---



UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



---



FORM 10-QSB



(Mark One)

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



For the quarterly period ended September 30, 2003



| ̈ | 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 1-14160



---



PainCare Holdings, Inc.

(Exact name of small business issuer as specified in its charter)



|Florida                                                        |  | 06-1110906                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of incorporation or organization) |  | (I.R.S. Employer Identification No.)



37 N. Orange Avenue,
Orlando, Florida 32801

(Address of principal executive offices)



(407) 926-6615

(Issuers telephone number)



---



Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the
past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x    No ̈



APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING

DURING THE PRECEDING FIVE YEARS



Check whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a
court.  Yes ̈No ̈



APPLICABLE ONLY TO CORPORATE ISSUERS



The
number of shares outstanding of the issuers common stock as of November 7, 2003 is 23,747,662 shares.



Transitional Small Business Disclosure Format (Check One)  Yes ̈No  x



---



---

PAINCARE HOLDINGS, INC.



INDEX



|PART I. FINANCIAL INFORMATION |  |          
|----------------------------- |  | ---------
|                              |  |          
|                              |  | Item 1.  
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  | Item 2.  
|                              |  |          
|                              |  | Item 3.  
|                              | 
|PART II. OTHER INFORMATION    |  |          
|                              |  |          
|                              |  | Signature



2



---

PART I FINANCIAL INFORMATION



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



PainCare Holdings, Inc

Consolidated Balance Sheet

As of September 30, 2003 and December 31, 2002



|                                                                                                                      |  | September 30,2003 |            | December 31,2002 |  
|--------------------------------------------------------------------------------------------------------------------- |  | ----------------- | ---------- | ---------------- | -
|                                                                                                                      |  | (Unaudited)       |            | (Audited)        |  
|Assets                                                                                                                |  |                   |            |                  |  
|Current Assets:                                                                                                       |  |                   |            |                  |  
|Cash                                                                                                                  |  | $                 | 1,895,391  |                  | $
|Accounts receivable                                                                                                   |  |                   | 4,282,654  |                  |  
|Due from Shareholder                                                                                                  |  |                   | 339,325    |                  |  
|Note receivable                                                                                                       |  |                   | 318,438    |                  |  
|Deposits & prepaid expenses                                                                                           |  |                   | 567,013    |                  |  
|                                                                                                                      |  |                   |            |                  |  
|Total current assets                                                                                                  |  |                   | 7,402,820  |                  |  
|Furniture and equipment, net                                                                                          |  |                   | 3,396,631  |                  |  
|Goodwill, net                                                                                                         |  |                   | 10,404,767 |                  |  
|Other Assets                                                                                                          |  |                   | 2,286,048  |                  |  
|                                                                                                                      |  |                   |            |                  |  
|Total assets                                                                                                          |  |                   | 23,490,265 |                  |  
|                                                                                                                      |  |                   |            |                  |  
|Liabilities and Stockholders Equity                                                                                  |  |                   |            |                  |  
|Current liabilities:                                                                                                  |  |                   |            |                  |  
|Accounts payable                                                                                                      |  |                   | 407,583    |                  |  
|Current portion of notes payable                                                                                      |  |                   | 1,939,784  |                  |  
|Current portion of convertible debenture                                                                              |  |                   | 332,063    |                  |  
|Current portion of lease payable                                                                                      |  |                   | 531,764    |                  |  
|                                                                                                                      |  |                   |            |                  |  
|Total current liabilities                                                                                             |  |                   | 3,211,194  |                  |  
|Notes payable                                                                                                         |  |                   | 521,865    |                  |  
|Convertible debentures - Net of Current Portion                                                                       |  |                   | 910,000    |                  |  
|Lease payable                                                                                                         |  |                   | 2,104,229  |                  |  
|Deferred Income Tax Liability                                                                                         |  |                   | 311,724    |                  |  
|Shareholder Loan                                                                                                      |  |                   |           |                  |  
|                                                                                                                      |  |                   |            |                  |  
|Total liabilities                                                                                                     |  |                   | 7,059,011  |                  |  
|                                                                                                                      |  |                   |            |                  |  
|Stockholders equity:                                                                                                 |  |                   |            |                  |  
|Common stock, $.0001 par value. Authorized 75,000,000 shares; issued and outstanding 23,667,057 and 15,576,640
shares |  |                   | 2,367      |                  |  
|Preferred stock, $.0001 par value. Authorized 10,000,000 shares; issued and outstanding-0- shares                     |  |                   |           |                  |  
|Additional paid in capital                                                                                            |  |                   | 14,613,847 |                  |  
|Retained earnings (accumulated deficit)                                                                               |  |                   | 1,803,381  |                  |  
|Cumulative translation adjustments                                                                                    |  |                   | 11,659     |                  |  
|                                                                                                                      |  |                   |            |                  |  
|Total stockholders equity                                                                                            |  |                   | 16,431,254 |                  |  
|                                                                                                                      |  |                   |            |                  |  
|Total liabilities and stockholders equity                                                                            |  | $                 | 23,490,265 |                  | $
|                                                                                                                      |  |                   |            |                  |  



The accompanying notes are an
integral part of the consolidated financial statements.



3



---

PainCare Holdings, Inc.



Consolidated Statements of Operations (unaudited)



For the Three and Nine Months Ended

September 30, 2003 and 2002



|                                            |  | For the Three Months EndedSeptember 30, |            | For the Nine Months EndedSeptember 30,
|------------------------------------------- |  | --------------------------------------- | ---------- | --------------------------------------
|                                            |  | 2003                                    |            | 2002                                  
|Total revenues:                             |  |                                         |            |                                       
|Patient services                            |  | $                                       | 1,838,095  |                                       
|Management fees                             |  |                                         | 2,538,322  |                                       
|                                            |  |                                         |            |                                       
|Total revenues                              |  |                                         | 4,376,417  |                                       
|                                            |  |                                         |            |                                       
|Cost of sales                               |  |                                         | 1,365,663  |                                       
|                                            |  |                                         |            |                                       
|Gross profit                                |  |                                         | 3,010,754  |                                       
|                                            |  |                                         |            |                                       
|Operating expenses:                         |  |                                         |            |                                       
|Selling, general and administrative         |  |                                         | 2,380,269  |                                       
|Depreciation expense                        |  |                                         | 138,713    |                                       
|                                            |  |                                         |            |                                       
|Operating income                            |  |                                         | 491,772    |                                       
|                                            |  |                                         |            |                                       
|Interest expense                            |  |                                         | 103,290    |                                       
|Other income                                |  |                                         | 37,419     |                                       
|                                            |  |                                         |            |                                       
|Income before taxes                         |  |                                         | 425,901    |                                       
|                                            |  |                                         |            |                                       
|Provision for income taxes                  |  |                                         | 65,296     |                                       
|                                            |  |                                         |            |                                       
|Net income                                  |  | $                                       | 360,605    |                                       
|                                            |  |                                         |            |                                       
|                                            |  |                                         |            |                                       
|Basic earnings per share                    |  | $                                       | 0.02       |                                       
|                                            |  |                                         |            |                                       
|                                            |  |                                         |            |                                       
|Basic weighted average shares outstanding   |  |                                         | 23,202,057 |                                       
|                                            |  |                                         |            |                                       
|                                            |  |                                         |            |                                       
|Diluted earnings per share                  |  | $                                       | 0.01       |                                       
|                                            |  |                                         |            |                                       
|                                            |  |                                         |            |                                       
|Diluted weighted average shares outstanding |  |                                         | 30,914,362 |                                       
|                                            |  |                                         |            |                                       



The accompanying notes are an
integral part of the consolidated financial statements.



4



---

PainCare Holdings, Inc.



Consolidated Statement of Stockholders Equity (unaudited)

For the Three Months ended September 30, 2003



|                                                |  | CommonStock Shares |  | CommonStock Amount |       | Additional Paid inCapital |   | Retained Earnings |  | Cumulative Translation Adjustment |           |  | Total Stockholders Equity
|----------------------------------------------- |  | ------------------ |  | ------------------ | ----- | ------------------------- | - | ----------------- |  | --------------------------------- | --------- |  | --------------------------
|                                                |  |                    |  |                    |       |                          
|Balance at June 30, 2003                        |  | 22,215,483         |  | $                  | 2,221 |                           | $ | 13,146,211        |  | $                                 | 1,442,776 |  | $                         
|                                                |  |                    |  |                    |       |                          
|Common stock issued to advisory network members |  | 2,030              |  |                    | 0.2   |                           |   | 2,030             |  |                                   |          |  |                           
|                                                |  |                    |  |                    |       |                          
|Common stock issued for cash                    |  | 14,544             |  |                    | 1.5   |                           |   | 30,749            |  |                                   |          |  |                           
|                                                |  |                    |  |                    |       |                          
|Common stock issued for merger                  |  | 1,375,000          |  |                    | 138   |                           |   | 1,374,863         |  |                                   |          |  |                           
|                                                |  |                    |  |                    |       |                          
|Common stock issued for exercise of warrants    |  | 60,000             |  |                    | 6     |                           |   | 59,994            |  |                                   |          |  |                           
|                                                |  |                    |  |                    |       |                          
|Foreign currency translation                    |  |                    |  |                    |       |                           |   |                   |  |                                   |           |  |                           
|                                                |  |                    |  |                    |       |                          
|Net income                                      |  |                    |  |                    |       |                           |   |                   |  |                                   | 360,605   |  |                           
|                                                |  |                    |  |                    |       |                           |   |                   |  |                                   |           |  |                           
|                                                |  |                    |  |                    |       |                          
|Balance at September 30, 2003                   |  | 23,667,057         |  | $                  | 2,367 |                           | $ | 14,613,847        |  | $                                 | 1,803,381 |  | $                         
|                                                |  |                    |  |                    |       |                           |   |                   |  |                                   |           |  |                           



The accompanying notes are an
integral part of the consolidated financial statements.



5



---

PainCare Holdings, Inc.



Consolidated Statement of Cash Flows (unaudited)



For the Nine Months ended September 30, 2003 and 2002



|                                                                              |  | 2003       |   |  | 2002       |  
|----------------------------------------------------------------------------- |  | ---------- | - |  | ---------- | -
|Operating activities:                                                         |  |            |   |  |            |  
|Net income                                                                    |  | 1,246,894  |   |  | 529,854    |  
|Adjustments to reconcile net income to net cash used in operating activities: |  |            |   |  |            |  
|Depreciation and amortization                                                 |  | 279,497    |   |  | 151,615    |  
|Cumulative translation adjustments                                            |  | 11,659     |   |  | (7,877     | )
|Change in operating assets and liabilities, net of assets acquired:           |  |            |   |  |            |  
|Accounts receivable                                                           |  | (1,501,560 | ) |  | (517,031   | )
|Prepaid expenses                                                              |  | (428,493   | ) |  | (50,298    | )
|Other assets                                                                  |  | (2,082,227 | ) |  | 46,770     |  
|Deferred Income Tax Liability                                                 |  | 311,724    |   |  |           |  
|Accounts payable                                                              |  | (121,448   | ) |  | 86,808     |  
|                                                                              |  |            |   |  |            |  
|Net cash provided (used) in operating activities                              |  | (2,283,954 | ) |  | 239,841    |  
|                                                                              |  |            |   |  |            |  
|                                                                              |  |           
|Investing activities:                                                         |  |            |   |  |            |  
|Purchase of furniture and equipment                                           |  | (384,016   | ) |  | (978,632   | )
|Payment of debentures                                                         |  |           |   |  | (306,556   | )
|Cash paid for acquisition of MRS                                              |  | (1,660,654 | ) |  |           |  
|Cash paid for acquisition of APG                                              |  | (1,531,914 | ) |  |           |  
|Cash from acquisitions                                                        |  | 342,950    |   |  | 236,698    |  
|                                                                              |  |            |   |  |            |  
|Net cash used in investing activities                                         |  | (3,233,634 | ) |  | (1,048,490 | )
|                                                                              |  |            |   |  |            |  
|                                                                              |  |           
|Financing activities:                                                         |  |            |   |  |            |  
|Proceeds from issuance of common stock                                        |  | 4,402,415  |   |  | 451,534    |  
|Capital lease obligations                                                     |  | 17,867     |   |  | 849,045    |  
|Payment of notes receivable                                                   |  | (218,122   | ) |  | (355,301   | )
|Notes payable                                                                 |  | 1,132,135  |   |  | 279,886    |  
|                                                                              |  |            |   |  |            |  
|Net cash provided by financing activities                                     |  | 5,334,295  |   |  | 1,225,164  |  
|                                                                              |  |            |   |  |            |  
|                                                                              |  |           
|Net increase in cash and cash equivalents                                     |  | (183,293   | ) |  | 416,515    |  
|                                                                              |  |           
|Cash and cash equivalents at beginning of period                              |  | 2,078,684  |   |  | 344,655    |  
|                                                                              |  |            |   |  |            |  
|Cash and cash equivalents at end of period                                    |  | 1,895,391  |   |  | 761,170    |  
|                                                                              |  |            |   |  |            |  
|                                                                              |  |           
|Supplementary disclosure of cash flow information:                            |  |            |   |  |            |  
|                                                                              |  |            |   |  |            |  
|Cash paid during year for interest                                            |  | 350,672    |   |  | 203,460    |  
|                                                                              |  |            |   |  |            |  



The accompanying notes are an
integral part of the consolidated financial statements.



6



---

PainCare Holdings, Inc.



Notes
to Consolidated Financial Statements



Organization and Basis of
Presentation



Organization



The Company was initially incorporated in State of Connecticut in May, 1984
under the name of HelpMate Robotics, Inc. On December 30, 1999, HelpMate sold substantially all of its assets to Pyxis Corporation (Pyxis).



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



On December 20, 2001, HelpMate entered in an Agreement and Plan of Merger with PainCare, Inc., a Nevada corporation (the Merger Agreement), which was consummated on July 17, 2002 (the Merger). Pursuant to the Merger,
PainCare, Inc. became a wholly-owned subsidiary of HelpMate. Holders of PainCare, Inc. common stock received shares of HelpMate common stock at a conversion rate of one (1) share of HelpMate common stock for each one share of PainCare, Inc. common
stock surrendered. As of the date the Merger was consummated there were 7,555,357 shares of PainCares common stock issued and outstanding. Holders of PainCare, Inc. options, warrants and other derivatives have the right to exercise those
derivatives for HelpMates common stock.



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



On December 12, 2002, the Company completed the acquisition of the outstanding capital stock of Pain and Rehabilitation Network, Inc., a pain management physician practice headquartered in Orange Park, Florida. The
capital stock was acquired from Andrea Trescot, M.D., the sole shareholder. The purchase price consisted of $1,000,000 in cash and 1,000,000 shares of the Companys common stock valued at $1.00 per share. The Company may also make additional
payments of up to $2,000,000 in cash and common stock if certain net earnings goals are achieved in each of the first three fiscal years following the closing. The acquisition has been accounted for using the purchase method of accounting.



On May 16, 2003, the Company completed the acquisition of the
outstanding capital stock of Medical Rehabilitation Specialists II, Inc., a physiatry and pain management physician practice headquartered in Tallahassee, Florida. The capital stock was acquired from Kirk Mauro, M.D., the sole shareholder. The
purchase price consisted of $1,375,000 in cash and 1,100,000 shares of the Companys common stock valued at $1.25 per share. The Company may also make additional payments of up to $2,750,000 in cash and common stock if certain net earnings
goals are achieved in each of the first three fiscal years following the closing. The acquisition has been accounted for using the purchase method of accounting.



On August 6, 2003, the Company completed the acquisition of the non-medical assets of Associated Physicians Group, Ltd.
(APG), a pain management practice serving the St. Louis Metro-East market with offices in OFallon, Freeburg and Glen Carbon, IL., and signed a long-term management agreement with the newly formed successor to APGs medical
practice. The purchase price consisted of $1,375,000 in cash and 1,375,000 shares of the Companys common stock valued



7



---

at $1.00 per share. The Company may also make additional payments of up to $2,750,000 in cash and common stock if certain net earnings goals are achieved in
each of the first three fiscal years following the closing. The acquisition has been accounted for using the purchase method of accounting.



Common Stock



As of November 7, 2003, the Company had 75,000,000 shares of authorized common stock with a par value of $.0001 per share of which 23,747,662 shares are
issued and outstanding. The Company also has 10,000,000 preferred shares authorized none of which have been issued.



Principles of Interim Statements.



The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for
interim financial information and with the instructions to Form 10-QSB and Rule 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States.
In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included in the accompanying unaudited financial statements. Operating results for the three month
and nine month periods ended September 30, 2003 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2003. For further information, refer to the financial statements and footnotes thereto included
in the Companys annual report on Form 10-KSB for the year ended December 31, 2002, the Companys Form 10-QSB filed with the SEC on August 12, 2003 and the Companys Definitive Proxy Statement 14A filed October 24, 2003.



In June 2001, the Financial Accounting Standards Board issued Statements
of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142), effective for fiscal years beginning after December 15, 2001. SFAS 142 requires that goodwill be allocated to reporting units and that goodwill and
intangibles assets with indefinite useful lives not be amortized over their useful lives, but rather be tested for impairment upon implementation of this standard and at least annually thereafter. The transitional impairment test should be completed
in the first interim period (or in case of goodwill in the first six months) of the fiscal year in which SFAS 142 is adopted, and any resulting impairment loss should be recognized as the effect of a change in accounting principle in accordance with
Accounting Principles Board Opinion No. 20, Accounting Changes. Any subsequent impairment losses resulting from events or circumstances that occur after the first day of the fiscal year in which SFAS 142 is adopted should be reported as a component
of income from continuing or discontinued operations, as appropriate. These statements apply to all business combinations that are initiated or completed after June 30, 2001 and the effective date of these pronouncements for the Company is January
1, 2002.



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



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



This Report
includes forward-looking statements made based on current management expectations pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual
outcomes may differ materially from what is expressed or forecasted. Factors that could cause future results to differ from the Companys expectations include the factors described on page 13 of this Report under Special Note Regarding
Forward-Looking Statements as well as under Risk Factors beginning on page 13 of this Report.



8



---

Outlook



The Company owns, manages and operates a network of pain management, minimally invasive surgery and orthopedic rehabilitation centers located in North
America. The Companys strategy is to rapidly grow by establishing a network of pain management, minimally invasive spine surgery and orthopedic rehabilitation centers. The Company has developed its Three Pillar business approach to
provide an integrated combination of products and services to patients seeking pain relief through Pain Management technologies, Minimally Invasive Spine Surgery (MIS) and Orthopedic Rehabilitation. MIS or band-aid surgery is a
specialized surgical technique based on currently available endoscopic technologies, which allows physicians to provide the most technically advanced treatment of back and neck pain in an outpatient environment. Orthopedic Rehabilitation is a
comprehensive program that advances functional restoration of the musculoskeletal system utilizing state of the art computerized MedX medical exercise machines.



It is the intention of management that the Companys Pain Management and Orthopedic Centers will specialize in the full spectrum of diagnosis and
treatment of pain, with a concentration on chronic back and neck pain. Management believes that by establishing a chain of Pain Management and Orthopedic Centers that provide minimally invasive spinal surgery and orthopedic rehabilitation services,
it will generate significant revenues and will be profitable.



Significant
Accounting Policies and Estimates



Managements
Discussion and Analysis of Financial Condition and Results of Operations discuss the Companys consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The
preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to marketing expenses, customer incentives, student attrition
rates, bad debts, intangible assets, income taxes, financing operations, contractual obligations, restructuring costs, retirement benefits, and contingencies and litigation. Management bases its estimates and judgments on historical experience and
on various other factors that 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 sources.
Actual results may differ from these estimates under different assumptions or conditions.



Our significant accounting policies are more fully discussed in Form 10-KSB filed with the SEC on March 24, 2003. However, certain of our accounting policies are particularly important to the portrayal of our
financial position and results of operations and require the application of significant judgment by our management; as a result they are subject to an inherent degree of uncertainty. In applying those policies, our management uses its judgment to
determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our
customers and information available from other outside sources, as appropriate. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its
consolidated financial statements.



9



---

Our critical accounting policies include:



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



| |  | Financial Accounting Standards . In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (SFAS 142), which establishes accounting
standards for the recognition and measurement of an asset retirement obligation and its associated asset retirement cost. The changes in these rules may have a significant impact on our reported financial results. In June 2001, the FASB issued
Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS No.142, Goodwill and Other Intangible Assets. These statements would continue to require recognition of goodwill as an asset but would not permit amortization
of goodwill as is currently required by Accounting Principles Board (APB) Opinion No. 17, Intangible Assets.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under the SFAS 142, goodwill would be separately tested for impairment using a fair-value-based approach when an event occurs indicating the potential for
impairment. Any required goodwill impairment charges would be presented as a separate line item within the operating section of the income statement. The change from an amortization approach to an impairment approach would apply to previously
recorded goodwill, as well as goodwill arising from acquisitions completed after the application of the new standard. The Company adopted SFAS No. 142 for its fiscal year beginning January 1, 2002 and as a result, the Company no longer amortized
goodwill.



Results of Operations



Set forth below is certain of our selected consolidated financial and
operating information for the three months and nine months ended September 30, 2003 and the comparable period in 2002, respectively. The selected consolidated financial information is derived from our consolidated financial statements for such
periods. The information set forth below should be read in conjunction with Managements Discussion and Analysis of Results of Operations and Financial Condition and our Consolidated Financial Statements and Notes thereto.



|                                    |  | Three Months ended September 30,                   |            | Nine Months ended September 30,                   
|----------------------------------- |  | -------------------------------------------------- | ---------- | --------------------------------------------------
|                                    |  | (in thousands, except share and per share amounts) |            | (in thousands, except share and per share amounts)
|                                    |  | 2003                                               |            | 2002                                              
|Total revenue                       |  |                                                    | 4,376,417  |                                                   
|Gross profit                        |  |                                                    | 3,010,754  |                                                   
|Net income                          |  |                                                    | 360,605    |                                                   
|Earnings per share, basic           |  | $                                                  | 0.02       |                                                   
|Earnings per share, diluted         |  | $                                                  | 0.01       |                                                   
|Weighted average shares outstanding |  |                                                    |            |                                                   
|Basic                               |  |                                                    | 23,202,057 |                                                   
|Diluted                             |  |                                                    | 30,914,362 |                                                   



10



---

|                     |  | At September 30, 2003
|-------------------- |  | ---------------------
|Working Capital      |  | $                    
|Total Current Assets |  |                      
|Total Assets         |  |                      
|Stockholders Equity |  |                      



COMPARISON OF THREE MONTHS ENDED
SEPTEMBER 30, 2003 AND 2002



Revenues increased to
$4,376,417 for the three months ended September 30, 2003 from $1,720,419 for the comparable 2002 period, representing an increase of 154%. This increase is primarily due to the acquisitions of Medical Rehabilitation Specialists (MRS) and Associated
Physicians Group (APG), along with the opening of new MedX Direct rehabilitation centers.



Our revenues for the three months ended September 30, 2003 were derived from the following sources:



|Government           |  | $ | 779,864   |  | 17.8 | %
|-------------------- |  | - | --------- |  | ---- | -
|Private Insurance    |  | $ | 722,135   |  | 16.5 | %
|Personal Injury      |  | $ | 515,809   |  | 11.8 | %
|Workers Compensation |  | $ | 412,649   |  | 9.4  | %
|Management Fees      |  | $ | 1,945,960 |  | 44.5 | %



Gross profit increased
to $3,010,754 for the three months ended September 30, 2003 from $1,086,939 for the comparable 2002 period, representing an increase of 177%. This increase is also attributed to the two acquisitions and the opening of new rehabilitation
centers.



Operating expenses increased by $1,465,295 to
$2,380,269 for the three months ended September 30, 2003 from $914,974 in the comparable 2002 period, representing an increase of 160%. The increase is primarily due to the additional operating costs related to the two acquisitions and the staff and
overhead expense associated with the increase in corporate infrastructure to handle current and projected growth.



Interest expense increased by $29,014 as a result of financing new rehabilitation centers.



As a result of the above changes, net income was $360,605 for the three months ended September 30, 2003 compared with net
income of $143,216 in the comparable 2002 period.



COMPARISON OF NINE MONTHS
ENDED SEPTEMBER 30, 2003 AND 2002



Revenues increased to
$10,649,024 for the nine months ended September 30, 2003 from $5,261,802 for the comparable 2002 period, representing an increase of 102%. This increase is primarily due to the revenues associated with Medical Rehabilitation Specialists and
Associated Physicians Group which were acquired this year and the addition of new MedX Direct rehabilitation centers.



11



---

Actual revenues for the nine months ended September 30, 2003 were derived from the following sources:



|Government           |  | $ | 1,893,701 |  | 17.8 | %
|-------------------- |  | - | --------- |  | ---- | -
|Private Insurance    |  | $ | 1,879,244 |  | 17.6 | %
|Personal Injury      |  | $ | 1,342,317 |  | 12.6 | %
|Workers Compensation |  | $ | 1,073,854 |  | 10.1 | %
|Management Fees      |  | $ | 4,459,908 |  | 41.9 | %



Gross profit increased
to $7,450,001 for the nine months ended September 30, 2003 from $3,336,819 for the comparable 2002 period, representing an increase of 123%. This increase is also attributed to growth at the existing centers, recent acquisitions and the opening of
the new rehabilitation centers.



Operating expenses increased
by $2,958,397 to $5,311,427 for the nine months ended September 30, 2003 from $2,353,030 in the comparable 2002 period, representing an increase of 126%. The increase is primarily due to the additional operating costs related to the two acquisitions
and the staff and overhead expense associated with the increase in corporate infrastructure to handle current and projected growth.



Interest expense increased by $147,212 as a result of financing new rehabilitation centers.



As a result of the above changes, net income was $1,246,894 for the nine months ended September 30, 2003 compared with net
income of $529,854 in the comparable 2002 period.



LIQUIDITY AND CAPITAL
RESOURCES ON SEPTEMBER 30, 2003 AND 2002



Cash amounted to
$1,895,391 at September 30, 2003, compared to $761,170 as of September 30, 2002. The net cash used in operations was $(2,283,954) for the nine months ended September 30, 2003, compared to operations generating $239,841 for the comparable period in
2002. This substantial use of cash in operations is primarily due to the additional operating costs related to the two acquisitions and the staff and overhead expense associated with the increase in corporate infrastructure to handle current and
projected growth.



Cash used in investing activities was
$(3,233,634) for the nine months ended September 30, 2003 compared with a use of $(1,048,490) in the comparable 2002 period. This increase is due to the recent acquisitions of Medical Rehabilitation Specialists and Associated Physicians Group.



Cash provided from financing activities was $5,334,295 for the
nine months ended September 30, 2003 compared with $1,225,164 from financing activities in the comparable 2002 period. The financing activity in 2003 was the result of the proceeds of the Companys private placement of its common stock.



Management believes the current cash position, together with
the expected earnings of the Company will be sufficient to provide the Company with capital sufficient to fund working capital needs for 2003. However, it will be necessary, in order to expand the business and consummate acquisitions that additional
capital be raised. While the prospects for raising additional capital on commercially reasonable terms appears to be favorable, no assurance can be given at this time that such funds will be available, or if available will be sufficient in the near
term or that future funds will be sufficient to meet growth. In the event of such developments, attaining financing under such conditions may not be possible, or even if such funds are available, the terms on such capital may be available but not
commercially feasible or advantageous.



12



---

PRO FORMA FINANCIALS



Following are the summarized unaudited pro forma results of operations for the nine months ended September 30, 2003 and 2002, assuming the acquisition of Associated
Physicians Group (APG) had taken place at the beginning of the year. The unaudited pro forma results are not necessarily indicative of future earnings or earnings that would have been reported had the acquisitions been completed when assumed.



Pro Forma Condensed Statement of Operations

Nine Months ended September 30, 2003



|                                            |  | PainCare Historical Statements |            | APG Historical Statements(1) |   | Pro forma Adjustments |  |   | Pro forma
|------------------------------------------- |  | ------------------------------ | ---------- | ---------------------------- | - | --------------------- |  | - | ---------
|Revenues                                    |  | $                              | 10,649,024 |                              | $ | 1,783,925             |  | $ |         
|Cost of sales(2)                            |  |                                | 3,199,023  |                              |   | 489,507               |  |   | (26,804  
|                                            |  |                                |            |                              |   |                       |  |   |          
|                                            |  |                                |            |                             
|Gross profit                                |  |                                | 7,450,001  |                              |   | 1,294,418             |  |   | 26,804   
|                                            |  |                                |            |                             
|Operating expenses:                         |  |                                |            |                              |   |                       |  |   |          
|General and administrative(3)               |  |                                | 5,311,427  |                              |   | 624,002               |  |   | (4,122   
|Depreciation expense                        |  |                                | 279,497    |                              |   | 36,400                |  |   |         
|                                            |  |                                |            |                              |   |                       |  |   |          
|Operating income                            |  |                                | 1,859,077  |                              |   | 634,016               |  |   | 30,926   
|                                            |  |                                |            |                             
|Interest expense                            |  |                                | 350,672    |                              |   | 274                   |  |   |         
|Other income                                |  |                                | 50,212     |                              |   | 448                   |  |   |         
|                                            |  |                                |            |                              |   |                       |  |   |          
|                                            |  |                                |            |                             
|Income before taxes                         |  |                                | 1,558,618  |                              |   | 634,190               |  |   | 30,926   
|                                            |  |                                |            |                             
|Provision for income taxes(4)               |  |                                | 311,724    |                              |   |                      |  |   | 126,838  
|                                            |  |                                |            |                              |   |                       |  |   |          
|                                            |  |                                |            |                             
|Net income                                  |  | $                              | 1,246,894  |                              | $ | 634,190               |  | $ | (95,912  
|                                            |  |                                |            |                              |   |                       |  |   |          
|                                            |  |                                |            |                             
|Basic earnings per share                    |  |                                |            |                              |   |                       |  |   |          
|                                            |  |                                |            |                              |   |                       |  |   |          
|                                            |  |                                |            |                             
|Basic weighted average shares outstanding   |  |                                |            |                              |   |                       |  |   |          
|                                            |  |                                |            |                              |   |                       |  |   |          
|                                            |  |                                |            |                             
|Diluted earnings per share                  |  |                                |            |                              |   |                       |  |   |          
|                                            |  |                                |            |                              |   |                       |  |   |          
|                                            |  |                                |            |                             
|Diluted weighted average shares outstanding |  |                                |            |                              |   |                       |  |   |          
|                                            |  |                                |            |                              |   |                       |  |   |          



See
accompanying footnotes to unaudited pro forma financial statements.



13



---

Pro Forma Condensed Statement of Operations

Nine Months ended September 30, 2002



|                                            |  | PainCare Historical Statements |           | APG Historical Statements(1) |   | Pro forma Adjustments |  |   | Pro forma
|------------------------------------------- |  | ------------------------------ | --------- | ---------------------------- | - | --------------------- |  | - | ---------
|Revenues                                    |  | $                              | 5,261,802 |                              | $ | 1,892,304             |  | $ |         
|Cost of sales(2)                            |  |                                | 1,924,983 |                              |   | 410,140               |  |   | (124,533 
|                                            |  |                                |           |                              |   |                       |  |   |          
|                                            |  |                                |           |                             
|Gross profit                                |  |                                | 3,336,819 |                              |   | 1,482,164             |  |   | 124,533  
|                                            |  |                                |           |                             
|Operating expenses:                         |  |                                |           |                              |   |                       |  |   |          
|General and administrative(3)               |  |                                | 2,353,030 |                              |   | 868,664               |  |   | (11,549  
|Depreciation expense                        |  |                                | 151,615   |                              |   | 44,700                |  |   |         
|                                            |  |                                |           |                              |   |                       |  |   |          
|Operating income                            |  |                                | 832,174   |                              |   | 568,800               |  |   | 136,082  
|                                            |  |                                |           |                             
|Interest expense                            |  |                                | 203,460   |                              |   | 5,637                 |  |   |         
|Other income                                |  |                                | 173,992   |                              |   | 2,542                 |  |   |         
|                                            |  |                                |           |                              |   |                       |  |   |          
|                                            |  |                                |           |                             
|Income before taxes                         |  |                                | 802,706   |                              |   | 565,706               |  |   | 136,082  
|                                            |  |                                |           |                             
|Provision for income taxes(4)               |  |                                | 272,852   |                              |   |                      |  |   | 113,141  
|                                            |  |                                |           |                              |   |                       |  |   |          
|                                            |  |                                |           |                             
|Net income                                  |  | $                              | 529,854   |                              | $ | 565,706               |  | $ | 22,941   
|                                            |  |                                |           |                              |   |                       |  |   |          
|                                            |  |                                |           |                             
|Basic earnings per share                    |  |                                |           |                              |   |                       |  |   |          
|                                            |  |                                |           |                              |   |                       |  |   |          
|                                            |  |                                |           |                             
|Basic weighted average shares outstanding   |  |                                |           |                              |   |                       |  |   |          
|                                            |  |                                |           |                              |   |                       |  |   |          
|                                            |  |                                |           |                             
|Diluted earnings per share                  |  |                                |           |                              |   |                       |  |   |          
|                                            |  |                                |           |                              |   |                       |  |   |          
|                                            |  |                                |           |                             
|Diluted weighted average shares outstanding |  |                                |           |                              |   |                       |  |   |          
|                                            |  |                                |           |                              |   |                       |  |   |          



See accompanying footnotes to
unaudited pro forma financial statements.



Footnotes to Unaudited Pro Forma
Financial Statements



|(1) | The historical financial results referenced above for APG are for the periods of January 1, 2003 through August 7, 2003 and January 1, 2002 through September 30,
2002. Results for August 8, 2003 through September 30, 2003 are included in the historical PainCare figures.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Adjustment for non-recurring compensation paid to John Vick.
|--- | ------------------------------------------------------------



|(3) | Adjustment for non-recurring general and administrative expenses.
|--- | -----------------------------------------------------------------



|(4) | Represents an estimate of income taxes for APG as if they had filed consolidated tax returns with PainCare Holdings, Inc.
|--- | -------------------------------------------------------------------------------------------------------------------------



14



---

RISK FACTORS



Special Note Regarding Forward-Looking Statements and Risk Factors



Certain statements in this Annual Report on Form 10-QSB contain forward-looking statements. Forward-looking statements are any statements
other than statements of historical fact. Examples of forward-looking statements include projections of earnings, revenues or other financial items, statements of the plans and objectives of management for future operations, and statements
concerning proposed new products and services, and any statements of assumptions underlying any of the foregoing. In some cases, you can identify forward-looking statements by the use of words such as may, will, expects, should, believes, plans,
anticipates, estimates, predicts, potential, or continue, and any other words of similar meaning.



Statements regarding the Companys future financial performance or results of operations, including expected revenue growth, EBITDA growth, future expenses, future operating margins and other future or expected
performance are subject to the following risks: that projected operating efficiencies and cost-reduction initiatives will not be achieved due to implementation difficulties or contractual spending commitments that cant be reduced; the
acquisition of businesses or the launch of new lines of business, which could increase operating expenses and dilute operating margins; the inability to attract new customers; increased competition, which could lead to negative pressure on the
Companys pricing and the need for increased marketing; the inability to maintain, establish or renew relationships with customers, whether due to competition or other factors; costs associated with the Companys initiatives to upgrade its
technology platforms or the failure of the Company to successfully complete that initiative; and to the general risks associated with the Companys businesses.



FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF SECURITIES



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



THERE IS A LIMITED PUBLIC MARKET FOR OUR COMMON SHARES AND NO ASSURANCE THAT AN ACTIVE TRADING MARKET WILL BE DEVELOPED OR MAINTAINED.



There is a limited market for the Companys common stock.There can be no
assurance that an active trading market for the Companys common shares will be developed or maintained. Historically, the market prices for securities of development companies like the Company have been highly volatile. In fact, during the
last two (2) years, the Companys common stock price has ranged from a low of $0.12 to a high of $3.15 (as determined on a reverse-split basis). The market price of the shares could continue to be subject to significant fluctuations in response
to various factors and events, including the liquidity of the market for the shares, announcements of potential business acquisitions, and changes in general market conditions. The Company expects to continue to file and be current in its Securities
Exchange Act reporting requirements as it pursues its business objective. Accordingly, management of the Company anticipates that its stock will continue to be quoted in the near term on the American Stock Exchange.



15



---

WE HAVE RECENTLY BEEN PROFITABLE BUT NO ASSURANCE CAN BE GIVEN THAT SUCH PROFITABILITY WILL CONTINUE



For the years ended December 31, 2001 and 2002, the Company realized net income of
$345,804 and $705,034, respectively.



The Company expects to increase its
spending significantly as it continues to expand its product and service offerings and commercialization activities. The Company will be dependent, in part, on the return of the market for medical products and services. As a result, the Company will
need to generate significant revenues in order to continue to grow its business and become profitable.



THE COMPANYS BUSINESS PLAN MAY NOT BE SCALABLE OR COMMERCIALLY VIABLE AND AS A RESULT THE EXPECTED INCREASE IN THE COMBINED COMPANY VALUE MAY NOT BE REALIZED



There is no assurance that the Companys business plan will ever be scalable or
commercially viable and no assurance can be given that the Company will maintain its profitability. In addition, prospects for the Companys profitability will be affected by expenses, operational difficulties and other factors frequently
encountered in the development of a business enterprise in a competitive environment, many of which factors may be unforeseen and beyond the Companys control. Accordingly, the Company may never obtain the expected growth and the value that
would otherwise be expected.



OUR LACK OF OPERATING HISTORY MAKES EVALUATING
OUR FUTURE PERFORMANCE DIFFICULT AND THE CHALLENGE OF OPERATING A PUBLIC COMPANY WITHOUT EXPERIENCE MAY CAUSE THE BUSINESS OPERATIONS AND FINANCIAL POSITION OF THE COMPANY TO BE ADVERSELY AFFECTED.



Because we have been operating only since August 2000, the market has had only a short time
to evaluate our ability to develop, market and sell our products and services. Our ability to commercialize these products and services and generate operating profits and positive operating cash flow will depend principally upon our ability to:



attract and retain an adequate number of patients;



enter new markets and compete successfully in them;



manage operating expenses;



raise additional capital to fund our capital expenditure plans; and



attract and retain qualified personnel.



The management of the Company will be challenged with the aspects of operating a public company with the associated regulatory and compliance issues. The diversion of the
attention of management, which has little experience in operating public companies, and any difficulties encountered in the process of operating a public company could lead to possible unanticipated liabilities and costs and cause the disruption of,
or a loss of momentum in, the business activities of the Company. This uncertainty may adversely affect the ability of the Company to retain some of its key employees. As a consequence, we cannot assure you that we will successfully or profitably
manage the Company.



WE MAY NOT BE ABLE TO KEEP OUR TRADE SECRETS
CONFIDENTIAL



The Company relies significantly upon unpatented proprietary
technology, information, processes and know-how. We seek to protect this information by confidentiality agreements with our employees, consultants and other third-party contractors as well as through other security measures. These confidentiality
agreements may be breached, and we may not have adequate remedies for any such breach. In addition, our trade secrets may otherwise become known or be independently developed by competitors.



16



---

THE LOSS OF KEY PERSONNEL COULD MAKE IT DIFFICULT TO COMPLETE EXISTING PROJECTS AND UNDERTAKE NEW PROJECTS



The Companys success is dependent upon its ability to identify,
hire and retain its employees, including its physicians and a significant component of the value of the business is in the know-how and experience of the Company employees. If certain key employees were to leave, the Company may be unable to operate
is business profitably, complete existing the Company projects or undertake certain new projects.



The key employees and consultants of the Company include Merrill Reuter, M.D., Peter Rothbart, M.D., Randy Lubinsky, Mark Szporka, Andrea Trescot, M.D., Kirk Mauro, M.D. and Ron Riewold. Employment agreements have
been executed with Randy Lubinsky (Chief Executive Officer and Director), Mark Szporka (Chief Financial Officer and Director), Dr. Merrill Reuter (President of AOSF), Dr. Andrea Trescot (President of PRN), Dr. Kirk Mauro (President of MRS) and Ron
Riewold (President and Director). A consulting agreement has been executed with Peter Rothbart, M.D. Should the services of Dr. Reuter, Dr. Rothbart, Randy Lubinsky, Mark Szporka, Dr. Andrea Trescot, Dr. Kirk Mauro, Ron Riewold or other key
personnel become unavailable to the Company for any reason, the business of the Company could be adversely affected. There is no assurance that the Company will be able to retain these key individuals and/or attract new employees of the caliber
needed to achieve the Companys objectives. The Company does not maintain any key employee life insurance policies.



Under the employment agreements of Mr. Lubinsky and Mr. Szporka, in the event of a change of control, they may terminate the agreement and receive a lump sum severance
payment. Under the employment agreement of Dr. Reuter, he is to receive a lump-sum severance payment of $500,000 if his employment is terminated Without Cause or if he terminates the agreement For Cause.



To date, the Company has experienced no difficulties in attracting key personnel and has been
able to retain all such key personnel, saving Jay Rosen, M.D. and Stanley Swartz whose employment agreement was not renewed. The Company does not believe that the loss of Dr. Rosens or Mr. Swartzs services will have a material adverse
effect on the Companys business. To the best of the Companys knowledge and belief, there are no other key personnel that are planning to retire or leave the Company in the near future.



GROWTH STRATEGY MAY NOT PROVE VIABLE AND EXPECTED GROWTH AND VALUE MAY NOT BE REALIZED.



| | Establishment of Pain Management Centers
|- | ----------------------------------------



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



There can be no assurance that
physicians, medical providers or the medical community in general will accept the business strategy of the Company and adopt the strategy offered by the Company. The extent that, and rate of which, these services achieve market acceptance and
penetration will depend



17



---

on many variables including, but not limited to, a timely penetration of the market, the establishment and demonstration in the medical community of the
clinical safety, efficacy and cost-effectiveness of these services, the advantage of these services over existing technology, and third-party reimbursement practices. There can be no assurance that the medical community and third-party payors will
accept the Companys technology. Similar risks will confront any other services developed by the Company in the future. Failure of the Companys services to gain market acceptance would have a material adverse effect on the Companys
business, financial condition, and results of operations



| | Growth Through Acquisitions
|- | ---------------------------



The Company intends to grow through acquisitions. There can be no assurance that suitable acquisitions will be available or that acquisitions can be negotiated on acceptable terms, or that the operations of acquired
businesses can be integrated effectively into the operations of the Company. Competition for suitable acquisition candidates is expected to be intense and many of the Companys competitors will have greater resources than the Company. The
failure of the Company to implement its acquisition strategy could have a material adverse effect on the Companys expected financial performance and, moreover, the attendant risks of expansion could also have a material adverse effect on the
Companys business.



The Companys growth strategy will result in
significant additional demands on its infrastructure, and will place a significant strain on the Companys management, administrative, operational, financial and technical resources, and increased demands on its systems and controls. Additional
capital will be needed to fund expected acquisitions and there can be no assurance that the Company will be able to obtain sufficient resources to support this planned growth strategy. The inability to continue to upgrade the operating and financial
control systems, the emergence of unexpected expansion difficulties or failure to manage the Companys proposed expansion properly could have a material adverse effect on the Companys business, financial condition and results of
operations.



SIGNIFICANT RISK ASSOCIATED WITH REIMBURSEMENTS BY THIRD PARTY
PAYORS



Approximately 35% of the Companys revenues are directly
dependent on the acceptance of its services as covered benefits under third party payor programs, including private insurance, HMOs and other managed care entities. The healthcare industry is undergoing significant changes, with third party
payors taking measures to reduce reimbursement rates or in some cases denying reimbursement fees for previously acceptable treatment modalities. There is no assurance that third party payors will continue to pay for minimally invasive surgery (MIS)
services provided by the Company under its payor programs. Failure of third party payors to adequately cover MIS will have a materially adverse affect on the Company.



THERE ARE RISKS INHERENT IN THE PROVISION OF MEDICAL SERVICES WHICH COULD ADVERSELY IMPACT OUR BUSINESS



The Companys affiliated physician groups are involved in the delivery of healthcare
services to the public and are exposed to the risk of professional liability claims. Claims of this nature, if successful, could result in damage awards to the claimants in excess of the limits of any applicable insurance coverage. Insurance against
losses related to claims of this type can be expensive and varies widely from state to state. There can be no assurance that the Company will not be subject to such claims, that any claim will be successfully defended or, if the Company is found
liable, that the claim will not exceed the limits of the Companys insurance. Professional liability claims could have a material adverse effect on the Company.



18



---

SUCCESS OF BUSINESS STARTEGY IS DEPENDANT ON MARKET ACCEPTANCE THE COMPANY HAS LIMITED MARKETING AND SALES CAPABILITY
WHICH COULD ADVERSELY AFFECT ITS GROWTH PLANS



The Company has limited
internal marketing and sales resources and personnel. In order to effectively market any services, the Company will have to develop a marketing and sales force with technical expertise and distribution capability (or out-source such duties to
independent contractors). There can be no assurance that the Company will be able to establish sales and distribution capabilities or that the Company will be successful in gaining market acceptance for any services it may develop. There can be no
assurance that the Company will be able to recruit and retain skilled sales, marketing, service or support personnel, that agreements with payors will be available on terms commercially reasonable to the Company, or at all, or that the
Companys marketing and sales efforts will be successful. Failure to successfully establish a marketing and sales organization, whether directly or through third parties, would have a material adverse effect on the Companys business,
financial condition, cash flows, and results of operations.



BUSINESS IS
SUBJECT TO SUBSTANTIAL COMPETITION WHICH COULD HAVE A MATERIAL IMPACT ON ITS BUSINESS AND FINANCIAL CONDITION



The healthcare industry in general, and the market for orthopedic and rehabilitation services in particular, are highly competitive. The Company competes with companies
like HealthSouth, Inc. and U.S. Physical Therapy, Inc. that are larger in size than the Company and have access to considerably greater financial resources than the Company. The Company competes by providing more personalized care to the patients
they serve. The Company competes against other contract providers on the basis of quality of services, price and reliability. In the State of Florida, in particular, competition with respect to healthcare providers is highly competitive. The Company
relies on reputation and service to market its services.



CASH FLOW AND
FINANCIAL CONDITION MAY BE ADVERSELY AFFECTED BY THE ASSUMPTION OF CREDIT RISKS



The Company will bill the patients and/or their insurance carriers for services provided by its client clinics and/or physicians, including physician fees, facility fees and technical fees. By undertaking the responsibility for patient
billing and collection activities, the Company will assume the credit risk presented by the patient base, as well as the risk of payment delays attendant to reimbursement through governmental programs or third party payors. If the Company is
unsuccessful in collecting a substantial amount of such fees it will have a material adverse affect on the financial condition of the Company.



CONTROL BY MANAGEMENT WILL LIMIT THE ABILITY OF OTHER SHAREHOLDERS TO HAVE ANY INFLUENCE ON THE OPERATION OF THE COMPANYS BUSINESS



Officers and Directors of the Company and its subsidiaries will hold common shares which
will represent approximately 40% of the outstanding shares entitled to vote on matters presented to stockholders of the Company. Management of the Company will therefore have voting control of the Company. See Voting Securities and Principal
Stockholders.



PROVISIONS IN ARTICLES OF INCORPORATION LIMIT LIABILITY
OF MANAGEMENT AN AS A RESULT LIMITS SHAREHOLDERS RIGHTS



The Company has
adopted provisions in its Articles of Incorporation which limit the liability of their officers and directors and provisions in its By-laws which provide for indemnification of its officers and directors to the full extent permitted by law. The
Articles of Incorporation generally provides that the directors shall have no personal liability to the Company or its stockholders for monetary damages for breaches of their fiduciary duties as directors, except for breaches of their duties of
loyalty, acts or



19



---

omissions not in good faith or which involve intentional misconduct or knowing violation of law, acts involving unlawful payment of dividends or unlawful
stock purchases or redemptions, or any transaction from which a director derives an improper personal benefit. Such provisions substantially limit the stockholders ability to hold directors liable for breaches of fiduciary duty.



INVESTORS SHOULD NOT RELY ON THE PAYMENT OF DIVIDENDS IN CONSIDERING AN INVESTMENT IN THE
COMPANY



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



CURRENT
CAPITAL MAY BE INSUFFICIENT



The Company believes that the current capital
will be sufficient to support the Companys operations and planned capital expenditures (savings acquisitions) through fiscal 2003, without additional fundraising. The Companys future need for capital will depend on a number of factors,
including the level of marketing activities, the amount of funding required to establish a network of minimally invasive spinal surgery and pain management clinics by purchasing, owning, establishing and expanding certain assets used in minimally
invasive spine surgery and pain management; managing and developing spine treatment and pain management clinics, diagnostic and rehabilitation services and outpatient surgery facilities; and provide non-professional support services, facilities,
equipment, non-professional personnel, supplies and non-professional support staff to medical practices. Moreover, the Companys business plans may change or unforeseen events may occur which affect the amount of additional funds required by
the Company. If the Company does not raise additional funds if and when required, the lack thereof could have a material adverse effect on the Company. Further, there is no assurance that the terms on which any funds obtained by the Company will be
favorable to stockholders of the Company at that time.



OUR COMMON SHARES
ARE SUBJECT TO LOW PRICED STOCK RISK DISCLOSURE REQUIREMENTS



The Company
common shares are considered a low priced security under rules promulgated under the Securities Exchange Act of 1934. Under these rules, broker-dealers participating in transactions in low priced securities must first deliver a risk disclosure
document which describes the risks associated with such stocks, the broker-dealers duties, the customers rights and remedies, and certain market and other information, and make a suitability determination approving the customer for low
priced stock transactions based on the customers financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent of the customer, and
provide monthly account statements to the customer. With all these restrictions, the likely affect of designation as a low priced stock will be to decrease the willingness of broker-dealers to make a market for the stock, to decrease the liquidity
of the stock and to increase the transaction cost of sales and purchases of such stock compared to other securities.



FAILURE TO OBTAIN MANAGED CARE CONTRACTS AND LEGISLATIVE CHANGES COULD ADVERSELY AFFECT BUSINESS



There can be no assurance that the Company will be able to obtain managed care contracts. The future inability of the Company to obtain
managed care contracts in its markets could have a material adverse effect on its business, financial condition or results of operation. In addition, federal and state legislative proposals have been introduced that could substantially increase the
number of Medicare



20



---

and Medicaid recipients enrolled in HMOs and other managed care plans. The Company will derive a substantial portion of its revenue from Medicare and
Medicaid. In the event such proposals are adopted, there can be no assurance that the Company will be able to obtain contracts from HMOs and other managed care plans serving Medicare and Medicaid enrollees. Failure to obtain such contracts could
have a material adverse effect on the business, financial condition and results of operations of the Company.



RISKS ASSOCIATED WITH HIGHLY REGULATED INDUSTRY



The Companys centers and its affiliated physicians are subject to numerous regulatory, accreditation and certification requirements, including requirements related to licensure, certificate of need, reimbursement from insurance
companies and other private third party payors, Medicare and Medicaid participation and reimbursement, and utilization and quality review organizations. An adverse determination by any authority could have a material adverse effect on the Company.
Set forth immediately below is a list of the most significant regulatory risks associated with the Companys business:



| | Future Healthcare Reforms Could Have an Adverse Impact on the Business
|- | ----------------------------------------------------------------------



The public has recently focused significant attention on reforming the healthcare system in the United States. A broad range of healthcare
reform measures have been introduced in Congress and in certain state legislatures. Legislative interest recently has also focused on the role of HMOs in the provision of healthcare and the effect of managed care reimbursement mechanisms on
healthcare service utilization and quality of service. It is not clear at this time what proposals, if any, will be adopted or, if adopted what effect, if any, such proposals would have on the Companys business. There can be no assurance that
any proposals adopted would be coordinated at the federal or state level, and therefore the Company, as a national participant in the healthcare industry, is subject to varying state regulatory environments. Certain proposals, such as cutbacks in
the Medicare and Medicaid programs, containment of healthcare costs that could include a negative affect on prices charged by physicians, hospitals or other healthcare providers, and greater state flexibility in the administration of Medicaid, could
adversely affect the Company. There can be no assurance that currently proposed or future healthcare programs, laws, regulations or policies will not have a material adverse effect on the Companys operating revenue.



The Company believes that trends in cost containment in the health care industry will
continue to result in reductions from historical levels in per-patient revenue. The federal government has implemented, through the Medicare program, the resource-based relative value scale (RBRVS) payment methodology for
physicians services. The RBRVS is a fee schedule that, except for certain geographical and other adjustments, pays similarly situated physicians the same amount for the same services. The RBRVS is adjusted each year and is subject to increases
or decreases at the discretion of Congress. To date, the implementation of RBRVS has reduced payment rates for certain of the procedures historically perform by the Companys affiliated physicians. There can be no assurance that any reduced
operating margins could be recouped by through cost reductions, increased volume, and introduction of additional procedures or otherwise.



Rates paid by non-governmental insurers, including those that provide Medicare supplemental insurance, are based on established physician, ambulatory surgery center and
hospital charges, and are generally higher than Medicare payment rates. A change in the makeup of the patient mix of the Companys ancillary services that results in a decrease in patients covered by private insurance or a shift by private
payors to RBRVS or similar payment structures could adversely affect the Companys business, financial condition and results of operations.



21



---

| | Laws Severely Restrict Physicians Ability to Make Referrals Which Could Impact Our Business
|- | -------------------------------------------------------------------------------------------



The Companys centers and their physicians are also subject to the Ethics in Patient Referrals Act of 1989 (the Stark Law).
Unless excepted, a physician may not make a referral of a Medicare or Medicaid patient to any clinical laboratory services provider with whom he/she has a financial relationship (either investment or compensation) for such restricted services, and
any provider who accepts such a referral may not bill for the service provided pursuant to the referral. Sanctions for violating the Stark Law can include civil monetary penalties and exclusion from Medicare and Medicaid. In August 1993, Congress
passed legislation (Stark II) that, effective January 1, 1995, expanded the self-referral ban to include a number of healthcare services provided by entities with which the physicians may have an ownership interest or are a part of a
physicians private practice do not apply to the restrictions. Violation of the Stark Law or Stark II or related state laws by the Company may have a materially adverse effect on the Company.



| | Corporate Practice of Medicine Regulations Will Affect the Way We Transact Business in Certain States
|- | -----------------------------------------------------------------------------------------------------



Organizations that employ physicians directly or exercise significant control over a
physicians practice may be subject to challenge in states that prohibit the corporate practice of medicine. In states that still prohibit the corporate practice of medicine, agreements with physicians must provide the physicians with
sufficient control over their practices to avoid being deemed employees for corporate practice purposes. Violation of the corporate practice of medicine laws by the Company which presently has operations in Colorado and Illinois and expects to have
operations in North Dakota, South Carolina, North Carolina and California (all of which prohibit the corporate practice of medicine) may have a materially adverse effect on the Company.



| | Many States Prohibit Fee-Splitting Which Will Limit Our Expansion Plans
|- | -----------------------------------------------------------------------



The laws of many states prohibit physicians from splitting fees with non-physicians (or other physicians) and prohibit non-physician
entities from practicing medicine. These laws vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. The Companys business operations have not been the subject of judicial or regulatory
interpretation; thus, there can be no assurance that review of the Companys business by courts or regulatory authorities will not result in determinations that could materially adversely affect its operations of the Company, or that the
healthcare regulatory environment will not change so as to restrict the Companys operations or their expansion. In addition, the regulatory framework of certain jurisdictions may limit the Companys expansion into such jurisdictions if
they are unable to modify their operational structure to conform to such regulatory framework.



| | The Company May Face Increased Scrutiny by Medicare and Medicaid
|- | ----------------------------------------------------------------



Federal law prohibits the offer, payment, solicitation or receipt of any form of remuneration in return or, or in order to induce: (i) the referral of a person in
connection with the provision of medical services; (ii) the furnishing or arranging for the furnishing of items or services reimbursable under Medicare and Medicaid programs; and (iii) the purchase, lease, order, arranging or recommending of any
items or service reimbursable under Medicare or Medicaid (the Anti-Kickback Law). Pursuant to the Anti-Kickback Law, the federal government has announced a policy of increased scrutiny of joint ventures and other transactions among
health care providers in an effort to reduce potential fraud and abuse relating to Medicare costs. The applicability of this policy to many business transactions in the health care industry will be subject to continuing judicial and regulatory
interpretation. Although the Company believes its operations and structure do not violate the Anti-Kickback Law, there can be no assurance that its activities will not be challenged by regulatory authorities. If such a challenge were successful, it
could have a material adverse effect on the business, financial condition and results of operations of the Company. Noncompliance with the Anti-Kickback Law can result in exclusion from Medicare and Medicaid programs and civil and criminal
penalties.



22



---

|ITEM 3. |  | CONTROLS AND PROCEDURES
|------- |  | -----------------------



The Companys Chief Executive Officer and Chief Financial Officer (collectively the Certifying Officers) are responsible for establishing
and maintaining disclosure controls and procedures for the Company. Such officers have concluded (based upon their evaluation of these controls and procedures as of a date within 90 days of the filing of this report) that the Companys
disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in this report is accumulated and communicated to the Companys management, including its principal executive officers as
appropriate, to allow timely decisions regarding required disclosure.



The Certifying Officers also have indicated that there were no significant changes in the Companys internal controls or other factors that could significantly affect such controls subsequent to the date of their evaluation, and there
were no corrective actions with regard to significant deficiencies and material weaknesses.



PART II  OTHER INFORMATION



|Item 1. |  | Legal Proceedings
|------- |  | -----------------



NONE



|Item 2. |  | Changes in Securities
|------- |  | ---------------------



Between July 1, 2003 and September 30, 2003, through a Board authorized private placement of our stock, the Company sold 14,544 shares of common stock for
$30,750 to accredited investors. The Company paid no commissions with respect to these transactions.



On August 8, 2003, 1,375,000 shares of common stock were issued to John Vick and his assigns as partial initial consideration for the acquisition of
Associated Physicians Group, Ltd.



Between July 1, 2003 and
September 30, 2003 there were no common stock shares issued for the exercise of vested stock options.



Between July 1, 2003 and September 30, 2003 a total of 60,000 common stock shares were issued for the exercise of vested warrants.



In connection with these transactions we relied on the exemptions from
registration provided by Rule 506, Regulation D and Section 4(2) of the Securities Act. We believe that all of the purchasers were Accredited Investors. All of the purchasers represented that they were acquiring the shares for investment
purposes, and the certificates issued were appropriately restricted.



|Item 3. |  | Defaults Upon Senior Securities
|------- |  | -------------------------------



NONE



|Item 4. |  | Submission of Matters to a Vote of Security Holders
|------- |  | ---------------------------------------------------



NONE



|Item 5. |  | Other Information
|------- |  | -----------------



The Company entered into Amended and Restated Employment Agreements with its CEO, Randy Lubinsky, and CFO, Mark Szparka, on August 1, 2003. A copy of said
Agreements are attached hereto as Exhibits 10.1 and 10.2, respectively.



23



---

|Item 6. |  | Exhibits and Reports on Form 8-K
|------- |  | --------------------------------



|(a) | Exhibit Index
|--- | -------------



|No.  |  | Description                                                                                                             
|---- |  | ------------------------------------------------------------------------------------------------------------------------
|     | 
|10.1 |  | Amended and Restated Employment Agreement by and between Paincare Holdings Inc. and Randy Lubinsky dated August 1, 2003.
|     | 
|10.2 |  | Amended and Restated Employment Agreement by and between Paincare Holdings, Inc. and Mark Szporka dated August 1, 2003. 
|     | 
|31.1 |  | Certification by CEO pursuant to 18 USC Section 1350as adopted by Section 302 of the Sarbanes-Oxley Act of 2002        
|     | 
|31.2 |  | Certification by CFO pursuant to 18 USC Section 1350as adopted by Section 302 of the Sarbanes-Oxley Act of 2002.       
|     | 
|32.1 |  | Certification by CEO pursuant to 18 USC Section 1350as adopted by Section 906 of the Sarbanes-Oxley Act of 2002        
|     | 
|32.2 |  | Certification by CFO pursuant to 18 USC Section 1350as adopted by Section 906 of the Sarbanes-Oxley Act of 2002.       



|(b) | Reports on Form 8-K
|--- | -------------------



A Form 8-K was filed by the Company with the SEC on August 15, 2003.



24



---

SIGNATURES



In accordance with Section 13 or 15
(d) of the Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



|                        |  |  |  | PainCare Holdings, Inc.                  
|----------------------- |  |  |  | -----------------------------------------
|                        |  | 
|Date: November 11, 2003 |  |  |  | /s/ Randy A. Lubinsky                    
|                        |  |  | 
|                        |  |  |  | Randy A. Lubinsky Chief Executive Officer



|                        |  |  |  |                                     
|----------------------- |  |  |  | ------------------------------------
|                        |  | 
|Date: November 11, 2003 |  |  |  | /s/ Mark Szporka                    
|                        |  |  | 
|                        |  |  |  | Mark Szporka Chief Financial Officer



25