UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
DC   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 June 30, 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.


(Exact
name of Registrant as Specified 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


(Registrant’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  oNon-accelerated
      filer  o (Do no check if a smaller reporting company)
              
              Smaller
      reporting company  x





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




Indicate the number of shares
outstanding of each of the issuer’s classes of common stock, as of the latest
practicable date: As of August 1, 2008, 57,496,310 shares of common
stock.





PERFORMANCE HEALTH TECHNOLOGIES, INC.
 FORM
10-Q
 FOR
THE QUARTER ENDED JUNE 30, 2008
  INDEX
 
 PAGEPART
      1—FINANCIAL INFORMATIONITEM
      1.
                FINANCIAL
      STATEMENTSBalance
      Sheets
                2Statements
      of Operations
                4Statements
      of Cash Flows
                5Notes
      to Financial Statements
                6ITEM
      2.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS
                34ITEM
      3.
                QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                50ITEM
      4.
                CONTROLS
      AND PROCEDURES
                50PART
      II—OTHER INFORMATIONITEM
      1.
                LEGAL
      PROCEEDINGS
                51ITEM
      1A.
                RISK
      FACTORS
                51ITEM
      2.
                UNREGISTERED
      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
                51ITEM
      3.
                DEFAULTS
      UPON SENIOR SECURITIES
                53ITEM
      4.
                SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY HOLDERS
                53ITEM
      5.
                OTHER
      INFORMATION
                54ITEM
      6.
                EXHIBITS
                54
      
 1
 PART I—FINANCIAL INFORMATION
 
 ITEM
1.   FINANCIAL STATEMENTS.
  PERFORMANCE
HEALTH TECHNOLOGIES, INC.
 BALANCE
SHEETS
 (Unaudited)
 
 
 
 June
      30, 2008
                
                
                December
      31, 2007*(unaudited)ASSETSCURRENT
      ASSETS:Cash
      and Cash Equivalents
                
                $
                197,151
                
                
                $
                35,559Accounts
      Receivable
                
                
                2,375
                
                
                
                4,720Inventory
                
                
                25,311
                
                
                
                26,866Prepaid
      Expenses
                
                
                131,789
                
                
                
                116,732Total
      Current Assets
                
                
                356,626
                
                
                
                183,877FURNITURE
      & EQUIPMENT, net
                
                
                6,438
                
                
                
                8,572OTHER
      ASSETS:Debt
      Issuance Costs, net
                
                
                193,408
                
                
                
                297,591Security
      Deposits
                
                
                4,802
                
                
                
                4,802Total
      Other Assets
                
                
                198,210
                
                
                
                302,393TOTAL
      ASSETS
                
                $
                561,274
                
                
                $
                494,842
       2
    June
      30, 2008
                
                
                December
      31, 2007*(unaudited)LIABILITIES &
      STOCKHOLDERS' DEFICITCURRENT
      LIABILITIES:Accounts
      Payable
                
                $
                769,186
                
                
                $
                610,840Accrued
      Salaries and Interest
                
                
                350,009
                
                
                
                335,740Accrued
      Expenses
                
                
                76,914
                
                
                
                50,338Accrued
      Interest - Non-Convertible Notes
                
                
                14,643
                
                
                
                —Accrued
      Interest - Convertible Notes
                
                
                1,154,211
                
                
                
                1,003,568Non-Convertible
      Notes Payable, Net of DebtDiscount
      of $201,686 and $0 at June 30, 2008 and December 31, 2007,
      respectively
                
                
                414,464
                
                
                
                50,000Convertible
      Notes Payable, Net of Debt Discount of $300,978
      and $618,708 at June 30, 2008 and December 31, 2007,
      respectively
                
                
                5,498,237
                
                
                
                3,538,370Derivative
      Liability
                
                
                3,243,895
                
                
                
                2,993,069Total
      Current Liabilities
                
                
                11,521,559
                
                
                
                8,581,925CONVERTIBLE
      NOTES PAYABLE, Net of DebtDiscount
      of $20,454 and $242,244 at June 30, 2008 and December 31,
      2007, respectively
                
                
                287,546
                
                
                
                2,194,756STOCKHOLDERS'
      DEFICIT:Common
      Stock, $0.01 Par Value, 500,000,000 Shares Authorized,56,743,093 and 53,184,604 Shares Issued and Outstanding at
      June 30, 2008 and December 31, 2007,
    respectively
                
                
                567,431
                
                
                
                531,847Paid-in
      Capital
                
                
                16,036,085
                
                
                
                15,026,813Accumulated
      Deficit
                
                
                (27,851,347
                )
                
                
                (25,840,499
                )Total
      Stockholders' Deficit
                
                
                (11,247,831
                )
                
                
                (10,281,839
                )TOTAL
      LIABILITIES & STOCKHOLDERS'DEFICIT
                
                $
                561,274
                
                
                $
                494,842
    See Notes
to Financial Statements
 
 3
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.
 STATEMENTS
OF OPERATIONS
 (Unaudited)
  
 For
      the Three Months Ended
                
                
                For
      the Six Months EndedJune
      30,
                
                
                June
      30,
                
                
                June
      30,
                
                
                June
      30,2008
                
                
                2007
                
                
                2008
                
                
                2007SALES,
      net
                
                $
                —
                
                
                $
                —
                
                
                $
                9,440
                
                
                $
                589COST
      OF SALES
                
                
                —
                
                
                
                —
                
                
                
                2,814
                
                
                
                —GROSS
      PROFIT
                
                
                —
                
                
                
                —
                
                
                
                6,626
                
                
                
                589OPERATING
      EXPENSES:General
      and Administrative
                
                
                387,463
                
                
                
                1,013,695
                
                
                
                787,551
                
                
                
                1,778,487Sales
      and Marketing
                
                
                39,848
                
                
                
                29,395
                
                
                
                91,072
                
                
                
                54,777Research
      and Development
                
                
                6,400
                
                
                
                29,889
                
                
                
                12,964
                
                
                
                51,750TOTAL
      OPERATING EXPENSES
                
                
                433,711
                
                
                
                1,072,979
                
                
                
                891,587
                
                
                
                1,885,014LOSS
      FROM OPERATIONS
                
                
                (433,711
                )
                
                
                (1,072,979
                )
                
                
                (884,961
                )
                
                
                (1,884,425
                )OTHER
      INCOME (EXPENSES):Interest
      Income
                
                
                57
                
                
                
                9
                
                
                
                70
                
                
                
                15Interest
      Expense
                
                
                (610,515
                )
                
                
                (785,177
                )
                
                
                (1,083,276
                )
                
                
                (1,527,054
                )Amortization
      - Debt Issuance Costs
                
                
                (126,021
                )
                
                
                (69,618
                )
                
                
                (213,257
                )
                
                
                (221,880
                )Gain
      (Loss) on Derivative Liability
                
                
                (66,773
                )
                
                
                88,750
                
                
                
                171,234
                
                
                
                456,784TOTAL
      OTHER INCOME (EXPENSES)
                
                
                (803,252
                )
                
                
                (766,036
                )
                
                
                (1,125,229
                )
                
                
                (1,292,135
                )LOSS
      BEFORE PROVISION FOR TAXES
                
                
                (1,236,963
                )
                
                
                (1,839,015
                )
                
                
                (2,010,190
                )
                
                
                (3,176,560
                )PROVISION
      FOR TAXES
                
                
                (135
                )
                
                
                (801
                )
                
                
                (655
                )
                
                
                (1,601
                )NET
      LOSS
                
                $
                (1,237,098
                )
                
                $
                (1,839,816
                )
                
                $
                (2,010,845
                )
                
                $
                (3,178,161
                )NET
      LOSS PER COMMON SHARE - BASIC  AND DILUTED
                
                $
                (0.02
                )
                
                $
                (0.04
                )
                
                $
                (0.04
                )
                
                $
                (0.07
                )Weighted
      Average Number of Shares
                
                
                54,866,086
                
                
                
                48,493,352
                
                
                
                54,127,468
                
                
                
                48,493,352
  See Notes
to Financial Statements
 
 4
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.
 STATEMENTS
OF CASH FLOWS
 (Unaudited)
   For
      the Six Months EndedJune
      30, 2008
                
                
                June
      30, 2007Cash
      flows from operating activitiesNet
      loss
                
                $
                (2,010,845
                )
                
                $
                (3,178,161
                )Adjustments
      to reconcile net loss to net cashused
      by operating activities:Non
      cash interest expense
                
                
                879,066
                
                
                
                1,229,780Non
      cash consulting expense
                
                
                20,325
                
                
                
                294,400Non
      cash stock based compensation
                
                
                139,121
                
                
                
                393,271Depreciation
      and amortization
                
                
                215,391
                
                
                
                225,970Gain
      on derivative liability
                
                
                (171,234
                )
                
                
                (456,784
                )Decrease
      in deferred offering costs
                
                
                —
                
                
                
                333,705Decrease
      in accounts receivable
                
                
                2,345
                
                
                
                —(Increase)
      decrease in inventories
                
                
                1,555
                
                
                
                (26,001
                )Decrease
      in other assets
                
                
                —
                
                
                
                3,271(Increase) in
      prepaid expenses
                
                
                (22,282
                )
                
                
                (124,562
                )Increase in
      accounts payable
                
                
                153,883
                
                
                
                246,807Increase in
      accrued liabilities
                
                
                9,385
                
                
                
                46,667Increase in
      interest payable
                
                
                196,743
                
                
                
                263,896Total
      adjustments
                
                
                1,424,298
                
                
                
                2,430,420Net
      cash (used) by operating activities
                
                
                (586,547
                )
                
                
                (747,741
                )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
                
                
                
                783,271Net
      proceeds from issuance of non-convertible notes
                
                
                486,889
                
                
                
                —Net
      proceeds from short term notes
                
                
                50,000
                
                
                
                —Principal
      payments on short term notes
                
                
                (50,000
                )
                
                
                —Net
      cash provided by financing activities
                
                
                748,139
                
                
                
                783,271Net
      increase (decrease) in cash and equivalents
                
                
                161,592
                
                
                
                32,590Cash
      and equivalents, beginning of period
                
                
                35,559
                
                
                
                206,725Cash
      and equivalents, end of period
                
                $
                197,151
                
                
                $
                239,315
   Supplemental
      disclosures of cash flow information:Cash
      paid during the year for:Interest
      expense
                
                $
                7,396
                
                
                $
                37,248Income
      tax
                
                $
                385
                
                
                $
                1,601
  See Notes
to Financial Statements
  5
 PERFORMANCE
HEALTH TECHNOLOGIES, INC.
 NOTES
TO FINANCIAL STATEMENTS
 June
30, 2008
 
 
 Note 1 – Summary of
Significant Accounting Policies:
 
 Organization
 Performance
Health Technologies, Inc. (“PHT,” the “Company,” “we” or “us”)
was 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, we became a reporting company under the Securities Exchange Act of
1934. Our common stock commenced trading on the OTC Bulletin Board on August 8,
2008.
 
 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 and six months ended June 30, 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
  6
 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 June 30, 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.
 
 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 Statements of Cash Flows, all highly liquid investments with a
maturity of three months or less are included in cash equivalents. As of June
30, 2008, cash and cash equivalents included $192,627 of cash held in commercial
banks, petty cash fund of $250, and $4,274 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 and six months ended June 30, 2008  amounted to $1,650 and
$9,150, respectively. Advertising expense for the three and six months ended
June 30, 2007  amounted to $7,655 and $8,467,
respectively.
 7
 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 and six
months ended June 30, 2008  amounted to $6,400 and $12,964,
respectively. The total amount of research and development expenses incurred
during the three and six months ended June 30, 2007 amounted to $29,889 and
$51,750, 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.
 
 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 and six
months ended June 30, 2008 was $69,600 and $139,121,
respectively.  Stock based compensation expense for the three and six
months ended June 30, 2007 was $168,782 and $393,271, respectively.
 
 No stock
options were exercised during the three and six months ended June 30, 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.  Our common stock commenced
trading on the OTC Bulletin Board on August 8, 2008.
 8
 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 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. The adoption of SFAS No. 141R is not expected to have a material
effect on the Company's financial statements.
  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
  9
 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.
 
 In April
2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible
Assets.” (“FSP 142-3”).  FSP 142-3 amends the factors that should be
considered in developing renewal or extension assumptions used to determine the
useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and
Other Intangible Assets.”  FSP 142-3 applies prospectively to intangible
assets that are acquired, individually or with a group of other assets, after
the effective date in either a business combination or asset acquisition.
 FSP 142-3 is effective for financial statements issued for fiscal years
beginning after December 15, 2008, and interim periods within those fiscal
years.  Early adoption is prohibited. The Company is currently evaluating
the impact of adopting FSP. 142-3 on its financial statements.
 
 In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States.  It is effective 60 days following the Securities and
Exchange Commission’s approval of the Public Company Accounting Oversight Board
amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With
Generally Accepted Accounting Principles".  The adoption of SFAS 162 is not
expected to have a material effect on the Company’s financial
statements.
 
 In May
2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts - An interpretation of FASB Statement No. 60" (“SFAS 163”).
 SFAS 163 requires that an insurance enterprise recognize a claim liability
prior to an event of default when there is evidence that credit deterioration
has occurred in an insured financial obligation.  It also clarifies how
Statement 60 applies to financial guarantee insurance contracts, including the
recognition and measurement to be used to account for premium revenue and claim
liabilities, and requires expanded disclosures about financial guarantee
insurance contracts.  It is effective for financial statements issued for
fiscal years beginning after December 15, 2008, except for some disclosures
about the insurance enterprise's risk-management activities. SFAS 163 requires
that disclosures about the risk-management activities of the insurance
enterprise be effective for the first period beginning after issuance.
 Except for those disclosures, earlier application is not permitted.
 The adoption of SFAS 163 is not expected to have a material effect on the
Company’s financial statements.
 
 10
 In June
2008, the Financial Accounting Standards Board ("FASB") issued FASB Staff
Position (“FSP”) EITF No. 03-6-1, “Determining Whether Instruments Granted in
Share-Based Payment Transactions Are Participating Securities” (“FSP EITF No.
03-6-1”).  FSP EITF No. 03-6-1 addresses whether instruments granted in
share-based payment transactions are participating securities prior to vesting
and therefore need to be included in the earnings allocation in calculating
earnings per share under the two-class method described in Statement of
Financial Accounting Standards ("SFAS") No. 128, “Earnings per Share”.  FSP
EITF No. 03-6-1 requires companies to treat unvested share-based payment awards
that have non-forfeitable rights to dividend or dividend equivalents as a
separate class of securities in calculating earnings per share.  FSP EITF
No. 03-6-1 is effective for fiscal years beginning after December 15, 2008;
earlier application is not permitted.  The adoption of FSP EITF No. 03-6-1
is not expected to have a material effect on the Company’s financial
statements.
 
 Note 2 – Property, Plant and
Equipment:
 
 Property,
plant and equipment as of June 30, 2008 and December 31, 2007 are as
follows:
  June
      30,
                  
                  
                  December
      31,2008
                  
                  
                  2007Equipment
      and Computers
                  
                  $
                  52,568
                  
                  
                  $
                  52,568Less:
      Accumulated depreciation
                  
                  
                  (46,130
                  )
                  
                  
                  (43,996
                  )$
                  6,438
                  
                  
                  $
                  8,572
 
 Depreciation
expense charged to income for three and six months ended June 30,
2008  amounted to $ 949 and $ 2,134, respectively.
 
 Depreciation
expense charged to income for three and six months ended June 30,
2007  amounted to $ 2,138 and $4,090, 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.
 
 11
 Debt
issuance costs consisted of the following:
  June
      30,
                    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
                  
                  
                  109,074
                  
                  
                  
                  —Total
      Debt Issuance Costs
                  
                  
                  1,996,731
                  
                  
                  
                  1,887,657Less:  
      Accumulated Amortization
                  
                  
                  (1,803,323
                  )
                  
                  
                  (1,590,066
                  )$
                  193,408
                  
                  
                  $
                  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 and six months ended June 30, 2008
amounted to $ 87,236 and $213,257, respectively.
 
 Amortization
expense charged to income for the three and six months ended June 30, 2007
amounted to $ 69,618 and $221,880, 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
  12
 shares to
net-share settle any warrants or options issued to
non-employees.  Therefore, as of June 30, 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
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 June 30, 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
   13
 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
June 30, 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 principal balance of the
2007 E Note, along with accrued and unpaid interest, was payable on June 27,
2008. The 2007 E Note was extended until November 30, 2008.  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 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
June 30, 2008, 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
  14
 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 principal balance of the
2007 D Note, along with accrued and unpaid interest, was payable on June 15,
2008. The 2007 D Note was extended until November 30, 2008. 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 June 30, 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
“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 was not
repaid on July 13, 2007, the Company would issue to the Investor an additional
50,000 warrant to purchase shares of Company common stock for each 45 days that
the Note was unpaid past July 13, 2007, with such warrants having substantially
the same terms as the Original 2007 C Warrants.  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”).  Upon
the issuance of the Non Payment Warrants, Section 2.3(b) of the Subscription
Agreement was deleted in its entirety.  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 with
the Investor 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 December
31, 2008.  The Conversion Price of the 2007 C Note
  15
 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 with a floor of
$0.15.  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.  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.
 
 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 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 original 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 original warrants were detached and
accounted for as a derivative liability.   The original warrants
were recorded as a discount of $ 243,000 which is being amortized over the life
of the convertible note. As of June 30, 2008, there was $248,137 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, subsequently extended to May 01, 2008 and
subsequently extended to September 30, 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 June
30, 2008, there was $101,000 in principal of 10% 2006 G Notes
outstanding.  The conversion
   16
 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, subsequently extended to May 01, 2008 and
subsequently extended to September 30, 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: 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 June 30, 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
   17
 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. As of
June 30, 2008, there was $250,000 in principal of the 2006 D Notes
outstanding.
 
 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,
subsequently extended to May 01, 2008 and subsequently extended to September 30,
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% 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. As of June 30,
2008, there was $250,000 in principal of the 2006 C Notes
outstanding.
 
 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
  18
 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,
subsequently extended to May 01, 2008 and subsequently extended to September 30,
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.
As of June 30, 2008, there was $250,000 in principal of the 2006 B Notes
outstanding.
 
 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,
subsequently extended to May 01, 2008 and subsequently extended to September 30,
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%,
   19
 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% 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 June 30,
2008, there was $250,000 in principal of the 2006 A Notes
outstanding.
 
 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
delivered a waiver of any event of default of the Note as of May 1, 2008, the
maturity date of such Note. 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. As of June 30, 2008, there was $50,000 in
principal of the April 04, 2006 Note outstanding.
 
 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
   20
 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 June 30, 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 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 June 30, 2008, $1,826,000
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 June 30, 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
 2008 D
UNITS.  On June 23, 2008 and June 27, 2008, we sold $66,150 and
$200,000 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 D Notes”), and
3,000 warrants to purchase one share of our common stock at $0.30 per share (the
“Warrants”).   The 2008 D 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 D Notes may be redeemed by us in
whole or in part at any time at a redemption price equal to 100% the principal
amount of 2008 D Notes to be redeemed plus accrued and unpaid interest upon ten
trading days prior notice (“Optional Redemption”).  The 2008 D Notes
will be redeemed by us on the 20th day
after the Mandatory Redemption Event (as herein defined) at a redemption price
equal to 100% the principal amount of 2008 D Notes to be redeemed plus accrued
and unpaid interest upon ten trading days prior notice (“Mandatory
Redemption”).  The Mandatory Redemption Event shall
   21
 be the
date on which we close on aggregate gross equity financings of $1 million prior
to the Maturity Date.  If the 2008 D Notes have not been redeemed as
of the Maturity Date, the principal and interest due thereunder will be paid by
us in cash.  The Warrants included in the Units are exercisable for
shares of our 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. 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%.  The warrants were
detached and accounted for as a derivative liability.   The
warrants were recorded as a discount of $ 124,558 which is being amortized over
the life of the note. As of June 30, 2008, there was $266,150 in principal of
the 2008 D Notes outstanding.
 
 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. 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%.  The warrants were detached and accounted
for as a derivative liability.   The warrants were recorded as a
discount of $ 140,400 which is being amortized over the life of the note. As of
June 30, 2008, there was $300,000 in principal of the 2008 C Notes
outstanding.
 
 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.
 
 22
 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,
subsequently extended to May 01, 2008 and subsequently extended to September 30,
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.
As of June 30, 2008, there was $50,000 in principal of the 2007
A Notes outstanding.
 
 Maturities
of debt are as follows:
  For
      the year ended December 31, 2008
                  
                  $
                  4,626,365For
      the year ended December 31, 2009 & thereafter
                  
                  
                  2,097,000Total
                  
                  $
                  6,723,365
   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
                )06/30/08
                Conversion
      option on 2008  Bridge Loans
                
                
                14,62706/30/08
                Warrant
      liability on 2008 Bridge Loans
                
                
                324,13306/30/08
                Warrant
      liability on amended 2007 advisory contract at fair market
      value
                
                
                13,100
   23
  06/30/08
                Warrant
      liability on 2007 Bridge Loans
                
                
                70,20006/30/08
                Fair
      market value adjustment on the 2006 advisory contract
                
                
                (36,000
                )06/30/08
                Fair
      market value adjustment on conversion options
                
                
                (8,115
                )06/30/08
                Fair
      market value adjustment on warrant liabilities
                
                
                (127,119
                )Total
                
                
                $
                3,243,895
   FAIR
VALUE MEASUREMENTS
 
 Effective
January 1, 2008, we adopted SFAS 157, Fair Value Measurements (SFAS 157). SFAS
157 clarifies the definition of fair value, prescribes methods for measuring
fair value, and establishes a fair value hierarchy to classify the inputs used
in measuring fair value as follows:
 
 Level
1-Inputs are unadjusted quoted prices in active markets for identical assets or
liabilities available at the measurement date.
  Level
2-Inputs are unadjusted quoted prices for similar assets and liabilities in
active markets, quoted prices for identical or similar assets and liabilities in
markets that are not active, inputs other then quoted prices that are
observable, and inputs derived from or corroborated by observable market
data.
  Level
3-Inputs are unobservable inputs which reflect the reporting entity’s own
assumptions on what assumptions the market participants would use in pricing the
asset or liability based on the best available information.
 
 The
adoption of SFAS No. 157 did not have a material impact on our fair value
measurements.
  The
following tables present our assets and liabilities that are measured at fair
value on a recurring basis and are categorized using the fair value hierarchy.
The fair value hierarchy has three levels based on the reliability of the inputs
used to determine fair value.
 
 Fair
      Value Measurements at Reporting Date UsingDescription
                  June
      30, 2008
                  
                  Quoted
      Prices in Active Markets for Identical Assets (Level 1)
                  
                  Significant
      Other Observable Inputs (Level 2)
                  
                  Significant
      Unobservable Inputs (Level 3)Liabilities
      - warrants
                  
                  $
                  2,461,213
                  
                  
                  $
                  –
                  
                  
                  $
                  2,461,213
                  
                  
                  $
                  –Liabilities
      - conversion options
                  
                  
                  782,682
                  
                  
                  
                  –
                  
                  
                  
                  782,682
                  
                  
                  
                  –Total
      Liabilities
                  
                  $
                  3,243,895
                  
                  
                  $
                  –
                  
                  
                  $
                  3,243,895
                  
                  
                  $
                  –
 Note 5 – Accrued Salaries
and Interest:
 
 Accrued
salaries and interest represents salaries and interest due to officers of the
Company. During the three and six months ended June 30, 2008, the Company
accrued salaries in the amounts of $ 0 and $ 0, respectively, and accrued
interest on the salaries of $7,134 and $14,269, respectively. At June 30, 2008
the officers were due $287,597 in accrued salaries along with interest on the
accrued salaries of $62,412. 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 and six
months ended June 30, 2008 amounted to $0.
 
 Accrued
salary and interest repayments related to the above during the three and six
months ended June 30, 2007 amounted to $27,956 and $27,956,
respectively.
 
 Accrued
salary and interest repayments related to the above during the year ended
December 31, 2007 amounted to $27,956.
 
 Note 6 – Provision for
Income Taxes:
 
 As of
June 30, 2008 and December 31, 2007, non-current deferred tax liabilities for
taxable temporary differences total $0 and $0, respectively. As of June 30, 2008
and December 31, 2007, non-current deferred tax assets recognized for deductible
temporary differences total $9,089,768 and $8,446,101,
respectively.
 
 The
Company’s deferred tax assets and liabilities consist of the following at June
30, 2008:
  Deferred
      tax assets:Net
      operating loss carryforwards
                  
                  $
                  8,886,115Excess
      of tax basis over financial statement of intangible assets
                  
                  
                  202,750Excess
      of tax basis over financial statement of property, plant and
      equipment
                  
                  
                  903Valuation
      allowance for deferred tax assets
                  
                  
                  (9,089,768
                  )$
                  0
  24
 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,
increased by $314,251 to $8,760,352 at March 31, 2008 and increased by $329,416
to $9,089,768 at June 30, 2008.
 
 Income
tax expense for the six months ended June 30, 2008 and 2007 consisted of the
following:
  June
      30,
                  
                  
                  June
      30,2008
                  
                  
                  2007Current
      State Tax
                  
                  $
                  655
                  
                  
                  $
                  1,601
   As of
June 30, 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 June 30, 2008 and December 31, 2007, the Company’s cash and cash equivalents
exceeded federally insured limits by $93,806 and $0, respectively.
  25
 Note 8 –
Cash Flow Disclosures:
 
 Non-cash
investing and financing transactions for the six months ended June 30, 2008
included the following:
 
 Convertible
notes along with accrued interest totaling $905,407 were converted into common
stock.
 
 Non-cash
investing and financing transactions for the six months ended June 30, 2007
included the following:
 
 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.
 
 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
and six months ended June 30, 2008, management has committed to contribute $0
and $0, respectively to the plan.  For the three and six months ended
June 30, 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 and
six months ended June 30, 2008. Matching contributions to the 401K plan amounted
to $0 and $0, respectively for three and six months ended June 30,
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 and $18,000
during the three and six months ended June 30, 2008 along with 3,000 and 6,000
stock options vesting which were granted during 2007.
 
 Consulting
fees pertaining to a prior contract with Phoenix Ventures amounted to $18,000
and $36,000 during the three months and six months ended June 30, 2007 along
with 7,500 and 15,000 stock options vesting which were granted during
2006.
 
 26
 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 June 30, 2008, the Company incurred fees of
approximately $402,022 relating to this agreement. As of June 30, 2008, $239,219
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. Fees incurred
during the six months ended June 30, 2008 and June 30, 2007 were $73,558 and
$119,216, respectively. 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 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 and six months ended June 30, 2008 was $69,521 and
$139,121, respectively.  Compensation cost recognized for the three
and six months ended June 30, 2007 was $224,489 and $393,271,
respectively.
 
 The
following assumptions were used in the Black Scholes pricing model for the 2008
option issuances:
 
 Fair
      Market Value
                Exercise
      Price
                Expected
      Term
                Dividend
      Yield
                Interest
      Rate
                Volatility$0.25
                $0.30
                10
      years
                -0-
                4.7%
                78%
 
 
 27
 The
status of the stock option plan is as follows at June 30, 2008:
 
 WeightedNumber
                
                
                AverageOf
                
                
                ExerciseShares
                
                
                PriceOutstanding
      at January 1, 2007
                
                
                11,205,334
                
                
                $
                0.25Granted
                
                
                1,161,999
                
                
                $
                0.30Exercised
                
                
                —
                
                
                
                —Canceled
                
                
                —
                
                
                
                —Outstanding
      at December 31, 2007
                
                
                12,367,333
                
                
                $
                0.26Granted
                
                
                1,000,000
                
                
                
                0.30Exercised
                
                
                —
                
                
                
                —Canceled
                
                
                —
                
                
                
                —Outstanding
      at June 30, 2008
                
                
                13,367,333
                
                
                
                0.26Exercisable
      at June 30, 2008
                
                
                11,063,323
                
                
                $
                0.26Exercisable
      at December 31, 2007
                
                
                9,750,658
                
                
                $
                0.25
   Note 12 – Stockholders’
Equity:
 
 During
2008, the Company converted $710,000 of the Company’s 2003 convertible debt and
$143,544 of accrued interest on the 2003 convertible debt into 3,414,184 shares
of the Company’s common stock.
 
 During
May 2008, the Company converted $51,863 of the Company’s 2007 convertible debt
into 148,180 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
  28
 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 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.
 
 29
 In an
effort to determine the fair market value of our common stock, which was not
readily determinable or actively traded as of June 30, 2008, 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 June 30, 2008.
 
 Warrants
 On June
23, 2008, the Company issued Warrants to purchase 100,000 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 June 23, 2013. 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%.
 
 The
aforementioned warrants were issued in conjunction with an amendment to a
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 $13,100 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 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. 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%.
 
 30
 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%.
 
 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
  31
 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 and six months
ended June 30, 2008 was $8,772 and $21,930, respectively. The total rent
incurred for the three and six months ended June 30, 2007 was $14,474 and
$27,578, respectively.
 
 Note 15 – Officers and
Directors:
 
 On June
10, 2008, Roger G. Harrison, PhD, 60, was appointed President of Performance
Health Technologies, Inc. (the “Company”).  Dr. Harrison has been
serving as a director of the Company since January 16, 2005 and as its Chairman
of the Board since March 7, 2006.
 
 On June
10, 2008, Timothy F. Parshall, 49, was appointed Executive Vice President for
Corporate Development of the Company.  Mr. Parshall has been serving
as a director of the Company since September 20, 2006.
 
 Robert D.
Prunetti will continue to serve as the Company’s Chief Executive
Officer.  Mr. Prunetti has been serving as Chief Executive Officer
since February 21, 2006 and as a director of the Company since January 19,
2005.
 
 Note 16 –
Commitments, Contingencies and Uncertainties:
 
 Going
Concern
 As shown
in the accompanying financial statements, the Company incurred a net loss of
$2,010,845 during the six months ended June 30, 2008, and as of that date, the
Company’s current liabilities exceeded its current assets by $11,164,933. 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 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:
 
 On July
18, 2008 and July 31, 2008, the Company sold  $125,000 and $95,000 of
units, respectively, to lenders in a private transaction.  Each Unit
consists of an unsecured
   32
 non-convertible
promissory note in the principal amount of $1,000 (the “2008 D Notes”), and
3,000 warrants to purchase one share of our common stock at $0.30 per share (the
“Warrants”).   The 2008 D 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 D 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 D Notes to be redeemed plus accrued and unpaid interest
upon ten trading days prior notice (“Optional Redemption”).  The 2008
D 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 D 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 D 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 $125,000 of 2008 D Units sold on July 18,
2008, the total offering price and total commissions paid to broker-dealers were
$125,000 and $17,500, respectively.  For the $95,000 of 2008 D Units
sold on July 31, 2008, the total offering price and total commissions paid to
broker-dealers were $95,000 and $13,300, respectively.  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 D Units were used for working
capital purposes.
 
 Our
common stock commenced trading on the OTC Bulletin Board on August 8,
2008.
  The
Company has obtained the consent of the holders of the following notes to a new
maturity date of November 30, 2008 and a waiver of any event of
default:  certain 2007 F Notes and 2008 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  August 13, 2008, the maturity date of such April 4,
2006 Note was May 01, 2008.
  In
August 2008, we agreed to reduce the exercise prices of approximately
3,570,600 of our outstanding warrants by approximately two-thirds in
exchange for the extension of the maturity dates of  outstanding notes held
by the holders of the adjusted warrants that would have otherwise been in
default.  In August 2008, we also agreed to reduce the exercise prices
of  approximately 2,970,000 of our outstanding warrants by
approximately two-thirds in exchange for additional loans made to us by the
holders of the adjusted warrants in connection with our 2008 C Unit and 2008 D
Unit financings.
 
 
 
 
 33
 
 ITEM 2.
                MANAGEMENT’S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS.
  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 of 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 merge 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.
  34
 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
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 be designed to be especially easy to
understand and use, and 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.
  Our
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 for use 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 JUNE 30, 2008 COMPARED TO
 THREE
MONTHS ENDED JUNE 30, 2007
 
 Revenuesduring the three
months ended June 30, 2008 and in the corresponding three months ended June 30,
2007 were $0. During the first quarter of 2008, the Company sold a few units to
its primary distributor (Interactive Metronome, Inc. (“Interactive Metronome”))
which were re-sold to end users and utilized in pilot programs which they
sponsored. During the second quarter of 2008, the Company placed several units
in pilot programs where it did not charge for those units.  During the
quarter ended June 30, 2007, the Company was in the process of designing
enhancements to the Core: TX product, thus sales were not procured. The product
is now being marketed through the Company’s contract with Interactive Metronome
as well as through direct marketing efforts by Company personnel.
 
 Cost of goods sold during
the three months ended June 30, 2008 and in the corresponding three months ended
June 30, 2007 was $0 as no products were sold in either period.
 
 Research and Development
Expenses during the three months ended June 30, 2008 of $6,400 decreased
by $23,489, or 79%, from $29,889 in the corresponding three months ended June
30, 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 second quarter of 2007 in the amount of $28,968 as
compared to salary expenses of $5,760 for the corresponding quarter ended June
30, 2008.
 
 General and Administrative Expensesduring the three months ended June 30, 2008 of $387,463 decreased by
$626,232, or 62%, from $1,013,695 in the corresponding three months ended June
30, 2007.  This decrease was primarily attributable to the decrease in
legal expenses of $437,550, consulting expenses of $62,559, stock option
expenses of $99,182, and accounting fees of $40,229.  These decreases
relate in large part to management’s efforts to raise capital, and the
registration of the Company’s common stock with the Securities Exchange
Commission (“SEC”) during the quarter ended March 31,
2007.  Approximately $334,000 of the decrease in legal fees were
related to deferred offering costs capitalized in 2006 relating to the Standby
Equity Distribution Agreement (“SEDA”) and subsequently expensed in
2007.  The decreases were primarily offset by an increase in general
and administrative salaries of $7,124.
   35
 Sales and Marketing Expensesduring the three months ended June 30, 2008 of $39,848 increased by
$10,453, or 36%, from $29,395 in the corresponding three months ended June 30,
2007. The increase is primarily attributable to an increase in marketing
consultant fees in the amount of approximately $16,830.  Advertising
salaries increased approximately $1,720.  These increases were offset
by a decrease in trade show and advertising expenses of approximately $8,507.
During the quarter ended June 30, 2007, the Company’s focus was on product
enhancements and registering the Company’s common stock with the
SEC.
  Amortization during the
three months ended June 30, 2008 of $126,021 increased by $56,403, or 81%, from
$69,618 during the corresponding three months ended June 30,
2007.  The increase is primarily attributable to amortization expense
on the debt issuance costs associated with the 2008 bridge loans and the
write-off of the debt issuance costs associated with conversions of outstanding
convertible notes during the period. The increase was offset by 2006 bridge
loans that were fully amortized during the year ended December 31,
2007.
 
 Interest expense, net of interest
income and interest expense related to beneficial conversion during the
three months ended June 30, 2008 of $610,458 decreased by $174,710, or 22%, from
$785,168 during the corresponding three months ended June 30,
2007.  The decrease is primarily attributable to the maturity and
conversions of outstanding convertible notes during the period.
 
 Gain (loss) on Conversion
Liability during the three months ended June 30, 2008 of $(66,773)
decreased by $155,523, or 175%, from $88,750 during the corresponding three
months ended June 30, 2007.  The decrease is primarily attributable to
the valuation of the derivative liability at the end of the reporting period in
accordance with Statement of Financial Accounting Standards (“SFAS”) 133, which
requires embedded derivatives to be marked to market at each balance sheet
date.
 
 Net loss to common
shareholders was $(1,237,098) or $(0.02) per share for the three months
ended June 30, 2008 as compared to a net loss to common shareholders to common
shareholders of $(1,839,816) or $(0.04) per share for the corresponding three
months ended June 30, 2007. The decrease in net loss is primarily attributable
to a decrease in legal expenses, 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
June 30, 2008, our accumulated deficit was $(27,851,347).
 
 SIX
MONTHS ENDED JUNE 30, 2008 COMPARED TO
 SIX
MONTHS ENDED JUNE 30, 2007
 
 Revenuesduring the six months
ended June 30, 2008 of $9,440 increased by $8,851, or 1503%, from $589 in the
corresponding six months ended June 30, 2007 primarily resulting from an
increase in sales of the Core: TX products in the amount of $8,851. During the
six months ended June 30, 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 six months ended June 30, 2008, the Company sold 10 Core:TX units and two
Core:TX units during the six months ended June 30, 2007.
 
 36
 Cost of goods sold in the
six months ended June 30, 2008 of $2,814 increased by $2,814, or 100%, from $0
in the corresponding six months ended June 30, 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 six months ended June 30, 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 six months ended June 30, 2008 of $12,964 decreased
by $38,786, or 75%, from $51,750 in the corresponding six months ended June 30,
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 six months ended June 30, 2007 in the amount of
$50,673 as compared to salary expenses of $12,838 for the corresponding six
months ended June 30, 2008.
 
 General and Administrative Expensesduring the six months ended June 30, 2008 of $787,551 decreased by
$990,936, or 56%, from $1,778,487 in the corresponding six months ended June 30,
2007.  This decrease was primarily attributable to a decrease in legal
expenses of $378,501, consulting expenses of $263,841, stock option expenses of
$254,151, general and administrative salaries of $32,048, and accounting fees of
$63,433.  These decreases relate to management’s efforts to raise
capital, and the registration of the Company’s common stock with the SEC during
the six months ended June 30, 2007.  Approximately $334,000 of the
decrease in legal fees were related to deferred offering costs capitalized in
2006 relating to the SEDA and subsequently expensed in 2007.
 
 Sales and Marketing Expensesduring the six months ended June 30, 2008 of $91,072 increased by
$36,295, or 66%, from $54,777 in the corresponding six months ended June 30,
2007. The increase is primarily attributable to an increase in marketing
consultants fees in the amount of approximately $36,830.  Advertising
salaries increased approximately $3,400.  These increases were offset
by a decrease in trade show and advertising expenses of approximately $4,460.
During the six months ended June 30, 2007, the Company’s focus was on product
enhancements and registering the Company’s common stock with the
SEC.
  Amortization during the
six months ended June 30, 2008 of $213,257 decreased by $8,623, or 4%, from
$221,880 during the corresponding six months ended June 30, 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.
 
 Interest expense, net of interest
income and interest expense related to beneficial conversion during the
six months ended June 30, 2008 of $1,083,206 decreased by $443,848, or 29%, from
$1,527,054 during the corresponding six months ended June 30,
2007.  The decrease is primarily attributable to the maturity and
conversions of outstanding convertible notes during the period.
 
 Gain on Conversion
Liability during the six months ended June 30, 2008 of $171,234
decreased by $285,550 or 63% from $456,784 during the corresponding six months
ended June 30, 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 $(2,010,845) or $(0.04) per share for the six months
ended June 30, 2008 as compared to a net loss to common shareholders of
$(3,178,161) or $(0.07) per share for the
  37
 corresponding
six months ended June 30, 2007. The decrease in net loss is primarily
attributable to a decrease in legal expenses, 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
June 30, 2008, our accumulated deficit was $(27,851,347).
 
 LIQUIDITY
AND FINANCIAL CONDITION
 
 GENERAL
 
 At June
30, 2008, cash and cash equivalents were $197,151. Total liabilities at June 30,
2008 were $11,809,105, consisting of current liabilities in the aggregate amount
of $11,521,559 and long-term liabilities in the amount of $287,546. At June 30,
2008, assets included $2,375 in accounts receivable, $25,311 in product
inventory, $131,789 in prepaid expenses, $6,438 in furniture and equipment, net
of depreciation; $193,408 in debt issuance costs, net of amortization; and other
assets of $4,802. As of June 30, 2008, our working capital deficit was
$(11,164,933) as compared to $(8,398,048) at December 31, 2007. We expect to
incur substantial operating losses as we continue our commercialization
efforts.
 
 Our debt
at June 30, 2008 was as follows:
  June
      30, 2008Non-convertible
      notes
                
                $
                616,150Short-term
      bridge loans
                
                
                3,033,215Convertible
      notes
                
                
                3,074,000
  For more
detailed information on long-term liabilities, see Note 5 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 debt 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 $635,000 on the continued development of the products. The Company
also used approximately $646,000 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
  38
 Exchange
Act of 1934. The Company has incurred approximately $1,310,000 of professional
fees in conjunction with the SEC registration. At June 30, 2008, $540,624 of
these fees are unpaid and included in Accounts Payable.
 
 Currently,
the Company is burning approximately $95,000 month on recurring expenses. Of the
$95,000 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 financing transactions consummated
during our most recent fiscal quarter ended June 30, 2008 and thereafter. See
also the Notes to Financial Statements included with this Report on Form 10-Q.
See our Annual Report on Form 10-KSB for our fiscal year ended December 31, 2007
and Quarterly Report on Form 10-Q for our fiscal quarter ended March 31, 2008
for descriptions of our previous financing transactions in 2007 and
2008.
 
 2008 C UNITS.  On
April 4, 2008, April 22, 2008 and May 12, 2008, we 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 us 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 us 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 we close 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 us in
cash.  The Warrants included in the Units are exercisable for shares
of our 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,
respectively.  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”) with 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
provided that in the event the 2007 C Note was not repaid on July 13, 2007, we
would issue to the Investor an additional 50,000 warrants to purchase shares of
our common stock for each 45 days that the Note was unpaid past July 13, 2007,
with such warrants having substantially the same terms as the Original 2007 C
Warrants. Pursuant to Section 2.3(b) of the Subscription Agreement, on May 1,
2008, we issued to the Investor five year Warrants to purchase 300,000 shares of
our common stock with an exercise price of $0.30 per share (the “Non Payment
Warrants”). Upon the issuance of the Non Payment Warrants, Section
  39
 2.3(b) of
the Subscription Agreement was deleted in its entirety. The 2007 C Note had been
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 with the Investor 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 December
31, 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 our common stock for the 20 days preceding
the notice of conversion, as reported by the exchange on which our common stock
is then traded. The Subscription Agreement was amended to delete Section
2.3(b).  We 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.  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.
 
 2008 D UNITS.  On
June 23, 2008, June 27, 2008, July 18, 2008 and July 31, 2008, we sold $66,150,
$200,000, $125,000 and $95,000 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 D Notes”), and
3,000 warrants to purchase one share of our common stock at $0.30 per share (the
“Warrants”).   The 2008 D 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 D Notes may be redeemed by us in
whole or in part at any time at a redemption price equal to 100% the principal
amount of 2008 D Notes to be redeemed plus accrued and unpaid interest upon ten
trading days prior notice (“Optional Redemption”).  The 2008 D Notes
will be redeemed by us on the 20th day
after the Mandatory Redemption Event (as herein defined) at a redemption price
equal to 100% the principal amount of 2008 D 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 we close on equity financings grossing an aggregate of $1 million
commencing upon the date of issuance of the 2008 D Notes and ending upon the
Maturity Date.  If the 2008 D Notes have not been redeemed as of the
Maturity Date, the principal and interest due thereunder will be paid by us in
cash.  The Warrants included in the Units are exercisable for shares
of our 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 $66,150 of 2008 D Units sold on June 23, 2008, the total
offering price and total commissions paid to broker-dealers were $66,150 and
$9,261, respectively.  For the $200,000 of 2008 D Units sold on June
27, 2008, the total offering price and total commissions paid to broker-dealers
were $200,000 and $28,000, respectively. For the $125,000 of 2008 D Units sold
on July 18, 2008, the total offering price and total commissions paid to
broker-dealers were $125,000 and $17,500, respectively.  For the
$95,000 of 2008 D Units sold on July 31, 2008, the total offering price and
total commissions paid to broker-dealers were $95,000 and $13,300,
respectively.  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.
 
 In August
2008, we agreed to reduce the exercise prices of approximately 3,570,600 of
our outstanding warrants by approximately two-thirds in exchange for the
extension of the maturity dates of outstanding notes held by the holders of
the adjusted warrants that would have otherwise been in default.  In
August 2008, we also agreed to reduce the exercise prices of approximately
2,970,000 of our outstanding warrants by approximately two-thirds in
exchange for additional loans made to us by the holders of the adjusted warrants
in connection with our 2008 C Unit and 2008 D Unit financings.
 
 40
 AGREEMENTS
WITH PLACEMENT AGENTS AND FINDERS
 
 We
entered into a Financial Advisory and Investment Banking Agreement with Dawson
James Securities (“Dawson James”) dated July 5, 2007 as amended (as amended, the
“DJ Financial Advisory Agreement”). Pursuant to the DJ Financial Advisory
Agreement, we 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, we issued 250,000 five year warrants
exercisable at $0.50 per share to Dawson James as consideration under the DJ
Financial Advisory Agreement.  Pursuant to an amendment of DJ
Financial Advisory Agreement entered into on June 23, 2008 which extended the
term thereof for an additional six month period through January 5, 2009, we paid
to Dawson James a fee of $60,000 and we issued 100,000 additional five year
warrants exercisable at $0.50 per share to Dawson James as consideration under
the amendment to the DJ Financial Advisory Agreement.  In addition,
the DJ Financial Advisory Agreement provides for payment of a fee equal to 5% of
the total consideration received by us either in a debt or equity financing
arrangement with an investor introduced to us by Dawson James, or in the event
of a sale, merger or sale of significant assets of us and/or our affiliates with
an investor introduced to us by Dawson James.
 
 We
entered into a Placement Agreement with Dawson James 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 our 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 equaled 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.
  We and
Dawson James also entered into a Placement Agreement dated January 24, 2008 and
amended on June 25, 2008 to extend the term thereof and increase the maximum
offering size (as amended, the “2008 Placement Agreement”) pursuant to which
Dawson James has agreed to act as a placement agent for the placement of up to
$3.0 million of our 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 will be exercisable at a price equal to 100% of the price of common
stock in the offering.  No securities have been sold by us as of the date
hereof under the 2008 Placement Agreement.
  We and
Dawson James also entered into a Finders Agreement on March 26, 2008 (the “2008
Finders Agreement”) pursuant to which Dawson James acts as a finder for the
placement of our 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 that 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.
 
 
 
 41
 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 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
$10.2 million in debt and equity financings we would have sufficient funds to
meet our needs for working capital ($1.1 million), repayment of debt
(approximately $7.6 million expected to mature from July 1, 2008 to June 30,
2009), accounts payable and accrued expenses (approximately $1.2 million) and
the balance to be utilized for marketing and development over the next twelve
months.  As of June 30, 2008, we had cash balances of
$197,151.
 
 We
recently signed a private placement agreement for the sale of up to $3.0 million
of our common stock. We expect selling activities to begin in the third 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 in 2007.
We began earning revenues relating to the 2007 Interactive Metronome 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.  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
IM 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 (“PHT Products”).
 
 Pursuant
to the agreement, Interactive Metronome has been appointed the exclusive
distributor of PHT Products in the United States and Canada (the “Territory”)
for the following markets:
 
 42
 ·
                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 IM Agreement, Interactive Metronome has been appointed a non-exclusive
distributor for PHT Products with respect to all other markets within the
Territory; provided however, if we appoint an exclusive distributor for any or
all such markets during the term of the IM Agreement, Interactive Metronome is
obligated to respect that exclusivity.
 
 The
exclusivity granted becomes null and void should IM fail to sell 120 Core:Tx(R)
Neuro units during the first eight months of the IM Agreement, and an additional
120 Core:Tx(R) Neuro units during the remaining four months of the IM Agreement
(240 units total during term).
 
 The
parties are required to agree upon suggested retail selling prices for the PHT
Products. The purchase price to be paid by Interactive Metronome for the PHT
Products is a percentage of the suggested retail selling price for the PHT
Products.
 
 The IM
Agreement has an initial term of one year. During the first year, the IM
Agreement may be terminated by us immediately upon Interactive Metronome’s
material breach of the IM Agreement or 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 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 the PHT Products. The amount of expected
revenues from the IM Agreement is undeterminable as of the date of this Report
on 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 an 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.
 
 
 43
 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 June 30, 2008, we had an
accumulated deficit of approximately $27.9 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 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 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 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.
 
 44
 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 which 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 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
 
 We
account for the fair value conversion features embedded in our 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 us to bifurcate and separately account for the conversion
feature as embedded derivatives contained in our convertible notes. Pursuant to
SFAS No. 133, we 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. We are required to carry these
embedded derivatives on our balance sheet at fair value and unrealized changes
in the value of these embedded derivatives are reflected in our 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 our
financial position, progressions in product development and the effects of
dilutive debt conversions.
 
 RECENTLY
ISSUED ACCOUNTING PRONOUNCEMENTS
  In
September 2006, the Financial Accounting Standards Board (“FASB”) issued SFAS
No. 157, “Fair Value Measurements” (“SFAS No. 157”), 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
  45
 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 our financial position and results of
operations.  We are currently evaluating the impact of adoption of
this statement on our 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.  We adopted this Statement as of January 1, 2008 and
have elected not to apply the fair value option to any of our financial
instruments.
  In
December 2007, the FASB issued 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 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. The adoption of SFAS 141R is not expected to have a material effect on
the Company's financial statements.
  In
December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in
Consolidated Financial Statements and Amendment of ARB No. 51” (“SFAS
160”).  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 our financial position, results of operations, or cash
flows.
 
 In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities” (“SFAS 161”). 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. We are currently evaluating the impact of adopting SFAS No. 161 on
our financial statements.
 
 In April
2008, the FASB issued FASB Staff Position (“FSP”) 142-3, “Determination of the
Useful Life of Intangible Assets” (“FSP 142-3”).  FSP 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used to determine the useful life of a recognized intangible asset under SFAS
No. 142, “Goodwill and Other Intangible Assets.”  FSP 142-3 applies
prospectively to intangible assets that are acquired, individually or with a
group of other assets, after the effective date in either a
   46
 business
combination or asset acquisition.  FSP 142-3 is effective for financial
statements issued for fiscal years beginning after December 15, 2008, and
interim periods within those fiscal years.  Early adoption is prohibited.
The Company is currently evaluating the impact of adopting FSP 142-3 on its
financial statements.
 
 In May
2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted
Accounting Principles" (“SFAS 162”). SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles to be used
in the preparation of financial statements of nongovernmental entities that are
presented in conformity with generally accepted accounting principles in the
United States.  It is effective 60 days following the SEC’s approval of the
Public Company Accounting Oversight Board amendments to AU Section 411, "The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles".  The adoption of SFAS 162 is not expected to have a material
effect on the Company’s financial statements.
 
 In May
2008, the FASB issued SFAS No. 163, "Accounting for Financial Guarantee
Insurance Contracts - An interpretation of FASB Statement No. 60" (“SFAS 163”).
 SFAS 163 requires that an insurance enterprise recognize a claim liability
prior to an event of default when there is evidence that credit deterioration
has occurred in an insured financial obligation.  It also clarifies how
Statement 60 applies to financial guarantee insurance contracts, including the
recognition and measurement to be used to account for premium revenue and claim
liabilities, and requires expanded disclosures about financial guarantee
insurance contracts.  It is effective for financial statements issued for
fiscal years beginning after December 15, 2008, except for some disclosures
about the insurance enterprise's risk-management activities. SFAS 163 requires
that disclosures about the risk-management activities of the insurance
enterprise be effective for the first period beginning after issuance.
 Except for those disclosures, earlier application is not permitted.
 The adoption of SFAS 163 is not expected to have a material effect on the
Company’s financial statements.
 
 In June
2008, the FASB issued FSP EITF No. 03-6-1, “Determining Whether Instruments
Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP
EITF No. 03-6-1”).  FSP EITF No. 03-6-1 addresses whether instruments
granted in share-based payment transactions are participating securities prior
to vesting and therefore need to be included in the earnings allocation in
calculating earnings per share under the two-class method described in SFAS No.
128, “Earnings per Share”.  FSP EITF No. 03-6-1 requires companies to treat
unvested share-based payment awards that have non-forfeitable rights to dividend
or dividend equivalents as a separate class of securities in calculating
earnings per share.  FSP EITF No. 03-6-1 is effective for fiscal years
beginning after December 15, 2008; earlier application is not permitted.
 The adoption of FSP EITF No. 03-6-1 is not expected to have a material
effect on the Company’s 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-KSB and the other information in this Report on Form 10-Q.  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 $(1.2) million during the quarter ended June 30, 2008. We expect
to incur substantial additional operating losses in the
  47
 future.
During the quarter ended June 30, 2008, we generated revenues from product sales
in the amount of $0. 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 WERE NOT
SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES ON JUNE 30, 2008.
 
 We had a
working capital deficit of $(11,164,933) at June 30, 2008, which means that our
current liabilities exceeded our current assets on June 30, 2008 by $11,164,933.
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
June 30, 2008 were not sufficient to satisfy all of our current liabilities on
that date.
 
 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 our debt and/or
equity securities through private placement offerings and/or the sale of common
stock. We believe that if we raise approximately $10.2 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 working capital, debt repayment or other expenses, or at all. If we are
unsuccessful in completing these financings, we will not be able to meet our
working capital, debt repayment or other capital 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
 
 On July
13, 2007, we became a reporting company under the Securities Exchange Act of
1934. Our common stock commenced trading on the OTC Bulletin Board on August 8,
2008. There can be no assurance that the trading market for our common stock
will be active. 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 June 30, 2008, we had 56,743,093 shares of common
stock outstanding and no shares of preferred stock outstanding.
 
 48
 Stock
Options
 
 As of
June 30, 2008, there were (i) 6,340,333 shares of our common stock issuable upon
exercise of outstanding stock options under our 1999 Stock Incentive Plan at
$0.25 per share and (ii) 7,027,000 shares of our common stock issuable upon
exercise of outstanding stock options under our 2006 Plan at $0.25 to $0.30 per
share.
 
 Warrants
 
 As of
June 30, 2008, there were outstanding warrants to purchase 35,715,182 shares of
our common stock at prices ranging from $0.10 to $1.50 per share.
 
 Convertible
Notes
 
 Conversion
into Common Stock.As of June 30,
2008, there were outstanding promissory notes convertible into shares of our
common stock as follows:
 
 Principal
                Type of
      Note
                Conversion
      Terms
                
                Conversion
      Shares$3,074,000
                2003
      Notes
                Convertible
      into common stock at $0.25 per share.
                
                12,296,000$    
      50,000
                April
      2006 Notes
                Convertible
      into common stock at $0.30 per share.
                
                166,667$  
      250,000
                2006
      A Note
                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$  
      248,137
                2007
      C Note
                Convertible
      into common stock at $0.35 per share.
                
                708,963$  
      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
   49
  $  
      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$  
      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$6,107,215
                
                
                
                24,440,346
 
 See the
Notes to the Financial Statements for additional terms of these convertible
notes.
 
 
 ITEM
3.QUANTITATIVE
AND QUALITATIVE DISCLOSURESABOUT MARKET RISK.
 
 As a
“smaller reporting company” as defined by Item 10 of Regulation S-K, we are not
required to provide information required by this Item.
 
 ITEM
4.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
Securities Exchange Act of 1934 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
June 30, 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 June 30, 2008 that have materially affected or are reasonably
likely to materially affect our internal controls.
 
 50
 PART
II —
OTHER INFORMATION
  ITEM 1.  LEGAL PROCEEDINGS.
  There are
no material legal proceedings pending against the Company except as described
below.
 
 On June
30, 2006, Marc R. Silverman, a former President and Chief Executive Officer of
the Company and a former member of the Company’s Board of Directors, filed a
lawsuit against the Company in the District Court for Boulder County, Colorado.
Mr. Silverman claims that salary and consulting fees which Mr. Silverman had
previously agreed to defer are now due and owing to him from the
Company.  Mr. Silverman alleges claims for relief based upon violation
of the Colorado Wage Act and breach of contract. Mr. Silverman seeks relief
including alleged unpaid wages due and owing, statutory liquidated damages under
the Colorado Wage Act, actual damages, costs and expenses of prosecution,
attorney fees and pre- and post-judgment interest. The Company believes that
this complaint is without merit and plans to file an answer to defend against
such complaint.
 
  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.
 ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
 
 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,
respectively.  Broker-dealer commissions consisted of a commission of
14% of the gross offering proceeds raised by, respectively 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 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.
 
 51
 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 1/2 on April 15, 2008; and 1/2 on April 15, 2009,
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, the Company 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 the
Company’s 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”) with 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 provided that in the event the 2007 C Note was not repaid on July 13,
2007, the Company would issue to the Investor an additional 50,000 warrant to
purchase shares of Company common stock for each 45 days that the Note was
unpaid past July 13, 2007, with such warrants having substantially the same
terms as the Original 2007 C Warrants.  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”).  Upon the
issuance of the Non Payment Warrants, Section 2.3(b) of the Subscription
Agreement was deleted in its entirety.  The 2007 C Note had been
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 with the Investor 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 December
31, 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.   The Subscription
Agreement was amended to delete Section 2.3(b).  The Company agreed in
the Amendment to issue to the Investor five year Warrants to purchase 150,000
shares of Company
  52
 common
stock having an exercise price of $0.30.  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.  This issuance was exempt from registration requirements
pursuant to Section 4(2) of the Securities Act of 1933.
 
 On June
23, 2008, the Company issued 100,000 warrants to a consultant for services
rendered to the Company, having an exercise price of $0.50 per share and an
expiration date of June 23, 2013.  This issuance was exempt from
registration requirements pursuant to Section 4(2) of the Securities Act of
1933.
 
 2008 D UNITS.  On
June 23, 2008, June 27, 2008, July 18, 2008 and July 31, 2008, the Company sold
$66,150, $200,000, $125,000 and $95,000 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 D
Notes”), and 3,000 warrants to purchase one share of our common stock at $0.30
per share (the “Warrants”).   The 2008 D 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 D 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 D Notes to be redeemed plus accrued
and unpaid interest upon ten trading days prior notice (“Optional
Redemption”).  The 2008 D 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 D 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 equity financings grossing an aggregate of $1
million commencing upon the date of issuance of the 2008 D Notes and ending upon
the Maturity Date.  If the 2008 D 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 $66,150 of 2008 D Units sold on June 23, 2008,
the total offering price and total commissions paid to broker-dealers were
$66,150 and $9,261, respectively.  For the $200,000 of 2008 D Units
sold on June 27, 2008, the total offering price and total commissions paid to
broker-dealers were $200,000 and $28,000, respectively. For the $125,000 of 2008
D Units sold on July 18, 2008, the total offering price and total commissions
paid to broker-dealers were $125,000 and $17,500, respectively.  For
the $95,000 of 2008 D Units sold on July 31, 2008, the total offering price and
total commissions paid to broker-dealers were $95,000 and $13,300,
respectively.  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 D Units were used for working capital purposes.
 
  ITEM
3.   DEFAULTS UPON SENIOR SECURITIES.
  None.
 
  ITEM
4.   SUBMISSION OF MATTERS TO A VOTE OF
SECURITYHOLDERS.
  None.
 
 53
 ITEM 5.   OTHER INFORMATION.
 
 The
Company has obtained the consent of the holders of the following notes to a new
maturity date of November 30, 2008 and a waiver of any event of
default:  2007 D Notes, 2007 E Notes, certain 2007 F Notes and 2008 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 August 13, 2008; the maturity
date of such April 4, 2006 Note was May 1, 2008.
 
  ITEM
6.   EXHIBITS.
  The
following Exhibits are filed as part of this Report or incorporated herein by
reference:
 
 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 (2)
 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
  (2)
 10.126
                        Sales
      and Marketing Agreement dated May 19, 2008 between Performance Health
      Technologies, Inc. and Interactive Metronome, Inc.
  +
 10.127
                          Amendment
      No. 1 to Consulting Agreement dated June 23, 2008 between Performance
      Health Technologies, Inc. and Dawson James Securities
  +
 10.128
                            Amendment
      No. 1 to Selling Agreement dated June 25, 2008 between Performance Health
      Technologies, Inc. and Dawson James Securities
+
 10.129
                Form
      of Subscription Agreement entered into in 2008 D private placement
      +
 
 10.130
                Form
      of 12% Non-Convertible Note issued in 2008 D private placement
      +
 
 10.131
                Form
      of $0.30 Warrants issued in 2008 D private placement
  +
  10.132
                Form
      of $0.50 Warrants to Purchase 100,000 shares issued to Dawson James
      Securities dated as of June 23, 2008
+
  10.133
                  Amendments
      to Notes dated June 15, 2007
+
 54
 10.134
                    Amendments to Notes dated June 27,
      2007 +
 10.135
                          Amendments to Notes dated August
      15, 2007 +
 
 10.136
                          Amendments to Notes
      dated January 31, 2008 +
  10.137
                            Amendments to Notes
      dated February 15, 2008 +
 10.138
                        Waiver Letter to Note dated April
      4, 2006 +
 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.
 
 (2)
                Filed
      as an exhibit to the Company’s Quarterly Report on Form 10-Q for the
      fiscal quarter ended March 31, 2008 and incorporated herein by
      reference.
 
 +           Exhibit
filed herewith in this Report.
 
                55
 SIGNATURES
  Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
     Date:  August
      18, 2008
                
                PERFORMANCE
      HEALTH TECHNOLOGIES, INC.BY:
                
                /s/ Robert D. PrunettiRobert
      D. Prunetti, Chief Executive Officer(Principal
      Executive Officer)BY:
                
                /s/ James E. BartolomeiJames
      E. Bartolomei, Chief Financial Officer(Principal
      Financial and Accounting Officer)
                           56