosure controls
and procedures.

As required by Rule 13a-15 under the Exchange Act, as of the end of the period covered by this report, we carried
out an evaluation under the supervision and with the participation of our management, including our Interim Chief Executive Officer and Vice President and Controller (our principal executive officer and principal accounting and financial officer),
of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, we and our management recognize that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and our management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. The term
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (Exchange Act), means controls and other procedures of a company that are designed to
ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SECs rules and forms.
Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and
communicated to the companys management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this
evaluation, our Interim Chief Executive Officer and Vice President and Controller concluded as of June 28, 2008 that our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses
discussed immediately below.

In light of the material weaknesses described below, we performed additional analysis and other post-closing
procedures to ensure that our consolidated financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the 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.

The Company has identified
the following material weaknesses in our internal control over financial reporting:



| |  |  | The Company did not establish and maintain adequate segregation of duties without appropriate alternative controls particularly in the areas of recording accounting
transactions and administration of accounting applications.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Inadequate controls and procedures were in place to assign, monitor and regulate access to the company computing infrastructure including networks, servers and
applications and access to accounting applications. Additionally the patient billing system has one group account (with non-expiring password and no other restrictive controls) that is shared among ten or more individuals.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The Company has formulated a strategic plan to remediate the material weaknesses noted above. Those plans include
establishing new procedures and hiring additional personnel, as resources permit, in order to provide for more segregation of duties, using a financial statement disclosure checklist for future reports and replacing the patient billing system with a
new system with better access controls. The Company expects to make additional investments in its internal IT support structure, including systems, applications, processes and personnel. Currently, the Company expects that the implementation of the
internal IT support structure will be completed by the fourth quarter of 2008 and the new patient billing system will be implemented by the end of the fourth quarter of 2008, although the Company cannot provide any assurances that it will be able to
do so in this timeframe.



26



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##### Table of Contents

Changes in internal control over financial reporting.

The following changes to the Companys internal control over financial reporting were implemented during the period covered by this Quarterly Report
addressing previously reported material weaknesses:



| |  |  | The Company has implemented the use of financial disclosure and period end checklists in order to increase control over the period end close process.
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | The Company is currently reviewing accounts receivable on a bi-weekly basis and taking appropriate steps to place delinquent accounts on credit hold to maintain
control over its outstanding receivables.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | While the Company continues to utilize spreadsheets to reconcile inventory records, these documents are stored on the network with restricted user access.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------



27



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##### Table of Contents

PART II OTHER INFORMATION



|ITEM 1. | LEGAL PROCEEDINGS.
|------- | ------------------

We are not a party to any
material legal proceedings.



|Item 1A. | Risk Factors.
|-------- | -------------

In addition to the other
information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the factors discussed under the heading, Risk Factors in Item 1A of Part I of our Annual Report on Form 10-KSB. These are risks and
uncertainties that could cause actual results to differ materially from the results contemplated by the forward-looking statements contained in this Quarterly Report on Form 10-Q. Because of the these factors, as well as other variables
affecting our operating results, past financial performance should not be considered as a reliable indicator of future performance and investors should not use historical trends to anticipate results or trends in future periods. These risks are not
the only ones facing the Company.



|ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
|------- | ------------------------------------------------------------

None.



|ITEM 3. | DEFAULTS UPON SENIOR SECURITIES.
|------- | --------------------------------

On June 28,
2006, the Company issued to Vicis Capital Master Fund a Senior Secured Convertible Note (2006 Note) in aggregate the principal amount of $2,000,000. The entire principal amount of the 2006 Note was payable on its maturity date of
June 28, 2008, subject to its earlier conversion, acceleration or redemption. However, the 2006 Note was not paid as of June 26, 2008 and has not yet been repaid. Vicis Capital Master Fund has not requested repayment of the 2006 Note and
has not notified the Company of an event of default. Currently, the Company is working with Vicis Capital Master Fund for an extension of the 2006 Note. At the option of the Company, interest payable upon conversion of all or a portion of the
converted principal amount may be settled either in cash or in registered common stock (at a conversion price equal to the then current debt conversion price). Interest is payable, in cash, at maturity and accrues at 6% per annum. The total
amount of the default as of August 8, 2008, both principal and interest, is approximately $2,270,000.



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

None.



|ITEM 5. | OTHER INFORMATION.
|------- | ------------------



|(a) | Not applicable.
|--- | ---------------



|(b) | Not applicable.
|--- | ---------------



|ITEM 6. | EXHIBITS
|------- | --------

The following in an index of the exhibits
included in this report:



|            |  |                                                                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                          
|3.1         |  | Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-KSB filed on April 16, 2007)                              
|            | 
|3.2         |  | Certificate of Amendment to Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-KSB filed on April 15,
2008)  
|            | 
|3.3         |  | Amended and Restated Bylaws of the Registrant (incorporated in reference to Exhibit 3.2 to the Annual Report on Form 10-KSB filed on April 16, 2007)                                                 
|            | 
|31.1        |  | Certification of Principal Executive Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.               
|            | 
|31.2        |  | Certification of Principal Accounting and Financial Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|            | 
|32.1        |  | Certification of Principal Executive Officer and Principal Accounting and Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.



28



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##### Table of Contents

MEDICAL SOLUTIONS MANAGEMENT INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                      |  |                                   |  |                                                              
|--------------------- |  | --------------------------------- |  | -------------------------------------------------------------
|                      |  | MEDICAL SOLUTIONS MANAGEMENT INC.
|                      |  |                                  
|Date: August 11, 2008 |  | By:                               |  | /s/ Lowell M. Fisher                                         
|                      |  |                                   |  | Lowell M. Fisher                                             
|                      |  |                                   |  | Interim Chief Executive Officer (principal executive officer)



---

##### Table of Contents

EXHIBIT INDEX

The following in an index of the exhibits included in this report:



|            |  |                                                                                                                                                                                                      
|----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                                                          
|3.1         |  | Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.1 to the Annual Report on Form 10-KSB filed on April 16, 2007)                              
|            | 
|3.2         |  | Certificate of Amendment to Amended and Restated Articles of Incorporation of the Registrant (incorporated by reference to Exhibit 3.2 to the Annual Report on Form 10-KSB filed on April 15,
2008)  
|            | 
|3.3         |  | Amended and Restated Bylaws of the Registrant (incorporated in reference to Exhibit 3.2 to the Annual Report on Form 10-KSB filed on April 16, 2007)                                                 
|            | 
|31.1        |  | Certification of Principal Executive Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.               
|            | 
|31.2        |  | Certification of Principal Accounting and Financial Officer, pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
|            | 
|32.1        |  | Certification of Principal Executive Officer and Principal Accounting and Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.