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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



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FORM 10-QSB



(Mark One)

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



For the quarterly period ended June 30, 2003



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



For the transition period from
 to



Commission File Number 1-14160



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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,
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 ̈



The number of shares outstanding of the issuers common stock as of August 11, 2003 is 23,644,563 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.  
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  |          
|                              |  | Item 2.  
|                              |  |          
|                              |  | Item 3.  
|                              | 
|PART II. OTHER INFORMATION    |  |          
|                              |  |          
|                              |  | Signature



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##### Table of Contents

PART I FINANCIAL INFORMATION



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



PainCare Holdings, Inc

Consolidated Balance Sheet

As of June 30, 2003 and December 31, 2002



|                                                                                                   |  | June 30, 2003 |            |   | December 31, 2002 |  
|-------------------------------------------------------------------------------------------------- |  | ------------- | ---------- | - | ----------------- | -
|                                                                                                   |  | (Unaudited)   |            |   | (Audited)         |  
|Assets                                                                                             |  |               |            |   |                   |  
|Current Assets:                                                                                    |  |               |            |   |                   |  
|Cash                                                                                               |  | $             | 2,443,530  |   |                   | $
|Accounts receivable                                                                                |  |               | 4,351,184  |   |                   |  
|Due from Shareholder                                                                               |  |               | 339,325    |   |                   |  
|Note receivable                                                                                    |  |               | 687,500    |   |                   |  
|Deposits & prepaid expenses                                                                        |  |               | 540,163    |   |                   |  
|                                                                                                   |  |               |            |   |                   |  
|Total current assets                                                                               |  |               | 8,361,702  |   |                   |  
|                                                                                                   |  |              
|Furniture and equipment, net                                                                       |  |               | 3,180,294  |   |                   |  
|Automobile                                                                                         |  |               | 8,526      |   |                   |  
|Goodwill, net                                                                                      |  |               | 8,856,513  |   |                   |  
|Other Assets                                                                                       |  |               | 635,884    |   |                   |  
|                                                                                                   |  |               |            |   |                   |  
|Total assets                                                                                       |  |               | 21,042,918 |   |                   |  
|                                                                                                   |  |               |            |   |                   |  
|Liabilities and Stockholders Equity                                                               |  |               |            |   |                   |  
|Current liabilities:                                                                               |  |               |            |   |                   |  
|Accounts payable                                                                                   |  |               | 366,764    |   |                   |  
|Current portion of notes payable                                                                   |  |               | 139,361    |   |                   |  
|Current portion of convertible debenture                                                           |  |               | 942,810    |   |                   |  
|Current portion of lease payable                                                                   |  |               | 490,361    |   |                   |  
|                                                                                                   |  |               |            |   |                   |  
|Total current liabilities                                                                          |  |               | 1,939,296  |   |                   |  
|                                                                                                   |  |              
|Notes payable                                                                                      |  |               | 1,578,868  |   |                   |  
|Convertible debentures - Net of Current Portion                                                    |  |               | 659,998    |   |                   |  
|Lease payable                                                                                      |  |               | 1,961,441  |   |                   |  
|Shareholder Loan                                                                                   |  |               | 465        |   |                   |  
|                                                                                                   |  |               |            |   |                   |  
|Total liabilities                                                                                  |  |               | 6,140,068  |   |                   |  
|                                                                                                   |  |               |            |   |                   |  
|Stockholders equity:                                                                              |  |               |            |   |                   |  
|Common stock, $.0001 par value. Authorized 75,000,000 shares; issued and outstanding 23,644,563    |  |               | 2,221      |   |                   |  
|Preferred stock, $.0001 par value. Authorized 10,000,000 shares; issued and outstanding -0- shares |  |               |           |   |                   |  
|Additional paid in capital                                                                         |  |               | 13,146,211 |   |                   |  
|Retained earnings (accumulated deficit)                                                            |  |               | 1,766,065  |   |                   |  
|Cumulative translation adjustments                                                                 |  |               | (11,647    | ) |                   |  
|                                                                                                   |  |               |            |   |                   |  
|Total stockholders equity                                                                         |  |               | 14,902,850 |   |                   |  
|                                                                                                   |  |               |            |   |                   |  
|Total liabilities and stockholders equity                                                         |  | $             | 21,042,918 |   |                   | $
|                                                                                                   |  |               |            |   |                   |  



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 and Six Months Ended

June 30, 2003 and 2002



|                                            |  | For the Three Months EndedJune 30, |            | For the Six Months EndedJune 30,
|------------------------------------------- |  | ---------------------------------- | ---------- | --------------------------------
|                                            |  | 2003                               |            | 2002                            
|Total revenues:                             |  |                                    |            |                                 
|Patient services                            |  | $                                  | 2,188,345  |                                 
|Management fees                             |  |                                    | 1,586,142  |                                 
|                                            |  |                                    |            |                                 
|Total revenues                              |  |                                    | 3,774,487  |                                 
|                                            |  |                                    |            |                                 
|Cost of sales                               |  |                                    | 1,046,816  |                                 
|                                            |  |                                    |            |                                 
|Gross profit                                |  |                                    | 2,727,671  |                                 
|                                            |  |                                    |            |                                 
|Operating expenses:                         |  |                                    |            |                                 
|Selling, general and administrative         |  |                                    | 1,892,941  |                                 
|Depreciation expense                        |  |                                    | 55,630     |                                 
|                                            |  |                                    |            |                                 
|Operating income                            |  |                                    | 779,100    |                                 
|                                            |  |                                    |            |                                 
|Interest expense                            |  |                                    | 114,101    |                                 
|Other income                                |  |                                    | 12,168     |                                 
|                                            |  |                                    |            |                                 
|Income before taxes                         |  |                                    | 677,167    |                                 
|                                            |  |                                    |            |                                 
|Provision for income taxes                  |  |                                    | 114,167    |                                 
|                                            |  |                                    |            |                                 
|Net income                                  |  | $                                  | 563,000    |                                 
|                                            |  |                                    |            |                                 
|Basic earnings per share                    |  | $                                  | 0.03       |                                 
|                                            |  |                                    |            |                                 
|Basic weighted average shares outstanding   |  |                                    | 20,845,528 |                                 
|                                            |  |                                    |            |                                 
|Diluted earnings per share                  |  | $                                  | 0.02       |                                 
|                                            |  |                                    |            |                                 
|Diluted weighted average shares outstanding |  |                                    | 27,194,881 |                                 
|                                            |  |                                    |            |                                 



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 Six Months ended June 30, 2003



|                                                            |  | Common StockShares |  | Common StockAmount |       | AdditionalPaid in Capital |   | RetainedEarnings |  | CumulativeTranslationAdjustment |           |  | TotalStockholdersEquity
|----------------------------------------------------------- |  | ------------------ |  | ------------------ | ----- | ------------------------- | - | ---------------- |  | ------------------------------- | --------- |  | ------------------------
|Balance at March 31, 2003                                   |  | 18,445,762         |  | $                  | 1,845 |                           | $ | 8,856,109        |  | $                               | 879,776   |  | $                       
|Common stock issued for conversion of bridge note           |  | 208,000            |  |                    | 21    |                           |   | 207,979          |  |                                 |           |  |                         
|Common stock issued for conversion of convertible debenture |  | 118,243            |  |                    | 11    |                           |   | 174,989          |  |                                 |           |  |                         
|Common stock issued for cash                                |  | 1,952,248          |  |                    | 195   |                           |   | 2,409,533        |  |                                 |           |  |                         
|Common stock issued for merger                              |  | 1,100,000          |  |                    | 110   |                           |   | 1,374,890        |  |                                 |           |  |                         
|Common stock issued for exercise of stock options           |  | 200,000            |  |                    | 20    |                           |   | 9,980            |  |                                 |           |  |                         
|Common stock issued for exercise of warrants                |  | 191,230            |  |                    | 19    |                           |   | 112,731          |  |                                 |           |  |                         
|Foreign currency translation                                |  |                    |  |                    |       |                           |   |                  |  |                                 |           |  |                         
|Net income                                                  |  |                    |  |                    |       |                           |   |                  |  |                                 | 886,289   |  |                         
|                                                            |  |                    |  |                    |       |                           |   |                  |  |                                 |           |  |                         
|Balance at June 30, 2003                                    |  | 22,215,483         |  | $                  | 2,221 |                           | $ | 13,146,211       |  | $                               | 1,766,065 |  | $                       
|                                                            |  |                    |  |                    |       |                           |   |                  |  |                                 |           |  |                         



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



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PainCare Holdings, Inc.



Consolidated Statements of Cash Flows (unaudited)



For the Six Months ended June 30, 2003 and 2002



|                                                                              |  | 2003 |            |   | 2002 |  
|----------------------------------------------------------------------------- |  | ---- | ---------- | - | ---- | -
|Operating activities:                                                         |  |      |            |   |      |  
|Net income                                                                    |  | $    | 886,289    |   |      | $
|Adjustments to reconcile net income to net cash used in operating activities: |  |      |            |   |      |  
|Depreciation and amortization                                                 |  |      | 140,784    |   |      |  
|Cumulative translation adjustments                                            |  |      | (11,647    | ) |      |  
|Change in operating assets and liabilities, net of assets acquired:           |  |      |            |   |      |  
|Accounts receivable                                                           |  |      | (1,570,090 | ) |      |  
|Prepaid expenses                                                              |  |      | (401,644   | ) |      |  
|Other assets                                                                  |  |      | (432,062   | ) |      |  
|Accounts payable                                                              |  |      | (162,267   | ) |      |  
|                                                                              |  |      |            |   |      |  
|Net cash provided (used) in operating activities                              |  |      | (1,550,637 | ) |      |  
|                                                                              |  |      |            |   |      |  
|Investing activities:                                                         |  |      |            |   |      |  
|Purchase of furniture and equipment                                           |  |      | (167,679   | ) |      |  
|Payment of debentures                                                         |  |      | 48,411     |   |      |  
|Cash from acquisitions                                                        |  |      |            |   |      |  
|                                                                              |  |      |            |   |      |  
|Net cash used in investing activities                                         |  |      | (119,268   | ) |      |  
|                                                                              |  |      |            |   |      |  
|Financing activities:                                                         |  |      |            |   |      |  
|Proceeds from issuance of common stock                                        |  |      | 2,409,533  |   |      |  
|Capital lease obligations                                                     |  |      | (176,313   | ) |      |  
|Payment of notes receivable                                                   |  |      | (587,184   | ) |      |  
|Notes payable                                                                 |  |      | 388,715    |   |      |  
|                                                                              |  |      |            |   |      |  
|Net cash provided by financing activities                                     |  |      | 2,034,751  |   |      |  
|                                                                              |  |      |            |   |      |  
|Net increase in cash and cash equivalents                                     |  |      | 364,846    |   |      |  
|                                                                              |  |     
|Cash and cash equivalents at beginning of period                              |  |      | 2,078,684  |   |      |  
|                                                                              |  |      |            |   |      |  
|Cash and cash equivalents at end of period                                    |  | $    | 2,443,530  |   |      | $
|                                                                              |  |      |            |   |      |  
|Supplementary disclosure of cash flow information:                            |  |      |            |   |      |  
|                                                                              |  |      |            |   |      |  
|Cash paid during year for interest                                            |  | $    | 247,382    |   |      | $
|                                                                              |  |      |            |   |      |  



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



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PainCare Holdings, Inc.



Notes to
Consolidated Financial Statements



Organization and Basis of Presentation



Organization



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



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



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



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



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



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



Common Stock



As of August 11, 2003, the Company had 75,000,000 shares of authorized common stock with a par value of $.0001 per share of which 23,644,563 shares are
issued and outstanding. The Company also has 10,000,000 preferred shares authorized none of which have been issued.



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Principles of Interim Statements.



The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally
accepted in the United States for interim financial information and with the instructions to Form 10-QSB and Rule 310 of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by accounting principles
generally accepted in the United States. In the opinion of management, all adjustments, consisting only of normal recurring accruals, considered necessary for a fair presentation have been included in the accompanying unaudited financial statements.
Operating results for the three month and six month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2003. For further information, refer to the financial statements
and footnotes thereto included in the Companys annual report on Form 10-KSB for the year ended December 31, 2002, the Companys Form S-4/A filed with the SEC on July 11, 2002 and the Companys Definitive Proxy Statement 14A filed
September 27, 2002.



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



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



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



This Report
includes forward-looking statements made based on current management expectations pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and actual
outcomes may differ materially from what is expressed or forecasted. Factors that could cause future results to differ from the Companys expectations include the factors described on page 14 of this Report under Special Note Regarding
Forward-Looking Statements as well as under Risk Factors beginning on page 14 of this Report.



Outlook



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



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neck pain in an outpatient environment. Orthopedic Rehabilitation is a comprehensive program that advances functional restoration of the musculoskeletal
system utilizing state of the art computerized MedX medical exercise machines.



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



Significant Accounting Policies and Estimates



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



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



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.



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



Results of Operations



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



|                                    |  | Three Months ended June 30,                       |            | Six Months endedJune 30,                         
|----------------------------------- |  | ------------------------------------------------- | ---------- | -------------------------------------------------
|                                    |  | (in thousands, except share andper share amounts) |            | (in thousands, except share andper share amounts)
|                                    |  | 2003                                              |            | 2002                                             
|Total revenue                       |  | $                                                 | 3,774      |                                                  
|Gross profit                        |  |                                                   | 2,728      |                                                  
|Net income                          |  |                                                   | 563        |                                                  
|Earnings per share, basic           |  | $                                                 | 0.03       |                                                  
|Earnings per share, diluted         |  | $                                                 | 0.02       |                                                  
|                                    |  |                                                   |            |                                                  
|Weighted average shares outstanding |  |                                                   |            |                                                  
|Basic                               |  |                                                   | 20,845,528 |                                                  
|Diluted                             |  |                                                   | 27,194,881 |                                                  





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



COMPARISON OF THREE MONTHS ENDED
JUNE 30, 2003 AND 2002



Revenues increased to $3,774,487
for the three months ended June 30, 2003 from $1,787,491 for the comparable 2002 period, representing an increase of 111.2%. This increase is primarily due to the acquisitions of Pain and Rehabilitation Network (PRN) and Medical Rehabilitation
Specialists (MRS), along with the opening of new MedX Direct rehabilitation centers.



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Gross profit increased to $2,727,671 for the three months ended June 30, 2003 from $1,180,405 for the
comparable 2002 period, representing an increase of 131%. This increase is also attributed to the two acquisitions and the opening of new rehabilitation centers.



Operating expenses increased by $1,111,329 to $1,948,571 for the three months ended June 30, 2003 from $837,242 in the
comparable 2002 period, representing an increase of 132.7%. The increase is primarily due to the additional operating costs associated with these the two acquisitions and the staff and overhead expense associated with the increase in the number of
rehabilitation centers.



Interest expense increased by $42,372
as a result of an increase of MedX equipment leases.



As a
result of the above changes, net income was $563,000 for the three months ended June 30, 2003 compared with net income of $179,147 in the comparable 2002 period.



Actual revenues for the three months ended June 30, 2003 were $3,774,488 and were derived from the following sources:



|Government           |  | $ | 609,508   |  | 16.1 | %
|-------------------- |  | - | --------- |  | ---- | -
|Private Insurance    |  | $ | 690,742   |  | 18.3 | %
|Personal Injury      |  | $ | 493,387   |  | 13.1 | %
|Workers Compensation |  | $ | 394,710   |  | 10.5 | %
|Management Fees      |  | $ | 1,586,142 |  | 42.0 | %



COMPARISON OF SIX MONTHS ENDED JUNE
30, 2003 AND 2002



Revenues increased to $6,272,607 for
the six months ended June 30, 2003 from $3,541,383 for the comparable 2002 period, representing an increase of 77.1%. This increase is primarily due to the revenues at company-owned physician practices, the acquisition of PRN and MRS and the
addition of new MedX Direct rehabilitation centers.



Gross
profit increased to $4,439,247 for the six months ended June, 2003 from $2,249,880 for the comparable 2002 period, representing an increase of 97.3%. This increase is also attributed to growth at our existing centers, the acquisitions and the
opening of new rehabilitation centers.



Operating expenses
increased by $1,536,758 to $3,071,942 for the six months ended June 30, 2003 from $1,535,184 in the comparable 2002 period, representing an increase of 100.1%. The increase is primarily due to the additional operating costs associated with the
acquisition of PRN and the staff and overhead expense associated with the addition of a corporate business development office in Boca Raton, FL.



Interest expense increased by $118,198 as a result of an increase of MedX equipment leases.



As a result of the above changes, net income was $886,289 for the six months ended June 30, 2003 compared with net income of
$386,438 in the comparable 2002 period.



Actual revenues for
the six months ended June 30, 2003 were $6,272,607 and were derived from the following sources:



|Government           |  | $ | 1,113,837 |  | 25.1 | %
|-------------------- |  | - | --------- |  | ---- | -
|Private Insurance    |  | $ | 1,157,109 |  | 18.4 | %
|Personal Injury      |  | $ | 826,507   |  | 10.9 | %
|Workers Compensation |  | $ | 661,205   |  | 8.5  | %
|Management Fees      |  | $ | 2,513,948 |  | 37.1 | %



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LIQUIDITY AND CAPITAL RESOURCES ON JUNE 30, 2003 AND 2002



Cash amounted to $2,443,530 at June 30, 2003, compared to $484,685 at June
30, 2002. The net cash used in operations was $(1,550,637) for the six months ended June 30, 2003, compared to operations generating $146,804 for the comparable period in 2002.



Cash used in investing activities was $(119,268) for the six months ended June 30, 2003 compared with a use of $(658,546) in
the comparable 2002 period. This decrease is primarily due to a reduction in furniture and equipment expenses.



Cash provided from financing activities was $2,034,751 for the six months ended June 30, 2003 compared with $651,772 from financing activities in the
comparable 2002 period. The financing activity in 2003 was the result of the proceeds of common stock offering.



Management believes the current cash position, together with the expected earnings of the Company will be sufficient to provide the Company with capital
sufficient to fund working capital needs for 2003. However, it may be necessary, in order to expand the business and consummate acquisitions that additional capital be raised. If the Company needs to raise additional capital, there can be no
assurance 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.



PRO FORMA FINANCIALS



Following are the summarized unaudited pro forma results of operations for the six months ended June 30, 2003 and 2002, assuming the acquisition of Medical Rehabilitation Specialists (MRS) had taken place at the
beginning of the year. The unaudited pro forma results are not necessarily indicative of future earnings or earnings that would have been reported had the acquisitions been completed when assumed.



Pro Forma Condensed Statement of Operations

Six Months ended June 30, 2003



|                           |  | PainCare Historical Statements |           | MRS Historical Statements (1) |   | Pro formaAdjustments |  |   | Pro forma
|-------------------------- |  | ------------------------------ | --------- | ----------------------------- | - | -------------------- |  | - | ---------
|Revenues                   |  | $                              | 6,272,607 |                               | $ | 428,750              |  | $ |         
|Cost of sales (2)          |  |                                | 1,833,360 |                               |   | 47,017               |  |   | (18,666  
|                           |  |                                |           |                               |   |                      |  |   |          
|Gross profit               |  |                                | 4,439,247 |                               |   | 381,733              |  |   | 18,666   
|                           |  |                                |           |                              
|Operating expenses:        |  |                                |           |                               |   |                      |  |   |          
|General and administrative |  |                                | 2,931,158 |                               |   | 71,695               |  |   |         
|Depreciation expense       |  |                                | 140,784   |                               |   | 252                  |  |   |         
|                           |  |                                |           |                               |   |                      |  |   |          
|Operating income           |  |                                | 1,367,305 |                               |   | 309,786              |  |   | 18,666   



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|Interest expense                            |  |   | 247,382   |  |   |        |  |   |        |   |  |   | 247,382   
|------------------------------------------- |  | - | --------- |  | - | ------- |  | - | ------- | - |  | - | ----------
|Other income                                |  |   | 12,793    |  |   |        |  |   |        |   |  |   | 12,793    
|                                            |  |   |           |  |   |         |  |   |         |   |  |   |           
|Income before taxes                         |  |   | 1,132,716 |  |   | 309,786 |  |   | 18,666  |   |  |   | 1,461,168 
|                                            |  |   |           | 
|Provision for income taxes (3)              |  |   | 246,427   |  |   |        |  |   | 77,447  |   |  |   | 323,874   
|                                            |  |   |           |  |   |         |  |   |         |   |  |   |           
|Net income                                  |  | $ | 886,289   |  | $ | 309,786 |  | $ | (58,781 | ) |  | $ | 1,137,294 
|                                            |  |   |           |  |   |         |  |   |         |   |  |   |           
|Basic earnings per share                    |  |   |           |  |   |         |  |   |         |   |  | $ | 0.06      
|                                            |  |   |           |  |   |         |  |   |         |   |  |   |           
|Basic weighted average shares outstanding   |  |   |           |  |   |         |  |   |         |   |  |   | 20,216,242
|                                            |  |   |           |  |   |         |  |   |         |   |  |   |           
|Diluted earnings per share                  |  |   |           |  |   |         |  |   |         |   |  | $ | 0.04      
|                                            |  |   |           |  |   |         |  |   |         |   |  |   |           
|Diluted weighted average shares outstanding |  |   |           |  |   |         |  |   |         |   |  |   | 26,267,252
|                                            |  |   |           |  |   |         |  |   |         |   |  |   |           



See
accompanying footnotes to unaudited pro forma financial statements.



Pro Forma Condensed Statement of Operations

Three Months ended June 30, 2002



|                                          |  | PainCare Historical Statements |           | MRS Historical Statements |   | Pro forma Adjustments |  |   | Pro forma
|----------------------------------------- |  | ------------------------------ | --------- | ------------------------- | - | --------------------- |  | - | ---------
|Revenues                                  |  | $                              | 3,541,383 |                           | $ | 853,820               |  | $ |         
|Cost of sales (2)                         |  |                                | 1,291,503 |                           |   | 71,167                |  |   | (52,000  
|                                          |  |                                |           |                           |   |                       |  |   |          
|Gross profit                              |  |                                | 2,249,880 |                           |   | 782,653               |  |   | 52,000   
|                                          |  |                                |           |                          
|Operating expenses:                       |  |                                |           |                           |   |                       |  |   |          
|General and administrative                |  |                                | 1,438,056 |                           |   | 173,519               |  |   |         
|                                          |  |                                |           |                          
|Depreciation expense                      |  |                                | 97,128    |                           |   | 767                   |  |   |         
|                                          |  |                                |           |                           |   |                       |  |   |          
|Operating income                          |  |                                | 714,696   |                           |   | 113,658               |  |   | 52,000   
|                                          |  |                                |           |                          
|Interest expense                          |  |                                | 129,184   |                           |   |                      |  |   |         
|Other income                              |  |                                |          |                           |   |                      |  |   |         
|                                          |  |                                |           |                           |   |                       |  |   |          
|Income before taxes                       |  |                                | 585,512   |                           |   | 608,367               |  |   | 52,000   
|                                          |  |                                |           |                          
|Provision for income taxes (3)            |  |                                | 199,074   |                           |   |                      |  |   | 152,092  
|                                          |  |                                |           |                           |   |                       |  |   |          
|Net income                                |  | $                              | 386,438   |                           | $ | 608,367               |  | $ | (100,092 
|                                          |  |                                |           |                           |   |                       |  |   |          
|Basic earnings per share                  |  |                                |           |                           |   |                       |  |   |          
|                                          |  |                                |           |                           |   |                       |  |   |          
|Basic weighted average shares outstanding |  |                                |           |                           |   |                       |  |   |          
|                                          |  |                                |           |                           |   |                       |  |   |          



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|Diluted earnings per share                  |  |  |  |  |  |  |  | $ | 0.08      
|------------------------------------------- |  |  |  |  |  |  |  | - | ----------
|                                            |  |  |  |  |  |  |  |   |           
|Diluted weighted average shares outstanding |  |  |  |  |  |  |  |   | 11,786,761
|                                            |  |  |  |  |  |  |  |   |           



See
accompanying footnotes to unaudited pro forma financial statements.



Footnotes
to Unaudited Pro Forma Financial Statements



(1) The historical financial
results referenced above for MRS are for the period from January 1, 2002 through April 30, 2003. Results for May and June 2003 are included in the historical PainCare statements.

(2) Adjustment for the compensation of Dr. Mauro to a base salary of $400,000 per year and the elimination of non-recurring costs subsequent to the acquisition.

(3) Represents an estimate of taxes for MRS based on filing a consolidated tax return with PainCare.



RISK FACTORS



Special Note Regarding Forward-Looking Statements and Risk Factors



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



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



FACTORS AFFECTING OPERATING RESULTS AND MARKET PRICE OF SECURITIES



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



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



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



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



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



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



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



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



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



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



attract and retain an adequate number of patients;



enter new markets and compete successfully in them;



manage operating expenses;



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raise additional capital to fund our capital expenditure plans; and



attract and retain qualified personnel.



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



WE MAY NOT BE ABLE TO KEEP OUR TRADE SECRETS CONFIDENTIAL



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



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



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



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



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



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



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



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



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



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



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



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



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



SIGNIFICANT RISK ASSOCIATED WITH REIMBURSEMENTS BY THIRD PARTY PAYORS



Approximately 58% of the Companys revenues are directly dependent on the acceptance of its services as covered benefits under third party payor
programs, including private insurance, HMOs and



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other managed care entities. The healthcare industry is undergoing significant changes, with third party payors taking measures to reduce reimbursement rates
or in some cases denying reimbursement fees for previously acceptable treatment modalities. There is no assurance that third party payors will continue to pay for minimally invasive surgery (MIS) services provided by the Company under its payor
programs. Failure of third party payors to adequately cover MIS will have a materially adverse affect on the Company.



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



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



SUCCESS OF BUSINESS STARTEGY IS DEPENDANT ON MARKET ACCEPTANCE



THE COMPANY HAS LIMITED MARKETING AND SALES CAPABILITY WHICH COULD ADVERSELY AFFECT ITS GROWTH PLANS



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



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



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



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



The Company will bill the patients and/or their
insurance carriers for services provided by its client clinics and/or physicians, including physician fees, facility fees and technical fees. By undertaking the responsibility for patient billing and collection activities, the Company will assume
the credit risk presented by the patient base, as well as the risk of payment delays attendant to reimbursement through



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governmental programs or third party payors. If the Company is unsuccessful in collecting a substantial amount of such fees it will have a material adverse
affect on the financial condition of the Company.



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



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



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



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



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



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



CURRENT CAPITAL MAY BE INSUFFICIENT



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



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



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



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



There
can be no assurance that the Company will be able to obtain managed care contracts. The future inability of the Company to obtain managed care contracts in its markets could have a material adverse effect on its business, financial condition or
results of operation. In addition, federal and state legislative proposals have been introduced that could substantially increase the number of Medicare and Medicaid recipients enrolled in HMOs and other managed care plans. The Company will derive a
substantial portion of its revenue from Medicare and Medicaid. In the event such proposals are adopted, there can be no assurance that the Company will be able to obtain contracts from HMOs and other managed care plans serving Medicare and Medicaid
enrollees. Failure to obtain such contracts could have a material adverse effect on the business, financial condition and results of operations of the Company.



RISKS ASSOCIATED WITH HIGHLY REGULATED INDUSTRY



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



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



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



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



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



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



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



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



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



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



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



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the Companys expansion into such jurisdictions if they are unable to modify their operational structure to conform to such regulatory framework.



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



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



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



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



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



PART IIOTHER INFORMATION



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



NONE



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



Between April 1, 2003 and April 27, 2003, through a Board authorized private placement of our stock, the Company sold 857,158 shares of common stock for
$1,180,200 to accredited investors. The Company paid no commissions with respect to these transactions.



Between April 28, 2003 and June 30, 2003, through a Board authorized private placement of our stock, the Company sold 1,091,459 shares of common stock for
$2,067,665 to accredited investors. The Company paid no commissions with respect to these transactions.



In connection with these transactions we relied on the exemptions from registration provided by Rule 506, Regulation D and Section 4(2) of the Securities
Act. We believe that all of the



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purchasers were Accredited Investors. All of the purchasers represented that they were acquiring the shares for investment purposes, and the
certificates issued were appropriately restricted.



During
April 2003, the Company issued 208,000 shares of common stock to bridge note holders as full payment plus accrued interest for bridge loans that expired on March 31, 2003.



During June 2003, 118,243 shares of common stock were issued to Shasqua for the conversion of their March 2003 convertible
debenture payment. The shares were valued at market, or $1.48 per share.



On April 17, 2003, 1,100,000 shares of common stock were issued to Kirk Mauro, M.D. as partial initial consideration for the merger with Medical Rehabilitation Specialists, Inc.



Between April 1, 2003 and June 30, 2003 a total of 200,000 common stock
shares were issued for the exercise of vested stock options.



Between April 1, 2003 and June 30, 2003 a total of 191,230 common stock shares were issued for the exercise of vested warrants.



Effective June 16, 2003, The American Stock Exchange®(Amex®)listed the common stock of the Company under the ticker symbol
PRZ.



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



NONE



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



NONE



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



Effective June 16, 2003, The American Stock Exchange®(Amex®)listed the common stock of the Company under the ticker symbol
PRZ.



On April 28, 2003, we announced that we signed on April
25, 2003, a Definitive Merger Agreement and Management Services Agreement with Associated Physicians Group, LTD. (APG) and Dr. John Vick. APG operates a fully integrated pain treatment group practice with offices located in OFallon, Freeburg
and Glen Carbon, Illinois. On August 6, 2003 to be effective as of August 1, 2003, we closed on this acquisition. The capital stock of APG was acquired in a merger transaction from Dr. Vick., the sole shareholder. Dr. Vick had no prior relationships
with us.



The terms of the transaction provide for PainCare to
acquire the non-medical assets of APG and provide ongoing management and administrative services to a newly formed successor of APGs medical practice. Subject to certain yet undetermined post-closing adjustments, if any, 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, which was the approximate value of our stock on the date we entered into the letter of intent with Dr. Vick. We 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. We funded the cash portion of the purchase price of APG from our line of
credit.



The financial statements required by Regulation S-X
will be filed within 60 days of the filing of this report.



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A copy of the Merger Agreement was filed on April 28, 2003 with the SEC on Form 8-K and a copy of the
Addendum to the Merger Agreement is filed as Exhibit 10.1 hereto and is incorporated herein by reference. A copy of the press release describing such transaction is filed as Exhibit 99.3 hereto and is incorporated herein by reference.



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



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



|ExhibitNo. |  | Description                                                                                                             
|---------- |  | ------------------------------------------------------------------------------------------------------------------------
|           | 
|10.1       |  | Addendum to Merger Agreement                                                                                            
|           | 
|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
|           | 
|99.1       |  | Press Release                                                                                                           



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



A Form 8-K filed by the Company on May 16, 2003.



SIGNATURES



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



|                      |  | PainCare Holdings, Inc.     
|--------------------- |  | ----------------------------
|                      | 
|Date: August 11, 2003 |  | /s/ Randy A. Lubinsky       
|                      |  | Randy A. Lubinsky, Chairman,
|                      |  | Chief Executive Officer     
|                      | 
|Date: August 11, 2003 |  | /s/Mark Szporka             
|                      |  | Mark Szporka                
|                      |  | Chief Financial Officer     



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