UNITED STATES

SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C.
20549_______________________________

FORM
10-Q_____________________

Quarterly Report Pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended March 31,
2006Commission File Number 1-14160

PainCare Holdings,
Inc.(Exact Name of Registrant as Specified in
its Charter)

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


1030 N. Orange Avenue, Suite 105, Orlando,
Florida 32801(Address of Principal Executive
Offices)

(407) 367-0944(Registrants Telephone Number)

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 June 28, 2006 there were 65,360,366 outstanding
shares of the Registrants common stock, $0.0001 par value.

1

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PAINCARE HOLDINGS, INC.INDEX

Table of Contents to Form 10-Q for the Three
Months Ended March 31, 2006

|PART I        | FINANCIAL
      INFORMATION                                                                                     
|------------- | ----------------------------------------------------------------------------------------------------------------
|             
|Item 1.       | Financial
      Statements                                                                                      
|              | Consolidated Balance Sheets as of March 31, 2006 (Unaudited)
      and December 31, 2005                        
|              | Consolidated
      Statements of Operations for the Three Months Ended March 31, 2006 and
      2005(Unaudited) 
|
|              | Consolidated
      Statements of Cash Flows for the Three Months Ended March 31, 2006 and
      2005(Unaudited) 
|
|              | Consolidated
      Statements of Stockholders Equity for the Three Months Ended March 31,
      2006(Unaudited)
|
|              | Notes to
      Consolidated Financial Statements (Unaudited)                                                    
|Item 2.       | Managements
      Discussion and Analysis of Financial Condition and Results of
      Operations               
|Item 3.       | Quantitative
      and Qualitative Disclosures About Market Risk                                                
|Item 4.       | Controls and
      Procedures                                                                                   
|             
|PART II       | OTHER
      INFORMATION                                                                                         
|             
|Item 1.       | Legal
      Proceedings                                                                                         
|Item
      1A | Risk
      Factors                                                                                              
|Item 2.       | Unregistered
      Sales of Equity Securities and Use of Proceeds                                               
|Item 3.       | Defaults Upon
      Senior Securities                                                                           
|Item 4.       | Submission of
      Matters to a Vote of Security Holders                                                       
|Item 5.       | Other
      Information                                                                                         
|Item 6.       | Exhibits                                                                                                        
|             
|              | Signatures                                                                                                      

2

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|PART I                                                            
|------------------------------------------------------------------
|                                                                  
|ITEM 1. FINANCIAL
      STATEMENTS                                
|                                                                  
|                                                                  
|PAINCARE HOLDINGS, INC.                                           
|Consolidated Balance Sheets                                       
|As of March 31, 2006 and December 31,
      2005                  
|                                                                  
|Assets                                                            
|                                                                  
|                                                                  
|Current assets:                                                   
|Cash and cash
      equivalents                                   
|Accounts receivable,
      net                                    
|Due from stockholders                                             
|Deposits and prepaid
      expenses                               
|Deferred tax asset                                                
|Total current
      assets                                        
|                                                                  
|Property and equipment,
      net                                 
|Goodwill, net                                                     
|Due from stockholders                                             
|Deferred tax asset                                                
|Other assets                                                      
|Total assets                                                      
|                                                                  
|Liabilities and Stockholders' Equity                              
|Liabilities:                                                      
|Accounts payable and accrued
      expenses                       
|Accrued compensation
      expense                                
|Derivative liabilities                                            
|Acquisition consideration
      payable                           
|Common stock payable                                              
|Income tax payable                                                
|Current portion of notes
      payable                            
|Current portion of convertible
      debentures                   
|Current portion of capital lease
      obligations                
|Total current
      liabilities                                   
|                                                                  
|Notes payable, less current portion                               
|Convertible debentures, less current portion                      
|Capital lease obligations, less current portion                   
|Total
      liabilities                                           
|                                                                  
|Minority interests in consolidated subsidiaries                   
|                                                                  
|Commitments and contingencies                                     
|Stockholders' equity:                                             
|Common stock, $.0001 par value.
      Authorized 200,000,000      
|shares; issued and
      outstanding 63,676,312 and 55,823,026    
|shares                                                            
|Preferred stock, $.0001 par value.
      Authorized 10,000,000    
|shares; issued and outstanding -0- shares                         
|Additional paid in
      capital                                  
|Accumulated deficit                                               
|Accumulated other comprehensive
      income                      
|Total stockholders'
      equity                                  
|                                                                  
|Total liabilities and
      stockholders' equity                  
|See accompanying notes to
      consolidated financial statements.

3

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|PAINCARE
      HOLDINGS, INC.                                       
|--------------------------------------------------------------------
|Consolidated
      Statements of Operations                         
|For the Three
      Months Ended March 31, 2006 and 2005 (Unaudited)
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|                                                                    
|Revenues:                                                           
|Pain management                                                     
|Surgeries                                                           
|Ancillary
      services                                            
|Total revenues                                                      
|                                                                    
|Cost of revenues                                                    
|Gross profit                                                        
|                                                                    
|General and administrative
      expense                            
|Compensation expense-variable
      stock options                   
|Amortization expense                                                
|Depreciation expense                                                
|Operating income
      (loss)                                       
|                                                                    
|Interest expense                                                    
|Derivative benefit
      (expense)                                  
|Other income                                                        
|Income (loss) before income
      taxes                             
|                                                                    
|Provision (benefit) for income
      taxes                          
|Income (loss) before minority
      interests                       
|                                                                    
|Minority interests in net
      earnings of consolidated            
|subsidiaries                                                        
|                                                                    
|Net income
      (loss)                                             
|                                                                    
|Basic income (loss) per common
      share                          
|                                                                    
|Basic weighted average common
      shares outstanding              
|                                                                    
|Diluted income (loss) per common
      share                        
|                                                                    
|Diluted weighted average common
      shares outstanding            
|                                                                    
|See accompanying notes to
      consolidated financial statements.  

4

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|PAINCARE
      HOLDINGS, INC.                                              
|---------------------------------------------------------------------------
|Consolidated
      Statements of Cash Flows                                
|For the Three
      Months Ended March 31, 2006 and 2005 (Unaudited)       
|                                                                           
|                                                                           
|Cash flows from operating
      activities:                                
|Net
      income (loss)                                                    
|Adjustments to reconcile net income (loss) to net cash
      provided by   
|operating activities:                                                      
|Depreciation and
    amortization                                          
|Non-cash transactions and
    other                                        
|Amortization of debt
    discount                                          
|Stock issued for interest
    payments                                     
|Derivative (benefit)
    expense                                           
|Deferred income taxes                                                      
|Amortization of deferred financing
      expenses                          
|Compensation expense-variable stock
      options                          
|Minority interests                                                         
|Change in operating assets and
      liabilities, net of assets acquired:  
|Accounts
      receivable                                                  
|Deposits and prepaid
      expenses                                        
|Other
    assets                                                           
|Interest
      payable                                                     
|Income tax
      payable                                                   
|Accounts payable and
      accrued expenses                                
|Net cash provided by operating
      activities                            
|                                                                           
|Cash flows from investing
      activities:                                
|Purchase of property and equipment                                         
|Cash
      paid for earnouts                                               
|Cash
      used for acquisitions                                           
|Cash
      from acquisitions                                               
|Net cash used in investing
      activities                                
|                                                                           
|Cash flows from financing
      activities:                                
|Proceeds from issuance of common stock, net of capital
      offering costs
|Payments of capital lease obligations                                      
|Payment of convertible debentures                                          
|Due
      from stockholders                                                
|Cash
      distributions to minority interests                             
|Payments on notes payable, net                                             
|Net cash provided by (used in) financing
    activities                    
|                                                                           
|Net decrease in cash and cash equivalents                                  
|                                                                           
|Cash and cash equivalents at
      beginning of period                     
|Cash and cash equivalents at end
      of period                           
|                                                                           
|Supplemental disclosures of cash
      flow information:                   
|Cash
      paid during the period for interest                             
|Cash
      paid during the period for income taxes                         
|Non-cash investing and financing
transactions:                             
|Common stock issued for acquisitions                                       
|Common stock issued for convertible
    debentures                         
|Common stock issued for earnouts                                           
|Acquisition consideration payable                                          
|Common stock issued for common stock
      payable                         
|                                                                           
|See accompanying notes to
      consolidated financial statements.         

5

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|PAINCARE
      HOLDINGS, INC.                                     
|------------------------------------------------------------------
|Consolidated
      Statements of Stockholders Equity             
|For the Three
      Months Ended March 31, 2006 (Unaudited)       
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|                                                                  
|Balances at December 31,
      2005                               
|Common stock issued for
      earnouts                            
|Common stock issued
      for  acquisitions                       
|
|Common stock options issued
      to  employees                   
|
|Common stock issued for
      debenture  interest
      payments  
|
|Common stock issued for
      private  placement
      offering   
|
|Components of
      comprehensive  income
      (loss):           
|
|Translation
      adjustment                                      
|Net
      income                                                  
|Comprehensive income                                              
|Balances at March 31,
      2006                                  
|                                                                  
|See accompanying notes to
      consolidated financial statements.

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-month period ended
March 31, 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.

(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.

7

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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.

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.

Valuation of Goodwill and Intangible
Assets

During the three month
period ended Match 31, 2006, the Company recorded $24,263,908 million of
goodwill and $322,164 of identified intangible assets, in connection with the
acquisitions described in note 7.

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 March 31, 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.

8

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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.

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

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.

9

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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.

For the Three
      Months Ended March 31, 2006Pain  Mgmt
    Surgeries
    Ancillary  Services
    Corporate
    TotalsRevenues
    $ 13,229,499
    $ 1,881,030
    $ 8,197,945
    $            
      -
    $23,308,474Operating income
    4,480,638
    486,214
    2,748,930
    (2,869,676)
    4,846,106For the Three
      Months Ended March 31, 2005Pain  Mgmt
    Surgeries
    Ancillary  Services
    Corporate
    TotalsRevenues
    $ 9,261,065
    $ 1,403,803
    $ 3,571,872
    $             -
    $14,236,740Operating income
      (loss)
    4,202,294
    430,638
    1,242,173
    (20,066,005)
    (14,190,900)


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:

10

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For the Three Months Ended March
      31,2006
    
    2005Basic income (loss) per common
      share:Net income (loss) available to
      common shareholders
    $
    11,888,099
    $
    (27,763,632)Basic weighted average common
      shares outstanding
    
    61,598,932
    
    44,412,972Basic income (loss) per common
      share
    $
    0.19
    $
    (0.63)Diluted income (loss) per common
      share:Net income (loss) available to
      common shareholders
    $
    11,888,099
    $
    (27,763,632)Plus impact of assumed
      conversionsInterest expense on 7.5%
      convertible note due 2006, net of tax
    
    112,500
    
    Interest expense on 7.25%
      convertible note due 2007, net of tax
    
    
    
    Interest expense on 7.5%
      convertible note due 2007, net of tax
    
    16,875
    
    Net income (loss) available to
      common shareholders plus assumed conversions
    $
    12,017,474
    $
    (27,763,632)Basic weighted average common
      shares outstanding
    
    61,598,932
    
    44,412,972Plus incremental shares from
      assumed conversions7.5% convertible note due
      2006
    
    4,713,242
    
    7.25% convertible note due
      2007
    
    
    
    7.5% convertible note due
      2007
    
    789,474
    
    Employee stock option plan for
      vested, in the money options
    
    3,709,895
    
    Warrants issued, outstanding, and
      in the money
    
    842,784
    
    Contingent shares for
      acquisitions
    
    
    
    Initial shares for acquisitions,
      weighted
    
    
    
    Diluted weighted average common
      shares outstanding
    
    71,654,327
    
    44,412,972Diluted income (loss) per common
      share
    $
    0.17
    $
    (0.63)


Potentially dilutive
shares for the three months ended March 31, 2006, of approximately 10,055,395
shares, were included in diluted weighted average common shares outstanding for
the diluted per share calculation. Potentially dilutive shares for the three
months ended March 31, 2005, of approximately 11,308,249 shares, were
anti-dilutive.

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

(5) Income Taxes

The income tax
provision for the three months ended March 31, 2006 and 2005 consists of the
following:

2006
    2005Computed expected tax expense
      (benefit)
    $    4,550,982
    $   (11,321,897)Increase (reduction) in income
      tax expense resulting from:Derivative (benefit)
      expense
    (3,534,149)
    6,201,225Derivative interest
      expense
    133,105
    178,739State income taxes, net of
      federal income tax benefit
    175,802
    (682,122)Assets acquired with no tax
      basis
    82,617
    67,977Other, net
    (67,718)
    16,880Other state taxes
    (43,407)
    -


11

---

Unamortized deferred
    taxes
    (91,193)
    -Income from foreign subsidiary,
      net
    (43,120)
    (11,567)Amortization of acquisition
      intangibles
    25,688
    14,700Total
    $ 1,188,607
    $
(5,536,065)


(6) Other Assets

The Company is a
distributor for the sale of MedX equipment in North America under an agreement
expiring on July 28, 2013. MedX equipment is used to provide orthopedic
rehabilitation services in our owned, managed and limited managed physician
practices. The agreement provides for the Company to repurchase MedXs right to
15% of the gross collections generated by the limited managed orthopedic
rehabilitation practices. In addition, the Company receives a 25% commission on
all MedX products purchased for resale. This contract right is being amortized
over the contract term of ten years.

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

The Company has costs
associated with closing acquisitions. These costs are 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 March 31, 2006 and December 31, 2005:

2006
    2005Asset
    Total
    Cost
    AccumulatedAmortization
    Net
      Value
    Total
    Cost
    AccumulatedAmortization
    Net ValueMedX Distribution right
    $
      2,212,673
    $    637,148
    $
      1,575,525
    $
      2,212,673
    $
      581,831
    $
      1,630,842Deferred acquisition
    costs
    475,958
    90,624
    385,334
    475,958
    -
    475,958Contract Right  DPM
    10,467,442
    1,010,885
    9,456,557
    6,026,200
    677,124
    5,349,076Contract Right 
    APG
    482,107
    45,643
    436,464
    486,023
    34,452
    451,571Contract Right  SPA
    1,419,471
    151,177
    1,268,294
    1,433,132
    118,657
    1,314,475Contract Right 
    SCPI
    1,041,546
    110,956
    930,590
    1,051,564
    87,095
    964,469Physician practice &
      surgery center acquisitions
    2,483,921
    597,527
    1,886,394
    2,161,757
    513,326
    1,648,431Total
    $18,583,118
    $   2,643,960
    $ 15,939,158
    $13,847,307
    $ 2,012,485
    $11,834,822




12

---

(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
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.Purchase
price allocation:

Cash
    Consideration
    $ 3,750,000Promissory Notes
    7,500,000Stock
    Consideration
    3,515,480Acquisition Costs
    279,923Less:Cash
    477,845Accounts
    receivable
    767,718Property and equipment
    263,563Prepaid and
    deposits
    80,035Other assets
    47,459Imputed interest on notes
      payable
    215,489Plus:Accounts payable and accrued
      liabilities
    86,046Other liabilities
    696,009Goodwill
    $ 13,975,349


13

---

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.

REC/CMA was acquired
on January 6, 2006 and utilized the purchase method of
accounting.Purchase price allocation:

Cash
    Consideration
    $ 625,000Stock Consideration
    670,870Acquisition
    Costs
    105,493Less:Cash
    28,106Accounts receivable
    80,841Property and
    equipment
    56,767Intangible assets
    82,089Plus:Accounts payable and accrued liabilities
    37,274Deferred taxes
    35,442Goodwill
    $
      1,226,276


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.Purchase
price allocation:

Cash Consideration
    $
    1,500,000Stock Consideration
    1,608,490Acquisition Costs
    110,845Less:Cash
    77,144Accounts receivable
    198,792Property and equipment
    418,384Deposits and prepaid expenses
    27,259Other assets
    8,111Intangible assets
    130,707Plus:Accounts payable and accrued liabilities
    155,718Note payable
    20,417Capital lease obligations
    62,523Deferred taxes
    134,556Goodwill
    $
    2,732,152


14

---

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.Purchase price allocation:

Cash Consideration
    $ 3,250,000Stock
      Consideration
    3,829,618Acquisition Costs
    43,025Less:Cash
    72,463Accounts
      receivable
    1,006,114Property and
      equipment
    176,817Intangible assets
    109,368Plus:Accounts payable and accrued
      liabilities
    114,191Capital lease
      obligations
    66,240Deferred taxes
    114,223Minority interests
    429,985Goodwill
    $ 6,482,520


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.

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.Following are the
summarized unaudited pro forma results of operations for the three months ended
March 31, 2006 and March 31, 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.



|Pro Forma
      Consolidated Statement of Operations    
|--------------------------------------------------------
|Three Months
      Ended March 31, 2006                 
|(Unaudited)                                             
|                                                        
|                                                        
|                                                        
|Revenues                                                
|Cost of revenues                                        
|                                                        
|Gross profit                                            
|                                                        
|General and administrative
      expenses               
|Depreciation and amortization
      expense             
|                                                        
|Operating income                                        
|Interest expense                                        
|Derivative benefit
      (expense)                      
|Other income                                            
|                                                        
|Income before
      taxes                               
|Provision for income
      taxes                        
|                                                        
|Income before minority
      interests share           
|Minority interests
      share                         
|                                                        
|Net income                                              
|                                                        
|Basic income per common
      share                     
|Basic weighted average common
      shares outstanding  
|Diluted income per common
      share                   
|Diluted weighted average common
      shares outstanding

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 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.



15

---

Pro Forma Consolidated
      Statement of OperationsThree Months Ended March
      31, 2005(Unaudited)PainCare  Historical
    
    
    
    
    Pro Forma 
      AdjustmentCPMASC(4)
    REC (5)
    DPMG
      (6)
    AMP
      (7)
    Pro
    FormaRevenues
    $  14,236,740
    $1,477,575
    $ 235,314
    $ 914,156
    251,855
    $         -
    $ 17,115,640Cost of revenues
    2,581,223
    155,475
    16,686
    181,228
    54,105
    (116,913)(1)
    2,871,804Gross profit
    11,655,517
    1,322,100
    218,628
    732,928
    197,750
    116,913
    14,243,836General and administrative
      expenses
    7,195,508
    876,285
    206,406
    490,857
    138,405
    (1,052,212) (2)
    7,855,249Compensation
      expense
    18,138,790
    -
    -
    -
    -
    -
    18,138,790Depreciation and
      amortization expense
    512,119
    -
    -
    -
    -
    -
    512,119Operating
    income (loss)
    (14,190,900)
    445,815
    12,222
    242,071
    59,345
    1,169,125
    (12,262,322)Interest expense
    (898,920)
    (2,295)
    (90)
    (1,193)
    -
    -
    (902,498)Derivative benefit
      (expense)
    (18,238,898)
    -
    -
    -
    -
    -
    (18,238,898 )Other income
    29,021
    -
    -
    -
    -
    -
    29,021Income (loss) before
    taxes
    (33,299,697)
    443,520
    12,132
    240,878
    59,345
    1,169,125
    (31,374,697)Provision for income
    taxes
    (5,536,065)
    -
    -
    -
    -
    264,556(3)
    (5,271,509)Net income (loss)
    $  (27,763,632)
    $ 443,520
    $  12,132
    $ 240,878
    $ 
     59,345
    $  904,569
    $ (26,103,188)Basic income per common
      share
    
    
    
    
    
    
    $          
       (0.59)Basic weighted average
      common shares outstanding
    
    
    
    
    
    
    44,546,751Diluted income per common
      share
    
    
    
    
    
    
    $          
      (0.59)Diluted weighted average
      common 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
      rate of 35%.                           
|4) | Represents the results from the period beginning on
      January 1, 2005 and ending on March 31, 2005.
|5) | Represents the results from the period beginning on
      January 1, 2005 and ending on March 31, 2005.
|6) | Represents the results from the period beginning on
      January 1, 2005 and ending on March 31, 2005.
|7) | Represents the results from the period beginning on
      January 1, 2005 and ending on March 31,
2005.

(8) Related Party
Transactions

During the three months
ended March 31, 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 three months ended March 31, 2006 and
2005:

|                                               | Expense related to the
      threemonths
      ended March 31:
|---------------------------------------------- | --------------------------------------------------------------
|
|                                               | Type
      of  Practice                                       
|Practice Name                                  | Type of Related
      Party Transaction                       
|Associated
      PhysiciansGroup,
    Ltd.     | ManagedPractice                                               
|
|
|
|                                              
|The Center for
      PainManagement, LLC       | Managed Practice                                              
|
|
|
|                                              
|                                               |                                                               
|
|
|                                              
|                                               |                                                               
|                                              
|                                               |                                                               
|                                              
|Dynamic
      Rehabilitation Centers,
    Inc. | Managed Practice                                              
|
|
|
|
|
|
|                                              
|                                               |                                                               
|                                              
|                                               |                                                               
|                                              
|Health Care
      Center of Tampa, Inc.        | Owned Practice                                                
|
|
|
|                                              
|Rick Taylor,
      D.O., P.A.                  | Managed Practice                                              
|
|
|                                              

16

---

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.
    $ 9,664
    $  20,150
    G&ASpine 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.
    $ 31,674
    $  34,969
    G&AThe Company,
      through a subsidiary, is the majority partner of thePSHS 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 receives distributions
      from the partnershiprepresenting
      his share of the profits of the surgery center.These
      distributions are reported as a reduction in minority interest on
      the balance sheet.
    $
      29,250
    $      -
    Minority Interest


(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 March 31, 2006 and December 31, 2005 consists of the
following:

Practice/Stockholder
    2006
    2005Merrill Reuter,
    M.D.
    $ 433,165
    $ 427,553John Vick
    150,000
    -Saqib Khan, M.D.
    452,846
    -Robert Windsor,
    M.D.
    150,000
    -Jeff & Michael
    Wayne
    450,000
    -Rick Taylor,
D.O.
    200,000
    -Bradley Vilims,
    M.D.
    325,000
    -Kenneth Alo,
M.D.
    442,876
    -Total
    $ 2,603,887
    $
427,553  **(10) Long-Term
Debt** Long-term debt
consists of the following at March
31: 2006PSHS Partnership Ventures,
      Inc. (a)
    $ 1,324,886Gary J. Lustgarten Profit
      Sharing and Trust (b)
    276,018HBK Investments (c)
    28,551,647




17

---

Wells Fargo(d)
    64,000CPM ASC acquisition promissory
      note(e)
    7,338,38337,554,935Less current
      installments
    12,697,012$     24,857,923


At March 31, 2006, the aggregate annual principal
payments with respect to the obligations existing at that date as described
above, are as follows:

Three Months Ending
      March 31:2006
    $    12,697,0122007
    5,000,0002008
    17,000,0002009
    4,500,000Thereafter
    -Less unamortized discount
    1,642,077$    37,554,935


(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 $26,572. The total amount amortized to interest expense in 2006 was
$19,602. The note is secured by the Company's interest in PSHS Beta Partners,
Ltd. The Company's carrying amount of the partnership is $1,949,486.

(b) Note payable 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 $5,535. The total amount amortized to interest expense in 2005 was
$4,084. 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. Cetain 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. For the year
end 2005 the Company was in violation of five sections of the agreement. The
Company has financial restatements that violate the No Material Adverse Change
clause. This also caused a violation of the complete disclosure clause. The
disclosures over internal control report one or more material weaknesses. The
restatement also caused a violation of meeting certain SEC laws regarding
disclosure obligations. The Company failed to meet the EBITDA covenant for the
quarter ended March 31, 2006. On May 2, 2006 and June 20, 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 a
$300,000 and a $150,000 waiver fee, respectively, to the lenders.The face
value of the note is $30,000,000 with unamortized discount of $1,448,353. The
total amount amortized to interest expense during 2005 was $184,284.

(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 $86,000.
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
$161,617. The total amount amortized to interest expense in 2006 was $161,617.
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.(11) Contractual
Obligations

A summary of our contractual obligations and
commercial commitments at March 31, 2006 were as follows:

Less than   1 Year
    1-3  Years
    3-5 
      YearsContractual Obligations
    Total
    5+ yearsLong-term debt
    $31,697,012
    $  3,879,012
    $  27,818,000
    $               
      -
    $              
      -Convertible
      debentures
    17,666,500
    14,935,007
    2,731,493
    -
    -Capital leases(1)
    4,278,626
    1,562,270
    2,426,210
    290,146
    -Operating leases
    16,214,628
    3,325,812
    6,728,016
    2,884,528
    3,276,272Acquisition consideration(2)
    51,988,232
    257,400
    51,730,832
    -
    -Employment agreements(3)
    3,000,000
    600,000
    1,800,000
    600,000Total
      contractual obligations
    $124,844,998




|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) Private Placement
Offering

On January 30, 2006,
the Company and a group of accredited investors closed a private placement of
3,305,033 shares of the Company's common stock at a purchase price of $3.10 per
share, for gross proceeds of $10,245,602. In addition, the private
placement investors were granted warrants to purchase up to an additional
1,349,884 shares of common stock at $3.45 per share. The warrants issued in
connection with this private placement offering are accounted for as derivative
instruments in accordance with FAS 133.

18

---

(13) Recent Accounting
PronouncementsStock-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 March 31, 2005 period is as follows (as restated) and has been
disclosed to be consistent with prior accounting rules:

For the Three
      Months  Ended March
      31,   2005Net income (loss), as
      reported
    $
    (27,763,632)Stock-based employee compensation included in reported net
      income (loss), net of tax
    
    10,883,274Stock-based employee compensation
      expense as determined under the fair value method for all
      awards,     net of
      tax
    
    (385,883)Net income (loss), pro
      forma
    $
    (17,266,241)Earnings per share:Basic  as
      reported
    $
    (0.63)Basic  pro
      forma
    $
    (0.39)Diluted  as
      reported
    $
    (0.63)Diluted  pro
      forma
    $
    (0.39)


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
    2005Risk-free interest
      rate
    4.56%
    3.71%Expected life
    2.504 years
    2.50 yearsVolatility
    43.84%
    48.90%Dividend yield
    0.00%
    0.00%


Total non-cash
compensation expense for the three months ended March 31, 2006 related to
unvested stock options amounted to $282,076 and is included in general and
administrative expenses in the consolidated statement of operations.

Subsequent to March 31,
2006, the Company granted 175,000 options to employees and directors at their
fair value on the date of grant. The total value of these options amounted to
$77,580 and will be expensed in the second quarter, since they vested on the
grant date.

19

---

(14) Subsequent
EventsOn April 3,
2006, the Company received notice from the American Stock Exchange (AMEX) of a
failure to satisfy certain of the AMEX continued listing standards. The notice
related to the failure of the Company to timely file its annual report on Form
10-K for the fiscal year ended December 31, 2005. The AMEX accepted the
Companys plan of compliance and granted the Company an extension to file its
Form 10-K by June 2, 2006 and its Form 10-Q for the period ended March 31, 2006
by June 30, 2006. The Company successfully filed its Form 10-K for the fiscal
year ended December 31, 2005 on June 1, 2006 and the Company plans to meet the
deadline to file its Form 10-Q for the period ended March 31, 2006 by June 30,
2006.

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.(15) 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

20

---

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 2. MANAGEMENTS DISCUSSION
AND ANALYSIS OF FINACNIAL 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 60
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.

We currently have two
owned practices primarily providing surgery services, five owned practices
primarily providing pain management services, one managed practice primarily
providing surgery services, eleven managed practices primarily providing pain
management services, two managed practices providing ancillary services, and 30
limited management services and equipment contracts.

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

21

---

At December
      31,
    At March
    31,2002
    2003
    2004
    2005
    2006Owned physician practices
    3
    6
    7
    7
    7Managed physician
      practices
    0
    3
    8
    12
    14Limited Management service and equipment
      contracts
    3
    8
    22
    34
    30


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

The Companys
previously issued consolidated financial statements as of and for the years
ended December 31, 2000 through 2004 and all quarterly financial information for
each of these years 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 June 28, 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.

Results of Operations

Set forth below is
certain of our selected consolidated financial and operating information for the
three months ended March 31, 2006 and the comparable period 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 
      March
      31,    (in thousands, except per share amounts)2006
    2005(As restated)Total revenues
    $23,308
    $14,237Gross profit
    18,568
    11,656Net income (loss)
    11,888
    (27,764)


22

---

Income (loss) per common share, basic
    $    0.19
    
    $   (0.63)Income (loss) per common share,
      diluted
    $    0.17
    
    $   (0.63)Weighted average common shares
      outstanding:Basic
    61,599
    
    44,413Diluted
    71,654
    
    44,413At March 31, 2006(in
      thousands)Working capital
    $ (8,647)Total current assets
    40,010Total assets
    204,506Stockholders equity
    125,006


Comparison of the three months ended March 31,
2006 and 2005

Total revenues
increased to $23,308,474 for the three months ended March 31, 2006 from
$14,236,740 for the comparable 2005 period, representing an increase of 63.7% .
Operating income increased to $4,846,106 for the three months ended March 31,
2006 from $(14,190,900) for the comparable 2005 period. This increase was
primarily the result $7,889,260 in revenue and $3,143,723 in operating income
from New-Practices acquired since March 31, 2005. There was a 7.61% increase
in revenues from practices acquired/managed prior to March 31, 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 March 31,2006
    2005
    % IncreaseSame-PracticesRevenues
    $ 14,347,264
    $ 13,332,764
    7.61%New-PracticesRevenues
    $ 7,899,260
    -
    -


Gross profit increased
to $18,567,740 for the three months ended March 31, 2006 from $11,655,517 for
the comparable 2005 period, representing an increase of 59.3% . This increase is
attributed to the six practices, three ambulatory surgical centers and
intraoperative monitoring company interest acquired since March 31,
2005.

Operating expenses
decreased to $13,721,634 for the three months ended March 31, 2006 from
$25,846,417 in the comparable 2005 period, representing a decrease of 46.9% .
The decrease is primarily due to the non-cash charge of $18,138,790 in 2005
related to accounting for our variable stock option plan. In addition,
$1,090,390 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 $1,932,194 for the three months ended March 31, 2006 from $898,920
in the comparable 2005 period, representing an increase of 114.9% . This
increase is primarily the result of $849,378 in non-cash interest expense from
derivative instruments related to our convertible debentures.

The provision for
income taxes increased to $1,188,607 for the three months ended March 31, 2006
compared with a benefit of $(5,536,065) for the three months ended March 31,
2005, representing an increase of 121.5% . This increase is primarily related to
the temporary difference caused by the tax benefit related to the accounting for
variable stock options. This tax benefit is not recurring since the company now
reports stock options in accordance with FAS 123R as of January 1,
2006.

As a result of the
above changes, net income was $11,888,099 for the three months ended March 31,
2006 compared with net loss of $(27,763,632) in the comparable 2005 period,
representing an increase of 142.8% . This increase is primarily due to the
non-cash benefit of $10,394,555 in 2006 as compared to a non-cash expense of
$(18,238,898) in 2005 from derivative instruments related to our convertible
debentures.

23

---

Liquidity and capital resources on March 31,
2006

Cash amounted to
$8,986,479 at March 31, 2006, compared to $10,272,446 as of March 31, 2005. The
net cash provided by operations was $447,423 for the three months ended March
31, 2006, compared to cash provided by operations of $316,500 for the comparable
period in 2005. 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 $(15,237,938) for the three months ended March 31, 2006 compared
with a use of $(8,317,468) in the comparable 2005 period. This increase is
primarily due to acquisitions during the three months ended March 31,
2006.

Cash provided by
financing activities was $1,063,829 for the three months ended March 31, 2006
compared with a use of $(827,426) in the comparable 2005 period. This increase
is primarily due to cash raised through the private placement common stock
offering, which closed in January 2006.

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 $10,830,160 in 2006, and $6,500,000 in
2007. 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.

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 passuwith 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. The warrants were
cancelled on June 7, 2006, in consideration for the issuance of 761,622 shares
of common stock to the investors.

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. The
warrants were cancelled on June 7, 2006, in consideration for the issuance of
98,378 shares of common stock to Midsummer.

Other debt

24

---

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

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

The outstanding balance under the credit facility was
$30,000,000 at March 31, 2006.

On May 2, 2006 and June
20, 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 a $300,000 and a
$150,000 waiver fee, respectively, to the lenders. 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 letter agreement.

A summary of our contractual obligations and
commercial commitments at March 31, 2006 were as follows:

Less than   1 Year
    1-3  Years
    3-5 
      YearsContractual Obligations
    Total
    5+ yearsLong-term debt
    $  31,697,012
    $    3,879,012
    $    27,818,000
    $          
      -
    $         
      -Convertible
    debentures
    17,666,500
    14,935,007
    2,731,493
    -
    -Capital leases (1)
    4,278,626
    1,562,270
    2,426,210
    290,146
    -Operating leases
    16,214,628
    3,325,812
    6,728,016
    2,884,528
    3,276,272Acquisition consideration
      (2)
    51,988,232
    257,400
    51,730,832
    -
    -Employment agreements
      (3)
    3,000,000
    600,000
    1,800,000
    600,000Total contractual
      obligations
    $124,844,998


|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.                                                                                                                                                                                       

Recent events

On January 3, 2006 the
Company acquired Center for Pain Management ASC, LLC (CPMASC), a fully
accredited ambulatory surgical center with four locations in Maryland. The
initial portion of the purchase price consisted of $3,750,000 in cash plus
1,021,942 common shares. The Company will pay the balance of the consideration,
$7,500,000 in cash, one year from the acquisition date. The members of CPMASC
did have a prior relationship with the Company from the acquisition of Center
for Pain Management, LLC in December 2004.

On January 6, 2006 the
Company acquired REC, Inc. & CareFirst Medical Associates, P.A.,(REC and
CMA) co-located pain management and orthopedic rehabilitation practices
located in Whitehouse, Texas. In connection with the purchase of REC and CMA,
the Company will provide, through a wholly owned subsidiary, ongoing management
and administrative services pursuant to a Management Agreement entered into with
REC and CMA. The initial portion of the purchase price consisted of $625,000 in
cash and 191,131 PainCare common shares subject to certain post-closing adjustments, if any. In addition, the Company will pay REC and CMA an
additional $1,250,000 in three equal annual payments (50% in cash and 50% in
PainCare common stock priced at market) subject to the satisfaction of certain
earnings goals and the payment of the management fee to the Company. Neither
REC, CMA nor its members have any prior relationship with the Company or its
affiliates.



25

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On January 20, 2006,
the Company acquired Desert Pain Medicine Group, a California-based pain
management practice operating three offices in Palm Springs, Yucca Valley and
Rancho Mirage, California. In connection with the purchase of Desert Pain, the
Company will provide, through a wholly owned subsidiary, on going management and
administrative services pursuant to a Management Agreement entered into with
Desert Pain. The initial portion of the purchase price consisted of $1,500,000
in cash and 471,698 shares of PainCares common stock subject to certain
post-closing adjustments, if any. In addition, the Company will pay Desert Pain
an additional $3,000,000 in three equal annual payments (50% in cash and 50% in
PainCare common stock priced at market) subject to the satisfaction of certain
earnings goals and the payment of the management fee to the Company. Neither
Desert Pain nor its members have any prior relationship with the Company or its
affiliates.     On January
30, 2006, the Company and a group of accredited investors closed a private
placement of 3,305,033 shares of the Company's common stock at a purchase price
of $3.10 per share, for gross proceeds of $10,245,602. In addition, the private
placement investors were granted warrants to purchase up to an additional
1,349,884 shares of common stock at $3.45 per
share.     On February 1, 2006, the Company acquired 60% of
the capital stock of Amphora, LLC, a Colorado-based Intraoperative Monitoring
(IOM) company serving medical institutions and surgeons throughout Colorado,
Wyoming, Arizona and Nebraska. The terms of the acquisition provide for PainCare
to pay Amphora's members total consideration of up to $15 million for a 60%
ownership in the Company. The initial portion of the purchase price consisted of
$3,250,000 in cash and 1,035,032 shares of PainCares common stock. The balance
of the consideration will be paid in installments over four years subject to a
yearly formula.

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;

26

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

In addition to the
risks and uncertainties discussed above you can find additional information
concerning risks and uncertainties that would cause actual results to differ
materially from those projected or suggested in the forward-looking statements
in this 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 March 31, 2006, we had $30 million of variable rate debt
outstanding under our credit facility. Presently, the revolving credit line
bears interest at a rate of either LIBOR plus 7.25% or prime plus 4.25%, with a
term of 48 months. A hypothetical 10% increase in our credit facilitys weighted
average interest rate of 10.92% per annum for the three months ended March 31,
2006 would correspondingly decrease our pre-tax earnings and operating cash
flows by approximately $146,880 and $2,375, respectively.

Intangible Asset Risk

We have a substantial
amount of intangible assets. We are required to perform goodwill impairment
tests whenever events or circumstances indicate that the carrying value may not
be recoverable from estimated future cash flows. As a result of our periodic
evaluations, we may determine that the intangible asset values need to be
written down to their fair values, which could result in material charges that
could be adverse to our operating results and financial position. Although at
March 31, 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
PROCEDURESEvaluation 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 adequate
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 March 31, 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.

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

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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.

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

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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
INFORMATIONITEM 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.

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.

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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. 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 and June
20, 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 a $300,000 and a $150,000 waiver fee, 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.

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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
March 31, 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 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

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acquisitions, this does not mean that we will necessarily identify all potential problems or issues in connection with any given acquisition, some of which could be significant.

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

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

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

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

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

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

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

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

For the years ended December 31, 2005, 2004 and 2003, net loss was ($5,339,378), $(1,501,482) and ($11,482,842), respectively. We expect to increase our spending significantly as we continue to
expand our service offerings and commercialization activities. As a result, we will need to generate significant revenues in order to continue to grow our business and become profitable.

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

As of March 31, 2006, we had an intangible asset, net goodwill, of approximately $135.7 million, which constituted 66% of our total assets. The net goodwill reflects the amount we pay for our acquired
practices in excess of the fair value of other identifiable intangible and tangible assets. Our net goodwill will increase in the future as a result of our acquisitions as we pay the contingent purchase price for the acquisitions according to the
terms of the respective purchase

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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, $9,653,008 as of March
31, 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.

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.

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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.

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.

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

Risks Related to Our Industry

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

Our owned practices,
the managed practices and the limited management practices are subject to
stringent federal, state and local government health care laws and regulations.
If we or they fail to comply with applicable laws, or if a determination is made
that in the past we or the managed practices or the limited management practices
have failed to comply with these laws, we may be subject to civil or criminal
penalties, including the loss of our license or our physicians licenses to
operate and our ability to participate in Medicare, Medicaid and other
government sponsored and third-party health care programs. In addition, laws and
regulations are constantly changing and may impose additional requirements.
These changes could have the effect of impeding our ability to continue to do
business or reduce our opportunities to continue to grow.

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

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

Because
government-sponsored payors generally pay providers based on a fee schedule, and
the trend is for private payors to do the same, we may not be able to prevent a
decrease in our revenues by increasing the amounts the owned practices charge
for services. The same applies to the limited 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.

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

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

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

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

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

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

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.

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

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

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

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

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

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

As the result of a congressional mandate, the Office of the Inspector General (OIG) of DHHS promulgated a regulation specifying certain payment practices which the OIG determined to be at
minimal risk for abuse. The OIG named these payment practices Safe Harbors. If a payment arrangement fits within a Safe Harbor, it will be deemed not to violate the Anti-Kickback Statute. Merely because a payment arrangement does not
comply with all of the elements of any Safe Harbor, however, does not mean that the parties to the payment arrangement are violating the Anti-Kickback Statute.

We receive fees under our agreements with the managed practices and the limited management practices for management and administrative services and equipment and supplies. We do not believe we are in a
position to make or influence referrals of patients or services reimbursed under Medicare, Medicaid or other governmental programs. Because the provisions of the Anti-Kickback Statute are broadly worded and have been broadly interpreted by federal
courts,

38

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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 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.

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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.

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

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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.

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.

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

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

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

We do not expect to pay
dividends.

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

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

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

ITEM 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 March 31, 2006 without registration under
the Securities Act of 1933, as amended (the "Securities Act").

Between January 1, 2006
and March 31, 2006 a total of 63,652 common stock shares were issued for the
payment of convertible debenture interest due to Midsummer Investments, Ltd. and
Islandia, L.P.

Between January 1, 2006
and March 31, 2006 a total of 3,305,033 common stock shares and 1,349,884
warrants were issued in connection with a private placement of offering of the
Companys common stock.

Between January 1, 2006
and March 31, 2006 a total of 1,021,942 common stock shares were issued for the
acquisition of the Center for Pain Management ASC, LLC.

Between January 1, 2006
and March 31, 2006 a total of 191,131 common stock shares were issued for the
acquisition of REC, Inc. and CareFirst Medical Associates.

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Between January 1, 2006
and March 31, 2006 a total of 471,698 common stock shares were issued for the
acquisition of Desert Pain Medicine Group.

Between January 1, 2006
and March 31, 2006 a total of 1,035,032 common stock shares were issued for the
acquisition of Amphora, LLC.

Between January 1, 2006
and March 31, 2006 a total of 159,381 common stock shares were issued
representing the second of three earnout installments related to the acquisition
of Kenneth M. Alo, M.D., P.A.

Between January 1, 2006
and March 31, 2006 a total of 615,984 common stock shares were issued
representing a portion of the potential earnout installments related to the
acquisition of Denver Pain Management.

Between January 1, 2006
and March 31, 2006 a total of 626,138 common stock shares were issued
representing the first of three earnout installments related to the acquisition
of Center for Pain Management.

Between January 1, 2006
and March 31, 2006 a total of 59,654 common stock shares were issued
representing the second of four earnout installments related to the acquisition
of Bone and Joint Surgical Clinic.

Between January 1, 2006
and March 31, 2006 a total of 58,194 common stock shares were issued
representing the second of three earnout installments related to the Spine and
Pain Center.

Between January 1, 2006
and March 31, 2006 a total of 68,990 common stock shares were issued
representing the second of three earnout installments related to the purchase of
three EDX contract rights.

Between January 1, 2006
and March 31, 2006 a total of 176,457 common stock shares were issued
representing the second of three earnout installments related to the Health Care
Center of Tampa, Inc.

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

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|No.  | Description                                                                                                                                                                                                                         
|---- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.1 | Securities Purchase Agreement By and Among PainCare Holdings,
      Inc. and Those Certain Buyers Listed in theSchedule Attached to the Agreement. (1)                                                                              
|
|    
|10.2 | Asset Purchase Agreement By and Among PainCare Holdings,
      Inc., PainCare Surgery Centers III, Inc. and Center for Pain Management ASC, LLC.                                                                                    
|
|    
|10.3 | Merger Agreement and Plan of Reorganization By and Among
      PainCare Holdings, Inc., PainCare Acquisition Company XXII, Inc., REC, Inc. and Robert Carpenter, D.C.
      (3)                                                     
|
|    
|10.4 | Merger Agreement and Plan of Reorganization By and Among
      PainCare Holdings, Inc., PainCare Acquisition Company XXII, Inc., CareFirst Medical Associates, P.A. and
      Randall Rodgers, D.O. (3)                             
|
|    
|10.5 | Merger Agreement and Plan of Reorganization By and Among
      PainCare Holdings, Inc., PainCare Acquisition Company XIX, Inc., Desert Pain Medicine Group and C. Edward
      Anderson, Jr., M.D. (4)                              
|
|    
|10.6 | Membership Interest Purchase Agreement By and Among Bruce
      Lockwood, M.D., John D. Bender, D.O., Richard Flores, Amphora, LLC, PainCare Holdings, Inc. and PainCare
      Neuromonitoring I, Inc. (5)                          
|
|    
|31.1 | Certification of Chief Executive Officer of PainCare
      Holdings, Inc. pursuant to Rule 13a - 14(a)/15d-14(a) of theSecurities 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
      January 3, 2006                                                                                                                                                  
|(2)  | Previously filed with the SEC with the Companys Form 8-K on
      January 9, 2006                                                                                                                                                  
|(3)  | Previously filed with the SEC with the Companys Form 8-K on
      January 11, 2006                                                                                                                                                 
|(4)  | Previously filed with the SEC with the Companys Form 8-K on
      January 25, 2006                                                                                                                                                 
|(5)  | Previously filed with the SEC with the Companys Form 8-K on
      February 3, 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.

Date: June 29, 2006
    PainCare Holdings, Inc.
      /s/ Randy A.
      Lubinsky  Randy A.
      Lubinsky  Chief Executive
      OfficerDate: June 29, 2006
    /s/ Mark
      Szporka  Mark
      Szporka  Chief Financial &
      Accounting Officer


45

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