UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549







FORM 10-Q







(Mark One)

x

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934



For the quarterly period ended March 31, 2005



 ̈

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



For the transition period from  to



Commission File Number 1-14160







PainCare Holdings, Inc.

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







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



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

(Address of principal executive offices)



(407) 367-0944

(Issuers telephone number)







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



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





APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDING DURING THE PRECEDING FIVE YEARS



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



APPLICABLE ONLY TO CORPORATE ISSUERS



The number of shares outstanding of the issuers common stock as of May 11, 2005 is 51,517,016 shares.







1





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PAINCARE HOLDINGS, INC.



INDEX







|PART I. | FINANCIAL INFORMATION                                                                                 |   
|------- | ----------------------------------------------------------------------------------------------------- | --
|        |                                                                                                       |   
|Item 1. | Financial Statements                                                                                  | 3 
|        |                                                                                                       |   
|        | Consolidated Balance Sheets as of March 31, 20005 (Unaudited) and December 31, 2004 (Audited)         | 3 
|        |                                                                                                       |   
|        | Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004 (Unaudited)  | 4 
|        |                                                                                                       |   
|        | Consolidated Statements of Stockholders Equity for the three months ended March 31, 2005 (Unaudited) | 5 
|        |                                                                                                       |   
|        | Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004 (Unaudited)  | 6 
|        |                                                                                                       |   
|        | Notes to Consolidated Financial Statements (Unaudited)                                                | 7 
|        |                                                                                                       |   
|Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations                 | 7 
|        |                                                                                                       |   
|Item 3. | Quantitative and Qualitative Disclosures About Market Risk                                            | 26
|        |                                                                                                       |   
|Item 4. | Controls and Procedures                                                                               | 26
|        |                                                                                                       |   
|PART II | OTHER INFORMATION                                                                                     | 26
|        |                                                                                                       |   
|Item 1. | Legal Proceedings                                                                                     | 26
|        |                                                                                                       |   
|Item 2. | Changes in Securities                                                                                 | 26
|        |                                                                                                       |   
|Item 3. | Defaults Upon Senior Securities                                                                       | 27
|        |                                                                                                       |   
|Item 4. | Submission of Matters to a Vote of Security Holders                                                   | 27
|        |                                                                                                       |   
|Item 5. | Other Information                                                                                     | 27
|        |                                                                                                       |   
|Item 6. | Exhibits                                                                                              | 27
|        |                                                                                                       |   
|        | Signatures                                                                                            | 28

2





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PART I FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



PainCare Holdings, Inc.

Consolidated Balance Sheets

As of March 31, 2005 and December 31, 2004





|                                                                                                                      | March 31, 2005
(Unaudited) |  | December 31, 2004
(Audited)
|--------------------------------------------------------------------------------------------------------------------- | -------------------------- |  | ---------------------------
|Assets                                                                                                                |                            |  |                            
|Current assets:                                                                                                       |                            |  |                            
|Cash                                                                                                                  | $ 10,272,446               |  | $    19,100,840            
|Accounts receivable, net                                                                                              | 14,301,134                 |  | 14,077,643                 
|Due from shareholders                                                                                                 | 2,192,800                  |  | 1,794,957                  
|Deposits & prepaid expenses                                                                                           | 1,976,633                  |  | 1,117,317                  
|Total current assets                                                                                                  | 28,743,013                 |  | 36,090,757                 
|                                                                                                                      |                            |  |                            
|Property and equipment, net                                                                                           | 7,190,906                  |  | 7,119,065                  
|Goodwill, net                                                                                                         | 55,675,019                 |  | 55,237,910                 
|Other assets                                                                                                          | 5,025,377                  |  | 4,628,770                  
|Total assets                                                                                                          | $96,634,315                |  | $         103,076,502      
|                                                                                                                      |                            |  |                            
|Liabilities and Stockholders Equity                                                                                  |                            |  |                            
|Current liabilities:                                                                                                  |                            |  |                            
|Accounts payable and accrued expenses                                                                                 | $849,584                   |  | $ 562,314                  
|Acquisition consideration payable                                                                                     | 583,333                    |  | 17,900,833                 
|Income tax payable                                                                                                    | 503,004                    |  | 2,199,100                  
|Interest payable                                                                                                      | 104,063                    |  | 131,368                    
|Current portion of notes payable                                                                                      | 658,603                    |  | 765,177                    
|Current portion of convertible debentures                                                                             | 2,382,334                  |  | 3,885,000                  
|Current portion of capital lease obligations                                                                          | 609,443                    |  | 930,117                    
|Total current liabilities                                                                                             | 5,690,364                  |  | 26,373,909                 
|                                                                                                                      |                            |  |                            
|Notes payable, less current portion                                                                                   | 139,035                    |  | 295,583                    
|Convertible debentures, less current portion                                                                          | 13,023,266                 |  | 17,186,000                 
|Capital lease obligations, less current portion                                                                       | 2,313,340                  |  | 2,190,627                  
|Deferred income tax liability                                                                                         | 1,839,367                  |  | 1,500,200                  
|Total liabilities                                                                                                     | 23,005,372                 |  | 47,546,319                 
|                                                                                                                      |                            |  |                            
|Stockholders equity:                                                                                                 |                            |  |                            
|Common stock, $.0001 par value, authorized 75,000,000 shares; issued and outstanding 48,785,444 and 41,512,833 shares | 4,879                      |  | 4,151                      
|Preferred stock, $.0001 par value, authorized 10,000,000       shares; issued and outstanding -0- shares              | -                          |  | -                          
|Additional paid in capital                                                                                            | 63,830,551                 |  | 47,995,110                 
|Retained earnings                                                                                                     | 9,772,724                  |  | 7,499,546                  
|Other comprehensive income                                                                                            | 20,789                     |  | 31,376                     
|Total stockholders equity                                                                                            | 73,628,943                 |  | 55,530,183                 
|                                                                                                                      |                            |  |                            
|Total liabilities and stockholders equity                                                                            | $96,634,315                |  | $ 103,076,502              





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

3





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PainCare Holdings, Inc.

Consolidated Statements of Operations (Unaudited)

For the Three Months Ended

March 31, 2005 and 2004







For the Three         For the Three

Months Ended       Months Ended

March 31,

March 31,



|                                                   | 2005                | 2004               
|-------------------------------------------------- | ------------------- | -------------------
|Total revenues:                                    |                     |                    
|Pain management                                    | $  9,261,065        | $ 3,592,765        
|Surgeries
Ancillary Services                       | 1,403,803
3,571,872 | 1,266,763
2,000,200
|Total revenues                                     | 14,236,740          | 6,859,728          
|                                                   |                     |                    
|Cost of sales                                      | 2,581,223           | 1,484,046          
|Gross profit                                       | 11,655,517          | 5,375,682          
|                                                   |                     |                    
|Operating expenses:                                |                     |                    
|Selling, general and administrative                | 7,173,056           | 3,538,941          
|Depreciation expense                               | 264,351             | 152,972            
|Amortization expense                               | 151,874             | 61,804             
|Operating income                                   | 4,066,236           | 1,621,965          
|                                                   |                     |                    
|Interest expense                                   | (428,079)           | (152,121)          
|Other income                                       | 29,021              | 16,825             
|Income before income taxes                         | 3,667,178           | 1,486,669          
|                                                   |                     |                    
|Provision for income taxes                         | 1,394,000           | 520,334            
|                                                   |                     |                    
|Net income                                         | $ 2,273,178         | $ 966,335          
|                                                   |                     |                    
|Basic earnings per common share                    | $          0.05     | $         0.04     
|                                                   |                     |                    
|Basic weighted average common shares outstanding   | 44,412,972          | 27,376,501         
|                                                   |                     |                    
|Diluted earnings per common share                  | $           0.04    | $         0.03     
|                                                   |                     |                    
|Diluted weighted average common shares outstanding | 55,721,221          | 32,662,630         
|                                                   |                     |                    

























































































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



4





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PainCare Holdings, Inc.



Consolidated Statements of Stockholders Equity (Unaudited)

For the Three Months Ended March 31, 2005







|                                                             | Common Stock
Shares | Common Stock
Amount | Additional
Paid in Capital | Retained
Earnings | Other Comprehensive Income (Loss) | Total
Stockholders
Equity
|------------------------------------------------------------ | ------------------- | ------------------- | -------------------------- | ----------------- | --------------------------------- | --------------------------
|Balances at December 31, 2004                                | 41,512,833          | $    4,151          | 47,995,110                 | 7,499,546         | 31,376                            | 55,530,183                
|                                                             |                     |                     |                            |                   |                                   |                           
|Common stock issued for exercise of warrants                 | 153,066             | 15                  | 164,360                    | -                 | -                                 | 164,375                   
|                                                             |                     |                     |                            |                   |                                   |                           
|Common stock issued for exercise of options                  | 410,812             | 41                  | 2,584                      | -                 | -                                 | 2,625                     
|                                                             |                     |                     |                            |                   |                                   |                           
|Common stock issued for acquisition consideration payable    | 4,557,690           | 456                 | 9,772,877                  | -                 | -                                 | 9,773,333                 
|                                                             |                     |                     |                            |                   |                                   |                           
|Common stock issued for compensation                         | 18,860              | 2                   | 11,890                     | -                 | -                                 | 11,892                    
|                                                             |                     |                     |                            |                   |                                   |                           
|Common stock issued for conversion of convertible debentures | 2,028,364           | 204                 | 5,529,696                  | -                 | -                                 | 5,529,900                 
|                                                             |                     |                     |                            |                   |                                   |                           
|Common stock issued for convertible debenture interest       | 103,819             | 10                  | 354,034                    | -                 | -                                 | 354,044                   
|                                                             |                     |                     |                            |                   |                                   |                           
|Other comprehensive loss                                     |                     |                     |                            |                   | (10,587)                          | (10,587)                  
|                                                             |                     |                     |                            |                   |                                   |                           
|Net income                                                   |                     |                     |                            | 2,273,178         |                                   | 2,273,178                 
|                                                             |                     |                     |                            |                   |                                   |                           
|Balances at March 31, 2005                                   | 48,785,444          | $    4,879          | 63,830,551                 | 9,772,724         | 20,789                            | 73,628,943                







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

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PainCare Holdings, Inc.

Consolidated Statements of Cash Flows (Unaudited)

For the Three Months Ended March 31, 2005 and 2004



|                                                   |                                                                      |                                                                     |                                       |                                                     | 2005        |             | 2004       
|-------------------------------------------------- | -------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------- | --------------------------------------------------- | ----------- | ----------- | -----------
|Cash flows from operating activities:              |                                                                      |                                                                     |                                      
|                                                   | Net income                                                           |                                                                     | $  2,273,178                          |                                                     | $  966,335 
|                                                   | Adjustments to reconcile net income to net cash                      |                                                                     |                                       |                                                    
|                                                   | provided by (used in) operating activities:                          |                                                                     |                                       |                                                    
|                                                   |                                                                      | Depreciation and amortization                                       | 538,696                               |                                                     | 214,776    
|                                                   |                                                                      | Loss on disposal of property and equipment                          | -                                     |                                                     | 171,121    
|                                                   |                                                                      | Common stock issued for convertible denture interest                | 354,044                               |                                                     | -          
|                                                   |                                                                      | Common stock issued for compensation                                | 11,892                                |                                                     | -          
|                                                   |                                                                      | Other comprehensive loss                                            | (10,587)                              |                                                     | (5,188)    
|                                                   |                                                                      |                                                                     |                                       |                                                     |             |             |            
|                                                   |                                                                      | Change in operating assets and liabilities, net of assets acquired: |                                       |                                                     |            
|                                                   |                                                                      |                                                                     | Accounts receivable                   | (223,491)                                           |             | (1,661,794)
|                                                   |                                                                      |                                                                     | Deposits and prepaid expenses         | (859,316)                                           |             | (84,681)   
|                                                   |                                                                      |                                                                     | Other assets                          | (670,952)                                           |             | 124,278    
|                                                   |                                                                      |                                                                     | Deferred income tax liability         | 339,167                                             |             | 191,308    
|                                                   |                                                                      |                                                                     | Interest payable                      | (27,305)                                            |             | -          
|                                                   |                                                                      |                                                                     | Income tax payable                    | (1,696,096)                                         |             | (246,052)  
|                                                   |                                                                      |                                                                     | Accounts payable and accrued expenses | 287,270                                             |             | 329,026    
|                                                   |                                                                      |                                                                     |                                       |                                                     |             |             |            
|                                                   |                                                                      |                                                                     |                                       | Net cash provided by (used in) operating activities | 316,500     |             | (871)      
|                                                   |                                                                      |                                                                     |                                       |                                                     |             |             |            
|Cash flow from investing activities:               |                                                                      |                                                                     |                                      
|                                                   | Purchase of property and equipment                                   | (773,301)                                                           |                                       | -                                                  
|                                                   | Cash paid for earnout payments                                       | -                                                                   |                                       | (1,445,677)                                        
|                                                   | Cash paid for acquisition consideration payable                      | (7,544,167)                                                         |                                       | -                                                  
|                                                   | Cash from acquisitions                                               | -                                                                   |                                       | (757,500)                                          
|                                                   |                                                                      |                                                                     |                                       |                                                     |             |             |            
|                                                   |                                                                      |                                                                     |                                       | Net cash used in investing activities               | (8,317,468) |             | (2,203,177)
|                                                   |                                                                      |                                                                     |                                       |                                                     |             |             |            
|Cash flows from financing activities:              |                                                                      |                                                                     |                                      
|                                                   | Net proceeds from issuance of convertible debentures                 | -                                                                   |                                       | 9,573,000                                          
|                                                   | Net proceeds from issuance of common stock, for options and warrants | 167,000                                                             |                                       | 245,245                                            
|                                                   | Payments of capital lease obligations                                | (197,961)                                                           |                                       | (146,949)                                          
|                                                   | Payment of convertible debentures                                    | (135,500)                                                           |                                       | (1,018,616)                                        
|                                                   | Due from shareholders                                                | (397,843)                                                           |                                       | (180,040)                                          
|                                                   | Net advances on notes receivable                                     | -                                                                   |                                       | 35,389                                             
|                                                   | Net payments on notes payable                                        | (263,122)                                                           |                                       | (3,808,221)                                        
|                                                   |                                                                      |                                                                     |                                       |                                                     |             |             |            
|                                                   |                                                                      |                                                                     |                                       | Net cash provided by (used in) financing activities | (827,426)   |             | 4,699,808  
|                                                   |                                                                      |                                                                     |                                       |                                                     |             |             |            
|                                                   |                                                                      |                                                                     |                                       | Net increase (decrease) in cash                     | (8,828,394) |             | 2,495,760  
|                                                   |                                                                      |                                                                     |                                       |                                                     |             |             |            
|Cash at beginning of period                        | 19,100,840                                                           |                                                                     | 7,923,767                            
|                                                   |                                                                      |                                                                     |                                       |                                                     |             |             |            
|Cash at end of period                              | $  10,272,446                                                        |                                                                     | $  10,419,527                        
|                                                   |                                                                      |                                                                     |                                       |                                                     |             |             |            
|Supplemental disclosures of cash flow information: |                                                                      |                                                                     |                                      
|                                                   |                                                                      |                                                                     |                                       |                                                     |             |             |            
|                                                   | Cash paid during the year for interest                               | $  455,384                                                          |                                       | $  152,121                                         
|                                                   | Cash paid during the year for income taxes                           | 2,730,000                                                           |                                       | -                                                  
|                                                   | Non-cash transactions:                                               |                                                                     |                                       |                                                    
|                                                   | Common stock issued for acquisition consideration payable            | 9,773,333                                                           |                                       | -                                                  
|                                                   | Common stock issued for conversion of convertible debentures         | 5,529,900                                                           |                                       | -                                                  
|                                                   | Common stock issued for earnout payments                             | -                                                                   |                                       | 666,666                                            
|                                                   | Common stock issued for contract rights                              | -                                                                   |                                       | 758,000                                            
|                                                   | Capitalized convertible debenture issuance costs                     | -                                                                   |                                       | 427,000                                            
|                                                   | Equipment financed with capital lease obligations                    | -                                                                   |                                       | 327,371                                            
|                                                   | Purchase price adjustment to goodwill and property and equipment     | 437,109                                                             |                                       | -                                                  
|                                                   |                                                                      |                                                                     |                                       |                                                     |             |             |            





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

6





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7





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PainCare Holdings, Inc.



Notes to Consolidated Financial Statements (Unaudited)





Organization and Basis of Presentation



(1) Organization and Summary of Significant Accounting Policies



Organization



History of the Company



The Company was initially incorporated in the State of Connecticut in May, 1984 under the name of HelpMate Robotics, Inc. ("HelpMate"). Prior to the sale of its business in December 1999, HelpMate was primarily engaged in the design, manufacture, and sale of HelpMate's flagship product, the HelpMate courier system, a trackless robotic courier used primarily in the health care industry to transport materials. On December 30, 1999, HelpMate sold substantially all of its assets to Pyxis Corporation ("Pyxis").



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



On December 20, 2001, HelpMate entered in an Agreement and Plan of Merger with PainCare, Inc., a Nevada corporation (the Merger Agreement), which was consummated on July 17, 2002 (the Merger). Pursuant to the Merger, PainCare, Inc. became a wholly-owned subsidiary of HelpMate. In connection with the Merger, the shareholders of PainCare, Inc. received voting common stock of HelpMate.



History of PainCare, Inc.



PainCare, Inc. was incorporated in the State of Nevada on February 19, 1997, under the name of Hi-Profile Corporation. PainCare, Inc. had approximately 128 shareholders of record prior to the Merger with HelpMate. The combined Company now has approximately 3,000 shareholders of record.



PainCare, Inc. was reorganized in the fall of 2000 for the purpose of establishing a North American network of pain management, minimally invasive surgery and orthopedic rehabilitation centers.



Principles of Interim Statements.



The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-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. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included in the accompanying unaudited financial statements. For further information, refer to the financial statements and footnotes thereto included in the Companys annual report on Form 10-KSB for the year ended December 31, 2004 filed with the SEC on March 16, 2005.



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



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

8





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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 39 physician practices which vary from state to state depending upon regulations governing the corporate practice of medicine and the type of service we provide. Our growth strategy is to acquire or 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 16 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, PainCare operated three 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 physicians practice. In these states, we manage physicians' practices pursuant to a management agreement.

·

Service and equipment contracts. We provide limited management services and equipment pursuant to specific contractual engagements 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, seven managed practices primarily providing pain management services, two managed practices providing ancillary services, and 23 limited management services and equipment contracts.



We manage nine 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. The Financial Accounting Standards Board Emerging Issues Task Force 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 case 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.



Significant Accounting Policies and Estimates



Managements Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to bad debts, intangible assets, income taxes, financing operations, contractual obligations, restructuring costs, retirement benefits, and

9





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contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



Our significant accounting policies are more fully described in Note 1 to our consolidated financial statements filed as part of our annual report on Form 10-KSB for the fiscal year ended December 31, 2004. However, certain of our accounting policies are particularly important to the portrayal of our financial position and results of operations and require the application of significant judgment by our management; as a result they are subject to an inherent degree of uncertainty. In applying those policies, our management uses its judgment to determine the appropriate assumptions to be used in the determination of certain estimates. Those estimates are based on our historical experience, terms of existing contracts, our observance of trends in the industry, information provided by our customers and information available from other outside sources, as appropriate. Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.



Our significant accounting estimates include:



Revenue Recognition. Our consolidated practice revenue is recognized at the time the service is performed at the estimated net realizable amounts from patients, third-party payors and others for services rendered. Revenue from limited management fees is recognized as the services are performed under the terms of the contract. We assume the net realizable amount for a particular practice based on historical collections of the particular practice. We are a provider under the Medicare program and various other third-party payor arrangements which provide for payments to us at amounts different from its established rates. Provisions for estimated third-party payor settlements, if necessary, are provided in the period the related services are rendered.



We recognize revenues and profits from real estate service contracts under the percentage of completion method of accounting. The amounts of revenues and profits recognized each year are based on the ratio of labor time completed in the period to the total estimated labor time required to fulfill the contract obligations. There are no allocated general and administrative costs to the contracts.



Intangible Assets. Intangible assets determined to have definite lives are amortized over their useful lives. In accordance with SFAS No. 142, if conditions exist that indicate that the carrying value may not be recoverable, we review those intangible assets with definite lives to ensure they are appropriately valued. Goodwill is not amortized.



Results of Operations



Set forth below is certain of our selected consolidated financial and operating information for the three months ended March 31, 2005 and the comparable period in 2004, 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)



2005

2004

Total revenues

$ 14,237

$   6,860

Gross profit

11,656

5,376



Net income

2,273

966

Earnings per common share, basic

$     0.05

$      0.04

Earnings per common share, diluted

$     0.04

$      0.03



Weighted average common shares outstanding:

Basic

44,412,972

27,376,501

Diluted

55,721,221

32,662,630

10





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At March 31, 2005

(in thousands)



Working capital

$23,053

Total current assets

28,743

Total assets

96,634

Stockholders equity

73,629





COMPARISON OF THREE MONTHS ENDED MARCH 31, 2005 AND 2004



Total revenues increased to $14,236,740 for the three months ended March 31, 2005 from $6,859,728 for the comparable 2004 period, representing an increase of 108%. Operating income increased to $4,066,236 for the three months ended March 31, 2005 from $1,621,965 for the comparable 2004 period, representing an increase of 151%. This increase was primarily the result of $6.6 million in revenue and $2.0 million in operating income from New-Practices acquired since March 31, 2004. There was a 10.8% increase in revenues and a 25.7% increase in operating income from practices acquired/managed prior to March 31, 2004 (Same-Practices). Net revenue and operating income for Same-Practices on a year over year basis is reflected in the chart below.



|For the Three Months Ended March 31,
|------------------------------------
|                                    
|Same-Practice                       
|Revenues                            
|Operating income                    
|                                    
|New-Practice                        
|Revenues                            
|Operating income                    































Gross profit increased to $11,655,517 for the three months ended March 31, 2005 from $5,375,682 for the comparable 2004 period, representing an increase of 117%. This increase is attributed to the six practices acquired since March 31, 2004.



Operating expenses increased to $7,589,281 for the three months ended March 31, 2005 from $3,753,717 in the comparable 2004 period, representing an increase of 102%. The increase is primarily due to an additional $3.7 million in operating expenses related to the six practices acquired since March 31, 2004 and approximately $125,000 from an increase in corporate operating expenses due to travel expenses for the practice integration team.



Interest expense increased to $428,079 for the three months ended March 31, 2005 from $152,121 in the comparable 2004 period, representing an increase of 181%. This increase is a result of interest associated with capital raised through convertible debentures, on which interest commenced in March 2004. In addition, there is interest expense associated with various equipment financing and working capital lines of credit at the practices.



The provision for income taxes increased to $1,394,000 for the three months ended March 31, 2005 compared with $520,334 for the three months ended March 31, 2004, representing an increase of 168%. The effective income tax rate increased to 38% from 35% due to an increase in profitability.



As a result of the above changes, net income was $2,273,178 for the three months ended March 31, 2005 compared with net income of $966,335 in the comparable 2004 period, representing an increase of 135%.

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LIQUIDITY AND CAPITAL RESOURCES ON MARCH 31, 2005 AND 2004



Cash amounted to $10,272,446 at March 31, 2005, compared to $10,419,527 as of March 31, 2004. The net cash provided by operations was $316,500 for the three months ended March 31, 2005, compared to cash used in operations of $871 for the comparable period in 2004. This net increase in cash from operations is primarily due to cash provided by growth in our existing practices acquired prior to March 31, 2004 and new practices acquired since March 31, 2004.



Cash used in investing activities was $8,317,468 for the three months ended March 31, 2005 compared with a use of $2,203,177 in the comparable 2004 period. This increase is due to the six practices acquired since March 31, 2004.



Cash used in financing activities was $827,426 for the three months ended March 31, 2005 compared with $4,699,808 provided by financing activities in the comparable 2004 period.



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." We are obligated to make $1,750,000 principal payments under this indebtedness in 2005, $12,723,337 in 2006, and $932,263 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 but may not be commercially feasible or advantageous.



OTHER DATA



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



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



|                                         
|-----------------------------------------
|For the Three Months Ended March 31, 2005
|                                         
|                                         
|Revenues                                 
|Operating Income                         
|                                         
|                                         
|For the Three Months Ended March 31, 2004
|                                         
|                                         
|Revenues                                 
|Operating Income                         
|                                         































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Pain management revenue, expense and income are attributable to five owned and seven 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 physician practices that offer surgical physician services, including minimally invasive spine surgery. Ancillary services revenue, expense and income are attributable to two managed practices that primarily offer orthopedic rehabilitation and to services, we provide to 23 practices under limited management agreements, including orthopedic rehabilitation, electrodiagnostic medicine and real estate services.



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 investors also received warrants to purchase 1,263,316 shares of common stock. The warrants have a term of four years ending on December 17, 2007 and are exercisable at an adjusted fixed exercise price of $1.90 per share. The debentures and the warrants 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 and the exercise price of the warrants, such conversion and exercise prices are automatically reduced to the lower price. The debenture holders also have a right of first refusal to participate in future equity financings of PainCare. With certain exceptions, PainCare is not permitted to incur debt that would be senior to orpari passu with the debentures. The securities purchase agreement pursuant to which the debentures were sold provides that we shall not effect any conversion of debentures or issue any shares upon exercise of the warrants, and holder shall not have the right to convert any portion of debentures or exercise the warrants, to the extent that after giving effect to such conversion or exercise, 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.



On March 2, 2004, we completed a $5 million private placement with Laurus Master Fund, Ltd., a private equity fund based in New York City. The financing consisted of $5 million principal amount of a secured convertible term note and warrants to purchase 450,000 shares of common stock. The note is secured by a pledge of the stock of a subsidiary of PainCare and subject to certain limited exceptions, all of our assets. The warrants have an exercise price of $4.24 per share for the first 200,000 shares, $4.58 per share for next 150,000 shares and $4.92 per share for the remaining shares. The warrants are exercisable until February 27, 2011. The note bears interest at a fluctuating interest rate equal at all times to the prime rate plus 2%, subject to reduction if the value weighted average price of our common stock exceeds the conversion rate by 25%. The initial interest rate on the note is 6%. The note is convertible by the investors at any time into shares of common stock at an adjusted price of $3.12 per share. We may require that the holder of the note convert its outstanding note into common stock, if the market price exceeds 120% of the conversion rate. The principal amount of the note is repayable in monthly installments, commencing as of June 1, 2004, in the initial amount of $50,000 eventually increasing to $181,667, with a final installment of $500,000 and may be paid, at our option, in cash or shares of common stock, if the market price exceeds 120% of the conversion rate. Interest on the note is payable monthly and may be paid, at our option, in cash or, subject to certain conditions, additional shares of common stock, if the market price exceeds 120% of the conversion rate. The note is subject to weighted average 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 notes, such conversion price is automatically reduced by an amount that takes into account the amount of dilution caused by the lower priced securities. The securities purchase agreement for the note contains certain restrictive covenants, including with respect to the payment of dividends and the incurrence of debt. The securities purchase agreement pursuant to which the note was sold provides that we shall not effect any conversion of the note, and the holder shall not have the right to convert any portion of the note or exercise the warrants, to the extent that after giving effect to such conversion or exercise, 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, provided that the holder has the right to waive this limitation upon at least 70 days prior written notice to us. As of the date of this writing this Debenture has been paid or converted in full.



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On March 22, 2004, we completed a second $5 million private placement with Laurus, consisting of $5 million principal amount of a secured convertible term note and warrants to purchase 550,000 shares of common stock. The warrants have an exercise price of $3.60 per share for the first 233,000 shares, $3.89 per share for next 183,000 shares and $4.18 per share for the remaining shares. The note is secured by a pledge of the stock of the same subsidiary that secures our other notes. The warrants are exercisable until March 22, 2011. The note bears interest at a fluctuating interest rate equal at all times to the prime rate plus 2%, subject to reduction if the value weighted average price of our common stock exceeds the conversion rate by 25%. The initial interest rate on the note is 6%. The note is convertible into shares of common stock at an adjusted price of $2.70 per share. The principal amount of the note is repayable in monthly installments, commencing as of January 1, 2005, in the initial amount of $50,000 eventually increasing to $181,667, with a final installment of $500,000. The conversion terms and other terms, including anti-dilution protections, of the March 22, 2004 note are otherwise, substantially the same as the March 2, 2004 note issued to Laurus.



On January 1, 2004, we completed two separate institutional private placement offerings with aggregate proceeds of $3.0 million from two of our existing investors, the Laurus Master Fund, Ltd. and Midsummer Investments Ltd.



Pursuant to a securities purchase agreement with Laurus, we issued and sold to Laurus (i) $1.5 million principal amount of a secured convertible term note due June 30, 2007 and (ii) warrants to purchase 165,000 shares of common stock at an exercise price of $3.60 per share for the first 82,500 shares and an exercise price of $3.76 per share for the remaining shares. The warrants are exercisable until June 30, 2011. The note bears interest at a fluctuating interest rate equal at all times to the prime rate plus 2%, subject to reduction if the value weighted average price of our common stock exceeds the conversion rate by 25%. The initial interest rate on the note is 6%.



The note is convertible into shares of common stock at an adjusted price of $2.92 per share. The principal amount of the note is repayable in monthly installments, commencing as of October 1, 2004, in the initial amount of $50,000 eventually increasing to $60,000. The conversion terms and other terms, including anti-dilution protections, of the March 22, 2004 note are otherwise, substantially the same as the March 2, and March 22, 2004 notes issued to Laurus. As of the date of this writing this Debenture has been paid or converted in full.



Pursuant to a separate securities purchase agreement with Midsummer, we issued and sold a $1.5 million fixed price 7.5% Convertible Debenture. Midsummer also received warrants to purchase 165,000 shares of our common stock.



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 warrants issued to Midsummer have a term of four years ending on July 1, 2008 and have an adjusted exercise price of $1.90 per share. The conversion terms and other terms, including anti-dilution protections, are otherwise substantially the same as the December 17, 2003 debenture issued to Midsummer.



We have granted these notes and debenture holders certain demand and piggyback registration rights with respect to the common stock that is issuable upon conversion of the notes and debentures and/or exercise of the warrants, and/or issuable in payment of principal and interest on the notes and debentures. These underlying shares were registered pursuant to the Form S-3 Registration Statements filed with the SEC during 2004.



These debenture and note holders also entered into lock-up agreements which prohibited such holders, without the prior written consent of our underwriter from selling, offering to sell, contracting to sell, hypothecating, pledging, granting an option to purchase or otherwise disposing of any shares of our common stock or securities convertible into or exchangeable or exercisable for common stock or any warrants or other rights to purchase common stock or such securities. This lock-up expired on November 11, 2004.



RECENT EVENTS



On April 13, 2005 the Company acquired the non-medical assets of Colorado Pain Specialists, PC (CPS), an advanced interventional pain management practice operating six clinics in the Denver, Colorado area.  In connection with the purchase of CPSs non-medical assets, the Company will provide, through a wholly owned subsidiary, ongoing management and administrative services pursuant to a Management Agreement entered into with CPS.

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The initial portion of the purchase price consisted of $2,125,000 plus 653,698 PainCare common shares subject to certain post-closing adjustments, if any. In addition, PainCare will pay CPS an additional $4,250,000 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 PainCare.  The Company funded the cash portion of the initial purchase price from the proceeds of the recently completed public offering. Neither CPS nor its members have any prior relationship with the Company or its affiliates.

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%, will be used primarily to fund the Company's growth-through-acquisition strategy and to retire a portion of the Company's existing debt. PainCare expects to immediately draw just over $13.6 million and will have the option to make additional draws of up to just under $11.4 million. No warrants or other equity securities were issued to any party in connection with this transaction.

On May 12, 2005, the Company acquired the controlling interest of PSHS Alpha Partners, Ltd. d/b/a Lake Worth Surgical Center (LWSC), a fully accredited ambulatory surgical center located in Palm Beach County, Florida. The Company acquired 100% of the interest in LWSC owned by the General Partner, PSHS Partnership Ventures, Inc., and approximately 50% of the interest in LWSC owned by the three Limited Partners, one of whom includes Dr. Merrill Reuter, Chairman of PainCare and President of Advanced Orthopaedics of South Florida II, Inc., a practice, which the Company has owned since 2001. PainCare Surgery Center I, Inc., a wholly owned subsidiary of the Company, will act as the sole general partner of LWSC and will own 67.5% of all partnership interests in the partnership. In consideration for its general partner interest and the controlling stake in LWSC, the Company paid the sellers a total of $8,159,058 in a combination of cash and common stock.



FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF SECURITIES



You should consider the risks described below before making an investment decision. We believe that the risks and uncertainties described below are the principal material risks facing our company as of the date of this Form 10-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



Our limited operating history makes evaluating our future performance difficult and the challenge of operating our company without significant experience may cause our business operations and financial position to be adversely affected.



Because our current business does not have a long history, you have a limited basis upon which to evaluate our ability to develop and market our services. Our business strategy is still in the developing stage and there is no assurance that it will be commercially viable as our business grows. Our ability to commercialize our services and generate operating profits and positive operating cash flow will depend, among other things, upon:



| | the ability of our owned practices, managed practices and limited management practices to attract and retain an adequate number of patients;
|- | --------------------------------------------------------------------------------------------------------------------------------------------



| | the ability of those practices to enter new markets and compete successfully in them;
|- | -------------------------------------------------------------------------------------



| | our ability to manage operating expenses for those practices;
|- | -------------------------------------------------------------



| | our ability to raise additional capital to fund our capital expenditure plans;
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| | our ability to attract and retain qualified personnel; and
|- | ----------------------------------------------------------



| | our ability to identify attractive physician practices to acquire.
|- | ------------------------------------------------------------------





Our management is challenged by the regulatory and compliance issues associated with our operations. The diversion of the attention of management, which has little experience in operating a public company, and any difficulties encountered in the process of operating a public company, could lead to possible unanticipated liabilities and costs, and further cause the disruption of our business activities. This uncertainty may adversely affect our ability to successfully or profitably manage our business.



We have recently been profitable but no assurance can be given that such profitability will continue.



For the three month period ended March 31, 2005, as well as for the years ended December 31, 2004 and 2003, we realized net income of $2,273,178, $5,730,153 and $1,212,906, 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 remain profitable.



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 and ambulatory surgery centers. Identifying appropriate physician groups and centers 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 such physician groups and centers. 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 continue to accept our business strategy and adopt the strategy offered by us. The extent to which, and rate at which, our strategy and these services achieve significant 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 continue to accept our technology. Similar risks will confront any other services developed by us in the future. Failure of our services to gain significant market acceptance would have a material adverse effect on our business, financial condition, and results of operations



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 16 physician practices and one ambulatory surgery center company since 2000 and we intend to pursue additional acquisitions and management relationships. Our future success will depend on our ability to identify, complete 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 increased demands on our systems and controls. Acquisitions involve 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;
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| | 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 or center do not meet expectations, we may be required to restructure the acquired practice or center or write-off the value of some or all of the assets of the acquired practice or center. We cannot assure you that any acquisition will be successfully integrated into our operations or will have the intended financial or strategic results.



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



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



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



We will need to incur additional debt or 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 you 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.



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, 2005, we had intangible assets and net goodwill of approximately $60.7 million, which constituted approximately 63% of our total assets. The net goodwill reflects the amount we pay for our acquired practices and non-medical assets in excess of their book value. Our net goodwill will increase in the future as a result of our acquisitions as we pay contingent purchase price for the acquisitions according to the terms of the respective purchase agreements. In addition, we expect to incur 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.



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Our owned, managed, and limited management practices bill their patients 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.



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 two five year renewal terms on our part. 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.



The loss of key personnel could make it difficult to complete existing projects and undertake new projects.



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., Peter Rothbart, 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). We also have a consulting agreement with Peter Rothbart, M.D. Should the services of Dr. Reuter, Dr. Rothbart, 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.



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



Approximately 40% of our revenues are directly dependent on the acceptance of the services provided by our owned practices, managed practices and limited management practices as covered benefits under third party payor programs, including PPOs, HMOs and other managed care entities. The healthcare industry is undergoing significant changes, with third party payors taking measures to reduce reimbursement rates or, in some cases, denying reimbursement 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 materially adverse affect on us.



Professional liability claims could adversely impact our business.



Our owned and managed practices are involved in the delivery of healthcare services to the public and are exposed to the risk of professional liability claims. Claims of this nature, if successful, could result in damage awards to the claimants in excess of the limits of any applicable insurance coverage. Insurance against losses related to claims of this type can be expensive and varies widely from state to state. There can be no assurance that our owned and managed

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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 that 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 out patient surgery centers. These hospitals and companies have established operating histories and greater financial resources than us. In addition, we expect competition to increase, particularly in the market for rehabilitation services, as consolidation of the physical therapy industry continues through the acquisition by hospitals and large health care companies of physician-owned and other privately owned physical therapy practices. We will also compete with our competitors in connection with acquisition opportunities.



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



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



Risks Associated with 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 source 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

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reimbursement occur, the revenues generated by the owned practices, the managed practices and the limited management practices could shrink. This shrinkage would cause a reduction in our revenues. Accordingly, our business could be adversely affected by reductions in or limitations on reimbursement amounts for medical services rendered, payor mix changes or shifts by payors to different payment structures.



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



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



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



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



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



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



A majority of our revenue in 2004 was generated by our operations in nine states. In particular, Florida accounted for approximately 32% of our revenue in 2004. 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 money penalties of up to $15,000 for each service ordered.

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Designated health services furnished pursuant to a referral that is prohibited by the Stark Law are not covered by Medicare and payments improperly collected must be promptly refunded.



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



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



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



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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 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 of DHHS (OIG) 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, 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

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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.



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



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



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



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



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



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



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



The HIPAA Transactions Rule establishes format and data content standards for eight of the most common health care transactions. When we perform billing and collection services for our owned practices or managed practices we may be engaging in one of 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 will be 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.



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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 exercise their warrants, 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, you 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 your 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 or the warrants that were issued with such securities are exercised, 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 and the exercise price of the warrants issued with such securities 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 of 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.



Revised corporate governance requirements of the American Stock Exchange will require our management to expend additional time and resources. In addition, we may not be able to attract and retain qualified board of director candidates as required by the revised American Stock Exchange corporate governance rules.



The revised corporate governance requirements of the American Stock Exchange require compliance before July 31, 2005, at the latest. These requirements will obligate us to implement additional corporate governance practices. These new rules and regulations will increase our legal and financial compliance costs, and make some activities more difficult, time-consuming and costly.



In addition, the new requirements necessitated changes in our board of directors and board committees. As a result, at our annual meeting of stockholders held on November 12, 2004 our shareholders elected three new, independent directors. As a result, the majority of our directors are independent directors. Furthermore, our audit committee, compensation committee and stock option committee are all comprised of directors which are independent.



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



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



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



There is a limited market for our common stock. There can be no assurance that an active trading market for the common stock will be developed or maintained. Historically, the market prices for securities of companies like us have been highly volatile. In fact, since January 1, 2002, our common stock price has ranged from a low $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

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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 in the payment of dividends. Accordingly, investors should not rely on the payment of dividends in considering an investment in our Company.



Control by management will limit the ability of other stockholders to have any influence on the operation of our business.



Officers and directors of PainCare and its subsidiaries hold shares of common stock representing approximately 21% of the outstanding shares entitled to vote on matters presented to our stockholders (including shares issuable upon exercise of stock options and warrants). Our management will therefore exercise significant influence over the outcome of corporate actions requiring stockholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions. These stockholders may delay or prevent a change of control of us, even if such change of control would benefit our other stockholders.



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.



FORWARD-LOOKING STATEMENTS



This report contains 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.



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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;
| | - | ----------------------------------------------------------------------------------------------------------------------------------



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



| |  | that projected operating efficiencies will not be achieved due to implementation difficulties or contractual spending commitments that cannot be reduced; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | to the general risks associated with our businesses.
| | - | ----------------------------------------------------



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 report under the section Risk Factors. The forward-looking statements contained in this report represent our judgment as of the date of this report, and you should not unduly rely on such statements.



Unless otherwise required by law, we undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this report. However, we acknowledge our obligation to disclose material developments related to previously disclosed information. 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.



None.



ITEM 4. CONTROLS AND PROCEDURES



Evaluation of Disclosure Controls and Procedures



Our chief executive officer and chief financial officer have reviewed and evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(c) and 15d-15(e) of the Securities Exchange Act of 1934, as amended, or Exchange Act) as of March 31, 2005. Based on that evaluation, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures effectively and timely provide them with material information relating to our company and its consolidated subsidiaries required to be disclosed in the reports we file under the Exchange Act.



Changes in Internal Control Over Financial Reporting



During the period covered by this report, there has been no change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.



PART II  OTHER INFORMATION



Item 1. Legal Proceedings



None.

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Item 2. Changes in Securities



Between January 1, 2005 and March 31, 2005 there were 410,812 common stock shares issued for the exercise of vested stock options.



Between January 1, 2005 and March 31, 2005 a total of 153,066 common stock shares were issued for the exercise of vested warrants.



Between January 1, 2005 and March 31, 2005 a total of 103,819 common stock shares were issued for the payment of

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convertible debenture interest due to Midsummer Investment, Ltd., Islandia, L.P and Laurus Master Fund, Ltd.



Between January 1, 2005 and March 31, 2005 a total of 2,028,364 common stock shares were issued for the conversion of convertible debenture principal by Midsummer Investment, Ltd., Islandia, L.P. and Laurus Master Fund, Ltd.



Between January 1, 2005 and March 31, 2005 a total of 3,687,500 common stock shares were issued for the acquisition of The Center for Pain Management, LLC.



Between January 1, 2005 and March 31, 2005 a total of 111,327 common stock shares were issued to Rehab Management Group, Inc. representing the first of three earn-out installments related to the acquisition of three electrodiagnostic purchase agreements.



Between January 1, 2005 and March 31, 2005 a total of 130,662 common stock shares were issued to Christopher Cenac, M.D. representing the first of three earn-out installments related to the acquisition of the Bone and Joint Surgical Clinic.



Between January 1, 2005 and March 31, 2005 a total of 83,001 common stock shares were issued to Michael Martire, M.D. representing the first of three earn-out installments related to the acquisition of the Spine and Pain Center, P.C..



Between January 1, 2005 and March 31, 2005 a total of 226,608 common stock shares were issued to Saqib Bashir Khan, M.D. representing the first of three earn-out installments related to the acquisition of the Health Care Center of Tampa, Inc.



Between January 1, 2005 and March 31, 2005 a total of 115,340 common stock shares were issued to Andrea Trescot, M.D. representing the second of three earn-out installments related to the acquisition of the Pain and Rehabilitation Network, Inc.



Between January 1, 2005 and March 31, 2005 a total of 203,252 common stock shares were issued to Kenneth Alo, M.D. representing the first of three earn-out installments related to the acquisition of Kenneth Alo, M.D., P.A.



Between January 1, 2005 and March 31, 2005 a total of 18,860 common stock shares were issued to employees of Advanced Orthopaedics of South Florida II, Inc. representing compensation in lieu of an employer 401k plan contribution.



All of the foregoing securities were issued pursuant to the exemption from registration provided in Section 4(2) of the Securities Act of 1933, as amended.



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



(a)

Exhibit Index













|No.  |  | Description                                                                                                                                                                                                              
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|31.1 |  | Certification of Chief Executive Officer of PainCare Holdings, Inc. pursuant to Rule 13a - 14(a)/15d-14(a) of the Securities Exchange Act of 1934.                                                                       
|     | 
|31.2 |  | Certification of Chief Financial and Accounting Officer of PainCare Holdings, Inc. pursuant to Rule 13a - 14(a)/15d-14(a) of the Securities Exchange Act of 1934.                                                        
|     |  |                                                                                                                                                                                                                          
|32.1 |  | Certifications of Chief Executive Officer and Chief Financial and Accounting Officer of PainCare Holdings, Inc. pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



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SIGNATURES

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



|                   |  |                                     
|------------------ |  | ------------------------------------
|                   |  | PainCare Holdings, Inc.             
|                   | 
|Date: May 13, 2005 |  | /s/ Randy A. Lubinsky               
|                   |  | Randy A. Lubinsky                   
|                   |  | Chief Executive Officer             
|                   | 
|Date: May 13, 2005 |  | /s/ Mark Szporka                    
|                   |  | Mark Szporka                        
|                   |  | Chief Financial & Accounting Officer
|                   |  |                                     



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