Southland Health Services 10-Q Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007

¨ 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: 0001364796

SOUTHLAND HEALTH SERVICES, INC.

(Exact name of registrant, as specified in its charter)

FLORIDA	20-0340136
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

2344 WOODRIDGE AVENUE, KINGSPORT, TN	37664
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number: (423) 247-9560

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2) of the Exchange Act. Check one:

Large accelerated filer  ¨    Accelerated Filer  ¨    Non-accelerated filer  x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares outstanding of the Registrant’s common stock as of November 15, 2007 was28,148,695

TABLE OF CONTENTS

		PAGE
PART I FINANCIAL INFORMATION
Item 1	Financial Statements	3
	Consolidated Balance Sheets As of September 30, 2007 (unaudited) As of December 31, 2006	3
	Consolidated Statement of Income Three Months and Nine Months ended September 30, 2007 (unaudited) and Three Months ended and Nine Months September 30, 2006 (unaudited)	4
	Consolidated Statements of Cash Flows Three Months and Nine Months ended September 30, 2007 (unaudited) Three Months and Nine Months ended September 30, 2006 (unaudited)	6
	Notes to Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis or Plan of Operation	15
Item 3	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4	Controls and Procedures	22
PART II OTHER INFORMATION
Item 1	Legal Proceedings	23
Item 1A	Risk Factors	24
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3	Defaults Upon Senior Securities	25
Item 4	Submission of Matters to a Vote of Security Holders	25
Item 5	Other Information	25
Item 6	Exhibits	25

2

SOUTHLAND HEALTH SERVICES, INC.

C0NSOLIDATED BALANCE SHEETS

September 30, 2007 (Unaudited) and December 31, 2006

ASSETS

	(Unaudited) September 30, 2007			December 31, 2006
CURRENT ASSETS
Cash	$	207,568		$	11,869
Investments		1,102,000			1,002,000
Accounts receivable - Trade		12,277,581			10,497,764
Prepaid supplies		316,064			328,666
TOTAL CURRENT ASSETS		13,903,213			11,840,299
FIXED ASSETS
Buildings		489,751			469,781
Furniture & fixtures		104,484			104,835
Equipment		1,859,444			1,803,646
Vehicles		4,369,820			4,436,800
Leasehold improvements		2,212			2,212
		6,825,711			6,817,274
Less: Accumulated depreciation		(4,399,753	)		(4,401,135	)
		2,425,958			2,416,139
OTHER ASSETS
Prepaid expenses and deposits		625,489			725,386
Notes receivable		5,747,175			5,736,940
Other assets		813,410			465,473
Deferred tax asset		544,423			—
Due from affiliated company		1,243,220			478,150
		25,320,888			21,662,387

LIABILITIES AND STOCKHOLDERS’ EQUITY

	(Unaudited)
	September 30, 2007		December 31, 2006
CURRENT LIABILITIES
Accounts Payable and accrued interest	$	745,404	$	540,739
Accounts receivable line of credit		1,898,551		1,245,908
Bank overdrafts		981,727		1,365,964
Accrued wages		245,289		245,289
Accrued and withheld taxes		10,298,590		8,460,179
Other liability		2,002,785		479,976
Current portion of Notes payable		1,497,731		741,521
TOTAL CURRENT LIABILITIES		17,670,077		13,079,576
Long-term Debt
Notes payable		925,525		1,024,773
Notes payable - officer		728,629		551,045
		1,654,154		1,575,818
TOTAL LIABILITIES		19,324,231		14,655,394
STOCKHOLDERS’ EQUITY
Common stock		28,149		28,149
Additional contributed capital		279,471		279,471
Retained earnings		5,671,037		6,699,373
		5,978,657		7,006,993
	$	25,302,888	$	21,662,387
	$	—

See accompanying notes and accountant’s report.

3

SOUTHLAND HEALTH SERVICES, INC.

CONSOLIDATED STATEMENT OF INCOME

Three Months and Nine Months Ended Septmber 30, 2007 and 2006

	Three Months Ended September 30,						Year to Date September 30,
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	2007			2006			2007			2006
REVENUES	$	8,495,636		$	9,288,199		$	25,353,399		$	26,789,482
EXPENSES
Payroll and employee benefits		5,065,929			6,516,010			15,605,006			17,426,613
Depreciation and amortization		192,912			173,092			565,191			423,184
Other operating expense		2,629,428			2,195,384			7,036,586			6,209,137
		7,888,269			8,884,486			23,206,783			24,058,934
INCOME (LOSS) FROM OPERATIONS		607,367			403,713			2,146,616			2,730,548
OTHER INCOME/(EXPENSE)
Interest income		81,249			71,321			279,102			190,242
Interest expense		(256,038	)		(54,483	)		(1,480,637	)		(300,559	)
Write down of note receivable		(2,500,000	)		—			(2,500,000	)		—
Total Other Income/(Expense)		(2,674,789	)		16,838			(3,701,535	)		(110,317	)
INCOME (LOSS) BEFORE INCOME TAXES/BENEFITS AND		(2,067,422	)		420,551			(1,554,919	)		2,620,231
Income tax (expense)/benefit		702,923			(142,987	)		526,583			(803,075	)
NET INCOME (LOSS)		(1,364,499	)		277,564			(1,028,336	)		1,817,156
NET INCOME/(LOSS) from operations per share	$	0.02		$	0.01		$	0.08		$	0.10
NET INCOME/(LOSS) per share		(0.05	)	$	0.01		$	(0.04	)	$	0.06
Average shares outstanding		28,148,695			28,148,695			28,148,695			28,148,695

See accompanying notes and accountant’s report.

4

SOUTHLAND HEALTH SERVICES, INC.

CONSOLIDATED STATEMENT CHANGES OF STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2007 (Unaudited)

	PREFERRED STOCK		COMMON STOCK		ADDITIONAL PAID IN	STOCK	RETAINED
	SHARES	AMOUNT	SHARES	AMOUNT	CAPITAL	WARRANTS	EARNINGS		TOTAL
Balance at beginning of December 31, 2006	—	—	28,149,695	28,149	279,471	—	6,699,373		7,006,993
Net other comprehensive income							(1,028,336	)	(1,028,336	)
Balance at September 30, 2007	—	—	28,149,695	28,149	279,471	—	5,671,037		5,978,657

5

SOUTHLAND HEALTH SERVICES, INC.

CONSOLIDATED STATEMENT OF CASH FLOWS

Three Months and Nine Months Ended September 30, 2007 and 2006

	Three Months Ended September 30,						Year to Date September 30,
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
	2007			2006			2007			2006
CASH FLOWS FROM OPERATION ACTIVITIES
Net Income (Loss)		(1,364,499	)		277,564		$	(1,028,336	)	$	1,817,156
Adjustments to reconcile Net Income (Loss) to Net Cash provided from operating activities:
Depreciation and amortization		192,912			173,092			565,191			423,184
Changes in Assets and Liabilities
Accounts receivable		(283,423	)		(712,624	)		(896,663	)		(1,181,786	)
Prepaid supplies & expenses		515			(3,442	)		112,499			(124,913	)
Other Assets		(717,612	)		(285,705	)		(1,065,549	)		(8,341	)
Accounts payable		(228,594	)		386,802			(179,572	)		434,144
Accrued wages		(247,500	)		2,422			—			(274,237	)
Accrued, other liabiities and withheld taxes		683,271			809,875			2,453,929			2,329,546
CASH FLOWS FROM OPERATING ACTIVITIES	$	(1,964,930	)	$	647,984		$	(38,501	)	$	3,414,753
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Fixed assets		(266,652	)		(89,235	)		(575,010	)		(594,065	)
Notes receivable-Net		1,261,632			(191,116	)		1,134,400			(824,076	)
Acquisition of Tri-County assets, net of payables assumed		—			—			(751,199	)		—
CASH FLOWS FROM INVESTING ACTIVITIES		994,980			(280,351	)		(191,809	)		(1,418,141	)
CASH FLOWS FROM FINANCING ACTIVITIES
Notes payable - Net		566,246			(766,606	)		1,178,350			(593,285	)
Notes payable-Officers-net		41,824			290,500			177,584			290,500
Due from affiliates-net		520,697			125,911			(929,925	)		(1,724,667	)
CASH FLOWS FROM FINANCING ACTIVITIES		1,128,767			(360,195	)		426,009			(2,027,452	)
NET CASH INCREASE	$	158,817		$	7,438		$	195,699		$	(30,840	)
CASH AT BEGINNING OF PERIOD		48,751			8,611			11,869			46,889
CASH AT END OF PERIOD	$	207,568		$	16,049		$	207,568		$	16,049

See accompanying notes and accountant’s report.

6

SOUTHLAND HEALTH SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Reporting

The consolidated financial statements reflect the activities of Southland Health Services, Inc. and its wholly owned subsidiaries Emergystat, Inc, MedExpress of Mississippi, LLC, Emergystat of Sulligent, Inc, Extended Emergency Medical Services, Inc., Southland Health Services, LLC and Southland Health Services of Georgia, Inc. The financial statements presented are the consolidated financial statements of all entities as of and for the three months and nine months ended September 30, 2007 and 2006, with selected data for the twelve months ended December 31, 2006.

Description of Business Operations

The Company operates its business and markets its services as Southland Health Services d/b/a Emergystat. Southland Health Services, Inc. and its subsidiaries provide emergency and non-emergency medical transportation (ambulance) services in six states. The subsidiaries are Southland Health Services, LLC, Emergystat, Inc., Emergystat of Sulligent, Inc., Med Express of Mississippi, LLC, Extended EMS, Inc., and Southland Health Services of Georgia, Inc. Southland Health Services, Inc. (Southland) operates a medical transportation business with over 900 full and part-time employees and provides over 100,000 medical transports annually. Southland currently serves approximately 200 communities in six states. Southland operates primarily within the southeast region of the United States. The Company intends to develop and expand contractual relationships in current and new markets. The ambulance group operates under the brand name “Emergystat”.

The Company operates in Alabama, Florida, Tennessee, Virginia, Georgia and Mississippi.

Southland’s revenues for these services are primarily derived from fees charged for medical transportation services pursuant to contracts with governmental entities, hospitals, health care facilities, and other health care organizations. Southland’s revenue under these contracts originates from reimbursements under private insurance programs, government programs such as Medicare and Medicaid, reimbursement from a variety of governmental entities, and from fees paid directly by patients utilizing our services.

Cash Equivalents

For purposes of the statement of cash flows, the Company considers all highly liquid investments, with an original maturity of three months or less, to be cash equivalents.

Property and Equipment

Property and Equipment are originally recorded at cost of acquisition. Depreciation is provided using the straight-line method over the estimated useful lives of the assets, which range from three to thirty-nine years.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the period. Actual results could differ from these estimates.

Trade Accounts Receivable

Trade accounts receivable are recorded net of an allowance for expected losses. The allowance is estimated based on historical experience. The Company’s accounts receivable can be classified into five categories of payors – Medicare, Medicaid, governmental entities, private insurance and private pay. Once all collection protocols are met, private pay accounts are sent to collection and written off to the allowance for bad debts. The remainder of the receivables is transferred to private pay once the last appeal-last denial has occurred. Once the collection protocols are met on these accounts as private pay, they are sent to collection and written off.

7

SOUTHLAND HEALTH SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Revenue Recognition

Revenue is recognized at the time of service and is recorded net of provisions for contractual discounts and estimated uncompensated care. Provisions for contractual discounts and estimated uncompensated care as a percentage of gross revenue and gross revenue less contractual discount provisions are as follows for the nine months ended September 30:

	2007		2006
Gross revenue	100	%	100.0	%
Provision for contractual discounts	25.0	%	26.2	%
Provision for estimated uncompensated care	20.0	%	18.2	%
After contractual provisions	54.2	%	55.6	%

Healthcare reimbursement is complex and may involve lengthy delays. Third-party payors are continuing their efforts to control expenditures for healthcare, including proposals to revise reimbursement policies. The Company has from time to time experienced delays in reimbursement from third-party payors. In addition, third-party payors may disallow, in whole or in part, claims for reimbursement based on determinations that certain amounts are not reimbursable under plan coverage, determinations of medical necessity, or the need for additional information. Laws and regulations governing the Medicare and Medicaid programs are very complex and subject to interpretation. As a result, there is a reasonable possibility that recorded estimates will change materially in the short-term. Retroactive adjustments may change the amounts realized from third-party payors and are considered in the recognition of revenue on an estimated basis in the period the related services are rendered. Such amounts are adjusted in future periods, as adjustments become known. To comply with industry reporting and effective with the quarter ended March 31, 2007, the Company began presenting its net revenue on its financial statements, net of allowance for bad debts

The Company also provides services to patients who have no insurance or other third-party payor coverage. In certain circumstances, federal law requires providers to render services to any patient who requires emergency care regardless of their ability to pay.

NOTE 2: CONCENTRATION OF CREDIT RISK

The Company operates in Alabama, Florida, Tennessee, Virginia, Georgia and Mississippi. Over 69% of the Company’s revenues consist of billings to Medicare and Medicaid and approximately 18% of the Company’s billing is to private insurance accounts. As such, the Company feels its overall credit risk is limited to those customers who are private pay and make up approximately 13% of the Company’s overall revenue and therefore is very limited.

The Company maintains several bank accounts to conduct its operations. One or more of these accounts may have exceeded federally insured deposit limits during 2007 and 2006. At December 31, 2006 and September 30, 2007, none of the Company’s bank accounts exceeded such limits.

NOTE 3: PAYROLL TAXES PAYABLE

At December 31, 2006 and September 30, 2007 the Company was in arrears for several quarters of income tax withholding, social security withholding, and the employer’s share of social security. A portion of the arrearage was acquired as part of the acquisition of Emergystat of Sulligent, Inc. by Southland Health Services, Inc in 2004. In 2007, the overall outstanding payable to the IRS increased by approximately $2.0 million from the 12/31/06 balance. On September 24, 2007 and September 27, 2007 the Company received notice of levy from the IRS on its wholly owned subsidiary, Emergystat of Sulligent, Inc. as well as notice of levy on the Company, as nominee of its subsidiary (see Note 15: Subsequent Events) for unpaid and past due payroll taxes. As a result of these levies, on October 4, 2007 the Company voluntarily placed its wholly owned subsidiary, Emergystat of Sulligent, Inc., into Chapter 11 bankruptcy protection under the US Federal Bankruptcy Laws in the Bankruptcy Court of the Eastern District of Tennessee. The Company feels the levies placed on the parent were improper and overextending. The Company was notified by the US Justice Department that all levies have been released by the IRS as of November 7, 2007. At September, 30, 2007 the Company’s wholly owned subsidiary, Medexpress of MS had past due federal payroll taxes of approximately $1.0 million. The Company is currently in negotiations to obtain certain debt instruments which would allow the Company to satisfy it past due payroll tax obligations. If the Company is unable to obtain such financing, it may be forced to seek for itself or for one or more of its wholly owned subsidiaries Bankruptcy Protection under the US Federal Bankruptcy Laws or sell material assets.

8

SOUTHLAND HEALTH SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 4: NOTES PAYABLE

Long-term debt consists of various notes with interest rates ranging from 6% to 10% secured by ambulances, and emergency medical equipment.

Notes Payable Consist of the following at September 30, 2007 and December 31, 2006:

	September 30, 2007			December 31, 2006
Ambulance financing	$	1,858,669		$	1,271,681
Acquisition debt		564,587			494,612
A/R Financing		1,898,551			1,245,908
All other debt		728,629			551,045
Total		5,050,436			3,563,247
Note payable - Officer		(728,629	)		(551,045	)
Less A/R Financing		(1,898,551	)		(1,245,908	)
Less Current Portion		(1,497,731	)		(741,521	)
Total Long Term Debt	$	925,525		$	1,024,773
Debt maturities are as follows:
2007	$	2,429,110		$	2,989,208
2008		1,647,898			325,210
2009		702,764			157,734
2010		211,874			81,166
2011		58,790			9,929
Total	$	5,050,436		$	3,563,247

Ambulance Financing

The Company has entered into various installment notes for the financing of ambulances used in its operations. All of the ambulance financing has a maturity of three years or less. The proceeds of some of the bank notes were used for working capital but are secured by ambulances. These notes carry various rates of interest from 5% to 10% and various monthly payments. At September 30, 2007, the Company was current on all payments on these notes.

Acquisition Debt

On March 23, 2007 Southland Health Services of Georgia, Inc., a wholly owned subsidiary of Southland Health Services, Inc. purchased the assets of Tri-County Ambulance, LLC. $564,587 of the debt reported in this category as acquisition debt is related to this purchase. The acquisition note is a 5-year convertible note carrying an interest rate of 6.5% and is payable in 5 annual installments of $135,859.

A/R Financing

The A/R Financing –Line of Credit with General Electric Capital Corporation (“GE Capital”) is a $5,000,000 revolving line of credit with a term of two years with a minimum interest rate of 6.5%. The line of credit is secured by the Company’s accounts receivable and other Company assets. See also Note 8-Legal.

9

SOUTHLAND HEALTH SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 5: INCOME TAXES

The Company was formally a wholly owned subsidiary of Bad Toys Holding Company, a Nevada corporation. The Company will file tax returns for 2006 as part of the consolidated group of Bad Toys Holding Company. Bad Toys Holding Company currently has operating loss carry forwards that will offset the net earnings of the Company. Through nine months ending September 30, 2007, the Company recognized tax obligations of $32 million. These obligations are offset on the Company’s balance sheet by amounts due from the parent company and are eliminated in consolidation.

Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred taxes for operating losses that are available to offset future taxable income.

	(unaudited) September 30 2007		(unaudited) September 30 2006
Tax provision	$		$	803,075
Tax Allowance		0
Tax Benefit		526,583		0
Tax Benefit/(Provision) Net	$	526,583	$	803,075

The Company has a current year tax benefit of $526,583, and $803,075 tax provision at September 30, 2007 (unaudited) and 2006 (unaudited), respectively. The 2006 amount is reduced by recognition of tax benefits from years prior to January 1, 2005. At December 31, 2004, the Company had a net operating loss (NOL) carryforward of $966,397. The NOL created a deferred tax asset for the Company which was reduced by a valuation allowance as it could not be determined at December 31, 2004 that the Company would have sufficient profits to utilize the benefit of the NOL.

	(unaudited) September 30 2007		(unaudited) September 30 2006
Deferred Tax Asset	$	544,423	$	0
Valuation Allowance		0		0
Deferred Tax Asset—Net	$	544,423	$	0

NOTE 6: LEASES

Southland Health Services, Inc. leases local stations, communication tower space and equipment for its ambulance services. Most of the Company lease expense is for station locations and these leases are primarily for a period of one year or less. The Company also leased ambulances and other equipment for use in its operations.

Future minimum lease payments are as follows:

Year	Amount
2007	$	185,915
2008	$	743,66
2009	$	46,435
2010	$	7,560

10

SOUTHLAND HEALTH SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 7: NOTES RECEIVABLE

Glenn Crawford, the previous Chief Executive Officer and majority shareholder of the Company issued the following promissory notes to Emergystat, Inc., a subsidiary of the Company: (1) a promissory note dated December 31, 2002 having an original principal balance of $702,568, (2) a promissory note dated December 31, 2003 having an original principal balance of $1,000,000, and (3) a promissory note dated December 31, 2003 issued by Crawford having an original principal balance of $500,000 (each individually, a “Crawford Note,” and collectively, the “Crawford Notes”). In total, Glenn Crawford borrowed, in the aggregate, an original principal amount of $2,202,568 from Emergystat, Inc. (the “Original Borrowings”). Prior to the acquisition of Southland Health Services, Inc. by Bad Toys Holdings, Inc., Glenn Crawford was the majority shareholder of Southland. He was also the majority shareholder of Emergystat, Inc. and Emergystat of Sulligent, Inc. prior to their roll up into Southland. Mr. Crawford controlled all operations and activities as majority shareholder. Mr. Crawford received direct cash loans and directed other payments for his personal benefit. These transactions were recorded as loans to Mr. Crawford in the records of the Company or its subsidiaries. Company auditors provided notes for Mr. Crawford to execute for the benefit of the Company to document his transactions.

The Crawford Notes accrue interest at the prime rate of interest as reported in the Wall Street Journal and are due and payable over the next ten years. Each Crawford Note anticipates that future advances will be made from time to time. Specifically, each Crawford Note provides that “[this note] includes any future funds borrowed by Glenn Crawford. The new debt will be added to the then existing balance.” During the year ended December 31, 2005, the Company increased the outstanding balance of the Crawford Notes upon its discovery that certain amounts classified as “other assets” and “inter-company accounts” on the Company’s balance sheet were actually funds used by Mr. Crawford for his personal use or by non-affiliated entities controlled by Mr. Crawford. This reclassification resulted in an increase of approximately $2,298,935 to the outstanding balance of the Crawford Notes. In addition, under Mr. Crawford’s tenure, the Company had not accrued interest on the Crawford Notes. The Company now has properly accrued interest on each Crawford Note, commencing on the date of issuance of each Crawford Note. Finally, as supplemental information, the Company currently maintains its operations center in Vernon, Alabama. The building is owned by Mr. Crawford. The monthly rent for use of the facility is applied to the Crawford Notes. The monthly rent charged is $10,000. As of December 31, 2006 and September 30, 2007, the aggregate outstanding balances of the Crawford Notes were $5,736,940 and $5,747,175, respectively.

The decrease in Notes Receivable for the period ending September 30, 2007 is primarily related to an adjustment of $1,150,000 related to an offer the Company has made in connection with the Mississippi Medicaid investigation. This investigation and settlement offer is related to years 2001-2004 while Mr. Crawford owned the Company and was not disclosed by Mr. Crawford at the time the Company was purchased by Bad Toys Holdings, Inc. (see Legal Matters) offset by a charge off of $2,500,000 for impairment.

NOTE 8: LEGAL MATTERS

The Company operates in the health care industry, which by its nature is a litigious industry. Consequently, the Company is subject to frequent litigation and, at December 31, 2005, is a defendant in several lawsuits. The Company plans to vigorously defend itself in all matters.

Pacific Capital, L.P. v. Emergystat, Inc., et al.On August 24, 2005, Pacific Capital, LP (“Pacific Capital”) filed a complaint in the Law Court for Sullivan County at Kingsport, Tennessee, Civil Action No. C36478(M) naming eleven defendants, including the Company and Southland Health Services, Inc., Emergystat, Inc. and Southland Health Services, LLC, former subsidiaries of the Company. The complaint seeks to recover $874,437.44 (plus interest, costs, and attorney’s fees) that Pacific Capital alleges it is owed under a Secured Promissory Note issued by Quality Care Ambulance Service, Inc. (“QCA”) and Quality Transportation Services, Inc. (“QTS”) to Pacific Capital in the original principal amount of $1,000,000 (the “Note”). The complaint also seeks an award of punitive damages in the amount of $3 million, or alternatively, an award of treble damages. The primary crux of Pacific Capital’s complaint is centered on its allegations that Southland Health Services, LLC, assumed a debt owed to Pacific Capital by QCA in the amount of $602,389.43 and that Southland Health Services, Inc. and the Company are liable to Pacific Capital under a successor-in-interest and/or merger/consolidation theory. On August 15, 2007, the Pacific Capital settled claims against all Defendants in the above referenced matter for a total sum of seventy-thousand dollars ($70,000).

11

SOUTHLAND HEALTH SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Mississippi Division of Medicaid Investigation.On October 1, 2004, the Attorney General of Mississippi, through its Medicaid Fraud Control Unit, initiated an investigation of the Company’s subsidiary, Med Express of Mississippi, LLC (“Med Express”), regarding various billing issues including Leake County, Mississippi. The period under review is from January 2000 through December 2004, which occurred prior to the acquisition of the Company by Bad Toys Holdings, Inc. The Company is contractually obligated by the county governments to provide Advance Life Support (“ALS”) service in response to all calls it receives in the Mississippi counties in which it operates. Due to this, prior management billed the State of Mississippi at an ALS rate for each transport provided, even if a Basic Life Support (“BLS”) service would have been sufficient under the circumstances. The State of Mississippi has taken the position that it should have been billed at a BLS rate if a BLS transport was provided, regardless of what type of service mandated by the county. Due to these actions, the State of Mississippi has issued an assessment to the Company based on a statistical sample, which the Company believes contains multiple errors. The Company has hired an expert statistician and counsel to review the findings of the State of Mississippi. The consultant and the State are working together to resolve the matters related to the statistical sample. An estimate cannot be made as to the likelihood of an adverse outcome and we cannot give an estimate a range of loss, however, the Company has instructed it counsel to make an offer of settlement in the amount of $1.15 million. The Company has charged this settlement offer to the Note due from Mr. Crawford as this investigation relates to the periods 2001-2004 during the time the Company was owned by Mr. Crawford and was not disclosed by Mr. Crawford at the time he sold the Company to Bad Toys Holdings Inc. (see footnote 7 “Notes Receivable”) The Company continues to treat this matter very seriously and is working with the Attorney General to resolve this matter as expeditiously as possible. In addition, it now bills the State of Mississippi based on the type of service provided and no longer bases its billing on the type of ambulance used to perform the service.

General Electric Capital Corporation v. Bad Toys Holdings, Inc. On or about March 6, 2006, GE Capital filed a complaint against our parent company, Bad Toys Holdings, Inc. in the United States District Court for the District of Maryland, Civil Action No. 06-cv-559. GE Capital’s complaint arose from the Tri-Party Agreement that GE Capital contends obligates Bad Toys to guarantee the performance of Emergystat, Inc., a Mississippi corporation, Emergystat of Sulligent, Inc., an Alabama corporation, Extended Emergency Medical Services, Inc., an Alabama corporation, and Med Express of Mississippi, LLC, a Mississippi limited liability company (collectively, the “Borrower”) under that certain Loan and Security Agreement dated April 30, 2003 by and among the Borrower and GE Capital (the “GE Line of Credit”) and the Borrower’s payment of its obligation to GE Healthcare Financial Services (the “GE Healthcare Obligation”) (the “Guaranty”). The GE Line of Credit is a $5,000,000 revolving line of credit with a term of two years and a minimum interest rate of 6.5% and is secured by the Borrower’s accounts receivables. Bad Toys responded to the complaint and filed affirmative defenses that, if successful, would have denied any relief in favor of GE Capital. On October 12, 2006, GE Capital moved for summary judgment against Bad Toys, seeking at least $2 million on its claims. Both parties exchanged written discovery in the case, and the company deposed GECC. On February 26, 2007, the court heard oral arguments on GE Capital’s motion for summary judgment. After the hearing, the Court granted GE Capital’s motion in part in the amount of $1,745,452 and deferred ruling on the balance of GE Capital’s claims in the approximate amount of $532,000. A final hearing on the matter resulted in a final judgment against Bad Toys Holdings, Inc. granted to GE Capital for a total sum of $1.9 million.

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SOUTHLAND HEALTH SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Bad Toys Holdings, Inc. v. Glenn Crawford, et al. On December 12, 2005, our parent company, Bad Toys Holdings, Inc. filed a complaint in the Law Court for Sullivan County at Kingsport, Tennessee against Glenn Crawford, Joseph Donovan, and Joe Cerone, the former shareholders of the Company, seeking, among other things, a purchase price adjustment under the Capital Stock Purchase Agreement entered into by the parties on February 4, 2005, by which Bad Toys purchased all of the outstanding stock of the Company. The defendants misrepresented to Bad Toys the financial condition of the Company, thereby causing a significant inflation in the agreed upon purchase price. Bad Toys has asserted various claims, and with the litigation, it expects to obtain at least a reduction in the purchase price of the Company. Bad Toys has also demanded compensatory and punitive damages.

In addition to the foregoing proceedings, the Company is involved in various claims and legal actions arising in the ordinary course of business. In the opinion of management, the ultimate disposition of these matters will not have a material adverse effect on our consolidated financial position, results of operations or liquidity.

Other than those proceedings described above, neither the Company nor its property is a party to any known proceeding that a governmental authority is contemplating.

Bankruptcy or Receivership

On October 4, 2007, Emergystat of Sulligent, Inc., (Emergystat) a wholly-owned subsidiary of the Company, filed a voluntary petition under Chapter 11 of the US Bankruptcy Code in the US Bankruptcy Court for the Eastern District of Tennessee, Greeneville Division, Case No. 07-51394. Emergystat is managing its affairs as a debtor in possession. The Company placed this wholly own subsidiary into Chapter 11 to obtain the release of certain levies that had been placed on the subsidiary, as well as the parent as a nominee of the subsidiary, by the IRS for unpaid payroll taxes. The Company feels the levies placed on the parent were improper and overextending. The Company was notified by the US Justice Department that all levies have been released by the IRS as of November 7, 2007.

NOTE 9: SHAREHOLDERS’ EQUITY

The Company had 300,000,000 shares authorized and 28,148,695 shares outstanding as of December 31, 2006 and September 30, 2007.

Preferred Stock

Mr. Lunan currently holds shares of preferred stock in Bad Toys Holdings, Inc. (“Bad Toys”). The Company has approved the issuance of preferred shares withidentical rights, preferences and designations to those preferred shares Mr. Lunan currently holds in Bad Toys.

NOTE 10: EMPLOYEE BENEFITS

The Company maintains a 401(k) Profit Sharing Plan (the “Plan”) that covers all eligible employees who have had at least one year of employment with the company. In accordance with the Plan, the Company may match a percentage of employee contributions determined at the end of each Plan year on a discretionary basis by management of the Company. The Company has not paid any matching or discretionary payments for the periods reported.

NOTE 11: LETTER OF CREDIT

In September 2005, the Company entered into an agreement with BB & T (the bank) of Kingsport, TN whereas the bank issued a letter of credit in the amount of $600,000.00 for the benefit of U. S. Fire Insurance Company of Morristown, NJ as underlying collateral for the Company’s workers compensation policy. This letter of credit is fully supported by a CD in the amount of $600,000.00 which is held by the bank. In the third quarter of 2006, the Company increased this amount by $400,000 at the request of the Insurance Carrier whereas the total amount of the letters of credit and the CD which serves as collateral for the letters of credit is $1,000,000. See also Note 12: Worker Compensation Insurance.

13

SOUTHLAND HEALTH SERVICES, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 12: WORKER COMPENSATION INSURANCE

On June 21, 2006, the Company was issued a policy from U. S. Fire Insurance Company of Morristown, NJ for workers compensation coverage. This policy ran from June 21, 2006 to June 20, 2007 and contains per claim deductible amounts of $350,000.00 with an aggregate stop loss of $1,600,000.00. On June 22, 2006 the Company renewed this policy. This policy is supported by a $1,000,000 Letter of Credit issued by BB & T of Kingsport, TN. The Letter of Credit is fully secured by a CD in the amount of $1,000,000 which is held by BB & T. The Company elected to increase it per claim deductibles after analysis of its past years historical claims in anticipation of lowered annual cost of it workers compensation insurance. Historically, the Company had paid approximately $1.2 million dollars per annum for full workers compensation coverage. The Company believes that under the new plan structure it will realize significant savings. Through September 30, 2007 or 12 months the Company had paid approximately $300,000 in policy administrative cost and approximately $75,000 in actual claim losses. On September 30, 2007, US Fire Insurance Company had reserved an additional $53,000 as possible losses on pending claims for the plan year ending June 2007 and approximately $105,000 reserves for the current year plan, ending June 2008.

The Company renewed the policy on June 21, 2007 with U. S. Fire Insurance Company. The Company was required to supply a new Letter of Credit for the new policy year. As requirements for the renewal the Company provided $100,000 additional cash deposits.

Under this insurance program, we establish reserves, using actuarial estimates, for all losses covered under the policies As such; we believe our estimates have been accurate in the past. We are not aware of anything that would likely cause these estimates to change materially. To the extent our losses exceed our collateral and assets or the limits of our insurance policies; they will have to be funded by us. If we are forced to satisfy losses that exceed our policy limits we may be forced to liquidate certain material assets to satisfy these obligations. This would have a material adverse effect on the Company’s results of operations and financial condition.

NOTE 13: COMMON STOCK

Bad Toys Holdings, Inc., the 100% owner of Southland Health Services, Inc. (the Company) declared a stock dividend of .9825 shares of Southland Health Services, Inc. for each Bad Toys Holdings, Inc. share issued and outstanding as of January 12, 2006. The purpose of this stock dividend was to affect the spin-off of 75% of the Company. In connection with this declaration, Bad Toys Holdings, Inc. authorized 300,000,000 common shares of Southland Health Services, Inc. carrying a par value of $.001, of which 28,148,695 will be outstanding post spin-off. The change became effective January 12, 2006 as directed by the Board of Directors of the Company. The change in the capital structure has been given retroactive effect in the Balance Sheets of the Company. Subsequently, the Company has restated its earnings per share for the un-audited quarterly periods ended March 31, 2006, to calculate those earnings per share, and restated the equity section of the balance sheet for the audited period ended December 31, 2006 and the un-audited period ended September 30, 2006 as if these shares had been outstanding at the beginning of the periods reported.

NOTE 14: MERGERS AND ACQUISITIONS OF CERTAIN ASSETS

Effective March 23, 2007, Southland Health Services of Georgia, a wholly owned subsidiary of Southland Health Services, Inc. acquired certain assets and assumed certain liabilities of Tri County Ambulance Service of Ellijay, GA for $1.0 million dollars in cash and notes. Under the purchase agreement, the former owner of Tri County Ambulance would receive an initial down payment of $.14 million and a five-year convertible note payable in annual installments and carrying the interest rate of 6.5%. The balance of the purchase price is made up of the assumption of certain operating liabilities. The purchase price allocation was finalized during the quarter ended March 31, 2007, and based on estimated fair values, is as follows (in thousands):

Purchase consideration	$	1,000
Allocated to:
Accounts receivable	$	883
Prepaid supplies		25
Property and equipment		278
Identifiable intangible assets		0
Accounts payable and other accrued liabilities		(186	)
Total allocation		1,000
Goodwill	$	0

Property and Equipment is primarily made up of ambulances with a estimated remaining useful life of 3-5 years.

NOTE 15: SUBSEQUENT EVENTS

On October 4, 2007, Emergystat of Sulligent, Inc., a wholly owned subsidiary of Southland Heath Services, Inc., filed a voluntary petition for Chapter 11 bankruptcy protection under the US Federal Bankruptcy Laws in the Bankruptcy Court of the Eastern District of Tennessee. The Company placed this wholly owned subsidiary into Chapter 11 to obtain the release of certain levies that had been placed on the subsidiary, as well as the parent as a nominee of the subsidiary, by the IRS for unpaid payroll taxes. The Company feels the levies placed on the parent were improper and overextending. The Company was notified by the Justice Department that all levies had been released as of November 7, 2007. At the time of the filing Emergystat of Sulligent, Inc, balance sheet information was as follows:

Current Assets	$	843,474
Other Assets-Due from previous owner		5,436,940
Total Assets	$	6,280,414
Due to the IRS	$	9,941,866
Secured AR Facility		220,421	*
Due to Affiliates		3,693,614
Unsecured misc debt		98,169
Retained earnings and shareholder equity		(7,673,646	)
Total Liabilities and shareholder equity	$	6,280,414

* Note: The amount noted as secured AR facility above is the prorated percentage for Emergystat of Sulligent, Inc. of the total amount due to GE based the accounts receivable balances of the borrowers as of September 30, 2007. The total amount due under this secured AR facility by all borrowers is approximately $1.9 million

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Item 2. Management’s Discussion and Analysis or Plan of Operation

General

Southland Health Services, Inc., (“Southland,” “we,” “us,” or the “Company”) a Florida corporation with corporate offices located in Vernon, Alabama and Kingsport, Tennessee, was formed in 2003 to provide health care services including emergency and non-emergency ambulance services. Ambulance services are offered under the trade name “Emergystat.” Effective as of May 2, 2004, the Company acquired 100% of Emergystat, Inc. and Emergystat of Sulligent, Inc., and 100% of Southland Health Services, LLC. Southland’s subsidiaries include Southland Health Services, LLC, Emergystat, Inc., Emergystat of Sulligent, Inc., Med Express of Mississippi, LLC, and Extended EMS, Inc.

Changes in Financial Condition

Results of Operations

Comparison of Quarters Ended September 30, 2007 and September 30, 2006 and Nine Months Ended September 30, 2007 and September 30, 2006.

Revenues. Revenues for the quarter ended September 30, 2007 were $8.5 million, compared to $9.3 million for the quarter ended September 30, 2006, which represents a $.8 million decrease This decrease was attributable to the Company moving out of less profitable geographic areas it serves as well as lower run transport volume in our 911 operations offset by increase revenues associated with the Company’s new Georgia operations. For the nine month period ended September 30, 2007 net revenues were $25.4 million as compared to $26.9 million in net revenues recorded in the nine month period ended September 30, 2006.

Operating Costs.Operating cost for the quarter ended September 30, 2007 were $7.9 million, compared to $8.9 million for the quarter ended September 30, 2006, which represents a $1.0 million, decrease. For the nine month period ended September 30, 2007, operating costs were $23.2 million as compared to operating cost of $24.1 million for the nine month period ended September 30, 2006. This decrease was due principally to reduction in payroll associated with the company’s ongoing efforts to improve on efficiencies and control overtime.

Other Income/(Expense).Other Expense for the quarter ended September 30, 2007 was ($2.7) million compared to Other Income of $.02 million for the quarter ended September 30, 2006. The increase in expense is primarily attributable to the higher cost of funds associated with the company’s borrowings. As well as a $2.5 million impairment charge the Company took in the quarter on the note receivable from the previous owner. (see Note 7, Note Receivable) For the nine month period ended September 30, 2007, other income/(expense) was ($3.7 )million as compared to other income/(expense) of ($.1) million for the nine month period ended September 30, 2006.

Net Income.Net Income decreased to ($1.6) million for the quarter ended September 30, 2007 to a net loss of ($1.4) million, when compared to net earnings of $.28 million for the quarter ended September 30, 2006. The decrease in net income is primarily attributable to the impairment charge as previously described. For the nine month period ended September 30, 2007, net loss was ($1.0) million as compared to net income of $1.8 million for the nine month period ended September 30, 2006.

Liquidity and Capital Resources

Cash and cash equivalents were $.21 million and $.01 million as of September 30, 2007 and September 30, 2006, respectively. The Company requires cash to pay its operating expenses, make capital expenditures and service its debt and other long-term liabilities. The Company’s principal source of funds is from its operations. The Company’s management believes that the Company’s cash on hand and funds generated from operations will be sufficient to fund its ongoing operations, but will not be sufficient to retire the full amount of the obligations asserted to be owing to the Internal Revenue Service and General Electric Capital Corporation (“GE Capital”). On September 24, 2007 and September 27, 2007 the Company received notice of levy from the IRS on its wholly owned subsidiary, Emergystat of Sulligent, Inc. as well as notice of levy on the Company, as nominee of its subsidiary (see Note 15: Subsequent Events) for unpaid and past due payroll taxes. As a result of these levies, on October 4, 2007 the Company voluntarily placed its wholly owned subsidiary, Emergystat of Sulligent, Inc., into Chapter 11 bankruptcy protection under the US Federal Bankruptcy Laws in the Bankruptcy Court of the Eastern District of Tennessee. The Company was notified by the US Justice Department that all levies have been released by the IRS as of November 7, 2007. The Company is actively seeking external sources to satisfy and restructure its debt and other long-term liabilities. If successful, the Company will use the proceeds from the line of credit to retire the indebtedness asserted to be owing to the Internal Revenue Service and GE Capital. If the Company is unable to obtain such financing, it may be forced to seek for itself or for one or more of its wholly owned subsidiaries Bankruptcy Protection under the US Federal Bankruptcy Laws. This alternative would have a material adverse effect on the Company’s results of operations and financial condition. Furthermore, although we believe that our currently available working capital will be sufficient to continue our business for at least the next twelve (12) months, should our costs and expenses prove to be greater than we currently anticipate due to the unsuccessful outcome of any of the legal proceedings described in this filing, or should we change our current business plan in a manner that will increase or accelerate our anticipated costs and expenses, such as through the acquisition of new product lines, the depletion of our working capital would be accelerated. As noted above, we are seeking to secure a financing alternative. However, we cannot give any assurance that we will be able to secure the additional cash or working capital we may require to continue our operations. The Company expects to continue its improved cash collections and intense management of collections over the next twelve months. The Company’s plans also include expansion via acquisition of ambulance service companies as well as additional new provider contracts. Effective March 23, 2007, Southland Health Services of Georgia, Inc., a wholly-owned subsidiary of the Company, acquired certain assets and assumed certain liabilities of Tri Country Ambulance Service of Ellijay, Georgia for $1.0 million in cash and promissory notes. As a result of this transaction, the Company acquired approximately $883,000 in accounts receivable, contributing substantially to the increase in accounts receivable seen in the financial statements which are a part of this report. This transaction also increased accounts payable by approximately $186,000.

15

effect on the Company’s results of operations and financial condition. Furthermore, although we believe that our currently available working capital will be sufficient to continue our business for at least the next twelve (12) months, should our costs and expenses prove to be greater than we currently anticipate due to the unsuccessful outcome of any of the legal proceedings described in this filing, or should we change our current business plan in a manner that will increase or accelerate our anticipated costs and expenses, such as through the acquisition of new product lines, the depletion of our working capital would be accelerated. As noted above, we are seeking to secure a $10,000,000 asset-based line of credit. However, we cannot give you any assurance that we will be able to secure the additional cash or working capital we may require to continue our operations.

The Company expects to continue its improved cash collections and intense management of collections over the next twelve months. The Company’s plans also include expansion via acquisition of ambulance service companies as well as additional new provider contracts.

Accounts Receivable. Effective March 23, 2007, Southland Health Services of Georgia, Inc., a wholly-owned subsidiary of the Company, acquired certain assets and assumed certain liabilities of Tri Country Ambulance Service of Ellijay, Georgia for $1.0 million in cash and promissory notes. As a result of this transaction, the Company acquired approximately $883,000 in accounts receivable, contributing substantially to the increase in accounts receivable seen in the financial statements which are a part of this report. This transaction also increased accounts payable by approximately $186,000.

Period ended September 30, 2007 and 2006

Operating Activities..Net cash used by operating activities was $1.9 million for the quarter ended September 30, 2007, compared to cash provided of $.6 million for the quarter ended June 30, 2006. Contributing to the cash used by operating activities during the quarter ended September 30, 2007 was a net loss of $1.4 million.

Investing Activities. Investing activities related to continuing operations provided $1.0 million for the quarter ended September 30, 2007, compared to usage of $.3 million for the quarter ended September 30, 2006. In the quarter ended September 30, 2007, we made capital expenditures of $ .3 million, mainly for ambulances as well as productivity improvements and for system and facility costs.

Financing Activities.In the quarter ended September 30, 2007, financing activities provided $1.1 million of cash comprised of $.6 million in net new borrowings and, $.5 million advances from affiliates. In the quarter ended September 30, 2006, financing activities used $.4 million of cash comprised of $.8 million for reduction in notes payable, and $.1 million advanced to affiliates.

Borrowing Arrangements

Senior Secured Credit Facility. As part of, and as a condition to Bad Toys’ acquisition of the Company, on February 3, 2005, Bad Toys allegedly guaranteed the performance of the Company’s subsidiaries, Emergystat, Inc., a Mississippi corporation, Emergystat of Sulligent, Inc., an Alabama corporation, Extended Emergency Medical Services, Inc., an Alabama corporation, and Med Express of Mississippi, LLC, a Mississippi limited liability company (collectively, the “Borrower”) under that certain Loan and Security Agreement dated April 30, 2003 by and among the Borrower and GE Capital (the “GE Line of Credit”) and the Borrower’s payment of its obligation to GE Healthcare Financial Services (the “GE Healthcare Obligation”) (the “Guaranty”). The GE Line of Credit is a $5,000,000 revolving line of credit with a term of two years and a minimum interest rate of 6.5% and is secured by the Borrower’s accounts receivables. The Borrower allegedly defaulted under both the GE Line of Credit and the GE Healthcare Obligation. As a result of the alleged default, GE Capital has filed suit against Bad Toys seeking enforcement of its alleged guaranty of these obligations (for a further discussion, please see the section entitled “Part II, Item 1, Legal Proceedings”). On or about February 26, 2007, the Court granted GE Capital’s Motion for Summary Judgment against Bad Toys in part in the amount of $1,745,452 and deferred ruling on the balance of GE Capital’s claims in the approximate amount of $532,000. The final hearing on the matter is scheduled for June 11, 2007, resulted in a judgment granted to be against Bad Toys Holdings in the amount of $1.9 million.

Since the GE Line of Credit was in forbearance at the time Bad Toys acquired Southland Health Services, Inc. in 2004, Bad Toys had no borrowing capability under the GE Line of Credit in 2006. While Bad Toys is disappointed in the outcome of the litigation, it continues to believe that the short term impact on its cash flow will be positive as it currently does not have the obligation to pay the excessive forbearance fees, legal fees, penalties, and interest it paid during fiscal 2005.

As previously stated, the Company is in negotiations and if successful will enter into a new asset-based line of credit, whose proceeds in part will be used to satisfy the judgment obtained by GE Capital.

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Liquidity

On September 24, 2007 and September 27, 2007 the Company received notice of levy from the IRS on its wholly owned subsidiary, Emergystat of Sulligent, Inc. as well as notice of levy on the Company, as nominee of its subsidiary (see Note 15: Subsequent Events) for unpaid and past due payroll taxes. As a result of these levies, on October 4, 2007 the Company voluntarily placed its wholly owned subsidiary, Emergystat of Sulligent, Inc., into Chapter 11 bankruptcy protection under the US Federal Bankruptcy Laws in the Bankruptcy Court of the Eastern District of Tennessee. The Company was notified by the US Justice Department that all levies have been released by the IRS as of November 7, 2007. The Company is actively seeking external sources to satisfy and restructure its debt and other long-term liabilities. If successful, the Company will use the proceeds from the line of credit to retire the indebtedness asserted to be owing to the Internal Revenue Service and GE Capital. If the Company is unable to obtain such financing, it may be forced to seek for itself or for one or more of its wholly owned subsidiaries Bankruptcy Protection under the US Federal Bankruptcy Laws. This alternative would have a material adverse effect on the Company’s results of operations and financial condition. Furthermore, although we believe that our currently available working capital will be sufficient to continue our business for at least the next twelve (12) months, should our costs and expenses prove to be greater than we currently anticipate due to the unsuccessful outcome of any of the legal proceedings described in this filing, or should we change our current business plan in a manner that will increase or accelerate our anticipated costs and expenses, such as through the acquisition of new product lines, the depletion of our working capital would be accelerated. As noted above, we are seeking to secure a financing alternative. However, we cannot give any assurance that we will be able to secure the additional cash or working capital we may require to continue our operations. The Company expects to continue its improved cash collections and intense management of collections over the next twelve months.

Liquidity and Proposed Plans for the Next Twelve Months

The Company’s management believes that the Company’s cash on hand and funds generated from operations will be sufficient to fund its ongoing operations throughout the upcoming year, but will not be sufficient to retire its outstanding obligations to the Internal Revenue Service and GE Capital. On September 24, 2007 and September 27, 2007 the Company received notice of levy from the IRS on its wholly owned subsidiary, Emergystat of Sulligent, Inc. as well as notice of levy on the Company, as nominee of its subsidiary (see Note 15: Subsequent Events) for unpaid and past due payroll taxes. As a result of these levies, on October 4, 2007 the Company voluntarily placed its wholly owned subsidiary, Emergystat of Sulligent, Inc., into Chapter 11 bankruptcy protection under the US Federal Bankruptcy Laws in the Bankruptcy Court of the Eastern District of Tennessee. The Company was notified by the US Justice Department that all levies have been released by the IRS as of November 7, 2007. The Company is actively seeking external sources to satisfy and restructure its debt and other long-term liabilities. If successful, the Company will use the proceeds from the line of credit to retire the indebtedness asserted to be owing to the Internal Revenue Service and GE Capital. If the Company is unable to obtain such financing, it may be forced to seek for itself or for one or more of its wholly owned subsidiaries Bankruptcy Protection under the US Federal Bankruptcy Laws. This alternative would have a material adverse effect on the Company’s results of operations and financial condition. Furthermore, although we believe that our currently available working capital will be sufficient to continue our business for at least the next twelve (12) months, should our costs and expenses prove to be greater than we currently anticipate due to the unsuccessful outcome of any of the legal proceedings described in this filing, or should we change our current business plan in a manner that will increase or accelerate our anticipated costs and expenses, such as through the acquisition of new product lines, the depletion of our working capital would be accelerated. As noted above, we are seeking to secure a financing alternative. However, we cannot give any assurance that we will be able to secure the additional cash or working capital we may require to continue our operations. The Company expects to continue its improved cash collections and intense management of collections over the next twelve months.

The Company expects to identify from time to time, as part of its growth strategy, potential acquisition candidates and, depending on the size of the acquisition require additional capital to be provided either through increases in an asset-based line of credit, various structured financing, or equity raises.

Contractual Obligations and Commercial Commitments

The following table describes our commitments to settle contractual obligations as of September 30, 2007:

	Payments due by period (Amounts stated in thousands)
	Total		Less than 1 year		1-3 years		3-5 years	More than 5 years
Notes payable-current	$	3,195	$	3,195
Long-term debt		1,047				1,047
Operating lease Obligations		1,532		692		360	240	240
Capital lease Obligations
Purchase obligations
Other Long-Term Liabilities
Total contractual obligations	$	5,774	$	3,887	$	1,407	240	240

17

Critical Accounting Policies and Estimates

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make significant estimates and judgments which affect the reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We evaluate our estimates, including those related to contingencies, on an ongoing basis. We base our estimates on historical experience and on various other assumptions 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 which are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Stock Based Compensation

In December 2004, the FASB issued SFAS No.123 (revised 2004), “Share-Based Payment.” SFAS 123(R) will provide investors and other users of financial statements with more complete and neutral financial information by requiring that the compensation cost relating to share-based payment transactions be recognized in financial statements. That cost will be measured based on the fair value of the equity or liability instruments issued. SFAS 123(R) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. SFAS 123(R) replaces FASB Statement No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees.” SFAS 123, as originally issued in 1995, established as preferable a fair-value-based method of accounting for share-based payment transactions with employees. However, that statement permitted entities the option of continuing to apply the guidance in Opinion 25, as long as the footnotes to financial statements disclosed what net income would have been had the preferable fair-value-based method been used. Public entities (other than those filing as small business issuers) will be required to apply SFAS 123(R) as of the first interim or annual reporting period that begins after June 15, 2005. The Company has evaluated the impact of the adoption of SFAS 123(R), and does not believe that it will impact the Company’s overall results of operations and financial position.

Impairment or Disposal of Long-Lived Assets. In August 2001, the FASB issued Statement No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). SFAS 144 clarifies the accounting for the impairment of long-lived assets and for long-lived assets to be disposed of, including the disposal of business segments and major lines of business. We adopted the new standard on January 1, 2002; the adoption did not have an effect on our consolidated financial statements.

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In May 2003 the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument which is within its scope as a liability (or an asset in some circumstances). SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after December 15, 2003. The adoption of this Statement is not expected to have a material effect on our financial statements.

Claims Liability and Professional Liability Reserves

We are self-insured up to certain limits for costs associated with workers’ compensation claims, automobile, professional liability claims and general business liabilities. Reserves are established for estimates of the loss that we will ultimately incur on claims that have been reported but not paid and claims that have been incurred but not reported. The reserves for workers’ compensation claims are based upon actuarial valuations that are prepared by our outside actuaries. The actuarial valuations consider a number of factors, including historical claim payment patterns, changes in case reserves and the assumed rate of increase in healthcare. Our reserves for automobile, professional liability claims and general business claims are based on management’s review of historical experience and recent trends. Historical experience and recent trends are the most significant factors in the determination of these reserves. We believe the use of our methods to account for these reserves provides a consistent and effective way to measure these subjective accruals. Our estimates and assumptions have been accurate in the past and our method of determining our estimates and assumptions has been applied consistently, except for a change in June 2005 when we converted to a self-insured style program for workers’ compensation insurance. However, given the magnitude of the claims involved and the length of time until the ultimate cost is known, the use of any estimation technique in this area is inherently sensitive. Accordingly, our recorded reserves could differ from our ultimate costs related to these claims due to changes in our accident reporting, claims payment and settlement practices or claims reserve practices, as well as differences between assumed and future cost increases.

Trade and Other Accounts Receivable

Our internal billing operations have primary responsibility for billing and collecting our accounts receivable. We utilize various processes and procedures in our collection efforts depending on the payor classification; these efforts include monthly statements, written collection notices and telephonic follow-up procedures for certain accounts. We write off amounts not collected through our internal collection efforts to our uncompensated care allowance, and send these receivables to third party collection agencies for further follow-up collection efforts. Accounts are written off when they are classified as “sent” or “to be sent” to collection agencies. We acquired software and expanded our internal collection efforts during the fourth quarter of 2006 and plan to continue to do so in 2007.

As we discuss further in our “Revenue Recognition” policy below, we determine our allowances for contractual discounts and uncompensated care based on our information systems and financial models, including payor reimbursement schedules, historical write-off experience and other economic data. We record our patient-related accounts receivable net of estimated allowances for contractual discounts and uncompensated care in the period in which we perform our services. We record gross fee-for-service revenue and related receivables based upon established fee schedule prices. We reduce our recorded revenue and receivables for estimated discounts to patients covered by contractual insurance arrangements, and reduce these further by our estimate of uncollectible accounts. We estimate our allowances for contractual discounts monthly utilizing our billing system information, and we write off applicable allowances when we receive net payments from third parties.

Our provision and allowance for contractual discounts and uncompensated care is based primarily on our historical collection and write-off activity. We believe the use of our methods to account for these allowances provides a consistent and effective way to measure these subjective accruals, and, to date, our estimates and assumptions have been accurate. However, given the complexity in collecting receivables from governmental agencies and private insurance carriers, the use of any estimation technique in this area is inherently sensitive. Accordingly, our accounts receivable could differ from the amounts we ultimately collect.

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The Company operates in Alabama, Florida, Tennessee, Virginia, Georgia and Mississippi. Over 60% of the Company��s revenue consists of billings to Medicare and Medicaid and approximately 23% of the Company’s billings are to private insurance accounts. As such, management believes the Company’s overall credit risk is low and is limited to those customers who are uninsured. Our uninsured patients, or uncompensated care, make up less than 17% of the Company’s overall revenue.

Southland Health Services, Inc

Days Sales

	Sept 30, 2007	Sept 30, 2006
Accounts Receivable	12,277,581	10,497,764
Sales for the period	31,510,374	32,844,593
Avg days sales	115,423	120,310
Days Sales	106	87

Revenue Recognition

A significant portion of our revenue is derived from Medicare, Medicaid, and private insurance payors that receive discounts from our standard charges (referred to as contractual provisions). Additionally, we are also subject to collection risk for services provided to uninsured patients or for the deductible or co-pay portion of services for insured patients (referred to as uncompensated care). Medical transportation and related service fees are recognized when services are provided and are recorded net of contractual discounts applicable to Medicare, Medicaid and other third party payors. Due to the complex healthcare reimbursement system and the length of the collection cycle with respect to medical transportation and related services fees, it is necessary to estimate the amount of these discounts at the time revenue is recognized. The collectibility of these fees is analyzed using historical collection experience. Using collection data resident in our billing system, we estimate the percentage of gross medical transportation and related services fees that will not be collected and record provisions for both discounts and doubtful accounts. The portion of the provision allocated to discounts is based on historical write-offs relating to such discounts as a percentage of the related gross revenue recognized. The ratio is then applied to current period gross medical transportation and related services fees to determine the portion of the provision that will be recorded as a reduction of revenue. The remaining amount is recorded as a provision for doubtful accounts. If the historical data used to calculate these estimates does not properly reflect the ultimate collectibility of the current revenue stream, revenue could be overstated or understated. For example, third party payors are continuing their efforts to control expenditures for healthcare and may disallow, in whole or in part, claims for reimbursement based on determinations that certain amounts are not reimbursable under plan coverage, were for services provided that were not determined medically necessary, or insufficient supporting information was provided. In addition, multiple payors with different requirements can be involved with each claim. Discounts applicable to Medicare, Medicaid, and other third-party payors related to continuing operations, which are reflected as a reduction of medical transportation and related services revenue, totaled $3.2 million and $3.0 million as of September 30, 2007 and September 30, 2006, respectively. As a percentage of gross medical transportation and related services revenue, contractual discounts were 25.4% and 26.2%, for the quarters ended September 30, 2007 and September 30, 2006, respectively. To comply with industry reporting and effective with the quarter ended March 31, 2007, the Company began presenting its net revenue on its financial statements, net of allowance for bad debts.

Our estimates and assumptions have been accurate in the past. However, due to the inherent complexity of these calculations, including the interpretation of governmental regulations and private insurance contract provisions, our actual revenues and net income and our accounts receivable, could vary from the amounts reported.

Income Tax Valuation Allowance

The Company has net deferred tax assets resulting from net operating losses that will reduce taxable income in future periods. Statement of Financial Accounting Standards No. 109 “Accounting for Income Taxes” requires that a valuation allowance be established when it is “more likely than not” that all or a portion of net deferred tax assets will not be realized. A review of all

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available positive and negative evidence needs to be considered, including a company’s recent financial performance, the market environment in which a company operates, tax planning strategies and the length of the NOL carry-forward periods. Furthermore, the weight given to the potential effect of negative and positive evidence should be commensurate with the extent to which it can be objectively verified. We routinely monitor the reliability of our deferred tax assets and liabilities. Changes in management’s assessment of recoverability could result in additions to the valuation allowance, and such additions could be significant.

Contingencies

The Company is involved in a number of lawsuits as described in “Legal Proceedings.” Management may not be able to make a reasonable estimate of liabilities that result from the final resolution of certain contingencies disclosed. Further assessments of the potential liability will be made as additional information becomes available. Management currently does not believe that these matters will have a material adverse effect on our consolidated financial position. It is possible, however, that results of operations could be materially affected by changes in management’s assumptions relating to these matters or the actual final resolution of these proceedings.

Intangible Assets

Definite life intangible assets are subject to impairment reviews when evidence or triggering events suggest that impairment may have occurred. Should such triggering events occur that cause us to review our definite life intangibles and the fair value of our definite life intangible asset proves to be less than our unamortized carrying amount, we would take a charge to earnings for the decline. Should factors affecting the value of our definite life intangibles change significantly, such as declining contract retention rates or reduced contractual cash flows, we may need to record an impairment charge in amounts that are significant to our financial statements.

Goodwill

Goodwill is not amortized and is required to be tested annually for impairment or more frequently if changes in circumstances, such as an adverse change to our business environment, cause us to believe that goodwill may be impaired. Goodwill is allocated at the reporting unit level. If the fair value of the reporting unit falls below the book value of the reporting unit at an impairment assessment date, an impairment charge would be recorded. Should our business environment or other factors change, our goodwill may become impaired and may result in charges to our income statements that are material.

Should our business environment or other factors change, our goodwill may become impaired and may result in charges to our income statements that are material.

Off Balance Sheet Arrangements

LETTER OF CREDIT

In September 2006, the Company entered into an agreement with BB & T (the bank) of Kingsport, TN whereas the bank issued a letter of credit in the amount of $1,000,000.00 for the benefit of U.S Fire Insurance Company of Morristown, NJ as underlying collateral for the Company’s workers compensation policy. This letter of credit is fully supported by a CD in the amount of $1,000,000.00 which is held by the bank.

WORKER’S COMPENSATION INSURANCE

On June 21, 2006, the Company was issued a policy from U. S Fire Insurance Company of Morristown, NJ for workers compensation coverage. This policy is to run from June 21, 2006 to June 20, 2007 and contains per claim deductible amounts of $350,000 with an aggregate stop loss of $1,600,000. This policy is supported by a $1,000,000 Letter of Credit issued by BB & T of Kingsport, TN. The Letter of Credit is fully secured by a CD in the amount of $1,000,000 which is held by BB & T. The Company elected to increase its per claim deductibles after analysis of its past years historical claims in anticipation of lowered annual cost of its workers compensation insurance. Historically, the Company had paid approximately $1.2 million dollars per annum for full workers compensation coverage. (See Note 12: Workers Compensation Insurance)

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Under this insurance program, we establish reserves, using actuarial estimates, for all losses covered under the policies As such, we believe our estimates have been accurate in the past. We are not aware of anything that would likely cause these estimates to change materially. To the extent our losses exceed our collateral and assets or the limits of our insurance policies, they will have to be funded by us. If we are forced to satisfy losses that exceed our policy limits we may be forced to liquidate certain material assets to satisfy these obligations. This would have a material adverse effect on the Company’s results of operations and financial condition.

Preferred Stock

Mr. Lunan currently holds shares of preferred stock in Bad Toys Holdings, Inc. (“Bad Toys”). The Company has approved the issuance of preferred shares withidentical rights, preferences and designations to those preferred shares Mr. Lunan currently holds in Bad Toys.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Commodity Price Risk

We are exposed to an increase in the price of refined fuels, principally diesel fuel. We use approximately 50,000 gallons of diesel fuel per month, or 600,000 gallons per year. An increase or decrease in diesel fuel costs will affect our operating expenses. For comparative purposes, for every $0.50 per gallon increase, our operating costs per year will increase by approximately $300,000 per year based on our current fuel consumption. In order to offset the rising costs of fuel, the Company is in negotiations with certain counties in which it operates to help subsidies the fuel costs as well developing efficiency plans with crews and dispatch for travel routes and use of vehicles.

Item 4. Controls and Procedures

Developing Disclosure Controls and Procedures

The Company’s Chief Executive and Chief Financial Officer is devoting effort to continue to develop and implement a system of disclosure controls and procedures to ensure that information required to be disclosed in our reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management and its officers, as appropriate, to allow timely decisions regarding required disclosure.

Management’s Conclusions as to Effectiveness of Disclosure Controls and Procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the fiscal period ending March 31, 2007 covered by this Quarterly Report on Form 10-Q. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were not effective as required under Rules 13a-15(e) and 15d-15(e) under the Exchange Act. This conclusion by the Company’s Chief Executive Officer and Chief Financial Officer does not relate to reporting periods after March 31, 2007.

The Company has limited working capital and has maintained minimal staffing in the financial and administrative areas. This limits the overall checks and balances in the system of financial controls.

Changes in Internal Controls over Financial Reporting

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, in order to move toward establishing an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes. During the first quarter of fiscal year 2007, there have been no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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Inherent Limitations of the Effectiveness of Internal Control

A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the internal control system are met. Because of the inherent limitations of any internal control system, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Pacific Capital, L.P. v. Emergystat, Inc., et al.On August 24, 2005, Pacific Capital, LP (“Pacific Capital”) filed a complaint in the Law Court for Sullivan County at Kingsport, Tennessee, Civil Action No. C36478(M) naming eleven defendants, including the Company and Southland Health Services, Inc., Emergystat, Inc. and Southland Health Services, LLC, former subsidiaries of the Company. The complaint seeks to recover $874,437.44 (plus interest, costs, and attorney’s fees) that Pacific Capital alleges it is owed under a Secured Promissory Note issued by Quality Care Ambulance Service, Inc. (“QCA”) and Quality Transportation Services, Inc. (“QTS”) to Pacific Capital in the original principal amount of $1,000,000 (the “Note”). The complaint also seeks an award of punitive damages in the amount of $3 million, or alternatively, an award of treble damages. The primary crux of Pacific Capital’s complaint is centered on its allegations that Southland Health Services, LLC, assumed a debt owed to Pacific Capital by QCA in the amount of $602,389.43 and that Southland Health Services, Inc. and the Company are liable to Pacific Capital under a successor-in-interest and/or merger/consolidation theory. On August 15, 2007, the Pacific Capital settled claims against all Defendants in the above referenced matter for a total sum of seventy-thousand dollars ($70,000).

Mississippi Division of Medicaid Investigation.On October 1, 2004, the Attorney General of Mississippi, through its Medicaid Fraud Control Unit, initiated an investigation of the Company’s subsidiary, Med Express of Mississippi, LLC (“Med Express”), regarding various billing issues including Leake County, Mississippi. The period under review is from January 2000 through December 2004, which occurred prior to the acquisition of the Company by Bad Toys Holdings, Inc. The Company is contractually obligated by the county governments to provide Advance Life Support (“ALS”) service in response to all calls it receives in the Mississippi counties in which it operates. Due to this, prior management billed the State of Mississippi at an ALS rate for each transport provided, even if a Basic Life Support (“BLS”) service would have been sufficient under the circumstances. The State of Mississippi has taken the position that it should have been billed at a BLS rate if a BLS transport was provided, regardless of what type of service mandated by the county. Due to these actions, the State of Mississippi has issued an assessment to the Company based on a statistical sample, which the Company believes contains multiple errors. The Company has hired an expert statistician and counsel to review the findings of the State of Mississippi. The consultant and the State are working together to resolve the matters related to the statistical sample. An estimate cannot be made as to the likelihood of an adverse outcome and we cannot give an estimate a range of loss, however, the Company has instructed it counsel to make an offer of settlement in the amount of $1.15 million. The Company has charged this settlement offer to the Note due from Mr. Crawford as this investigation relates to the periods 2001-2004 during the time the Company was owned by Mr. Crawford and was not disclosed by Mr. Crawford at the time he sold the Company to Bad Toys Holdings Inc. (see footnote 7 “Notes Receivable”) The Company continues to treat this matter very seriously and is working with the Attorney General to resolve this matter as expeditiously as possible. In addition, it now bills the State of Mississippi based on the type of service provided and no longer bases its billing on the type of ambulance used to perform the service.

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General Electric Capital Corporation v. Bad Toys Holdings, Inc. On or about March 6, 2006, GE Capital filed a complaint against our parent company, Bad Toys Holdings, Inc. in the United States District Court for the District of Maryland, Civil Action No. 06-cv-559. GE Capital’s complaint arose from the Tri-Party Agreement that GE Capital contends obligates Bad Toys to guarantee the performance of Emergystat, Inc., a Mississippi corporation, Emergystat of Sulligent, Inc., an Alabama corporation, Extended Emergency Medical Services, Inc., an Alabama corporation, and Med Express of Mississippi, LLC, a Mississippi limited liability company (collectively, the “Borrower”) under that certain Loan and Security Agreement dated April 30, 2003 by and among the Borrower and GE Capital (the “GE Line of Credit”) and the Borrower’s payment of its obligation to GE Healthcare Financial Services (the “GE Healthcare Obligation”) (the “Guaranty”). The GE Line of Credit is a $5,000,000 revolving line of credit with a term of two years and a minimum interest rate of 6.5% and is secured by the Borrower’s accounts receivables. Bad Toys responded to the complaint and filed affirmative defenses that, if successful, would have denied any relief in favor of GE Capital. On October 12, 2006, GE Capital moved for summary judgment against Bad Toys, seeking at least $2 million on its claims. Both parties exchanged written discovery in the case, and the company deposed GECC. On February 26, 2007, the court heard oral arguments on GE Capital’s motion for summary judgment. After the hearing, the Court granted GE Capital’s motion in part in the amount of $1,745,452 and deferred ruling on the balance of GE Capital’s claims in the approximate amount of $532,000. A final hearing on the matter resulted in a final judgment against Bad Toys Holdings, Inc. granted to GE Capital for a total sum of $1.9 million.

Bad Toys Holdings, Inc. v. Glenn Crawford, et al. On December 12, 2005, Bad Toys Holdings, Inc., which formerly owned the majority of the stock of the Company, filed a complaint in the Law Court for Sullivan County at Kingsport, Tennessee against Glenn Crawford, Joseph Donovan, and Joe Cerone, the former shareholders of the Company, seeking, among other things, a purchase price adjustment under the Capital Stock Purchase Agreement entered into by the parties on December 26, 2004, by which Bad Toys purchased the outstanding stock of the Company. The defendants misrepresented to Bad Toys the financial condition of the Company, thereby causing a significant inflation in the agreed upon purchase price. Bad Toys has asserted various claims, and with the litigation, it expects to obtain at least a reduction in the purchase price of the Company. Bad Toys has also demanded compensatory and punitive damages. Defendant Joseph Cerone was voluntarily dismissed from the case ofPacific Capital, L.P. v. Emergystat, Inc., et al.; therefore, his motion to consolidate thePacific Capital case with this case is now moot. Defendant Cerone’s bankruptcy filing has put an automatic stay on further proceedings in this matter.

In addition to the matters described above, the Internal Revenue Service assessed Emergystat of Sulligent, Inc., our subsidiary, with a deficiency of approximately $2,800,000, inclusive of penalties and interest, for the entity’s failure to collect and remit employment taxes for the tax periods ended December 31, 2005 and March 31, 2006. On July 5, 2006, the IRS sent Sulligent a Notice of Intent to Levy in connection with the assessment. Shortly thereafter, Sulligent filed a Collection Due Process request in response to the proposed levy. On October 19, 2006, the IRS issued its Notice of Determination Concerning Collection Action(s) under § 6320 and/or 6330 in response to Sulligent’s Collection Due Process Request. Pursuant to the notice, the IRS advised Sulligent that it would not be eligible for collection alternatives and that the IRS could proceed to levy against Sulligent’s assets. On November 20 2006, the period under which Sulligent could request a review of the IRS’s collection actions expired. As such, the IRS also may levy Sulligent’s assets to satisfy the above-described tax deficiencies.

Other than those proceedings described above, neither the Company nor our property is a party to any known proceeding that a governmental authority is contemplating.

Other than as described above, this disclosure does not cover levies or other administrative actions taken by the United States Internal Revenue Service or state departments of revenue.

Bankruptcy or Receivership

On October 4, 2007, Emergystat of Sulligent, Inc., (Emergystat) a wholly-owned subsidiary of the Company, filed a voluntary petition under Chapter 11 of the US Bankruptcy Code in the US Bankruptcy Court for the Eastern District of Tennessee, Greeneville Division, Case No. 07-51394. Emergystat is managing its affairs as a debtor in possession. The Company placed this wholly own subsidiary into Chapter 11 to obtain the release of certain levies that had been placed on the subsidiary, as well as the parent as a nominee of the subsidiary, by the IRS for unpaid payroll taxes. The Company feels the levies placed on the parent were improper and overextending. The Company was notified by the US Justice Department that all levies have been released by the IRS as of November 7, 2007.

Item 1A. Risk Factors

An investment in our common shares involves a high degree of risk and is subject to many uncertainties. These risks and uncertainties may adversely affect our business, operating results and financial condition. In order to attain an appreciation for these risks and uncertainties, investors should read the risk factors included in our annual report on Form 10-K, filed with the United States Securities and Exchange Commission on April 17, 2007 (the “Annual Report”), in their entirety and consider all of the information and advisements contained therein. There have been no material changes to the risk factors disclosed in our Annual Report.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

Other than sales previously reported, there were no unregistered sales of equity securities during the fiscal quarter ended March 31, 2007.

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Issuer Purchases of Equity Securities

The Company did not repurchase any equity securities during the fiscal quarter ended March 31, 2007.

Item 3. Defaults Upon Senior Securities

Other than as described in the section of this filing titled “Legal Proceedings,” there have been no material defaults in the paying of interest or principal.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits

Exhibits
*2.2	Form of Common Stock Exchange Agreement dated May 2, 2004 by and among Southland Health Services, Inc. and the shareholders of Emergystat, Inc. and Emergystat of Sulligent, Inc.
*2.3	Form of Asset Purchase Agreement dated May 2, 2004 by and among Southland Health Services, LLC and Quality Care Ambulance Services, Inc.
*2.1	Form of Contribution and Stock Agreement dated May 2, 2004 by and among Southland Health Services, Inc. and Roy Joseph Cerone, as sole member of Southland Health Services, LLC.
*2.4	Agreement of Merger and Plan of Reorganization dated May 24, 2006 by and among Southland Health Services, Inc., a Delaware corporation and Southland Health Services, Inc., a Florida corporation.
*3.1	Certificate of Incorporation of Southland Health Services, Inc.
*3.2	Articles of Incorporation of Southland Health Services, Inc.
*3.3	By-Laws of Southland Health Services, Inc.
**10.1	Loan and Security Agreement dated April 30, 2003 by and between Emergystat, Inc., Emergystat of Sulligent, Inc., Extended Emergency Medical Services, Inc. Med Express of Mississippi, LLC, and General Electric Capital Corporation, Inc.
*10.2	Form of Tri Party Agreement dated February 3, 2005 by and among Emergystat, Inc., Emergystat of Sulligent, Inc., Extended Emergency Medical Services, Inc. Med Express of Mississippi, LLC, Bad Toys Holdings, Inc. and General Electric Capital Corporation, Inc.
*10.3	Form of Restructuring Agreement dated March 18, 2005 by and among Emergystat, Inc., Emergystat of Sulligent, Inc., Extended Emergency Medical Services, Inc. Med Express of Mississippi, LLC, Bad Toys Holdings, Inc. and General Electric Capital Corporation, Inc.
*10.4	Form of Amendment No. 1 to Restructuring Agreement dated April 29, 2005 by and among Emgerystat, Inc., Emergystat of Sulligent, Inc., Extended Emergency Medical Services, Inc. Med Express of Mississippi, LLC, Bad Toys Holdings, Inc. and General Electric Capital Corporation, Inc.
*10.5	Form of Forbearance Agreement dated May 31, 2005 by and among Emergystat, Inc., Emergystat of Sulligent, Inc., Extended Emergency Medical Services, Inc. Med Express of Mississippi, LLC, Bad Toys Holdings, Inc. and General Electric Capital Corporation, Inc.
*10.6	Form of Second Forbearance Agreement dated July 15, 2005 by and among Emergystat, Inc., Emergystat of Sulligent, Inc., Extended Emergency Medical Services, Inc. Med Express of Mississippi, LLC, Bad Toys Holdings, Inc. and General Electric Capital Corporation, Inc.
*10.7	Form of Indemnification Agreement dated July 15, 2005 by and among Emergystat, Inc., Emergystat of Sulligent, Inc., Extended Emergency Medical Services, Inc. Med Express of Mississippi, LLC, Bad Toys Holdings, Inc. and General Electric Capital Corporation, Inc.
*10.8	Third Forbearance Agreement dated September 1, 2005 by and among Emergystat, Inc., Emergystat of Sulligent, Inc., Extended Emergency Medical Services, Inc. Med Express of Mississippi, LLC, Bad Toys Holdings, Inc. and General Electric Capital Corporation, Inc.
*10.9	Fourth Forbearance Agreement dated October 1, 2005 by and among Emergystat, Inc., Emergystat of Sulligent, Inc., Extended Emergency Medical Services, Inc. Med Express of Mississippi, LLC, Bad Toys Holdings, Inc. and General Electric Capital Corporation, Inc.
*10.10	Fifth Forbearance Agreement dated November, 2005 by and among Emergystat, Inc., Emergystat of Sulligent, Inc., Extended Emergency Medical Services, Inc. Med Express of Mississippi, LLC, Bad Toys Holdings, Inc. and General Electric Capital Corporation, Inc.
**10.11	Employment Agreement by and between Southland Health Services, Inc. and T. Alan Walls dated July 29, 2004.
**10.12	Promissory note issued by Glenn Crawford to Emergystat, Inc. dated December 31, 2002 in the original principal amount of $702,568.
**10.13	Promissory note issued by Glenn Crawford to Emergystat, Inc. dated December 31, 2003 in the original principal amount of $1,000,000.
**10.14	Promissory note issued by Glenn Crawford to Emergystat, Inc. dated December 31, 2003 in the original principal amount of $500,000.
***10.15	Interest Bearing Demand Line of Credit Promissory Note issued by the Company to Larry Lunan on December 28, 2006.
*21.1	List of consolidated entities of the Company.
23.1	Report of Independent Certified Public Accountants.
****31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
****31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and 15d-14(a) as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
****32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
****32.2	Certification of Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
****99.1	Risk Factors incorporated by reference into Part II – Item 1A of this report.

* Previously filed as an Exhibit to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on June 7, 2006

** Previously filed as an Exhibit to the Registration Statement on Amendment No. 1 to Form S-1 filed with the Securities and Exchange Commission on October 13, 2006.

*** Previously filed as an Exhibit to the Registration Statement on Amendment No. 5 to Form S-1 filed with the Securities and Exchange Commission on December 29, 2006.

**** Filed herewith.

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SIGNATURES

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

SOUTHLAND HEALTH SERVICES, INC.
By	/s/ Larry N. Lunan
	Larry N. Lunan
	President and Chief Executive Officer
	November 19, 2007

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