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

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

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| DELAWARE                                                                |   | 841474432                                     |
|-------------------------------------------------------------------------|--------|-----------------------------------------------|
| (State      or Other Jurisdiction ofIncorporation      or Organization) |   | (I.R.S.      EmployerIdentification      No.) |

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

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PERFORMANCE HEALTH TECHNOLOGIES, INC.

|          |                                                                                                  | PAGE   |
|---------------|-------------------------------------------------------------------------------------------------------|--------|
|          | PART      1—FINANCIAL INFORMATION                                                          |   |
| ITEM      1.  | FINANCIAL      STATEMENTS                                                                             |   |
|          |                                                                                                  |   |
|          | Balance      Sheet                                                                                    | 2      |
|          |                                                                                                  |   |
|          | Statements      of Operations                                                                         | 4      |
|          |                                                                                                  |   |
|          | Statements      of Cash Flows                                                                         | 5      |
|          |                                                                                                  |   |
|          | Notes      to Financial Statements                                                                    | 6      |
|          |                                                                                                  |   |
|          |                                                                                                  |   |
| ITEM      2.  | MANAGEMENT’S      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF      OPERATIONS | 44     |
|          |                                                                                                  |   |
|          |                                                                                                  |   |
| ITEM      3.  | QUANTITATIVE      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                       | 60     |
|          |                                                                                                  |   |
|          |                                                                                                  |   |
| ITEM      4.  | CONTROLS      AND PROCEDURES                                                                          | 60     |
|          |     PART      II—OTHER INFORMATION                                     |   |
| ITEM      1.  | LEGAL      PROCEEDINGS                                                                                | 61     |
|          |                                                                                                  |   |
|          |                                                                                                  |   |
| ITEM      1A. | RISK      FACTORS                                                                                     | 61     |
|          |                                                                                                  |   |
|          |                                                                                                  |   |
| ITEM      2.  | UNREGISTERED      SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                                      | 61     |
|          |                                                                                                  |   |
|          |                                                                                                  |   |
| ITEM      3.  | DEFAULTS      UPON SENIOR SECURITIES                                                                  | 62     |
|          |                                                                                                  |   |
|          |                                                                                                  |   |
| ITEM      4.  | SUBMISSION      OF MATTERS TO A VOTE OF SECURITY HOLDERS                                              | 62     |
|          |                                                                                                  |   |
|          |                                                                                                  |   |
| ITEM      5.  | OTHER      INFORMATION                                                                                | 62     |
|          |                                                                                                  |   |
|          |                                                                                                  |   |
| ITEM      6.  | EXHIBITS                                                                                              | 63     |

----

PART I—FINANCIAL INFORMATION

|                                |   |   |                    |    |   |              |   |
|-------------------------------------|--------|--------|--------------------|---------|--------|-------------------|--------|
|                                |   |   | September      30, |    |   | December      31, |   |
|                                |   |   | 2008               |    |   | 2007*             |   |
|                                |   |   | (unaudited)        |    |   |              |   |
|                                |   |   |               |    |   |              |   |
| ASSETS                              |   |   |               |    |   |              |
| CURRENT      ASSETS:                |   |   |               |    |   |              |   |
| Cash      and Cash Equivalents      |   |   | $                  | 29,536  |   |              | $      | 35,559 |   |
| Accounts      Receivable            |   |   |               | — |   |              |   | 4,720 |   |
| Inventory                           |   |   |               | 24,469  |   |              |   | 26,866 |   |
| Prepaid      Expenses               |   |   |               | 169,581 |   |              |   | 116,732 |   |
|                                |   |   |               |    |   |              |   |   |   |
| Total      Current Assets           |   |   |               | 223,586 |   |              |   | 183,877 |   |
|                                |   |   |               |    |   |              |   |   |   |
|                                |   |   |               |    |   |              |   |   |   |
| FURNITURE      & EQUIPMENT, net |   |   |               | 5,614   |   |              |   | 8,572 |   |
|                                |   |   |               |    |   |              |   |   |   |
|                                |   |   |               |    |   |              |   |   |   |
| OTHER      ASSETS:                  |   |   |               |    |   |              |   |   |   |
| Debt      Issuance Costs, net       |   |   |               | 71,667  |   |              |   | 297,591 |   |
| Security      Deposits              |   |   |               | 4,802   |   |              |   | 4,802 |   |
|                                |   |   |               |    |   |              |   |   |   |
| Total      Other Assets             |   |   |               | 76,469  |   |              |   | 302,393 |   |
|                                |   |   |               |    |   |              |   |   |   |
|                                |   |   |               |    |   |              |   |   |   |
| TOTAL      ASSETS                   |   |   | $                  | 305,669 |   |              | $      | 494,842 |   |
|                                |   |   |               |    |   |              |   |   |   |
|                                |   |   |               |    |   |              |   |   |   |

----

|                                                                                   |   | September      30, |    |        | December      31, |   |
|----------------------------------------------------------------------------------------|--------|--------------------|---------|-------------|-------------------|--------|
|                                                                                   |   | 2008               |    |        | 2007*             |   |
|                                                                                   |   | (unaudited)        |    |        |              |   |
| LIABILITIES &      STOCKHOLDERS’ DEFICIT                                     |   |               |    |        |              |   |   |   |
|                                                                                   |   |               |    |        |              |   |   |   |   |
| CURRENT      LIABILITIES:                                                              |   |               |    |        |              |   |   |   |   |
| Accounts      Payable                                                                  |   |               | $       | 787,999     |              |   | $ | 610,840 |   |
| Accrued      Salaries and Interest                                                     |   |               |    | 357,144     |              |   |   | 335,740 |   |
| Accrued      Expenses                                                                  |   |               |    | 107,324     |              |   |   | 50,338 |   |
| Accrued      Interest - Non-Convertible Notes                                          |   |               |    | 38,675      |              |   |   | — |   |
| Accrued      Interest - Convertible Notes                                              |   |               |    | 837,246     |              |   |   | 1,003,568 |   |
| Non-Convertible      Notes Payable, Net of Debt                                        |   |               |    |        |              |   |   |   |   |
|     Discount      of $222,369 and $0 at September 30, 2008         |   |               |    |        |              |   |   |   |
|     and      December 31, 2007, respectively                       |   |               |    | 663,781     |              |   |   | 50,000 |   |
| Convertible      Notes Payable, Net of Debt                                            |   |               |    |        |              |   |   |   |   |
|     Discount      of $64,945 and $618,708 at September 30, 2008    |   |               |    |        |              |   |   |   |
|     and      December 31, 2007, respectively                       |   |               |    | 4,058,270   |              |   |   | 3,538,370 |   |
| Derivative      Liability                                                              |   |               |    | 5,745,886   |              |   |   | 2,993,069 |   |
|                                                                                   |   |               |    |        |              |   |   |   |   |
| Total      Current Liabilities                                                         |   |               |    | 12,596,325  |              |   |   | 8,581,925 |   |
|                                                                                   |   |               |    |        |              |   |   |   |   |
| CONVERTIBLE      NOTES PAYABLE, Net of Debt                                            |   |               |    |        |              |   |   |   |
|     Discount      of $0 and $242,244 at September 30, 2008         |   |               |    |        |              |   |   |   |
|     and      December 31, 2007, respectively                       |   |               |    | —     |              |   |   | 2,194,756 |   |
|                                                                                   |   |               |    |        |              |   |   |   |   |
|                                                                                   |   |               |    |        |              |   |   |   |   |
| STOCKHOLDERS’      DEFICIT:                                                      |   |               |    |        |              |   |   |   |   |
| Common      Stock, $0.01 Par Value, 500,000,000 SharesAuthorized,                 |   |               |    |        |              |
|     67,188,638      and 53,184,604 Shares Issued and Outstanding   |   |               |    |        |              |   |   |   |
|     at      September 30, 2008 and December 31, 2007, respectively |   |               | 671,887 |        |              |   | 531,847 |   |
| Paid-in      Capital                                                                   |   |               |    | 20,668,217  |              |   |   | 15,026,813 |   |
| Accumulated      Deficit                                                               |   |               |    | (33,630,760 | )                 |   |   | (25,840,499 | ) |
|                                                                                   |   |               |    |        |              |   |   |   |   |
| Total      Stockholders’ Deficit                                                 |   |               |    | (12,290,656 | )                 |   |   | (10,281,839 | ) |
| TOTAL      LIABILITIES & STOCKHOLDERS’                                       |   |               |    |        |              |   |   |   |   |
| DEFICIT                                                                                |   |               | $       | 305,669     |              |   | $ | 494,842 |   |

```
         See Notes to Financial Statements- 3
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.STATEMENTS
OF OPERATIONS(Unaudited)    
       For
      the Three Months Ended  For
      the Nine Months Ended  
       September
      30,  September
      30,  September
      30,  September
      30,  
       2008  2007  2008  2007  
                   
                   
                  SALES,
      net $2,723  $—  $12,163  $589  
                      COST
      OF SALES  842   —   3,656   —  
                       
                      GROSS
      PROFIT  1,881   —   8,507   589  
                      OPERATING
      EXPENSES:                General
      and Administrative  433,021   604,867   1,220,572   2,383,354 Sales
      and Marketing  50,324   60,420   141,396   115,197 Research
      and Development  6,414   15,759   19,378   67,509  
                      TOTAL
      OPERATING EXPENSES  489,759   681,046   1,381,346   2,566,060  
                       
                      LOSS
      FROM OPERATIONS  (487,878)  (681,046)  (1,372,839)  (2,565,471) 
                      OTHER
      INCOME (EXPENSES):                Interest
      Income  12   12   82   27 Interest
      Expense  (428,712)  (453,202)  (1,511,988)  (1,980,256)Amortization
      - Debt Issuance Costs  (159,541)  (76,774)  (372,798)  (298,654)Gain
      (Loss) on Derivative Liability  (4,703,294)  122,770   (4,532,060)  579,554  
                      TOTAL
      OTHER INCOME (EXPENSES)  (5,291,535)  (407,194)  (6,416,764)  (1,699,329) 
                      LOSS
      BEFORE PROVISION FOR TAXES  (5,779,413)  (1,088,240)  (7,789,603)  (4,264,800) 
                      PROVISION
      FOR TAXES  —   (986)  (655)  (2,587) 
                       
                      NET
      LOSS $(5,779,413) $(1,089,226) $(7,790,258) $(4,267,387) 
                       
                       
                      NET
      LOSS PER COMMON SHARE - BASIC  AND DILUTED $(0.10) $(0.02) $(0.14) $(0.09)Weighted
      Average Number of Shares  59,258,776   48,649,764   55,871,302   48,544,918   See Notes
to Financial Statements - 4
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.STATEMENTS
OF CASH FLOWS(Unaudited)  
       For
      the Nine Months Ended  
       September
      30,  September
      30,  
       2008  2007  
            Cash
      flows from operating activities      Net
      loss $(7,790,258) $(4,267,387) 
              Adjustments
      to reconcile net loss to net cash provided        (used)
      by operating activities:        Non
      cash interest expense  1,562,852   1,605,718 Non
      cash consulting expense  26,474   299,364 Non
      cash stock based compensation  242,424   658,202 Depreciation
      and amortization  375,756   304,498 (Gain)
      Loss on derivative liability  4,532,060   (579,554)Decrease
      in deferred offering costs  —   333,704 (Increase)
      decrease in accounts receivable  4,720   — (Increase)
      decrease in inventories  2,397   (27,544)(Increase)
      decrease in other assets  —   3,271 (Increase)
      in prepaid expenses  (66,223)  (197,501)Increase
      in accounts payable  172,696   333,946 Increase in
      accrued liabilities  9,250   79,480 Increase
      (decrease) in interest payable  (58,510)  333,099  
              Total
      adjustments  6,803,896   3,146,683  
              Net
      cash provided (used) by operating activities  (986,362)  (1,120,704) 
               
              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   1,058,641 Net
      proceeds from issuance of non-convertible notes  719,089   — Net
      proceeds from short term notes  50,000   — Principal
      payments on short term notes  (50,000)  —  
              Net
      cash provided by financing activities  980,339   1,058,641  
               
              Net
      (decrease) in cash and equivalents  (6,023)  (65,003)Cash
      and equivalents, beginning of period  35,559   206,725  
              Cash
      and equivalents, end of period $29,536  $141,722  
               
              Supplemental
      disclosures of cash flow information:        Cash
      paid during the year for:        Interest
      expense $7,643  $37,248 Income
      tax $520  $2,587   See Notes
to Financial Statements - 5
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited) Note 1 – Summary of
Significant Accounting Policies:   OrganizationPerformance
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 nine months ended September 30, 2008 are not
necessarily indicative of the results that can be expected for the year ending
December 31, 2008.Revenue and Cost
RecognitionRevenue
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
TaxesIncome
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.      - 6
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  Use of
EstimatesThe
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and the disclosure of contingent assets and liabilities at the date
of the financial statements, as well as reported amounts of revenues and
expenses during the reporting period.  Actual results could differ
from those estimates.Fair Value of Financial
InstrumentsThe
Company estimates that there are no material variations between fair value and
book value of our financial assets or liabilities as of September 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
EquipmentProperty
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
yearsLong Lived
AssetsIn
accordance with  Statement of Financial Accounting Standards (“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.InventoryInventory
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
EquivalentsFor
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
September 30, 2008, cash and cash equivalents included $25,001 of cash held in
commercial banks, petty cash fund of $250, and $4,285 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.    - 7
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  AdvertisingThe
Company expenses advertising costs as they are incurred. Advertising expense for
the three and nine months ended September 30, 2008 amounted to $8,300 and
$17,450, respectively. Advertising expense for the three and nine months ended
September 30, 2007 amounted to $3,004 and $11,471, respectively.Research and Development
CostsExpenses
for research and development are charged to expense when incurred. The total
amount of research and development expenses incurred during the three and nine
months ended September 30, 2008 amounted to $6,414 and $19,378, respectively.
The total amount of research and development expenses incurred during the three
and nine months ended September 30, 2007 amounted to $15,579 and $67,509,
respectivelyEmployee Stock
OptionsIn
December 2004, the Financial Accounting Standards Board (“FASB”) issued 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 expenses for the cost of
stock options.  Stock based compensation expense for the three and
nine months ended September 30, 2008 was $103,303 and $242,424,
respectively.  Stock based compensation expense for the three and nine
months ended September 30, 2007 was $264,931 and $658,202,
respectively.    - 8
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  No stock
options were exercised during the three and nine months ended September 30, 2008
and 2007.Estimating the Fair Market
Value of our Common StockThe 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.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 ValueOption for Financial Assets and Financial Liabilities” (“SFAS No. 159”). SFASNo. 159 permits entities to choose to measure, on an item-by-item basis,specified financial instruments and certain other items at fairvalue.  Unrealized gains and losses on items for which the fair valueoption has been elected are required to be reported in earnings at eachreporting date.  SFAS No. 159 is effective for fiscal years beginningafter November 15, 2007, the provisions of which are required to be appliedprospectively.  The Company adopted this Statement as of January 1,2008 and has elected not to apply the fair value option to any of its financialinstruments.     - 9
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  In
December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS No. 141R”), 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 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 FASB issued SFAS 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.      - 10
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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 No. 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
No. 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 No. 163 is not expected to have a material effect on
the Company’s financial statements.      - 11
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  In
May 2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible Debt
Instruments That May be Settled in Cash upon Conversion (Including Partial Cash
Settlement)” (“FSP APB 14-1”).  FSP APB 14-1 states that convertible
debt instruments that may be settled in cash upon conversion (including partial
cash settlement) are not addressed by paragraph 12 of Accounting Principles
Board Opinion No. 14 and that issuers of such instruments should account
separately for the liability and equity components of the instruments in a
manner that will reflect the entity’s nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for
financial statements issued for fiscal years beginning after December 15,
2008, and must be applied retrospectively to all periods presented.  The
Company is currently evaluating the impact that FSP APB 14-1 will have on its
financial statements In June
2008, the 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 September 30, 2008 and December 31, 2007 are as
follows:   September
      30,2008  December
      31,2007 Equipment
      and Computers $52,568  $52,568 Less:
      Accumulated depreciation  (46,954)  (43,996) 
                $5,614  $8,572       - 12
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  Depreciation
expense charged to income for three and nine months ended September 30, 2008
amounted to $ 824 and $ 2,958, respectively.Depreciation
expense charged to income for three and nine months ended September 30, 2007
amounted to $ 1,754 and $5,844, 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.Debt
issuance costs consisted of the following:   September
      30,2008  December
      31,2007 2003/2004
      Private Placement $930,476  $930,476 2005
      Bridge Loan A  200,048   200,048 2005
      Bridge Loan B  274,114   274,114 2006
      Bridge Loans  234,300   234,300 2007
      Bridge Loans  248,719   248,719 2008
      Bridge Loans  146,874   —  
              Total
      Debt Issuance Costs  2,034,531   1,887,657  
              Less:  
      Accumulated        Amortization  (1,962,864)  (1,590,066) 
               
       $71,667  $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.    - 13
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  Amortization
expense charged to income for the three and nine months ended September 30, 2008
amounted to $ 159,542 and $ 372,798, respectively.Amortization
expense charged to income for the three and nine months ended September 30, 2007
amounted to $ 76,774 and $298,654, respectively. Note 4
–Notes:Convertible
Notes:The
Company accounts for the value of warrants and the intrinsic value of beneficial
conversion rights arising from the issuance of convertible debt instruments with
nondetachable conversion rights that are in-the-money at the commitment date
pursuant to EITF Issue. 98-5, EITF Issue No. 00-19 and EITF Issue No.
00-27.  Such values are determined by first allocating an appropriate
portion of the proceeds received from the debt instruments to the warrants or
any other detachable instrument included in the exchange.  The
intrinsic value of the beneficial conversion rights at the commitment date may
also be recorded as additional paid-in capital and debt discount as of that date
or, if the terms of the debt instrument are contingently adjustable, may only be
recorded if a triggering event occurs and the contingency is
resolved.  Since the conversion rights associated with the convertible
notes were initially exercisable into an indeterminable number of common shares,
the Company has determined that under the guidance of EITF 00-19, the Company
could not conclude that it had sufficient authorized and unissued shares to
net-share settle any warrants or options issued to
non-employees.  Therefore, as of September 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 were extended until November 30, 2008. The 2008 A Notes are
convertible        - 14
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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. In August 2008, the Company
reduced the exercise price from $1.50 to $.50 for 275,000 Warrants in exchange
for the extension of the maturity date of the Note and/or 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. 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 September 30, 2008, there was $275,000
in principal of the 2008 A Notes outstanding.           - 15
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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”). $333,700 of the 2007 F Units matured during the third quarter 20008.
$77,200 of the units were extended until November 30, 2008 and $256,500 of the
2007 F Notes were extended until December 31, 2008 and/or 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. The 2007 F Notes are convertible into shares of
Company common stock at a price equal to the lesser of (i) $0.75 or (ii) 70% of
the average of the closing bid price for our common stock for the 20 days
preceding the Conversion Notice, as reported by the exchange on which our common
stock is then traded but in any event not less than $0.30 (the “Conversion
Price”). The 2007 F Notes may be redeemed by the Company, upon ten trading days
prior notice, during which time the Noteholder may convert the 2007 F Notes into
Company common stock.  If the 2007 F Notes have not been redeemed or
converted as of the Maturity Date, the principal and interest due thereunder
will be paid by the Company in shares of our common stock valued at the then
applicable Conversion Price.  The exercise price is $0.75 for 2,000 of
the Warrants and $1.50 per share for the remaining 2,000 Warrants. (See 2008
Note B)  On March 26, 2008, 150,000 of the Warrants with an original
exercise price of $1.50 were reduced to $0.50.  In August 2008, the Company
reduced the exercise price from $.75 to $.25 for 50,000 Warrants, from $1.50 to
$.50 for 711,600 Warrants and from $1.50 to .30 for 50,000 Warrants in exchange
for the extension of the maturity date of the Note and/or 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. 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
September 30, 2008, there was $606,000 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%            - 16
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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. In August 2008,
the Company reduced the exercise price from $.75 to $.25 for 90,000
Warrants, from $1.50 to $.50 for 330,000 Warrants and from $1.50 to .30 for
90,000 Warrants in exchange for the extension of the maturity date of the Note
and/or 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. 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 September 30, 2008, there was $240,000
in principal of the 2007 E Notes outstanding.On June
15, 2007, the holders of $300,000 of principal of our non-convertible 2006 E
Notes, 2006 F Notes and 2007 B Notes exchanged principal and interest due
thereunder for $315,000 of equity units (“2007 D Units”) in a private exchange
transaction.  Each 2007 D Unit consists of an unsecured convertible
promissory note in the principal amount of $1,000 (the “2007 D Notes”) and 4,000
warrants (the “Warrants”) to purchase one share of our common stock. The 2007 D
Notes bear interest at 10% per annum and will mature one year from the date of
issuance (the “Maturity Date”). The principal balance of the 2007 D Note, along
with accrued and unpaid interest, was payable on June 15,            - 17
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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. In August 2008, the Company
reduced the exercise price from $.75 to $.30 for 44,000 Warrants, from $.75 to
$.25 for 180,000 Warrants and from $1.50 to .50 for 630,000 Warrants in exchange
for the extension of the maturity date of the Note and/or 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. 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 September 30,
2008, there was $162,000 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
           - 18
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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 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            - 19
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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 September 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. In August 2008, the Company
reduced the exercise price from $1.50 to .50 for 202,000 Warrants in exchange
for the extension of the maturity date of the Note and/or 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. 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,
subsequently extended to September 30, 2008, and subsequently extended to
December 31, 2008. The holders of each 10% 2006 G Note may elect to convert the
principal balance of the 10% 2006 G Notes into shares of our common stock at a
price equal to the lesser of (i) $0.75 or (ii) 70% of the average of the closing
bid price for the Company’s common stock for the 20 days preceding the
conversion notice, as reported by the exchange on which the Company’s common
stock is then traded, but in any event not less than $0.30 (the “Conversion
Rate”). This conversion feature was recorded as a discount of $13,900 and is
being amortized over the life of the convertible note.   Each 10%
2006 G Note bears interest at 10% per annum payable at maturity or at the time
of conversion in arrears, in cash, or at the option of the noteholder in common
stock at the conversion rate. As of the September 30, 2008, there was $101,000
in principal of 10% 2006 G Notes outstanding.  The conversion feature
and the stock purchase warrants were valued using a Black Scholes Option Pricing
Model using the following assumptions: Volatility:82.0%, Straight Bond Yield:
5.0%, Risk-free Rate:  4.7% and Dividend Growth Rate:
0.  The warrants were detached and accounted for as a derivative
liability.   The warrants were recorded as a discount of $53,100
which is being amortized over the life of the convertible note.On
December 27, 2006 the Company sold $149,000 of equity units (the “2006 G Units”)
in a private placement in an offshore transaction under             - 20
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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. In August 2008, the Company
reduced the exercise price from $1.50 to .50 for 298,000 Warrants in exchange
for the extension of the maturity date of the Note and/or 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. 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,
subsequently extended to September 30, 2008, and subsequently extended to
December 31, 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 September
30, 2008 there were $138,078 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          - 21
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  an
extension agreement entered into with the holder of the 2006 D Notes as of April
13, 2007, the principal balance of the 2006 D Notes, along with accrued and
unpaid interest, was payable on July 13, 2007. We did not pay the 2006 D Notes
on July 13, 2007. Effective November 20, 2007, the maturity date of the 2006 D
notes was further extended to November 30, 2008 (“Amendment No. 2”). The holder
of the 2006 D Note may elect to convert the principal balance of the 2006 D Note
into shares of our common stock at a price equal to the lesser of (i) $0.50, or
(ii) 70% of the average of the closing bid price for the Company’s common stock
for the 20 days preceding the conversion notice, as reported by the exchange on
which the Company’s common stock is then traded (the “Conversion
Rate”).  This conversion feature was recorded as a discount of
$149,800 and is being amortized over the life of the convertible
note.   The Note bears interest at 13% per annum payable at
maturity or at the time of conversion in arrears, in cash, or at the option of
the noteholder in common stock at the conversion rate. The Company paid a total
of $8,125 in prepaid interest to the 2006 D noteholder on the date of closing,
representing 90 days’ worth of interest on the 2006 D Note.  The 2006
D noteholder also received $12,500 at the closing as additional
consideration.  The 2006 D Notes are secured by a security interest in
all of the assets of the Company, which the investor agreed to subordinate in
favor of financing from a bank or other traditional lending institution. The
conversion feature and the stock purchase warrants were valued using a Black
Scholes Option Pricing Model using the following assumptions: Volatility: 93.5%,
Straight Bond Yield: 5.0%, Risk-free Rate:  4.7% and Dividend Growth
Rate: 0.  The warrants were detached and accounted for as a derivative
liability. The warrants were recorded as a discount of $98,750 which is being
amortized over the life of the convertible note. As of September 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              - 22
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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, subsequently extended to September 30, 2008, and subsequently extended to
December 31, 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 September
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 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. In August 2008, the Company
reduced the exercise price from $.60 to $.25 for 45,000 Warrants and from $1.25
to $.40 for 675,000 Warrants in exchange for the extension of the maturity date
of the Note and/or 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.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,           - 23
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  2007,
subsequently extended to November 01, 2007, subsequently extended to May 01,
2008, subsequently extended to September 30, 2008, and subsequently extended to
December 31, 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 September 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. In August 2008, the Company
reduced the exercise price from $1.00 to $.35 for 750,000 of the Warrants in
exchange for the extension of the maturity date of the 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, subsequently extended to September 30,
2008, and subsequently extended to December 31, 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        - 24
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  at a
price equal to the lower of (i) 70% of the average closing price of our common
stock on the exchange on which the Company’s stock is trading for the 20 trading
days immediately preceding the day upon which we receive a conversion notice
from the Noteholder or (ii) $.30 per share (the “Conversion
Rate”).  This conversion feature was recorded as a discount of
$175,600 and is being amortized over the life of the convertible
note.  The conversion feature and the stock purchase warrants were
valued using a Black Scholes Option Pricing Model using the following
assumptions: Volatility:93.5%, Straight Bond Yield: 5.0%, Risk-free
Rate:  4.7% and Dividend Growth Rate: 0.  The need for
bifurcation and fair market value will be assessed on each balance sheet date
over the maturity of the note. Each 2006 A Note bears interest at 10% 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 September
30, 2008, there was $200,000 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. In August 2008, the Company
reduced the exercise price from $.50 to $.17 for 1,350,000 of the Warrants in
exchange for the extension of the maturity date of the Note and/or 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. 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           - 25
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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 September 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
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 September 30, 2008,
$750,000 of the convertible notes has been converted to common
stock.          - 26
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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 September 30, 2008,
$3,547,000 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, June 27, 2008, July 18, 2008, July 31, 2008
and August 28, 2008 we sold $66,150, $200,000, $125,000, $95,000 and
$50,000 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
           - 27
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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 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%-100%, 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 $ 344,218 which is being amortized over the life of
the note. As of September 30, 2008, there was $536,150 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              - 28
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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 September 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.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 holder delivered a waiver of any event of default of the Note as of
September 30, 2008, the maturity date of such Note. 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 September 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 $4,081,365 For
      the year ended December 31, 2009 & thereafter  928,000  
          Total $5,009,365         - 29
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)The
derivative liability consists of the following:DateDescription Balance 12/31/06Conversion
      option 2006 Bridge Loans at fair market value $602,341 12/31/06Warrant
      liability on 2005 Bridge Loans at fair market value  331,122 12/31/06Warrant
      liability on 2006 Bridge Loans issuance at fair market
    value  854,621 12/31/06Warrant
      liability on 2006 advisory contract at fair market value  712,000 12/31/07Conversion
      option on 2006  Bridge Loans issued during 2007  13,920 12/31/07Warrant
      liability on 2006 Bridge Loans issued during 2007  187,752 12/31/07Conversion
      option on 2007  Bridge Loans  259,116 12/31/07Warrant
      liability on 2007 Bridge Loans  768,977 12/31/07Warrant
      liability on 2007 advisory contract at fair market value  34,750 12/31/07Fair
      market value adjustment on the 2006 advisory contract  (140,000)12/31/07Fair
      market value adjustment on conversion options  (99,207)12/31/07Fair
      market value adjustment on warrant liabilities  (528,823)12/31/07Fair
      market value adjustment on the 2007 advisory contract  (3,500)09/30/08Conversion
      option on 2008  Bridge Loans  14,627 09/30/08Warrant
      liability on 2008 Bridge Loans  543,793 09/30/08Warrant
      liability on amended 2007 advisory contract at fair market
      value  13,100 09/30/08Warrant
      liability on 2007 Bridge Loans  70,200 09/30/08Fair
      market value adjustment on the 2006 advisory contract  1,179,520 09/30/08Fair
      market value adjustment on conversion options  737,736 09/30/08Fair
      market value adjustment on warrant liabilities  2,614,804 09/30/08Cashless
      Exercise of Warrants  (2,420,963) 
       
          Total 
       $5,745,886        - 30
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited) FAIR
VALUE MEASUREMENTSEffective
January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements (SFAS No.
157). SFAS No. 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 Using Description  September
      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 $4,217,353  $—  $4,217,353  $— Liabilities
      - conversion options  1,528,533   —   1,528,533   — Total
      Liabilities $5,745,886  $—  $5,745,886  $— Note 5 – Accrued Salaries
and Interest:Accrued
salaries and interest represents salaries and interest due to officers of the
Company. During the three and nine months ended September 30, 2008, the Company
accrued interest on the salaries of $7,134 and $ 21,402, respectively. At
September 30, 2008 the officers were due $287,597 in accrued salaries along with
interest on the accrued salaries of $69,547. 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.        - 31
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  During the three and nine
months ended September 30, 2008 there were no accrued salary and interest
repayments related to the above.Accrued
salary and interest repayments related to the above during the three and nine
months ended September 30, 2007 amounted to $21,875 and $65,625,
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
September 30, 2008 and December 31, 2007, non-current deferred tax assets
recognized for deductible temporary differences total $7,142,077 and $8,446,101,
respectively.The
Company’s deferred tax assets and liabilities consist of the following at
September 30, 2008: Deferred
      tax assets:   Net
      operating loss carryforwards $6,964,137 Excess
      of tax basis over financial statement of intangible assets  177,113 Excess
      of tax basis over financial statement of property, plant and
      equipment  827 Valuation
      allowance for deferred tax assets  (7,142,077) 
       $0  The
Company’s deferred tax assets and liabilities consist of the following at
December 31, 2007: Deferred
      tax assets:    Net
      operating loss carryforwards $8,232,879 Excess
      of tax basis over financial statement of intangible assets  212,327 Excess
      of tax basis over financial statement of property, plant and
      equipment  895 Valuation
      allowance for deferred tax assets  (8,446,101) 
       $0       - 32
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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, increased by $329,416 to
$9,089,768 at June 30, 2008 and decreased by $1,947,692 at September 30,
2008.Income
tax expense for the nine months ended September 30, 2008 and 2007 consisted of
the following:   September
      30,2008  September
      30,2007        Current
      State Tax $655  $2,587  As of
September 30, 2008, the Company had net operating loss carryforwards of
$18,938,595 that can be deducted against future taxable income. These tax
carryforward amounts expire as follows: Year
      EndingDecember
      31,         12/31/19 $1,101,282 12/31/20  2,862,191 12/31/21  1,032,226 12/31/22  2,036,114 12/31/23  2,099,394 12/31/24  2,675,931 12/31/25  2,723,509 12/31/26  1,781,136 12/31/27  2,626,812        $18,938,595   Due to
changes in control, which may be deemed to have taken place, a portion of the
tax carryforward amount listed above may not be available for use in the
future.  Note 7 – Concentration of
Credit Risk:The
Company maintains its cash balances in two financial institutions.  As
of September 30, 2008 and December 31, 2007, the Company’s cash and cash
equivalents did not exceed federally insured limits. Note 8 – Cash Flow
Disclosures:Non-cash
investing and financing transactions for the nine months ended September
30, 2008 included the following:     - 33
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  4,555,347
warrants were exercised into 3,172,406 shares of common stock using a cashless
exercise feature.Convertible
notes along with accrued interest totaling $3,316,765 were converted into common
stock.Non-cash
investing and financing transactions for the nine months ended September
30, 2007 included the following:Convertible
notes along with accrued interest totaling $ 1,041,897 were converted into
common stock.Debt
issuance costs paid in the form of stock warrants in the amount of $19,640 were
valued at fair market value using a Black Scholes pricing model.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 nine months ended September 30, 2008 and 2007, respectively,
      management has not contributed 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.  For the nine months ended September 30, 2008
      and 2007, respectively, no matching contributions were made to the 401K
      plan.Note 10 –
Related Party Transactions:ConsultingIn
September 2007, the Company signed a consulting agreement with Phoenix
Ventures.  The Chief Executive Officer of the Company has an ownership
interest in Phoenix Ventures. The agreement, starting November 01, 2007, calls
for monthly consulting fees of $3,000. In addition, the       - 34
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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 $27,000 during the three and nine months ended September 30, 2008
along with 3,000 and 9,000 stock options vesting which were granted during
2007. Consulting
fees pertaining to a prior contract with Phoenix Ventures amounted to $18,000
and $54,000 during the three months and nine months ended September 30, 2007
along with 7,500 and 22,500 stock options vesting which were granted during
2006.  
      In
      June 2006, the Company entered into a services agreement with Bartolomei
      Pucciarelli, LLC, a related party.  Fees will be paid to
      Bartolomei Pucciarelli, LLC on an hourly basis for financial reporting and
      related services.  As of September 30, 2008, the Company
      incurred fees of approximately $407,324 relating to this agreement. 
      As of September 30, 2008, $251,949 of these fees are still outstanding.
      Fees incurred during the nine months ended September 30, 2008 and
      September 30, 2007 were $108,299 and $172,107, 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            - 35
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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 nine months ended September 30, 2008 was
$103,303 and $242,424, respectively.  Compensation cost recognized for
the three and nine months ended September 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 ValueExercise
      PriceExpected
      TermDividend
      YieldInterest
      RateVolatility$0.25-$0.90$0.25-$0.7510
      years-0-4.7%78%-100%The
status of the stock option plan is as follows at September 30,
2008: 
          Weighted  
       Number  Average  
       Of  Exercise  
       Shares  Price Outstanding
      at January 1, 2007  11,205,334  $0.25  
              Granted  1,161,999  $0.30 Exercised  —   — Canceled  —   — Outstanding
      at December 31, 2007  12,367,333  $0.26  
              Granted  1,100,000  $0.31 Exercised  —   — Canceled  —   — Outstanding
      at September 30, 2008  13,467,333  $0.26  
              Exercisable
      at September 30, 2008  11,257,989  $0.26 Exercisable
      at December 31, 2007  9,750,658  $0.25             - 36
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  Note 12 – Stockholders’
Equity: During
2008, the Company converted $2,431,000 of the Company’s 2003 convertible debt
and $532,583 of accrued interest on the 2003 convertible debt into 11,854,362
shares of the Company’s common stock.During
2008, the Company converted $264,863 of the Company’s 2007 convertible debt and
$26,688 of accrued interest on the  2007 convertible debt into 657,526
shares of the Company’s common stock.During
2008, the Company converted $50,000 of the Company’s 2006 convertible debt and
$11,631 of accrued interest on the  2006 convertible debt into 205,435
shares of the Company’s common stock.During
the third quarter of 2008, 4,555,347 warrants were exercised into 3,172,406
shares of common stock using a cashless exercise feature.In
September 2008, 2,000,000 shares of common stock issued in connection with the
Standby Equity Distribution Agreement (SEDA) were returned to the Company by YA
Global Investments, L.P. and retired.On July
13, 2007, the Company filed an Amendment to its Amended and Restated Certificate
of Incorporation with Secretary of State of Delaware to increase the number of
authorized shares of the Company’s common stock to 500,000,000 shares and
preferred stock to 100,000,000 shares.During
2007, the Company converted $1,016,000 of the Company’s 2003 convertible debt
and $148,846 of accrued interest on the 2003 convertible debt into 4,656,877
shares of the Company’s common stock.During
2007, the Company converted $5,000 of the Company’s 2005 convertible debt and
$500 of accrued interest on the 2005 convertible debt into 34,375 shares of the
Company’s common stock.On
January 23, 2006, the Company entered into a Standby Equity Distribution
Agreement (SEDA) with YA Global Investments, L.P. (formerly known as Cornell
Capital Partners, L.P.) (“YA Global”) which provided for the periodic sale by us
to YA Global of shares of our common stock for a total purchase price of up to
$10 million, subject to the conditions and limitations set forth in that
agreement.  In consideration of the commitment of YA Global to
purchase up to $10 million of our shares of common stock pursuant to the standby
equity distribution agreement YA Global received a one-time commitment fee in
the form of 2,000,000 shares of the Company’s common stock equaling
approximately $500,000 (the “YA Global Shares”).  We engaged Newbridge
Securities Corporation, a registered broker-dealer, to advise us in connection
with the            - 37
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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.          - 38
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  In an
effort to determine the fair market value of our common stock, which was not
readily determinable or actively traded through August 07, 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 August 07, 2008.Our
common stock commenced trading on the OTC Bulletin Board on August 8,
2008.WarrantsOn 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%.      - 39
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  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%.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%.          - 40
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  The
aforementioned warrants were issued in conjunction with a twelve month
consulting agreement with Dawson James Securities, Inc. (Dawson James.)
Accordingly, the cost of these warrants has been recorded as a prepaid expense
with the appropriate charges to income as time passes. The warrants were also
accounted for as a derivative liability. The warrants were recorded as a
discount of $34,750 and are being amortized over the life of the consulting
agreement.  Under this agreement Dawson James is contracted to assist
the Company with investment banking and public relations services.On July
1, 2006, the Company issued Warrants to purchase 4,000,000 shares of the
Company’s common stock, $0.01 par value.  The exercise price of the
warrants is $0.25 per share and the warrants expire July 1, 2011. The warrants
were valued using a Black Scholes Option Pricing Model, utilizing the following
assumptions:  Volatility:  97.6%, Risk-Free Rate: 4.7%, and
Dividend Growth Rate: 0%.The
aforementioned warrants were issued in conjunction with a ten month consulting
agreement with North Coast Securities Corporation (North Coast). Accordingly,
the cost of these warrants has been recorded as a prepaid expense with the
appropriate charges to income as time passes. The warrants were also accounted
for as a derivative liability. The warrants were recorded as a discount of
$736,000 and are being amortized over the life of the consulting
agreement.  Under this agreement North Coast is contracted to assist
the Company with investment banking and public relations services.Note 13 - Earnings (Loss)
Per Share Basic
earnings (loss) per share is computed by dividing net income (loss) by the
weighted-average number of common shares outstanding for the period. Diluted
earnings (loss) per share is computed giving effect to all potential dilutive
common stock, including options and convertible debentures. For all periods
presented, options and convertible debentures were not included in the
computation of diluted loss per share because the effect would be antidilutive.
These items could be dilutive in the future. Note 14 – Leasing
Arrangements: Trenton, New
Jersey  FacilityIn
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 nine months
ended September 30, 2008 was $13,473 and $ 36,033, respectively. The total rent
incurred for the three and nine months ended September 30, 2007 was $13,203 and
$40,781, respectively.           - 41
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited) 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
ConcernAs shown
in the accompanying financial statements, the Company incurred a net loss of
$7,790,258 during the nine months ended September 30, 2008, and as of that date,
the Company’s current liabilities exceeded its current assets by $12,372,739.
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.Recent Events in the
Financial MarketsDuring
recent weeks the US and global financial markets have undergone extreme levels
of volatility. In addition, the Global and US credit markets have become more
restrictive than in the past. The Company has primarily utilized these markets
for financing and capital. As a result of the recent changes in these markets,
it may not be possible for the Company to continue to raise capital. As
mentioned above, the ability of the Company to continue as a going concern is
dependent on its ability to raise additional capital through private placements
or debt financings. The financial statements do not include any adjustments that
might be necessary if the Company is unable to raise additional capital and
continue as a going concern.       - 42
-PERFORMANCE
HEALTH TECHNOLOGIES, INC.NOTES
TO FINANCIAL STATEMENTSSeptember
30, 2008(Unaudited)  Note 17 – Subsequent
Events:The
Company has obtained the consent of the holders of the following notes to a new
maturity date of December 31, 2008 and a waiver of any event of default as of
the previous maturity date:  2006 A Notes, 2006 B Notes, 2006 C Notes,
2006 G Notes, certain 2007 F Notes and 2008 C Notes.  The holder of
the April 4, 2006 Note delivered a waiver of any event of default of the April
4, 2006 Note through December 31, 2008; the maturity date of such April 4, 2006
Note was May 1, 2008.Effective
October 22, 2008, the holder of $50,000 of principal of our non-convertible 2007
A Notes exchanged principal and interest due thereunder for $58,000 of equity
units (“2008 E Units”) in a private exchange transaction.  Each 2008 E
Unit consists of an unsecured convertible promissory note in the principal
amount of $1,000 (the “2008 E Notes”) and 2,000 warrants (the “Warrants”) each
to purchase one share of our common stock. The 2008 E Notes bear interest at 13%
per annum and will mature on September 30, 2009 (the “Maturity Date”). The 2008
E Notes are convertible into shares of our common stock at a per share price of
$0.25 (the “Conversion Price”). The 2008 E Notes may be redeemed by us, upon ten
trading days’ prior notice, during which time the holder may convert the 2007 D
Notes into our common stock.  If the 2008 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 1,000 of
the Warrants and $1.00 per share for the remaining 1,000 Warrants. The Warrants
are exercisable for a period of five years from their date of issuance. The
shares issuable upon conversion of the Notes and exercise of the Warrants have
piggyback registration rights.  We repaid amounts due of less than
$1,000 in cash to the exchanging noteholder for a total of
$614.73. On
October 14, 2008, Tommy J. Harris, 61, was appointed as a Director of
Performance Health Technologies, Inc.              - 43
-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.  GENERALWe
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 in the United States and
Canada. The SportsRAC Shoulder, Knee and Forearm systems are no longer being
produced or sold as all of our efforts are now being directed towards marketing
of our Core:Tx product line.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.     - 44
-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 OPERATIONSTHREE
MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TOTHREE
MONTHS ENDED SEPTEMBER 30, 2007Revenues during the three months ended September
30, 2008 of $2,783 increased by $2,783 from $0 in the corresponding three months
ended September 30, 2007. During the three months ended September 30, 2008, the
Company sold two Core:Tx for Stroke Survivors units and one Core:Tx for
Professionals unit.  During the three months ended September 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, Inc. (“Interactive
Metronome”) as well as through direct marketing efforts by Company
personnel.Cost of Goods
Sold during the three
months ended September 30, 2008 of $842 increased by $842 from $0 in the
corresponding three months ended September 30, 2007. The increase in cost of
goods sold during the three months ended September 30, 2008 is primarily
attributable to the costs associated with the three units sold during the period
as compared to no units sold during the comparable period ended September 30,
2007.Research and
Development Expensesduring the three months ended September
30, 2008 of $6,414 decreased by $9,345, or 59%, from $15,759 in the
corresponding three months ended September 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 third quarter of 2007
in the amount of $14,080 as compared to salary expenses of $5,760 for the
corresponding quarter ended September 30, 2008.General and
Administrative Expenses during the three months ended September
30, 2008 of $433,021 decreased by $171,846, or 28%, from $604,867 in the
corresponding three months ended September 30, 2007.  This decrease is
primarily attributable to a decrease in legal and accounting expenses of
approximately $49,000, a decrease in stock option expenses of approximately
$161,000, offset by an increase in outside consulting expenses of approximately
$34,000 relating to product enhancements and stock marketing
expenses.  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
2007.   - 45
-Sales and Marketing
Expenses during
the three months ended September 30, 2008 of $50,324 decreased by $10,096, or
17%, from $60,420 in the corresponding three months ended September 30, 2007.
The decrease is primarily attributable to a decrease in website design expenses
of approximately $28,000  offset by an increase in marketing
consultant fees in the amount of approximately $20,000.  Advertising
salaries also decreased approximately $2,300.   Amortization during the three months
ended September 30, 2008 of $159,541 increased by $82,767, or 108%, from $76,774
during the corresponding three months ended September 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
conversionduring the
three months ended September 30, 2008 of $428,712 decreased by $24,490, or 5%,
from $453,202 during the corresponding three months ended September 30,
2007.  The decrease is primarily attributable to cashless exercises of
stock purchase warrants offset by the maturity and conversions of outstanding
convertible notes during the period.Gain (Loss) on
Conversion Liability during the three months ended September
30, 2008 of $(4,703,294) decreased by $4,826,064, or 3931%, from $122,770 during
the corresponding three months ended September 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.  The volatility assumption used increased
from 78% to 100% during the period.  The fair market value assumption
utilized increased from $0.25 to $0.34.Net loss to common
shareholders was $(5,779,413) or
$(0.10) per share for the three months ended September 30, 2008 as compared to a
net loss to common shareholders to common shareholders of $(1,089,226) or
$(0.02) per share for the corresponding three months ended September 30, 2007.
The increase in net loss is primarily attributable to an increase in losses on
conversion liabilities and an increase in amortization expense associated with
the Company’s convertible debt outstanding, offset by a decrease in legal
expenses, a decrease in consulting expenses, a decrease in stock option
expenses, and a decrease in interest expense.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
September 30, 2008, our accumulated deficit was
$(33,630,760). NINE
MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TONINE
MONTHS ENDED SEPTEMBER 30, 2007Revenues during
the nine months ended September 30, 2008 of $12,163 increased by $11,574, or
1965%, from $589 in the corresponding nine months ended September 30, 2007
primarily resulting from an increase in sales of the Core: TX products in the
amount of $11,574. During the nine months ended September 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 nine months ended
September 30, 2008, the Company sold 13 Core:TX units and two Core:TX units
during the nine months ended September 30, 2007.- 46
-Cost of Goods Sold in the nine months ended
September 30, 2008 of $3,656 increased by $3,656 from $0 in the corresponding
nine months ended September 30, 2007.  The increase in cost of goods
sold during the nine months ended September 30, 2008 is primarily attributable
to the costs associated with the increase in units sold.  Thirteen
units were sold during the period as compared to no units sold during the
comparable period ended September 30, 2007.Research and
Development Expensesduring the nine months ended September
30, 2008 of $19,378 decreased by $48,131, or 71%, from $67,509 in the
corresponding nine months ended September 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 nine months ended September 30, 2007
in the amount of $65,459 as compared to salary expenses of $19,120 for the
corresponding nine months ended September 30, 2008.General and Administrative
Expenses during
the nine months ended September 30, 2008 of $1,220,572 decreased by $1,162,782,
or 49%, from $2,383,354 in the corresponding nine months ended September 30,
2007.  This decrease is primarily attributable to a decrease in legal
and accounting expenses of approximately $490,000, a decrease in stock option
expenses of approximately $416,000, a decrease in salaries of approximately
$25,000 offset by an increase in outside consulting expenses of approximately
$63,000 relating to product enhancements and stock marketing
expenses.  Approximately $334,000 of the decrease in legal fees were
related to deferred offering costs capitalized in 2006 relating to the Company’s
Standby Equity Distribution Agreement (“SEDA”) and subsequently expensed in
2007.Sales and Marketing
Expenses during the nine months ended September
30, 2008 of $141,396 increased by $26,199, or 23%, from $115,197 in the
corresponding nine months ended September 30, 2007. The increase is primarily
attributable to an increase in marketing consultants’ fees in the amount of
approximately $57,000.  Advertising salaries increased approximately
$1,100.  These increases were offset by a decrease in trade show and
advertising expenses of approximately $34,400. During the nine months ended
September 30, 2007, the Company’s focus was on product enhancements and
registering the Company’s common stock with the
SEC.   Amortization during the nine months
ended September 30, 2008 of $372,798 increased by $74,144, or 25%, from $298,654
during the corresponding nine months ended September 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
conversionduring the nine
months ended September 30, 2008 of $1,511,988 decreased by $468,268, or 24%,
from $1,980,256 during the corresponding nine months ended September 30,
2007.  The decrease is primarily attributable to cashless exercises of
stock purchase warrants offset by maturity and conversions of outstanding
convertible notes during the period.Gain (Loss) on Conversion
Liability during the nine months
ended September 30, 2008 of $(4,532,060) decreased by $5,111,614, or 882%, from
$579,554 during the corresponding nine months ended September 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.  The volatility assumption used increased from 78% to 100%
during the period.  The fair market value assumption utilized
increased from $0.25 to $0.34.- 47
-Net loss to common
shareholderswas
$(7,790,258) or $(0.14) per share for the nine months ended September 30, 2008
as compared to a net loss to common shareholders of $(4,267,387) or $(0.09) per
share for the corresponding nine months ended September 30, 2007. The increase
in net loss is primarily attributable to an increase in losses on conversion
liabilities and an increase in amortization expense associated with the
Company’s convertible debt outstanding, offset by a decrease in legal expenses,
a decrease in consulting expenses, a decrease in stock option expenses, and a
decrease in interest expense.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 September 30, 2008,
our accumulated deficit was $(33,630,760).  LIQUIDITY
AND FINANCIAL CONDITIONAt
September 30, 2008, cash and cash equivalents were $29,536. Total liabilities at
September 30, 2008 were $12,596,325, consisting of current liabilities in the
aggregate amount of $12,596,325 and long-term liabilities in the amount of $0.
At September 30, 2008, assets included $0 in accounts receivable, $24,469 in
product inventory, $169,581 in prepaid expenses, $5,614 in furniture and
equipment, net of depreciation; $71,667 in debt issuance costs, net of
amortization; and other assets of $4,802. As of September 30, 2008, our working
capital deficit was $(12,372,739) 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 September 30, 2008 was as follows:  
       September
      30, 2008 Non-convertible
      notes $886,150 Short-term
      bridge loans  2,770,215 Convertible
      notes  1,353,000  For more
detailed information on long-term liabilities, see Note 4 to our financial
statements contained herein.  FINANCING
TRANSACTIONSWe 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. See “Item 2 – Management’s Discussion and
Analysis of Financial Condition and Results of Operations-Going Concern
Matters.”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 $668,000 on the continued development of the products. The Company
also used approximately $696,000 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 - 48
-of the
expenses associated with the registration of the Company’s common stock under
the Securities Exchange Act of 1934. The Company has incurred approximately
$1,310,000 of professional fees in conjunction with the SEC registration. At
September 30, 2008, $540,624 of these fees are unpaid and included in Accounts
Payable.Currently,
the Company is burning approximately $125,000 per month on recurring expenses.
Of the $125,000 monthly burn rate, 82% is comprised of general and
administrative costs, 13% 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 September 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 Reports on Form 10-Qs for our fiscal quarters ended March
31, 2008 and June 30, 2008 for descriptions of our previous financing
transactions in 2007 and 2008.2008 D UNITS.  On
June 23, 2008, June 27, 2008, July 18, 2008, July 31, 2008 and August 28, 2008
we sold $66,150, $200,000, $125,000, $95,000 and $50,000 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 fees 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 fees 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 fees 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 fees paid to broker-dealers were
$95,000 and $13,300, respectively.  For the $50,000 of 2008 D Units
sold on August 28, 2008, the total offering price and total fees paid to
broker-dealers were $50,000 and $7,000, respectively.  Broker-dealer
fees consisted of a finder’s fee of 14% of the gross offering proceeds raised by
the finder in this offering.  Such fees were deducted from the
offering proceeds.Effective
in August 2008, we reduced the exercise prices of approximately 2,565,000 of our
outstanding warrants by approximately two-thirds in exchange for the extension
of the maturity dates of certain outstanding notes held by the holders of the
adjusted warrants that would have otherwise been in
default.  Effective in August 2008, we also reduced the exercise
prices of approximately 3,355,600 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.  - 49
-2008 E
UNITS.  Effective October 22, 2008, the holder of $50,000 of
principal of our non-convertible 2007 A Notes exchanged principal and interest
due thereunder for $58,000 of equity units (“2008 E Units”) in a private
exchange transaction.  Each 2008 E Unit consists of an unsecured
convertible promissory note in the principal amount of $1,000 (the “2008 E
Notes”) and 2,000 warrants (the “Warrants”) each to purchase one share of our
common stock. The 2008 E Notes bear interest at 13% per annum and will mature on
September 30, 2009 (the “Maturity Date”). The 2008 E Notes are convertible into
shares of our common stock at a per share price of $0.25 (the “Conversion
Price”). The 2008 E Notes may be redeemed by us, upon ten trading days’ prior
notice, during which time the holder may convert the 2007 D Notes into our
common stock.  If the 2008 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 1,000 of the Warrants and
$1.00 per share for the remaining 1,000 Warrants. The Warrants are exercisable
for a period of five years from their date of issuance. The shares issuable upon
conversion of the Notes and exercise of the Warrants have piggyback registration
rights.  We repaid amounts due of less than $1,000 in cash to the
exchanging noteholder for a total of $614.73. AGREEMENTS
WITH PLACEMENT AGENTS AND FINDERSWe
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 - 50
-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
receives 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. MANAGEMENT’S
PLANS TO OVERCOME OPERATING AND LIQUIDITY DIFFICULTIESWe
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
$8.9 million in debt and equity financings we would have sufficient funds to
meet our needs for working capital ($1.5 million), repayment of debt
(approximately $5.0 million expected to mature from October 1, 2008 to September
30, 2009), accounts payable and accrued expenses (approximately $2.1 million)
and the balance to be utilized for marketing and development over the next
twelve months.  As of September 30, 2008, we had cash balances of
$29,536.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 first quarter
of 2009 with completion of the offering at the end of the second quarter of
2009. 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. - 51
-SALES
ACTIVITIES AND PRODUCT DEVELOPMENTWe
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:· 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  - 52
-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.We
engaged Minneapolis-based Logic Product Development (“Logic”), a product
development and manufacturing company, to improve the usability and design of
the next-generation Core:Tx rehabilitation device in September
2008.  The updated product design is intended to utilize our existing
Core:Tx platform, be significantly smaller and lighter, read movement in
multiple directions, and have multi-use capabilities for a more complex exercise
program. The product design is also intended to run on bluetooth technology for
greater accuracy and improved signal strength enabling the Core:Tx to account
for a more peripheral movement.  The product is intended to be
released along with the next generation of Core:Tx software, which is planned to
be web-enabled to allow for remote access to the therapy.  With this
product, patients will be able to remain connected to their physical therapists
via the internet.  Our agreement with Logic provides that Logic will
be paid for its services at an hourly rate based upon the nature of the services
provided and for materials purchased at cost plus an 18% materials acquisition
fee.  The project labor and materials fees and expenses are estimated
to total approximately $154,000.  To date, the Company has paid a
$40,000 retainer fee to Logic.  A termination fee of $8,000 plus the
costs of work performed to date would apply in the event of a delay in the
performance of the project under the agreement or an early termination of the
agreement.  Logic commenced work on this project in September
2008.  The project was placed on hold in November 2008, pending the
Company obtaining further financing.  No fees will apply in connection
with this project delay. GOING
CONCERN MATTERSOur
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 September 30, 2008, we had
an accumulated deficit of approximately $33.6 million. We have
financed our operations since inception primarily through equity financings and
loans from our officers, directors and stockholders. No assurances can be given
that the additional capital necessary to meet our working capital needs or to
sustain or expand our operations will be available in sufficient amounts through
our capital raising activities discussed above.In
addition, during recent weeks the United States and global financial markets
have undergone extreme levels of volatility.  The United States and global
credit markets have also become more restrictive than in the past. We have
primarily utilized these markets for financing and raising capital. As a result
of the recent changes in these markets, it may not be possible for us to
continue to raise capital.Our
ability to continue as a going concern is dependent on our ability to raise
additional capital through private placements or debt financings. 
Continuing our operations in 2008 is dependent upon obtaining such further
financing.  Our accompanying financial statements do not include any
adjustments that might be necessary if the Company is unable to raise additional
capital and continue as a going concern. - 53
-CRITICAL
ACCOUNTING POLICIESThe 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.REVENUESWe
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 ASSETSDepreciation
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.INCOME
TAXESAs 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.  - 54
-FAIR
VALUE OF FINANCIAL INSTRUMENTSFair
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 FEATURESWe
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 STOCKThe 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 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. - 55
-In
December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS No.
141R”), “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 No.
160”).  SFAS No. 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 No. 160
is effective for fiscal years beginning on or after December 15,
2008.  The adoption of SFAS No. 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 No. 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 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 Staff Position No. APB 14-1, “Accounting for
Convertible Debt Instruments That May be Settled in Cash upon Conversion
(Including Partial Cash Settlement)” (“FSP APB 14-1”).  FSP APB 14-1 states
that convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by paragraph 12 of
Accounting Principles Board Opinion No. 14 and that issuers of such
instruments should account separately for the liability and equity components of
the instruments in a manner that will reflect the entity’s nonconvertible debt
borrowing rate when interest cost is recognized in subsequent periods. FSP APB
14-1 is effective for financial statements issued for fiscal years beginning
after December 15, 2008, and must be applied retrospectively to all periods
presented.  The Company is currently evaluating the impact that FSP APB
14-1 will have on its financial statements.- 56
-In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles” (“SFAS No. 162”). SFAS No. 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 No. 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 No.
163”).  SFAS No. 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
No. 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 No. 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
FACTORSWe
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 $(5.8) million during the quarter ended September 30, 2008. We
expect to incur substantial additional operating losses in the future. During
the quarter ended September 30, 2008, we generated revenues from product sales
in the amount of $2,723. We cannot assure you that we will continue to generate
revenues from operations or achieve profitability in the near future or at
all. - 57
-WE
HAVE A WORKING CAPITAL LOSS, WHICH MEANS THAT OUR CURRENT ASSETS WERE NOT
SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES ON SEPTEMBER 30,
2008.We had a
working capital deficit of $(12,372,739) at September 30, 2008, which means that
our current liabilities exceeded our current assets on September 30, 2008 by
$12,372,739. 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 September 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 $8.9 million we will be able to
service our debt obligations, continue operations and begin market penetration
for the CoreTx product line. During recent weeks the United States and global
financial markets have undergone extreme levels of volatility.  The United
States and global credit markets have also become more restrictive than in the
past. We have primarily utilized these markets for financing and raising
capital. As a result of the recent changes in these markets, it may not be
possible for us to continue to raise capital.  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 MATTERSMarket
InformationOn July
13, 2007, we became a reporting company under the Securities Exchange Act of
1934. Our common stock has been quoted on the OTC Bulletin Board since August 8,
2008. There is currently a low volume public trading market for our common
stock.  There can be no assurance that an active public trading market
for our common stock will develop. 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 has experienced, and 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 SharesOur
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 September 30, 2008, we had 67,188,638 shares of
common stock outstanding and no shares of preferred stock
outstanding.- 58
-Stock
OptionsAs of
September 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) 7,127,000 shares of our common stock issuable upon
exercise of outstanding stock options under our 2006 Plan at $0.25 to $0.75 per
share.WarrantsAs of
September 30, 2008, there were outstanding warrants to purchase 31,465,083
shares of our common stock at prices ranging from $0.10 to $1.50 per
share.Convertible
NotesConversion
into Common Stock.  As of September
30, 2008, there were outstanding promissory notes convertible into shares of our
common stock as follows:Principal Type of
      NoteConversion
      Terms  Conversion
      Shares$1,353,0002003
      NotesConvertible
      into common stock at $0.25 per share. 5,412,000$50,000April
      2006 NotesConvertible
      into common stock at $0.30 per share. 166,667$200,0002006
      A NoteConvertible
      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]. 1,142,858$250,0002006
      B NotesConvertible
      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$250,0002006
      C NotesConvertible
      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$250,0002006
      D NotesConvertible
      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$239,0782006
      G NotesConvertible
      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$248,1372007
      C NoteConvertible
      into common stock at $0.35 per share. 708,963$162,0002007
      D NotesConvertible
      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]. 540,000 - 59
-$240,0002007
      E NotesConvertible
      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]. 800,000$606,0002007
      F NotesConvertible
      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]. 2,020,000$275,0002008
      A NotesConvertible
      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$4,123,215 
       
       16,560,631See the
Notes to the Financial Statements for additional terms of these convertible
notes. ITEM
      3.QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK.As a
“smaller reporting company” as defined by Item 10 of Regulation S-K, we are not
required to provide information required by this Item. ITEM
      4.CONTROLS
      AND PROCEDURES. Evaluation
of Disclosure Controls and ProceduresWe
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
September 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 ControlsThere
have been no changes in our internal controls over financial reporting during
the quarter ended September 30, 2008 that have materially affected or are
reasonably likely to materially affect our internal controls. - 60
-PART
II - OTHER INFORMATIONITEM 1.LEGAL
      PROCEEDINGS.      There are
no material legal proceedings pending against the Company except as described
below.On June
18, 2008, 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 filed an answer to defend against such
complaint on July 31, 2008.  The matter is scheduled for trial on
March 2, 2009. 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 DUNITS.  On June 23, 2008, June 27, 2008, July 18, 2008, July31, 2008 and August 28, 2008, the Company sold $66,150, $200,000, $125,000,$95,000 and $50,000 of units, respectively, to lenders in a privatetransaction.  Each Unit consists of an unsecured non-convertiblepromissory note in the principal amount of $1,000 (the “2008 D Notes”), and3,000 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% perannum and will mature 180 days from the date of issuance if not redeemed by suchdate (the “Maturity Date”).  The 2008 D Notes may be redeemed by theCompany in whole or in part at any time at a redemption price equal to 100% theprincipal amount of 2008 D Notes to be redeemed plus accrued and unpaid interestupon ten trading days prior notice (“Optional Redemption”).  The 2008D Notes will be redeemed by the Company on the 20th dayafter the Mandatory Redemption Event (as herein defined) at a redemption priceequal to 100% the principal amount of 2008 D Notes to be redeemed plus accruedand unpaid interest upon ten trading days prior notice (“MandatoryRedemption”).  The Mandatory Redemption Event shall be the date onwhich the Company has closed on equity financings grossing an aggregate of $1million commencing upon the date of issuance of the 2008 D Notes and ending uponthe Maturity Date.  If the 2008 D Notes have not been redeemed as ofthe Maturity Date, the principal and interest due thereunder will be paid by theCompany in cash.  The Warrants included in the Units are exercisablefor shares of Company common stock at any time beginning on the date of issuanceand ending five years from the date of issuance at an exercise price of $0.30per share.   For the $66,150 of 2008 D Units sold on June 23, 2008,the total offering price and total fees paid to broker-dealers were $66,150 and$9,261, respectively.  For the $200,000 of 2008 D Units sold on June27, 2008, the total offering price and total fees paid to broker-dealers were$200,000 and $28,000, respectively. For the $125,000 of 2008 D Units sold onJuly 18, 2008, the total offering price and total fees paid to broker-dealerswere $125,000 and $17,500, respectively.  For the $95,000 of 2008 DUnits sold on July 31, 2008, the total offering price and total fees paid tobroker-dealers were $95,000 and $13,300, respectively.  For the$50,000 of 2008 D Units sold on August 28, 2008, the total offering price andtotal fees paid to broker-dealers were $50,000 and $7,000,respectively.  Broker-dealer fees consisted of a finder’s fee of 14%of the gross offering proceeds raised by the finder in thisoffering.  Such fees were deducted from the offeringproceeds.  This issuance was exempt from registration requirementspursuant to Section 4(2) of the Securities Act of 1933.  The proceedsfrom the 2008 D Units were used for working capital purposes.- 61
-On August
18, 2008, the Company granted 100,000 options with an exercise price of $0.75 to
Dr. August Leming upon his joining the Company’s Advisory Board which vest 1/3
on August 18, 2008, 1/3 on August 18, 2009 and 1/3 on August 18, 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
October 14, 2008, the Company granted 150,000 options with an exercise price of
$0.30 to Tommy Harris upon his joining the Company’s Board of Directors which
vest 1/3 on October 14, 2008, 1/3 on October 14, 2009 and 1/3 on October 14,
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 1933.2008 E
UNITS.  Effective October 22, 2008, the holder of $50,000 of
principal of our non-convertible 2007 A Notes exchanged principal and interest
due thereunder for $58,000 of equity units (“2008 E Units”) in a private
exchange transaction.  Each 2008 E Unit consists of an unsecured
convertible promissory note in the principal amount of $1,000 (the “2008 E
Notes”) and 2,000 warrants (the “Warrants”) each to purchase one share of our
common stock. The 2008 E Notes bear interest at 13% per annum and will mature on
September 30, 2009 (the “Maturity Date”). The 2008 E Notes are convertible into
shares of our common stock at a per share price of $0.25 (the “Conversion
Price”). The 2008 E Notes may be redeemed by us, upon ten trading days’ prior
notice, during which time the holder may convert the 2007 D Notes into our
common stock.  If the 2008 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 1,000 of the Warrants and
$1.00 per share for the remaining 1,000 Warrants. The Warrants are exercisable
for a period of five years from their date of issuance. The shares issuable upon
conversion of the Notes and exercise of the Warrants have piggyback registration
rights.  We repaid amounts due of less than $1,000 in cash to the
exchanging noteholder for a total of $614.73.  ITEM
3.                  DEFAULTS
UPON SENIOR SECURITIES. None. ITEM
4.                  SUBMISSION
OF MATTERS TO A VOTE OF SECURITYHOLDERS. None. ITEM
5.                  OTHER
INFORMATION.The
Company has obtained the consent of the holders of the following notes to a new
maturity date of December 31, 2008 and a waiver of any event of default as of
the previous maturity date:  2006 A Notes, 2006 B Notes, 2006 C Notes,
2006 G Notes, certain 2007 F Notes, and 2008 C Notes.  The holder of
the April 4, 2006 Note delivered a waiver of any event of default of the April
4, 2006 Note through December 31, 2008; the maturity date of such April 4, 2006
Note was May 1, 2008. - 62
-ITEM
6.                  EXHIBITS. The
following Exhibits are filed as part of this Report or incorporated herein by
reference: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) 10.127  Amendment
      No. 1 to Consulting Agreement dated June 23, 2008 between Performance
      Health Technologies, Inc. and Dawson James Securities
  (3) 10.128  Amendment
      No. 1 to Selling Agreement dated June 25, 2008 between Performance Health
      Technologies, Inc. and Dawson James Securities
  (3) 10.129  Form
      of Subscription Agreement entered into in 2008 D private placement
      (3)10.130  Form
      of 12% Non-Convertible Note issued in 2008 D private placement
      (3)10.131  Form
      of $0.30 Warrants issued in 2008 D private placement
(3)  10.132Time
      and Materials Contract dated August 8, 2008 between Logic Product
      Development and Performance Health Technologies, Inc. +  10.133  Form
      of Amendment to Notes to extend maturity dates +  10.134  Form
      of Waiver Letter to Note dated April 4, 2006 +  10.135  Form
      of Debt Exchange Agreement and Investor Questionnaire dated as of October
      22, 2008 (including forms of notes and warrants) +  31.1Certification
      of Chief Executive Officer pursuant to Section 302 of the Sarbanes Oxley
      Act of 2002 +  31.2Certification
      of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
      Act of 2002 +  32.1Certification
      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
  +  32.2Certification
      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.(3)Filed
      as an exhibit to the Company’s Quarterly Report on Form 10-Q for the
      fiscal quarter ended June 30, 2008 and incorporated herein by
      reference.+           Exhibit
filed herewith in this Report.  - 63
-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.    PERFORMANCE
      HEALTH TECHNOLOGIES, INC.        Date:   November
      19, 2008By:
      /s/ Robert
      D. Prunetti   Robert
      D. Prunetti, Chief Executive Officer   (Principal
      Executive Officer)                By:
      /s/ James
      E. Bartolomei   James
      E. Bartolomei, Chief Financial Officer   (Principal
      Financial and Accounting Officer)                   - 64
-
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