UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549









FORM
10-Q





(Mark
One)


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




For
the Quarterly Period ended March 31, 2008




OR




 ̈
            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 000-52647









PERFORMANCE
HEALTH TECHNOLOGIES, INC.


(Name
of Small Business Issuer in Its Charter)









DELAWARE
            
            841474432(State
      or Other Jurisdiction of
              Incorporation
      or Organization)
            
            (I.R.S.
      Employer
              Identification
      No.)




427
RIVERVIEW PLAZA, TRENTON, NEW JERSEY 08611


(Address
of Principal Executive Offices) (Zip Code)




(609)  656-0800


(Issuer’s Telephone Number, Including
Area Code)




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




Indicate
by check mark whether the registrant is a large accelerates filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in rule 12b-2 of the
Exchange Act.




Large
      accelerated filer  o
              Accelerated
      filer  o
              Smaller
      reporting company  x
              Non-accelerated
      filer  o (Do no check if a smaller reporting company
    )




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




APPLICABLE
ONLY TO CORPORATE ISSUERS




State the
number of shares outstanding of each of the issuer’s classes of common equity,
as of the latest practicable date: As of May 1, 2008, 53,755,697 shares of
common stock.












PERFORMANCE HEALTH TECHNOLOGIES, INC.


FORM
10-Q


FOR
THE QUARTER ENDED MARCH 31, 2008




INDEX





PAGEPART
      1—FINANCIAL INFORMATIONITEM
      1.
            FINANCIAL
      STATEMENTSBalance
      Sheets
            1Statements
      of Operations
            2Statements
      of Cash Flows
            3Notes
      to Financial Statements
            4ITEM
      2.
            MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATION
            25ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
            39ITEM
      4T.
            CONTROLS
      AND PROCEDURES
            39PART
      II—OTHER INFORMATIONITEM
      1.
            LEGAL
      PROCEEDINGS
            39ITEM
      1A.
            RISK
      FACTORS
            39ITEM
      2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
            40ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES
            42ITEM
      4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
            42ITEM
      5.
            OTHER
      INFORMATION
            42ITEM
      6.
            EXHIBITS
            42








PART I—FINANCIAL INFORMATION





ITEM
1. FINANCIAL STATEMENTS




PERFORMANCE
HEALTH TECHNOLOGIES, INC.


BALANCE
SHEET


March
      31,2008
            
            
            December
      31,(unaudited)
            
            
            2007ASSETSCURRENT
      ASSETS:Cash
      and Cash Equivalents
            
            $
            12,702
            
            
            $
            35,559Accounts
      Receivable
            
            
            2,375
            
            
            
            4,720Inventory
            
            
            25,311
            
            
            
            26,866Prepaid
      Expenses
            
            
            125,658
            
            
            
            116,732Total
      Current Assets
            
            
            166,046
            
            
            
            183,877FURNITURE
      & EQUIPMENT, net
            
            
            7,388
            
            
            
            8,572OTHER
      ASSETS:Debt
      Issuance Costs, net
            
            
            228,567
            
            
            
            297,591Security
      Deposits
            
            
            4,802
            
            
            
            4,802Total
      Other Assets
            
            
            233,369
            
            
            
            302,393TOTAL
      ASSETS
            
            $
            406,803
            
            
            $
            494,842LIABILITIES
      & STOCKHOLDERS’
      DEFICITCURRENT
      LIABILITIES:Accounts
      Payable
            
            $
            662,277
            
            
            $
            610,840Accrued
      Salaries and Interest
            
            
            342,875
            
            
            
            335,740Accrued
      Expenses
            
            
            61,546
            
            
            
            50,338Accrued
      Interest - Convertible Notes
            
            
            1,139,155
            
            
            
            1,003,568Non-Convertible
      Notes Payable
            
            
            100,000
            
            
            
            50,000Convertible
      Notes Payable, Net of Debt
              Discount
      of $487,816 and $618,708 at March 31, 2008
              and
      December 31, 2007, respectively4,636,262
            
            
            
            3,538,370Derivative
      Liability
            
            
            2,817,264
            
            
            
            2,993,069Total
      Current Liabilities
            
            
            9,759,379
            
            
            
            8,581,925CONVERTIBLE
      NOTES PAYABLE, Net ofDebt
      Discount of $134,609 and $242,244, respectively
            
            
            1,490,391
            
            
            
            2,194,756STOCKHOLDERS’
      DEFICIT:Common
      Stock, $0.01 Par Value, 500,000,000 Shares
Authorized,53,751,822
      and 53,184,604 Shares Issued and Outstandingat
      March 31, 2008 and December 31, 2007, respectively
            
            
            537,519
            
            
            
            531,847Paid-in
      Capital
            
            
            15,233,763
            
            
            
            15,026,813Accumulated
      Deficit
            
            
            (26,614,249
            )
            
            
            (25,840,499
            )Total
      Stockholders’ Deficit
            
            
            (10,842,967
            )
            
            
            (10,281,839
            )TOTAL
      LIABILITIES & STOCKHOLDERS’DEFICIT
            
            $
            406,803
            
            
            $
            494,842





See Notes to Financial
Statements





- 2
-


PERFORMANCE
HEALTH TECHNOLOGIES, INC.


STATEMENTS
OF OPERATIONS


(Unaudited)





For
      the Three Months EndedMarch
      31,
            
            
            March
      31,2008
            
            
            2007SALES,
      net
            
            $
            9,440
            
            
            $
            589COST
      OF SALES
            
            
            2,814
            
            
            
            —GROSS
      PROFIT
            
            
            6,626
            
            
            
            589OPERATING
      EXPENSES:General
      and Administrative
            
            
            400,088
            
            
            
            764,792Sales
      and Marketing
            
            
            51,224
            
            
            
            25,382Research
      and Development
            
            
            6,564
            
            
            
            21,861TOTAL
      OPERATING EXPENSES
            
            
            457,876
            
            
            
            812,035LOSS
      FROM OPERATIONS
            
            
            (451,250
            )
            
            
            (811,446
            )OTHER
      INCOME (EXPENSES):Interest
      Income
            
            
            13
            
            
            
            6Interest
      Expense
            
            
            (472,761
            )
            
            
            (741,877
            )Amortization
      - Debt Issuance Costs
            
            
            (87,236
            )
            
            
            (152,262
            )Gain on
      Derivative Liability
            
            
            238,007
            
            
            
            368,034TOTAL
      OTHER INCOME (EXPENSES)
            
            
            (321,977
            )
            
            
            (526,099
            )LOSS
      BEFORE PROVISION FOR TAXES
            
            
            (773,227
            )
            
            
            (1,337,545
            )PROVISION
      FOR TAXES
            
            
            (520
            )
            
            
            (800
            )NET
      LOSS
            
            $
            (773,747
            )
            
            $
            (1,338,345
            )NET
      LOSS PER COMMON SHARE - BASIC  AND DILUTED
            
            $
            (0.01
            )
            
            $
            (0.03
            )Weighted
      Average Number of Shares
            
            
            53,390,852
            
            
            
            44,702,852





See Notes
to Financial Statements




- 3
-


PERFORMANCE
HEALTH TECHNOLOGIES, INC.


STATEMENTS
OF CASH FLOWS


(Unaudited)





For
      the Three Months EndedMarch
      31, 2008
            
            
            March
      31, 2007Cash
      flows from operating activitiesNet
      loss
            
            $
            (773,747
            )
            
            $
            (1,338,345
            )Adjustments
      to reconcile net loss to net cashused
      by operating activities:Non
      cash interest expense
            
            
            323,830
            
            
            
            596,747Non
      cash consulting expense
            
            
            9,928
            
            
            
            220,800Non
      cash stock based compensation
            
            
            69,521
            
            
            
            224,489Depreciation
      and amortization
            
            
            88,421
            
            
            
            154,214Gain
      on derivative liability
            
            
            (238,007
            )
            
            
            (368,034
            )(Increase)
      decrease in accounts receivable
            
            
            2,345
            
            
            
            —(Increase)
      decrease in inventories
            
            
            1,555
            
            
            
            (2,070
            )(Increase)
      decrease in other assets
            
            
            —
            
            
            
            3,271(Increase)
      decrease in prepaid expenses
            
            
            (18,854
            )
            
            
            (87,160
            )Increase
      (decrease) in accounts payable
            
            
            46,974
            
            
            
            118,021Increase
      (decrease) in accrued liabilities
            
            
            9,635
            
            
            
            14,407Increase
      (decrease) in interest payable
            
            
            144,292
            
            
            
            137,545Total
      adjustments
            
            
            439,640
            
            
            
            1,012,230Net
      cash provided (used) by operating activities
            
            
            (334,107
            )
            
            
            (326,115
            )Cash
      flows from investing activities:Cash
      payments for the purchase of equipment
            
            
            —
            
            
            
            (2,940
            )Net
      cash (used) by investing activities
            
            
            —
            
            
            
            (2,940
            )Cash
      flows from financing activities:Net
      proceeds from issuance of convertible notes
            
            
            261,250
            
            
            
            240,520Net
      proceeds from short term notes
            
            
            50,000
            
            
            
            —Net
      cash provided by financing activities
            
            
            311,250
            
            
            
            240,520Net (decrease)
      in cash and equivalents
            
            
            (22,857
            )
            
            
            (88,535
            )Cash
      and equivalents, beginning of period
            
            
            35,559
            
            
            
            206,725Cash
      and equivalents, end of period
            
            $
            12,702
            
            
            $
            118,190Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
      expense
            
            $
            4,583
            
            
            $
            9,816Income
      tax
            
            $
            —
            
            
            $
            800





See Notes
to Financial Statements




- 4
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




NOTE 1 – SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES:





Organization


Performance
Health Technologies, Inc. (“PHT,” the “Company,” “we” or “us”) incorporated on
June 15, 1998 in the state of Delaware. PHT develops and markets computer-based
rehabilitation and health maintenance products. The Company is
based in Trenton, NJ.





On July
13, 2007, the Company became a reporting company under the Securities Exchange
Act of 1934. In October 2007, a NASD member firm filed a Form 211 Application
with the NASD pursuant to SEC Rule 15c 2-11 on behalf of the Company for the
purpose of obtaining an OTC Bulletin Board listing of the Company’s Common
Stock. The NASD responded to the October filing with a request for additional
information which the Company is in the process of compiling.


The
accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions to Form 10-Q and
Article 8 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary in order to make the interim financials not misleading have
been included and all such adjustments are of normal recurring nature. The
operating results for the three months ended March 31, 2008 are not necessarily
indicative of the results that can be expected for the year ending December 31,
2008.


Revenue and Cost
Recognition


Revenue
is recognized as services are rendered or products are delivered, the price to
the buyer is fixed and determinable, and collectability is reasonably
assured.





Income
Taxes


Income
taxes are provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due plus deferred taxes. Deferred
taxes are recognized for differences between the basis of assets and liabilities
for financial statement and income tax purposes. The differences relate
primarily to depreciable and amortizable assets (use of different depreciation
and amortization methods and lives for financial statement and income tax
purposes) and allowance for doubtful receivables (deductible for financial
statement purposes but not for income tax purposes). The deferred tax assets and
liabilities represent the future tax return consequences of those differences,
which will be deductible or taxable when the assets and liabilities are
recovered or settled. Deferred taxes also are recognized for operating losses
and tax credits that are available to offset future taxable income.





Use of
Estimates


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





Fair Value of Financial
Instruments


The
Company estimates that there are no material variations between fair value and
book value of our financial assets or liabilities as of March 31, 2008 and
December 31, 2007.  The carrying amounts of cash and cash equivalents,
accounts payable, accrued expenses and short-term notes payable approximate fair
value due to the short-term nature of the instruments.  Long-term
liabilities are comprised of the convertible notes which approximate fair value
based on borrowing rates available to the Company.





- 5
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




Property and
Equipment


Property
and equipment is stated at cost. Depreciation is provided utilizing both the
straight-line and accelerated methods over the estimated useful lives of the
assets as follows:





Equipment
& Computers   3-5
years





Long Lived
Assets


In
accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets,” the Company records impairment losses on long-lived assets
used in operations when indicators of impairment are present and the
undiscounted cash flows estimated to be generated by those assets are less than
the assets’ carrying amounts.  SFAS No. 144 also addresses the
accounting for long-lived assets that are expected to be disposed
of.





Inventory


Inventory
is stated at the lower of cost or market using the first-in, first-out (FIFO)
valuation method and consists primarily of finished goods.





Cash and Cash
Equivalents


For
purposes of the Statement of Cash Flows, all highly liquid investments with a
maturity of three months or less are included in cash equivalents. As of March
31, 2008, cash and cash equivalents included $8,190 of cash held in commercial
banks, petty cash fund of $250, and $4,262 of money market securities. As of
December 31, 2007, cash and cash equivalents included $31,060 of cash held in
commercial banks, petty cash fund of $250, and $4,249 of money market
securities.





Advertising


The
Company expenses advertising costs as they are incurred. Advertising expense for
the three months ended March 31, 2008 and 2007 amounted to $7,500 and $2,954,
respectively.





Debt Issuance
Costs


Debt
Issuance Costs are amortized using the straight-line method over the term of the
notes.





Research and Development
Costs


Expenses
for research and development are charged to expense when incurred. The total
amount of research and development expenses incurred during the three months
ended March 31, 2008 and 2007 amounted to $6,437 and $21,861,
respectively.





Employee Stock
Options


In
December 2004, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 123R, “Share Based
Payment”.  SFAS No. 123R is a revision of SFAS No. 123, “Accounting
for Stock Based Compensation”, and supersedes APB 25.  Among other
items, SFAS 123R eliminates the use of APB 25 and the intrinsic value method of
accounting, and requires companies to recognize the cost of employee services
received in exchange for awards of equity instruments, based on the grant date
fair value of those awards, in the financial statements.  On January
1, 2006, the Company adopted SFAS 123R.  The provisions of SFAS 123R
became effective the first annual reporting period beginning after December 15,
2005. The Company adopted the requirements of SFAS 123R using the “modified
prospective” method.  Under the “modified prospective” method,
compensation cost is recognized in the financial statements beginning with the
effective date, based on the requirements of SFAS 123R for all share-based
payments granted after that date, and based on the requirements of SFAS 123 for
all vested awards granted prior to the effective date of SFAS 123R, and based on
the requirements of SFAS 123R for all unvested awards granted prior to the
effective date of SFAS 123R.





- 6
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




Beginning
in the 2006 calendar year, with the adoption of SFAS 123R, the Company included
stock-based compensation in general and administrative for the cost of stock
options.  Stock based compensation expense for the three months ended
March 31, 2008 and 2007 was $69,521 and $224,489, respectively.





No stock
options were exercised during the three months ended March 31, 2008 and
2007.





Estimating the Fair Market
Value of our Common Stock


The fair
market value of our common stock is a significant estimate used in determining
the value of our various equity related instruments (options, warrants,
conversion features, etc.). In determining the fair market value of our stock we
consider such things as the most recent equity transaction, changes in the
Company’s financial position, progressions in product development and the
effects of dilutive debt conversions.





Deferred Offering
Costs


Amounts
paid or accrued for costs associated with an anticipated public offering will be
expensed and not recorded as a reduction of the net proceeds, if the offering is
not consummated. Upon successful completion of such an offering, these expenses
will be recorded as a reduction of the net proceeds.





At March
31, 2008 and December 31, 2007, we had net deferred offering costs of
$0.





Recent Accounting
Pronouncements


In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. SFAS
No. 157 is effective for fiscal years beginning after November 15, 2007,
and all interim periods within those fiscal years. In February 2008, the FASB
released FASB Staff Position (FSP FAS 157-2 – Effective Date of FASB Statement
No. 157) which delays the effective date of SFAS
No. 157  for all nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed at fair value in the
financial statements on a recurring basis (at least annually), to fiscal years
beginning after November 15, 2008 and interim periods within those fiscal years.
The implementation of SFAS No. 157 for financial assets and liabilities,
effective January 1, 2008, did not have an impact on  the
Company’s financial position and results of operations.  The Company
is currently evaluating the impact of adoption of this statement on
its  non-financial assets and liabilities in the first quarter of
fiscal 2009.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure, on an item-by-item basis, specified
financial instruments and certain other items at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected are required to be reported in earnings at each
reporting date.  SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007, the provisions of which are required to be applied
prospectively.  The Company adopted this Statement as of January 1,
2008 and has elected not to apply the fair value option to any of its financial
instruments.




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
2007), Business Combinations, which replaces SFAS No 141. The statement retains
the purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized in
the purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the




- 7
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




capitalization
of in-process research and development at fair value, and requires the expensing
of acquisition-related costs as incurred. SFAS No. 141R is effective
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008.




In
December 2007, the FASB issued SFAS No. 160.  “Noncontrolling
Interests in Consolidated Financial Statements-and Amendment of ARB No.
51.”  SFAS 160 establishes accounting and reporting standards
pertaining to ownership interests in subsidiaries held by parties other than the
parent, the amount of net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of any retained noncontrolling equity investment when a subsidiary is
deconsolidated.  This statement also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners.  SFAS 160 is
effective for fiscal years beginning on or after December 15,
2008.  The adoption of SFAS 160 is not currently expected to have a
material effect on the Company’s financial position, results of operations, or
cash flows.





In March
2008, the Financial Accounting Standards Board (FASB) issued FASB Statement No.
161, Disclosures about Derivative Instruments and Hedging Activities. The new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. The company is currently evaluating the impact of
adopting SFAS. No. 161 on its financial statements.





NOTE 2 – PROPERTY, PLANT AND
EQUIPMENT:





Property,
plant and equipment as of March 31, 2008 and December 31, 2007 are as
follows:




March 31, 2008
            
            
            December 31, 2007Equipment
      and Computers
            
            $
            52,568
            
            
            $
            52,568Less:
      Accumulated depreciation
            
            
            (45,180
            )
            
            
            (43,996
            )$
            7,388
            
            
            $
            8,572





Depreciation
expense charged to income for three months ended March 31, 2008 and 2007
amounted to $ 1,185 and $1,952, respectively.





NOTE 3 – DEBT ISSUANCE
COSTS:





We have
incurred certain costs related to financing activities since
inception.  These costs consisted primarily of legal fees, placement
agent fees, and commissions which are related to the placement of debt
securities.  Debt issuance costs were paid in the form of cash and
stock warrants.





- 8
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




Debt
issuance costs consisted of the following:





March 31, 2008
            
            
            December 31, 20072003/2004
      Private Placement
            
            $
            930,476
            
            
            $
            930,4762005
      Bridge Loan A
            
            
            200,048
            
            
            
            200,0482005
      Bridge Loan B
            
            
            274,114
            
            
            
            274,1142006
      Bridge Loans
            
            
            234,300
            
            
            
            234,3002007
      Bridge Loans
            
            
            248,719
            
            
            
            248,7192008
      Bridge
      Loans
            
            
            18,213
            
            
            
            —Total
      Debt Issuance Costs
            
            
            1,905,870
            
            
            
            1,887,657Less:  Accumulated
      Amortization
            
            
            (1,677,303
            )
            
            
            (1,590,066
            )$
            228,567
            
            
            $
            297,591




In
conjunction with each of our 2008 and 2007 debt issuances (bridge loans), we
incurred Placement, Marketing and Due Diligence Fees to the Company’s Investment
Banking advisors totaling approximately 20% of the gross loan amount. In
addition, most of the issuers were paid an origination fee of 5% of the gross
loan amount. These fees along with any legal fees that were specifically
attributable to the issuances of such loans are included in the issuances stated
above.





Amortization
expense charged to income for the three months ended March 31, 2008 and 2007
amounted to $ 87,236 and $152,262, respectively.





NOTE 4
–NOTES:





Convertible
Notes


The
Company accounts for the value of warrants and the intrinsic value of beneficial
conversion rights arising from the issuance of convertible debt instruments with
nondetachable conversion rights that are in-the-money at the commitment date
pursuant to EITF Issue. 98-5, EITF Issue No. 00-19 and EITF Issue No.
00-27.  Such values are determined by first allocating an appropriate
portion of the proceeds received from the debt instruments to the warrants or
any other detachable instrument included in the exchange.  The
intrinsic value of the beneficial conversion rights at the commitment date may
also be recorded as additional paid-in capital and debt discount as of that date
or, if the terms of the debt instrument are contingently adjustable, may only be
recorded if a triggering event occurs and the contingency is
resolved.  Since the conversion rights associated with the convertible
notes were initially exercisable into an indeterminable number of common shares,
the Company has determined that under the guidance of EITF 00-19, the Company
could not conclude that it had sufficient authorized and unissued shares to
net-share settle any warrants or options issued to
non-employees.  Therefore, as of March 31, 2008, the Company had
classified the fair value of all warrants and conversion features as a
derivative liability.





In
January and February 2008, the Company sold $275,000 of equity units (“2008 A
Units”) in a private placement.  Each 2008 A Unit consists of an
unsecured convertible promissory note in the principal amount of $1,000 (the
“2008 A Notes”) and 2,000 warrants (the “Warrants”) to purchase one share of
Company common stock. The 2008 A Notes bear interest at 10% per annum and will
mature 180 days from the date of issuance (the “Maturity Date”). The 2008 A
Notes are convertible into shares of Company common stock at a price equal to
80% of the average of the closing bid price for our common stock for the 20 days
preceding the Conversion Notice, as reported by the exchange on which our common
stock is then traded but in any event not less than $0.40 (the “Conversion
Price”). The 2008 A Notes may be redeemed by the Company, upon ten trading days
prior notice, during which time the Noteholder may convert the 2008 A Notes into




- 9
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




Company
common stock.  The Notes will be redeemed by the Company on the
20th
day after the Mandatory Redemption Event (as herein defined) at a redemption
price equal to 100% the principal amount of Notes to be redeemed plus accrued
and unpaid interest upon ten trading days prior notice, during which time the
Noteholder may convert the Notes into Company common stock (“Mandatory
Redemption”).  The Mandatory Redemption Event will be the date on
which the Company has closed on aggregate gross equity financings of $1 million
prior to the Maturity Date.  If the 2008 A Notes have not been
redeemed or converted as of the Maturity Date, the principal and interest due
thereunder will be paid by the Company in shares of Company common stock valued
at the then applicable Conversion Price. Sixty days of pre-paid interest was
paid by the Company at the time of closing along with an origination fee of 5%
of the principal of the 2008 A Notes purchased. The exercise price is $1.00 for
1,000 of the Warrants and $1.50 per share for the remaining 1,000 Warrants. On
March 26, 2008, 200,000 of the Warrants with an original exercise price of $1.00
were reduced to $0.30. (See 2008 Note B) The Warrants will be exercisable for a
period of five years from the date of issuance. The shares issuable upon
conversion of the Notes and exercise of the Warrants have piggyback registration
rights.  There is no penalty provision in the event we do not register
such shares. The conversion feature and the warrants were valued using a
Black Scholes Option Pricing Model, utilizing the following
assumptions:  Volatility:  78.0%, Straight Bond Yield: 5.0%,
Risk-Free Rate: 4.7%, and Dividend Growth Rate: 0%.  The warrants were
detached and accounted for as a derivative liability.   The
warrants were recorded as a discount of $ 47,575 which is being amortized over
the life of the convertible note. As of March 31, 2008, there was $275,000 in
principal of the 2008 A Notes outstanding.





From
August 15, 2007 through November 30, 2007, the Company sold $656,000 of equity
units (“2007 F Units”) in a private placement.  Each 2007 F Unit
consists of an unsecured convertible promissory note in the principal amount of
$1,000 (the “2007 F Notes”) and 4,000 warrants (the “Warrants”) to purchase one
share of Company common stock. The 2007 F Notes bear interest at 10% per annum
and will mature one year from the date of issuance (the “Maturity Date”). The
2007 F Notes are convertible into shares of Company common stock at a price
equal to the lesser of (i) $0.75 or (ii) 70% of the average of the closing bid
price for our common stock for the 20 days preceding the Conversion Notice, as
reported by the exchange on which our common stock is then traded but in any
event not less than $0.30 (the “Conversion Price”). The 2007 F Notes may be
redeemed by the Company, upon ten trading days prior notice, during which time
the Noteholder may convert the 2007 F Notes into Company common
stock.  If the 2007 F Notes have not been redeemed or converted as of
the Maturity Date, the principal and interest due thereunder will be paid by the
Company in shares of our common stock valued at the then applicable Conversion
Price.  The exercise price is $0.75 for 2,000 of the Warrants and
$1.50 per share for the remaining 2,000 Warrants. On March 26, 2008, 150,000 of
the Warrants with an original exercise price of $1.50 were reduced to $0.50.
(See 2008 Note B) The Warrants will be exercisable for a period of five years
from the date of issuance. The shares issuable upon conversion of the Notes and
exercise of the Warrants have piggyback registration rights.  There is
no penalty provision in the event we do not register such shares.  The
conversion feature and the warrants were valued using a Black Scholes Option
Pricing Model, utilizing the following
assumptions:  Volatility:  78.0%-82.0%, Straight Bond Yield:
5.0%, Risk-Free Rate: 4.7%, and Dividend Growth Rate: 0%.  The
warrants were detached and accounted for as a derivative
liability.   The warrants were recorded as a discount of $
258,002 which is being amortized over the life of the convertible note. As of
March 31, 2008, there was $656,000 in principal of the 2007 F Notes
outstanding.





On June
27, 2007, the Company sold $250,000 of equity units (“2007 E Units”) in a
private placement.  Each 2007 E Unit consists of an unsecured
convertible promissory note in the principal amount of $1,000 (the “2007 E
Notes”) and 4,000 warrants (the “Warrants”) to purchase one share of our common
stock. The 2007 E Notes bear interest at 10% per annum and will mature one year
from the date of issuance (the “Maturity Date”). The 2007 E Notes are
convertible into shares of our common stock at a price equal to the lesser of
(i) $0.75 or (ii) 70% of the average of the closing bid price for our common
stock for the 20 days preceding the Conversion Notice, as reported by the
exchange on which our common stock is then traded but in any event




- 10
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




not less
than $0.30 (the “Conversion Price”). The 2007 E Notes may be redeemed by us once
the Company is a reporting Company under the Exchange Act, upon ten trading days
prior notice, during which time the Noteholder may convert the 2007 E Notes into
our common stock.  If the 2007 E Notes have not been redeemed or
converted as of the Maturity Date, the principal and interest due thereunder
will be paid by us in shares of our common stock valued at the then applicable
Conversion Price.  The exercise price is $0.75 for 2,000 of the
Warrants and $1.50 per share for the remaining 2,000 Warrants. The Warrants will
be exercisable for a period of five years from the date of issuance. The shares
issuable upon conversion of the Notes and exercise of the warrants have
piggyback registration rights.  There is no penalty provision in the
event we do not register such shares.   The conversion feature
and the stock purchase warrants were valued using a Black Scholes Option Pricing
Model using the following assumptions: Volatility: 82%, Straight Bond Yield:
5.0%, Risk-free Rate:  4.7% and Dividend Growth Rate:
0.  The warrants were detached and accounted for as a derivative
liability.   The warrants were recorded as a discount of $
102,500 which is being amortized over the life of the convertible note. As of
March 31, 2007, there was $250,000 in principal of the 2007 E Notes
outstanding.





On June
15, 2007, the holders of $300,000 of principal of our non-convertible 2006 E
Notes, 2006 F Notes and 2007 B Notes exchanged principal and interest due
thereunder for $315,000 of equity units (“2007 D Units”) in a private exchange
transaction.  Each 2007 D Unit consists of an unsecured convertible
promissory note in the principal amount of $1,000 (the “2007 D Notes”) and 4,000
warrants (the “Warrants”) to purchase one share of our common stock. The 2007 D
Notes bear interest at 10% per annum and will mature one year from the date of
issuance (the “Maturity Date”). The 2007 D Notes are convertible into shares of
our common stock at a price equal to the lesser of (i) $0.75 or (ii) 70% of the
average of the closing bid price for our common stock for the 20 days preceding
the Conversion Notice, as reported by the exchange on which our common stock is
then traded but in any event not less than $0.30 (the “Conversion Price”). The
2007 D Notes may be redeemed by us once the Company is a reporting company under
the Exchange Act, upon ten trading days prior notice, during which time the
Noteholder may convert the 2007 D Notes into our common stock.  If the
2007 D Notes have not been redeemed or converted as of the Maturity Date, the
principal and interest due thereunder will be paid by us in shares of our common
stock valued at the then applicable Conversion Price.  The exercise
price is $0.75 for 2,000 of the Warrants and $1.50 per share for the remaining
2,000 Warrants. The Warrants will be exercisable for a period of five years from
the date of issuance. The shares issuable upon conversion of the Notes and
exercise of the warrants have piggyback registration rights.  There is
no penalty provision in the event we do not register such shares. The conversion
feature and the stock purchase warrants were valued using a Black Scholes Option
Pricing Model using the following assumptions: Volatility: 82.0%, Straight Bond
Yield: 5.0%, Risk-free Rate:  4.7% and Dividend Growth Rate:
0.  The warrants were detached and accounted for as a derivative
liability.   The warrants were recorded as a discount of $ 129.2
thousand which is being amortized over the life of the convertible note. There
are amounts due of less than $1,000 in cash to the exchanging noteholders for an
aggregate $1,693.  As of March 31, 2008, there was $315,000 in
principal of the 2007 D Notes outstanding.





On May
14, 2007, the Company sold $300,000 of equity units (the “2007 C Units”) in a
private placement. The 2007 C Units consist of a 15% convertible note in the
principal amount of $300,000 (the “2007 C Note”) and 1,500,000
five year warrants to purchase our common stock at an exercise price of $0.30
(the “2007 C Warrants”). The holder of the 2007 C Note may elect to convert the
balance of the 2007 C Note into shares of our common stock at a price equal to
$0.50 per share.  The principal balance of the 2007 C Note, along with
accrued and unpaid interest, was payable on July 13, 2007. The 2007 C Note was
extended until November 01, 2007 and subsequently extended to June 01,
2008.  The 2007 C Note bears interest at 15% per annum.  Any
unpaid amounts of interest are payable in cash at maturity. We paid a total of
$7,398 in prepaid interest to the 2007 C Noteholder on the date of closing,
representing two months worth of interest on the 2007 C Note plus a 5%
origination fee of $15,000. The 2007 C Note is secured by a security interest in
all of the assets of the Company, which the investor agreed to subordinate in
favor of financing from a bank or




- 11
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




other
traditional lending institution. The Warrants will be exercisable for a period
of five years from the date of issuance. The shares issuable upon conversion of
the Notes and exercise of the warrants have piggyback registration
rights.  There is no penalty provision in the event we do not register
such shares.  The conversion feature and the stock purchase warrants
were valued using a Black Scholes Option Pricing Model using the following
assumptions: Volatility: 82.0%, Straight Bond Yield: 5.0%, Risk-free
Rate:  4.7% and Dividend Growth Rate: 0.  The warrants were
detached and accounted for as a derivative liability.   The
warrants were recorded as a discount of $ 243,000 which is being amortized over
the life of the convertible note. As of March 31, 2008, there was $300,000 in
principal of the 2007 C Notes outstanding.





During
January of 2007, the Company sold $101,000 of equity units (the “2006 G Units”)
in a private placement in an offshore transaction under Regulation S of the
Securities Act of 1933. Each 2006 G Unit, with a purchase price of $1,000 per
unit, consists of a 10% convertible note in the principal amount of $1,000 (the
“10% 2006 G Notes”), 2,000 five year warrants to purchase our common stock at an
exercise price of $0.75 and 2,000 five year warrants to purchase our common
stock at an exercise price of $1.50. The principal balance of each 10% 2006 G
Note, along with accrued and unpaid interest, was payable 120 days after
issuance.  As per an extension agreement entered into with the holders
of the 2006 G Note, the principal balance of each 2006 G Note, along with
accrued and unpaid interest, was extended until July 15, 2007, subsequently
extended to November 01, 2007 and subsequently extended to May 01, 2008. The
holders of each 10% 2006 G Note may elect to convert the principal balance of
the 10% 2006 G Notes into shares of our common stock at a price equal to the
lesser of (i) $0.75 or (ii) 70% of the average of the closing bid price for the
Company’s common stock for the 20 days preceding the conversion notice, as
reported by the exchange on which the Company’s common stock is then traded, but
in any event not less than $0.30 (the “Conversion Rate”). This conversion
feature was recorded as a discount of $13,900 and is being amortized over the
life of the convertible note.   Each 10% 2006 G Note bears
interest at 10% per annum payable at maturity or at the time of conversion in
arrears, in cash, or at the option of the noteholder in common stock at the
conversion rate. As of the date of this report, there was $250,000 in principal
of 10% 2006 G Notes outstanding.  The conversion feature and the stock
purchase warrants were valued using a Black Scholes Option Pricing Model using
the following assumptions: Volatility: 82.0%, Straight Bond Yield: 5.0%,
Risk-free Rate:  4.7% and Dividend Growth Rate: 0.  The
warrants were detached and accounted for as a derivative
liability.   The warrants were recorded as a discount of $53,100
which is being amortized over the life of the convertible note.





On
December 27, 2006 the Company sold $149,000 of equity units (the “2006 G Units”)
in a private placement in an offshore transaction under Regulation S of the
Securities Act of 1933. Each 2006 G Unit, with a purchase price of $1,000 per
unit, consists of a 10% convertible note in the principal amount of $1,000 (the
“10% 2006 G Notes”), 2,000 five year warrants to purchase our common stock at an
exercise price of $0.75 and 2,000 five year warrants to purchase our common
stock at an exercise price of $1.50. The principal balance of each 10% 2006 G
Note, along with accrued and unpaid interest, was payable 120 days after
issuance.  As per an extension agreement entered into with the holders
of the 2006 G Note, the principal balance of each 2006 G Note, along with
accrued and unpaid interest, was extended until July 15, 2007, subsequently
extended to November 01, 2007 and subsequently extended to May 01, 2008. The
holders of each 10% 2006 G Note may elect to convert the principal balance of
the 10% 2006 G Notes into shares of our common stock at a price equal to the
lesser of (i) $0.75 or (ii) 70% of the average of the closing bid price for the
Company’s common stock for the 20 days preceding the conversion notice, as
reported by the exchange on which the Company’s common stock is then traded, but
in any event not less than $0.30 (the “Conversion Rate”). This conversion
feature was recorded as a discount of $19,400 and is being amortized over the
life of the convertible note.   Each 10% 2006 G Note bears
interest at 10% per annum payable at maturity or at the time of conversion in
arrears, in cash, or at the option of the noteholder in common stock at the
conversion rate.  The conversion feature and the stock purchase
warrants were valued using a Black Scholes Option Pricing Model using the
following assumptions: Volatility: 93.5%, Straight Bond Yield:




- 12
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




5.0%,
Risk-free Rate:  4.7% and Dividend Growth Rate: 0.  The
warrants were detached and accounted for as a derivative
liability.   The warrants were recorded as a discount of $75,100
which is being amortized over the life of the convertible note. As of March 31,
2008 there were $138,068 in principal of 2006 G Notes outstanding that were
issued on December 27, 2006.





On
October 13, 2006 the Company sold $250,000 of equity units (the “2006 D Units”)
in a private placement.  The 2006 D Units consist of a 13% convertible
note (the “2006 D Notes”) in the principal amount of $250,000 and 625,000 five
year warrants to purchase our common stock at an exercise price of $.50. The
principal balance of the 2006 D Note, along with accrued and unpaid interest, is
payable on the earlier of (i) 30 days after the effective date of a registration
statement filed by the Company that includes the warrant shares, or (ii) April
13, 2007.  As per an extension agreement entered into with the holder
of the 2006 D Notes as of April 13, 2007, the principal balance of the 2006 D
Notes, along with accrued and unpaid interest, was payable on July 13, 2007. We
did not pay the 2006 D Notes on July 13, 2007. Effective November 20, 2007, the
maturity date of the 2006 D notes was further extended to November 30, 2008
(“Amendment No. 2”). The holder of the 2006 D Note may elect to convert the
principal balance of the 2006 D Note into shares of our common stock at a price
equal to the lesser of (i) $0.50, or (ii) 70% of the average of the closing bid
price for the Company’s common stock for the 20 days preceding the conversion
notice, as reported by the exchange on which the Company’s common stock is then
traded (the “Conversion Rate”).  This conversion feature was recorded
as a discount of $149,800 and is being amortized over the life of the
convertible note.   The Note bears interest at 13% per annum
payable at maturity or at the time of conversion in arrears, in cash, or at the
option of the noteholder in common stock at the conversion rate. The Company
paid a total of $8,125 in prepaid interest to the 2006 D noteholder on the date
of closing, representing 90 days’ worth of interest on the 2006 D
Note.  The 2006 D noteholder also received $12,500 at the closing as
additional consideration.  The 2006 D Notes are secured by a security
interest in all of the assets of the Company, which the investor agreed to
subordinate in favor of financing from a bank or other traditional lending
institution. The conversion feature and the stock purchase warrants were valued
using a Black Scholes Option Pricing Model using the following assumptions:
Volatility: 93.5%, Straight Bond Yield: 5.0%, Risk-free Rate:  4.7%
and Dividend Growth Rate: 0.  The warrants were detached and accounted
for as a derivative liability. The warrants were recorded as a discount of
$98,750 which is being amortized over the life of the convertible
note.





The
holder of the 2006 D Notes received 312,500 five year warrants to purchase our
common stock at an exercise price of $.50 in connection with the extension
agreement. In connection with Amendment No. 2 the Company issued to the holder
of the 2006 D Note 312,500 five years warrants to purchase our common stock at
an exercise price of $0.50 and 250,000 five year warrants to purchase our common
stock at an exercise price of $0.10. The warrants are exercisable for a period
of five years from the date of issuance.





On June
30, 2006, the Company sold $250,000 of equity units (the “2006 C Units”) in a
private placement.  Each 2006 C Unit, with a purchase price of $1,000
per unit consists of a 10% convertible note (the “2006 C Notes”) in the
principal amount of $1,000 and 6,000 warrants to purchase our common stock. The
principal balance of each 2006 C Note, along with accrued and unpaid interest,
was payable 6 months after the date of issuance.  The 2006 C Note was
extended until June 30, 2007, subsequently extended to November 01, 2007 and
subsequently extended to May 01, 2008. The holder of each 2006 C Note may elect
to convert the principal balance of the Convertible Note into shares of common
stock.  The 2006 C Notes are convertible at a price equal to the
lesser of (i) $0.60 (the “Conversion Price”) or (ii) 70% of the average of the
closing bid price for the Company’s common stock for the 20 days preceding the
Conversion Notice, as reported by the exchange on which the Company’s common
stock is then traded (the “Conversion Rate”).  This conversion feature
was recorded as a discount of $170,200 and is being amortized over the life of
the convertible note.  The conversion feature and the stock purchase
warrants were valued using a Black Scholes Option Pricing Model using the
following assumptions: Volatility: 93.5%, Straight Bond Yield: 5.0%, Risk-free
Rate:  4.7%




- 13
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




and
Dividend Growth Rate: 0.  The need for bifurcation and fair market
value will be assessed on each balance sheet date over the maturity of the note.
Each 2006 C Note bears interest at 10% per annum payable at maturity or at the
time of conversion in arrears, in cash, or at the option of the noteholder in
common stock at the conversion rate.





Each
investor participating in the Offering received a Warrant to purchase 6,000
shares of common stock for every $1,000 invested.  The exercise price
of 3,000 of the warrants is $.60 per share and the exercise price for 3,000
warrants is $1.25 per share.  The warrants are exercisable for a
period of five years from the date of issuance.  The warrants were
detached and accounted for as a derivative liability.   The
warrants were recorded as a discount of $201,750 which is being amortized over
the life of the convertible note.





On May
24, 2006, the Company sold $250,000 of equity units (the “2006 B Units”) in a
private placement.  Each 2006 B Unit, with a purchase price of $1,000
per unit consists of a 10% convertible note (the “2006 B Notes”) in the
principal amount of $1,000 and 6,000 warrants to purchase our common stock. The
principal balance of each 2006 B Note, along with accrued and unpaid interest,
was payable 6 months after the date of issuance.  The 2006 B Note was
extended until June 30, 2007, subsequently extended to November 01, 2007 and
subsequently extended to May 01, 2008. The holder of each 2006 B Note may elect
to convert the principal balance of the 2006 B Note into shares of common
stock.  The 2006 B Notes are convertible at a price equal to the
lesser of (i) $0.50 (the “Conversion Price”) or (ii) 70% of the average of the
closing bid price for the Company’s common stock for the 20 days preceding the
Conversion Notice, as reported by the exchange on which the Company’s common
stock is then traded (the “Conversion Rate”).  This conversion feature
was recorded as a discount of $175.6 thousand and is being amortized over the
life of the convertible note.  The conversion feature and the stock
purchase warrants were valued using a Black Scholes Option Pricing Model using
the following assumptions: Volatility: 93.5%, Straight Bond Yield: 5.0%,
Risk-free Rate:  4.7% and Dividend Growth Rate: 0.  The need
for bifurcation and fair market value will be assessed on each balance sheet
date over the maturity of the note.   Each 2006 B Note bears
interest at 10% per annum payable at maturity or at the time of conversion in
arrears, in cash, or at the option of the noteholder in common stock at the
conversion rate.





Each
investor participating in the Offering received a Warrant to purchase 6,000
shares of common stock for every $1,000 invested.  The exercise price
of 3,000 of the warrants is $.50 per share and the exercise price for 3000
warrants is $1.00 per share.  The warrants are exercisable for a
period of five years from the date of issuance.  The warrants were
detached and accounted for as a derivative liability.   The
warrants were recorded as a discount of $214,500 which is being amortized over
the life of the convertible note.





On May
15, 2006, the Company sold $250,000 of equity units (the “2006 A Units”) in a
private placement.  Each 2006 A Unit, with a purchase price of $1,000
per unit consists of a 10% convertible note (the “2006 A Notes”) in the
principal amount of $1,000 and 6,000 warrants to purchase our common stock. The
principal balance of each 2006 A Note, along with accrued and unpaid interest,
was payable 6 months after the date of issuance.  The 2006 A Note was
extended until June 30, 2007, subsequently extended to November 01, 2007 and
subsequently extended to May 01, 2008.  The holder of each 2006 A Note
may elect to convert the principal balance of the 2006 A Note into shares of
common stock.  The 2006 A Notes are convertible at a price equal to
the lower of (i) 70% of the average closing price of our common stock on the
exchange on which the Company’s stock is trading for the 20 trading days
immediately preceding the day upon which we receive a conversion notice from the
Noteholder or (ii) $.30 per share (the “Conversion Rate”).  This
conversion feature was recorded as a discount of $175,600 and is being amortized
over the life of the convertible note.  The conversion feature and the
stock purchase warrants were valued using a Black Scholes Option Pricing Model
using the following assumptions: Volatility: 93.5%, Straight Bond Yield: 5.0%,
Risk-free Rate:  4.7% and Dividend Growth Rate: 0.  The need
for bifurcation and fair market value will be assessed on each balance sheet
date over the maturity of the note. Each 2006 A Note bears interest at 10%




- 14
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




per annum
payable at maturity or at the time of conversion in arrears, in cash, or at the
option of the noteholder in common stock at the conversion rate.





Each
investor participating in the Offering received a Warrant to purchase 6,000
shares of common stock for every $1,000 invested.  The exercise price
of the warrants is $.50 per share.  The warrants are exercisable for a
period of five years from the date of issuance.  The warrants were
detached and accounted for as a derivative liability.   The
warrants were recorded as a discount of $285,000 which is being amortized over
the life of the convertible note.





On April
4, 2006, we sold $50,000 of equity units (the “April 2006 Units”) in a private
placement. Each April 2006 Unit, with a purchase price of $1,000 per unit
consists of a 15% convertible note (the “15% April 2006 Notes”) in the principal
amount of $1,000 and 3,000 warrants to purchase our common stock. The original
maturity date of the 15% April 2006 Note was extended to June 30, 2007,
subsequently to November 01, 2007 and subsequently to May 01, 2008. The holder
of the 15% April 2006 Note may elect to convert the principal balance of the 15%
April 2006 Note into shares of our common stock at a price equal to $0.30 per
share (the “Conversion Rate”). Each 15% April 2006 Note bears interest at 15%
per annum payable at maturity or at the time of conversion in arrears, in cash,
or at the option of the noteholder in common stock (at the Conversion Rate). We
paid a total of $2,466 in prepaid interest to the 15% April 2006 Noteholder on
the date of closing, representing four months worth of interest on the 15% April
2006 Note. As of March 31, 2008, there were $50,000 in principal of 15% April
2006 Notes outstanding.  The conversion feature and the stock purchase
warrants were valued using a Black Scholes Option Pricing Model using the
following assumptions: Volatility: 93.5%, Straight Bond Yield: 5.0%, Risk-free
Rate:  4.7% and Dividend Growth Rate: 0.  The need for
bifurcation and fair market value will be assessed on each balance sheet date
over the maturity of the note.





The
investor received a warrant to purchase a total of 150,000 shares of common
stock having an exercise price of $0.30 per share. The warrants are exercisable
for a period of five years from the date of issuance. The warrants were detached
and accounted for as a derivative liability. The warrants were recorded as a
discount of $24,600 which is being amortized over the life of the convertible
note.





A
convertible note in accordance with the Company’s private placement memorandum
dated February 24, 2005 of $750,000 is due on the earlier of the first
anniversary of the closing for the convertible note or the occurrence of a
fundamental change in capital structure.  The convertible note is
convertible into approximately 3.75 million shares of common stock at an
effective conversion price equal to 80% of the price of common stock in the next
equity offering conducted by us or, if no such offering occurs, at the rate of
one share per $2.00 converted.  This conversion feature was recorded
as at a discount of $604,400 and is being amortized over the life of the
convertible note.  The conversion feature and the stock purchase
warrants were valued using a Black Scholes Option Pricing Model using the
following assumptions: volatility: 97.6%, Straight Bond Yield: 5.0%, Risk-free
Rate:  4.7% and Dividend Growth Rate: 0.  The need for
bifurcation and fair market value will be assessed on each balance sheet date
over the maturity of the note.  The notes are available for conversion
into approximately 5,000 shares of the Company’s common stock for each $1,000
note.   The notes are issued at par and pay interest of 10%
annually.  The interest is payable at the option of the Company, in
cash, or common stock, or a combination of cash and common stock.  The
holder may elect at any time after purchase prior to maturity or redemption to
convert the note into the Company’s common stock.  The convertible
notes are unsecured obligations of the Company. As of March 31, 2008, $750,000
of the convertible notes has been converted to common stock.





A
convertible note in accordance with the Company’s private placement memorandum
dated October 24, 2003 of $4.9 million is due on the earlier of the fifth
anniversary of the closing for the convertible notes or the occurrence of a
fundamental change in capital structure.  The convertible notes are
convertible into




- 15
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




approximately
19.2 million shares of common stock at $0.25 per share.  The notes are
available for conversion into approximately 4,000 shares of the Company’s common
stock for each $1,000 note.   The notes are issued at par and pay
interest of 8.5% annually.  The interest is payable at the option of
the Company, in cash, common stock, or a combination of cash and common
stock.  The holder may elect at any time after purchase prior to
maturity or redemption to convert the note into the Company’s common
stock.  The convertible notes are unsecured obligations of the
Company. As of March 31, 2008, $1,236,000 of the convertible notes has been
converted to common stock.





In
connection with the issuance of all of our convertible notes, we granted demand
and piggy-back registration rights with respect to the shares issuable for
interest or upon conversion of such notes. The registration rights cease at the
time the shares are eligible for sale under Rule 144 of the Securities Act. As
of December 31, 2006, the underlying shares related to the 2003 Convertible
Notes issued in 2003 and 2004 were eligible for sale under Rule 144 and the
underlying shares related to all notes issued since January 1, 2005 had
registration rights.





All
derivative liabilities are assessed at each balance sheet date and are marked to
market.  At March 31, 2008, the following assumptions were utilized
using the Black Scholes option pricing model:  Volatility: 78.0%,
Straight Bond Yield: 5.0%, Risk-free Rate:  4.7% and Dividend Growth
Rate: 0.





Non-Convertible
Notes


On March
26, 2008, we sold $50,000 of non-convertible 12% promissory notes (the “2008 B
Notes”) to a lender in a private transaction.  The principal balance
of the 2008 B Notes, along with accrued and unpaid interest is payable on the
earlier of (i) April 25, 2008 and (ii) the closing by the Company on aggregate
gross equity financings of $50,000.  Interest is payable at the rate
of 12% per annum from the issuance date to maturity, however, the Company shall
pay a total of $2,500 in interest for the first 30 days of the
Note.  In consideration of marking the loan, the Company reduced the
exercise prices of the following warrants held by the lender:  150,000
warrants with an original exercise price of $1.50 were reduced to $0.50 and
200,000 warrants with an original exercise price of $1.00 were reduced to $0.30.
On April 4, 2008 the 2008 B Notes were repaid.





On March
27, 2007 we sold $50,000 of non-convertible 13% promissory notes (the “13% 2007
A Notes”) to a lender in a private transaction. The principal balance of the 13%
2007 A Notes, along with accrued and unpaid interest, was payable on September
1, 2007.  The 2007 A Note was extended until November 01, 2007 and
subsequently extended to May 01, 2008. The 13% 2007 A Notes bear interest at 13%
per annum payable in cash at maturity in arrears.  We paid a total of
$1,625 in prepaid interest to the 13% 2007 A Noteholder on the date of closing,
representing three months worth of interest on the 13% 2007 A Notes plus a 5%
origination fee of $2,500.





Maturities
of debt are as follows:





For
      the year ended December 31, 2008
            
            $
            4,522,078For
      the year ended December 31, 2009 & thereafter
            
            
            2,327,000Total
            
            $
            6,849,078





- 16
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)





The
derivative liability consists of the following:





Date
            Description
            
            Balance12/31/06
            Conversion
      option 2006 Bridge Loans at fair market value
            
            $
            602,34112/31/06
            Warrant
      liability on 2005 Bridge Loans at fair market value
            
            
            331,12212/31/06
            Warrant
      liability on 2006 Bridge Loans issuance at fair market
    value
            
            
            854,62112/31/06
            Warrant
      liability on 2006 advisory contract at fair market value
            
            
            712,00012/31/07
            Conversion
      option on 2006  Bridge Loans issued during 2007
            
            
            13,92012/31/07
            Warrant
      liability on 2006 Bridge Loans issued during 2007
            
            
            187,75212/31/07
            Conversion
      option on 2007  Bridge Loans
            
            
            259,11612/31/07
            Warrant
      liability on 2007 Bridge Loans
            
            
            768,97712/31/07
            Warrant
      liability on 2007 advisory contract at fair market value
            
            
            34,75012/31/07
            Fair
      market value adjustment on the 2006 advisory contract
            
            
            (140,000
            )12/31/07
            Fair
      market value adjustment on conversion options
            
            
            (99,207
            )12/31/07
            Fair
      market value adjustment on warrant liabilities
            
            
            (528,823
            )12/31/07
            Fair
      market value adjustment on the 2007 advisory contract
            
            
            (3,500
            )03/31/08
            Conversion
      option on 2008  Bridge Loans
            
            
            14,62703/31/08
            Warrant
      liability on 2008 Bridge Loans
            
            
            47,57503/31/08
            Fair
      market value adjustment on the 2006 advisory contract
            
            
            (20,000
            )03/31/08
            Fair
      market value adjustment on conversion options
            
            
            (161,682
            )03/31/08
            Fair
      market value adjustment on warrant liabilities
            
            
            (56,325
            )Total
            
            
            $
            2,817,264




NOTE 5 – ACCRUED SALARIES
AND INTEREST:





Accrued
salaries and interest represents salaries and interest due to officers of the
Company. During the three months ended March 31, 2008 and 2007, the Company
accrued salaries in the amounts of $ 0 and $21,875, respectively, and accrued
interest on the salaries of $7,134 and $4,061, respectively. At March 31, 2008
the officers were due $287,597 in accrued salaries along with interest on the
accrued salaries of $55,278. At December 31, 2007 the officers were due $287,597
in accrued salaries along with interest on the accrued salaries of $48,143.
Interest is accrued at a rate of 8.500% per annum.





Accrued
salary and interest repayments related to the above during the three months
ended March 31, 2008 and 2007 amounted to $0.





Accrued
salary and interest repayments related to the above during the year ended
December 31, 2007 amounted to $27,596.





NOTE 6 – PROVISION FOR
INCOME TAXES:





As of
March 31, 2008 and December 31, 2007, non-current deferred tax liabilities for
taxable temporary differences total $0 and $0, respectively. As of March 31,
2008 and December 31, 2007, non-current deferred tax assets recognized for
deductible temporary differences total $8,760,352 and $8,446,101,
respectively.




- 17
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)





The
Company’s deferred tax assets and liabilities consist of the following at March
31, 2008:





Deferred
      tax assets:Net
      operating loss carryforwards
            
            $
            8,553,307Excess
      of tax basis over financial statement    of intangible
      assets
            
            
            206,105Excess
      of tax basis over financial statement of property, plant and
      equipment
            
            
            940Valuation
      allowance for deferred tax assets
            
            
            (8,760,352
            )$
            0





The
Company’s deferred tax assets and liabilities consist of the following at
December 31, 2007:





Deferred
      tax assets:Net
      operating loss carryforwards
            
            $
            8,232,879Excess
      of tax basis over financial statement    of intangible
      assets
            
            
            212,327Excess
      of tax basis over financial statement of property, plant and
      equipment
            
            
            895Valuation
      allowance for deferred tax assets
            
            
            (8,446,101
            )$
            0





A
valuation allowance has been established to eliminate the net deferred tax
benefit since it is uncertain if the tax benefits will be realized. This
allowance was increased by $2,085,096 to $8,446,101 at December 31, 2007, and
increased by $314,251 to $8,760,352 at March 31, 2008.





Income
tax expense for the three months ended March 31, 2008 and 2007 consisted of the
following:





March 31, 2008
            
            
            March 31, 2007Current
      State Tax
            
            $
            520
            
            
            $
            800





As of
March 31, 2008, the Company had net operating loss carryforwards of $24,214,349
that can be deducted against future taxable income. These tax carryforward
amounts expire as follows:




Year
      Ending
              December
      31,12/31/19
            
            $
            1,101,28212/31/20
            
            
            2,862,19112/31/21
            
            
            1,032,22612/31/22
            
            
            2,036,11412/31/23
            
            
            2,099,39412/31/24
            
            
            2,675,93112/31/25
            
            
            2,723,50912/31/26
            
            
            4,633,09812/31/27
            
            
            5,050,604$
            24,214,349





NOTE 7 – CONCENTRATION OF
CREDIT RISK:





The
Company maintains its cash balances in two financial institutions.  As
of March 31, 2008 and December 31, 2007, the Company’s cash and cash equivalents
exceeded federally insured limits by $0.




- 18
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)





NOTE 8 – CASH FLOW
DISCLOSURES:





Non-cash
investing and financing transactions for the three months ended March 31, 2008
included the following:





Convertible
notes along with accrued interest totaling $142,772 were converted into common
stock.





NOTE 9 – 401K AND PROFIT
SHARING PLAN:





The
Company maintains a 401K and Profit Sharing Plan.  Contributions to
the Profit Sharing Plan are at management’s discretion.  For the three
months ended March 31, 2008 and 2007, management has committed to contribute $0
and $0, respectively to the plan.





Matching
corporate contributions to the 401K plan are at management’s discretion and only
apply to those employees who choose to participate.  Matching
contributions to the 401K plan amounted to $0 and $0, respectively for three
months ended March 31, 2008 and 2007.





NOTE 10 –
RELATED PARTY TRANSACTIONS:





Consulting


In
September 2007, the Company signed a consulting agreement with Phoenix Ventures,
a related party. The agreement, starting November 01, 2007, calls for monthly
consulting fees of $3,000. In addition, the Company will issue to Phoenix
Ventures 12,000 option shares at an exercise price of $0.30 per share. 1,000
options will vest each month this contract is in effect. The vested options
shall be exercisable for ten years regardless of whether or not this contract is
in effect at the time of exercise. This agreement is set to end on October 31,
2008. Consulting fees pertaining to this contract amounted to $9,000 during the
three months ended March 31, 2008 along 3,000 stock options vesting which were
granted during 2007.





Consulting
fees pertaining to a prior contract with Phoenix Ventures amounted to $18,000
during the three months ended March 31, 2007 along with 7,500 stock options
vesting which were granted during 2006.





In June
2006, the Company entered into a services agreement with Bartolomei Pucciarelli,
LLC, a related party.  Fees will be paid to Bartolomei Pucciarelli,
LLC on an hourly basis for financial reporting and related
services.  As of March 31, 2008, the Company incurred fees of
approximately $359,098 relating to this agreement. As of March 31, 2008,
$221,295 of these fees are still outstanding. As of December 31, 2007, the
Company incurred fees of approximately $328,464 relating to this agreement. As
of December 31, 2007, $190,661 of these fees are still outstanding. On September
17, 2007 Bartolomei Pucciarelli, LLC was granted 100,000 stock options for
services rendered.





NOTE 11 – STOCK OPTION
PLAN:





As of
July 12, 2007, the Company’s 2006 Stock Incentive Plan, as amended (the “2006
Plan”) was approved by the holders of a majority of the Company’s common stock
by written consent. Pursuant to the terms of the 2006 Plan, an aggregate of 12
million shares of Company common stock may be awarded to individuals under the
2006 Plan. The 2006 Plan terminates in 2016. Notice of the approval of the 2006
Plan by the stockholders was sent to all to the stockholders of the
Company.





The
Company issued employee stock options through stock-based compensation
plans.  Effective January 1, 2006, the Company adopted the fair value
method of recording stock-based compensation, as defined in SFAS No. 123(R)
“Stock-Based Payments”, under the modified prospective transition method for
stock




- 19
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




options
awarded to employees after the date of adoption and for previously issued stock
options that were not vested as of January 1, 2006 which were issued under the
Company’s stock based compensation plan.  Under the modified
prospective transition method, the Company is required to recognize compensation
expense for options granted commencing January 1, 2006 and
thereafter.  Additionally, the fair value of existing unvested awards
at the date of adoption is recorded in compensation expense over the remaining
requisite service period.  Prior to January 1, 2006, the Company
applied Accounting Principles Board Opinion (APB) No. 25 “Accounting for Stock
Issued to Employees” and related interpretations in accounting for stock options
and other stock-based compensation.  APB No. 25 required the use of
the intrinsic value method, which measured compensation cost as the excess, if
any, of the quoted market price of the stock at the measurement date over the
amount an employee must pay to acquire the stock.





Compensation
cost recognized for the three months ended March 31, 2008 and 2007 was $69,521
and $224,489, respectively and is the same as that which would have been
recognized had the recognition provision of SFAS No. 123(R) been applied in
previous years.  Results for prior periods have not been
restated.  The Company recognizes a non-employee who sits on the board
of directors and is compensated by the Company solely for the individual’s role
as a director as an employee under SFAS 123(R).





During
the three months ended March 31, 2008 there were no option issuances. The
following assumptions were used in the Black Scholes pricing model for the 2007
option issuance:





Fair
      Market Value
            Exercise
      Price
            Expected
      Term
            Dividend
      Yield
            Interest
      Rate
            Volatility$0.25
            $0.30
            10
      years
            -0-
            4.7%
            78%








The
status of the stock option plan is as follows at March 31, 2008:





Number
            
            
            WeightedOf
            
            
            AverageShares
            
            
            ExercisePriceOutstanding
      at December 31, 2007
            
            
            11,205,333
            
            
            $
            0.25Granted
            
            
            1,161,999
            
            
            $
            0.30Exercised
            
            
            —
            
            
            
            —Canceled
            
            
            —
            
            
            
            —Outstanding
      at December 31, 2007
            
            
            12,367,332
            
            
            $
            0.26Granted
            
            
            —
            
            
            
            —Exercised
            
            
            —
            
            
            
            —Canceled
            
            
            —
            
            
            
            —Outstanding
      at March 31 2008
            
            
            12,367,332
            
            
            
            0.26Exercisable
      at March 31, 2008
            
            
            10,210,324
            
            
            $
            0.26Exercisable
      at December 31, 2007
            
            
            9,750,658
            
            
            $
            0.25




- 20
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




NOTE 12 – STOCKHOLDERS’
EQUITY:





During
2008, the Company converted $120,000 of the Company’s 2003 convertible debt and
$22,772 of accrued interest on the 2003 convertible debt into 571,093 shares of
the Company’s common stock.





On July
13, 2007, the Company filed an Amendment to its Amended and Restated Certificate
of Incorporation with Secretary of State of Delaware to increase the number of
authorized shares of the Company’s common stock to 500,000,000 shares and
preferred stock to 100,000,000 shares.





During
2007, the Company converted $1,016,000 of the Company’s 2003 convertible debt
and $148,846 of accrued interest on the 2003 convertible debt into 4,656,877
shares of the Company’s common stock.





During
2007, the Company converted $5,000 of the Company’s 2005 convertible debt and
$500 of accrued interest on the 2005 convertible debt into 34,375 shares of the
Company’s common stock.





On
January 23, 2006, the Company entered into a Standby Equity Distribution
Agreement (SEDA) with YA Global Investments, L.P. (formerly known as Cornell
Capital Partners, L.P.) (“YA Global”) which provided for the periodic sale by us
to YA Global of shares of our common stock for a total purchase price of up to
$10 million, subject to the conditions and limitations set forth in that
agreement.  In consideration of the commitment of YA Global to
purchase up to $10 million of our shares of common stock pursuant to the standby
equity distribution agreement YA Global received a one-time commitment fee in
the form of 2,000,000 shares of the Company’s common stock equaling
approximately $500,000 (the “YA Global Shares”).  We engaged Newbridge
Securities Corporation, a registered broker-dealer, to advise us in connection
with the standby equity distribution agreement. We were introduced to Newbridge
Securities Corporation by YA Global. No written material was provided to us by
Newbridge Securities Corporation in connection with this transaction. We have no
knowledge as to whether Newbridge Securities Corporation studied the effect of
standby equity distribution agreements on the market price of an issuer’s
securities. While we are aware of the fact that Newbridge Securities Corporation
has advised other companies that have entered into standby equity distribution
agreements with YA Global as reported in the public filings of such companies,
we have no other knowledge of the relationship between Newbridge Securities
Corporation and YA Global, any compensation that Newbridge Securities
Corporation receives from YA Global except as reported in the public filings of
such companies or the portion of Newbridge Securities Corporation’s business
that is derived from transactions involving YA Global. For its services to us in
connection with this transaction, Newbridge Securities Corporation received a
fee of $10,000 by the issuance of 40,000 shares of our common stock (the
“Newbridge Shares”). These shares were accounted for at fair market value and
were recorded to stock issuance costs in 2006.





Before
entering into the standby equity distribution agreement with YA Global, we
considered various alternative debt and equity financing arrangements with
potential financing sources. We considered the standby equity distribution
agreement to be a preferable arrangement because we are not required to take the
aggregate amount of the funds under the arrangement all at once or at all. In
connection with the approval of the standby equity distribution agreement we
considered this and other factors including, the possible effect of the standby
equity distribution agreement on the market price of our common stock, once a
market develops for our stock.





On
November 14, 2007, we entered into a Termination Agreement with YA Global and
Newbridge Securities Corporation (the “Termination Agreement”) pursuant to which
the parties terminated the standby equity distribution agreement, the
registration rights agreement and the placement agent agreement, each dated as
of January 23, 2006. Pursuant to the Termination Agreement, Newbridge Securities
Corporation will retain the 40,000 Newbridge Shares. YA Global agreed in March
2008 to return the 2,000,000 YA Global




- 21
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




Shares to
us.  No shares were issued under the standby equity distribution
agreement.  We are currently pursuing other financing in lieu of the
standby equity distribution agreement financing.





The stock
issuance costs referenced above consisted of: $510,000 represented the recording
of the 2,040,000 shares of common stock issued in conjunction with the Standby
Equity Distribution Agreement, legal & consulting fees related to the
Standby Equity Distribution Agreement, and other registration related services.
Legal services are provided on an hourly basis and the consulting fees paid to
investment bankers for services related to equity transactions during the
year.





In an
effort to determine the fair market value of our common stock, which is not
readily determinable or actively traded, we applied SFAS No. 157 “Fair Value
Measurements” to derive the historical and the current fair market value of our
common stock.  SFAS No. 157 states, “This Statement emphasizes that
fair value is a market-based measurement, not an entity specific
measurement.  Therefore, fair value measurement should be determined
based on the assumptions that market participants would use in pricing the
asset.”





Fair
market value during 2003/2004 was set at $1.33.  We derived this fair
market value by analyzing the conversion rate of the 2003/2004 private placement
agreement.  Offerees were invited to purchase a $1,000 unit, and in
return, the offering received a conversion rate of 1 share of our common stock
for every $2.00 plus 250 share of our Company’s common stock.  For a
$1,000 Unit, the offerees potentially receive 750 shares of our Company’s common
stock.





Fair
market value during 2007 was set at $.25 as a result of the following
considerations: As part of the negotiations of the aforementioned Standby Equity
Distribution Agreement, YA Partners was seeking initial compensation in the
amount of $500,000. YA Partners agreed to accept 2,000,000 shares of our common
stock as such compensation. This transaction resulted in a fair market value of
$.25 per share. The amount of shares issued as compensation was the result of an
arms length negotiation between unrelated parties and this is the only capital
transaction during the time period under consideration.  Furthermore,
we also considered the fair market value of our common stock in the previous
issuances, the changes in the Company’s financial position, progressions in
product development and the effects of dilutive debt conversions in determining
the fair market value of our stock during 2007.  Accordingly, we
believe that $.25 is the best indication of fair market value for our stock
during 2007 and through March 31, 2008.





Warrants


North
Coast Securities Corporation (North Coast) served as placement agent for us in
the private placement of the 2007 F Units.  As partial consideration
for services rendered as placement agent, during 2007 the Company issued North
Coast five year warrants to purchase up to 18,667 shares of Company common stock
at $0.33 per share, expiring throughout 2012.  The warrants were
valued using a Black Scholes Option Pricing Model, utilizing the following
assumptions:  Volatility:  78.0%, Risk-Free Rate: 4.7%, and
Dividend Growth Rate: 0%.





Dawson
James served as placement agent for us in the private placement of the 2007 F
Units.  As partial consideration for services rendered as placement
agent, during 2007 the Company issued Dawson James five year warrants to
purchase up to 200,002 shares of Company common stock at $0.30 per share,
expiring throughout 2012.  The warrants were valued using a Black
Scholes Option Pricing Model, utilizing the following
assumptions:  Volatility:  78.0%-82.0%, Risk-Free Rate:
4.7%, and Dividend Growth Rate: 0%.





On August
15, 2007, the Company issued Warrants to purchase 250,000 shares of the
Company’s common stock, $0.01 par value.  The exercise price of the
warrants is $0.50 per share and the warrants expire August 15, 2012. The
warrants were valued using a Black Scholes Option Pricing Model, utilizing the
following assumptions:  Volatility:  82.0%, Risk-Free Rate:
4.7%, and Dividend Growth Rate: 0%.





- 22
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




The
aforementioned warrants were issued in conjunction with a twelve month
consulting agreement with Dawson James Securities, Inc. (Dawson James.)
Accordingly, the cost of these warrants has been recorded as a prepaid expense
with the appropriate charges to income as time passes. The warrants were also
accounted for as a derivative liability. The warrants were recorded as a
discount of $34,750 and are being amortized over the life of the consulting
agreement.  Under this agreement Dawson James is contracted to assist
the Company with investment banking and public relations services.





On July
1, 2006, the Company issued Warrants to purchase 4,000,000 shares of the
Company’s common stock, $0.01 par value.  The exercise price of the
warrants is $0.25 per share and the warrants expire July 1, 2011. The warrants
were valued using a Black Scholes Option Pricing Model, utilizing the following
assumptions:  Volatility:  97.6%, Risk-Free Rate: 4.7%, and
Dividend Growth Rate: 0%.





The
aforementioned warrants were issued in conjunction with a ten month consulting
agreement with North Coast Securities Corporation (North Coast). Accordingly,
the cost of these warrants has been recorded as a prepaid expense with the
appropriate charges to income as time passes. The warrants were also accounted
for as a derivative liability. The warrants were recorded as a discount of
$736,000 and are being amortized over the life of the consulting
agreement.  Under this agreement North Coast is contracted to assist
the Company with investment banking and public relations services.





NOTE 13 - EARNINGS (LOSS)
PER SHARE:





Basic
earnings (loss) per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding for the period. Diluted
earnings (loss) per share is computed giving effect to all potential dilutive
common stock, including options and convertible debentures. For all periods
presented, options and convertible debentures were not included in the
computation of diluted loss per share because the effect would be antidilutive.
These items could be dilutive in the future.





NOTE 14 – LEASING
ARRANGEMENTS:





Trenton, New
Jersey  Facility


In
September of 2006, the Company assumed a lease for their facility in Trenton,
NJ.  The lease requires a base rent of $3,738.46 (increasing to
$3,897.54 on January 1, 2007) per month along with its proportionate share of
taxes, common area maintenance charges and insurance beginning on September 01,
2006 for a period of sixteen months. On December 31, 2007 the Company extended
this lease for an additional five years. The term of this lease agreement
expires December 31, 2012. The total rent incurred for the three months ended
March 31, 2008 and 2007 was $8,772 and $12,986, respectively.





NOTE 15 – OFFICERS AND
DIRECTORS:





In
February of 2006 Robert Prunetti was elected CEO and President of the
Company.





NOTE 16 –
COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES:





Going
Concern


As shown
in the accompanying financial statements, the Company incurred a net loss of
$773,747 during the three months ended March 31, 2008, and as of that date, the
Company’s current liabilities exceeded its current assets by $9,593,333. Those
factors raise substantial doubt about the Company’s ability to continue as a
going concern. Management of the Company plans to raise additional capital
through private placement offerings. The ability of the Company to continue as a
going concern is dependent on its ability to raise




- 23
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL STATEMENTS
 (Unaudited)




additional
capital through private placement offerings. The financial statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern.





NOTE 17 – SUBSEQUENT
EVENTS:





2008 C
UNITS.  On April 4, 2008, April 22, 2008 and May 12, 2008, the Company
sold $179,000, $88,500 and $32,500 of units, respectively, to lenders in a
private transaction.  Each Unit consists of an unsecured
non-convertible promissory note in the principal amount of $1,000 (the “2008 C
Notes”), and 3,000 warrants to purchase one share of our common stock at $0.30
per share ( the “Warrants”).   The 2008 C Notes will bear
interest at 12% per annum and will mature 180 days from the date of issuance if
not redeemed by such date (the “Maturity Date”).  The 2008 C Notes may
be redeemed by the Company in whole or in part at any time at a redemption price
equal to 100% the principal amount of 2008 C Notes to be redeemed plus accrued
and unpaid interest upon ten trading days prior notice (“Optional
Redemption”).  The 2008 C Notes will be redeemed by the Company on the
20th
day after the Mandatory Redemption Event (as herein defined) at a redemption
price equal to 100% the principal amount of 2008 C Notes to be redeemed plus
accrued and unpaid interest upon ten trading days prior notice (“Mandatory
Redemption”).  The Mandatory Redemption Event shall be the date on
which the Company has closed on aggregate gross equity financings of $1 million
prior to the Maturity Date.  If the 2008 C Notes have not been
redeemed as of the Maturity Date, the principal and interest due thereunder will
be paid by the Company in cash.  The Warrants included in the Units
are exercisable for shares of Company common stock at any time beginning on the
date of issuance and ending five years from the date of issuance at an exercise
price of $0.30 per share.  For the $179,000 of 2008 C Units sold on
April 4, 2008, the total offering price and total commissions paid to
broker-dealers were $179,000 and $25,060, respectively.  For the
$88,500 of 2008 C Units sold on April 22, 2008, the total offering price and
total commissions paid to broker-dealers were $88,500 and $12,390, respectively.
For the $32,500 of 2008 C Units sold on May 12, 2008, the total offering price
and total commissions paid to broker-dealers were $32,500 and
$4,550.  Broker-dealer commissions consisted of a commission of 14% of
the gross offering proceeds raised by the finder in this
offering.  Such fees were deducted from the offering proceeds. The
proceeds from the 2008 C Units were used for working capital
purposes.





On April
15, 2008, the Company granted 600,000 fully vested options with an exercise
price of $0.25 to Robert D. Prunetti in lieu of granting 400,000 restricted
shares which are deliverable under the employment agreement between the Company
and Mr. Prunetti.  This issuance was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act of
1933.





On April
15, 2008, the Company granted 75,000 options with an exercise price of $0.30 to
each of two employees which vest 1/3 on April 15, 2008, 1/3 on April 15, 2009
and 1/3 on April 15, 2010, provided the optionee is providing services to the
Company on such dates.  This issuance was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act of
1933.





On April
15, 2008, the Company granted 50,000 options with an exercise price of $0.30 to
a consultant, which vest 1/3 on April 15, 2008, 1/3 on April 15, 2009 and 1/3 on
April 15, 2010, provided the optionee is providing services to the Company on
such dates.  This issuance was exempt from registration requirements
pursuant to Section 4(2) of the Securities Act of 1933.





On April
15, 2008, the Company granted 100,000 options with an exercise price of $0.30 to
its law firm for services provided, which vest 1/3 on April 15, 2008, 1/3 on
April 15, 2009 and 1/3 on April 15, 2010, provided the optionee is providing
services to the Company on such dates.  This issuance was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act of
1933.




- 24
-
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES TO FINANCIAL
STATEMENTS





On April
15, 2008, the Company granted 100,000 options with an exercise price of $0.30 to
a consultant, which vest 1/3 on April 15, 2008, 1/3 on April 15, 2009 and 1/3 on
April 15, 2010, provided the optionee is providing services to the Company on
such dates.  This issuance was exempt from registration requirements
pursuant to Section 4(2) of the Securities Act of 1933.





On April
15, 2008, the Company issued 100,000 warrants to an individual for services
provided to the Company, having an exercise price of $0.30 per share and an
expiration date of December 31, 2010.  This issuance was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act of
1933.





On May
14, 2007, we sold $300,000 of equity units (the “2007 C Units”) in a private
placement consisting of a 15% convertible note in the principal amount of
$300,000 (the “2007 C Note”) and 1,500,000 five year warrants to purchase our
common stock at an exercise price of $0.30 (the “Original 2007 C Warrants”)
pursuant to a Subscription Agreement dated May 14, 2007 (the “Subscription
Agreement”) between the Company and the investor (the
“Investor”).  The 2007 C Note had an original conversion price of
$0.50 per share.  The principal balance of the 2007 C Note, along with
accrued and unpaid interest, was payable on July 13, 2007.  Section
2.3 (b) of the Subscription Agreement provides that in the event the 2007 C Note
is not repaid on July 13, 2007, the Company shall issue to the Investor an
additional 50,000 warrant to purchase shares of Company common stock for each 45
days that the Note is unpaid past July 13, 2007, with such warrants having
substantially the same terms as the Original 2007 C Warrants.  The
2007 C Note was extended until November 1, 2007 and subsequently extended to
June 1, 2008.  An amendment agreement (the “Amendment”) was entered
into as of May 1, 2008 by and between the Investor and the Company pursuant to
which the parties agreed to amend the Subscription Agreement, the 2007 C Note
and the Original 2007 C Warrants as follows.  The Maturity Date of the
2007 C Note was amended to July 13, 2008.  The Conversion Price of the
2007 C Note was amended to a price per share equal to the lesser of (i) $0.35
per share or (ii) 70% of the average of the closing bid price for the Company’s
Common Stock for the 20 days preceding the notice of conversion, as reported by
the exchange on which the Company’ Common Stock is then
traded.   Pursuant to Section 2.3(b) of the Subscription
Agreement, on May 1, 2008 the Company issued to the Investor five year Warrants
to purchase 300,000 shares of the Company with an exercise price of $0.30 per
share (the “Non Payment Warrants”).  The Company agreed in the
Amendment to issue to the Investor five year Warrants to purchase 150,000 shares
of Company common stock having an exercise price of $0.30.  In the
Amendment the Original 2007 C Warrants were amended as follows:  (i)
300,000 of the Original 2007 C Warrants shall have an exercise price of $0.10
per share, and (ii) 1,200,000 of the Original 2007 C Warrants shall have an
exercise price of $0.30 per share.  Upon the issuance of the Non
Payment Warrants, Section 2.3(b) of the Subscription Agreement was deleted in
its entirety.   This issuance was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act of
1933.




The
Company has obtained the consent of the holders of the following notes to a new
maturity date of September 30, 2008 and a waiver of any event of default as of
May 1, 2008:  2006 A Notes, 2006 B Notes, 2006 C Notes, 2006 G Notes
and 2007 A Notes. The holder of the April 4, 2006 Note delivered a waiver of any
event of default of the April 4, 2006 Note as of May 1, 2008, the maturity date
of such April 4, 2006 Note.


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-





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




Information
included in this Form 10-Q may contain forward-looking statements. This
information may involve known and unknown risks, uncertainties and other factors
which may cause our actual results, performance or achievements to be materially
different from the future results, performance or achievements expressed or
implied by any forward-looking statements. Forward-looking statements, which
involve assumptions and describe our future plans, strategies and expectations,
are generally identifiable by use of the words “may,” “will,” “should,”
“expect,” “anticipate,” “estimate,” “believe,” “intend” or “project” or the
negative of these words or other variations on these words or comparable
terminology.





This Form
10-Q contains forward-looking statements, including statements regarding, among
other things, (a) our projected sales and profitability, (b) our growth
strategies, (c) anticipated trends in our industry, (d) our future financing
plans and (e) our anticipated needs for working capital.  Actual
events or results may differ materially from those discussed in forward-looking
statements as a result of various factors, including, without limitation, the
risks outlined under “Risk Factors” and matters described in this Form 10-Q
generally. In light of these risks and uncertainties, there can be no assurance
that the forward-looking statements contained in this Form 10-Q will in fact
occur.





The
following discussion and analysis should be read together with the financial
statements and the accompanying notes thereto included elsewhere in this Form
10-Q.





GENERAL





We
develop and market performance evaluation and rehabilitation products that
monitor and guide exercise and give real-time motivational feedback. Over the
past nine years, our medical and computer experts have brought together advanced
software and medical technology in order to create MotionTrack, our versatile
proprietary technology platform. Our goal is to transform the way individuals
exercise, train, and rehab from injuries by creating innovative products using
MotionTrack that merges technology with exercise for more accurate and
controlled therapy, injury recovery, and personal training and
fitness.





Our
products have been tested, accepted, and endorsed by leaders in the medical,
rehabilitation and athletic communities. Our SportsRAC Shoulder, Knee and
Forearm systems are installed in physical therapy clinics, and university
athletic departments and with professional sports teams throughout the United
States and Canada.





In
January 2005, we released Core:Tx for Physical Therapists (Core:Tx PT), the
first product to incorporate MotionTrack technology, a wireless motion and
position sensing system. This system is the culmination of several years of
development effort, including three new patent applications. Core:Tx for
Professionals, an improved version of Core:Tx PT is currently being marketed to
the clinical physical therapy market. An enhanced and targeted version of the
product for stroke survivors was released directly to consumers in the fourth
quarter of 2005. Since the launch of the Core:Tx for Stroke Survivors product
and the marketing of Core:Tx for Professionals, we have been evaluating other
rehabilitation markets, as well as potential new market segments and plan to
begin an intensive effort of marketing Core:Tx products to athletes, health and
fitness enthusiasts, fitness centers, rehabilitation patients and rehabilitation
clinics. We expect to use a broad range of distribution networks designed to
target specific categories of sports at differing skill levels and differing
rehabilitation needs.




The
inherent versatility designed into the MotionTrack technology affords the
opportunity to explore numerous additional markets, including personal fitness,
athletic training, and occupational health and safety. Accordingly, we intend to
develop and market additional PC-based products that will function with an




- 26
-




upgraded
MotionTrack technology system and communicate with a higher performing Core:Tx
device. This new family of Core:Tx products will focus on training for the
health and fitness consumer market, designed to be especially easy to understand
and use, and will be manufactured at a lower price point. These products will be
internet ready, and will include the ability to collect and distribute human
motion data among multiple users.




Future
development and successful brand identity will be linked to our ability to
create high-performance exercise evaluation and monitoring products based on our
MotionTrack technology platform. We intend to produce and market rehabilitation
and fitness aids for both a clinical (rehabilitation or therapy) setting as well
as for use in the home and at the gym. Additionally, we seek to license and
distribute our MotionTrack technology in pre-existing fitness and rehabilitation
products that currently lack the ability to track and monitor motion and
position in real-time.





RESULTS
OF OPERATIONS





THREE
MONTHS ENDED MARCH 31, 2008 COMPARED TO


THREE
MONTHS ENDED MARCH 31, 2007





Revenuesduring the three
months ended on March 31, 2008 of $9,440 increased by $8,851, or 1503%, from
$589 in the corresponding three months ended March 31, 2007 primarily resulting
from an increase in sales of the Core: TX products in the amount of $8,851.
During the quarter ended March 31, 2007 the Company was in the process of
completing enhancements to the Core: TX product, thus sales were
limited.  The product is marketed through the Company’s contract with
Interactive Metronome.





During
the three months ended on March 31, 2008, the Company sold approximately 10
Core:TX units and 2 Core:TX units during the three months ended on March 31,
2007.





Cost of goods sold in the
three months ended March 31, 2008 of $2,814 increased by $2,814 or 100%, from $0
in the corresponding three months ended March 31, 2007. The increase is
primarily attributable to the increase in units sold.  During
management’s transition in 2006, the Company moved primary locations from
Colorado to New Jersey.  During this process, management was unable to
account for products that the previous management team provided to potential
sales distribution channels as demonstration products (the costs of which were
expensed).  Products sold during the quarter ended March 31, 2007,
were assembled from pieces of recovered demo units. Accordingly, the cost of
goods sold for 2007 is significantly lower than it would be had the units sold
been manufactured under normal circumstances.





Research and Development
Expenses during the three months ended March 31, 2008 of $6,564 decreased
by $15,297, or 70%, from $21,861 in the corresponding three months ended March
31, 2007. The decrease in research and development expenses is primarily
attributable to the Company completing product enhancements during
2007.  Management engaged outside contractors for research and
development needs during the first quarter of 2007 in the amount of $21,300 as
compared to salary expenses of $5,760 for the corresponding quarter ended March
31, 2008.





General and Administrative Expensesduring the three months ended March 31, 2008 of $400,088 decreased by
$364,704, or 48%, from $764,792 in the corresponding three months ended March
31, 2007.  This decrease was primarily attributable to the decrease in
consulting expenses of $201,282, stock option expenses of $154,968, general and
administrative salaries of $39,171, and accounting fees of
$23,203.  These decreases relate to management’s efforts to raise
capital, and the registration of the Company with the Securities Exchange
Commission during the quarter ended March 31, 2007.  The decreases
were offset by an increase in legal fees of $59,049.




- 27
-





Sales and Marketing Expensesduring the three months ended March 31, 2008 of $51,224 increased by
$25,842, or 102%, from $25,382 in the corresponding three months ended March 31,
2007. The increase is primarily attributable to an increase in marketing
consultants in the amount of approximately $20,000.  Advertising costs
increased approximately $4,546.  During the quarter ended March 31,
2007, the Company’s focus was on product enhancements and registering the
Company’s common stock with the Securities Exchange
Commission.




Amortization during the
three months ended March 31, 2008 of $87,236 decreased by $65,026, or 43%, from
$152,262 during the corresponding three months ended March 31,
2007.  The decrease is primarily attributable to amortization expense
on the debt issuance costs associated with the 2006 bridge loans that were fully
amortized during the year ended December 31, 2007.  Minimal
amortization expense was recorded on these issuances during the three months
ended March 31, 2008.





Interest expense, net of interest
income and interest expense related to beneficial conversion during the
three months ended March 31, 2008 of $472,761 decreased by $269,116, or 36%,
from $741,877 during the corresponding three months ended March 31,
2007.  The decrease is primarily attributable to the maturity and
conversions of outstanding convertible notes during the period.





Gain on Conversion
Liability during the three months ended March 31, 2008 of $238,007
decreased by $130,027 or 35% from $368,034 during the corresponding three months
ended March 31, 2007.  The decrease is primarily attributable to the
valuation of the derivative liability at the end of the reporting period in
accordance with SFAS 133, which requires embedded derivatives to be marked to
market at each balance sheet date.





Net loss to common
shareholders was $(773,747) or $(0.01) per share for the three months
ended March 31, 2008 as compared to a net loss of $(1,338,345) or $(0.03) per
share for the corresponding three months ended March 31, 2007. The decrease in
net loss is primarily attributable to a decrease in consulting expenses, a
decrease in stock option expenses, a decrease in interest expense, a decrease in
amortization expense associated with the Company’s convertible debt outstanding,
and gain on conversion liabilities.





Accumulated Deficit. Since
inception, we have incurred substantial operating losses and expect to incur
substantial additional operating losses over the next few years unless the sales
from our products and licensing efforts yield a sustainable income stream. As of
March 31, 2008 our accumulated deficit was $(26,614,249).





LIQUIDITY
AND FINANCIAL CONDITION





GENERAL





At March
31, 2008, cash and cash equivalents were $12,702. Total liabilities at March 31,
2008 were $11,249,770, consisting of current liabilities in the aggregate amount
of $9,759,379 and long-term liabilities in the amount of $1,490,391. At March
31, 2008, assets included $2,375 in accounts receivable, $25,311 in product
inventory, $125,658 in prepaid expenses, $7,388 in furniture and equipment, net
of depreciation; $228,567 in debt issuance costs, net of amortization; and other
assets of $4,802. As of March 31, 2008, our working capital deficit was
$(9,593,333) as compared to $(8,398,048) at December 31, 2007. We expect to
incur substantial operating losses as we continue our commercialization
efforts.




- 28
-





Our debt
at March 31, 2008 was as follows:




March
      31, 2008Short-term
      note
            
            $
            100,000Short-term
      bridge loans
            
            
            3,085,078Convertible
      notes
            
            
            3,664,000




For more
detailed information on long-term liabilities, see Note 4 to our financial
statements contained herein.




FINANCING
TRANSACTIONS





GENERAL





We have
financed our operations since inception primarily through equity and debt
financings and, loans from shareholders and other related parties.  We
have entered into a number of financing transactions during 2005, 2006, 2007 and
2008 and are continuing to seek other financing initiatives. We will need to
raise additional capital to meet our working capital needs, to complete our
product commercialization process and to execute our marketing strategy. Such
capital is expected to come from convertible securities and the sale of our
common stock. No assurances can be given that such financing will be available
in sufficient amounts or at all.





The
Company used the proceeds from the 2005, 2006, 2007 and 2008 private placement
offerings to fund continued research and development and marketing of the
Core:Tx Stroke and Core:Tx for Professionals products. The Company used
approximately $629,000 on the continued development of the products. The Company
also used approximately $606,000 on selling and marketing campaigns. The
remaining proceeds from the issuances have been used to fund the Company’s
general operating costs and a portion of the expenses associated with the
registration of the Company’s common stock under the Securities Exchange Act of
1934. The Company has incurred approximately $1,310,000 of professional fees in
conjunction with the SEC registration. At March 31, 2007, $540,624 of these fees
are unpaid and included in Accounts Payable.





Currently,
the Company is burning approximately $85,000 month on recurring expenses. Of the
$85,000 monthly burn rate, 75% is comprised of general and administrative costs,
20% is comprised of sales and marketing and 5% is comprised of continued product
refinement and support costs.





The
following is a general description of our most recent financing transactions.
See also the Notes to Financial Statements included with this
Report.





2008 A UNITS.  In
January and February 2008, the Company sold $275,000 of equity units (“2008 A
Units”) in a private placement.  Each 2008 A Unit consists of an
unsecured convertible promissory note in the principal amount of $1,000 (the
“2008 A Notes”) and 2,000 warrants (the “Warrants”) to purchase one share of
Company common stock. The 2008 A Notes bear interest at 10% per annum and will
mature 180 days from the date of issuance (the “Maturity Date”). The 2008 A
Notes are convertible into shares of Company common stock at a price equal to
80% of the average of the closing bid price for our common stock for the 20 days
preceding the Conversion Notice, as reported by the exchange on which our common
stock is then traded but in any event not less than $0.40 (the “Conversion
Price”). The 2008 A Notes may be redeemed by the Company, upon ten trading days
prior notice, during which time the Noteholder may convert the 2008 A Notes into
Company common stock.  The Notes will be redeemed by the Company on
the 20th day
after the Mandatory Redemption Event (as herein defined) at a redemption price
equal to 100% the principal amount of Notes to be redeemed plus accrued and
unpaid interest upon ten trading days prior notice, during which time the
Noteholder may convert the Notes into Company common stock (“Mandatory
Redemption”).  The




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-




Mandatory
Redemption Event will be the date on which the Company has closed on aggregate
gross equity financings of $1 million prior to the Maturity Date.  If
the 2008 A Notes have not been redeemed or converted as of the Maturity Date,
the principal and interest due thereunder will be paid by the Company in shares
of Company common stock valued at the then applicable Conversion Price. Sixty
days of pre-paid interest was paid by the Company at the time of closing along
with an origination fee of 5% of the principal of the 2008 A Notes purchased.
The exercise price is $1.00 for 1,000 of the Warrants and $1.50 per share for
the remaining 1,000 Warrants. The Warrants will be exercisable for a period of
five years from the date of issuance. The shares issuable upon conversion of the
Notes and exercise of the Warrants have piggyback registration
rights.  There is no penalty provision in the event we do not register
such shares.





2008 B NOTES.On
March 26, 2008, we sold $50,000 of non-convertible 12% promissory notes (the
“2008 B Notes”) to a lender in a private transaction.  The principal
balance of the 2008 B Notes, along with accrued and unpaid interest is payable
on the earlier of (i) April 25, 2008 and (ii) the closing by the Company on
aggregate gross equity financings of $50,000.  Interest is payable at
the rate of 12% per annum from the issuance date to maturity, however, the
Company shall pay a total of $2,500 in interest for the first 30 days of the
Note.  In consideration of marking the loan, the Company reduced the
exercise prices of the following warrants held by the lender:  150,000
warrants with an original exercise price of $1.50 were reduced to $0.50 and
200,000 warrants with an original exercise price of $1.00 were reduced to
$0.30.  On April 4, 2008 the 2008 B Notes were repaid.





2008 C UNITS.  On
April 4, 2008, April 22, 2008 and May 12, 2008, the Company sold $179,000,
$88,500 and $32,500 of units, respectively, to lenders in a private
transaction.  Each Unit consists of an unsecured non-convertible
promissory note in the principal amount of $1,000 (the “2008 C Notes”), and
3,000 warrants to purchase one share of our common stock at $0.30 per share (
the “Warrants”).   The 2008 C Notes will bear interest at 12% per
annum and will mature 180 days from the date of issuance if not redeemed by such
date (the “Maturity Date”).  The 2008 C Notes may be redeemed by the
Company in whole or in part at any time at a redemption price equal to 100% the
principal amount of 2008 C Notes to be redeemed plus accrued and unpaid interest
upon ten trading days prior notice (“Optional Redemption”).  The 2008
C Notes will be redeemed by the Company on the 20th day
after the Mandatory Redemption Event (as herein defined) at a redemption price
equal to 100% the principal amount of 2008 C Notes to be redeemed plus accrued
and unpaid interest upon ten trading days prior notice (“Mandatory
Redemption”).  The Mandatory Redemption Event shall be the date on
which the Company has closed on aggregate gross equity financings of $1 million
prior to the Maturity Date.  If the 2008 C Notes have not been
redeemed as of the Maturity Date, the principal and interest due thereunder will
be paid by the Company in cash.  The Warrants included in the Units
are exercisable for shares of Company common stock at any time beginning on the
date of issuance and ending five years from the date of issuance at an exercise
price of $0.30 per share.  For the $179,000 of 2008 C Units sold on
April 4, 2008, the total offering price and total commissions paid to
broker-dealers were $179,000 and $25,060, respectively.  For the
$88,500 of 2008 C Units sold on April 22, 2008, the total offering price and
total commissions paid to broker-dealers were $88,500 and $12,390, respectively.
For the $32,500 of 2008 C Units sold on May 12, 2008, the total offering price
and total commissions paid to broker-dealers were $32,500 and
$4,550.  Broker-dealer commissions consisted of a commission of 14% of
the gross offering proceeds raised by the finder in this
offering.  Such fees were deducted from the offering
proceeds.





2007 C NOTES.On
May 14, 2007, we sold $300,000 of equity units (the “2007 C Units”) in a private
placement consisting of a 15% convertible note in the principal amount of
$300,000 (the “2007 C Note”) and 1,500,000 five year warrants to purchase our
common stock at an exercise price of $0.30 (the “Original 2007 C Warrants”)
pursuant to a Subscription Agreement dated May 14, 2007 (the “Subscription
Agreement”) between the Company and the investor (the
“Investor”).  The 2007 C Note had an original conversion price of
$0.50 per share.  The principal balance of the 2007 C Note, along with
accrued and unpaid interest, was payable on July 13, 2007.  Section
2.3 (b) of the Subscription Agreement provides that in the event the 2007 C Note
is not repaid on July 13, 2007, the Company shall issue to the Investor an
additional 50,000 warrants




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-




to
purchase shares of Company common stock for each 45 days that the Note is unpaid
past July 13, 2007, with such warrants having substantially the same terms as
the Original 2007 C Warrants.  The 2007 C Note was extended until
November 1, 2007 and subsequently extended to June 1, 2008.  An
amendment agreement (the “Amendment”) was entered into as of May 1, 2008 by and
between the Investor and the Company pursuant to which the parties agreed to
amend the Subscription Agreement, the 2007 C Note and the Original 2007 C
Warrants as follows.  The Maturity Date of the 2007 C Note was amended
to July 13, 2008.  The Conversion Price of the 2007 C Note was amended
to a price per share equal to the lesser of (i) $0.35 per share or (ii) 70% of
the average of the closing bid price for the Company’s Common Stock for the 20
days preceding the notice of conversion, as reported by the exchange on which
the Company’ Common Stock is then traded.   Pursuant to Section
2.3(b) of the Subscription Agreement, on May 1, 2008 the Company issued to the
Investor five year Warrants to purchase 300,000 shares of the Company with an
exercise price of $0.30 per share (the “Non Payment Warrants”).  The
Company agreed in the Amendment to issue to the Investor five year Warrants to
purchase 150,000 shares of Company common stock having an exercise price of
$0.30.  In the Amendment the Original 2007 C Warrants were amended as
follows:  (i) 300,000 of the Original 2007 C Warrants shall have an
exercise price of $0.10 per share, and (ii) 1,200,000 of the Original 2007 C
Warrants shall have an exercise price of $0.30 per share.  Upon the
issuance of the Non Payment Warrants, Section 2.3(b) of the Subscription
Agreement was deleted in its entirety.





AGREEMENTS
WITH PLACEMENT AGENTS AND FINDERS





The
Company entered into a Financial Advisory and Investment Banking Agreement (the
“NC Financial Advisory Agreement”) with North Coast Securities Corporation
(“North Coast”) effective as of July 1, 2006 for a period of 10
months.  Pursuant to the NC Financial Advisory Agreement, the Company
paid to North Coast a fee of $115,000 in exchange for certain financial advisory
services to be provided during the term of the NC Financial Advisory
Agreement.  In addition, the NC Financial Advisory Agreement provided
for payment of a fee equal to 5% of the total consideration received by the
Company either in a debt or equity financing arrangement with an investor
introduced to the Company by North Coast, or in the event of a sale, merger or
sale of significant assets of the Company and/or its affiliates with an investor
introduced to the Company by North Coast. In further consideration for the
services provided by North Coast, the Company granted North Coast Warrants to
purchase 4,000,000 shares of the Company’s common stock at an exercise price of
$0.25 per share, exercisable for a period of five years from July 1,
2006.





The
Company and North Coast have entered into a Placement Agreement on May 15, 2007
(the “Placement Agreement”) pursuant to which North Coast will act as a
placement agent for the placement of up to $700,000 of securities of the Company
and for the placement of up to $3.5 million of the Company’s securities on terms
to be agreed by the Company and North Coast (the “$3.5 Million Placement”)
..  North Coast will receive cash compensation equal to 12% of the
gross offering price, plus an additional non-accountable expense allowance equal
to 3% of the gross offering price, of the securities sold by or through North
Coast.  Additionally, Performance Health has paid North Coast a fee of
$125,000 for due diligence and pre-marketing services, and will pay the legal
fees incurred by North Coast in connection with the offering which includes, but
is not limited to blue sky filing fees and issuance costs.  At each
closing of the $3.5 Million Placement, North Coast will also receive warrants to
purchase such number of shares of common stock as equals 10% of the common stock
issued to investors in the offering.  Such warrants will be
exercisable at a price equal to 110% of the price of common stock in the
offering.





The
Company entered into a Financial Advisory and Investment Banking Agreement with
Dawson James Securities (“Dawson James”) effective July 2, 2007 for a term of
one year (the “DJ Financial Advisory Agreement”). Pursuant to the DJ Financial
Advisory Agreement, the Company paid to Dawson James a fee of $100,000 in
exchange for certain financial advisory services to be provided during the term
of the Financial Advisory Agreement and on August 15, 2007 the Company issued
250,000 five year warrants exercisable at $0.50 per share to Dawson James as
consideration under the DJ Financial Advisory Agreement.  In addition,
the DJ Financial Advisory Agreement provides for payment of a fee equal to 5% of




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the total
consideration received by the Company either in a debt or equity financing
arrangement with an investor introduced to the Company by Dawson James, or in
the event of a sale, merger or sale of significant assets of the Company and/or
its affiliates with an investor introduced to the Company by Dawson
James.





The
Company and Dawson James have entered into a Placement Agreement on July 2, 2007
(the “2007 Placement Agreement”) pursuant to which Dawson James acted as a
placement agent for the placement of up to $600,000 of the Company’s
securities.  Dawson James received cash compensation equal to 12% of
the gross offering price, plus an additional non-accountable expense allowance
equal to 5% of the gross offering price, of the securities sold by or through
Dawson James.   At each closing of the offering of the securities,
Dawson James also received warrants to purchase such number of shares of common
stock as equals 10% of the common stock issued to investors in the
offering.  Such warrants are exercisable at a price equal to 100% of
the price of common stock in the offering.




The
Company and Dawson James have entered into a Placement Agreement dated January
24, 2008 (the “2008 Placement Agreement”) pursuant to pursuant to which Dawson
James has agreed to act as a placement agent for the placement of up to $2.5
million of the Company’s securities on a best efforts basis.  Dawson James
will receive cash compensation equal to 12% of the gross offering price, plus an
additional non-accountable expense allowance equal to 3% of the gross offering
price, of the securities sold by or through Dawson James.  The 2008
Placement Agreement also provides for the payment of a fee of $100,000 for due
diligence and pre-marketing expenses, $75,000 of which was paid in January 2008.
At each closing of the offering of the securities, Dawson James will also
receive warrants to purchase such number of shares of common stock as equals 10%
of the common stock issued to investors in the offering.  Such
warrants are exercisable at a price equal to 100% of the price of common stock
in the offering.  No securities have been sold by the Company as of the
date hereof under the 2008 Placement Agreement.




The
Company and Dawson James have entered into a Finders Agreement on March 26, 2008
(the “2008 Finders Agreement”) pursuant to pursuant to which Dawson James acted
as a finder for the placement of the Company’s equity securities on a “best
efforts” basis.  Dawson James will receive cash compensation equal to
14% of the gross offering price of the securities sold by or through Dawson
James.   The 2008 Finders Agreement also provides if within one year
of the date of the 2008 Finders Agreement, we complete any private financing of
equity or debt not involving Dawson James as a finder, placement agent or
otherwise, with any prospective investors to whom we were introduced by Dawson
James and disclosed to us in writing, we will pay Dawson James upon the closing
of such financing 14% of the gross offering price of such securities as a source
fee.





MANAGEMENT’S
PLANS TO OVERCOME OPERATING AND LIQUIDITY DIFFICULTIES





We
develop and market performance evaluation and rehabilitation products that
monitor and guide exercise and give real-time motivational feedback. Over the
past nine years, our medical and computer experts have brought together advanced
software and medical technology in order to create MotionTrack, our versatile
proprietary technology platform. Our goal is to enter into an emerging category
of electronic personal training and therapeutic products using MotionTrack
technology, developed initially for injury prevention and rehabilitation
products.





Our
operating plan seeks to minimize our capital requirements, but expansion of our
production capacity to meet increasing sales and refinement of our manufacturing
process and equipment will require additional capital. We expect that operating
and production expenses will increase significantly as we continue to ramp up
our production, enhance our technology and develop, produce, sell and license
products for commercial applications.





We have
recently entered into a number of financing transactions (see Notes 4 and 17).
We are continuing to seek other financing initiatives. We need to raise
additional capital to meet our working capital needs, for the




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repayment
of debt and for capital expenditures. Such capital is expected to come from the
sale of debt and/or equity securities through private placement offerings and/or
the sale of common stock. (See Note 17). We believe that if we raise
approximately $8.9 million in debt and equity financings we would have
sufficient funds to meet our needs for working capital ($1.0 million), repayment
of debt (approximately $6.4 million expected to mature from January 01, 2008 to
December 31, 2008), accounts payable and accrued expenses (approximately $1.0
million) and the balance to be utilized for marketing and development over the
next twelve months.  As of March 31, 2008, we have cash balances of
$12,702.





We have
recently signed a private placement agreement for the sale of up to $2.5 million
of our common stock. We expect selling activities to begin in the second quarter
of 2008 with completion of the offering at the end of 2008. In the meantime we
are presently offering private debt securities to provide capital until the
common stock offering is completed and the funds realized.





No
assurance can be given that we will be successful in completing any financings
at the minimum level necessary to fund our capital equipment, debt repayment or
working capital requirements, or at all. If we are unsuccessful in completing
these financings, we will not be able to meet our working capital, debt
repayment or capital equipment needs or execute our business plan. In such case
we will assess all available alternatives including a sale of our assets or
merger, the suspension of operations and possibly liquidation, auction,
bankruptcy, or other measures.





SALES
ACTIVITIES AND PRODUCT DEVELOPMENT





We
entered into a Sales and Marketing contract with Interactive Metronome, Inc. in
2007. We began earning revenues relating to the 2007 Interactive Metronome, Inc.
contract during the latter part of the fourth quarter of 2007. In May 2008, we
entered into a new Sales and Marketing Agreement (the “IM Agreement”) with
Interactive Metronome, Inc. (“Interactive Metronome”). Interactive Metronome
markets its Interactive Metronome(R) therapy product (“IM”) to the health care
industry for patients who suffer from neurological and motor impairments such as
traumatic brain injury, Parkinson’s Disease, amputation, multiple sclerosis and
balance disorders. Pursuant to the agreement, Interactive Metronome will market
our “Pro Products” and the Stroke Survivor (Home) Products, which use our
proprietary Core:Tx technology for measuring a person’s range of motion (the
“Products”).





Pursuant
to the agreement, Interactive Metronome has been appointed the exclusive
distributor of the Products with respect to the United States and Canada (the
“Territory”) for the following markets:





·
            NEUROLOGICAL REHABILITATION
      MARKET. Facilities that provide neurological and motor therapy to
      adults who have suffered stroke, brain injury and other neuro-muscular
      disorders provided that sales efforts are directed to Interactive
      Metronome’s contacts in the areas of the rehabilitation facilities that
      treat the individuals referenced above regardless of whether they are
      Interactive Metronome customers.





·
            PEDIATRIC AND DEVELOPMENTAL
      MARKET. Clinics and hospitals that currently offer the IM for
      individuals, typically children, diagnosed with cognitive and motor
      discrepancies such as Autism Spectrum  Disorders, sensory
      integration disorders and a range of speech and language disabilities,
      provided that sales efforts are directed to Interactive Metronome’s
      contacts in the areas of the clinics and hospitals that treat the
      individuals referenced above; and





·
            SPECIALISTS. Physical
      therapists, occupational therapists and speech therapists who enroll and
      participate in IM’s Certification or CEU
  programs.





Pursuant
to the agreement, Interactive Metronome has been appointed a non-exclusive
distributor for the Products with respect to all other markets within the
Territory; provided however, if we appoint an exclusive




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-




distributor
for any or all such markets during the term of the agreement, Interactive
Metronome is obligated to respect that exclusivity.





The
exclusivity granted to us becomes null and void should the Company fail to sell
twelve (12) Core:Tx(R encircled) Neuro units during the first eight (8) months
of the IM Agreement, and an additional one hundred twenty (120) Core:Tx(R
encircled) Neuro units during the remaining four (4) months of the IM Agreement
(two hundred forty (240) units total during term).





The
parties are required to agree upon suggested retail selling prices for the
Products. The purchase price to be paid by Interactive Metronome for the
Products is a percentage of the suggested retail selling price for
Products.





The IM
Agreement has an initial term of one year. During the first year, the IM
Agreement may be terminated by the Company immediately upon Interactive
Metronome’s material breach of the IM Agreement or Interactive Metronome’s
inability to perform its obligations for financial reasons or
otherwise.





During
the term of the IM Agreement and for a period of two years after termination of
the IM Agreement, Interactive Metronome may not, without our prior written
consent, in any manner, directly or indirectly contact or solicit the trade or
patronage of any of our customers for itself or any other person or entity with
respect to any products that are designed for or may be used to measure a
person’s range of motion, or solicit, induce or attempt to induce any or our
employees to leave our employ to become connected in any way with, or employ or
utilize any such employee in, any other business engaged in the sale or
distribution of products similar to our Products. The amount of expected
revenues from this agreement is undeterminable as of the date of this Report of
Form 10-Q.





Management
has begun to evaluate the feasibility of marketing an updated version of our
original product, SportsRAC. This initiative was sparked by feedback received
from existing users of SportsRAC, We anticipate that the updated version of
SportsRAC would utilize our existing Core:Tx platform. At this time management
believes that an updated SportsRAC product would appeal to a different market
segment than the existing Core:Tx products.





GOING
CONCERN MATTERS





Our
accompanying financial statements have been prepared on a going concern basis,
which contemplates our continuation of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. Since inception,
we have incurred substantial operating losses and expect to incur additional
operating losses over the next several periods. As of March 31, 2008, we had an
accumulated deficit of approximately $26.6 million.





We have
financed our operations since inception primarily through equity financings and
loans from our officers, directors and stockholders. No assurances can be given
that the additional capital necessary to meet our working capital needs or to
sustain or expand our operations will be available in sufficient amounts through
our capital raising activities discussed above. Continuing our operations in
2008 is dependent upon obtaining such further financing.





Our
accompanying financial statements do not include any adjustments that might
result from the outcome of this uncertainty.





CRITICAL
ACCOUNTING POLICIES





The
Securities and Exchange Commission (“SEC”) defines “critical accounting
policies” as those that require application of management’s most difficult,
subjective or complex judgments, often as a result of the




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need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. Our significant accounting policies are described
in Note 1 in the Notes to the financial statements. Not all of these significant
accounting policies require management to make difficult, subjective or complex
judgments or estimates. However, the policies set out in Note 1 could be deemed
to be critical within the SEC definition.





REVENUES





We
recognize income and expenses on the accrual method of accounting. Revenue is
recognized as services are rendered or products are delivered, the price to the
buyer is fixed and determinable, and collectability is reasonably
assured.





USEFUL
LIVES OF TANGIBLE AND INTANGIBLE ASSETS





Depreciation
and amortization of tangible and intangible assets are based on estimates of the
useful lives of the assets. We regularly review the useful life estimates
established to determine their propriety. Changes in estimated useful lives
could result in increased depreciation or amortization expense in the period of
the change in estimate and in future periods that could materially impact our
financial condition and results of operations.




IMPAIRMENT
OF LONG-LIVED ASSETS




Effective
January 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”)
No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
No. 144”). SFAS No. 144 requires that long-lived assets and certain identifiable
intangibles be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by a
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets. An impairment charge
could materially impact our financial condition and results of
operations.





INCOME
TAXES





As part
of the process of preparing our financial statements, we are required to
estimate our taxes in each of the jurisdictions of operation. This process
involves management estimating the actual current tax expense together with
assessing temporary differences resulting from differing treatment of items for
tax and accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within the balance sheet. We then must assess
the likelihood that the deferred tax assets will be recovered from future
taxable income and, to the extent recovery is not likely, we must establish a
valuation allowance. Future taxable income depends on the ability to generate
income in excess of allowable deductions. Significant management judgment is
required in determining the provision for income taxes, deferred tax assets and
liabilities and any valuation allowance recorded against net deferred tax
assets. In the event that actual results differ from these estimates or we
adjust these estimates in future periods, we may need to change our valuation
allowance that could materially impact our financial condition and results of
operations.





FAIR
VALUE OF FINANCIAL INSTRUMENTS





Fair
value estimates, assumptions and methods used to estimate fair value of our
financial instruments are made in accordance with the requirements of SFAS No.
107, “Disclosures about Fair Value of Financial Instruments.” We have used
available information to derive our estimates. However, because these estimates
are made as of a specific point in time, they are not necessarily indicative of
amounts we could realize




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-




currently.
The use of different assumptions or estimating methods may have a material
effect on the estimated fair value amounts.





CONVERTIBLE
SECURITIES WITH CONVERSION FEATURES





The
Company accounts for the fair value conversion features embedded in the
Company’s convertible notes in accordance with SFAS No. 133 “Accounting For
Derivative Instruments and Hedging Activities” and EITF Issue No. 00-19
“Accounting For Derivative Financial Instruments Indexed To and Potentially
Settled In a Company’s Own Stock” which requires the Company to bifurcate and
separately account for the conversion feature as embedded derivatives contained
in the Company’s convertible notes. Pursuant to SFAS No. 133, the Company
bifurcated the fair value of the conversion feature from the convertible notes,
since the conversion features were determined to not be clearly and closely
related to the debt host. The Company is required to carry these embedded
derivatives on its balance sheet at fair value and unrealized changes in the
value of these embedded derivatives are reflected in the statement of
operations. The resulting discount on the debt is amortized to interest expense
over the life of the related debt.




ESTIMATING
THE FAIR MARKET VALUE OF OUR COMMON STOCK





The fair
market value of our common stock is a significant estimate used in determining
the value of our various equity related instruments (options, warrants,
conversion features, etc.). In determining the fair market value of our stock we
consider such things as the most recent equity transaction, changes in the
Company’s financial position, progressions in product development and the
effects of dilutive debt conversions.





RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS




In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements,
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles, and expands disclosures about fair
value measurements. This statement does not require any new fair value
measurements, but provides guidance on how to measure fair value by providing a
fair value hierarchy used to classify the source of the information. SFAS
No. 157 is effective for fiscal years beginning after November 15, 2007,
and all interim periods within those fiscal years. In February 2008, the FASB
released FASB Staff Position (FSP FAS 157-2 – Effective Date of FASB Statement
No. 157) which delays the effective date of SFAS No. 157 for all
nonfinancial assets and nonfinancial liabilities, except those that are
recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually), to fiscal years beginning after November 15, 2008 and
interim periods within those fiscal years. The implementation of SFAS
No. 157 for financial assets and liabilities, effective January 1,
2008, did not have an impact on the Company’s financial position and results of
operations.  The Company is currently evaluating the impact of
adoption of this statement on its non-financial assets and liabilities in the
first quarter of fiscal 2009.




In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFAS No. 159
permits entities to choose to measure, on an item-by-item basis, specified
financial instruments and certain other items at fair
value.  Unrealized gains and losses on items for which the fair value
option has been elected are required to be reported in earnings at each
reporting date.  SFAS No. 159 is effective for fiscal years beginning
after November 15, 2007, the provisions of which are required to be applied
prospectively.  The Company adopted this Statement as of January 1,
2008 and has elected not to apply the fair value option to any of its financial
instruments.




In
December 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 141 (revised
2007), Business Combinations, which replaces SFAS No 141. The statement retains
the purchase method of accounting for acquisitions, but requires a number of




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-




changes,
including changes in the way assets and liabilities are recognized in the
purchase accounting. It also changes the recognition of assets acquired and
liabilities assumed arising from contingencies, requires the capitalization of
in-process research and development at fair value, and requires the expensing of
acquisition-related costs as incurred. SFAS No. 141R is effective
for business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008.




In
December 2007, the FASB issued SFAS No. 160.  “Noncontrolling
Interests in Consolidated Financial Statements-and Amendment of ARB No.
51.”  SFAS 160 establishes accounting and reporting standards
pertaining to ownership interests in subsidiaries held by parties other than the
parent, the amount of net income attributable to the parent and to the
noncontrolling interest, changes in a parent’s ownership interest, and the
valuation of any retained noncontrolling equity investment when a subsidiary is
deconsolidated.  This statement also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners.  SFAS 160 is
effective for fiscal years beginning on or after December 15,
2008.  The adoption of SFAS 160 is not currently expected to have a
material effect on the Company’s financial position, results of operations, or
cash flows.





In March
2008, the Financial Accounting Standards Board (FASB) issued FASB Statement No.
161, Disclosures about Derivative Instruments and Hedging Activities. The new
standard is intended to improve financial reporting about derivative instruments
and hedging activities by requiring enhanced disclosures to enable investors to
better understand their effects on an entity’s financial position, financial
performance, and cash flows. It is effective for financial statements issued for
fiscal years and interim periods beginning after November 15, 2008, with early
application encouraged. The company is currently evaluating the impact of
adopting SFAS. No. 161 on its financial statements.





RISK
FACTORS





We
are subject to various risks that may materially harm our business, financial
condition and results of operations.  You should carefully consider
the risks and uncertainties described below and in our Annual Report on Form
10-K and the other information in this filing before deciding to purchase our
common stock.  If any of these risks or uncertainties actually occurs,
our business, financial condition or operating results could be materially
harmed. In that case, the trading price of our common stock could decline and
you could lose all or part of your investment.





WE
HAVE HAD LIMITED PRODUCT SALES, A HISTORY OF OPERATING LOSSES AND HAVE BEEN
UNPROFITABLE SINCE INCEPTION.





We have
had limited sales of our products to date. We incurred net losses of
approximately $(773,747)  during the quarter ended March 31, 2008. We
expect to incur substantial additional operating losses in the future. During
the quarter ended March 31, 2008 we generated revenues from product sales in the
amounts of approximately $9,440. We cannot assure you that we will continue to
generate revenues from operations or achieve profitability in the near future or
at all.





WE
HAVE A WORKING CAPITAL LOSS, WHICH MEANS THAT OUR CURRENT ASSETS ON MARCH 31,
2008 WERE NOT SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES.





We had a
working capital deficit of $(9,593,333) at March 31, 2008, which means that our
current liabilities exceeded our current assets on March 31, 2008 by $9,593,333.
Current assets are assets that are expected to be converted to cash or otherwise
utilized within one year and, therefore, may be used to pay current liabilities
as they become due. Our working capital deficit means that our current assets on
March 31, 2008 were not sufficient to satisfy all of our current liabilities on
that date.




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-





WE
MAY NOT BE ABLE TO OBTAIN THE SIGNIFICANT FINANCING THAT WE NEED TO CONTINUE TO
OPERATE.





We have
recently entered into a number of financing transactions. We are continuing to
seek other financing initiatives. We need to raise additional capital to meet
our working capital needs, for the repayment of debt and for capital
expenditures. Such capital is expected to come from the sale of debt and/or
equity securities through private placement offerings and/or the sale of common
stock. We believe that if we raise approximately $8.9 million we will be able to
service our debt obligations, continue operations and begin market penetration
for the CoreTx product line. No assurance can be given that we will be
successful in completing any financings at the minimum level necessary to fund
our capital equipment, debt repayment or working capital requirements, or at
all. If we are unsuccessful in completing these financings, we will not be able
to meet our working capital, debt repayment or capital equipment needs or
execute our business plan. In such case we will assess all available
alternatives including a sale of our assets or merger, the suspension of
operations and possibly liquidation, auction, bankruptcy, or other
measures.





MARKET
INFORMATION AND OTHER MATTERS





Market
Information





Our
common stock is not currently traded on any public market. On July 13, 2007, the
Company became a reporting company under the Securities Exchange Act of 1934. In
October 2007, a FINRA member firm filed a Form 211 Application with FINRA
pursuant to SEC Rule 15c 2-11 on behalf of the Company for the purpose of
obtaining an OTC Bulletin Board listing of the Company’s Common Stock. FINRA
responded to the October filing with a request for additional information which
the Company provided.  In April 2008, FINRA requested further
information.  The Company is in the process of assembling all of the
information requested.  Once a trading market is established, there
can be no assurance that it will be active. An absence of an active trading
market could adversely affect our stockholders’ ability to sell our common stock
in short time periods, or possibly at all. Our common stock is likely to
experience in the future, significant price and volume fluctuations that could
adversely affect the market price of our common stock without regard to our
operating performance. In addition, we believe that factors such as fluctuations
in our financial results and changes in the overall economy or the condition of
the financial markets could cause the price of our common stock to
fluctuate  substantially.





Authorized
and Outstanding Shares





Our
Certificate of Incorporation authorizes 500,000,000 shares of our common stock,
$0.01 par value per share and 100,000,000 shares of our preferred stock, $0.01
par value per share. As of March 31, 2008, we have 53,751,822 shares of common
stock outstanding and no shares of preferred stock outstanding.





Stock
Options





As of
March 31, 2008, there were (i) 6,340,444 shares of our common stock issuable
upon exercise of outstanding stock options under the 1999 Plan at $0.25 per
share and (ii) 6,027,000 shares of our common stock issuable upon exercise of
outstanding stock options under the 2006 Plan at $0.25 to $0.30 per
share.





Warrants





As of
March 31, 2008, there were outstanding warrants to purchase 33,366,732 shares of
our common stock at prices ranging from $0.025 to $1.50 per share.




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-





Convertible
Notes





Conversion
into Common Stock.As of March 31,
2008, there were outstanding promissory notes convertible into shares of our
common stock as follows:





Principal
            
            Type of
      Note
            Conversion
      Terms
            
            Conversion
      Shares$
            3,664,000
            
            2003
      Notes
            Convertible
      into common stock at $0.25 per share.
            
            
            14,656,000$
            50,000
            
            April
      2006 Notes
            Convertible
      into common stock at $0.30 per share.
            
            
            166,667$
            250,000
            
            2006
      A Notes
            Convertible
      into common stock at the lower of $0.30 and 70% of the average closing bid
      price for the 20 trading days before conversion [at an assumed market
      price of $0.25 the assumed conversion price is $0.175].
            
            
            1,428,572$
            250,000
            
            2006
      B Notes
            Convertible
      into common stock at the lower of $0.50 and 70% of the average closing bid
      price for the 20 trading days before conversion [at an assumed market
      price of $0.25 the assumed conversion price is $0.175].
            
            
            1,428,572$
            250,000
            
            2006
      C Notes
            Convertible
      into common stock at the lower of $0.60 and 70% of the average closing bid
      price for the 20 trading days before conversion [at an assumed market
      price of $0.25 the assumed conversion price is $0.175].
            
            
            1,428,572$
            250,000
            
            2006
      D Notes
            Convertible
      into common stock at the lower of $0.50 and 70% of the average closing bid
      price for the 20 trading days before conversion [at an assumed market
      price of $0.25 the assumed conversion price is $0.175].
            
            
            1,428,572$
            239,078
            
            2006
      G Notes
            Convertible
      into common stock at the lower of $0.75 and 70% of the average closing bid
      price for the 20 trading days before conversion but in no event less than
      $0.30 [at an assumed market price of $0.25 the assumed conversion price is
      $0.30].
            
            
            796,927$
            300,000
            
            2007
      C Note
            Convertible
      into common stock at $0.50 per share.
            
            
            600,000$
            315,000
            
            2007
      D Notes
            Convertible
      into common stock at the lower of $0.75 and 70% of the average closing bid
      price for the 20 trading days before conversion but in no event less than
      $0.30 [at an assumed market price of $0.25 the assumed conversion price is
      $0.30].
            
            
            1,050,000$
            250,000
            
            2007
      E Notes
            Convertible
      into common stock at the lower of $0.75 and 70% of the average closing bid
      price for the 20 trading days before conversion but in no event less than
      $0.30 [at an assumed market price of $0.25 the assumed conversion price is
      $0.30].
            
            
            833,334$
            656,000
            
            2007
      F Notes
            Convertible
      into common stock at the lower of $0.75 and 70% of the average closing bid
      price for the 20 trading days before conversion but in no event less than
      $0.30 [at an assumed market price of $0.25 the assumed conversion price is
      $0.30].
            
            
            2,186,667




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-




$
            275,000
            
            2008
      A Notes
            Convertible
      into common stock at 80% of the average closing bid price for the 20
      trading days before conversion but in no event less than $0.40 [at an
      assumed market price of $0.25 the assumed conversion price is
      $0.40].
            
            
            687,500$
            6,749,078
            
            
            
            
            
            26,691,383





See the
Notes to the Financial Statements for additional terms of these convertible
notes.





ITEM
      3.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





As a
“smaller reporting company” as defined by Item 10 of Regulation S-K, the Company
is not required to provide information required by this Item.




ITEM
      4T.
              CONTROLS
      AND PROCEDURES




Evaluation
of Disclosure Controls and Procedures





We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our reports filed pursuant to the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the SEC’s rules, regulations and related forms, and that
such information is accumulated and communicated to our principal executive
officer and principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.





As of
March 31, 2008, we carried out an evaluation, under the supervision and with the
participation of our principal executive officer and our principal financial
officer of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our principal executive
officer and our principal financial officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this report.





Changes
in Internal Controls





There
have been no changes in our internal controls over financial reporting during
the quarter ended March 31, 2008 that have materially affected or are reasonably
likely to materially affect our internal controls.







PART
II.


OTHER
INFORMATION




ITEM 1.
            LEGAL
PROCEEDINGS




None.





ITEM
      1A.
            RISK
      FACTORS





As a
“smaller reporting company” as defined by Item 10 of Regulation S-K, the Company
is not required to provide information required by this Item.





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ITEM 2.
            UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS





2008
A UNITS.  In January and February 2008, the Company sold
$275,000 of equity units (“2008 A Units”) in a private
placement.  Each 2008 A Unit consists of an unsecured convertible
promissory note in the principal amount of $1,000 (the “2008 A Notes”) and 2,000
warrants (the “Warrants”) to purchase one share of Company common stock. The
2008 A Notes bear interest at 10% per annum and will mature 180 days from the
date of issuance (the “Maturity Date”). The 2008 A Notes are convertible into
shares of Company common stock at a price equal to 80% of the average of the
closing bid price for our common stock for the 20 days preceding the Conversion
Notice, as reported by the exchange on which our common stock is then traded but
in any event not less than $0.40 (the “Conversion Price”). The 2008 A Notes may
be redeemed by the Company, upon ten trading days prior notice, during which
time the Noteholder may convert the 2008 A Notes into Company common
stock.  The Notes will be redeemed by the Company on the 20th day
after the Mandatory Redemption Event (as herein defined) at a redemption price
equal to 100% the principal amount of Notes to be redeemed plus accrued and
unpaid interest upon ten trading days prior notice, during which time the
Noteholder may convert the Notes into Company common stock (“Mandatory
Redemption”).  The Mandatory Redemption Event will be the date on
which the Company has closed on aggregate gross equity financings of $1 million
prior to the Maturity Date.  If the 2008 A Notes have not been
redeemed or converted as of the Maturity Date, the principal and interest due
thereunder will be paid by the Company in shares of Company common stock valued
at the then applicable Conversion Price. Sixty days of pre-paid interest was
paid by the Company at the time of closing along with an origination fee of 5%
of the principal of the 2008 A Notes purchased. The exercise price is $1.00 for
1,000 of the Warrants and $1.50 per share for the remaining 1,000 Warrants. The
Warrants will be exercisable for a period of five years from the date of
issuance. The shares issuable upon conversion of the Notes and exercise of the
Warrants have piggyback registration rights.  There is no penalty
provision in the event we do not register such shares.  No commissions
were paid to any brokers in this offering.  This issuance was exempt
from registration requirements pursuant to Section 4(2) of the Securities Act of
1933.





2008 B NOTES.On
March 26, 2008, we sold $50,000 of non-convertible 12% promissory notes (the
“2008 B Notes”) to a lender in a private transaction.  The principal
balance of the 2008 B Notes, along with accrued and unpaid interest is payable
on the earlier of (i) April 25, 2008 and (ii) the closing by the Company on
aggregate gross equity financings of $50,000.  Interest is payable at
the rate of 12% per annum from the issuance date to maturity, however, the
Company shall pay a total of $2,500 in interest for the first 30 days of the
Note.  In consideration of marking the loan, the Company reduced the
exercise prices of the following warrants held by the lender:  150,000
warrants with an original exercise price of $1.50 were reduced to $0.50 and
200,000 warrants with an original exercise price of $1.00 were reduced to
$0.30.  On April 4, 2008 the 2008 B Notes were repaid.  No
commissions were paid to any brokers in this offering.  This issuance
was exempt from registration requirements pursuant to Section 4(2) of the
Securities Act of 1933.





2008 C UNITS.  On
April 4, 2008, April 22, 2008 and May 12, 2008, the Company sold $179,000,
$88,500 and $32,500 of units, respectively, to lenders in a private
transaction.  Each Unit consists of an unsecured non-convertible
promissory note in the principal amount of $1,000 (the “2008 C Notes”), and
3,000 warrants to purchase one share of our common stock at $0.30 per share (
the “Warrants”).   The 2008 C Notes will bear interest at 12% per
annum and will mature 180 days from the date of issuance if not redeemed by such
date (the “Maturity Date”).  The 2008 C Notes may be redeemed by the
Company in whole or in part at any time at a redemption price equal to 100% the
principal amount of 2008 C Notes to be redeemed plus accrued and unpaid interest
upon ten trading days prior notice (“Optional Redemption”).  The 2008
C Notes will be redeemed by the Company on the 20th day
after the Mandatory Redemption Event (as herein defined) at a redemption price
equal to 100% the principal amount of 2008 C Notes to be redeemed plus accrued
and unpaid interest upon ten trading days prior notice (“Mandatory
Redemption”).  The Mandatory Redemption Event shall be the date on
which the Company has closed on aggregate gross equity financings of $1 million
prior to the Maturity Date.  If the 2008 C Notes have not been
redeemed as of the Maturity Date, the principal and interest due thereunder will
be paid by the Company in cash.  The Warrants included in the




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Units are
exercisable for shares of Company common stock at any time beginning on the date
of issuance and ending five years from the date of issuance at an exercise price
of $0.30 per share.  For the $179,000 of 2008 C Units sold on April 4,
2008, the total offering price and total commissions paid to broker-dealers were
$179,000 and $25,060, respectively.  For the $88,500 of 2008 C Units
sold on April 22, 2008, the total offering price and total commissions paid to
broker-dealers were $88,500 and $12,390, respectively. For the $32,500 of 2008 C
Units sold on May 12, 2008, the total offering price and total commissions paid
to broker-dealers were $32,500 and $4,550.  Broker-dealer commissions
consisted of a commission of 14% of the gross offering proceeds raised by the
finder in this offering.  Such fees were deducted from the offering
proceeds.  This issuance was exempt from registration requirements
pursuant to Section 4(2) of the Securities Act of 1933.





The
proceeds from the 2008 A Units, 2008 B Units and 2008 C Units were used for
working capital purposes.





On April
15, 2008, the Company granted 600,000 fully vested options with an exercise
price of $0.25 to Robert D. Prunetti in lieu of granting 400,000 restricted
shares which are deliverable under the employment agreement between the Company
and Mr. Prunetti.  This issuance was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act of
1933.





On April
15, 2008, the Company granted 75,000 options with an exercise price of $0.30 to
each of two employees which vest 1/3 on April 15, 2008, 1/3 on April 15, 2009
and 1/3 on April 15, 2010, provided the optionee is providing services to the
Company on such dates.  This issuance was exempt from registration
requirements pursuant to Section 4(2) of the Securities Act of
1933.





On April
15, 2008, the Company granted 50,000 options with an exercise price of $0.30 to
a consultant, which vest 1/3 on April 15, 2008, 1/3 on April 15, 2009 and 1/3 on
April 15, 2010, provided the optionee is providing services to the Company on
such dates.  This issuance was exempt from registration requirements
pursuant to Section 4(2) of the Securities Act of 1933.





On April
15, 2008, the Company granted 100,000 options with an exercise price of $0.30 to
its law firm for services provided, which vest 1/3 on April 15, 2008, 1/3 on
April 15, 2009 and 1/3 on April 15, 2010, provided the optionee is providing
services to the Company on such dates.  This issuance was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act of
1933.





On April
15, 2008, the Company granted 100,000 options with an exercise price of $0.30 to
a consultant, which vest 1/3 on April 15, 2008, 1/3 on April 15, 2009 and 1/3 on
April 15, 2010, provided the optionee is providing services to the Company on
such dates.  This issuance was exempt from registration requirements
pursuant to Section 4(2) of the Securities Act of 1933.





On April
15, 2008, the Company issued 100,000 warrants to an individual for services
provided to the Company, having an exercise price of $0.30 per share and an
expiration date of December 31, 2010.  This issuance was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act of
1933.





On May
14, 2007, we sold $300,000 of equity units (the “2007 C Units”) in a private
placement consisting of a 15% convertible note in the principal amount of
$300,000 (the “2007 C Note”) and 1,500,000 five year warrants to purchase our
common stock at an exercise price of $0.30 (the “Original 2007 C Warrants”)
pursuant to a Subscription Agreement dated May 14, 2007 (the “Subscription
Agreement”) between the Company and the investor (the
“Investor”).  The 2007 C Note had an original conversion price of
$0.50 per share.  The principal balance of the 2007 C Note, along with
accrued and unpaid interest, was payable on July 13, 2007.  Section
2.3 (b) of the Subscription Agreement provides that in the event the 2007 C Note
is not repaid on July 13, 2007, the Company shall issue to the Investor an
additional 50,000 warrant to purchase shares of Company common stock for each 45
days that the Note is unpaid past July 13, 2007, with such




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warrants
having substantially the same terms as the Original 2007 C
Warrants.  The 2007 C Note was extended until November 1, 2007 and
subsequently extended to June 1, 2008.  An amendment agreement (the
“Amendment”) was entered into as of May 1, 2008 by and between the Investor and
the Company pursuant to which the parties agreed to amend the Subscription
Agreement, the 2007 C Note and the Original 2007 C Warrants as
follows.  The Maturity Date of the 2007 C Note was amended to July 13,
2008.  The Conversion Price of the 2007 C Note was amended to a price
per share equal to the lesser of (i) $0.35 per share or (ii) 70% of the average
of the closing bid price for the Company’s Common Stock for the 20 days
preceding the notice of conversion, as reported by the exchange on which the
Company’ Common Stock is then traded.   Pursuant to Section
2.3(b) of the Subscription Agreement, on May 1, 2008 the Company issued to the
Investor five year Warrants to purchase 300,000 shares of the Company with an
exercise price of $0.30 per share (the “Non Payment Warrants”).  The
Company agreed in the Amendment to issue to the Investor five year Warrants to
purchase 150,000 shares of Company common stock having an exercise price of
$0.30.  In the Amendment the Original 2007 C Warrants were amended as
follows:  (i) 300,000 of the Original 2007 C Warrants shall have an
exercise price of $0.10 per share, and (ii) 1,200,000 of the Original 2007 C
Warrants shall have an exercise price of $0.30 per share.  Upon the
issuance of the Non Payment Warrants, Section 2.3(b) of the Subscription
Agreement was deleted in its entirety.   This issuance was exempt
from registration requirements pursuant to Section 4(2) of the Securities Act of
1933.





ITEM
      3.
            DEFAULTS
      UPON SENIOR SECURITIES




None.




ITEM 4.
            SUBMISSION OF MATTERS TO A VOTE OF
      SECURITYHOLDERS




None.





ITEM 5.
            OTHER
INFORMATION





On May 23, 2008, the Company entered into a new sales and
marketing agreement with Interactive Metronome. See “Management’s Discussion and
Analysis of Financial Condition and Results of Operation  - Sales
Activities and Product Development.”.





The
Company has obtained the consent of the holders of the following notes to a new
maturity date of September 30, 2008 and a waiver of any event of default as of
May 1, 2008:  2006 A Notes, 2006 B Notes, 2006 C Notes, 2006 G Notes
and 2007 A Notes. The holder of the April 4, 2006 Note delivered a waiver of any
event of default of the April 4, 2006 Note as of May 1, 2008, the maturity date
of such April 4, 2006 Note.





ITEM
      6.
            EXHIBITS




The
following Exhibits are filed as part of this Report or incorporated herein by
reference:





10.111
            Form
      of Subscription Agreement entered into in 2008 A private placement
      (1)





10.112
            Form
      of 10% Convertible Note issued in 2008 A private placement
    (1)





10.113
            Form
      of $1.00 Warrant issued in 2008 A private placement
  (1)





10.114
            Form
      of $1.50 Warrant issued to 2008 A private placement
  (1)





10.115
            Form
      of Subscription Agreement entered into in 2008 B private placement
      (1)





10.116
            Form
      of 12% Promissory Note issued in 2008 B private placement
    (1)





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-


10.117
            Warrant
      Amendment issued in 2008 B private placement
(1)





10.118
            Form
      of Subscription Agreement entered into in 2008 C private placement
      (1)





10.119
            Form
      of 12% Non-Convertible Note issued in 2008 C private placement
      (1)





10.120
            Form
      of $0.30 Warrants issued in 2008 C private placement
  (1)





10.121
            Finders
      Fee Agreement dated March 24, 2008 between Performance Health
      Technologies, Inc. and Dawson James Securities
  (1)





10.122
            Selling
      Agreement dated January 24, 2008 between Performance Health Technologies,
      Inc. and Dawson James Securities
(1)




10.123
            Form
      of Warrant to Purchase 100,000 shares dated April 15, 2008
    +





10.124
            Amendment
      Agreement dated as of May 1, 2008 between Performance Health Technologies,
      Inc. and Portfolio Lenders II, LLC
+





10.125
            Form
      of Warrant to purchase shares issued to Portfolio Lenders II, LLC dated
      May 1, 2008 +





10.126
            Sales
      and Marketing Agreement dated May 19, 2008 between Performance Health
      Technologies, Inc. and Interactive Metronome, Inc
  +





31.1
            Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley
      Act of 2002 +





31.2
            
            Certification
      of Chief Financial Officer 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 Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted
      pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  +





______________________








(1)
            Filed
      as an exhibit to the Company’s Annual Report on Form 10-KSB for the year
      ended December 31, 2007 and incorporated herein by
    reference.





+
            Exhibit
      filed herewith in this Report.





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SIGNATURES




In
accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.




PERFORMANCE
      HEALTH TECHNOLOGIES, INC.Date:  May
      20, 2008BY:
            
            /s/ Robert D.
    PrunettiRobert
      D. Prunetti, President and Chief Executive Officer(Principal
      Executive Officer)BY:
            
            /s/ James E.
    BartolomeiJames
      E. Bartolomei, Chief Financial Officer(Principal
      Financial and Accounting Officer)
































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