**UNITED
      STATES**


**SECURITIES
      AND EXCHANGE COMMISSION**


**Washington,
      D.C. 20549**





**FORM
      10-QSB**




**o**
            
            Quarterly
                Report pursuant to Section 13 or 15(d) of the Securities Exchange
                Act of
                1934For
                the quarterly period ended August 31, 2006**o**
            
            TRANSITION
                REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
                1934For
                the transition period from _______________to ________________




**Commission
      File No.**  **333-86706**




**PAPERFREE
      MEDICAL SOLUTIONS, INC.**




(Exact
      Name of Registrant as Specified in its Charter)






**Nevada**
            **7389**
            **98-0375957**(State
                or Other Jurisdiction of Incorporation)
            (Primary
                Standard Industrial Classification Code Number)
            (IRS
                Employer Identification. No.)121
                WEST SYCAMORE ST., KOKOMO, Indiana 46901(Address
                of Principal Executive Offices) (Zip Code)Issuer’s
                telephone number, including area code: ( 765) 456-1089Securities
                registered pursuant to Section 12(b) of the Exchange Act:
                None
              Securities
                registered pursuant to Section 12(g) of the Act: Common Stock, par
                value
                $0.001 per share




Check
      whether the Issuer (1) filed all reports required to be filed by Section 13
      or
      15(d) of the Securities 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
                _____




Check
      if
      there is no disclosure of delinquent filers in response to Item 405 of
      Regulation S-B is not contained in this form, and no disclosure will be
      contained, to the best of registrant’s knowledge, in definitive proxy
      information statements incorporated by reference in Part III of this Form 10-KSB
      or any amendment to this Form 10-KSB.




Yes
            X
            No
                _____






1





Indicate
      by check mark whether the registrant is a shell company (as defined in Rule
      12b-2 of the Exchange Act.)




Yes
            _______
            No
                X











State
                issuer’s revenues for its most recent fiscal year:
            $979,381




State
      the
      aggregate market value of the voting and non-voting common equity held by
      non-affiliates computed by reference to the price at which the common equity
      was
      sold, or the average bid and asked price of such common equity, as of a
      specified date within the past 60 days. (See definition of affiliate in Rule
      12b-2 of the Exchange Act.)





$624,468
      as at October 10, 2006 based on the last sale price of our shares






State
      the
      number of shares outstanding of each of the issuer’s classes of common equity,
      as of the latest practicable date.


69,385,367
      as at October 10, 2006


2





**NOTE
      REGARDING FORWARD-LOOKING STATEMENTS**




This
      Form
      10-QSB may contain certain forward-looking statements within the meaning of
      the
      Private Securities Litigation Reform Act of 1995. For this purpose any
      statements contained in this Form 10-QSB that are not statements of historical
      fact may be deemed to be forward-looking statements. Without limiting the
      foregoing, words such as “may,” “will,” “expect,” “believe,” “anticipate,”
“estimate” or “continue” or comparable terminology is intended to identify
      forward-looking statements. It is important to note that our actual results
      could differ materially from those anticipated from the forward-looking
      statements depending on various important factors. These important factors
      include our history of losses and ability to continue as a going concern, the
      uncertainty of acceptance of current and new products in our markets,
      competition in our markets, our dependence on our distributors and the other
      factors discussed in our “Risk Factors” found below.




**FORWARD-LOOKING
      STATEMENTS**




Portions
      of this Form 10-QSB, including disclosure under “Management’s Discussion and
      Analysis or Plan of Operation,” contain forward-looking statements within the
      meaning of Section 27A of the Securities Act of 1933, as amended (the
“Securities Act”), Section 21E of the Securities and Exchange Act of 1934, as
      amended (the “Exchange Act”), and the Private Securities Litigation Reform Act
      of 1995, as amended. These forward-looking statements are subject to risks
      and
      uncertainties and other factors that may cause our actual results, performance
      or achievements to be materially different from the results, performance or
      achievements expressed or implied by the forward-looking statements. You should
      not unduly rely on these statements. Forward-looking statements involve
      assumptions and describe our plans, strategies, and expectations. You can
      generally identify a forward-looking statement by words such as may, will,
      should, expect, anticipate, estimate, believe, intend, contemplate or project.
      Factors, risks, and uncertainties that could cause actual results to differ
      materially from those in the forward-looking statements include, among
      others,




o
            our
                ability to raise capital,o
            our
                ability obtain and retain customers,o
            our
                ability to provide our products and services at competitive
                rates,o
            our
                ability to execute our business strategy in a very competitive
                environment,o
            our
                degree of financial leverage,o
            risks
                associated with our acquiring and integrating companies into our
                own,o
            risks
                related to market acceptance and demand for our services,o
            the
                impact of competitive services,o
            other
                risks referenced from time to time in our SEC filings.




3





With
      respect to any forward-looking statement that includes a statement of its
      underlying assumptions or bases, we caution that, while we believe such
      assumptions or bases to be reasonable and have formed them in good faith,
      assumed facts or bases almost always vary from actual results, and the
      differences between assumed facts or bases and actual results can be material
      depending on the circumstances. When, in any forward-looking statement, we
      or
      our management express an expectation or belief as to future results, that
      expectation or belief is expressed in good faith and is believed to have a
      reasonable basis, but there can be no assurance that the stated expectation
      or
      belief will result or be achieved or accomplished. All subsequent written and
      oral forward-looking statements attributable to us, or anyone acting on our
      behalf, are expressly qualified in their entirety by the cautionary statements.
      We do not undertake any obligations to publicly release any revisions to any
      forward-looking statements to reflect events or circumstances after the date
      of
      this report or to reflect unanticipated events that may occur.




**PART
      I - FINANCIAL INFORMATION**




**ITEM
      1. FINANCIAL STATEMENTS**




The
      accompanying unaudited consolidated financial statements have been prepared
      in
      accordance with the instructions to Form 10-QSB and Item 310 (b) of Regulation
      S-B, and, therefore, do not include all information and footnotes necessary
      for
      a complete presentation of financial position, results of operations, cash
      flows, and stockholders’ equity in conformity with generally accepted accounting
      principles. In the opinion of management, all adjustments considered necessary
      for a fair presentation of the results of operations and financial position
      have
      been included and all such adjustments are of a normal recurring nature.
      Operating results for the six months ended August 31, 2006 are not necessarily
      indicative of the results that can be expected for the year ending February
      28,
      2007.




4





**PAPERFREE
      MEDICAL SOLUTIONS, INC.**


**CONSOLIDATED
      BALANCE SHEETS**


**(Unaudited)**




ASSETS




August
                31, 2006
            February
                28, 2006Current
                assetsCash
            $
                181,368
            $
                213,368Accounts
                receivable, net of allowance of $75,000 and $75,000
            108,140
            68,223Deferred
                financing costs
            30,284
            13,751Total
                current assets
            319,792
            295,342Fixed
                assets, net of accumulated depreciation of $120,250 and
                $111,721
            45,726
            54,255Deferred
                financing costs
            49,716
            77,916Goodwill
            1,632,502
            1,632,502Total
                assets
            $
                2,047,736
            $
                2,060,015LIABILITIES
                AND STOCKHOLDERS’ EQUITYCurrent
                liabilitiesAccounts
                payable and accrued liabilities
            $
                709,242
            $
                332,862Deferred
                revenue
            5,000
            -Stock
                payable
            103,849
            103,849Notes
                payable - related parties
            225,218
            195,529Lines
                of credit
            13,400
            16,913Mandatorily
                redeemable Series C Preferred Stock, $0.001
              par
                value, 90,000 shares authorized, issued and outstanding
            75,600
            75,600Derivative
                liabilities
            213,545
            160,305Total
                current liabilities
            1,345,854
            885,058Callable
                secured convertible notes payable, net of unamortized discount of
                $606,739
                and $628,733
            393,261
            171,267Total
                Liabilities
            1,739,115
            1,056,325Stockholders’
                equitySeries
                A Convertible Preferred Stock, $0.001 par value,5,000,000
                shares authorized, 0 shares issued and outstanding
            -
            -Series
                B Preferred Stock, $0.001 par value, 5,000,000 sharesauthorized,
                0 shares issued and outstanding
            -
            -Common
                stock, $0.001 par value, 500,000,000 sharesauthorized,
                69,385,367 and 68,561,857 shares issued and outstanding
            69,385
            68,561Additional
                paid-in capital
            61,774,763
            61,749,888Accumulated
                deficit
            (61,535,527)
            (60,814,759)Total
                stockholders’ equity
            308,621
            1,003,690Total
                liabilities and stockholders’ equity
            $
                2,047,736
            $
                2,060,015






5


**PAPERFREE
      MEDICAL SOLUTIONS, INC.**


**CONSOLIDATED
      STATEMENTS OF OPERATIONS**


**(Unaudited)**




Three
                Months ended August 31,
            
            Six
                Months ended August 31,2006
            
            2005
            
            2006
            
            2005Sales
            
            $
            234,968
            
            $
            368,210
            
            $
            369,031
            
            $
            573,493Cost
                of sales
            
            
            16,804
            
            
            59,931
            
            
            40,983
            
            
            86,378Gross
                profit
            
            
            218,164
            
            
            308,279
            
            
            328,048
            
            
            487,115Operating
                expenses:General
                and administrative
            
            
            376,144
            
            
            528,797
            
            
            697,545
            
            
            961,791Consulting
                fees
            
            
            7,500
            
            
            17,204
            
            
            78,747
            
            
            32,204Professional
                fees
            
            
            19,784
            
            
            30,455
            
            
            48,688
            
            
            245,621Net
                loss from operations
            
            
            (185,264
            )
            
            (268,177
            )
            
            (496,932
            )
            
            (752,501
            )Gain
                on derivatives
            
            
            97,903
            
            
            -
            
            
            1,055
            
            
            -Registration
                rights penalties
            
            
            (48,000
            )
            
            -
            
            
            (96,000
            )
            
            -Interest
                expense
            
            
            (51,944
            )
            
            (13,627
            )
            
            (128,891
            )
            
            (38,555
            )Net
                loss
            
            $
            (187,305
            )
            $
            (281,804
            )
            $
            (720,768
            )
            $
            (791,056
            )Basic
                and dilutednet
                loss per share
            
            $
            (0.00
            )
            $
            (0.01
            )
            $
            (0.01
            )
            $
            (0.02
            )Weighted
                averageshares
                outstanding
            
            
            68,974,769
            
            
            51,756,762
            
            
            68,867,731
            
            
            50,740,283




6





**PAPERFREE
      MEDICAL SOLUTIONS, INC.**


**CONSOLIDATED
      STATEMENTS OF CASH FLOWS**


**(Unaudited)**






Six
                Months Ended August 31,2006
            
            2005CASH
                FLOWS FROM OPERATING ACTIVITIES:Net
                loss
            
            $
            (720,768
            )
            $
            (791,056
            )Adjustments
                to reconcile net loss to cash used inoperating
                activities:Depreciation
            
            
            8,529
            
            
            9,693Deferred
                financing costs amortization
            
            
            16,667
            
            
            -Convertible
                debt discount amortization
            
            
            76,289
            
            
            -Imputed
                interest
            
            
            13,799
            
            
            -Bad
                debt expense
            
            
            -
            
            
            73,000Gain
                on derivatives
            
            
            (1,055
            )
            
            -Common
                stock issued for service
            
            
            11,900
            
            
            180,000Stock
                payable
            
            
            -
            
            
            89,500Changes
                in assets and liabilities:Accounts
                receivable
            
            
            (39,917
            )
            
            (19,282
            )Deferred
                revenue
            
            
            5,000
            
            
            -Accounts
                payable and accrued liabilities
            
            
            376,380
            
            
            (5,386
            )CASH
                USED IN OPERATING ACTIVITIES
            
            
            (253,176
            )
            
            (463,531
            )CASH
                FLOWS FROM FINANCING ACTIVITIES:Net
                change in line of credit
            
            
            (3,513
            )
            
            (6,593
            )Advances
                from related party
            
            
            65,076
            
            
            26,220Repayment
                of advances to related party
            
            
            (35,387
            )
            
            -Proceeds
                from exercise of warrants
            
            
            -
            
            
            248,573Proceeds
                from convertible debt, net of offering costs
            
            
            195,000
            
            
            -Shares
                issued for cash, net of offering costs
            
            
            -
            
            
            109,885CASH
                PROVIDED BY FINANCING ACTIVITIES
            
            
            221,176
            
            
            378,085NET
                CHANGE IN CASH
            
            
            (32,000
            )
            
            (85,446
            )Cash,
                beginning of period
            
            
            213,368
            
            
            121,837Cash,
                end of period
            
            $
            181,368
            
            $
            36,391Cash
                paid for:Interest
            
            $
            36,301
            
            $
            38,556Income
                tax
            
            
            -
            
            
            -NON-CASH
                INVESTING AND FINANCING ACTIVITIES:Acquisition
                of KMS:Fair
                value of assets acquired
            
            $
            -
            
            $
            3,556,246Less:
                fair value of liabilities assumed
            
            
            -
            
            
            (556,246
            )Shares
                issued for acquisition of KMS
            
            
            -
            
            
            3,000,000Discount
                on convertible debt from derivatives
            
            
            54,295
            
            
            -Reclassification
                of short term debt for warrant
              exercises
            
            
            -
            
            
            403,000




7





**PAPERFREE
      MEDICAL SOLUTIONS, INC.**


**NOTES
      TO CONSOLIDATED FINANCIAL STATEMENTS**


**(Unaudited)**




**NOTE
      1 - BASIS OF PRESENTATION**





The
      accompanying unaudited interim consolidated financial statements of PaperFree
      Medical Solutions, Inc., have been prepared in accordance with accounting
      principles generally accepted in the United States of America and the rules
      of
      the Securities and Exchange Commission, and should be read in conjunction with
      the audited financial statements and notes thereto contained in PaperFree’s
      Annual Report filed with the SEC on Form 10-KSB. In the opinion of management,
      all adjustments, consisting of normal recurring adjustments, necessary for
      a
      fair presentation of financial position and the results of operations for the
      interim periods presented have been reflected herein. The results of operations
      for interim periods are not necessarily indicative of the results to be expected
      for the full year. Notes to the consolidated financial statements, which would,
      substantially duplicate the disclosure contained in the audited financial
      statements for fiscal 2006 as reported in form 10-KSB have been
      omitted.





**NOTE
      2 - CALLABLE SECURED CONVERTIBLE NOTES PAYABLE**





PaperFree
      entered into a securities purchase agreement with four investors (the “note
      holders”) on November 30, 2005, for the sale of (i) $1,500,000 in callable
      secured convertible notes and (ii) warrants to purchase 3,000,000 shares of
      common stock at an exercise price of $0.10 per share. The securities purchase
      agreement required the purchase of an aggregate of $1,500,000 of the callable
      secured convertible notes and 3,000,000 warrants occurring in three traunches
      as
      follows:




(i)
            $800,000
                on November 30, 2005 and 1,600,000 warrants to purchase common stock,
                due
                November 30, 2008;





(ii)
            $400,000
                within two days after filing a registration statement covering the
                number
                of shares of common stock underlying the callable secured convertible
                notes and 800,000 warrants to purchase common stock; and





(iii)
            $300,000
                within two days of the effectiveness of the registration statement
                and
                600,000 warrants to purchase common
                stock.





On
      August
      31, 2006, PaperFree received $200,000 and issued 400,000 warrants related to
      the
      second traunch of convertible notes detailed above. As of that date they had
      not
      filed the required registration statement. These notes mature on August 31,
      2009.





The
      callable secured convertible notes bear interest at 8% per annum from the date
      of issuance. Interest is computed on the basis of a 365-day year and is payable
      quarterly in cash. The callable secured convertible notes mature three years
      from the date of issuance, and are convertible into common stock at the note
      holders’ option, at the lower of (i) $2.00 or (ii) 65% of the average of the
      three lowest intraday trading prices for the common stock on the OTC Bulletin
      Board for the 20 trading days before but not including the conversion date.
      Accordingly, there is no limit to the number of shares into which the callable
      secured convertible notes may be converted. The callable secured convertible
      notes are secured by PaperFree’s assets, including inventory, accounts
      receivable and intellectual property.





The
      agreement restricts the note holder’s ability to convert their callable secured
      convertible notes or exercise their warrants and receive shares of common stock
      such that the number of shares of common stock held by them in the aggregate
      and
      their affiliates after such conversion or exercise does not exceed 4.99% of
      the
      then issued and outstanding shares of common stock. However, the note holders
      may repeatedly sell shares of common stock in order to reduce their ownership
      percentage, and subsequently convert additional callable secured convertible
      notes.





PaperFree
      incurred direct financing costs of $100,000 associated with the first traunch
      of
      the convertible notes and $5,000 associated with the second traunch. These
      costs
      were recorded as deferred financing costs to be amortized over the life of
      the
      notes using the effective interest method. Costs incurred included:





Debt
                arrangement fees
            $
                40,000Broker
                fees
            40,000Key
                man life insurance single premium
            20,000Legal
                fees
            5,000Total
                associated fees
            105,000Less
                amortization
            (25,000)Deferred
                financing costs
            $
                80,000





PaperFree
      analyzed the Convertible Notes and the Warrants for derivative financial
      instruments, in accordance with SFAS No. 133. The Convertible Notes are a hybrid
      instrument which contains more than one embedded derivative feature which would
      individually warrant separate accounting as derivative instruments under SFAS
      133. The various embedded derivative features have been bundled together as
      a
      single, compound embedded derivative instrument that has been bifurcated from
      the debt host contract, and referred to as the “Single Compound Embedded
      Derivatives within the Convertible Notes”. The single compound embedded
      derivative features include the conversion feature within the Convertible Notes,
      the early redemption option and the Contract Rate adjustment. PaperFree valued
      the compound embedded derivatives based on a probability weighted discounted
      cash flow model. The value of the single compound embedded derivative liability
      was bifurcated from the debt host contract and recorded as a derivative
      liability, which resulted in a reduction of the initial carrying amounts (as
      unamortized discounts) of the Convertible Notes. The 1 st traunch
      of Convertible Notes for $800,000 was reduced by $555,809 at inception on
      November 30, 2005. The amount received for the second traunch as of August
      31,
      2006 of $200,000 was reduced by $35,465. The unamortized discounts will be
      amortized to interest expense using the effective interest method over the
      life
      of the Convertible Notes, or 36 months.




The
      Stock
      Purchase Warrants are freestanding derivative financial instruments which were
      valued using the Black-Scholes method. The fair value of the derivative for
      the
      1 st traunch
      was computed at $106,089 at inception on November 30, 2005 and for the
      2 nd traunch
      was computed at $18,830 at August 31, 2006. The fair values of both were
      recorded as derivative liabilities which resulted in a reduction of the initial
      carrying amount (as unamortized discounts) of the Convertible Notes. The
      unamortized discounts will be amortized to interest expense using the effective
      interest method over the life of the Convertible Notes, or 36
      months.




Both
      the
      embedded and freestanding derivative financial instruments were recorded as
      liabilities in the consolidated balance sheet and measured at fair value. These
      derivative liabilities will be marked-to-market each quarter with the change
      in
      fair value recorded in the income statement.





Variables
      used in the Black−Scholes option−pricing model from inception through August 31,
      2006 include (1) 4.41% to 5.03% risk−free interest rate, (2) expected warrant
      lift is the actual remaining life of the warrant as of each period end, (3)
      expected volatility is from 130% to 200% and (4) zero expected
      dividends.





The
      impact of the application of SFAS 133 and EITF 00-19 on the balance sheets
      and
      statements of operations as of and through August 31, 2006 was as
      follows:





Liability
                as of 2/28/06
            Discount
                related to 2ndtraunch
            Liability
                as of 8/31/06
            Gain
                (loss) from 3/1/06 to 8/31/06Convertible
                notes
            $
                130,115
            $
                35,465
            $
                177,334
            $
                (11,754)Warrants
            30,190
            18,830
            36,211
            12,809Total
            $
                160,305
            $
                54,295
            $
                213,545
            $
                1,055


Discount
      related to 2 nd traunch
      of convertible debt is added to derivative liability and has no effect on
      derivative gain or loss.








The
      following summarizes the financial presentation of the Convertible Notes at
      August 31, 2006:





Face
                value of convertible notes
            $
                1,000,000Adjustments:Discount
                for derivative liability - convertible notes with compound
              embedded
                derivatives
            (591,274)Discount
                for derivative liability - investors warrant
            (124,919)Amortization
                of debt discount
            109,454Convertible
                notes balance, as adjusted
            $
                393,261





Per
      the
      terms of the registration rights agreement associated with the securities
      purchase agreement, PaperFree is required to register shares for both the
      convertible notes and the attached warrants. These shares were to be registered
      by February 28, 2006. The registration rights agreement contains a liquidated
      damages clause that enforces penalties at 2% of the face value of the
      convertible notes for each month the shares remain unregistered. As of August
      31, 2006, the required shares had not been registered and PaperFree has accrued
      $96,000 in expected registration rights penalties.








**NOTE
      3 - COMMON STOCK**





During
      the six months ended August 31, 2006, PaperFree issued 825,000 shares valued
      at
      $11,900 for services.








**NOTE
      4 - SUBSEQUENT EVENTS**





On
      September 28, 2006, PaperFree acquired all of the shares issued and outstanding
      of Doctors Billing Corporation, in exchange for the issuance of 175,000 shares
      valued at $1,750 and $75,000 payable in three installments payable September
      28,
      2006, October 28, 2006 and November 28, 2006. Doctors Billing Corporation is
      a
      developer, licensor and maintenance supporter of proprietary Practice Management
      and Occupational Medicine software applications. Doctors Billing Corporation
      at
      the time of acquisition held customer contracts with annual revenues less than
      $15,000; proprietary rights to its software and fixed assets with a fair market
      value of $5,000; and no liabilities. The acquisition is accounted for as a
      purchase.





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




**GENERAL**




PaperFree
      is in the business of providing Medical Practitioners with software and
      associated hardware solutions, which meet or exceed security levels specified
      by
      the Health Insurance Portability and Accountability Act of 1996.




We
      are in
      the business of providing Medical Practitioners with professional and technical
      services, software and associated hardware solutions, which meet or exceed
      security levels specified by the Health Insurance Portability and Accountability
      Act of 1996.  We
      generate revenue from the provision of these services to Medical Practioners,
      physician offices, clinics, and hospitals. Inside the medical practitioner
      marketplace, we focus primarily upon sole practitioners, doctors and other
      health providers operating in clinics of up to ten providers.




**OVERVIEW
      AND PLAN OF OPERATION**




PaperFree
      Medical Solutions, Inc. (the “Company”) was incorporated on January 29th, 2002
      under the laws of the State of Nevada under the name of Link Media Publishing
      Ltd.




From
      the
      date of its incorporation to August 31, 2006 PaperFree has undertaken the
      following activity:




(1)
      Through an agreement dated February 15, 2002 and completed on February 22,
      2002,
      we acquired a 100% equity interest in Business to Business Publishing Ltd.
      (“B2B”), a private British Columbia company involved in the publication and
      distribution of industry and profession specific wall planners. The agreement
      was in consideration of 2,600,000 (13,000,000 post forward 5:1 split, and
      325,000 after the 1:40 reverse split) restricted shares of its common stock
      and
      by advancing B2B with $50,000 in long-term loans carrying no interest or fixed
      terms of repayment. As a result of the transaction B2B became a wholly owned
      subsidiary of PaperFree and their operations were merged.




PaperFree
      through B2B, which had no salaried employees, was considered a start-up
      corporation involved in the production and distribution of industry specific
      and
      special interests wall planners. Revenue was generated by B2B by selling
      advertising space in its wall planners. The wall planners were distributed,
      free
      of charge, to targeted professionals or individuals who comprise the industry
      or
      interest groups for which the planners were designed and produced.




(2)
      During the fiscal year ended February 28, 2003, our subsidiary suspended
      operations due to our failure to raise sufficient working capital to fund
      ongoing operations and our inability to attain profitable operations. We
      attempted to raise additional financing to fund future operations, but were
      not
      successful.




(3)
      On
      July 14, 2003, PaperFree completed a 5:1 stock split of its outstanding share
      capital in connection with the proposed acquisition of Crown Medical Systems,
      Inc. resulting in an increase in outstanding common shares from 6,390,367 shares
      to 31,951,835 shares.




(4)
      On
      September 3, 2003, PaperFree executed an Agreement and Plan of Merger (the
      “Merger Agreement”) with Crown Medical Systems, Inc. (“Crown Delaware”). Crown
      Delaware is a private Delaware company that provides computer software, hardware
      and support solutions to the health care industry.




(5)
      Effective December 18, 2003 PaperFree changed its name to Crown Medical Systems,
      Inc.




(6)
      On
      February 23, 2004 PaperFree disposed of its entire interest in the shares of
      Business to Business Publishing Inc. in return for the surrender for
      cancellation of the 13,000,000 post forward split shares of PaperFree issued
      in
      connection with the acquisition of Business to Business Publishing
      Inc.




11





(7)
      PaperFree, through an agreement dated January 27, 2004 acquired the rights
      to MD
      PaperFree, a proprietary EMR (Electronic Medical Record) software program used
      by Medical Practitioners to document patient encounters.




(8)
      On
      September 1, 2004, PaperFree, in connection with its aborted takeover of Crown
      Medical Systems, Inc. (Delaware) for 4,396,825 Preferred Series A shares. These
      Series A shares were immediately converted into 39,901,187 PaperFree common
      shares.




As
      the
      former management of Crown Medical Systems, Inc. (Delaware) were unable to
      provide financial records in a format that was economically susceptible to
      audit
      verification by an independent registered accounting firm, the PaperFree Board
      of Directors took formal action to abandon the investment in Crown Medical
      Systems, Inc. (Delaware).




(9)
      On
      September 3, 2004, PaperFree executed an Agreement and Plan of Merger (the
      “Merger Agreement”) with Crown Delaware. This Merger Agreement takes precedent
      over the Share Purchase Agreement executed June 20, 2004. Crown Delaware is
      a
      private Delaware company that provides computer software, hardware and support
      solutions to the health care industry.




As
      the
      former management of Crown Medical Systems, Inc. (Delaware) were unable to
      provide financial records in a format that was economically susceptible to
      audit
      verification by an independent registered accounting firm, the PaperFree Board
      of Directors took formal action to abandon the investment in Crown Medical
      Systems, Inc. (Delaware).




(10)
      Following the decision to abandon the Crown acquisition, PaperFree Management
      undertook a search for a replacement operating company. They identified a
      Company known as KMS Computer Services , Inc., located in Kokomo, Indiana.
      KMS
      is a provider of paper-free turnkey medical solutions for small to large
      multi-physician, multi-specialty offices, hospitals and integrated delivery
      networks.




(11)
      On
      March 1, 2005, PaperFree acquired 100 percent of the outstanding common shares
      of KMS Computer Services, Inc. (‘KMS”) in exchange for the issuance of 2,400,000
      shares of PaperFree common stock. The results of KMS’s operations have been
      included in the consolidated statement of operations since that date. KMS is
      a
      provider of billing and practice management software. PaperFree is expected
      to
      be the leading provider of paper-free turnkey medical solutions for small to
      large multi-physician, multi-specialty offices, hospitals and integrated
      delivery networks.




The
      aggregate purchase price was 2,400,000 shares of Paperfree’s common stock valued
      at $3,000,000. The value of the 2,400,000 common shares issued was determined
      based on the market price of PaperFree’s common shares on the date of the
      initial agreement




(12)
      For
      the period ended August 31, 2006, PaperFree had total assets of $ 2,047,736
      (February 28, 2006 - $2,060,015). Current assets were comprised of cash
      resources of $ 181,368 (February 28, 2006 - $213,368), and accounts receivable
      of $108,140 after taking into account a bad debt allowance of $75,000 (February
      28, 2006 accounts receivable of $68,223 net of bad debt allowance of $75,000).
      Current assets also includes deferred financing costs of $30,284 (February
      28,
      2006 - $13,751) being $105,000 of costs associated with the callable secured
      notes payable net of $25,000 (February 28, 2006 - $8,333) amortization over
      the
      three year term of the notes. The cash and equivalents and accounts receivable
      represent PaperFree’s present source of liquidity.




Long
      term
      assets included fixed assets of $45,726 (February 28, 2006 $54,255) net of
      accumulated depreciation of $120,250 (February 28, 2006 - $111,721) and goodwill
      of $ 1,632,502 (February 28, 2006 - $1,632,502).




PaperFree’s
      current liabilities at August 31, 2006 totalled $ 1,345,854 (February 28, 2006
      $885,058) , consisting of $709,242 (February 28, 2006 - $332,862) in accounts
      payables and accrued liabilities and $103,849 (February 28, 2006 - $103,849)
      in
      stock payable, $225,218 (February 28, 2006 $195,529) due to related parties,
      lines of credit of $13,400 (February 28, 2006 $16,913) and mandatory redeemable
      preferred stock shown as a current liability item was $75,600 (February 28,
      2006
      - $75,600). Current liabilities also include $213,545 (February 28, 2006 -
      $160,305) of derivative liability associated with (1) warrants and (2) callable
      secured convertible notes payable.




12





Long
      term
      liabilities are comprised of the callable secured convertible notes payable
      of
      $1,000,000 (February 28, 2006 - $800,000) net of discount.




PaperFree
      is presently operating at a loss. PaperFree’s ability to continue as an ongoing
      concern is dependent on its ability to generate revenues from software sales.
      Failing that, PaperFree may need to raise additional capital, either debt or
      equity capital, to fund future operation and ultimately to attain profitable
      operation.




(13)
      During the six months ended August 31, 2006 , 2006 we incurred losses of
      $496,932 from operations and had a net loss of $720,768 after a gain of $1,055
      from marking derivatives to market, recognition of registration rights penalties
      of $96,000 and recording interest expense of $128,891.




(14)
      During the six months ended August 31, 2006 we intend to seek financing
      necessary to fund future operations and to fund our investigation, negotiation
      and acquisition of other business acquisition opportunities. Currently we have
      commitments for $500,000 of additional financing dependent upon the filing
      of
      registration statement with the Securities Exchange Commission.




**Risk
      Factors**




In
      addition to the other information set forth in this report, you should carefully
      consider the factors discussed in Part I, Item 1A. Risk Factors in our Annual
      Report on Form 10-KSB for the year ended February 28, 2006, which could
      materially affect our business, financial condition or future results. The
      risks
      described in our Annual Report on Form 10-KSB are not the only risks facing
      our
      Company. Additional risks and uncertainties not currently known to us or that
      we
      currently deem to be immaterial also may materially adversely affect our
      business, financial condition and/or operating results.




**Unsuccessful
      Operating History**




We
      have a
      limited operating history upon which an evaluation of our future prospects
      can
      be made. Our prior business history has been limited to the publication and
      distribution of industry and profession specific wall planners Currently we
      are
      engaged in the provision of Billing Services as well as the sale of computerized
      Practice Management and Electronic Medical Record solutions to medical
      practioners. We are not yet profitable. There is no guarantee that we will
      be
      able to raise the financing necessary to develop any future business plan we
      may
      adopt.




**If
      We Do Not Obtain Additional Financing, We Will Not Be Able to Acquire Any
      Assets**




As
      of
      August 31, 2006, we had cash on hand in the amount of $ 181,368. We will likely
      have to raise funds to acquire new assets and finance operation or acquire
      new
      assets and to finance operations. If we are not able to raise the funds
      necessary to fund our business objectives, we may have to delay the
      implementation of any future business plan.




We
      do not
      have any arrangements for financing and we can provide no assurance that we
      will
      be able to obtain the required financing when needed. Obtaining additional
      financing will be subject to a number of factors, including:




*
            Market
                conditions;*
            Investor
                acceptance of potential business assets; and*
            Investor
                sentiment.


These
      factors may make the timing, amount, terms and conditions of additional
      financing unattractive or unavailable to us. If we are not successful in
      achieving financing id operation or acquire business assets, our development
      will be delayed.




13





**If
      We Are Unable To Generate Significant Revenues From Our Operations, Our Business
      Will Fail.**


If
      we are
      unable to generate significant revenues from resumption of operations or any
      business interest we acquire, we will not be able to achieve profitability
      or
      continue operations.




**Our
      Securities May Be Subject to Penny Stock Regulation.**


If
      an
      active trading market for our securities develops and the price of our common
      stock falls below $5.00 per share, then we will be subject to “penny stock”
regulation. “Penny stock” rules impose additional sales practice requirements on
      broker-dealers who sell such securities to persons other than established
      customers and accredited investors (generally those with assets in excess of
      $1,000,000 or annual income exceeding $200,000 or $300,000 together with a
      spouse). For transactions covered by these rules, the broker-dealer must make
      a
      special suitability determination for the purchase of such securities and have
      received the purchaser’s written consent to the transaction prior to the
      purchase. Additionally, for any transaction involving a penny stock, unless
      exempt, the rules require the delivery, prior to the transaction, of a
      disclosure schedule prescribed by the Commission relating to the penny stock
      market. The broker-dealer also must disclose the commissions payable to both
      the
      broker-dealer and the registered representative and current quotations for
      the
      securities. Finally, monthly statements must be sent disclosing recent price
      information on the limited market in penny stocks. Consequently, the “penny
      stock” rules may restrict the ability of broker-dealers to sell our shares of
      common stock. The market price of our shares would likely suffer as a result.




**Forward-Looking
      Statements**


This
      prospectus contains forward-looking statements that involve risks and
      uncertainties. We use words such as anticipate, believe, plan, expect, future,
      intend and similar expressions to identify such forward-looking statements.
      You
      should not place too much reliance on these forward-looking statements. Our
      actual results are most likely to differ materially from those anticipated
      in
      these forward-looking statements for many reasons, including the risks faced
      by
      us described in the this Risk Factors section and elsewhere in this prospectus.




**ITEM
      2. DESCRIPTION OF PROPERTY**





PaperFree
      leases office premises from the former owner of KMS Medical Solutions,
      Inc.




**ITEM
      3. CONTROLS AND PROCEDURES**





Evaluation
      of disclosure controls and procedures:


Based
      on
      their evaluation of our disclosure controls and procedures (as defined in Rule
      13a−15e under the Securities Exchange Act of 1934 (the "Exchange Act")), our
      principle executive officer and principle financial officer have concluded
      that
      as of the end of the period covered by this quarterly report on Form 10−QSB such
      disclosure controls and procedures were not effective to ensure that information
      required to be disclosed by us in reports that we file or submit under the
      Exchange Act is recorded, processed, summarized and reported within the time
      periods specified in Securities and Exchange Commission rules and forms. The
      deficiencies in our internal control related to accrual of registration rights
      penalties. These deficiencies have been disclosed to our Board of Directors.
      Additional effort is needed to fully remedy these deficiencies and we are
      continuing our efforts to improve and strengthen our control processes and
      procedures. We are in the process of improving our internal control over
      financial reporting in an effort to remediate these deficiencies by improving
      supervision and increasing training of our accounting staff with respect to
      generally accepted accounting principles, providing additional training to
      our
      management regarding use of estimates in accordance with generally accepted
      accounting principles, adding additional accounting personnel to assist daily
      transactions, and increasing the frequency of internal financial statement
      review.





Changes
      in internal controls:


There
      were no significant changes in PaperFree’s internal controls or in other factors
      that could significantly affect those controls since the most recent evaluation
      of such controls.


14





**PART
      II**






**ITEM
      1 - LEGAL PROCEEDINGS**




NONE






**ITEM
      2 - CHANGES IN SECURITIES**




NONE






**ITEM
      3 - DEFAULTS UPON SENIOR SECURITIES**




NONE






**ITEM
      4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**




NONE






**ITEM
      5 - OTHER INFORMATION**




NONE






**ITEM
      6 - EXHIBITS AND REPORTS ON FORM 8-K**




(a)
      Exhibits




Exhibit
            Description
                of Exhibit31.1
            Certification
                of Chief Executive Officer Pursuant to Rule
                13a-14(a)/15d-14(a)31.2
            Certification
                of Chief Financial Officer Pursuant to Rule
                13a-14(a)/l5d-14(a)32.1
            Certification
                of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002, 18 U.S.C. 135032.2
            Certification
                of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
                Act of 2002, 18 U.S.C. 1350




(b)
      Reports on Form 8K




On
      September 1, 2006, we filed on form 8-K a notice of Change of Directors or
      Principal Officers’; Election of Directors and Appointment of Principal
      Officers, whereby Mr. William L. Sklar resigned as President, CEO and CFO and
      Stephen Hawksworth was elected President and CEO and Mr. Craig S. Barrow was
      elected CFO.




15





**SIGNATURES**






Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, PaperFree has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.






PAPERFREE
      MEDICAL SOLUTIONS, INC.




(Registrant)






By:/s/
                Stephen Hawksworth


Stephen
      Hawksworth, Chief Executive Officer


Date:
       October 10, 2006








By:/s/
                Craig S. Barrow


Craig
      S.
      Barrow, Chief Financial Officer, Treasurer and Director


Date:
       October 10, 2006






Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, PaperFree has duly caused this report to be signed on its behalf by the
      undersigned, thereunto duly authorized.






16