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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-Q



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Quarterly Report Pursuant to Section 13 or 15(d)

of the Securities Exchange Act of 1934

For the Quarterly Period Ended June 30, 2006

Commission File Number 1-14160



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PainCare Holdings, Inc.

(Exact Name of Registrant as Specified in
its Charter)



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

1030 N. Orange Avenue, Suite 105, Orlando, Florida 32801

(Address of Principal Executive Offices)

(407) 367-0944

(Registrants Telephone Number)



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Indicate by check mark whether the registrant
(1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.    Yes  x    No ̈

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

Large
Accelerated Filer ̈Accelerated Filer  x    Non-Accelerated Filer ̈

As of August 10, 2006 there were 65,836,016 outstanding shares of the Registrants common stock, $0.0001 par value.



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PAINCARE HOLDINGS, INC.

INDEX



|        |  |          |  |                                                                                                            |  |   
|------- |  | -------- |  | ---------------------------------------------------------------------------------------------------------- |  | --
|PART I  |  |          |  | FINANCIAL INFORMATION                                                                                      |  |   
|        |  |          | 
|        |  | Item 1.  |  | Financial Statements                                                                                       |  | 3 
|        |  |          |  | Consolidated Balance Sheets as of June 30, 2006 (Unaudited) and December 31, 2005 (Audited)                |  | 3 
|        |  |          |  | Consolidated Statement of Operations for the three and six months ended June 30, 2006 and 2005 (Unaudited) |  | 4 
|        |  |          |  | Consolidated Statements of Cash Flows for the six months ended June 30, 2006 and 2005 (Unaudited)          |  | 5 
|        |  |          |  | Consolidated Statements of Stockholders Equity for the six months ended June 30, 2006 (Unaudited)         |  | 6 
|        |  |          |  | Notes to Consolidated Financial Statements (Unaudited)                                                     |  | 7 
|        |  | Item 2.  |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                      |  | 27
|        |  | Item 3.  |  | Quantitative and Qualitative Disclosures About Market Risk                                                 |  | 35
|        |  | Item 4.  |  | Controls and Procedures                                                                                    |  | 36
|        |  |          | 
|PART II |  |          |  | OTHER INFORMATION                                                                                          |  |   
|        |  |          | 
|        |  | Item 1.  |  | Legal Proceedings                                                                                          |  | 38
|        |  | Item 1A. |  | Risk Factors                                                                                               |  | 39
|        |  | Item 2.  |  | Unregistered Sales of Equity Securities and Use of Proceeds                                                |  | 53
|        |  | Item 3.  |  | Defaults Upon Senior Securities                                                                            |  | 54
|        |  | Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                        |  | 54
|        |  | Item 5.  |  | Other Information                                                                                          |  | 54
|        |  | Item 6.  |  | Exhibits                                                                                                   |  | 54
|        |  |          |  | Signatures                                                                                                 |  | 55



2



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PART I

ITEM 1. FINANCIAL STATEMENTS

PAINCARE HOLDINGS, INC.

Consolidated Balance Sheets

As of June 30, 2006 and December 31, 2005



|                                                                                                                       |  |               |             |   |                   |   |             |  
|---------------------------------------------------------------------------------------------------------------------- |  | ------------- | ----------- | - | ----------------- | - | ----------- | -
|                                                                                                                       |  | June 30, 2006 |             |   | December 31, 2005 |  
|                                                                                                                       |  | (Unaudited)   |             |   |                   |  
|Assets                                                                                                                 |  |               |             |   |                   |   |             |  
|Current assets:                                                                                                        |  |               |             |   |                   |   |             |  
|Cash and cash equivalents                                                                                              |  | $             | 6,249,412   |   |                   | $ | 22,713,165  |  
|Accounts receivable, net                                                                                               |  |               | 26,313,430  |   |                   |   | 21,263,405  |  
|Due from stockholders                                                                                                  |  |               | 2,733,420   |   |                   |   |            |  
|Deposits and prepaid expenses                                                                                          |  |               | 2,950,435   |   |                   |   | 2,557,492   |  
|Deferred tax asset                                                                                                     |  |               | 1,042,033   |   |                   |   | 683,391     |  
|                                                                                                                       |  |               |             |   |                   |   |             |  
|Total current assets                                                                                                   |  |               | 39,288,730  |   |                   |   | 47,217,453  |  
|Property and equipment, net                                                                                            |  |               | 12,697,511  |   |                   |   | 11,494,656  |  
|Goodwill, net                                                                                                          |  |               | 139,812,167 |   |                   |   | 111,468,292 |  
|Due from stockholder                                                                                                   |  |               |            |   |                   |   | 427,553     |  
|Deferred tax asset                                                                                                     |  |               |            |   |                   |   | 867,854     |  
|Other assets                                                                                                           |  |               | 16,897,250  |   |                   |   | 11,834,822  |  
|                                                                                                                       |  |               |             |   |                   |   |             |  
|Total assets                                                                                                           |  | $             | 208,695,658 |   |                   | $ | 183,310,630 |  
|                                                                                                                       |  |               |             |   |                   |   |             |  
|Liabilities and Stockholders Equity                                                                                   |  |               |             |   |                   |   |             |  
|Liabilities:                                                                                                           |  |               |             |   |                   |   |             |  
|Accounts payable and accrued expenses                                                                                  |  | $             | 3,899,135   |   |                   | $ | 3,522,714   |  
|Accrued compensation expense                                                                                           |  |               | 17,142,549  |   |                   |   | 17,142,549  |  
|Derivative liabilities                                                                                                 |  |               |            |   |                   |   | 12,952,455  |  
|Acquisition consideration payable                                                                                      |  |               | 2,554,000   |   |                   |   | 8,011,567   |  
|Common stock payable                                                                                                   |  |               |            |   |                   |   | 5,405,601   |  
|Income tax payable                                                                                                     |  |               | 1,420,409   |   |                   |   | 3,003,766   |  
|Current portion of notes payable                                                                                       |  |               | 12,699,012  |   |                   |   | 3,883,012   |  
|Current portion of convertible debentures                                                                              |  |               | 8,334,717   |   |                   |   | 8,519,131   |  
|Current portion of capital lease obligations                                                                           |  |               | 1,573,664   |   |                   |   | 1,646,378   |  
|                                                                                                                       |  |               |             |   |                   |   |             |  
|Total current liabilities                                                                                              |  |               | 47,623,486  |   |                   |   | 64,087,173  |  
|                                                                                                                       |  |              
|Notes payable, less current portion                                                                                    |  |               | 24,282,363  |   |                   |   | 26,129,569  |  
|Convertible debentures, less current portion                                                                           |  |               | 1,184,944   |   |                   |   | 1,133,877   |  
|Capital lease obligations, less current portion                                                                        |  |               | 2,886,440   |   |                   |   | 2,872,708   |  
|Deferred tax liability                                                                                                 |  |               | 311,198     |   |                   |   |            |  
|                                                                                                                       |  |               |             |   |                   |   |             |  
|Total liabilities                                                                                                      |  |               | 76,288,431  |   |                   |   | 94,223,327  |  
|                                                                                                                       |  |               |             |   |                   |   |             |  
|Minority interests in consolidated subsidiaries                                                                        |  |               | 2,505,516   |   |                   |   | 1,763,838   |  
|                                                                                                                       |  |               |             |   |                   |   |             |  
|Commitments and contingencies                                                                                          |  |               |             |   |                   |   |             |  
|Stockholders equity:                                                                                                  |  |               |             |   |                   |   |             |  
|Common stock, $.0001 par value. Authorized 200,000,000 shares; issued and outstanding 65,686,016 and 55,823,026 shares |  |               | 6,569       |   |                   |   | 5,582       |  
|Preferred stock, $.0001 par value. Authorized 10,000,000 shares; issued and outstanding -0- shares                     |  |               |            |   |                   |   |            |  
|Additional paid in capital                                                                                             |  |               | 137,719,608 |   |                   |   | 106,253,345 |  
|Accumulated deficit                                                                                                    |  |               | (7,901,081  | ) |                   |   | (18,983,089 | )
|Accumulated other comprehensive income                                                                                 |  |               | 76,615      |   |                   |   | 47,627      |  
|                                                                                                                       |  |               |             |   |                   |   |             |  
|Total stockholders equity                                                                                             |  |               | 129,901,711 |   |                   |   | 87,323,465  |  
|                                                                                                                       |  |               |             |   |                   |   |             |  
|Total liabilities and stockholders equity                                                                             |  | $             | 208,695,658 |   |                   | $ | 183,310,630 |  
|                                                                                                                       |  |               |             |   |                   |   |             |  

See accompanying notes to consolidated financial statements.



3



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PAINCARE HOLDINGS, INC.

Consolidated Statements of Operations

For the Three and Six Months Ended June 30, 2006 and 2005 (Unaudited)



|                                                                |  |                                     |            |   |                                   |   |            |      |  |   |               |   |  |   |             |  
|--------------------------------------------------------------- |  | ----------------------------------- | ---------- | - | --------------------------------- | - | ---------- | ---- |  | - | ------------- | - |  | - | ----------- | -
|                                                                |  | For the Three Months Ended June 30, |            |   | For the Six Months Ended June 30, |  
|                                                                |  | 2006                                |            |   | 2005                              |   |            | 2006 |  |   | 2005          |  
|                                                                |  |                                     |            |   | (As restated)                     |   |            |      |  |   | (As restated) |  
|Revenues:                                                       |  |                                     |            |   |                                   |   |            |      |  |   |               |   |  |   |             |  
|Pain management                                                 |  | $                                   | 12,485,143 |   |                                   | $ | 9,794,283  |      |  | $ | 25,714,642    |   |  | $ | 19,055,347  |  
|Surgeries                                                       |  |                                     | 1,604,047  |   |                                   |   | 2,301,230  |      |  |   | 3,485,077     |   |  |   | 3,705,033   |  
|Ancillary services                                              |  |                                     | 9,502,122  |   |                                   |   | 3,792,340  |      |  |   | 17,700,067    |   |  |   | 7,364,213   |  
|                                                                |  |                                     |            |   |                                   |   |            |      |  |   |               |   |  |   |             |  
|Total revenues                                                  |  |                                     | 23,591,312 |   |                                   |   | 15,887,853 |      |  |   | 46,899,786    |   |  |   | 30,124,593  |  
|                                                                |  |                                     |            |  
|Cost of revenues                                                |  |                                     | 5,370,006  |   |                                   |   | 2,434,558  |      |  |   | 10,110,740    |   |  |   | 5,015,781   |  
|                                                                |  |                                     |            |   |                                   |   |            |      |  |   |               |   |  |   |             |  
|Gross profit                                                    |  |                                     | 18,221,306 |   |                                   |   | 13,453,295 |      |  |   | 36,789,046    |   |  |   | 25,108,812  |  
|                                                                |  |                                     |            |  
|General and administrative expense                              |  |                                     | 15,455,145 |   |                                   |   | 981,758    |      |  |   | 28,061,948    |   |  |   | 26,316,057  |  
|Amortization expense                                            |  |                                     | 626,074    |   |                                   |   | 285,131    |      |  |   | 1,117,405     |   |  |   | 532,899     |  
|Depreciation expense                                            |  |                                     | 548,095    |   |                                   |   | 241,526    |      |  |   | 1,171,595     |   |  |   | 505,877     |  
|                                                                |  |                                     |            |   |                                   |   |            |      |  |   |               |   |  |   |             |  
|Operating income (loss)                                         |  |                                     | 1,591,992  |   |                                   |   | 11,944,880 |      |  |   | 6,438,098     |   |  |   | (2,246,021  | )
|                                                                |  |                                     |            |  
|Interest expense                                                |  |                                     | 2,095,721  |   |                                   |   | 1,292,490  |      |  |   | 4,027,915     |   |  |   | 2,191,410   |  
|Derivative expense (benefit)                                    |  |                                     | (98,396    | ) |                                   |   | (4,992,151 | )    |  |   | (10,492,951   | ) |  |   | 13,246,747  |  
|Other income                                                    |  |                                     | 311,428    |   |                                   |   | 114,361    |      |  |   | 453,537       |   |  |   | 143,383     |  
|                                                                |  |                                     |            |   |                                   |   |            |      |  |   |               |   |  |   |             |  
|Income (loss) before income taxes                               |  |                                     | (93,905    | ) |                                   |   | 15,758,902 |      |  |   | 13,356,671    |   |  |   | (17,540,795 | )
|                                                                |  |                                     |            |  
|Provision (benefit) for income taxes                            |  |                                     | 315,717    |   |                                   |   | 4,551,003  |      |  |   | 1,504,324     |   |  |   | (985,062    | )
|                                                                |  |                                     |            |   |                                   |   |            |      |  |   |               |   |  |   |             |  
|Income (loss) before minority interests                         |  |                                     | (409,622   | ) |                                   |   | 11,207,899 |      |  |   | 11,852,347    |   |  |   | (16,555,733 | )
|                                                                |  |                                     |            |  
|Minority interests in net earnings of consolidated subsidiaries |  |                                     | 396,469    |   |                                   |   | 97,072     |      |  |   | 770,339       |   |  |   | 97,072      |  
|                                                                |  |                                     |            |   |                                   |   |            |      |  |   |               |   |  |   |             |  
|Net income (loss)                                               |  | $                                   | (806,091   | ) |                                   | $ | 11,110,827 |      |  | $ | 11,082,008    |   |  | $ | (16,652,805 | )
|                                                                |  |                                     |            |   |                                   |   |            |      |  |   |               |   |  |   |             |  
|                                                                |  |                                     |            |  
|Basic income (loss) per common share                            |  | $                                   | (0.01      | ) |                                   | $ | 0.22       |      |  | $ | 0.18          |   |  | $ | (0.37       | )
|                                                                |  |                                     |            |   |                                   |   |            |      |  |   |               |   |  |   |             |  
|Basic weighted average common shares outstanding                |  |                                     | 64,482,619 |   |                                   |   | 51,621,811 |      |  |   | 63,011,366    |   |  |   | 44,412,972  |  
|                                                                |  |                                     |            |   |                                   |   |            |      |  |   |               |   |  |   |             |  
|Diluted income (loss) per common share                          |  | $                                   | (0.01      | ) |                                   | $ | 0.18       |      |  | $ | 0.16          |   |  | $ | (0.37       | )
|                                                                |  |                                     |            |   |                                   |   |            |      |  |   |               |   |  |   |             |  
|Diluted weighted average common shares outstanding              |  |                                     | 64,482,619 |   |                                   |   | 61,803,873 |      |  |   | 71,718,631    |   |  |   | 44,412,972  |  
|                                                                |  |                                     |            |   |                                   |   |            |      |  |   |               |   |  |   |             |  

See accompanying notes to consolidated financial statements.



4



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PAINCARE HOLDINGS, INC.

Consolidated Statements of Cash Flows

For the Six Months Ended June 30, 2006 and 2005 (Unaudited)



|                                                                                         |  |      |             |   |               |   |             |  
|---------------------------------------------------------------------------------------- |  | ---- | ----------- | - | ------------- | - | ----------- | -
|                                                                                         |  | 2006 |             |   | 2005          |  
|                                                                                         |  |      |             |   | (As restated) |  
|Cash flows from operating activities:                                                    |  |      |             |   |               |   |             |  
|Net income (loss)                                                                        |  | $    | 11,082,008  |   |               | $ | (16,652,805 | )
|Adjustments to reconcile net income (loss) to net cash provided by operating activities: |  |      |             |   |               |   |             |  
|Depreciation and amortization                                                            |  |      | 2,289,000   |   |               |   | 1,038,776   |  
|Non-cash transactions and other                                                          |  |      | 431,373     |   |               |   | 42,112      |  
|Amortization of debt discount                                                            |  |      | 1,367,078   |   |               |   | 1,196,210   |  
|Common stock issued for debenture interest payments                                      |  |      | 196,050     |   |               |   | 599,067     |  
|Derivative (benefit) expense                                                             |  |      | (10,492,951 | ) |               |   | 13,246,747  |  
|Deferred income taxes                                                                    |  |      | 385,474     |   |               |   | (4,145,762  | )
|Amortization of deferred financing expenses                                              |  |      | (37,014     | ) |               |   | (475,717    | )
|Non-cash compensation expense                                                            |  |      | 1,182,015   |   |               |   | 11,977,160  |  
|Minority interests                                                                       |  |      | 770,339     |   |               |   | 97,072      |  
|                                                                                         |  |     
|Change in operating assets and liabilities, net of assets acquired:                      |  |      |             |   |               |   |             |  
|Accounts receivable                                                                      |  |      | (2,996,560  | ) |               |   | (3,248,097  | )
|Deposits and prepaid expenses                                                            |  |      | 107,294     |   |               |   | (923,059    | )
|Other assets                                                                             |  |      | (102,396    | ) |               |   | (1,375,831  | )
|Interest payable                                                                         |  |      |            |   |               |   | (59,075     | )
|Income tax payable                                                                       |  |      | (1,583,357  | ) |               |   | 455,009     |  
|Accounts payable and accrued expenses                                                    |  |      | (712,817    | ) |               |   | 616,976     |  
|                                                                                         |  |      |             |   |               |   |             |  
|Net cash provided by operating activities                                                |  |      | 1,885,536   |   |               |   | 2,388,783   |  
|                                                                                         |  |      |             |   |               |   |             |  
|Cash flows from investing activities:                                                    |  |      |             |   |               |   |             |  
|Purchase of property and equipment                                                       |  |      | (1,022,302  | ) |               |   | (562,185    | )
|Cash paid for earnouts                                                                   |  |      | (7,705,992  | ) |               |   | (3,960,833  | )
|Cash used for acquisitions                                                               |  |      | (9,982,214  | ) |               |   | (16,283,479 | )
|Cash from acquisitions                                                                   |  |      | 655,556     |   |               |   | 127,712     |  
|                                                                                         |  |      |             |   |               |   |             |  
|Net cash used in investing activities                                                    |  |      | (18,054,952 | ) |               |   | (20,678,785 | )
|                                                                                         |  |      |             |   |               |   |             |  
|Cash flows from financing activities:                                                    |  |      |             |   |               |   |             |  
|Proceeds from issuance of common stock, net of capital offering costs                    |  |      | 4,090,707   |   |               |   | 424,362     |  
|Payments of capital lease obligations                                                    |  |      | (879,755    | ) |               |   | (773,526    | )
|Payment of convertible debentures                                                        |  |      |            |   |               |   | (135,500    | )
|Due from stockholders                                                                    |  |      | (2,294,643  | ) |               |   | (495,202    | )
|Cash distributions to minority interests                                                 |  |      | (458,646    | ) |               |   |            |  
|Net proceeds from (payments on) notes payable                                            |  |      | (752,000    | ) |               |   | 12,400,119  |  
|                                                                                         |  |      |             |   |               |   |             |  
|Net cash provided by (used in) financing activities                                      |  |      | (294,337    | ) |               |   | 11,420,253  |  
|                                                                                         |  |      |             |   |               |   |             |  
|Net decrease in cash and cash equivalents                                                |  |      | (16,463,753 | ) |               |   | (6,869,749  | )
|Cash and cash equivalents at beginning of period                                         |  |      | 22,713,165  |   |               |   | 19,100,840  |  
|                                                                                         |  |      |             |   |               |   |             |  
|Cash and cash equivalents at end of period                                               |  | $    | 6,249,412   |   |               | $ | 12,231,091  |  
|                                                                                         |  |      |             |   |               |   |             |  
|Supplemental disclosures of cash flow information:                                       |  |      |             |   |               |   |             |  
|Cash paid during the period for interest                                                 |  | $    | 2,464,787   |   |               | $ | 439,774     |  
|Cash paid during the period for income taxes                                             |  |      | 2,538,328   |   |               |   |            |  
|Non-cash investing and financing transactions:                                           |  |      |             |   |               |   |             |  
|Common stock issued for acquisitions                                                     |  |      | 9,624,459   |   |               |   | 15,922,038  |  
|Common stock issued for earnouts                                                         |  |      | 7,481,786   |   |               |   | 4,858,807   |  
|Acquisition consideration payable                                                        |  |      | 2,554,000   |   |               |   | 2,154,300   |  
|Common stock issued for debenture conversions                                            |  |      |            |   |               |   | 15,735,237  |  
|Common stock issued for cancelled warrants                                               |  |      | 3,486,632   |   |               |   |            |  
|Common stock issued for common stock payable                                             |  |      | 5,405,601   |   |               |   |             |  

See accompanying notes to consolidated financial statements.



5



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PAINCARE HOLDINGS, INC.

Consolidated Statements of Stockholders Equity

For the Six Months Ended June 30, 2006 (Unaudited)



|                                                    |  |              |  |                            |       |                     |   |             |                                      |   |                           |   |  |   |        |  |   |            
|--------------------------------------------------- |  | ------------ |  | -------------------------- | ----- | ------------------- | - | ----------- | ------------------------------------ | - | ------------------------- | - |  | - | ------ |  | - | -----------
|                                                    |  | Common Stock |  | Additional Paid in Capital |       | Accumulated Deficit |   |             | AccumulatedOtherComprehensive Income |   | TotalStockholders Equity
|                                                    |  | Shares       |  | Amount                     |       |                     |   |            
|Balances at December 31, 2005                       |  | 55,823,026   |  | $                          | 5,582 |                     | $ | 106,253,345 |                                      | $ | (18,983,089               | ) |  | $ | 47,627 |  | $ | 87,323,465 
|Common stock issued for earnouts                    |  | 2,464,502    |  |                            | 247   |                     |   | 7,481,539   |                                      |   |                          |   |  |   |       |  |   | 7,481,786  
|Common stock issued for acquisitions                |  | 2,719,803    |  |                            | 272   |                     |   | 9,624,187   |                                      |   |                          |   |  |   |       |  |   | 9,624,459  
|Common stock options issued to employees            |  |             |  |                            |      |                     |   | 1,182,015   |                                      |   |                          |   |  |   |       |  |   | 1,182,015  
|Common stock issued for debenture interest payments |  | 63,652       |  |                            | 6     |                     |   | 196,044     |                                      |   |                          |   |  |   |       |  |   | 196,050    
|Common stock issued for private placement offering  |  | 3,305,033    |  |                            | 331   |                     |   | 9,495,977   |                                      |   |                          |   |  |   |       |  |   | 9,496,308  
|Common stock issued for cancelled warrants          |  | 1,310,000    |  |                            | 131   |                     |   | 3,486,501   |                                      |   |                          |   |  |   |       |  |   | 3,486,632  
|Components of comprehensive income:                 |  |              |  |                            |       |                     |   |             |                                      |   |                           |   |  |   |        |  |   |            
|Translation adjustment                              |  |             |  |                            |      |                     |   |            |                                      |   |                          |   |  |   | 28,988 |  |   | 28,988     
|Net income                                          |  |             |  |                            |      |                     |   |            |                                      |   | 11,082,008                |   |  |   |       |  |   | 11,082,008 
|                                                    |  |              |  |                            |       |                     |   |             |                                      |   |                           |   |  |   |        |  |   |            
|Comprehensive income                                |  |             |  |                            |      |                     |   |            |                                      |   |                          |   |  |   |       |  |   | 11,110,996 
|                                                    |  |              |  |                            |       |                     |   |             |                                      |   |                           |   |  |   |        |  |   |            
|Balances at June 30, 2006                           |  | 65,686,016   |  | $                          | 6,569 |                     | $ | 137,719,608 |                                      | $ | (7,901,081                | ) |  | $ | 76,615 |  | $ | 129,901,711
|                                                    |  |              |  |                            |       |                     |   |             |                                      |   |                           |   |  |   |        |  |   |            



6



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PainCare Holdings, Inc.

Notes to Consolidated Financial Statements (Unaudited)

(1) Organization and Basis of Presentation

Nature of the
Business

PainCare Holdings, Inc. (the Company) is a provider of pain-focused medical and surgical solutions. Through
its proprietary network of acquired or managed physician practices and ambulatory surgery centers, and in partnership with independent physician practices and medical institutions throughout the United States and Canada, PainCare is committed to
utilizing the most advanced science and technologies to diagnose and treat pain stemming from neurological and musculoskeletal conditions and disorders.

Through its majority-owned subsidiary, Amphora, the Company is also engaged in providing advanced Intraoperative Monitoring (IOM) and interpretation services to hospitals and surgeons; and through its wholly owned
subsidiary, Caperian, Inc., PainCare offers medical real estate and development services.

Presentation of Interim Statements

The accompanying unaudited consolidated 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-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the
United States for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Companys Form 10-K for the year ended December 31, 2005. In the opinion
of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included in the accompanying unaudited consolidated financial statements. The results of operations for the periods
presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year. The consolidated financial results as of and for the three and six-month periods ended June 30, 2005 have been
restated; for further information as to the restatement refer to the Companys annual report on Form 10-K for the year ended December 31, 2005 filed with the SEC on June 1, 2006.

Use of Estimates

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



7



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(2) Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying consolidated financial statements include the
accounts of PainCare Holdings, Inc. and its wholly-owned and majority-owned subsidiaries. The other parties interest in entities that are majority-owned by the Company are reported as minority interests in the consolidated financial
statements. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company operates fourteen
practices in states with laws governing the corporate practice of medicine. In those states, a corporation is precluded from owning the medical assets and practicing medicine. Therefore, contractual arrangements are effected to allow the Company to
manage the practice.

Emerging Issues Task Force No. 97-2 (EITF No. 97-2) states that consolidation can occur when a
physician practice management entity establishes an other than temporary controlling financial interest in a physician practice through contractual arrangements. All but one of the management services agreements between the Company and the physician
satisfies all of the criteria of EITF No. 97-2. The Company includes these practices in the consolidated financial statements in accordance with EITF No. 97-2.

Cash and Cash Equivalents

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

Property and Equipment

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

Property and equipment, net at June 30, 2006 and
December 31, 2005, consisted of:



|                                |  |               |            |                   |   |           
|------------------------------- |  | ------------- | ---------- | ----------------- | - | ----------
|                                |  | June 30, 2006 |            | December 31, 2005
|Furniture, fixtures & equipment |  | $             | 11,363,050 |                   | $ | 10,744,044
|Medical equipment               |  |               | 9,650,659  |                   |   | 7,895,215 
|                                |  |               |            |                   |   |           
|Total cost                      |  |               | 21,013,709 |                   |   | 18,639,259
|Less accumulated depreciation   |  |               | 8,316,198  |                   |   | 7,144,603 
|                                |  |               |            |                   |   |           
|Property and equipment, net     |  | $             | 12,697,511 |                   | $ | 11,494,656
|                                |  |               |            |                   |   |           



8



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Valuation of Goodwill and Intangible Assets

Goodwill acquired in purchase business combinations and determined to have an infinite useful life is not amortized, but instead tested for impairment at
least annually. In accordance with SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142), the Company conducts, on at least an annual basis, a review of its reporting entities to determine whether the carrying
values of goodwill exceed the fair market value using a combination of the income or discounted cash flow approach and the market approach, which uses comparable market data, for each entity. Should this be the case, the value of its goodwill may be
impaired and written down. Identified intangible assets are amortized over their estimated useful lives.

Income Taxes

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

The recording of a net deferred tax asset assumes the realization
of such asset in the future, otherwise a valuation allowance must be recorded to reduce this asset to its net realizable value. The Company considers future pretax income and, if necessary, ongoing prudent and feasible tax planning strategies in
assessing the need for such a valuation allowance. In the event that the Company determines that it may not be able to realize all or part of the net deferred tax asset in the future, a valuation allowance for the deferred tax asset is charged
against income in the period such determination is made. The Company has not recorded any valuation allowances as of June 30, 2006 or 2005. The Company anticipates that it will generate sufficient pretax income in the future to realize its
deferred tax assets.

Fair Value Disclosures

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

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

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

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



9



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Revenue Recognition

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

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

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

(3) Categories of Revenue by Operating Segment

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

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



10



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|                        |  |                                          |            |           |   |                    |  |           |            |  |        |             |   |  |   |            |  
|----------------------- |  | ---------------------------------------- | ---------- | --------- | - | ------------------ |  | --------- | ---------- |  | ------ | ----------- | - |  | - | ---------- | -
|                        |  | For the Three Months Ended June 30, 2006 |           
|                        |  | Pain Mgmt                                |            | Surgeries |   | Ancillary Services |  | Corporate |            |  | Totals |            
|Revenues                |  | $                                        | 12,485,143 |           | $ | 1,604,047          |  | $         | 9,502,122  |  | $      |            |   |  | $ | 23,591,312 |  
|Operating income (loss) |  |                                          | 3,275,756  |           |   | 169,779            |  |           | 3,677,856  |  |        | (5,531,399  | ) |  |   | 1,591,992  |  
|                        | 
|                        |  | For the Three Months Ended June 30, 2005 |           
|                        |  | Pain Mgmt                                |            | Surgeries |   | Ancillary Services |  | Corporate |            |  | Totals |            
|Revenues                |  | $                                        | 9,794,283  |           | $ | 2,301,230          |  | $         | 3,792,340  |  | $      |            |   |  | $ | 15,887,853 |  
|Operating income (loss) |  |                                          | 5,613,722  |           |   | 774,835            |  |           | 1,485,353  |  |        | 4,070,970   |   |  |   | 11,944,880 |  
|                        | 
|                        |  | For the Six Months Ended June 30, 2006   |           
|                        |  | Pain Mgmt                                |            | Surgeries |   | Ancillary Services |  | Corporate |            |  | Totals |            
|Revenues                |  | $                                        | 25,714,642 |           | $ | 3,485,077          |  | $         | 17,700,067 |  | $      |            |   |  | $ | 46,899,786 |  
|Operating income (loss) |  |                                          | 7,756,394  |           |   | 655,994            |  |           | 6,426,784  |  |        | (8,401,074  | ) |  |   | 6,438,098  |  
|                        | 
|                        |  | For the Six Months Ended June 30, 2005   |           
|                        |  | Pain Mgmt                                |            | Surgeries |   | Ancillary Services |  | Corporate |            |  | Totals |            
|Revenues                |  | $                                        | 19,055,347 |           | $ | 3,705,033          |  | $         | 7,364,212  |  | $      |            |   |  | $ | 30,124,592 |  
|Operating income (loss) |  |                                          | 9,816,015  |           |   | 1,205,473          |  |           | 2,727,527  |  |        | (15,995,036 | ) |  |   | (2,246,021 | )

These items, appearing in the Statements of Operations, are not allocated to the companys
operating segments: interest expense, derivative expense (benefit), and other income. Total assets of the operating segments have materially changed since December 31, 2005 as a result of the companys acquisitions, as described in Note 7.



Pain management revenue, expense and income are attributable to five
owned and eleven managed practices that primarily offer physician services for pain management and physiatry. With respect to one of our managed practices, we only include the revenue recognized from management fees earned. Surgery revenue, expense
and income are attributable to two owned and one managed physician practices that offer surgical physician services, including minimally invasive spine surgery. Ancillary service revenue, expense and income are attributable to two managed practices
that primarily offer orthopedic rehabilitation services. We have 34 practices under limited management agreements, including orthopedic rehabilitation, electrodiagnostic medicine and real estate services.

(4) Income Per Common Share

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



|                                                                            |  |                                     |            |                                   |      |   |            |  |      |            |  |   |             |  
|--------------------------------------------------------------------------- |  | ----------------------------------- | ---------- | --------------------------------- | ---- | - | ---------- |  | ---- | ---------- |  | - | ----------- | -
|                                                                            |  | For the Three Months Ended June 30, |            | For the Six Months Ended June 30, |     
|                                                                            |  | 2006                                |            |                                   | 2005 |   | 2006       |  | 2005 |           
|Basic income (loss) per common share:                                       |  |                                     |            |                                   |      |   |            |  |      |            |  |   |             |  
|Net income (loss) available to common shareholders                          |  | $                                   | (806,091   | )                                 |      | $ | 11,110,827 |  | $    | 11,082,008 |  | $ | (16,652,805 | )
|                                                                            |  |                                     |            |                                   |      |   |            |  |      |            |  |   |             |  
|Basic weighted average common shares outstanding                            |  |                                     | 64,482,619 |                                   |      |   | 51,621,811 |  |      | 63,011,366 |  |   | 44,412,972  |  
|                                                                            |  |                                     |            |                                   |      |   |            |  |      |            |  |   |             |  
|Basic income (loss) per common share                                        |  | $                                   | (0.01      | )                                 |      | $ | 0.22       |  | $    | 0.18       |  | $ | (0.37       | )
|                                                                            |  |                                     |            |                                   |      |   |            |  |      |            |  |   |             |  
|Diluted income (loss) per common share:                                     |  |                                     |            |                                   |      |   |            |  |      |            |  |   |             |  
|                                                                            |  |                                     |            |                                  
|Net income (loss) available to common shareholders                          |  | $                                   | (806,091   | )                                 |      | $ | 11,110,827 |  | $    | 11,082,008 |  | $ | (16,652,805 | )
|Plus impact of assumed conversions                                          |  |                                     |            |                                   |      |   |            |  |      |            |  |   |             |  
|Interest expense on 7.5% convertible note due 2006, net of tax              |  |                                     |           |                                   |      |   | 104,114    |  |      | 225,000    |  |   |            |  
|Interest expense on 7.25% convertible note due 2007, net of tax             |  |                                     |           |                                   |      |   |           |  |      |           |  |   |            |  
|Interest expense on 7.5% convertible note due 2007, net of tax              |  |                                     |           |                                   |      |   | 17,438     |  |      | 33,750     |  |   |            |  
|                                                                            |  |                                     |            |                                   |      |   |            |  |      |            |  |   |             |  
|Net income (loss) available to common shareholders plus assumed conversions |  | $                                   | (806,091   | )                                 |      | $ | 11,232,379 |  | $    | 11,340,758 |  | $ | (16,652,805 | )
|                                                                            |  |                                     |            |                                   |      |   |            |  |      |            |  |   |             |  
|Basic weighted average common shares outstanding                            |  |                                     | 64,482,619 |                                   |      |   | 51,621,811 |  |      | 63,011,366 |  |   | 44,412,972  |  
|Plus incremental shares from assumed conversions                            |  |                                     |            |                                   |      |   |            |  |      |            |  |   |             |  
|7.5% convertible note due 2006                                              |  |                                     |           |                                   |      |   | 4,713,242  |  |      | 4,713,242  |  |   |            |  
|7.25% convertible note due 2007                                             |  |                                     |           |                                   |      |   |           |  |      |           |  |   |            |  
|7.5% convertible note due 2007                                              |  |                                     |           |                                   |      |   | 789,474    |  |      | 789,474    |  |   |            |  
|Employee stock option plan for vested, in the money options                 |  |                                     |           |                                   |      |   | 3,174,115  |  |      | 2,612,773  |  |   |            |  
|Warrants issued, outstanding, and in the money                              |  |                                     |           |                                   |      |   | 1,505,231  |  |      | 256,776    |  |   |            |  
|Contingent shares for acquisitions                                          |  |                                     |           |                                   |      |   |           |  |      | 335,000    |  |   |            |  
|Initial shares for acquisitions, weighted                                   |  |                                     |           |                                   |      |   |           |  |      |           |  |   |            |  
|                                                                            |  |                                     |            |                                   |      |   |            |  |      |            |  |   |             |  
|Diluted weighted average common shares outstanding                          |  |                                     | 64,482,619 |                                   |      |   | 61,803,873 |  |      | 71,718,631 |  |   | 44,412,972  |  
|                                                                            |  |                                     |            |                                   |      |   |            |  |      |            |  |   |             |  
|Diluted income (loss) per common share                                      |  | $                                   | (0.01      | )                                 |      | $ | 0.18       |  | $    | 0.16       |  | $ | (0.37       | )
|                                                                            |  |                                     |            |                                   |      |   |            |  |      |            |  |   |             |  



11



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Potentially dilutive shares at June 30, 2006 of approximately 1,781,419 shares were not included in
the diluted weighted average shares as their inclusion would be anti-dilutive.

Potentially dilutive securities for options, warrants, and
contingent shares were 1,395,781, 162,305, and 223,333 respectively.

Potentially dilutive shares at June 30, 2005 of approximately
9,973,026 shares were not included in the diluted weighted average shares as their inclusion would be anti-dilutive.

Potentially dilutive
securities for options, warrants, and convertible debentures were 3,063,152, 1,407,158 and 5,502,716 respectively.

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

(5) Income Taxes

The income tax provision for the three and six months ended June 30, 2006 and 2005 consists of the following:



|                                                           |  |                                     |          |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|---------------------------------------------------------- |  | ----------------------------------- | -------- | - | --------------------------------- | - | ---------- | ---- |  | - | ---------- | - |  | - | ---------- | -
|                                                           |  | For the Three Months Ended June 30, |          |   | For the Six Months Ended June 30, |  
|                                                           |  | 2006                                |          |   | 2005                              |   |            | 2006 |  |   | 2005       |  
|Computed expected tax expense (benefit)                  |  | $                                   | (166,727 | ) |                                   | $ | 5,325,022  |      |  | $ | 4,279,353  |   |  | $ | (5,996,875 | )
|Increase (reduction) in income tax expense resulting from: |  |                                     |          |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Derivative (benefit) expense                               |  |                                     | (33,455  | ) |                                   |   | (1,697,331 | )    |  |   | (3,567,603 | ) |  |   | 4,503,894  |  
|Derivative interest expense                                |  |                                     | 177,271  |   |                                   |   | 252,095    |      |  |   | 310,376    |   |  |   | 430,834    |  
|State income taxes, net of federal income tax benefit      |  |                                     | 577      |   |                                   |   | 564,282    |      |  |   | 138,615    |   |  |   | (117,840   | )
|Assets acquired with no tax basis                          |  |                                     |         |   |                                   |   | 75,375     |      |  |   | 82,617     |   |  |   | 143,352    |  
|Other, net                                                 |  |                                     | 131,494  |   |                                   |   | 31,560     |      |  |   | 54,409     |   |  |   | 51,573     |  
|State taxes deferred                                       |  |                                     | 26,337   |   |                                   |   |           |      |  |   | 26,337     |   |  |   |           |  
|Income from flowthroughs                                   |  |                                     | 180,220  |   |                                   |   |           |      |  |   | 180,220    |   |  |   |           |  
|                                                           |  |                                     |          |   |                                   |   |            |      |  |   |            |   |  |   |            |  
|Total                                                      |  | $                                   | 315,717  |   |                                   | $ | 4,551,003  |      |  | $ | 1,504,324  |   |  | $ | (985,062   | )
|                                                           |  |                                     |          |   |                                   |   |            |      |  |   |            |   |  |   |            |  

(6) Other Assets

The Company entered into a distribution agreement with MedX96, Inc. on May 1, 2002. The agreement allowed the Company to market and sell MedX equipment in return for a 50% commission of the gross selling price of
all equipment sold to the Company and our affiliates. MedX96, Inc. received 15% of the revenue generated by the Company and our affiliates. The equipment is used to provide orthopedic rehabilitation services in our owned, managed, and limited
managed physician



12



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practices. The contract was amended on July 28, 2003 and provides for the Company to repurchase MedXs right to
15% of the gross collections generated by the limited managed orthopedic rehabilitation practices. In addition, the Company receives a 25% commission on all MedX products purchased for resale. This contract right is being amortized over the contract
term of ten years.

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

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

The Company has costs associated with closing acquisitions. These costs are deferred as an
asset until the acquisition is closed, at which time they are either allocated to the acquisition costs or expensed if a potential acquisition is not closed.

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

The table below
summarizes the other assets at June 30, 2006 and December 31, 2005:



|                                                   |  |            |            |                          |   |           |  |            |            |                          |   |            |  |   |           |  |   |           
|-------------------------------------------------- |  | ---------- | ---------- | ------------------------ | - | --------- |  | ---------- | ---------- | ------------------------ | - | ---------- |  | - | --------- |  | - | ----------
|                                                   |  | 2006       |            | 2005                    
|Asset                                              |  | Total Cost |            | Accumulated Amortization |   | Net Value |  | Total Cost |            | Accumulated Amortization |   | Net Value 
|MedX Distribution right                            |  | $          | 2,212,673  |                          | $ | 690,859   |  | $          | 1,521,814  |                          | $ | 2,212,673  |  | $ | 581,831   |  | $ | 1,630,842 
|Deferred acquisition costs                         |  |            | 65,891     |                          |   |          |  |            | 65,891     |                          |   | 475,958    |  |   |          |  |   | 475,958   
|Contract Right  DPM                               |  |            | 11,958,485 |                          |   | 1,365,473 |  |            | 10,593,012 |                          |   | 6,026,200  |  |   | 677,124   |  |   | 5,349,076 
|Contract Right  APG                               |  |            | 482,107    |                          |   | 56,834    |  |            | 425,273    |                          |   | 486,023    |  |   | 34,452    |  |   | 451,571   
|Contract Right  SPA                               |  |            | 1,419,471  |                          |   | 183,697   |  |            | 1,235,774  |                          |   | 1,433,132  |  |   | 118,657   |  |   | 1,314,475 
|Contract Right  SCPI                              |  |            | 1,041,546  |                          |   | 135,267   |  |            | 906,279    |                          |   | 1,051,564  |  |   | 87,095    |  |   | 964,469   
|Physician practice and surgery center acquisitions |  |            | 2,860,709  |                          |   | 711,502   |  |            | 2,149,207  |                          |   | 2,161,757  |  |   | 513,326   |  |   | 1,648,431 
|                                                   |  |            |            |                          |   |           |  |            |            |                          |   |            |  |   |           |  |   |           
|Total                                              |  | $          | 20,040,882 |                          | $ | 3,143,632 |  | $          | 16,897,250 |                          | $ | 13,847,307 |  | $ | 2,012,485 |  | $ | 11,834,822
|                                                   |  |            |            |                          |   |           |  |            |            |                          |   |            |  |   |           |  |   |           

(7) Acquisitions

The Company operates fourteen practices in states with laws governing the corporate practice of medicine. In those states, a corporation is precluded from owning the medical assets and practicing medicine. Therefore,
contractual arrangements are effected to allow the Company to manage the practice. FASB Emerging Issues Task Force Issue No. 97-2 (EITF No. 97-2) states that



13



---

consolidation can occur when a physician practice management entity establishes an other than temporary controlling
financial interest in a physician practice through contractual arrangements. All but one of the management services agreements between the Company and the physician satisfies all of the criteria of EITF No. 97-2. The Company includes revenue
with respect to these practices in the consolidated financials in accordance with EITF No. 97-2.

On January 3, 2006, the Company
closed an acquisition pursuant to an Asset Purchase Agreement with its wholly-owned subsidiary, PainCare Surgery Centers III, Inc. (PCSC III), and the members of Center for Pain Management ASC, LLC (CPMASC). The Asset Purchase Agreement provides for
the purchase of 100% ownership of CPMASC by PCSC III, a Florida corporation. In exchange for this acquisition the members of CPMASC received 1,021,942 shares of common stock of the Company priced at $3.44 per share and $3,750,000 in cash. In
addition, the former members of CPMASC will receive the remaining balance of the purchase price in the form of a promissory note for $7,500,000 plus interest, due in January 2007. CPMASC is a fully accredited ambulatory surgery center with four
locations in Maryland. The members of CPMASC did have a prior relationship with the Company from the acquisition of Center for Pain Management, LLC in December 2004.

CPMASC was purchased on January 3, 2006 and utilized the purchase method of accounting. During the second quarter of 2006, the purchase price was reduced by $376,788 due to a change in identifiable intangible
assets and an addition of $150,715 for deferred taxes. The net change was a $226,073 reduction in the purchase price.

Purchase price allocation:



|                                         |  |   |           
|---------------------------------------- |  | - | ----------
|Cash Consideration                       |  | $ | 3,750,000 
|Promissory Notes                         |  |   | 7,500,000 
|Stock Consideration                      |  |   | 3,515,480 
|Acquisition Costs                        |  |   | 279,923   
|Less:                                    |  |   |           
|Cash                                     |  |   | 477,845   
|Accounts receivable                      |  |   | 767,718   
|Property and equipment                   |  |   | 263,563   
|Prepaid and deposits                     |  |   | 80,035    
|Other assets                             |  |   | 47,459    
|Imputed interest on notes payable        |  |   | 215,489   
|Identifiable intangible assets           |  |   | 376,788   
|Plus:                                    |  |   |           
|Accounts payable and accrued liabilities |  |   | 86,046    
|Other liabilities                        |  |   | 696,009   
|Deferred taxes                           |  |   | 150,715   
|                                         |  |   |           
|Goodwill                                 |  | $ | 13,749,276
|                                         |  |   |           

On January 6, 2006, the Company closed a merger pursuant to a Merger Agreement with its
wholly-owned subsidiary, PainCare Acquisition Company XXII, Inc. (PNAC XXII), and REC, Inc. and CareFirst Medical Associates, P.A. (REC/CMA). The Merger Agreement provides for the acquisition of the non-medical assets of REC/CMA by PNAC XXII, a
Florida corporation. In exchange for the non-medical assets the shareholders of REC/CMA received 191,131 shares of common stock of the Company priced at $3.51 per share and $625,000 in cash. In addition, the former shareholders of REC/CMA may
receive up to $1,250,000 in additional consideration if certain net earnings goals are achieved in each of the first three fiscal years following the closing. REC/CMA is an orthopedic rehabilitation practice located in Whitehouse, Texas. Neither
REC, CMA nor its members had any prior relationship with the Company or its affiliates.



14



---

REC/CMA was acquired on January 6, 2006 and utilized the purchase method of accounting. During the
second quarter of 2006 $23,257 additional acquisition costs were added to the purchase price.

Purchase price allocation:



|                                         |  |   |          
|---------------------------------------- |  | - | ---------
|Cash Consideration                       |  | $ | 625,000  
|Stock Consideration                      |  |   | 670,870  
|Acquisition Costs                        |  |   | 128,750  
|Less:                                    |  |   |          
|Cash                                     |  |   | 28,106   
|Accounts receivable                      |  |   | 80,841   
|Property and equipment                   |  |   | 56,767   
|Intangible assets                        |  |   | 82,089   
|Plus:                                    |  |   |          
|Accounts payable and accrued liabilities |  |   | 37,274   
|Deferred taxes                           |  |   | 35,442   
|                                         |  |   |          
|Goodwill                                 |  | $ | 1,249,533
|                                         |  |   |          

On January 20, 2006, the Company closed a merger pursuant to a Merger Agreement with its
wholly-owned subsidiary, PainCare Acquisition Company XIX, Inc. (PNAC XIX), and Desert Pain Medicine Group (DPMG). The Merger Agreement provides for the acquisition of the non-medical assets of DPMG by PNAC XIX, a Florida corporation. In exchange
for the non-medical assets the shareholder of DPMG received 471,698 shares of common stock of the Company priced at $3.41 per share and $1,500,000 in cash. In addition, the former shareholder of DPMG may receive up to $3,000,000 in additional
consideration if certain net earnings goals are achieved in each of the first three fiscal years following the closing. DPMG is a pain management physician practice with four locations in California. Neither DMPG nor its members had any prior
relationship with the Company or its affiliates.

DMPG was acquired on January 20, 2006 and utilized the purchase method of
accounting. During the second quarter of 2006 $44,155 additional acquisition costs were added to the purchase price.

Purchase price allocation:



|                                         |  |   |          
|---------------------------------------- |  | - | ---------
|Cash Consideration                       |  | $ | 1,500,000
|Stock Consideration                      |  |   | 1,608,490
|Acquisition Costs                        |  |   | 155,000  
|Less:                                    |  |   |          
|Cash                                     |  |   | 77,144   
|Accounts receivable                      |  |   | 198,792  
|Property and equipment                   |  |   | 418,384  
|Deposits and prepaid expenses            |  |   | 27,259   
|Other assets                             |  |   | 8,111    
|Intangible assets                        |  |   | 130,707  
|Plus:                                    |  |   |          
|Accounts payable and accrued liabilities |  |   | 155,718  
|Note payable                             |  |   | 20,417   
|Capital lease obligations                |  |   | 62,523   
|Deferred taxes                           |  |   | 134,556  
|                                         |  |   |          
|Goodwill                                 |  | $ | 2,776,307
|                                         |  |   |          



15



---

On February 1, 2006, the Company closed a majority interest purchase pursuant to a Membership
Interest Purchase Agreement with its wholly-owned subsidiary, PainCare Neuromonitoring I, Inc. (PCN I), and the members of Amphora, LLC (AMP). The Membership Interest Purchase Agreement provides for the purchase of 60% ownership of AMP by PCN I, a
Florida corporation. In exchange for the majority interest purchase the members of AMP received 1,035,032 shares of common stock of the Company priced at $3.70 per share and $3,250,000 in cash. In addition, the former members of AMP will receive the
remaining balance of the purchase price of $8,500,000 in the form of performance-based installments over four years. AMP is an intraoperative monitoring company based in Denver, Colorado.

Majority interest in AMP was purchased on February 1, 2006 and utilized the purchase method of accounting. During the second quarter of 2006
$250,516 additional acquisition costs were added to the purchase price.

Purchase price allocation:



|                                         |  |   |          
|---------------------------------------- |  | - | ---------
|Cash Consideration                       |  | $ | 3,250,000
|Stock Consideration                      |  |   | 3,829,618
|Acquisition Costs                        |  |   | 293,541  
|Less:                                    |  |   |          
|Cash                                     |  |   | 72,463   
|Accounts receivable                      |  |   | 1,006,114
|Property and equipment                   |  |   | 176,817  
|Intangible assets                        |  |   | 109,368  
|Plus:                                    |  |   |          
|Accounts payable and accrued liabilities |  |   | 114,191  
|Capital lease obligations                |  |   | 66,240   
|Deferred taxes                           |  |   | 114,223  
|Minority interests                       |  |   | 429,985  
|                                         |  |   |          
|Goodwill                                 |  | $ | 6,733,036
|                                         |  |   |          

In January 2006, the Company paid $218,333 in cash and issued 59,654 shares of common stock to the
former shareholder of Bone and Joint Surgical Clinic, representing the second of four potential earnout payments.

In January 2006, the
Company paid $583,333 in cash and issued 159,381 shares of common stock to the former shareholder of Kenneth M. Alo, M.D., P.A., representing the second of four potential earnout payments.

In January 2006, the Company paid $2,254,500 in cash and issued 615,984 shares of common stock to the former shareholder of Denver Pain Management,
representing a portion of potential earnout payments.

In January 2006, the Company paid $2,291,667 in cash and issued 626,138 shares of
common stock to the former shareholders of Center for Pain Management, LLC, representing the first of three potential earnout payments.



16



---

In March 2006, the Company paid $208,333 in cash and issued 58,194 shares of common stock to the former
shareholder of Spine and Pain Center, P.C., representing the second of three potential earnout payments.

In March 2006, the Company issued
176,457 shares of common stock to the former shareholder of the Health Care Center of Tampa, Inc., representing the second of three potential earnout payments. The cash portion of this earnout payment was paid throughout 2005.

In March 2006, the Company paid $252,500 in cash and issued 68,990 shares of common stock to the shareholders of RMG, Inc., representing the second of
three potential earnout payments.

In April 2006, the Company paid $128,700 in cash and issued 35,165 shares of common stock to the former
shareholder of Pain and Rehabilitation Network, Inc., representing the final earnout payment.

In April 2006, the Company paid $458,333 in
cash and issued 183,333 shares of common stock to the former shareholder of Medical Rehabilitation Specialists, Inc., representing the final earnout payment.

In May 2006, the Company paid $814,125 in cash and issued 325,650 shares of common stock to the former shareholder of Denver Pain Management.

In May 2006, the Company paid $350,000 in cash and issued 155,556 shares of common stock to the former shareholder of Colorado Pain Specialists, P.C.,
representing the first of three potential earnout payments.

Following are the summarized unaudited pro forma results of operations for the
six months ended June 30, 2006 and June 30, 2005, assuming the acquisitions of Center for Pain Management ASC, LLC, REC, Inc. and CareFirst Medical, Desert Pain Medicine Group and Amphora, LLC had taken place at the beginning of the
year. The unaudited pro forma results are not necessarily indicative of future earnings that would have been reported had the acquisitions been completed when assumed.



17



---

Pro Forma Consolidated Statement of Operations

Six Months Ended June 30, 2006

(Unaudited)



|                                            |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  |   |             |  
|------------------------------------------- |  | -------------- | ----------- | - | --------- | - | ------ |  | ------- | ------ | ---------- | - | -------------------- |  | - | --------- |  | - | -------- | ---- |  | - | ----------- | -
|                                            |  | PainCareActual |             |   | CPMASC(4) |   | REC(5) |  | DPMG(6) |        | AMPHORA(7) |   | Pro formaAdjustments |  |   | Pro forma | 
|Revenues                                    |  | $              | 46,899,786  |   |           | $ | 16,064 |  | $       | 13,761 |            | $ | 324,614              |  | $ | 91,316    |  | $ |         |      |  | $ | 47,345,541  |  
|                                            |  |                |             |   |           |   |       
|Cost of revenues                            |  |                | 10,110,740  |   |           |   | 1,690  |  |         | 976    |            |   | 64,354               |  |   | 19,617    |  |   | (25,483  | )(1) |  |   | 10,171,894  |  
|                                            |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  |   |             |  
|Gross profit                                |  |                | 36,789,046  |   |           |   | 14,374 |  |         | 12,785 |            |   | 260,260              |  |   | 71,699    |  |   | 25,483   |      |  |   | 37,173,647  |  
|                                            |  |                |             |   |           |   |       
|Operating expenses:                         |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  |   |             |  
|                                            |  |                |             |   |           |   |       
|General & administrative                    |  |                | 28,061,948  |   |           |   | 9,528  |  |         | 12,070 |            |   | 174,302              |  |   | 50,182    |  |   | (234,910 | )(2) |  |   | 28,073,120  |  
|Depreciation & amortization                 |  |                | 2,289,000   |   |           |   |       |  |         |       |            |   |                     |  |   |          |  |   |         |      |  |   | 2,289,000   |  
|                                            |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  |   |             |  
|Operating income                            |  |                | 6,438,098   |   |           |   | 4,846  |  |         | 715    |            |   | 85,958               |  |   | 21,517    |  |   | 260,393  |      |  |   | 6,811,527   |  
|                                            |  |                |             |   |           |   |       
|Interest expense                            |  |                | 4,027,915   |   |           |   | 24     |  |         | 2      |            |   | 424                  |  |   |          |  |   |         |      |  |   | 4,028,365   |  
|Derivative expense (benefit)                |  |                | (10,492,951 | ) |           |   |       |  |         |       |            |   |                     |  |   |          |  |   |          |      |  |   | (10,492,951 | )
|Other income                                |  |                | 453,537     |   |           |   |       |  |         |       |            |   |                     |  |   |          |  |   |         |      |  |   | 453,537     |  
|                                            |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  |   |             |  
|Income before taxes                         |  |                | 13,356,671  |   |           |   | 4,822  |  |         | 713    |            |   | 85,534               |  |   | 21,517    |  |   | 260,393  |      |  |   | 13,729,650  |  
|                                            |  |                |             |   |           |   |       
|Provision for income taxes                  |  |                | 1,504,324   |   |           |   |       |  |         |       |            |   |                     |  |   |          |  |   | 39,405   | (3)  |  |   | 1,543,729   |  
|                                            |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  |   |             |  
|Income before minority interests share     |  |                | 11,852,347  |   |           |   | 4,822  |  |         | 713    |            |   | 85,534               |  |   | 21,517    |  |   | 220,988  |      |  |   | 12,185,921  |  
|Less: Minority interests share             |  |                | 770,339     |   |           |   |       |  |         |       |            |   |                     |  |   | 8,607     |  |   |         |      |  |   | 778,946     |  
|                                            |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  |   |             |  
|Net income                                  |  | $              | 11,082,008  |   |           | $ | 4,822  |  | $       | 713    |            | $ | 85,534               |  | $ | 12,910    |  | $ | 220,988  |      |  | $ | 11,406,975  |  
|                                            |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  |   |             |  
|Basic earnings per share                    |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  | $ | 0.18        |  
|                                            |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  |   |             |  
|Basic weighted average shares outstanding   |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  |   | 63,145,145  |  
|                                            |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  |   |             |  
|Diluted earnings per share                  |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  | $ | 0.16        |  
|                                            |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  |   |             |  
|Diluted weighted average shares outstanding |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  |   | 71,852,410  |  
|                                            |  |                |             |   |           |   |        |  |         |        |            |   |                      |  |   |           |  |   |          |      |  |   |             |  

---

Footnotes to Unaudited Pro Forma Financial
Statements:



|1) | Adjustment for non-recurring cost of revenues.
|-- | ----------------------------------------------

|2) | Adjustment for non-recurring general and administrative expenses.
|-- | -----------------------------------------------------------------

|3) | Represents the provision for income taxes at an effective tax rate of 35%.
|-- | --------------------------------------------------------------------------

|4) | Represents the results from the period beginning on January 1, 2006 and ending on January 2, 2006.
|-- | --------------------------------------------------------------------------------------------------

|5) | Represents the results from the period beginning on January 1, 2006 and ending on January 5, 2006.
|-- | --------------------------------------------------------------------------------------------------

|6) | Represents the results from the period beginning on January 1, 2006 and ending on January 31, 2006.
|-- | ---------------------------------------------------------------------------------------------------

|7) | Represents the results from the period beginning on January 1, 2006 and ending on January 31, 2006.
|-- | ---------------------------------------------------------------------------------------------------



18



---

Pro Forma Consolidated Statement of Operations

Six Months Ended June 30, 2005

(Unaudited)



|                                            |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  |   |             |  
|------------------------------------------- |  | -------------- | ----------- | - | --------- | - | --------- |  | ------- | ------- | ---------- | - | -------------------- |  | - | --------- |  | - | ---------- | ---- |  | - | ----------- | -
|                                            |  | PainCareActual |             |   | CPMASC(4) |   | REC(5)    |  | DPMG(6) |         | AMPHORA(7) |   | Pro formaAdjustments |  |   | Pro forma | 
|Revenues                                    |  | $              | 30,124,593  |   |           | $ | 2,987,944 |  | $       | 110,060 |            | $ | 2,124,748            |  | $ | 328,739   |  | $ |           |      |  | $ | 35,676,084  |  
|                                            |  |                |             |   |           |   |          
|Cost of revenues                            |  |                | 5,015,781   |   |           |   | 314,374   |  |         | 3,464   |            |   | 421,228              |  |   | 11,221    |  |   | (887,500   | )(1) |  |   | 4,878,568   |  
|                                            |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  |   |             |  
|Gross profit                                |  |                | 25,108,812  |   |           |   | 2,673,570 |  |         | 106,596 |            |   | 1,703,520            |  |   | 317,518   |  |   | 887,500    |      |  |   | 30,797,516  |  
|                                            |  |                |             |   |           |   |          
|Operating expenses:                         |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  |   |             |  
|                                            |  |                |             |   |           |   |          
|General & administrative                    |  |                | 14,338,897  |   |           |   | 1,772,052 |  |         | 103,859 |            |   | 1,140,879            |  |   | 240,056   |  |   | (1,425,545 | )(2) |  |   | 16,170,198  |  
|Compensation expense                        |  |                | 11,977,160  |   |           |   |          |  |         |        |            |   |                     |  |   |          |  |   |           |      |  |   | 11,977,160  |  
|Depreciation & amortization                 |  |                | 1,038,776   |   |           |   |          |  |         |        |            |   |                     |  |   |          |  |   |           |      |  |   | 1,038,776   |  
|                                            |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  |   |             |  
|Operating income (loss)                     |  |                | (2,246,021  | ) |           |   | 901,518   |  |         | 2,737   |            |   | 562,641              |  |   | 77,462    |  |   | 2,313,045  |      |  |   | 1,611,382   |  
|                                            |  |                |             |   |           |   |          
|Interest expense                            |  |                | 2,191,410   |   |           |   | 4,625     |  |         |        |            |   | 2,778                |  |   |          |  |   |           |      |  |   | 2,198,813   |  
|Derivative expense                          |  |                | 13,246,747  |   |           |   |          |  |         |        |            |   |                     |  |   |          |  |   |           |      |  |   | 13,246,747  |  
|Other income                                |  |                | 143,383     |   |           |   |          |  |         |        |            |   |                     |  |   |          |  |   |           |      |  |   | 143,383     |  
|                                            |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  |   |             |  
|Income (loss) before taxes                  |  |                | (17,540,795 | ) |           |   | 896,893   |  |         | 2,737   |            |   | 559,863              |  |   | 77,462    |  |   | 2,313,045  |      |  |   | (13,690,795 | )
|                                            |  |                |             |   |           |   |          
|Provision (benefit) for income taxes        |  |                | (985,062    | ) |           |   |          |  |         |        |            |   |                     |  |   |          |  |   | 315,672    | (3)  |  |   | (669,390    | )
|                                            |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  |   |             |  
|Income before minority interests share     |  |                | (16,555,733 | ) |           |   | 896,893   |  |         | 2,737   |            |   | 559,863              |  |   | 77,462    |  |   | 1,997,373  |      |  |   | (13,021,405 | )
|Less: Minority interests share             |  |                | 97,072      |   |           |   |          |  |         |        |            |   |                     |  |   |          |  |   |           |      |  |   | 97,072      |  
|                                            |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  |   |             |  
|Net income (loss)                           |  | $              | (16,652,805 | ) |           | $ | 896,893   |  | $       | 2,737   |            | $ | 559,863              |  | $ | 77,462    |  | $ | 1,997,373  |      |  | $ | (13,118,477 | )
|                                            |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  |   |             |  
|Basic earnings per share                    |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  | $ | (0.29       | )
|                                            |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  |   |             |  
|Basic weighted average shares outstanding   |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  |   | 44,546,751  |  
|                                            |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  |   |             |  
|Diluted earnings per share                  |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  | $ | (0.29       | )
|                                            |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  |   |             |  
|Diluted weighted average shares outstanding |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  |   | 44,546,751  |  
|                                            |  |                |             |   |           |   |           |  |         |         |            |   |                      |  |   |           |  |   |            |      |  |   |             |  

---

Footnotes to Unaudited Pro Forma Financial
Statements:



|1) | Adjustment for non-recurring cost of revenues.
|-- | ----------------------------------------------

|2) | Adjustment for non-recurring general and administrative expenses.
|-- | -----------------------------------------------------------------

|3) | Represents the provision for income taxes at an effective tax rate of 35%.
|-- | --------------------------------------------------------------------------

|4) | Represents the results from the period beginning on January 1, 2005 and ending on June 30, 2005.
|-- | ------------------------------------------------------------------------------------------------

|5) | Represents the results from the period beginning on January 1, 2005 and ending on June 30, 2005.
|-- | ------------------------------------------------------------------------------------------------

|6) | Represents the results from the period beginning on January 1, 2005 and ending on June 30, 2005.
|-- | ------------------------------------------------------------------------------------------------

|7) | Represents the results from the period beginning on January 1, 2005 and ending on June 30, 2005.
|-- | ------------------------------------------------------------------------------------------------



19



---

(8) Related Party Transactions

During the six months ended June 30, 2006 and 2005 the Company had transactions with companies owned by certain shareholders of the Company. The
following is a summary of transactions with these entities for the six months ended June 30, 2006 and 2005:



|                                     |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  |                                                 |           |      |   |            |  |    
|------------------------------------ |  | ---------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------------------------------------------- | --------- | ---- | - | ---------- |  | ---
|                                     |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |  | Expense Related to the Six MonthsEnded June 30:
|Practice Name                        |  | Type of Practice |  | Type of Related Party Transaction                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |  | 2006                                            |           | 2005 |   | ReportedAs
|Associated Physicians Group, Ltd.    |  | Managed Practice |  | The Company leases its office space from a limited liability company partially owned by a certain shareholder of the Company. The lease commenced January 1, 2005 for an initial term of ten years
with the option to renew for two five year periods.                                                                                                                                                                                                                                                                                                                                                                                                                                            |  | $                                               | 73,590    |      | $ | 24,057     |  | G&A
|                                     |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
|The Center for Pain Management, LLC  |  | Managed Practice |  | The Company leases certain employees from a limited liability company owned by certain shareholders of the Company. The Company also charged this entity for the use of its equipment and certain
services.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | $                                               | 1,154,901 |      | $ |           |  | G&A
|                                     |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
|                                     |  |                  |  | The Company has an agreement to outsource its billing and collections function to a limited liability company owned by certain shareholders of the Company. The Company is charged a fee of 8% of
net collections under this arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  | $                                               | 404,411   |      | $ | 366,107    |  | G&A
|                                     |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
|                                     |  |                  |  | * (A)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                                                 |           |      |   |            |  |    
|                                     |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
|                                     |  |                  |  | * (B)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                                                 |           |      |   |            |  |    
|                                     |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
|Dynamic Rehabilitation Centers, Inc. |  | Managed Practice |  | The Company leases its office space from a limited liability company partially owned by certain shareholders of the Company. The lease associated with the Redford location has a ten year term
commencing January 1, 2000 with no option to renew. The lease associated with the Clinton Township location commenced October 8, 2004 and expires December 31, 2014. The lease was amended in July 2005 for the occupancy of additional space by the
Company.                                                                                                                                                                                                                                     |  | $                                               | 84,444    |      | $ | 84,444     |  | G&A
|                                     |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
|                                     |  |                  |  | The Company provides services for billing, accounting and management oversight to a limited liability company owned by certain shareholders of the Company.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | $                                               | 495,007   |      | $ |           |  | G&A
|                                     |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
|                                     |  |                  |  | * (C)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |  |                                                 |           |      |   |            |  |    
|                                     |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
|Health Care Center of Tampa, Inc.    |  | Owned Practice   |  | The Company has an agreement to outsource its billing and collections function to a limited liability company owned by a certain shareholder of the Company. The Company is charged a fee of 10%
of net collections under this arrangement.                                                                                                                                                                                                                                                                                                                                                                                                                                                       |  | $                                               | 159,418   |      | $ | 63,888     |  | G&A
|                                     |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
|Rick Taylor, D.O., P.A.              |  | Managed Practice |  | The Company has an agreement to lease an aircraft from a limited liability company owned by a certain shareholder of the Company. The lease agreement was entered into in June 2003 for a period
of 60 months. Effective January 1, 2005, the lease payment was lowered to a nominal amount of $1 per year; the Company will continue to pay a third party provider for the related fuel and maintenance cost. Effective January 1, 2004 the lease fee was
reduced from the original amount of $12,000 per month to $7,000 per month; maintenance, fuel, insurance recurring training, hangar rental and any other fees required to maintain the aircraft were the responsibility of the Company. |  | $                                               | 16,042    |      | $ | 48,828     |  | G&A
|                                     |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | 
|Spine and Pain Center, P.C.          |  | Managed Practice |  | The Company leases its office space from a limited liability company partially owned by certain shareholders of the Company. The lease commenced December 23, 2003 and expires December 31, 2008,
with no option to renew.                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |  | $                                               | 63,348    |      | $ | 61,032     |  | G&A



20



---

|                                                           |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |   |         |  |   |        |  |    
|---------------------------------------------------------- |  | ---------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | - | ------- |  | - | ------ |  | ---
|PSHS Alpha Partners, Ltd. d/b/a Lake Worth Surgical
Center |  |                  |  | The Company, through a subsidiary, is the majority partner of the PSHS Alpha Partners, Ltd. Partnership Dr. Merrill Reuter, the Companys chairman, is a minority partner of partnership. The
Company owns 67.5% and Dr. Reuter owns 9.75% of the partnership. Dr. Reuter received distributions from the partnership representing his share of the profits of the surgery center. These distributions are reported as a reduction in minority interest
on the balance sheet. |  | $ | 76,538  |  | $ | 27,924 |  | BS 
|                                                           |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|The Center for Pain Management ASC, LLC                    |  | Managed Practice |  | The Company leases certain employees from a limited liability company owned by certain shareholders of the Company. The Company also charged this entity for the use of its equipment and certain
services.                                                                                                                                                                                                                                                                   |  | $ | 614,432 |  | $ |       |  | G&A
|                                                           |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|                                                           |  |                  |  | The Company has an agreement to outsource its billing and collections function to a limited liability company owned by certain shareholders of the Company. The Company is charged a flat fee of
$40,000 per month under this arrangement.                                                                                                                                                                                                                                    |  | $ | 240,000 |  | $ |       |  | G&A
|                                                           |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|                                                           |  |                  |  | * (A)                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |   |         |  |   |        |  |    
|                                                           |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|                                                           |  |                  |  | * (B)                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |  |   |         |  |   |        |  |    
|                                                           |  |                  |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                               | 
|Georgia Pain Physicians, P.C.                              |  | Managed Practice |  | The Company has an agreement to lease RF equipment from a limited partnership wholly owned by Dr. Windsor. The lease commenced February 1, 2006 with no expiration date.                                                                                                                                                                                                                                                                                                      |  | $ | 8,500   |  | $ |       |  | G&A

---

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

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

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

(9) Due from
Stockholders

The balance in due from stockholders at June 30, 2006 and December 31, 2005 consists of the following:



|                        |  |      |           |      |   |        
|----------------------- |  | ---- | --------- | ---- | - | -------
|Practice/Stockholder    |  | 2006 |           | 2005
|Merrill Reuter, M.D.    |  | $    | 438,776   |      | $ | 427,553
|John Vick               |  |      | 213,000   |      |   |       
|Saqib Khan, M.D.        |  |      | 863,768   |      |   |       
|Robert Windsor, M.D.    |  |      | 150,000   |      |   |       
|Kenneth Alo, M.D.       |  |      | 642,876   |      |   |       
|Rick Taylor, D.O.       |  |      | 300,000   |      |   |       
|Bradley Vilims, M.D.    |  |      | 100,000   |      |   |       
|Christopher Cenac, M.D. |  |      | 25,000    |      |   |        
|                        |  |      |           |      |   |        
|Total                   |  | $    | 2,733,420 |      | $ | 427,553
|                        |  |      |           |      |   |        



21



---

Pursuant to a Construction Development & Leasing Agreement, Merrill Reuter, M.D., Chairman of the Board of the
Company and President of AOSF, is obligated, subject to conditions, to pay the Companys subsidiary, Caperian, Inc. (Caperian), $450,000 for real estate development and construction oversight services relating to a planned medical
office and ambulatory surgery facility on land that the agreement anticipates Dr. Reuter will acquire. Fifty percent of the amount owed is due upon commencement of construction of the facility and fifty percent upon completion. Upon completion
of the facility, Caperian is also entitled to earn leasing fees from Dr. Reuter for procuring tenants to lease space in the facility. Dr. Reuter currently owns approximately 4.5% of the outstanding shares of the Companys common stock.

The amount due from Saqib Khan, M.D. represents an advance on the contingent earnout cash payment due at the end of the year.

The amount due from Kenneth Alo, M.D. is associated with employee, billing, and other managerial services provided to a company wholly owned by Dr. Alo for which
payment is due the Company.

Due from John Vick, Robert Windsor, M.D., Rick Taylor, D.O., Bradley Vilims, M.D., and Christopher Cenac, M.D. represents
management fees due the Company from the physicians respective practice.

(10) Long-Term Debt

Long-term debt consists of the following at June 30:



|                                                |  |      |           
|----------------------------------------------- |  | ---- | ----------
|                                                |  | 2006
|PSHS Partnership Ventures, Inc. (a)             |  | $    | 1,344,706 
|Gary J. Lustgarten Profit Sharing and Trust (b) |  |      | 280,147   
|HBK Investments (c)                             |  |      | 27,898,266
|Wells Fargo (d)                                 |  |      | 66,000    
|CPM ASC acquisition promissory note (e)         |  |      | 7,392,256 
|                                                |  |      |           
|                                                |  |      | 36,981,375
|Less current installments                       |  |      | 12,699,012
|                                                |  |      |           
|                                                |  | $    | 24,282,363
|                                                |  |      |           

At June 30, 2006, the aggregate annual principal payments with respect to the obligations
existing at that date as described above, are as follows:



|                              |  |   |           
|----------------------------- |  | - | ----------
|Twelve Months Ending June 30: |  |  
|2007                          |  | $ | 12,699,012
|2008                          |  |   | 8,000,000 
|2009                          |  |   | 17,750,000
|Less unamortized discount     |  |   | 1,467,637 
|                              |  |   |           
|                              |  | $ | 36,981,375
|                              |  |   |           

---

|(a) | Note payable for acquisition of PSHS Beta Partners, Ltd. Due on August 1, 2006 without a stated interest rate. Interest is imputed at 6.25% over the period. The face value is
$1,351,458 with unamortized discount of $6,752. The total amount amortized to interest expense in 2006 was $39,422. The note is secured by the Companys interest in PSHS Beta Partners, Ltd. The Companys carrying amount of the partnership
is $1,949,486.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



22



---

|(b) | Note payable for acquisition of PSHS Beta Partners, Ltd. Due on August 1, 2006 without a stated interest rate. Interest is imputed at 6.25% over the period. The face value is
$281,554 with unamortized discount of $1,407. The total amount amortized to interest expense in 2006 was $8,213. The note is secured by the Companys interest in PSHS Beta Partners, Ltd. The Companys carrying amount of the partnership is
$1,949,486.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|c) | Note payable to HBK Investments. Due on November 10, 2006 interest is either LIBOR + 7.25% or Prime + 4.5% at the discretion of the company. Interest payments are due monthly
with quarterly principal repayments beginning on April 1, 2006. Certain mandatory prepayments must be made upon the occurrence of any sale or disposition of property or assets, upon the receipt of an extraordinary receipts, and upon issuance of
any indebtedness other than indebtedness permitted by the agreement, including equipment leases and notes. The agreement requires compliance with various financial and nonfinancial covenants for the Company starting in the second quarter of 2005.
The primary financial covenants pertain to, among other things, minimum EBITDA, minimum Free Cash Flow, Leverage ratio, and Market Capitalization. The company for the second quarter ended 2006 is in violation of five sections of the agreement. The
company has financial restatements that violates the No Material Adverse Change clause. This also caused a violation of the complete disclosure clause. The Disclosures over internal control report one or more material weeknesses. The restatement
also caused a violation of meeting certain SEC laws regarding disclosure obligations. The Company failed to meet the EBITDA covenant for the quarter ended June 30, 2006. On May 2, 2006, June 20, 2006 and August 9, 2006 we
entered into letter agreements with the lenders under the credit facility in consideration for which we paid $300,000, $150,000 and $100,000 in waiver fees, respectively, to the lenders. The Face value of the Note is $29,250,000 with unamortized
discount of $1,351,734. The total amount amortized to interest expense during 2006 was $280,910.
|-- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(d) | Line of credit payable to Wells Fargo for equipment at The Centeno Clinic. Due on January 25, 2007 with Prime + 2% interest is payable monthly. The unused portion of the credit
line is $84,000. The line of credit is secured by property for use at the practice.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(e) | Note payable for acquisition of CPM, ASC LLC. Due on January 3, 2007 with a stated interest rate of 3.45%. Interest is imputed at 6.75% over the period. The face value is
$7,500,000 with unamortized discount of $107,744. The total amount amortized to interest expense in 2006 was $53,872. The note is secured by the Companys interest in PainCare Surgery Centers III, Inc. The Companys carrying amount of the
partnership is $15,045,403.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



23



---

(11) Contractual Obligations

A summary of our contractual obligations and commercial commitments at June 30, 2006 were as follows:



|                              |  |       |             |                 |   |            |  |           |            |          |   |           |  |   |          
|----------------------------- |  | ----- | ----------- | --------------- | - | ---------- |  | --------- | ---------- | -------- | - | --------- |  | - | ---------
|Contractual Obligations       |  | Total |             | Less than 1Year |   | 1-3 Years  |  | 3-5 Years |            | 5+ Years
|Long-term debt                |  | $     | 38,449,012  |                 | $ | 12,699,012 |  | $         | 25,750,000 |          | $ |          |  | $ |         
|Convertible debentures        |  |       | 10,455,160  |                 |   | 8,955,160  |  |           | 1,500,000  |          |   |          |  |   |         
|Capital leases(1)             |  |       | 4,460,104   |                 |   | 1,573,664  |  |           | 2,729,608  |          |   | 156,832   |  |   |         
|Operating leases              |  |       | 16,184,529  |                 |   | 3,449,246  |  |           | 6,706,364  |          |   | 2,818,541 |  |   | 3,210,378
|Acquisition consideration(2)  |  |       | 51,463,330  |                 |   | 17,796,666 |  |           | 33,666,664 |          |   |          |  |   |         
|Employment agreements(3)      |  |       | 3,000,000   |                 |   | 600,000    |  |           | 1,800,000  |          |   | 600,000   |  |   |          
|                              |  |       |             |                 |   |            |  |           |            |          |   |           |  |   |          
|Total contractual obligations |  | $     | 124,012,135 |                 |   |            |  |           |            |          |   |           |  |   |          
|                              |  |       |             |                 |   |            |  |           |            |          |   |           |  |   |          

---

|1) | Includes the total minimum lease payments due in each year.
|-- | -----------------------------------------------------------

|2) | Includes both the cash and stock components of the acquisition earnouts. One-half of the contractual obligation is a payment in cash, while the remaining half in payable in common
stock priced at fair market value. This assumes the practices meet all earnings threshold obligations.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3) | Includes guaranteed minimum management bonuses through employment agreements which expire on December 31, 2010.
|-- | ---------------------------------------------------------------------------------------------------------------

(12) Recent Accounting Pronouncements

Stock-Based
Compensation

In the first quarter of 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised
2004), Share-Based Payment, (SFAS 123R). This Statement requires companies to expense the estimated fair value of stock options and similar equity instruments issued to employees over the vesting period in their statement of
operations. SFAS 123R eliminates the alternative to use the intrinsic method of accounting provided for in Accounting Principles Board Opinion No. 25,Accounting for Stock Issued to Employees , (APB 25), which generally
resulted in no compensation expense recorded in the financial statements related to the grant of stock options to employees if certain conditions were met.

The Company adopted SFAS 123R using the modified prospective method effective January 1, 2006, which requires the Company to record compensation expense over the vesting period for all awards granted after the date of adoption, and for
the unvested portion of previously granted awards that remain outstanding at the date of adoption. Accordingly, amounts for periods prior to January 1, 2006 presented herein have not been restated to reflect the adoption of SFAS 123R.

The pro forma effect for the three and six months ended June 30, 2005 period is as follows (as restated) and has been disclosed
to be consistent with prior accounting rules:



|                                                                                                               |  |                                         |            |   |                                   |   |             |  
|-------------------------------------------------------------------------------------------------------------- |  | --------------------------------------- | ---------- | - | --------------------------------- | - | ----------- | -
|                                                                                                               |  | For the three monthsended June 30, 2005 |            |   | For six months endedJune 30, 2005 |  
|Net income(loss), as reported                                                                                  |  | $                                       | 11,110,827 |   |                                   | $ | (16,652,805 | )
|Stock-based employee compensation included in reported net income (loss), net of tax                           |  |                                         | (3,696,979 | ) |                                   |   | 7,186,296   |  
|Stock-based employee compensation expense as determined under the fair value method for all awards, net of tax |  |                                         |            |   |                                   |   | (385,883    | )
|Stock-based compensation expense as determined under the fair value method for all awards, net of tax          |  |                                         | (153,668   | ) |                                   |   | (641,997    | )
|Net income(loss), pro forma                                                                                    |  | $                                       | 7,260,180  |   |                                   | $ | (10,108,506 | )
|Earnings per share:                                                                                            |  |                                         |            |   |                                   |   |             |  
|Basic  as reported                                                                                            |  | $                                       | 0.22       |   |                                   | $ | (0.37       | )
|Basic  pro forma                                                                                              |  | $                                       | 0.14       |   |                                   | $ | (0.23       | )
|Diluted  as reported                                                                                          |  | $                                       | 0.18       |   |                                   | $ | (0.37       | )
|Diluted  pro forma                                                                                            |  | $                                       | 0.12       |   |                                   | $ | (0.23       | )



24



---

The fair value concepts were not changed significantly in SFAS 123R; however, in adopting SFAS 123R,
companies must choose among alternative valuation models and amortization assumptions. After assessing alternative valuation models and amortization assumptions, the Company will continue using the Black-Scholes valuation model and has elected to
use the ratable method to amortize compensation expense over the vesting period of the grant.

The fair value of each option granted was estimated using
the following assumptions:



|                        |  |            |   |  |            |  
|----------------------- |  | ---------- | - |  | ---------- | -
|                        |  | 2006       |   |  | 2005       |  
|Risk-free interest rate |  | 5.11       | % |  | 3.71       | %
|Expected life           |  | 2.50 years |   |  | 2.50 years |  
|Volatility              |  | 43.84      | % |  | 48.90      | %
|Dividend yield          |  | 0.00       | % |  | 0.00       | %

Total non-cash compensation expense for the three months ended June 30, 2006 related to
unvested stock options amounted to $899,939 and for the six months ended June 30, 2006 amounted to $1,182,015 and is included in general and administrative expenses in the consolidated statement of operations.

Included in the expense is $760,912 of compensation expense related to accelerations of stock options that occurred in the three months ended
June 30, 2006. During the three months ended June 30, 2006 and 2005, the Company granted 175,000 and 50,000 options, respectively, to employees and directors at their fair value on the grant date. The options granted during the three
months ended June 30, 2006 had a weighted average exercise price of $1.39 per share.

Uncertainty in Income Taxes

In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes  an
interpretation of FASB Statement No. 109 (FIN 48), which clarifies the accounting for uncertainty in tax positions. This Interpretation requires that the Company recognize in its financial statements, the impact of a tax position, if that
position is more likely than not of being sustained on audit, based on the technical merits of the position. The provisions of FIN 48 are effective as of the beginning of the Companys 2007 fiscal year, with the cumulative effect, if any, of
the change in accounting principle recorded as an adjustment to opening retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on the financial statements.

(13) Subsequent Events

On August 2, 2006, the Company completed a private placement of 8.5%
convertible debentures in the principal amount of $3.0 million with Midsummer Investments Ltd. and Islandia, L.P. The 8.5% Convertible Debentures are due August 2, 2009 and are convertible into shares of the Companys common stock at an
initial price of $1.90 per share at the holders option. Interest on the 8.5% Convertible Debentures is payable in quarterly installments commencing in October 2006. Subject to the satisfaction of certain conditions, the Company has the right
to redeem the 8.5% Convertible Debentures at any time after the two years from issuance, to make certain redemption payments in shares of the Companys common stock, and to make interest payments in shares of the Companys common stock.

Concurrently with the August 2, 2006 financing, the Company, Midsummer, and Islandia entered into an amendment agreement pursuant to which
the due dates on the $10 million and $1.5 million Convertible Debentures were extended until August 2, 2009. The Company has agreed to issue the two debenture holders 500,000 shares of the Companys common stock in connection with the financing
and the due date extension. Management is in the process of performing the calculations related to the restructuring and has not yet determined the impact on the financial statements for the third quarter.



25



---

(14) Litigation

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

On March 21, 2006, Roy Thomas Mould filed a complaint under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company, as
well as the Companys chief executive officer and chief financial officer, before the United States District Court for the Middle District of Florida. The complaint is entitledMould v. PainCare Holdings, Inc., et al., Case
No. 06-CV-00362-JA-DAB. Mr. Mould alleges material misrepresentations and omissions in connection with the Companys financial statements which appear to relate principally to the Companys previously announced intention to
restate certain past financial statements. Mr. Mould seeks unspecified damages and purports to represent a class of shareholders who purchased the Companys common stock from August 27, 2002 to March 15, 2006. Ten additional
complaints were filed shortly afterward before the same court which recite similar allegations. (Collectively, these cases will be referred to as the Securities Litigation.) To allow for the selection of a lead plantiff(s) and counsel,
and the consolidation of the individual class action complaints, plaintiffs and defendants have agreed that a response to the individual complaints is not required until after a consolidated complaint has been filed. The Company cannot predict the
outcome of the Securities Litigation, but believes that the allegations lack merit and will vigorously defend against them. The Company anticipates that it will move to dismiss plaintiffs consolidated class action complaint.

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

On March 30,
2006 and May 3, 2006, two purported shareholders of the Company made separate demands on the Companys board of directors. These demands raise many if not all of the same issues as the derivative action, but asks the independent directors
to investigate the charges and to take legal action against those individuals responsible.

In accordance with governing
Florida law, the Company formed a special committee of independent directors (Tom Crane, Jay Rosen and Aldo Berti) to review and investigate the two derivative demands and the allegations of the derivative complaint, to oversee settlement
discussions and to make recommendations concerning the handling of the demands and the complaint to the full board of directors. To assist with this charge, the special committee has retained the law firm of Morris, Nichols, Arshdt &
Tunnel.



26



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The Company is currently involved in active settlement negotiations with the attorneys representing the
shareholders to address the issues raised in the derivative demands and the derivative action. Although the outcome of these discussions cannot be predicted, the Company hopes to resolve the issues raised on an amicable basis and, thus, avoid the
expense and uncertainty of protracted litigation.

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

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

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

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

Outlook

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

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



| |  | Owned practices. These practices are owned by us through one of our wholly-owned subsidiaries. We own the property and the physicians are our employees.
|- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Managed practices. In states where the corporate practice of medicine is not permitted, we are not permitted to own a physicians practice. In these states, we manage physician
practices pursuant to a management agreement.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Service and equipment contracts. We provide limited management services and equipment pursuant to specific contractual arrangements in such areas as in-house physical therapy,
electrodiagnostic services and in-office surgery.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



27



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We currently have one owned practice primarily providing surgery services, five owned practices primarily
providing pain management services, two managed practices primarily providing surgery services, eleven managed practices primarily providing pain management services, two managed practices providing ancillary services, and 34 limited management
services and equipment contracts. Advanced Orthopaedics of South Florida (AOSF) was converted to a managed surgery practice from an owned surgery practice.

We had a number of acquisitions since we began our current business in 2000. The following table presents the changes in the number of practices we own and manage at December 31, 2005, 2004, 2003, 2002 and
June 30, 2006.



|                                                   |  |                 |  |             |  |      |  |      |  |     
|-------------------------------------------------- |  | --------------- |  | ----------- |  | ---- |  | ---- |  | ----
|                                                   |  | At December 31, |  | At June 30,
|                                                   |  | 2002            |  | 2003        |  | 2004 |  | 2005 |  | 2006
|Owned physician practices                          |  | 3               |  | 6           |  | 7    |  | 7    |  | 6   
|Managed physician practices                        |  | 0               |  | 3           |  | 8    |  | 12   |  | 15  
|Limited Management service and equipment contracts |  | 3               |  | 8           |  | 22   |  | 34   |  | 34  

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

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

As part of a periodic review by the Division of Corporation Finance of the SEC of our
Annual Report on Form 10-KSB for the year ended December 31, 2004, we received and responded to a number of SEC staff comments. As of August 10, 2006 certain of the SEC comments remain unresolved and pertain to our method of accounting for
(i) certain term notes, freestanding and embedded derivatives, and (ii) intangible assets acquired in connection with physician practice and surgery center acquisitions.

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

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



28



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Results of Operations

Set forth below is certain of our selected consolidated financial and operating information for the three and six months ended June 30, 2006 and the comparable periods in 2005, 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 June 30,              |           
|                                            |  | (in thousands, except per share amounts) |           
|                                            |  | 2006                                     |            |   | 2005 |  
|Total revenues                              |  | $                                        | 23,591     |   |      | $ | 15,888     |  
|Gross profit                                |  |                                          | 18,221     |   |      |   | 13,453     |  
|Net income (loss)                           |  |                                          | (806       | ) |      |   | 11,111     |  
|                                            |  |                                         
|Earnings per common share, basic            |  | $                                        | (0.01      | ) |      | $ | 0.22       |  
|Earnings per common share, diluted          |  | $                                        | (0.01      | ) |      | $ | 0.18       |  
|                                            |  |                                         
|Weighted average common shares outstanding: |  |                                          |            |   |      |   |            |  
|Basic                                       |  |                                          | 64,482,619 |   |      |   | 51,621,811 |  
|Diluted                                     |  |                                          | 64,482,619 |   |      |   | 61,803,873 |  
|                                            | 
|                                            |  | Six Months Ended June 30,                |           
|                                            |  | (in thousands, except per share amounts) |           
|                                            |  | 2006                                     |            |   | 2005 |  
|Total revenues                              |  | $                                        | 46,900     |   |      | $ | 30,124     |  
|Gross profit                                |  |                                          | 36,789     |   |      |   | 25,109     |  
|Net income (loss)                           |  |                                          | 11,082     |   |      |   | (16,653    | )
|                                            |  |                                         
|Earnings per common share, basic            |  | $                                        | 0.18       |   |      | $ | (0.37      | )
|Earnings per common share, diluted          |  | $                                        | 0.16       |   |      | $ | (0.37      | )
|                                            |  |                                         
|Weighted average common shares outstanding: |  |                                          |            |   |      |   |            |  
|Basic                                       |  |                                          | 63,011,366 |   |      |   | 44,412,972 |  
|Diluted                                     |  |                                          | 71,718,631 |   |      |   | 44,412,972 |  

Comparison of the three months ended June 30, 2006 and 2005

Total revenues increased to $23,591,312 for the three months ended June 30, 2006 from $15,887,853 for the comparable 2005 period, representing an
increase of 48.5%. Operating income decreased to $1,591,992 for the three months ended June 30, 2006 from $11,944,880 for the comparable 2005 period. This decrease was the result of a $6,161,131 benefit related to the accounting for variable
stock option plan. There was a 10.3% increase in revenues from practices acquired/managed prior to June 30, 2005 (Same-Practices). Net revenue for Same-Practices on a year over year basis is reflected in the chart below.



|               |  |                                     |            |      |   |            |  |      |  
|-------------- |  | ----------------------------------- | ---------- | ---- | - | ---------- |  | ---- | -
|               |  | For the Three Months Ended June 30, |           
|               |  | 2006                                |            | 2005 |   | % Increase | 
|Same-Practices |  |                                     |            |      |   |            |  |      |  
|Revenues       |  | $                                   | 13,300,623 |      | $ | 12,060,034 |  | 10.3 | %
|               |  |                                     |           
|New-Practices  |  |                                     |            |      |   |            |  |      |  
|Revenues       |  | $                                   | 9,831,553  |      | $ | 703,936    |  |     |  



29



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Gross profit increased to $18,221,306 for the three months ended June 30, 2006 from $13,453,295 for
the comparable 2005 period, representing an increase of 35.4%. This increase is attributed to the six practices, three ambulatory surgical centers and intraoperative monitoring company interest acquired since June 30, 2005.

Operating expenses increased to $16,619,314 for the three months ended June 30, 2006 from $1,508,415 in the comparable 2005 period. The increase is
primarily due to the non-cash benefit of $6,161,631 in 2005 related to accounting for our variable stock option plan. In addition, $2,539,950 in 2006 is attributed to non-recurring accounting, legal, and consulting expenses related to our financial
restatement, class action lawsuits and initial implementation of Sarbanes-Oxley compliance.

Interest expense increased to $2,095,721 for
the three months ended June 30, 2006 from $1,292,490 in the comparable 2005 period, representing an increase of 62.1%. This increase is primarily the result of $582,906 in incremental interest expense from the HBK Investments, L.P. credit
facility since the full principal balance was drawn during the quarter ended June 30, 2006 versus June 30, 2005.

The provision
for income taxes decreased to $315,717 for the three months ended June 30, 2006 compared with a provision of $4,551,003 for the three months ended June 30, 2005. This decrease is primarily related to the permanent difference caused by the
tax benefit related to the accounting for derivatives.

As a result of the above changes, net loss was $806,091 for the three months ended
June 30, 2006 compared with net income of $11,110,827 in the comparable 2005 period. This decrease is primarily due to the non-cash benefit of $6,161,631 in 2005 and a non-cash benefit of $4,992,151 in 2005 from variable options and derivative
instruments related to our convertible debentures, respectively. There was no variable option benefit during 2006 and the derivate benefit was $98,396.

Comparison of the six months ended June 30, 2006 and 2005

Total revenues increased to $46,899,786 for the six
months ended June 30, 2006 from $30,124,593 for the comparable 2005 period, representing an increase of 55.7%. Operating income increased to $6,438,098 for the six months ended June 30, 2006 from a loss of $2,246,021 for the comparable
2005 period. This increase was primarily the result of $17,730,813 in revenue acquired since June 30, 2005. There was a 8.9% increase in revenues from practices acquired/managed prior to June 30, 2005 (Same-Practices). Net
revenue for Same-Practices on a year over year basis is reflected in the chart below.



|               |  |                                   |            |      |   |            |  |     |  
|-------------- |  | --------------------------------- | ---------- | ---- | - | ---------- |  | --- | -
|               |  | For the Six Months Ended June 30, |           
|               |  | 2006                              |            | 2005 |   | % Increase | 
|Same-Practices |  |                                   |            |      |   |            |  |     |  
|Revenues       |  | $                                 | 27,647,886 |      | $ | 25,392,798 |  | 8.9 | %
|               |  |                                   |           
|New-Practices  |  |                                   |            |      |   |            |  |     |  
|Revenues       |  | $                                 | 17,730,813 |      | $ | 703,936    |  |    |  

Gross profit increased to $36,789,046 for the six months ended June 30, 2006 from $25,108,812
for the comparable 2005 period, representing an increase of 46.5%. This increase is attributed to the six practices, three ambulatory surgical centers and intraoperative monitoring company interest acquired since June 30, 2005.



30



---

Operating expenses increased to $30,350,948 for the six months ended June 30, 2006 from $27,354,833
in the comparable 2005 period, representing an increase of 11.0%. The increase is primarily due to the non-cash charge of $11,972,160 in 2005 related to accounting for our variable stock option plan. In addition, $3,630,340 in 2006 is attributed to
non-recurring accounting, legal, and consulting expenses related to our financial restatement, class action lawsuits and initial implementation of Sarbanes-Oxley compliance.

Interest expense increased to $4,027,915 for the six months ended June 30, 2006 from $2,191,410 in the comparable 2005 period, representing an
increase of 83.8%. This increase is primarily the result of $1,433,363 in interest expense from the HBK Investment, L.P. credit facility since the full principal balance was drawn during the entire period ending June 30, 2006 versus only part
of the six months ended June 30, 2005.

The provision for income taxes increased to $1,504,324 for the six months ended June 30,
2006 compared with a benefit of $985,062 for the six months ended June 30, 2005. This increase is primarily related to the permanent difference caused by the tax benefit related to the accounting for derivatives.

As a result of the above changes, net income was $11,082,008 for the six months ended June 30, 2006 compared with net loss of $16,652,805 in the
comparable 2005 period. This increase is primarily due to the non-cash benefit of $10,492,951 in 2006 as compared to a non-cash expense of $13,246,747 in 2005 from derivative instruments related to our convertible debentures.

Liquidity and capital resources on June 30, 2006

Cash amounted to $6,249,412 at June 30, 2006, compared to $12,231,091 as of June 30, 2005. The net cash provided by operations was $1,885,536 for the six months ended June 30, 2006, compared to cash provided by operations of
$2,388,782 in the comparable 2005 period. This net decrease in cash from operations is primarily due to non-recurring accounting, legal and consulting expenses related to our financial restatement, class action lawsuits and initial implementation of
Sarbanes-Oxley compliance.

Cash used in investing activities was $18,054,952 for the six months ended June 30, 2006 compared with a
use of $20,678,785 in the comparable 2005 period. This decrease is primarily due to acquisitions and earn out payments during the three months ended June 30, 2006.

Cash used in financing activities was $294,337 for the six months ended June 30, 2006 compared with a use of $11,420,254 in the comparable 2005 period. This decrease is primarily due to cash raised through the
HBK Investments L.P. credit facility which closed in May 2005.

Management believes the current cash position will be sufficient to provide
us with capital to fund working capital needs for the next twelve months. We have significant indebtedness, as described under Convertible Debt and Other Debt. We are obligated to make principal payments of $12,699,012 for
the twelve months ending June 30, 2007, $8,000,000 for twelve months ending June 30, 2008 and $17,750,000 for the twelve months ending June 30, 2009. We may not have adequate funds from operations to pay the debt when it comes due. It
will be necessary, in order to expand our business, consummate acquisitions and refinance indebtedness, to raise additional capital. No assurance can be given at this time that such funds will be available, or if available will be sufficient in the
near term or that future funds will be sufficient to meet growth. In the event of such developments, attaining financing under such conditions may not be possible, or even if such funds are available, the terms on which such capital may be
available, may not be commercially feasible or advantageous.



31



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Convertible debt

On December 18, 2003, we completed a private placement offering of $10 million in 7.5% convertible debentures to two institutional investors, Midsummer Investments Ltd. and Islandia, L.P. The debentures are due
December 17, 2006 and are convertible by the investors at any time into shares of common stock at an adjusted fixed price of $1.90 per share. Interest on the debentures is payable (in cash or stock, at our election) in quarterly installments,
which commenced in March 2004. Interest paid in shares is based upon 90% of the market value for the shares as defined in the debentures. The debentures have full ratchet anti-dilution protection, which means that, with certain exceptions, if we
issue common stock or securities convertible or exercisable for common stock, with a purchase, conversion or exercise price below the conversion price of the debentures such conversion price is automatically reduced to the lower price. The debenture
holders also have a right of first refusal to participate in future equity financings of PainCare. With certain exceptions, PainCare is not permitted to incur debt that would be senior to orpari passu with the debentures. The securities
purchase agreement pursuant to which the debentures were sold provides that we shall not effect any conversion of debentures and holder shall not have the right to convert any portion of debentures to the extent that after giving effect to such
conversion the holder (together with the holders affiliates), would beneficially own in excess of 4.99% of the number of shares of the common stock outstanding immediately after giving effect to such conversion. The investors also received
warrants to purchase 1,263,316 shares of common stock. On June 7, 2006, the American Stock Exchange approved the Companys request to replace 2,593,316 warrants previously granted to Midsummer Investments, Ltd., Islandia, L.P. and Laurus
Master Fund, Ltd in connection with convertible debenture financings with a total of 1,310,000 restricted common shares.

On July 1,
2004, we completed an institutional private placement offering with aggregate proceeds of $1.5 million from Midsummer Investments Ltd. Pursuant to a separate securities purchase agreement with Midsummer, we issued and sold a $1.5 million fixed price
7.5% Convertible Debenture. The 7.5% convertible debenture is due July 1, 2007 and is convertible into shares of our common stock at an adjusted price of $1.90 per share. Interest on the debenture is payable in quarterly installments commencing
in September 2004 in cash or stock, at our election. The conversion terms and other terms, including anti-dilution protections, are otherwise substantially the same as the December 17, 2003 debenture issued to Midsummer. Midsummer also received
warrants to purchase 165,000 shares of common stock. On June 7, 2006, the American Stock Exchange approved the Companys request to replace 2,593,316 warrants previously granted to Midsummer Investments, Ltd., Islandia, L.P. and Laurus
Master Fund, Ltd in connection with convertible debenture financings with a total of 1,310,000 restricted common shares.

On August 2,
2006, the Company completed a private placement of 8.5% convertible debentures in the principal amount of $3.0 million with Midsummer Investments Ltd. and Islandia, L.P. The 8.5% Convertible Debentures are due August 2, 2009 and are convertible into
shares of the Companys common stock at an initial price of $1.90 per share at the holders option. Interest on the 8.5% Convertible Debentures is payable in quarterly installments commencing in October 2006. Subject to the satisfaction of
certain conditions, the Company has the right to redeem the 8.5% Convertible Debentures at any time after the two years from issuance, to make certain redemption payments in shares of the Companys common stock, and to make interest payments in
shares of the Companys common stock.

Concurrently with the August 2, 2006 financing, the Company, Midsummer, and Islandia entered
into an amendment agreement pursuant to which the due dates on the $10 million and $1.5 million Convertible Debentures were extended until August 2, 2009. The Company has agreed to issue the two debenture holders 500,000 shares of the Companys
common stock in connection with the financing and the due date extension. Management is in the process of performing the calculations related to the restructuring and has not yet determined the impact on the financial statements for the third
quarter.



32



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Other debt

Note payable for acquisition of PSHS Beta Partners, Ltd. Due on August 1, 2006 without a stated interest rate. The face value is $1,351,458. The note is secured by the Companys interest in PSHS Beta
Partners, Ltd. The Companys carrying amount of the partnership is $1,949,486. The note was paid in full August 4, 2006

Note
payable for acquisition of PSHS Beta Partners, Ltd. Due on August 1, 2006 without a stated interest rate. The face value is $281,554. The note is secured by the Companys interest in PSHS Beta Partners, Ltd. The Companys carrying
amount of the partnership is $1,949,486. The note was paid in full August 1, 2006.

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

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

The outstanding balance under the credit facility was $29,250,000 at June 30, 2006.

On May 2,
2006, June 20, 2006 and August 9, 2006 we entered into letter agreements with the lenders under the credit facility pursuant to which the lenders waived certain historic breaches of the terms of the credit facility in consideration
for which we paid $300,000, $150,000 and $100,000 in waiver fees, respectively, to the lenders. The August 9, 2006 letter agreement further provides that the Company and the lenders must reach an agreement on or before October 15, 2006 with respect
to modification of certain financial covenants set forth in the credit facility documents. Any failure to reach such an agreement will be an Event Default under the credit facility. Subsequent to the date of the letter agreements we may have failed
to comply with certain covenants set forth in the credit facility. To date we have not received a notice letter from the lenders with respect to any breaches or defaults under the terms of the credit facility after the date of the most recent letter
agreement.

A summary of our contractual obligations and commercial commitments at June 30, 2006 were as follows:



|                              |  |       |             |                 |   |            |  |           |            |          |   |           |  |   |          
|----------------------------- |  | ----- | ----------- | --------------- | - | ---------- |  | --------- | ---------- | -------- | - | --------- |  | - | ---------
|Contractual Obligations       |  | Total |             | Less than 1Year |   | 1-3 Years  |  | 3-5 Years |            | 5+ Years
|Long-term debt                |  | $     | 38,449,012  |                 | $ | 12,699,012 |  | $         | 25,750,000 |          | $ |          |  | $ |         
|Convertible debentures        |  |       | 10,455,160  |                 |   | 8,955,160  |  |           | 1,500,000  |          |   |          |  |   |         
|Capital leases(1)             |  |       | 4,460,104   |                 |   | 1,573,664  |  |           | 2,729,608  |          |   | 156,832   |  |   |         
|Operating leases              |  |       | 16,184,529  |                 |   | 3,449,246  |  |           | 6,706,364  |          |   | 2,818,541 |  |   | 3,210,378
|Acquisition consideration(2)  |  |       | 51,463,330  |                 |   | 17,796,666 |  |           | 33,666,664 |          |   |          |  |   |         
|Employment agreements(3)      |  |       | 3,000,000   |                 |   | 600,000    |  |           | 1,800,000  |          |   | 600,000   |  |   |          
|                              |  |       |             |                 |   |            |  |           |            |          |   |           |  |   |          
|Total contractual obligations |  | $     | 124,012,135 |                 |   |            |  |           |            |          |   |           |  |   |          
|                              |  |       |             |                 |   |            |  |           |            |          |   |           |  |   |          

|1) | Includes the total minimum lease payments due in each year.
|-- | -----------------------------------------------------------



33



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|2) | Includes both the cash and stock components of the acquisition earnouts. One-half of the contractual obligation is a payment in cash, while the remaining half in payable in common
stock priced at fair market value. This assumes the practices meet all earnings threshold obligations.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3) | Includes guaranteed minimum management bonuses through employment agreements which expire on December 31, 2010.
|-- | ---------------------------------------------------------------------------------------------------------------

FORWARD-LOOKING STATEMENTS

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

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

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



| |  |  | the acquisition of businesses or the launch of new lines of business, which could increase operating expenses and dilute operating margins;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | the inability to attract new patients by our owned practices, the managed practices and the limited management practices;
| | - |  | -------------------------------------------------------------------------------------------------------------------------



| |  |  | increased competition, which could lead to negative pressure on our pricing and the need for increased marketing;
| | - |  | -----------------------------------------------------------------------------------------------------------------



| |  |  | the inability to maintain, establish or renew relationships with physician practices, whether due to competition or other factors;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



| |  |  | the inability to comply with regulatory requirements governing our owned practices, the managed practices and the limited management practices;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | that projected operating efficiencies will not be achieved due to implementation difficulties or contractual spending commitments that cannot be reduced; and to the general risks
associated with our businesses.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

We have interest rate risk, in that borrowings under our credit facility are based on variable market
interest rates. As of June 30, 2006, we had $29.25 million of variable rate debt outstanding under our credit facility. Presently, the revolving credit line bears interest at a rate of either LIBOR plus 7.25% or prime plus 4.25%, with a term of
48 months. A hypothetical 10% increase in our credit facilitys weighted average interest rate of 12.4% per annum for the three months ended June 30, 2006 would correspondingly decrease our pre-tax earnings and operating cash flows by
approximately $90,675.

Intangible Asset Risk

We have a substantial amount of intangible assets. We are required to perform goodwill impairment tests whenever events or circumstances indicate that the carrying value may not be recoverable from estimated future cash flows. As a result
of our periodic evaluations, we may determine that the intangible asset values need to be written down to their fair values, which could result in material charges that could be adverse to our operating results and financial position. Although at
June 30, 2006 we believed our intangible assets were recoverable, changes in the economy, the business in which we operate and our own relative performance could change the assumptions used to evaluate intangible asset recoverability. We
continue to monitor those assumptions and their effect on the estimated recoverability of our intangible assets.

Equity Price Risk

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

Commodity Price Risk

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



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ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures, as such term is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of
1934 (the Exchange Act) designed to ensure information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in
Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding
required disclosure.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the
participation of our disclosure committee and management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules
13a-15(b) and 15d-15(b). During this evaluation, management considered the impact any material weaknesses and other deficiencies in our internal control over financial reporting might have on our disclosure controls and procedures. In accordance
with Section 404 of the Sarbanes-Oxley Act and the rules and regulations promulgated under this section, we were required for our Annual Report on Form 10-K for the year ended December 31, 2005 to evaluate and report on our internal
control over financial reporting. In our report contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005, we reported the following material weaknesses:

Inadequate controls over the process for the identification and implementation of the proper accounting for complex and non-routine transactions which
caused the Company to restate its consolidated financial statements for the years ended December 31, 2000, December 31, 2001, December 31, 2002, December 31, 2003 and December 31, 2004, and for the quarterly
periods ended March 31, 2005, June 30, 2005 and September 30, 2005 (collectively, the financial statements) to correct the Companys financial statements;

Inadequate segregation of duties in the field locations;

Inadequate controls to timely identify, analyze, record, and properly disclose all transactions with related parties;

Inadequate controls over operating knowledge or training, adequate backup and security of certain critical financial systems;

Inadequate controls over the timeliness and accuracy of the monthly close process; and

Inadequate
technical expertise with respect to income tax accounting and tax compliance to effectively oversee these areas.

Because the material
weaknesses identified in connection with the assessment of our internal control over financial reporting as of December 31, 2005 have not yet been remediated, our Chief Executive Officer and our Chief Financial Officer concluded our disclosure
controls and procedures were not effective as of June 30, 2006. To address these control weaknesses, the Company performed additional analysis and performed other procedures in order to prepare the unaudited quarterly consolidated financial
statements in accordance with generally accepted accounting principles in the United States of America.



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The certifications of our Chief Executive Officer and our Chief Financial Officer required in accordance
with Section 302 of the Sarbanes-Oxley Act of 2002 are attached as exhibits to this Quarterly Report on Form 10-Q. The disclosures set forth in this Item 4 contain information concerning the evaluation of our disclosure controls and
procedures, referred to in paragraph 4 of the certifications. Those certifications should be read in conjunction with this Item 4 for a more complete understanding of the matters covered by the certifications.

Remediation Plans for Material Weaknesses in Internal Control over Financial Reporting

In order to remediate the material weaknesses in internal control over financial reporting and ensure the integrity of our financial reporting processes
for the remainder of 2006, we are planning the following enhancements:

Identification and implementation of the proper
accounting for complex and non-routine transactions.

The creation and staffing of an Assistant Controller position to provide oversight
over the accounting organization as well as other actions to strengthen the operation and effectiveness of our internal controls and allow the Controller the essential time to identify accounting issues, and prepare the required disclosures in the
notes to the financial statements.

Engage a third party advisor with expertise in identifying, researching and evaluating the
appropriateness of complex accounting principles and for evaluating the effects of new accounting pronouncements.

Segregation of duties in the field locations

The creation and staffing of two Internal Auditors to provide technical
expertise in the review of accounting and reconciliation processes as well as enforcing of corporate policy and procedures related to field operations.

Timely identify, analyze, record, and properly disclose all transactions with related parties

The
two Internal Auditors will also be responsible for the identification and documentation of new related parties. In addition, they will also review all existing related party arrangements and authorize transactions to ensure that documentation is
analyzed and recorded timely.

Engage a third party advisor with expertise in identifying, researching and evaluating the appropriateness
of complex accounting principles and for evaluating the effects of new accounting pronouncements.

Operating knowledge
or training, adequate backup and security of certain critical financial systems

Engage a third party advisor with expertise in
information system security to help implement, train and ensure compliance with corporate IT policies and procedures.

Timeliness and accuracy of the monthly close process

The creation and staffing of an Assistant Controller to provide
oversight over the accounting organization as well as other actions to strengthen the operation and effectiveness of our internal controls and allow the Controller the essential time to identify accounting issues, and prepare the required
disclosures in the notes to the financial statements.



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Engage a third party advisor with expertise in identifying, researching and evaluating the
appropriateness of complex accounting principles and for evaluating the effects of new accounting pronouncements.

The creation and
staffing of two Internal Auditors to provide technical expertise in the review of accounting and reconciliation processes to ensure the accurate and timely reporting of each field location prior to consolidation at corporate.

Accounting for income taxes

Engage a third party advisor to provide oversight over the income tax accounting and tax compliance as well as other actions to strengthen the income tax accounting function within the organization.

Until these changes are fully implemented, the material weaknesses will continue to exist. Management presently anticipates that the changes necessary to
remediate these weaknesses will be in place by the end of the third quarter of 2006.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during our
last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II  OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

On March 21, 2006, Roy Thomas Mould
filed a complaint under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 against the Company, as well as the Companys chief executive officer and chief financial officer, before the United States District Court for the Middle
District of Florida. The complaint is entitledMould v. PainCare Holdings, Inc., et al., Case No. 06-CV-00362-JA-DAB. Mr. Mould alleges material misrepresentations and omissions in connection with the Companys financial
statements which appear to relate principally to the Companys previously announced intention to restate certain past financial statements. Mr. Mould seeks unspecified damages and purports to represent a class of shareholders who purchased
the Companys common stock from August 27, 2002 to March 15, 2006. Ten additional complaints were filed shortly afterward before the same court which recite similar allegations. (Collectively, these cases will be referred to as the
Securities Litigation.) To allow for the selection of a lead plantiff(s) and counsel, and the consolidation of the individual class action complaints, plaintiffs and defendants have agreed that a response to the individual complaints is
not required until after a consolidated complaint has been filed. The Company cannot predict the outcome of the Securities Litigation, but believes that the allegations lack merit and will vigorously defend against them. The Company anticipates that
it will move to dismiss plaintiffs consolidated class action complaint.



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

On March 30, 2006 and May 3, 2006, two purported shareholders of the Company made separate demands on the Companys board of directors. These demands raise many if not all of the same issues as the
derivative action, but asks the independent directors to investigate the charges and to take legal action against those individuals responsible.

In accordance with governing Florida law, the Company formed a special committee of independent directors (Tom Crane, Jay Rosen and Aldo Berti) to review and investigate the two derivative demands and the allegations
of the derivative complaint, to oversee settlement discussions and to make recommendations concerning the handling of the demands and the complaint to the full board of directors. To assist with this charge, the special committee has retained the
law firm of Morris, Nichols, Arshdt & Tunnel.

The Company is currently involved in active settlement negotiations with the
attorneys representing the shareholders to address the issues raised in the derivative demands and the derivative action. Although the outcome of these discussions cannot be predicted, the Company hopes to resolve the issues raised on an amicable
basis and, thus, avoid the expense and uncertainty of protracted litigation.

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

ITEM 1A. RISK FACTORS

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-Q. In the future, we may become subject to additional risks that are not currently known to us. Our business, financial condition or results of operations could be materially adversely
affected by any of the following risks. The trading price of our common stock could decline due to any of the following risks.

Risks Related to Our
Business

We may need to restate our consolidated financial statements again.

Based upon comments received from the SEC staff regarding our method of accounting for (i) certain term notes, freestanding and embedded derivatives,
and (ii) intangible assets acquired in connection with physician practice and surgery center acquisitions, we have restated our consolidated financial statements for the years ended December 31, 2000, December 31,
2001, December 31, 2002, December 31, 2003, December 31, 2004 and the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005. We based the foregoing restatements on our interpretation of
applicable accounting pronouncements, notwithstanding the fact that the SEC staff comments remain unresolved.



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There can be no assurance that the SEC staff will agree with our interpretation of the applicable accounting
pronouncements. In the event the SEC staff disagrees with one or more of our interpretations of applicable accounting pronouncements, we may have to restate our consolidated financial statements again in the future.

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

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

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

On May 2, 2006, June 20, 2006 and August 9, 2006 we entered into letter agreements with the lenders under our $30 million senior
credit facility pursuant to which the lenders waived certain historic breaches of the terms of the credit facility in consideration for which we paid $300,000, $150,000 and $100,000 in waiver fees, respectively, to the lenders.

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

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

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

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

As a result of the material weaknesses, management concluded that our disclosure controls and procedures and our internal controls over financial reporting as of December 31, 2005, the end of our most recent
fiscal year, were not effective. Management has concluded that our disclosure controls and procedures remain not effective as of June 30, 2006.

In an effort to rectify the foregoing material weaknesses, we have modified our method of accounting for certain transactions and have implemented additional controls. In so doing, we restated



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our consolidated financial statements for the years ended December 31, 2000, December 31,
2001, December 31, 2002, December 31, 2003, December 31, 2004 and the quarters ended March 31, 2005, June 30, 2005 and September 30, 2005.

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

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

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



| |  |  | the possibility that we are not able to identify suitable acquisition candidates or consummate acquisitions on acceptable terms;
| | - |  | --------------------------------------------------------------------------------------------------------------------------------



| |  |  | possible decreases in capital resources or dilution to existing stockholders;
| | - |  | -----------------------------------------------------------------------------



| |  |  | difficulties and expenses incurred in connection with an acquisition;
| | - |  | ---------------------------------------------------------------------



| |  |  | the difficulties of operating an acquired business;
| | - |  | ---------------------------------------------------



| |  |  | the diversion of managements attention from other business concerns;
| | - |  | ---------------------------------------------------------------------



| |  |  | a limited ability to predict future operating results of acquired practices; and
| | - |  | --------------------------------------------------------------------------------



| |  |  | the potential loss of key physicians, employees and patients of an acquired practice.
| | - |  | -------------------------------------------------------------------------------------

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

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

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



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

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

There can be no assurance that physicians, medical providers or the medical community in general will accept our
business strategy and adopt the strategy offered by us. The extent to which, and rate at which, these services achieve market acceptance and penetration will depend on many variables including, but not limited to, the establishment and demonstration
in the medical community of the clinical safety, efficacy and cost-effectiveness of these services, the advantage of these services over existing technology, and third-party reimbursement practices. There can be no assurance that the medical
community and third-party payors will accept our technology. Similar risks will confront any other services developed by us in the future. Failure of our services to gain market acceptance would have a material adverse effect on our business,
financial condition, and results of operations.

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

We will need to raise additional capital in order to acquire, integrate, develop, operate and expand our affiliated physician
practices. We may finance future acquisition and development projects through debt or equity financings and may use shares of our capital stock for all or a portion of the consideration to be paid in acquisitions. To the extent that we undertake
these financings or use capital stock as consideration, our stockholders may, in the future, experience significant ownership dilution. To the extent we incur indebtedness, we may have significant interest expense and may be subject to covenants in
the related debt agreements that affect the conduct of our business. We have convertible notes and debentures outstanding that have anti-dilution rights and limitations on incurring additional indebtedness that could limit our ability to obtain
financing on favorable terms, or at all. We have notes due within the next twelve months totaling $7,758,750, including principal and interest. In addition, we are obligated to make debt principal payments of $3,000,000 over the next twelve months.

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

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

For the years ended
December 31, 2005, 2004 and 2003, net loss was ($5,339,378), $(1,501,482) and ($11,482,843), respectively. We expect to increase our spending significantly as we continue to expand our service offerings and commercialization activities. As a
result, we will need to generate significant revenues in order to continue to grow our business and become profitable.

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

As of June 30, 2006, we had an intangible asset, net goodwill, of approximately $139.8 million, which constituted 67% of our total assets. The net goodwill reflects the amount we pay for our



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

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

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

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

Our 7.5% convertible debentures and our secured convertible term notes contain certain provisions and
restrictions, which if violated, could result in the full principal amount, $10,455,160 as of June 30, 2006, together with interest and other amounts, becoming immediately due and payable in cash on such securities. If such an event occurred
and if a holder of such securities demanded repayment, we might not have the cash resources to repay such indebtedness. The debentures have a term of three years, with interest payable quarterly. Subject to certain conditions, the quarterly interest
payments on the debentures may be paid, at our option, in cash or additional shares of our common stock. Our secured convertible term notes are repayable in monthly installments of principal over the three year life of the notes. Subject to certain
conditions, the monthly principal and interest payments on the notes may be paid, at our option, in cash or additional shares of common stock. If we made the payments on the debentures and notes in cash rather than additional shares of common stock,
it would reduce the amount of cash available to fund operations.

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

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



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

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

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

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

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

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

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

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

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



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Professional liability claims could adversely impact our business.

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

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

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

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

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

Risks Related to Our Industry

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

Our owned practices, the managed practices and the limited
management practices are subject to stringent federal, state and local government health care laws and regulations. If we or they fail to comply with applicable laws, or if a determination is made that in the past we or the managed practices or the
limited management practices have failed to comply with these laws, we may be subject to civil or criminal penalties, including the loss of our license or our physicians licenses to



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operate and our ability to participate in Medicare, Medicaid and other government sponsored and third-party health care
programs. In addition, laws and regulations are constantly changing and may impose additional requirements. These changes could have the effect of impeding our ability to continue to do business or reduce our opportunities to continue to grow.

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

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

Because government-sponsored payors generally pay providers based on a fee schedule, and the trend is for private payors to do the same,
we may not be able to prevent a decrease in our revenues by increasing the amounts the owned practices charge for services. The same applies to the limited management practices and the managed practices. They cannot increase their charges in an
attempt to counteract reductions in reimbursement for services. There can be no assurance that any reduced operating margins could be recouped through cost reductions, increased volume, and introduction of additional procedures or otherwise. We
believe that trends in cost containment in the health care industry will continue to result in reductions from historical levels of per-patient revenue.

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

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

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

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

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

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



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

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

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

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

The referral of Medicare patients by physicians employed by or under
contract with the managed practices and the limited management practices, respectively, to their respective practices, however, does trigger the Stark Law. We believe, nevertheless, that the in-office ancillary exception to the Stark



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

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

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

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

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

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

As the
result of a congressional mandate, the Office of the Inspector General (OIG) of DHHS promulgated a regulation specifying certain payment practices which the OIG determined to be at minimal risk for abuse. The OIG named these payment
practices Safe Harbors. If a payment arrangement fits within a Safe Harbor, it will be deemed not to violate the Anti-Kickback Statute.



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Merely because a payment arrangement does not comply with all of the elements of any Safe Harbor, however, does not mean
that the parties to the payment arrangement are violating the Anti-Kickback Statute.

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

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

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

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

Our
agreements with the limited management practices may also raise different Anti-Kickback concerns, but we believe that our arrangements are sufficiently different from those deemed suspect by the OIG so as not to violate the law. In April of 2003,
the OIG issued a Special Advisory Bulletin where the OIG addressed contractual arrangements where a health care provider in one line of business (Owner) expands into a related health care business by contracting with an existing



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provider of a related item or service (Manager) to provide the new item or service to the Owners
existing patient population. In those arrangements, the Manager not only manages the new line of business, but may also supply it with inventory, employees, space, billing and other services. In other words, the Owner contracts out substantially the
entire operation of the related line of business to the Manager, receiving in return the profits of the business as remuneration for its federal program referrals to the Manager.

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

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

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

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

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



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

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

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

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

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

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

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



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

Risks Related to Our Common Stock

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

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

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

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

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

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

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



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We do not expect to pay dividends.

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

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

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

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

The following information sets forth
certain information for all securities sold by the Company during the three months ended June 30, 2006 without registration under the Securities Act of 1933, as amended (the Securities Act).

Between March 31, 2006 and June 30, 2006 a total of 35,165 common stock shares were issued representing the final earnout installment related
to the acquisition of Pain and Rehabilitation Network, Inc.

Between March 31, 2006 and June 30, 2006 a total of 183,333 common
stock shares were issued representing the final earnout installment related to the acquisition of Medical Rehabilitation Specialists, Inc.

Between March 31, 2006 and June 30, 2006 a total of 325,650 common stock shares were issued representing earnout installments related to the acquisition of Denver Pain Management.

Between March 31, 2006 and June 30, 2006 a total of 155,556 common stock shares were issued representing the first of three earnout
installments related to the acquisition of Colorado Pain Specialists, P.C.

Between March 31, 2006 and June 30, 2006 a total of
1,310,000 common stock shares were issued to Midsummer Investments, Ltd. and Islandia, L.P. replacing cancelled warrants, which were previously issued in connection with two convertible debt financings.



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With respect to the foregoing offers and sale of restricted and unregistered securities, the Company
relied on the provisions of Sections 3(b) and 4(2) of the Securities Act and rules and regulations promulgated thereunder, including, but not limited to Rules 505 and 506 of Regulation D, in that such transaction did not involve any public offering
of securities and were exempt from registration under the Securities Act. The offers and sale of the securities was not made by any means of general solicitation, the securities were acquired by the investors without a view towards distribution, and
all purchasers represented to the Company that they were sophisticated and experienced in such transactions and investments and able to bear the economic risk of their investment. A legend was placed on the certificates or instruments, as the case
may be, they have not been registered under the Securities Act and setting forth the restrictions on their transfer and sale. Each investor also signed a written agreement that the securities would not be sold without registration under the
Securities Act or pursuant to an applicable exemption from such registration.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS



|     |  |                                                                                                                                                                                                                          
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|No.  |  | Description                                                                                                                                                                                                              
|10.1 |  | Letter Agreement between PainCare Holdings, Inc. and HBK Investments, L.P. (1)                                                                                                                                           
|     | 
|10.2 |  | Warrant Cancellation Agreement between PainCare Holdings, Inc. and Laurus Master Fund, Ltd.(2)                                                                                                                           
|     | 
|10.3 |  | Warrant Cancellation Agreement between PainCare Holdings, Inc. and Midsummer Investments, Ltd.(2)                                                                                                                        
|     | 
|10.4 |  | Warrant Cancellation Agreement between Paincare Holdings, Inc. and Islandia, LP(2)                                                                                                                                       
|     | 
|31.1 |  | Certification of Chief Executive Officer of PainCare Holdings, Inc. pursuant to Rule 13a - 14(a)/15d-14(a) of the Securities Exchange Act of
1934.                                                                       
|     | 
|31.2 |  | Certification of Chief Financial and Accounting Officer of PainCare Holdings, Inc. pursuant to Rule 13a - 14(a)/15d-14(a) of the
Securities Exchange Act of 1934.                                                        
|     | 
|32.1 |  | Certifications of Chief Executive Officer and Chief Financial and Accounting Officer of PainCare Holdings, Inc. pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

---

|(1) | Previously filed with the SEC with the Companys Form 8-K on May 8, 2006
|--- | ------------------------------------------------------------------------

|(2) | Previously filed with the SEC with the Companys Form 8-K on May 8, 2006
|--- | ------------------------------------------------------------------------



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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: August 14, 2006 |  | /s/ Randy A. Lubinsky Randy A.
Lubinsky Chief Executive Officer   
|                      | 
|Date: August 14, 2006 |  | /s/ Mark Szporka Mark
Szporka Chief Financial & Accounting Officer



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