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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-QSB



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(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, 2004



| ̈ | 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



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PainCare Holdings, Inc.

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



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



37 N. Orange Avenue,
Suite 500, Orlando, Florida 32801

(Address of principal executive offices)



(407) 926-6615

(Issuers telephone number)



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



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



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



APPLICABLE ONLY TO CORPORATE ISSUERS



The number of shares outstanding of the issuers common stock as of April 23, 2004 is
28,055,268 shares.



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



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##### Table of Contents

PAINCARE HOLDINGS, INC.



INDEX



|                              |  |                                                                                                      |  |   
|----------------------------- |  | ---------------------------------------------------------------------------------------------------- |  | --
|PART I. FINANCIAL INFORMATION |  |                                                                                                     
|                              |  |                                                                                                     
|Item 1.                       |  | Financial Statements                                                                                 |  |   
|                              |  |                                                                                                     
|                              |  | Consolidated Balance Sheets as of March 31, 2004 (unaudited) and December 31, 2003 (audited)         |  | 3 
|                              |  |                                                                                                     
|                              |  | Consolidated Statements of Operations for the three months ended March 31, 2004 and 2003 (unaudited) |  | 4 
|                              |  |                                                                                                     
|                              |  | Consolidated Statement of Stockholders Equity for the three months ended March 31, 2004 (unaudited) |  | 5 
|                              |  |                                                                                                     
|                              |  | Consolidated Statements of Cash Flows for the three months ended March 31, 2004 and 2003 (unaudited) |  | 6 
|                              |  |                                                                                                     
|                              |  | Notes to Consolidated Financial Statements (unaudited)                                               |  | 7 
|                              |  |                                                                                                     
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations                |  | 12
|                              |  |                                                                                                     
|Item 3.                       |  | Controls and Procedures                                                                              |  | 28
|                              | 
|PART II. OTHER INFORMATION    |  |                                                                                                     
|                              | 
|Signature                     |  | 30                                                                                                  



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PART I FINANCIAL INFORMATION



ITEM 1. FINANCIAL STATEMENTS



PainCare Holdings, Inc.

Consolidated Balance Sheet

As of March 31, 2004 and December 31, 2003



|                                                                                                                      |  |               |            |   |                  |   |           
|--------------------------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ---------------- | - | ----------
|                                                                                                                      |  | March 31,2004 |            |   | December 31,2003
|                                                                                                                      |  | (Unaudited)   |            |   | (Audited)       
|Assets                                                                                                                |  |               |            |   |                  |   |           
|Current assets:                                                                                                       |  |               |            |   |                  |   |           
|Cash                                                                                                                  |  | $             | 10,419,527 |   |                  | $ | 7,923,767 
|Accounts receivable, net                                                                                              |  |               | 6,762,493  |   |                  |   | 5,100,699 
|Due from stockholder                                                                                                  |  |               | 383,090    |   |                  |   | 203,050   
|Note receivable                                                                                                       |  |               | 284,964    |   |                  |   | 320,353   
|Deposits & prepaid expenses                                                                                           |  |               | 599,638    |   |                  |   | 514,957   
|                                                                                                                      |  |               |            |   |                  |   |           
|Total current assets                                                                                                  |  |               | 18,449,712 |   |                  |   | 14,062,826
|                                                                                                                      |  |              
|Property and equipment, net                                                                                           |  |               | 4,734,001  |   |                  |   | 4,730,723 
|Goodwill, net                                                                                                         |  |               | 24,059,078 |   |                  |   | 21,946,735
|Other assets                                                                                                          |  |               | 4,437,083  |   |                  |   | 2,680,665 
|                                                                                                                      |  |               |            |   |                  |   |           
|Total assets                                                                                                          |  | $             | 51,679,874 |   |                  | $ | 43,420,949
|                                                                                                                      |  |               |            |   |                  |   |           
|Liabilities and Stockholders Equity                                                                                  |  |               |            |   |                  |   |           
|Current liabilities:                                                                                                  |  |               |            |   |                  |   |           
|Accounts payable and accrued expenses                                                                                 |  |               | 393,616    |   |                  | $ | 639,668   
|Income tax payable                                                                                                    |  |               | 329,026    |   |                  |   |          
|Current portion of notes payable                                                                                      |  |               | 867,206    |   |                  |   | 4,216,566 
|Current portion of convertible debentures                                                                             |  |               |           |   |                  |   | 306,616   
|Current portion of capital lease obligations                                                                          |  |               | 607,294    |   |                  |   | 578,557   
|                                                                                                                      |  |               |            |   |                  |   |           
|Total current liabilities                                                                                             |  |               | 2,197,142  |   |                  |   | 5,741,407 
|                                                                                                                      |  |              
|Notes payable, less current portion                                                                                   |  |               | 51,280     |   |                  |   | 510,141   
|Convertible debentures, less current portion                                                                          |  |               | 20,000,000 |   |                  |   | 10,712,000
|Deferred income tax liability                                                                                         |  |               | 874,608    |   |                  |   | 683,300   
|Capital lease obligations, less current portion                                                                       |  |               | 2,451,850  |   |                  |   | 2,300,165 
|                                                                                                                      |  |               |            |   |                  |   |           
|Total liabilities                                                                                                     |  |               | 25,574,880 |   |                  |   | 19,947,013
|                                                                                                                      |  |               |            |   |                  |   |           
|Stockholders equity:                                                                                                 |  |               |            |   |                  |   |           
|Common stock, $.0001 par value, authorized 75,000,000 shares; issued and outstanding 27,955,268 and 26,882,597 shares |  |               | 2,796      |   |                  |   | 2,688     
|Preferred stock, $.0001 par value, authorized 10,000,000 shares; issued and outstanding -0- shares                    |  |               |           |   |                  |   |          
|Additional paid in capital                                                                                            |  |               | 23,370,697 |   |                  |   | 21,700,894
|Retained earnings                                                                                                     |  |               | 2,735,728  |   |                  |   | 1,769,393 
|Other comprehensive income (loss)                                                                                     |  |               | (4,227     | ) |                  |   | 961       
|                                                                                                                      |  |               |            |   |                  |   |           
|Total stockholders equity                                                                                            |  |               | 26,104,994 |   |                  |   | 23,473,936
|                                                                                                                      |  |               |            |   |                  |   |           
|Commitments                                                                                                           |  |               |            |   |                  |   |           
|                                                                                                                      |  |               |            |   |                  |   |           
|Total liabilities and stockholders equity                                                                            |  | $             | 51,679,874 |   |                  | $ | 43,420,949
|                                                                                                                      |  |               |            |   |                  |   |           



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



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PainCare Holdings, Inc.



Consolidated Statements of Operations (Unaudited)



For the Three Months ended

March 31, 2004 and 2003



|                                            |  |                                      |            |   |                  |   |            |  
|------------------------------------------- |  | ------------------------------------ | ---------- | - | ---------------- | - | ---------- | -
|                                            |  | For the Three Months Ended March 31, |           
|                                            |  | (Unaudited) 2004                     |            |   | (Unaudited) 2003 |  
|Total revenues:                             |  |                                      |            |   |                  |   |            |  
|Patient services                            |  |                                      | 3,619,565  |   |                  | $ | 1,570,314  |  
|Management fees                             |  |                                      | 3,240,163  |   |                  |   | 927,806    |  
|                                            |  |                                      |            |   |                  |   |            |  
|Total revenues                              |  |                                      | 6,859,728  |   |                  |   | 2,498,120  |  
|                                            |  |                                     
|Cost of sales                               |  |                                      | 1,484,046  |   |                  |   | 786,544    |  
|                                            |  |                                      |            |   |                  |   |            |  
|Gross profit                                |  |                                      | 5,375,682  |   |                  |   | 1,711,576  |  
|                                            |  |                                     
|Operating expenses:                         |  |                                      |            |   |                  |   |            |  
|Selling, general and administrative         |  |                                      | 3,538,941  |   |                  |   | 1,038,217  |  
|Depreciation expense                        |  |                                      | 152,972    |   |                  |   | 85,154     |  
|Amortization expense                        |  |                                      | 61,804     |   |                  |   |           |  
|                                            |  |                                      |            |   |                  |   |            |  
|Operating income                            |  |                                      | 1,621,965  |   |                  |   | 588,205    |  
|                                            |  |                                     
|Interest expense                            |  |                                      | (152,121   | ) |                  |   | (133,281   | )
|Other income                                |  |                                      | 16,825     |   |                  |   | 625        |  
|                                            |  |                                      |            |   |                  |   |            |  
|Income before taxes                         |  |                                      | 1,486,669  |   |                  |   | 455,549    |  
|                                            |  |                                     
|Provision for income taxes                  |  |                                      | 520,334    |   |                  |   | 132,260    |  
|                                            |  |                                      |            |   |                  |   |            |  
|Net income                                  |  |                                      | 966,335    |   |                  | $ | 323,289    |  
|                                            |  |                                      |            |   |                  |   |            |  
|Basic earnings per share                    |  | $                                    | 0.04       |   |                  | $ | 0.02       |  
|                                            |  |                                      |            |   |                  |   |            |  
|Basic weighted average shares outstanding   |  |                                      | 27,376,501 |   |                  |   | 16,836,956 |  
|                                            |  |                                      |            |   |                  |   |            |  
|Diluted earnings per share                  |  | $                                    | 0.03       |   |                  | $ | 0.01       |  
|                                            |  |                                      |            |   |                  |   |            |  
|Diluted weighted average shares outstanding |  |                                      | 32,662,630 |   |                  |   | 22,851,425 |  
|                                            |  |                                      |            |   |                  |   |            |  



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



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PainCare Holdings, Inc.



Consolidated Statement of Stockholders Equity (Unaudited)

For the Three Months ended March 31, 2004



|                                             |  |                     |  |                     |  |                            |  |                   |  |                                 |   |  |                            |  
|-------------------------------------------- |  | ------------------- |  | ------------------- |  | -------------------------- |  | ----------------- |  | ------------------------------- | - |  | -------------------------- | -
|                                             |  | Common Stock Shares |  | Common Stock Amount |  | Additional Paid in Capital |  | Retained Earnings |  | OtherComprehensiveIncome (loss) |   |  | Total Stockholders Equity |  
|Balances at December 31, 2003                |  | 26,882,597          |  | 2,688               |  | 21,700,894                 |  | 1,769,393         |  | 961                             |   |  | 23,473,936                 |  
|Common stock issued for earnout              |  | 455,645             |  | 46                  |  | 666,620                    |  |                  |  |                                |   |  | 666,666                    |  
|Common stock issued for contract rights      |  | 342,760             |  | 34                  |  | 757,966                    |  |                  |  |                                |   |  | 758,000                    |  
|Common stock issued for exercise of warrants |  | 265,766             |  | 27                  |  | 243,093                    |  |                  |  |                                |   |  | 243,120                    |  
|Common stock issued for exercise of options  |  | 8,500               |  | 1                   |  | 2,124                      |  |                  |  |                                |   |  | 2,125                      |  
|Foreign currency translation                 |  |                    |  |                    |  |                           |  |                  |  | (5,188                          | ) |  | (5,188                     | )
|Net income                                   |  |                    |  |                    |  |                           |  | 966,335           |  |                                |   |  | 966,335                    |  
|                                             |  |                     |  |                     |  |                            |  |                   |  |                                 |   |  |                            |  
|Balances at March 31, 2004                   |  | 27,955,268          |  | 2,796               |  | 23,370,697                 |  | 2,735,728         |  | (4,227                          | ) |  | 26,104,994                 |  
|                                             |  |                     |  |                     |  |                            |  |                   |  |                                 |   |  |                            |  



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



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PainCare Holdings, Inc.



Consolidated Statement of Cash Flows (Unaudited)



For the Three Months ended March 31, 2004 and 2003



|                                                                              |  |      |            |   |      |   |           |  
|----------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | - | --------- | -
|                                                                              |  | 2004 |            |   | 2003 |  
|Cash flows from operating activities:                                         |  |      |            |   |      |   |           |  
|Net income                                                                    |  | $    | 966,335    |   |      | $ | 323,289   |  
|Adjustments to reconcile net income to net cash used in operating activities: |  |      |            |   |      |   |           |  
|Depreciation and amortization                                                 |  |      | 214,776    |   |      |   | 85,154    |  
|Loss on disposal of property and equipment                                    |  |      | 171,121    |   |      |   |          |  
|Other comprehensive income (loss)                                             |  |      | (5,188     | ) |      |   | (21,218   | )
|Change in operating assets and liabilities, net of assets acquired:           |  |      |            |   |      |   |           |  
|Accounts receivable                                                           |  |      | (1,661,794 | ) |      |   | (244,409  | )
|Deposits and prepaid expenses                                                 |  |      | (84,681    | ) |      |   | (130,649  | )
|Other assets                                                                  |  |      | 124,278    |   |      |   | 137,741   |  
|Deferred income tax liability                                                 |  |      | 191,308    |   |      |   |          |  
|Accounts payable and accrued expenses                                         |  |      | (246,052   | ) |      |   | (189,028  | )
|Income tax payable                                                            |  |      | 329,026    |   |      |   |          |  
|                                                                              |  |      |            |   |      |   |           |  
|Net cash used in operating activities                                         |  |      | (871       | ) |      |   | (39,120   | )
|                                                                              |  |      |            |   |      |   |           |  
|Cash flows from investing activities:                                         |  |      |            |   |      |   |           |  
|Sale (purchase) of property and equipment                                     |  |      |           |   |      |   | (178,070  | )
|Cash paid for earnouts                                                        |  |      | (1,445,677 | ) |      |   |          |  
|Cash used for purchase of contract rights                                     |  |      | (757,500   | ) |      |   |          |  
|                                                                              |  |      |            |   |      |   |           |  
|Net cash used in investing activities                                         |  |      | (2,203,177 | ) |      |   | (178,070  | )
|                                                                              |  |      |            |   |      |   |           |  
|Cash flows from financing activities:                                         |  |      |            |   |      |   |           |  
|Net proceeds from issuance of convertible preferred stock                     |  |      |           |   |      |   | 219,496   |  
|Net proceeds from issuance of common stock                                    |  |      | 245,245    |   |      |   | 1,454,045 |  
|Net proceeds from issuance of debentures                                      |  |      | 9,573,000  |   |      |   |          |  
|Payments of capital lease obligations                                         |  |      | (146,949   | ) |      |   | (8,464    | )
|Payments of debentures                                                        |  |      | (1,018,616 | ) |      |   | (350,000  | )
|Due from/to stockholders                                                      |  |      | (180,040   | ) |      |   | 487       |  
|Net (advances) payments on notes receivable                                   |  |      | 35,389     |   |      |   | (21,316   | )
|Net payments on notes payable                                                 |  |      | (3,808,221 | ) |      |   | (651,122  | )
|                                                                              |  |      |            |   |      |   |           |  
|Net cash provided by financing activities                                     |  |      | 4,699,808  |   |      |   | 643,126   |  
|                                                                              |  |      |            |   |      |   |           |  
|Net increase in cash                                                          |  |      | 2,495,760  |   |      |   | 425,936   |  
|                                                                              |  |     
|Cash at beginning of period                                                   |  |      | 7,923,767  |   |      |   | 2,078,684 |  
|                                                                              |  |      |            |   |      |   |           |  
|Cash at end of period                                                         |  | $    | 10,419,527 |   |      | $ | 2,504,620 |  
|                                                                              |  |      |            |   |      |   |           |  
|Supplementary disclosure of cash flow information:                            |  |      |            |   |      |   |           |  
|Cash paid during the period for interest                                      |  | $    | 152,121    |   |      | $ | 133,281   |  
|Non-cash transactions:                                                        |  |      |            |   |      |   |           |  
|Common stock issued for earnouts                                              |  |      | 666,666    |   |      |   | 170,000   |  
|Common stock issued for contract rights                                       |  |      | 758,000    |   |      |   |          |  
|Equipment financed                                                            |  |      | 327,371    |   |      |   |          |  
|Capitalized debenture issuance costs                                          |  |      | 427,000    |   |      |   |          |  



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



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PainCare Holdings, Inc.



Notes to
Consolidated Financial Statements



(1) Organization and Basis of
Presentation



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s 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 1,425 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.



On December 1, 2000, PainCare, Inc. acquired 51% of the outstanding shares of Rothbart Pain Management Clinic Inc.
(Rothbart). Rothbart was incorporated in Ontario, Canada in November, 1994. Rothbart is one of the largest providers of pain management services in Canada with over 14 pain management physicians practicing in its center. On March 1,
2001, PainCare, Inc. acquired the remaining 49% of the outstanding shares of Rothbart.



On January 1, 2001, PainCare, Inc. closed a merger pursuant to a merger agreement by and among PainCare, Inc., its wholly-owned subsidiary, PainCare Acquisition Company I, Inc. (PNAC I), and Advanced
Orthopedics of South Florida, Inc.(AOSF), a Florida corporation. AOSF is an orthopedic surgery, pain management and orthopedic rehabilitation center located in Lake Worth, Florida.



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PainCare, Inc. through PainCare Management Services, Inc. (PCMS), a wholly owned subsidiary
of PainCare, Inc. entered into on March 1, 2001 a lease agreement with MedX 96, Inc. (MedX), whereby MedX will supply rehabilitation equipment to PCMS in exchange for 15% of the net revenues of PCMS. The mission of PCMS is to deliver a
turnkey musculoskeletal rehabilitation program for select orthopedic surgeon practices. The lease was subsequently amended on May 1, 2002. This lease was amended on July 28, 2003, whereby MedX no longer receives the 15% commission.



On August 31, 2001, PainCare, Inc. consummated the closing of an Asset
Purchase Agreement with Perry Haney, M.D., whereby PainCare, Inc. acquired certain assets used by Dr. Haney in his pain management practice located in Aurora, Colorado. Pursuant to a Management Agreement between PainCare, Inc. and Dr. Haney,
PainCare, Inc. provides Dr. Haneys practice with various business, administrative and management services including support services, non-professional personnel, office space, management, administration, marketing, advertising, billing,
collection, and financial record keeping services.



On July
17, 2002 PainCare, Inc. consummated the Merger with HelpMate, as previously discussed.



The Merger



As
indicated above, on December 20, 2001, HelpMate Robotics, Inc. entered in a Merger Agreement with PainCare, Inc. whereby a wholly-owned subsidiary of HelpMate, formed for the purpose of the Merger, would merge into PainCare, Inc. and PainCare, Inc.
would become a subsidiary of HelpMate. The shareholders of PainCare, Inc. would receive voting common stock of HelpMate. In connection with the Merger, the companies filed a Form S-4 with the SEC which was effective on July 12, 2002. Immediately
thereafter, a Certificate of Merger was filed with the Secretary of State of the State of Connecticut and Articles of Merger were filed with the Secretary of State of the State of Nevada. The Merger became effective on July 17, 2002.



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



Holders of PainCare, Inc. common
stock received shares of HelpMate common stock at a conversion rate of one (1) share of HelpMate common stock for each one share of PainCare, Inc. common stock surrendered. As of the date the Merger was consummated there were 7,555,357 shares of
PainCares common stock issued and outstanding. Holders of PainCare, Inc. options, warrants and other derivatives have the right to exercise those derivatives for HelpMates common stock.



HelpMate had 900,122 shares of common stock outstanding as of the date of
the Merger. There were no other shares of HelpMate capital stock or derivatives issued or outstanding.



In summary, PainCare, Inc. security holders received an aggregate of 11,789,816 shares of HelpMate common stock in the merger, or approximately 93% of the
issued and outstanding shares of HelpMate common stock, assuming the exercise or conversion of all issued and outstanding PainCare, Inc. stock options, warrants and convertible notes.



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On November 8, 2002, the Board of Directors and shareholders approved an amendment to the Companys
Certificate of Incorporation for the purpose of changing the name of the Company from HelpMate Robotics, Inc. to PainCare Holdings, Inc. This name change reflects the revised strategic vision and marketing strategy of the Company following the
completion in July 2002 of the merger with PainCare, Inc. In conjunction with the Company name change, the trading symbol for the Companys common stock changed from HMRB to PANC in December 2002. The current outstanding
stock certificates evidencing shares of the Companys common stock bearing the name HelpMate Robotics, Inc. will continue to be valid and represent shares of the Company following the name change. All shares issued after November 8,
2002, will be issued bearing the new name.



On November 8,
2002, the Board of Directors and shareholders approved a proposal to change the Companys state of incorporation from Connecticut to Florida. The Board of Directors believe that this change in domicile is in the best interests of the Company
and its shareholders. The Reincorporation was effected by merging the Company with and into PainCare Holdings, Inc., a Florida corporation, a corporation formed by the Company for the purpose of the Reincorporation.



On December 12, 2002, the Company completed the acquisition of the
outstanding capital stock of Pain and Rehabilitation Network, Inc., a pain management physician practice headquartered in Orange Park, Florida. The capital stock was acquired from Andrea Trescot, M.D., the sole shareholder. Dr. Trescot had no prior
relationships with the Company.



The purchase price consisted
of $1,000,000 in cash and 1,000,000 shares of the Companys common stock valued at $1.00 per share. The Company may also make additional payments of up to $2,000,000 in cash and common stock if certain net earnings goals are achieved in each of
the first three fiscal years following the closing. The acquisition has been accounted for using the purchase method of accounting. The Company funded the cash portion of the purchase price of Pain and Rehabilitation Network, Inc. from the proceeds
of a debt financing obtained from Arthur J. Hudson, a director of the Company. The terms of the loan from Mr. Hudson require the Company to make monthly interest payments at the annual rate of 8% with the entire principal and unpaid interest due on
December 31, 2004. In addition, the Company issued Mr. Hudson a warrant to purchase 100,000 shares of the Companys common stock at an exercise price of $0.70 per share.



On May 16, 2003, the Company completed the acquisition of the outstanding capital stock of Medical Rehabilitation
Specialists II, P.A., a pain management physician practice headquartered in Tallahassee, Florida. The capital stock was acquired in a merger transaction from Kirk Mauro, M.D., the sole shareholder. Dr. Mauro had no prior relationships with the
Company.



The purchase price consisted of $975,000 in cash, a
note for $400,000, and 1,100,000 shares of our common stock valued at $1.25 per share. The Company may also make additional payments of up to $2,750,000 in cash and common stock if certain net earnings goals are achieved in each of the first three
fiscal years following the closing. The acquisition has been accounted for using the purchase method of accounting. The Company funded the cash portion of the purchase price of Medical Rehabilitation Specialists II, P.A. with internal cash reserves
of $975,000, and a note for $400,000 which is payable on June 15, 2003. The note for $400,000 was paid in full by the Company on June 12, 2003 using internal cash reserves.



On August 6, 2003, the Company completed the acquisition of the outstanding capital stock of Industrial & Sport
Rehabilitation, Ltd. d/b/a Associated Physicians Group, an orthopedic rehabilitation practice headquartered in OFallon, Illinois. The capital stock was acquired in a merger transaction from John Vick, the sole shareholder. Mr. Vick had no
prior relationships with the Company.



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The purchase price consisted of $1,375,000 in cash, and 1,375,000 shares of our common stock valued at
$1.00 per share. The Company may also make additional payments of up to $2,750,000 in cash and common stock if certain net earnings goals are achieved in each of the first three fiscal years following the closing. The acquisition has been accounted
for using the purchase method of accounting. The Company funded the cash portion of the purchase price of Industrial & Sport Rehabilitation, Ltd. d/b/a Associated Physicians Group, with internal cash reserves.



On December 23, 2003, the Company completed the acquisition of the
outstanding capital stock of Spine & Pain Center, P.C., a pain management physician practice headquartered in Bismarck, North Dakota. The capital stock was acquired in a merger transaction from Michael Martire, M.D., the sole shareholder. Dr.
Martire had no prior relationships with the Company.



Pursuant
to the merger agreement, the Company acquired the non-medical assets of Spine & Pain Center, P.C. and will in accordance with the management agreement, provide ongoing management and administrative services to a newly formed successor of Spine
& Pain Centers medical practice. The purchase price consisted of $625,000 in cash, and 277,778 shares of common stock valued at $2.25 per share. The Company may also make additional payments of up to $1,250,000 in cash and common stock if
certain net earnings goals are achieved in each of the first three fiscal years following the closing. The acquisition has been accounted for using the purchase method of accounting. The Company funded the cash portion of the purchase price of Spine
& Pain Center, P.C. from our internal cash reserves and line of credit.



On December 30, 2003, the Company completed the acquisition of the outstanding capital stock of Health Care Center of Tampa, Inc., a pain management physician practice headquartered in Lakeland, Florida. The capital
stock was acquired in a merger transaction from Saqib Bashir Khan, M.D., the sole shareholder. Dr. Khan had no prior relationships with the Company.



The purchase price consisted of $1,937,500 in cash, and 809,315 shares of our common stock valued at $2.394 per share. The Company may also make
additional payments of up to $3,875,000 in cash and common stock if certain net earnings goals are achieved in each of the first three fiscal years following the closing. The acquisition has been accounted for using the purchase method of
accounting. The company funded the cash portion of the purchase price of Health Care Center of Tampa, Inc. from the proceeds of the $10 million Convertible Debenture offering closed December 18, 2003.



On December 31, 2003, the Company completed the acquisition of Bone and
Joint Surgical Clinic pursuant to an asset purchase transaction from Christopher Cenac, M.D., the sole shareholder. Dr. Cenac had no prior relationships with the Company.



Pursuant to the asset purchase agreement, the Company acquired the assets of Bone and Joint Surgical Clinic. The purchase
price consisted of $1,250,000 in cash, and 565,048 shares of common stock valued at $2.2122 per share. The Company may also make additional payments of up to $2,500,000 in cash and common stock if certain net earnings goals are achieved in each of
the first three fiscal years following the closing. The acquisition has been accounted for using the purchase method of accounting. The Company funded the cash portion of the purchase price of Bone and Joint Surgical Clinic from the proceeds of the
$10 million Convertible Debenture offering closed on December 18, 2003.



On December 31, 2003, the Company completed the acquisition of the outstanding capital stock of Kenneth M. Alo, M.D., P.A., a pain management and anesthesiology physician practice headquartered in Houston, Texas. The
capital stock was acquired in a merger transaction from Kenneth Alo, M.D., the sole shareholder. Dr. Alo had no prior relationships with the Company.



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Pursuant to the merger agreement, the Company acquired the non-medical assets of Kenneth M. Alo, M.D.,
P.A., and will in accordance with the management agreement, provide ongoing management and administrative services to a newly formed successor of Dr. Alos medical practice. The purchase price consisted of $1,750,000 in cash, and 777,778 shares
of common stock valued at $2.25 per share. The Company may also make additional payments of up to $3,500,000 in cash and common stock if certain net earnings goals are achieved in each of the first three fiscal years following the closing. The
acquisition has been accounted for using the purchase method of accounting. The Company funded the cash portion of the purchase price of Kenneth M. Alo, M.D., P.A. from the proceeds of the $10 million Convertible Debenture offering closed on
December 18, 2003.



On January 17, 2004, the Company purchased
from Rehab Management Group, Inc., a South Carolina based corporation (RMG) all rights, title and interest that RMG owns or acquires in and to all management fees, revenues, compensation and payments of any kind with respect to three
electrodiagnostic management agreements with the named physicians practice:



|                                                                             |  |                                                                                                                                                                                     
|---------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Name of Physicians Practice                                                 |  | Purchase Price                                                                                                                                                                      
|Associated Physicians Group, Ltd., a fully integrated treatment practice     |  | $107,500 in cash and 48,643 shares of common stock, plus contingent payments of up to $215,000 group located in Illinois in cash and common stock if certain earnings goals are
met.
|                                                                             | 
|Statesville Pain Associates, P.C., a North Carolina professional corporation |  | $375,000 in cash and 169,683 shares of common stock, plus contingent payments of up to $750,000 in cash and common stock if certain earnings goals are met.                         
|                                                                             | 
|Space Coast Pain Institute, P.C., a Florida Professional corporation         |  | $275,000 in cash and 124,434 shares of common stock, plus contingent payments of up to $550,000 in cash and common stock if certain earnings goals are met.                         



Common Stock



As of April 23, 2004, the Company had 75,000,000 shares of authorized common
stock with a par value of $.0001 per share of which 28,055,268 shares are issued and outstanding. The Company also has 10,000,000 preferred shares authorized none of which have been issued.



Basis of Presentation



The accompanying unaudited financial statements have been prepared in
accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-QSB and Rule 310 of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by accounting principles generally accepted in the United States. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included in the
accompanying unaudited financial statements. Operating results for the three month period ended March 31, 2004 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2004. These statements should be
read in conjunction with the financial statements and footnotes thereto included in the Companys annual report on Form 10-KSB for the year ended December 31, 2003.



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



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



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



Outlook



PainCare Holdings, Inc. (the
Company or PainCare) is a holding company that provides high-tech health care services through (i) our wholly owned medical practice subsidiaries, or Owned Practices, (ii) medical practices that we manage in
States that prohibit the corporate practice of medicine, or Managed Practices, and (iii) medical practices where we provide certain equipment and services pursuant to specific or limited engagements, or Limited Management
Practices. These services include pain management, minimally invasive spine surgery and orthopedic rehabilitation services to patients of our Owned Practices, Managed Practices and Limited Management Practices, (collectively the
Practices), seeking pain relief. We have developed our Three Pillar business approach to provide an integrated combination of products and services to patients of the Practices seeking pain relief through pain management
technologies, minimally invasive spine surgery and orthopedic rehabilitation.



Minimally invasive spine surgery or band-aid surgery is a specialized surgical technique based on currently available endoscopic technologies, which allows physicians to provide the most technically
advanced treatment of back and neck pain in an outpatient environment. Orthopedic rehabilitation is a comprehensive program that advances functional restoration of the musculoskeletal system utilizing state of the art computerized MedXmedical exercise machines.



We have two (2) profit centers:



(1) We acquire, in the case of Owned Practices, or manage in the case of the Managed Practices, highly profitable pain management, physiatry and
orthopedic physician practices to serve as a delivery platform for our three integrated musculoskeletal services. We currently have two (2) Owned Practices providing spine surgery services, four (4) Owned Practices providing pain management
services, and four (4) Managed Practices, providing pain management services.



(2) We also provide a turn-key orthopedic rehabilitation and electrodiagnostic medicine program for select orthopedic, neurosurgery, physiatry and pain physician practices. There are currently twenty (20) Limited
Managed Practices, three (3) Owned Practices and four (4) Managed Practices providing these programs. The orthopedic rehabilitation program utilizes MedX state-of-the-art equipment.



We began our business in August 2000 through the reorganization of a predecessor corporation. We maintain our principal
executive offices at 37 North Orange Avenue, Suite 500, Orlando, Florida 32801. Our telephone number is (407) 926-6615. Our Internet website addresses is as follows: www.paincareholdings.com. The information on our Internet website is not
incorporated by reference in this report and our website address is included in this report as a textual reference only.



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Significant Accounting Policies and Estimates



Managements Discussion and Analysis of Financial Condition and Results of Operations discuss the Companys
consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related to marketing expenses, customer incentives, student attrition rates, bad debts, intangible assets, income taxes, financing operations, contractual obligations,
restructuring costs, retirement benefits, and contingencies and litigation. Management bases its estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.



Our significant accounting policies are more fully discussed in Form 10-KSB
filed with the SEC on March 25, 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 critical accounting policies include:



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



 Financial
Accounting Standards. In July 2001, the FASB issued Statement of Financial Accounting Standards No. 142 (SFAS 142), which establishes accounting standards for the recognition and measurement of an asset retirement obligation and its
associated asset retirement cost. The changes in these rules may have a significant impact on our reported financial results. In June 2001, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 141, Business Combinations and SFAS
No.142, Goodwill and Other Intangible Assets. These statements would continue to require recognition of goodwill as an asset but would not permit amortization of goodwill as is currently required by Accounting Principles Board (APB) Opinion No. 17,
Intangible Assets. Under the SFAS 142, goodwill would be separately tested for impairment using a fair-value-based approach when an event occurs indicating the potential for impairment. Any required goodwill impairment charges would be presented as
a separate line item within the operating section of the income statement. The change from an amortization approach to an impairment approach would apply to previously recorded goodwill, as well as goodwill arising from acquisitions completed after
the application of the new standard. The Company adopted SFAS No. 142 for its fiscal year beginning January 1, 2002 and as a result, the Company no longer amortized goodwill.



 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 the carrying value may not be recoverable, we review those intangible assets with definite lives to ensure they are appropriately valued as goodwill is not amortized.



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Accounting Policies Not Yet Adopted



In April 2002, the FASB issued SFAS No. 145, rescision of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and
Technical Corrections. SFAS No. 145 updates, clarifies and simplifies existing accounting pronouncements. This statement rescinds SFAS No. 4, which requires all gains and losses from extinguishments of debt to be aggregated and if material,
classified as an extraordinary item, net of related income tax effect. As a result, the criteria in ABP No. 30 will now be used to classify those gains and losses. SFAS No. 64 amended SFAS No. 4 and is no longer necessary as SFAS No. 4 has been
rescinded. SFAS No. 44 has been rescinded and it is no longer necessary. SFAS No. 145 amends SFAS No. 13 to require that certain lease modifications that have economic effects similar to sale-leaseback transactions be accounted for in the same
manner as sale-leaseback transactions. This statement also makes technical corrections to existing pronouncements. While those corrections are not substantive in nature, in some instances, they may change accounting practice. This statement is not
applicable to the Company.



In June 2002, the FASB issued SFAS No. 146,
Accounting for Cost associated with Exit or Disposal Activities. This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (EITF)
Issue No. 94-3. Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit, an activity including Certain Costs Incurred in a Restructuring. This statement requires that a liability for a cost associated with
an exit or disposal activity be recognized when the liability is incurred. Under EITF Issue No. 94-3 a liability for an exit cost, as defined, was recognized at the date of equitys commitment to an exit plan. The provisions of this statement
are effective for exit or disposal activities that are initiated after December 31, 2003 with earlier application encouraged. The company does not expect adoption of SFAS No. 146 to have a material impact, if any, on its financial position or
results of operations.



In October 2002, the FASB issued SFAS No. 147,
Acquisition of Certain Financial Institutions. SFAS No. 147 removes the requirement in SFAS No. 72 and Interpretation 9 thereto, to recognize and amortize any excess of the fair value or liabilities assumed over the fair value of
tangible and identifiable intangible assets acquired as an unidentifiable intangible asset. This statement requires that those transactions be accounted for in accordance with SFAS No. 141, Business Combinations, and SFAS No. 142,
Goodwill and other Intangible Assets. In addition, this statement amends SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, to include certain financial institution-related intangible assets. SFAS
No. 147 is not applicable to the Company.



In December 2002, the FASB issued
SFAS No. 148, Accounting for Stock-Based Compensation Transition and Disclosure, an amendment of SFAS No. 123. SFAS No. 148 provides alternative methods of transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require more prominent and more frequent disclosures in financial statements about the effects of stock-based compensation. This
statement is effective for financial statements for the fiscal years ending after December 15, 2002, SFAS No. 148 will not have any impact on the Companys financial statements as management does not intend to change to the fair value method.



Results of Operations



Set forth below is certain of our selected consolidated financial and
operating information for the three months ended March 31, 2004 and the comparable period in 2003, 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.



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|                                    |  |                                                   |            |      |   |           
|----------------------------------- |  | ------------------------------------------------- | ---------- | ---- | - | ----------
|                                    |  | Three Months ended March 31,                     
|                                    |  | (in thousands, except share andper share amounts)
|                                    |  | 2004                                              |            | 2003
|Total revenue                       |  | $                                                 | 6,860      |      | $ | 2,498     
|Gross profit                        |  |                                                   | 5,376      |      |   | 1,712     
|Net income                          |  |                                                   | 966        |      |   | 323       
|Earnings per share, basic           |  | $                                                 | 0.04       |      | $ | 0.02      
|Earnings per share, diluted         |  | $                                                 | 0.03       |      | $ | 0.01      
|Weighted average shares outstanding |  |                                                   |            |      |   |           
|Basic                               |  |                                                   | 27,376,501 |      |   | 16,836,956
|Diluted                             |  |                                                   | 32,662,630 |      |   | 22,551,425



|                     |  |                   |       
|-------------------- |  | ----------------- | ------
|                     |  | At March 31, 2004
|                     |  | (in thousands)   
|Working Capital      |  | $                 | 16,253
|Total Current Assets |  |                   | 18,450
|Total Assets         |  |                   | 51,680
|Stockholders Equity |  |                   | 26,105



COMPARISON OF THREE MONTHS ENDED
MARCH 31, 2004 AND 2003



Revenues increased to $6,859,728
for the three months ended March 31, 2004 from $2,498,120 for the comparable 2003 period, representing an increase of 175%. This increase is primarily due to the acquisitions of Medical Rehabilitation Specialists II, Inc. (MRS), Associated
Physicians Group (APG), Spine and Pain Center (SPC), Health Care Center of Tampa, Inc. (HCCT), Bone and Joint Surgical Clinic (BJSC) and Kenneth M. Alo, M.D., P.A. (ALO), revenues associated with the purchase of the three electrodiagnostic
management agreements, the growth of existing practices and the opening of new MedX Direct rehabilitation centers.



Our revenues for the three months ended March 31, 2004 were derived from the following sources:



|                     |  |   |           |  |      |  
|-------------------- |  | - | --------- |  | ---- | -
|Government           |  | $ | 1,269,088 |  | 18.5 | %
|Private Insurance    |  | $ | 1,255,269 |  | 18.3 | %
|Personal Injury      |  | $ | 588,996   |  | 8.6  | %
|Workers Compensation |  | $ | 506,211   |  | 7.4  | %
|Management Fees      |  | $ | 3,240,164 |  | 47.2 | %



Gross profit increased
to $5,375,682 for the three months ended March 31, 2004 from $1,711,576 for the comparable 2003 period, representing an increase of 214%. This increase is also attributed to the six acquisitions closed during fiscal year 2003, electrodiagnostic
management agreements, and growth associated with our existing rehabilitation centers.



Operating expenses increased by $2,630,346 to $3,753,717 for the three months ended March 31, 2004 from $1,123,371 in the comparable 2003 period, representing an increase of 234%. The increase is primarily due to an
additional $1,600,000 in operating costs related to the six acquisitions closed during 2003, approximately $231,000 of incremental overhead expense associated with the orthopedic rehabilitation division and an increase of approximately $690,000 for
staff and overhead expense associated with the increase in corporate infrastructure and the addition of an acquisition integration team at corporate.



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Interest expense increased by $18,840 as a result of interest associated with capital raised through a
convertible debenture, which commenced in December 2003.



The
provision for income taxes increased to $520,334 for the three months ended March 31, 2004 compared with $132,260 for the three months ended March 31, 2003. The effective income tax rate increased to 35% from 29% due to the full utilization of prior
period tax loss carryforwards.



As a result of the above
changes, net income was $966,335 for the three months ended March 31, 2004 compared with net income of $323,289 in the comparable 2003 period.



LIQUIDITY AND CAPITAL RESOURCES ON MARCH 31, 2004 AND 2003



Cash amounted to $10,419,527 at March 31, 2004, compared to $2,504,620 as of March 31, 2003. The net cash used in operations was $871 for the three months
ended March 31, 2004, compared to operations using $39,120 for the comparable period in 2003. This use of cash in operations is primarily due to the additional operating costs related to the six acquisitions, and the staff and overhead expense
associated with the increase in corporate infrastructure and acquisition integration.



Cash used in investing activities was $2,203,177 for the three months ended March 31, 2004 compared with a use of $178,070 in the comparable 2003 period. This increase is due to the six acquisitions completed during
this period and the purchase of three electrodiagnostic management agreements.



Cash provided from financing activities was $4,699,808 for the three months ended March 31, 2004 compared with $643,126 from financing activities in the comparable 2003 period. The financing activity in 2004 is the
result of the proceeds of convertible debentures.



Management
believes the current cash position, together with the expected earnings of the Company will be sufficient to provide the Company with capital sufficient to fund working capital needs for 2004. However, it will be necessary, in order to expand the
business and consummate acquisitions that additional capital be raised. While the prospects for raising additional capital on commercially reasonable terms appears to be favorable, no assurance can be given at this time that such funds will be
available, or if available will be sufficient in the near term or that future funds will be sufficient to meet growth. In the event of such developments, attaining financing under such conditions may not be possible, or even if such funds are
available, the terms on such capital may be available but not commercially feasible or advantageous.



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 2006 and are convertible into shares of common stock at a fixed price of $2.6121 per share. Interest on the Debentures is payable in quarterly installments commencing in March 2004
in cash or stock, at our election. The investors also received warrants to purchase 1,273,316 shares of common stock. The warrants have a term of four years and are exercisable as follows: 631,658 shares at $2.730905 per share and 631,658 warrants
at $2.84964 per share.



On February 27, 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.
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. Laurus has also committed,
subject to its sole reasonable discretion, to make available to us an additional $10 million in increments of $5 million to finance future acquisitions in accordance with a negotiated fixed price convertible debt instrument.



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Our 7.5% convertible debentures issued in December 2003 and our secured convertible term notes issued in
February and March 2004, contain certain provisions and restrictions, which if violated, could result in the full principal amount together with interest and other amounts becoming immediately due and payable in cash on such securities. If such an
event occurred and if a holder of such securities demanded repayment, we might not have the cash resources to repay such indebtedness when due. The debentures are repayable in 2006 with interest payable quarterly. Subject to certain conditions, the
quarterly interest payments on the debentures may be paid, at our option, in cash or additional shares of our common stock. Our two secured convertible term notes are each repayable in 32 monthly installments of principal commencing on June 1, 2004
and July 1, 2004, respectively, which start at $50,000 and increase to $181,667, with a final installment of $500,000. Subject to certain conditions, the monthly principal and interest payment on the notes may be paid, at our option, in cash or
additional shares of common stock. If we made the payments on the debentures and notes in cash rather than additional shares of common stock, it would reduce the amount of cash available to fund operations. The debentures and the notes contain
certain restrictions upon incurring additional indebtedness. The existence of debt service obligations and the terms and anti-dilution provisions of the debentures and the notes may limit our ability to obtain additional financing on favorable
terms, or at all.



RISK FACTORS



Special Note Regarding Forward-Looking Statements and Risk Factors



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



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



Risks Related to Our Company and Business



Our Lack Of Operating History Makes Evaluating Our Future Performance Difficult And
The Challenge Of Operating A Public Company Without Experience May Cause Our Business Operations And Financial Position To Be Adversely Affected.



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



| |  | attract and retain an adequate number of patients;
| | - | --------------------------------------------------



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| |  | enter new markets and compete successfully in them;
| | - | ---------------------------------------------------



| |  | manage operating expenses;
| | - | --------------------------



| |  | raise additional capital to fund our capital expenditure plans; and
| | - | -------------------------------------------------------------------



| |  | attract and retain qualified personnel.
| | - | ---------------------------------------



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



We Have Recently Been Profitable But No Assurance Can Be Given
That Such Profitability Will Continue



For the years
ended December 31, 2003 and 2002, we realized net income of $1,212,906 and $750,034, respectively. For the three months ended March 31, 2004, we realized net income of $966,335.



We expect to increase our spending significantly as we continue to expand our product and service offerings and
commercialization activities. We will be dependent, in part, on the return of the market for medical products and services. As a result, we will need to generate significant revenues in order to continue to grow our business and remain profitable.



Our Current Capital May Be Insufficient To Finance All Of Our Future
Business Plans



We believe that our current capital
will be sufficient to support our operations and planned capital expenditures (saving acquisitions) through fiscal 2004, without additional fundraising but may not be sufficient to fund all of our future business plans. Our future need for capital
will depend on a number of factors, including the level of marketing activities, the amount of funding required to establish a network of minimally invasive spinal surgery and pain management clinics by purchasing, owning, establishing and expanding
certain assets used in minimally invasive spine surgery and pain management; managing and developing spine treatment and pain management clinics, diagnostic and rehabilitation services and outpatient surgery facilities; and provide non-professional
support services, facilities, equipment, non-professional personnel, supplies and non-professional support staff to medical practices. Moreover, our business plans may change or unforeseen events may occur which affect the amount of additional funds
required by us. If we do not raise additional funds if and when required, the lack thereof could have a material adverse effect on us. Further, there is no assurance that the terms on which any funds obtained by us will be favorable to our
stockholders at that time.



Our Cash Flow And Financial Condition May Be
Adversely Affected By The Assumption Of Credit Risks



Our Practices bill patients and/or their insurance carriers for services provided by the Practices and/or their physicians, including physician fees, facility fees and technical fees. 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.



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Our Business Plan May Not Be Scalable Or Commercially Viable And As A Result The Expected Increase In The Combined
Company Value May Not Be Realized



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



We May Not Be Able To Keep Our Trade
Secrets Confidential



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



The Loss Of Key Personnel Could Make It Difficult To Complete Existing Projects And
Undertake New Projects



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



In addition to our Practice physicians, our key employees and consultants include Merrill Reuter, M.D., Peter Rothbart, M.D., Randy Lubinsky, Mark Szporka, and Ron Riewold. Employment agreements have been executed
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 AOSF and Chairman of the Board) A consulting agreement has
been executed 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.



Under the employment agreements of Mr. Lubinsky and Mr. Szporka, in the event
of a change of control, they may terminate the agreement and receive a lump sum severance payment equal to 2.9 times their annual salary at date of termination. Under the employment agreement of Dr. Reuter, he is to receive a lump-sum severance
payment of $500,000 if his employment is terminated Without Cause or if he terminates the agreement For Cause.



To date, we have experienced no difficulties in attracting key personnel and have been able to retain all such key personnel. To the best of our knowledge
and belief, there are no key personnel that are planning to retire or leave PainCare in the near future.



Our Growth Strategy May Not Prove Viable And Expected Growth And Value May Not Be Realized



Our strategy is to rapidly grow by acquiring, establishing and managing a network of pain management, minimally invasive spine surgery and orthopedic
rehabilitation centers. Identifying appropriate physician groups and proposing, negotiating and implementing economically attractive affiliations with them can be a lengthy, complex and costly process. There can be no assurance that we will



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be successful in identifying and establishing relationships with orthopedic surgery and pain management groups. If we are
successful in implementing our strategy of rapid growth, such growth may impair our ability to efficiently provide non-professional support services, facilities, equipment, non-professional personnel, supplies and non-professional support staff to
medical practices. Our future financial results could be materially adversely affected if we are unable to manage growth effectively.



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



Growth Through Acquisitions



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



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 its systems and controls. Additional capital will be needed to fund expected acquisitions and there can be no assurance that we will be able to obtain
sufficient resources to support this planned growth strategy. The inability to continue to upgrade the operating and financial control systems, the emergence of unexpected expansion difficulties or failure to manage our proposed expansion properly
could have a material adverse effect on our business, financial condition and results of operations.



Significant Risk Associated With Reimbursements By Third Party Payors



Approximately 60% of our revenues are directly dependent on the acceptance of our Practice services as covered benefits under third party payor programs,
including private insurance, HMOs and other managed care entities. The healthcare industry is undergoing significant changes, with third party payors taking measures to reduce reimbursement rates or in some cases denying reimbursement fees for
previously acceptable treatment modalities. There is no assurance that third party payors will continue to pay for minimally invasive surgery services provided by our Owned Practices us under their payor programs. Failure of third party payors to
adequately cover minimally invasive surgery will have a materially adverse affect on us.



There Are Risks Inherent In The Provision Of Medical Services Which Could Adversely Impact Our Business



Our 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 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. Professional liability
claims could have a material adverse effect on us.



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We Have Limited Marketing And Sales Capability Which Could Adversely Affect Our Growth Plans



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



Our Business Is Subject To Substantial Competition Which Could Have A Material Impact On Its Business And Financial Condition



The healthcare industry in general, and the market
for orthopedic and rehabilitation services in particular, are highly competitive. We compete with companies like HealthSouth, Inc. and U.S. Physical Therapy, Inc. that are larger in size than us and have access to considerably greater financial
resources than us. We compete by providing through our Practices more personalized care to the patients we serve. Our Practices compete against other contract providers on the basis of quality of services, price and reliability. In the State of
Florida, in particular, competition with respect to healthcare providers is highly competitive. Our Practices rely on their reputation and service to market our services and products.



Failure To Obtain Managed Care Contracts And Legislative Changes Could Adversely Affect Business



There can be no assurance that our Practices will be able to obtain managed
care contracts. Our 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 our 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 our 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.



Risks Associated With Highly Regulated 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 substantial 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, our financial condition
and results of operations could be adversely affected. 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.



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Periodic Revisions To Laws And Regulations May Have The Effect Of Reducing The Revenues Generated By The Owned
Practices, Managed Practices And The Limited Management Practices. This Could Have An Adverse Effect On The Companys Revenues And Results Of Operations.



A source of the revenues generated by the 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. Oftentimes, private payors follow the lead of governmental payors, and private payors could also take
steps to reduce the cost to them of medical care. A change in the makeup of the patient mix that results in a decrease in patients covered by private insurance or a shift by private payors to other payment structures could also adversely affect our
business, financial condition and results of operations. If reductions in reimbursement occur, the revenues generated by the Owned Practices, the Managed Practices and the Limited Management Practices could shrink. This shrinkage would cause a
reduction in our revenues. Accordingly, our business could be adversely affected by reductions in or limitations on reimbursement amounts for medical services rendered, payor mix changes or shifts by payors to different payment structures.



Because government-sponsored payors generally pay providers
based on a fee schedule, and the trend is for private payors to do the same, we may not be able to forestall 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. There can be no assurance that such proposals would not have a material adverse effect on our business.



If The Owned Practices, Managed Practices And Limited Management Practices Do Not
Appropriately Record And Bill For Services Rendered, Our Revenues Could Be Adversely Affected.



Because our revenues are dependent, at least in part, on the revenues generated by the Owned Practices, Managed Practices and Limited Management
Practices, if physicians employed by or under contract with them do not bill for their services appropriately, our revenues could be adversely affected.



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 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



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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. Designated health services furnished pursuant to a referral that is prohibited by Stark 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, and that 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 fail to abide by 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 The 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. This Would Have An Adverse Effect On Our Financial Condition And Results Of Operations.



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.



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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. This, Or The Inability To Successfully Restructure The Relationships To Comply With The Anti-Kickback Law Would Have An Adverse Effect On Our Financial Condition And Results Of Operations.



The anti-kickback provisions of the Social Security Act prohibit anyone from
knowingly and willfully (a) soliciting or receiving any remuneration in return for referrals for items and services reimbursable under most federal health care programs; or (b) offering or paying any remuneration to induce a person to make referrals
for items and services reimbursable under most federal health care programs (the Anti-Kickback Statute). 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 (the Secretary or the DHHS) has the authority to exclude
violators from all federal health care programs and/or impose civil monetary penalties of $50,000 for each violation and assess damages of not more than three times the total amount of remuneration offered, paid, solicited or received.



As the result of a congressional mandate, the Office of the Inspector
General 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 federal 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 law. 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 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



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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 law. Nevertheless, although we believe we have structured our management agreements in such
a manner as not to violate the Anti-Kickback law, we cannot guarantee that a regulator would not conclude that the compensation to us under the management agreements constitutes prohibited remuneration. In such event, our operations would be
materially adversely affected.



The relationship between the
physicians employed by the Owned Practices and the Owned Practices is subject to the Anti-Kickback Statute as well because the employed physicians refer Medicare patients to the Owned Practices and the employed physicians receive compensation from
the Owned Practices for services rendered on behalf of the Owned Practices. Nevertheless, we have tried to structure our arrangements with our physician employees to meet the employment Safe Harbor. Therefore, it is our position that the Owned
Practices arrangements with their respective employed physicians do not violate the Anti-Kickback law. 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 run afoul of 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 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, for our part, 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, the fair market value of which has been confirmed by an appraisal conducted by an
independent third party appraiser. 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 law 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 law. In the event the OIG were to conclude that these arrangements violate the
Anti-Kickback law, this would have a material adverse effect on us.



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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 our agreements violate these laws.



Regulatory Authorities Or Others May Assert That Our Agreements With
Limited Management Practices Or Managed Practices, Or Our Owned Practices, Violate State Fee Splitting Laws. If Such A Claim Were Successfully Asserted, We Could Be Subject To Civil And Perhaps Criminal Penalties, And Could Be Required To
Restructure Or Terminate The Applicable Contractual Arrangements. This Result, Or Our Inability To Successfully Restructure Our Relationships To Comply With These Statutes, Could Jeopardize Our Business And Results Of Operations.



The laws of many states prohibit physicians from splitting fees with
non-physicians (or other physicians). These laws vary from state to state and are enforced by the courts and by regulatory authorities with broad discretion. The relationship between us on the one hand, and the Managed Practices and Limited
Management Practices, on the other hand, may raise issues in some states with fee splitting prohibitions. Although we have attempted to structure our contracts with the Managed Practices and the Limited Management Practices in a manner that keeps us
from violating prohibitions on fee splitting, state regulatory authorities or other parties may assert that we are engaged in practices that constitute fee-splitting. This 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 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, 2003, April 16, 2003 and April 21, 2005. HIPAA applies to covered entities, which include most healthcare facilities and health plans that will contract for the
use of our services. The HIPAA rules require covered entities to bind contractors to compliance with certain burdensome HIPAA rule 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 healthcare transactions. When we perform billing and collection services we may be engaging in one of more of these standard transactions and will be
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with the required standards. The HIPAA Privacy Rule restricts the use and disclosure of patient information, requires
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 rule 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 web sites or otherwise, and to regulate the presentation of web site
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 patient information. These laws in many cases are not preempted by the HIPAA rules
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 these laws could create liability for us or increase our cost of doing business.



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



Risks
Related To Our Common Stock



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 development companies like the Company have been highly volatile. In
fact, since January 1, 2002, our common stock price has ranged from a low $0.80 to a high of $4.00 (as determined on a reverse-split basis). The market price of the shares could continue to be subject to significant fluctuations in response to
various factors and events, including the liquidity of the market for the shares, announcements of potential business acquisitions, and changes in general market conditions.



Investors Should Not Rely On The Payment Of Dividends In Considering An Investment In Our Company



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



Our Common Stock is Subject to Low Priced
Stock Risk Disclosure Requirements



Our common stock
is considered a low priced security under rules promulgated under the Securities Exchange Act of 1934. Under these rules, broker-dealers participating in transactions in low priced securities must first deliver a risk disclosure document which
describes the risks associated with such stocks, the broker-dealers duties, the customers rights and remedies, and certain market and other information, and make a suitability determination approving the customer of low priced stock
transactions based on the customers financial situation, investment experience and objectives. Broker-dealers must also disclose these restrictions in writing to the customer, obtain specific written consent of the customer,



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and provide monthly account statements to the customer. With all these restrictions, the likely affect of designation as
a low priced stock will be to decrease the willingness of broker-dealers to make a market for the stock, to decrease the liquidity of the stock and to increase the transaction cost of sales and purchases of such stock compared to other
securities.



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 which representing approximately 31% of the outstanding shares entitled to vote on matters presented to stockholders of the Company.
Our management will therefore exercise significant influence over PainCare which may limit the ability of other stockholders to have an influence over our business.



Provisions In Articles Of Incorporation Limit Liability Of Management And As A Result Limits Stockholders Rights



We have adopted provisions in our Articles of Incorporation which limit the liability of
our officers and directors and provisions in our By-laws which provide for indemnification of our officers and directors to the full extent permitted by law. The Articles of Incorporation generally provides that the directors shall have no personal
liability to us or our stockholders for monetary damages for breaches of their fiduciary duties as directors, except for breaches of their duties of loyalty, acts or omissions not in good faith or which involve intentional misconduct or knowing
violation of law, acts involving unlawful payment of dividends or unlawful stock purchases or redemptions, or any transaction from which a director derives an improper personal benefit. Such provisions substantially limit the stockholders
ability to hold directors liable for breaches of fiduciary duty.



ITEM 3. CONTROLS AND PROCEDURES



|(a) | Evaluation of disclosure controls and procedures.
|--- | -------------------------------------------------



Our principal executive officer and its principal financial officer, evaluated the effectiveness of our disclosure controls and procedures as of the end
of the period covered by this report. based on that evaluation, such principal executive officer and principal financial officer concluded that, our disclosure controls and procedures as of the end of the period covered by this report have been
designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the SECs rules and forms.



|(b) | Change in Internal Control over Financial Reporting.
|--- | ----------------------------------------------------



No change in our internal control over financial reporting occurred during our most recent fiscal quarter that has materially affected, or is reasonably
likely to materially affect our internal control over financial reporting.



PART II  OTHER INFORMATION



Item 1.
Legal Proceedings



NONE



Item 2. Changes in Securities



On January 21, 2004, 342,760 shares of common stock were issued to Rehab
Management Group, Inc. as initial consideration for the acquisition of three electro-diagnostic contracts servicing practices located in OFallon, Illinois, Statesville, North Carolina and Cocoa Beach, Florida.



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Between January 1, 2004 and March 31, 2004, there were 71,429 common stock shares issued to Carol
Rothbart and Stan Swartz representing the final earn-out installment related to the acquisition of Rothbart Pain Management.



Between January 1, 2004 and March 31, 2004, there were 333,333 common stock shares issued to Andrea Trescot, M.D. representing the first of three earn-out
installments related to the acquisition of Pain and Rehabilitation Network, Inc.



Between January 1, 2004 and March 31, 2004, there were 50,883 common stock shares issued to Shasqua Limited representing the final earn-out installment related to the acquisition of Rothbart Pain Management.



Between January 1, 2004 and March 31, 2004 there were 8,500
common stock shares issued for the exercise of vested stock options.



Between January 1, 2004 and March 31, 2004 a total of 265,766 common stock shares were issued for the exercise of vested warrants.



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 and Reports on Form 8-K



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



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##### Table of Contents

|     |  |                                                                                                                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------
|No.  |  | Description                                                                                                             
|31.1 |  | Certification by CEO and CFO pursuant to 18 USC Section 1350as adopted by Section 302 of the Sarbanes-Oxley Act of 2002
|     | 
|32.1 |  | Certification by CEO and CFO pursuant to 18 USC Section 1350as adopted by Section 906 of the Sarbanes-Oxley Act of 2002



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



Form 8-K filed with the SEC on March 25, 2004



Form 8-K filed with the SEC on March 23, 2004



Form 8-K filed with the SEC on March 22, 2004



Form 8-K filed with the SEC on March 2, 2004



Form 8-K filed with the SEC on January 23, 2004



Form 8-K filed with the SEC on January 13, 2004



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: April 29, 2004 |  | /s/ Randy A. Lubinsky  
|                     |  | Randy A. Lubinsky      
|                     |  | Chief Executive Officer
|                     | 
|Date: April 29, 2004 |  | /s/ Mark Szporka       
|                     |  | Mark Szporka           
|                     |  | Chief Financial Officer



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