UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-QSB


(Mark
One)





[X]
            QUARTERLY
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934





For the
quarterly period ended December 31, 2007





[  
      ]
            TRANSITION
      REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
      ACT





For the
transition period from ___________ to ___________





Commission
file number: 000-51804





PEDIATRIC PROSTHETICS,
INC.


(Exact
name of small business issuer as specified in its charter)





IDAHO
            68-0566694(State
      or other jurisdiction of
            (IRS
      Employer Identification No.)incorporation
      or organization)





12926 Willow Chase Drive,
Houston, Texas 77070


(Address
of principal executive offices)





(281)
897-1108


(Registrant's
telephone number)





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





As of
February 18, 2008, 113,247,181 shares of Common Stock of the issuer were
outstanding ("Common Stock").





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





Transitional
Small Business Disclosure Format Yes [  ] No [X]




















PART
I. FINANCIAL INFORMATION




ITEM 1. FINANCIAL
STATEMENTS





PEDIATRIC PROSTHETICS, INC.UNAUDITED
      BALANCE SHEETSDecember
      31, 2007 and June 30, 2007December
      31, 2007
            
            
            June
      30, 2007ASSETSCurrent
      assets:Cash
      and cash equivalents
            
            $
            9,021
            
            
            $
            25,557Trade
      accounts receivable, net of reserve of $491,680 and
              $395,915,
      respectively
            
            
            339,067
            
            
            
            249,418Prepaid
      expenses and other current assets
            
            
            8,920
            
            
            
            11,420Current
      portion of deferred financing costs
            
            
            160,295
            
            
            
            152,111Total
      current assets
            
            
            517,303
            
            
            
            438,506Furniture
      and equipment, net of accumulated depreciation of $83,262
              and
      $71,965, respectively
            
            
            35,582
            
            
            
            46,879Deferred
      financing costs, net of accumulated amortization of $219,232
              and
      $140,450, respectively
            
            
            67,470
            
            
            
            139,436Total
      assets
            
            $
            620,355
            
            
            $
            624,821LIABILITIES
      AND STOCKHOLDERS' DEFICITCurrent
      liabilities:Trade
      accounts payable
            
            $
            166,506
            
            
            $
            243,068Accrued
      liabilities
            
            
            150,309
            
            
            
            143,985Current
      portion of convertible debt
            
            
            -
            
            
            
            75,000Due
      to related party
            
            
            500
            
            
            
            500Derivative
      financial instruments
            
            
            1,430,671
            
            
            
            2,974,683Total
      current liabilities
            
            
            1,747,986
            
            
            
            3,437,236Convertible
      debt, net of discount of $990,372 and $810,486,
    respectively
            
            
            411,913
            
            
            
            189,514Deferred
      rent
            
            
            7,848
            
            
            
            10,060Total
      liabilities
            
            
            2,167,747
            
            
            
            3,636,810Commitments
      and contingencies
            
            
            -
            
            
            
            -Stockholders'
      deficit:Preferred
      stock, par value $0.001; authorized10,000,000; 1,000,000
      shares issued and outstanding
            
            
            1,000
            
            
            
            1,000Common
      stock, par value $0.001; authorized 950,000,000;issued
      and outstanding 108,525,789 and 100,274,889 shares,
      respectively
            
            
            108,526
            
            
            
            100,275Additional
      paid-in capital
            
            
            8,745,414
            
            
            
            8,542,869Accumulated
      deficit
            
            
            (10,402,332
            )
            
            
            (11,656,133
            )Total
      stockholders’ deficit
            
            
            (1,547,392
            )
            
            
            (3,011,989
            )Total
      liabilities and stockholders' deficit
            
            $
            620,355
            
            
            $
            624,821





The
      accompanying notes are an integral part of these financial
      statements.


F-2





PEDIATRIC PROSTHETICS, INC.UNAUDITED
      STATEMENTS OF OPERATIONSFor
      the Three and Six Months Ended December 31, 2007 and 2006Three
      Months Ended
            
            
            Six
      Months EndedDecember
      31,
            
            
            December
      31,2007
            
            
            2006
            
            
            2007
            
            
            2006Revenue
            
            $
            326,707
            
            
            $
            241,138
            
            
            $
            426,627
            
            
            $
            436,368Operating
      expenses:Cost
      of sales, except for items stated separately below
            
            
            32,615
            
            
            
            35,640
            
            
            
            80,247
            
            
            
            111,641Selling,
      general and administrative expenses
            
            
            330,497
            
            
            
            385,212
            
            
            
            642,648
            
            
            
            928,451Depreciation
      expense
            
            
            5,259
            
            
            
            6,038
            
            
            
            11,297
            
            
            
            11,997Total
      operating expenses
            
            
            368,371
            
            
            
            426,890
            
            
            
            734,192
            
            
            
            1,052,089Loss
      from operations
            
            
            (41,664
            )
            
            
            (185,752
            )
            
            
            (307,565
            )
            
            
            (615,721
            )Other
      income (expenses):Interest
      income
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1Interest
      expense
            
            
            (161,700
            )
            
            
            (69,093
            )
            
            
            (326,886
            )
            
            
            (159,585
            )Gain
      on derivative financial instruments
            
            
            633,634
            
            
            
            1,150,661
            
            
            
            1,875,767
            
            
            
            2,353,201Other
      income
            
            
            12,485
            
            
            
            -
            
            
            
            12,485
            
            
            
            -Total
      other income, net
            
            
            484,419
            
            
            
            1,081,568
            
            
            
            1,561,366
            
            
            
            2,193,617Net
      income
            
            $
            442,755
            
            
            $
            895,816
            
            
            $
            1,253,801
            
            
            $
            1,577,896Net
      income (loss) per common share:Basic
            
            $
            0.00
            
            
            $
            0.01
            
            
            $
            0.01
            
            
            $
            0.02Diluted
            
            $
            (0.00
            )
            
            $
            (0.00
            )
            
            $
            (0.00
            )
            
            $
            (0.01
            )Weighted
      average shares of common stock outstanding:Basic
            
            
            106,467,093
            
            
            
            98,274,889
            
            
            
            104,273,305
            
            
            
            98,274,889Diluted
            
            
            200,751,782
            
            
            
            120,753,460
            
            
            
            195,433,505
            
            
            
            120,753,460The
      accompanying notes are an integral part of these financial
      statements.





F-3





PEDIATRIC PROSTHETICS, INC.UNAUDITED
      STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICITFor
      the Six Months Ended December 31, 2007AdditionalPreferred
      Stock
            
            Common
      Stock
            
            Paid-In
            
            AccumulatedShares
            
            Amount
            
            Shares
            
            Amount
            
            Capital
            
            Deficit
            
            TotalBalance
      at June 30, 2007
            1,000,000
            
            $
            1,000
            
            100,274,889
            
            $
            100,275
            
            $
            8,542,869
            
            $
            (11,656,133
            )
            $
            (3,011,989
            )Conversions
      of Convertible Debt
            -
            
            
            -
            
            8,250,900
            
            
            8,251
            
            
            139,037
            
            
            -
            
            
            147,288Amortization
      of Stock-BasedCompensation
            -
            
            
            -
            
            -
            
            
            -
            
            
            63,508
            
            
            -
            
            
            63,508Net
      income
            -
            
            
            -
            
            -
            
            
            -
            
            
            -
            
            
            1,253,801
            
            
            1,253,801Balance
      at December 31, 2007
            1,000,000
            
            $
            1,000
            
            108,525,789
            
            $
            108,526
            
            $
            8,745,414
            
            $
            (10,402,332
            )
            $
            (1,547,392
            )The
      accompanying notes are an integral part of these financial
      statements.





F-4





PEDIATRIC PROSTHETICS, INC.UNAUDITED
      STATEMENTS OF CASH FLOWSFor
      the Six Months Ended December 31, 2007 and 20062007
            
            2006Cash
      Flows From Operating Activities:Net
      income
            $
            1,253,801
            
            $
            1,577,896Adjustments
      to reconcile net income to net cash used byoperating
      activities:Depreciation
      expense
            
            11,297
            
            
            11,997Deferred
      rent
            
            (2,212
            )
            
            (704)Stock-based
      compensation
            
            63,508
            
            
            446,288Provision
      for doubtful accounts
            
            95,755
            
            
            15,838Amortization
      of debt discount
            
            201,442
            
            
            -Amortization
      of debt issue costs
            
            78,782
            
            
            134,190Gain
      on derivative financial instruments
            
            (1,875,767
            )
            
            (2,353,201
            )Changes
      in operating assets and liabilities:Accounts
      receivable
            
            (185,404
            )
            
            (127,589
            )Other
      assets
            
            2,500
            
            
            1,571Accounts
      payable
            
            (76,562)
            
            
            53,344Accrued
      liabilities
            
            6,324
            
            
            10,399Net
      cash used by operating activities
            
            (426,536
            )
            
            (229,971
            )Cash
      Flows From Investing Activities:Purchase
      of furniture and equipment
            
            -
            
            
            (11,813
            )Net
      cash used by investing activities
            
            -
            
            
            (11,813
            )Cash
      Flows From Financing Activities:Proceeds
      from issuance of debt
            
            500,000
            
            
            -Payment
      of debt issuance cost
            
            (15,000
            )
            
            -Repayment
      of convertible debt
            
            (75,000
            )
            
            (10,000
            )Net
      cash provided (used) by financing activities
            
            410,000
            
            
            (10,000
            )Net
      decrease in cash and cash equivalents
            
            (16,536
            )
            
            (251,784)Cash
      and cash equivalents, beginning of period
            
            25,557
            
            
            274,641Cash
      and cash equivalents, end of period
            $
            9,021
            
            $
            28,857Supplemental
      Disclosure of Cash Flow Information:Cash
      paid for interest expense
            $
            10,859
            
            $
            3,000Cash
      paid for income taxes
            $
            -
            
            $
            -Non-Cash
      Disclosures:Conversion
      of convertible debt and related derivative liability into common
      stock
            $
            147,288
            
            $
            -Discount
      related to issuance of convertible debt
            $
            381,328
            
            $
            600,000The
      accompanying notes are an integral part of these financial
      statements.





F-5





PEDIATRIC PROSTHETICS, INC.NOTES
      TO UNAUDITED FINANCIAL STATEMENTS





1.
BASIS OF PRESENTATION
AND CRITICAL ACCOUNTING POLICIES




GENERAL





Pediatric
Prosthetics, Inc. ("Pediatric") is a company involved in the design, fabrication
and fitting of custom-made artificial limbs. Pediatric's focus is infants and
children and the comprehensive care and training needed by those infants and
children and their parents.





USE
OF ESTIMATES





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





INTERIM
FINANCIAL STATEMENTS





The
unaudited condensed financial statements included herein have been prepared by
Pediatric pursuant to the rules and regulations of the Securities and Exchange
Commission. The financial statements reflect all adjustments that are, in the
opinion of management, necessary to fairly present such information. All such
adjustments are of a normal recurring nature. Although Pediatric believes that
the disclosures are adequate to make the information presented not misleading,
certain information and footnote disclosures, including a description of
significant accounting policies normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (US GAAP), have been condensed or omitted pursuant to
such rules and regulations. These financial statements should be read in
conjunction with the financial statements and the notes thereto included in
Pediatric's Annual Report on Form 10-KSB for the year ended June 30, 2007. The
results of operations for interim periods are not necessarily indicative of the
results for any subsequent quarter or the entire fiscal year ending June 30,
2008.





2.
GOING CONCERN
CONSIDERATIONS





Since its
inception, Pediatric has suffered significant losses and has been dependent on
outside investors to provide the cash resources to sustain its
operations.  For the six months ended December 31, 2007, Pediatric
reported net income of $1,253,801 and negative cash flows from operations of
$426,536.





Although
Pediatric had net income of $1,253,801 for the six months ended December 31,
2007, such net income was the result of non-cash changes in the value of
derivative financial instruments and not the result of core operations. Negative
operating results have produced a working capital deficit of $1,230,683 and a
stockholders' deficit of $1,547,392 at December 31, 2007. Pediatric's negative
financial results and its current financial position raise substantial doubt
about Pediatric's ability to continue as a going concern. The financial
statements do not reflect any adjustments relating to the recoverability and
classification of recorded asset amounts or liability amounts that might be
necessary should Pediatric be unable to continue in existence.


F-6





PEDIATRIC
      PROSTHETICS, INC.NOTES
      TO UNAUDITED FINANCIAL STATEMENTS





2.
GOING CONCERN
CONSIDERATIONS, continued





Pediatric
is currently implementing it plans to deal with going concern
issues.  Management believes that Pediatric, through private
placements of its common stock, will be able to raise the capital to expand
operations to a level that will ultimately produce positive cash flows from
operations.





Pediatric's
long-term viability as a going concern is dependent on certain key factors,
including its ability to:





·
            Obtain
      adequate sources of outside financing to support near term operations and
      to allow Pediatric to continue forward with current strategic
      plans.





·
            Increase
      its customer base and broaden its service
  capabilities.





·
            Ultimately
      achieve adequate profitability and cash flows to sustain continuing
      operations.








3.
CONVERTIBLE
DEBT





On July
27, 2007, Pediatric sold an aggregate of $500,000 in Callable Secured
Convertible Notes (“Debentures"), to various third parties (the “Purchasers”).
The sale of the Debentures represented the third and final tranche of funding in
connection with a Securities Purchase Agreement entered into with the Purchasers
on May 30, 2006 for a total of $1,500,000 of such Debentures.  In
connection with the issuance of the Debentures for the six months ended December
31, 2007, we paid a consultant debt issue costs totaling $15,000, which will be
amortized over the term of the Debentures and we also repaid $75,000 of
previously issued convertible debt with cash.





The
Debentures are convertible into common stock at a 40% discount to the average of
the three lowest intraday trading prices for which the common stock trades on
the market or exchange over the most recent twenty (20) day trading period,
ending one day prior to the date a conversion notice is received (the “Trading
Price”), and bear interest at the rate of six percent (6%) per annum, payable
quarterly in arrears, provided that no interest shall be due and payable for any
month in which the trading price of common stock is greater than $0.10375 for
each day that the common stock trades. Any amounts not paid under the
Debentures, which are due May 31, 2009, bear interest at the rate of fifteen
percent (15%) per annum until paid.  The following is a summary of
convertible debt as of December 31, 2007 and June 30, 2007:








December
      31, 2007
            
            
            June
      30, 2007Convertible
      debentures
            
            $
            1,500,000
            
            
            $
            1,075,000Debt
      converted to common stock
            
            
            (97,715
            )
            
            
            -Unamortized
      debt discount
            
            
            (990,372
            )
            
            
            (810,486
            )Convertible
      debentures, net
            
            
            411,913
            
            
            
            264,514Convertible
      debentures, net (current)
            
            
            -
            
            
            
            (75,000
            )Convertible
      debentures, net (long-term)
            
            $
            411,913
            
            
            $
            189,514




F-7





PEDIATRIC
      PROSTHETICS, INC.NOTES
      TO UNAUDITED FINANCIAL STATEMENTS





3.
CONVERTIBLE DEBT,
continued





In
accordance with Statement of Financial Accounting Standards No. 133, "Accounting
for Derivative Instruments and Hedging Activities," as amended ("SFAS 133"), the
debt conversion feature provision (the "Debt Feature") contained in the terms of
the Notes is not clearly and closely related to the characteristics of the Note.
Accordingly, the Debt Feature qualified as an embedded derivative instrument at
issuance and, because it does not qualify for any scope exception within SFAS
133, it was required by SFAS 133 to be accounted for separately from the debt
instrument and recorded as a derivative financial instrument.





Pursuant
to the terms of the Notes, these notes are convertible at the option of the
holder, at anytime on or prior to maturity. The Debt Feature represents an
embedded derivative that is required to be accounted for apart from the
underlying Notes. At issuance of the Notes of $500,000 for the six months ended
December 31, 2007, the Debt Feature had an estimated initial fair value of
$381,328, which was recorded as a discount to the note and will be accreted over
the term of the debt using the effective interest method.





During
the six months ended December 31, 2007, the Purchasers converted $97,715 of
Debentures to common stock resulting in the issuance of 8,250,900 common shares
and the acceleration of accretion of debt discount of $74,825. A proportionate
relief of the derivative liability related to the converted Debentures was
recorded to additional paid in capital in the amount of $49,573.





4.
SUBSEQUENT
EVENTS





Between
January 1, 2008 and February 13, 2008, the Purchasers converted another $4,207
of principal related to the Debentures, at an average exercise price of
$0.01, resulting in the issuance of an additional 721,392 common
shares.




In
February 2008, the Company reissued its President, Linda Putback-Bean an
aggregate of 4,000,000 shares of the Company’s common stock which she cancelled
on or around September
30, 2005, to reduce the number of issued shares of the Company and to increase the
number of authorized but unissued shares of the Company to allow the Company
sufficient shares of common stock to pay various consultants for services
rendered. The shares were earned prior to their original issuance in December
2004.






F-8


ITEM 2. MANAGEMENT'S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION





THIS
REPORT CONTAINS FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF
THE SECURITIES ACT OF 1933, AS AMENDED AND SECTION 21E OF THE SECURITIES
EXCHANGE ACT OF 1934, AS AMENDED. THE COMPANY'S ACTUAL RESULTS COULD DIFFER
MATERIALLY FROM THOSE SET FORTH ON THE FORWARD LOOKING STATEMENTS AS A RESULT OF
THE RISKS SET FORTH IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE
COMMISSION, GENERAL ECONOMIC CONDITIONS, AND CHANGES IN THE ASSUMPTIONS USED IN
MAKING SUCH FORWARD LOOKING STATEMENTS.





Pediatric
Prosthetics, Inc. (the "Company," "we," and "us") is engaged in the custom
fitting and fabrication of custom made prosthetic limbs for both upper and lower
extremities to infants and children throughout the United States. We also
provide our services to families from the international community when the
parents can bring the child to the United States for fitting. We buy
manufactured components from a number of manufacturers and combine those
components to fabricate custom measured, fitted and designed prosthetic limbs
for our patients. We also create "anatomically form-fitted suspension sockets"
that allow the prosthetic limbs to fit comfortably and securely with each
patient's unique residual limb. These suspension sockets must be hand crafted to
mirror the surface contours of a patient's residual limb, and must be
dynamically compatible with the underlying bone, tendon, ligament, and muscle
structures in the residual limb.





We are
accredited by the Texas Department of Health as a fully accredited prosthetics
provider. We began operations as a fully accredited prosthetic facility on March
18, 2004.





We have a
website at www.kidscanplay.com,
which contains information which we do not desire to be incorporated by
reference into this filing.





We
generate an average of approximately $8,000 of gross profit per fitting of the
prosthetics devices, however, the exact amount of gross profit we will receive
for each fitting will depend on the exact mix of arms versus legs fitted and the
number of re-fittings versus new fittings. From July 1, 2005 until
December 31, 2005, we made twenty-seven fittings; from January 1, 2006
until June 30, 2006, we made thirty-six fittings; from July 1, 2006 to June 30,
2007, we made fifty-nine fittings, from July 1, 2007 until December 31, 2007, we
made thirty-seven fittings, one of which was pro bono, and from January 1, 2008
through February 12, 2008, we made seven fittings, none of which were pro bono.
We currently average between 4 and 5 fittings per month.





May 2006 Securities Purchase
Agreement





On May
30, 2006 (the "Closing"), we entered into a Securities Purchase Agreement
("Purchase Agreement") with AJW Partners, LLC; AJW Offshore, Ltd.; AJW Qualified
Partners, LLC; and New Millennium Capital Partners II, LLC (each a "Purchaser"
and collectively the "Purchasers"), pursuant to which the Purchasers agreed to
purchase $1,500,000 in convertible debt financing from us. Pursuant to the
Purchase Agreement, we agreed to sell the investors $1,500,000 in Callable
Secured Convertible Notes (the "Debentures," the “Notes” or the “Convertible
Notes”), which are to be payable in three tranches, $600,000 of which was
received by the Company on or around May 31, 2006, in connection with the entry
into the Purchase Agreement; $400,000 which was received in February 2007, upon
the filing of our registration statement to register shares of common stock
which the Debentures are convertible into as well as the shares of common stock
issuable in connection with the exercise of the Warrants (defined below); and
$500,000 which was received in August 2007, shortly after the effectiveness of
our registration statement on July 27, 2007.


-9-


On  February
16, 2007 (the "Second Closing”), we sold an aggregate of $400,000 in Debentures
to the Purchasers. The sale of the Debentures represented the second tranche of
funding in connection with our Purchase Agreement.





On  July
27, 2007 (the "Third Closing"), we sold an aggregate of $500,000 in Debentures
to the Purchasers, which funds were received by us on  July 31, 2007.
The sale of the Debentures represented the third and final tranche of funding in
connection with our Purchase Agreement.





The
Debentures are convertible into our common stock at a 40% discount to the
average of the three lowest intraday trading prices over the most recent twenty
(20) day trading period in which our common stock trades on the market or
exchange , ending one day prior to the date a conversion notice is received (the
“Conversion Price”). Additionally, in connection with the Securities Purchase
Agreement, we agreed to issue the Purchasers warrants to purchase an aggregate
of 50,000,000 shares of our common stock at an exercise price of $0.10 per share
(the "Warrants"). We originally agreed to register all of the shares of common
stock which the Debentures are convertible into and the shares of common stock
which the Warrants are exercisable for; however, pursuant to the Second Waiver
of Rights Agreement, described below, the Purchasers agreed to amend the terms
of the Registration Rights Agreement such that we were only required to register
9,356,392 shares underlying the Debentures on our Form SB-2 registration
statement, which was declared effective on July 20, 2007. We secured the
Debentures pursuant to the Security Agreement and Intellectual Property Security
Agreement, described below.





We also
agreed in the Purchase Agreement to use our best efforts to increase our key man
life insurance on our President and Director, Linda Putback-Bean and our Vice
President and Director Kenneth W. Bean, which we have been able to increase to
$3,000,000 and $2,000,000, respectively.





Pursuant
to the Purchase Agreement, we agreed to sell the Purchasers an aggregate of
$1,500,000 in Debentures, which Debentures mature May 31,
2009 and bear interest at the rate of six percent (6%) per annum, payable
quarterly in arrears, provided that no interest shall be due and payable for any
month in which the trading value of our common stock is greater than $0.10375
for each day that our common stock trades. Any amounts not paid under the
Debentures when due bear interest at the rate of fifteen percent (15%) per annum
until paid. The conversion price of the Debentures is equal to 60% of the
average of the three lowest intraday trading prices over the most recent twenty
(20) day trading period in which our common stock trades on the market or
exchange , ending one day prior to the date a conversion notice is received (the
"Conversion Price").





Furthermore,
the Purchasers have agreed to limit their conversions of the Debentures to no
more than the greater of (1) $80,000 per calendar month; or (2) the average
daily volume calculated during the ten business days prior to a conversion, per
conversion.





Pursuant
to the Debentures, the Conversion Price is automatically adjusted if, while the
Debentures are outstanding, we issue or sell, any shares of common stock for no
consideration or for a consideration per share (before deduction of reasonable
expenses or commissions or underwriting discounts or allowances in connection
therewith) less than the Conversion Price then in effect, with the consideration
paid per share, if any being equal to the new Conversion Price; provided
however, that each Purchaser has agreed to not convert any amount of principal
or interest into shares of common stock, if, as a result of such conversion,
such Purchaser and affiliates of such Purchaser will hold more than 4.99% of our
outstanding common stock.





Upon the
occurrence of and during the continuance of an Event of Default (as defined in
the Debentures), the Purchasers can make the Debentures immediately due and
payable, and can make us pay the greater of (a) 130% of the total remaining
outstanding principal amount of the Debentures, plus accrued and unpaid interest
thereunder, or (b) the total dollar value of the number of shares of common
stock which the funds referenced in section (a) would be convertible into (as
calculated in the Debentures), multiplied by the highest closing price for our
common stock during the period we are in default. If we fail to pay the
Purchasers such amount within five (5) days of the date such amount is due, the
Purchasers can require us to pay
them in shares of common stock at the greater of the amount of shares of common
stock which (a) or (b) is convertible into, at the Conversion Rate then in
effect.


-10-





Pursuant
to the Debentures, we have the right, assuming (a) no Event of Default has
occurred or is continuing, (b) that we have a sufficient number of authorized
but unissued shares of common stock, (c) that our common stock is trading at or
below $0.20 per share, and (d) that we are then able to prepay the Debentures as
provided in the Debentures, to make an optional prepayment of the outstanding
amount of the Debentures equal to 120% of the amount outstanding under the
Debentures (plus any accrued and unpaid interest thereunder) during the first
180 days after the Closing, 130% of the outstanding amount of the Debentures
(plus any accrued and unpaid interest thereunder) between 181 and 360 days after
the Closing, and 140% thereafter, after giving ten (10) days written notice to
the Purchasers.





Additionally,
pursuant to the Debentures, we have the right, in the event the average daily
price of our common stock for each day of any month the Debentures are
outstanding is below $0.20 per share, to prepay a portion of the outstanding
principal amount of the Debentures equal to 101% of the principal amount of the
Debentures divided by thirty-six (36) plus one month's interest. Additionally,
the Purchasers have agreed in the Debentures to not convert any principal or
interest into shares of common stock in the event we exercise such prepayment
right.





At the
Closing, we entered into a Security Agreement and an Intellectual Property
Security Agreement (collectively, the "Security Agreements"), with the
Purchasers, whereby we granted the Purchasers a security interest in, among
other things, all of our goods, equipment, machinery, inventory, computers,
furniture, contract rights, receivables, software, copyrights, licenses,
warranties, service contracts and intellectual property to secure the repayment
of the Debentures.





Stock Purchase
Warrants





In
connection with the Closing, we sold Warrants for the purchase of 50,000,000
shares of our common stock to the Purchasers, which warrants are exercisable for
shares of our common stock at an exercise price of $0.10 per share (the
"Exercise Price"). Each Purchaser, however, has agreed not to exercise any of
the Warrants into shares of common stock, if, as a result of such exercise, such
Purchaser and affiliates of such Purchaser will hold more than 4.99% of our
outstanding common stock.





The
Warrants expire, if unexercised at 6:00 p.m., Eastern Standard Time on May 30,
2013. The Warrants also include reset rights, which provide for the Exercise
Price of the Warrants to be reset to a lower price if we (a) issue any warrants
or options (other than in connection with our Stock Option Plans), which have an
exercise price of less than the then market price of the common stock, as
calculated in the Warrants, at which time the Exercise Price of the Warrants
will be equal to the exercise price of the warrants or options granted, as
calculated in the Warrants; or (b) issue any convertible securities, which have
a conversion price of less than the then market price of the common stock, as
calculated in the Warrants, at which time the Exercise Price of the Warrants
will be equal to the conversion price of the convertible securities, as
calculated in the Warrants.





Pursuant
to the Warrants, until we register the shares of common stock which the Warrants
are exercisable for, the Warrants have a cashless exercise feature, where the
Purchasers can exercise the Warrants and pay for such exercise in shares of
common stock, in lieu of paying the exercise price of such Warrants in
cash.





Registration Rights
Agreement





Pursuant
to the Registration Rights Agreement entered into at the Closing, we agreed to
file a registration statement on Form SB-2, to register two (2) times the number
of shares of common stock which the Debentures are convertible into (to account
for changes in the Conversion Rate and the conversion of interest on the
Debentures) as well as the shares of common stock issuable in connection with
the exercise of the Warrants, within sixty (60) days of the Closing which we
were not able to accomplish, but which date was
amended from sixty (60) days from the Closing until January 15, 2007, in
connection with the Waiver of Rights Agreement, and until February 15, 2007, in
connection with the Second Waiver of Rights Agreement (both described below),
which filing date was met by us. Additionally, the number of shares of common
stock we were required to register on the Registration Statement has been
amended to include only 9,356,392 shares of common stock underlying the
Debentures, due to amendments to the Registration Rights Agreement affected by
the Second Waiver of Rights Agreement.   We gained effectiveness
of the Registration Statement on July 20, 2007.


-11-





Waiver of Rights
Agreement





On
October 25, 2006, with an effective date of July 31, 2006, we entered into a
Waiver of Rights Agreement with the Purchasers, whereby the Purchasers agreed to
waive our prior defaults under the Securities Purchase Agreement and
Registration Rights Agreement. In connection with the Waiver of Rights
Agreement, the Purchasers agreed to amend the Securities Purchase Agreement to
state that we are required to use our best efforts to timely file our periodic
reports with the Commission, which amendment waived the previous default caused
by our failure to timely file our annual report on Form 10-KSB with the
Commission. The Waiver of Rights Agreement also amended the Securities Purchase
Agreement to provide for us to use our best efforts to obtain shareholder
approval to increase our authorized shares of common stock as was required by
the Securities Purchase Agreement, which amendment waived our failure to obtain
shareholder approval to increase our authorized shares of common stock by August
15, 2006. Finally, the Waiver of Rights Agreement amended the dates we were
required to file our registration statement from July 31, 2006 to January 15,
2007, which filing date was not met, and the date our registration statement was
required to be effective with the Commission from October 22, 2006 to April 16,
2007. The amendments affected by the Waiver of Rights Agreement were later
modified pursuant to the Second Waiver of Rights Agreement, described
below.





Second Waiver of Rights
Agreement





On April
17, 2007, with an effective date of January 15, 2007, we entered into a Second
Waiver of Rights Agreement (the “Second Waiver”) with the Purchasers. Pursuant
to the previous Waiver of Rights Agreement we entered into with the Purchasers
in October 2006 (the “First Waiver”), we agreed to use our best efforts to
obtain shareholder approval to increase our authorized shares by December 15,
2006; to file a registration statement with the SEC covering the Underlying
Shares no later than January 15, 2007, and to obtain effectiveness of such
registration statement with the SEC by April 16, 2007.





Pursuant
to the Second Waiver, the Purchasers agreed to waive our failure to file a
registration statement by the prior January 15, 2007, deadline (we filed the
registration statement on February 9, 2007), agreed we are not in default of the
Rights Agreement; agreed to waive our inability to maintain effective controls
and procedures as was required pursuant to the Purchase Agreement, that we are
required to use our “best efforts” to maintain effective controls and procedures
moving forward; to waive the requirement pursuant to the Purchase Agreement that
we keep solvent at all times (defined as having more assets than liabilities);
to waive the requirement pursuant to the Purchase Agreement that we obtain
authorization to obtain listing of our common stock on the Over-the-Counter
Bulletin Board (“OTCBB”), and to allow for us to use our “best efforts” to
obtain listing of our common stock on the OTCBB, which listing we obtained
effective May 25, 2007.





We also
agreed with the Purchasers, pursuant to the Second Waiver, to amend the Rights
Agreement to reduce the number of shares we are required to register pursuant to
the Rights Agreement, from all of the Underlying Shares, to only 9,356,392 of
the shares issuable upon conversion of the Notes and to amend the date we are
required to obtain effectiveness of our registration statement by from April 16,
2007, to August 13, 2007, which registration statement was declared effective on
July 20, 2007.  The 9,356,392 shares of common stock we are required
to register pursuant to the Second Waiver is equal to the amount remaining after
calculating approximately 30% of our then public float (17,909,961 shares, with
our public float equal to approximately 58,866,538 shares as of the date of the
Second Waiver), and subtracting the 8,553,569 shares of common stock held by
other shareholders, which were being registered in our Registration Statement,
which gave us a total of 9,356,392 shares available to be registered for the
Purchasers. Because we believe that the registration of shares totaling only
approximately 30% of our public float clearly does not represent a primary
offering of our securities, we and the Purchasers believe that the registration
of only 9,356,392 shares underlying the Notes would expedite the review and
effectiveness of our Registration Statement.


-12-





It is
anticipated that the Purchasers will rely on Rule 144 under the Securities Act
of 1933, as amended in the future for any sales of shares issuable in connection
with the conversion of the Notes and/or exercise of the Warrants which are no
longer required to be registered on a registration statement by us pursuant to
the amendments above.





In
consideration for their entry into the Second Waiver, we granted the Purchasers
additional warrants to purchase 1,000,000 shares of our common stock at an
exercise price of $0.10 per share, which warrants shall expire if unexercised on
the same date as the original Warrants expire if unexercised, May 30, 2013,
which warrants were granted to the Purchasers as follows:





AJW
      Partners, LLC
            102,000AJW
      Offshore, Ltd.
            606,000AJW
      Qualified Partners, LLC
            279,000New
      Millennium Capital Partners II, LLC
            13,000Total
            1,000,000





The Market
Place





According
to the Limb Loss Research and Statistics Program ("LLR&SP"), a multi-year
statistical study done by the American Amputee Coalition in 2001, in concert
with the Johns Hopkins Medical School, and the United States Center of Disease
Control, approximately 1,000 children are born each year with a limb loss in the
United States. The LLR&SP can be found at www.amputee-coalition.org. During
their high growth years, ages 1 through age 12, these children will be
candidates for re-fitting once per year as they grow. We calculate that there
are presently approximately up to 12,000 pre-adolescent (younger than age 12)
children in the United States in need of prosthetic rehabilitation, based on the
fact that there are approximately 1,000 children born each year with a limb-loss
in the United States.





Competition





Although
there are many prosthetic provider companies in the United States, to the best
of our knowledge, there is no other private sector prosthetics provider in the
country specializing in fitting infants and children. The delivery of prosthetic
care in the United States is extremely fragmented and is based upon a local
practitioner "paradigm." Generally, a local practitioner obtains referrals for
treatment from orthopedic physicians in their local hospitals based on
geographic considerations. Management believes the inherent limitation of this
model for pediatric fittings is that the local practitioner may never encounter
more than a very few small children with a limb loss, even during an entire
career. The result is that the local practice is a "general practice", and in
prosthetics that is considered an "adult practice" because of the overwhelming
percentage of adult patients. In any given year, according to The American
Amputee Coalition, over 150,000 new amputations are performed, suggesting the
need for prosthetic rehabilitation. The overwhelming majority of those
amputations are performed upon adults. For children ages 1-14, there will be
approximately 1,200 limb losses per year due primarily to illness, vascular
problems, and congenital accidents. Children, especially small children, cannot
provide practitioners the critical verbal feedback they usually receive from
their adult patients.





Management
believes the challenge to effectively treat children with a limb-loss in the
United States is compounded by the time constraints of local practitioners
working primarily with their adult patients and a limited overall number of
board certified prosthetists. To engage in the intensive patient-family focus
required
to fit the occasional infant or small child puts enormous time pressure on local
practitioners trying to care for their adult patients.


-13-





Though
not competitors in a business sense, the Shriner's Hospital system, a non-profit
organization with 22 orthopedic hospitals throughout North America, has
historically extended free prosthetic rehabilitation in addition to providing
medical and surgical services to children at no charge. The free care offered by
Shriner's may put downward pressure on the prices we charge for our services
and/or lower the number of potential clients in the marketplace, which may in
turn lower our revenues.





PLAN
OF OPERATIONS





We have
established working relationships with fifteen (15) Host Affiliates operating in
approximately 21 states. In establishing the relationships with the fifteen Host
Affiliates, we also provided one-on-one pediatric training to fifteen
prosthetists who are employed by those Host Affiliates. We currently plan to
hire one more certified prosthetist and two additional support personnel during
the next twelve months, funding permitting, of which there can be no
assurance.





As of
February 19, 2008, we believe we can operate for at least the next twelve
months.  We believe we will require recurring cash for overhead of
approximately $54,000 per month, and that we will receive monthly gross profits
of approximately $50,000 per month in connection with fittings of our prosthetic
limbs, of which there can be no assurance. If we are required to raise
additional funding, we will likely do so through the sale of debt or equity
securities.





We
received $600,000 on May 30, 2006 (less closing costs and structuring fees),
from the sale of certain Convertible Debentures described above, an additional
$400,000 through the sale of additional Convertible Debentures in connection
with our filing of our Registration Statement with the SEC, and a final $500,000
in connection with the sale of Debentures when our Registration Statement was
declared effective on or around July 20, 2007.  Increases in our
advertising and marketing budget during the year ended June 30, 2007, allowed us
to undertake the following advertising and marketing activities:





o
            The
      composition of and distribution of certain feature newspaper articles;
      and




o
            Publicity
      and marketing campaign, pursuant to which we previously issued 7,000,000
      shares of common stock to certain
consultants.




Additionally,
we believe the increases in our advertising and marketing budget will allow us
to undertake the following activities during the next twelve (12) months,
funding permitting, of which there can be no assurance:





o
            The
      production, filming, editing and narration of informational videos on the
      value of modern prosthetic options for children, which videos describe the
      success stories we have had in helping children overcome limb loss by
      fitting such children with artificial limbs, as well as the distribution
      of such videos to fellow pediatric professionals such as nurses, physical
      therapists, doctors and hospital-based family counselors nationally, at a
      cost of approximately $10,000;





o
            Costs
      associated with a national internet marketing campaign utilizing state of
      the art  Search Engine Optimization Planning
      (“S.E.O.P”)  and pay per click advertising  at a cost
      of approximately $50,000, which has been operational since August 2007, at
      a cost of approximately $4,000 per
month;





o
            Travel
      and associated costs involved with appearances on television shows,
      medical conventions and nursing schools at a cost of approximately
      $20,000; and travel and components expenses related to pro-bono fittings
      in various cities across the United States of approximately $100,000, and
      the establishment of a national internet chat-room for parents and kids
      with a limb-loss at a cost of approximately $10,000;
  and


-14-





o
            Sponsorship
      costs of non-profit organizations such as the "Amputee Coalition of
      American" and the Para-Olympics, at a cost of approximately
      $10,000.





COMPARISON
OF OPERATING RESULTS





RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2007 COMPARED TO THE THREE
MONTHS ENDED DECEMBER 31, 2006





We had
revenue of $326,707 for the three months ended December 31, 2007, compared to
revenue of $241,138 for the three months ended December 31, 2006, an increase in
revenue of $85,569 or 35.5% from the prior period. The increase in revenue was
mainly due to a larger number of fittings and more complex fittings, which
generated higher revenues for the Company during the three months ended December
31, 2007, compared to the three months ended December 31, 2006.





We had
total operating expenses of $368,371 for the three months ended December 31,
2007, compared to total operating expenses of $426,890 for the three months
ended December 31, 2006, a decrease in total operating expenses of $58,519 or
13.7% from the previous period. The decrease in total operating expenses was
mainly due to a $54,715 or 14.2% decrease in selling, general and administrative
expenses of $330,497 for the three months ended December 31, 2007, compared to
$385,212 for the three months ended December 31, 2006, which decrease was mainly
due to higher than normal administrative expenses during the three months ended
December 31, 2006, in connection with certain one-time legal and accounting fees
associated with the revision of and refiling of our amended Form 10-SB and
correspondence filings, and a $3,025 or 8.5% decrease in cost of sales, to
$32,615 for the three months ended December 31, 2007, compared to $35,640 for
the three months ended December 31, 2006.  The decrease in our cost of
sales for the three months ended December 31, 2007, compared to the same period
in 2006 was mainly due to a larger number of re-fittings during the three month
period ended December 31, 2007, compared to the same period in 2006, which
re-fittings require less new components and generate higher margins for the
Company.





Our cost
of sales as a percentage of revenue for the three months ended December 31, 2007
was 10%, compared to 14.8% for the three months ended December 31, 2006, a
decrease in cost of sales as a percentage of revenues of 4.8% from the prior
period, which was mainly due to the increase in revenue and the decrease in cost
of sales, as described above.





We had a
loss from operations of $41,664 for the three months ended December 31, 2007,
compared to $185,752 for the three months ended December 31, 2006, a decrease in
loss from operations of $144,088 or 77.6% from the prior period. The decrease in
loss from operations was primarily the result of the increase in revenue and the
decrease in cost of sales and selling, general and administrative expenses, as
described above.





We had
total other income, net of $484,419 for the three months ended December 31,
2007, compared to $1,081,568 for the three months ended December 31, 2006, which
represented a decrease in other income of $597,149 or 55.2% from the prior
period. The decrease in net other income was mainly due to an increase of
$92,607 in net interest expense to $161,700 for the three months ended December
31, 2007, as compared to net interest expense of $69,093 for the three months
ended December 31, 2006, which interest was mainly in connection with the
amortization of the deferred financing cost and accretion of debt discount
related to the Convertible Notes and a decrease of $517,027 in change in value
of derivative financial instruments, to $633,634 for the three months ended
December 31, 2007, compared to $1,150,661 for the three months ended December
31, 2006.





We had
net income of $442,755 for the three months ended December 31, 2007, compared to
$895,816 for the three months ended December 31, 2006, a decrease of $453,061
from the previous period. The decrease in net
income was mainly due to the decrease in value of derivative financial
instruments and increase in interest expense offset by the decrease in cost of
sales, selling, general and administrative expenses and the increase in
revenues, as described above.


-15-





Investors
should keep in mind that our net income for the three months ended December 31,
2007 was the result of changes in the value of our derivative financial
instruments and not the result of our core operations.  Without the changes
to net income due to the changes in the fair value of derivative instruments, we
would have had a significant net loss for the period.











RESULTS
OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2007 COMPARED TO THE SIX
MONTHS ENDED DECEMBER 31, 2006





We had
revenue of $426,627 for the six months ended December 31, 2007, compared to
revenue of $436,368 for the six months ended December 31, 2006, a decrease in
revenue of $9,741 or 2.2% from the prior period. The decrease in revenue was
mainly due to an unusual number of delayed fittings caused by those clients’
insurance providers requesting additional information regarding the fitting
process during the three months ended September 30, 2007.  From time
to time, prospective clients may have their fittings delayed by their insurance
providers (usually Medicaid and Medicare) requesting additional information
and/or clarification regarding the procedures we perform prior to those
insurance providers paying for the prospective client’s procedures.  
While we believe that we had an unusually high number of such delays during the
three months ended September 30, 2007, which number of delays decreased
substantially over the three months ended December 31, 2007, there can be no
assurance that our future revenues will not be impacted by such delays in the
future.





We had
total operating expenses of $734,192 for the six months ended December 31, 2007,
compared to total operating expenses of $1,052,089 for the six months ended
December 31, 2006, a decrease in total operating expenses of $317,897 or 30.2%
from the previous year’s period. The decrease in total operating expenses was
mainly due to a $285,803 or 30.8% decrease in selling, general and
administrative expenses, to $642,648 for the six months ended December 31, 2007,
compared to $928,451 for the six months ended December 31, 2006, resulting from
a decrease in share based compensation for the six months ended December 31,
2007 and higher than normal administrative expenses during the six months ended
December 31, 2006, in connection with certain one-time legal and accounting fees
associated with the revision of and refiling of our amended Form 10-SB and
correspondence filings, also a $31,396 or 28% decrease in cost of sales, to
$80,247 for the six months ended December 31, 2007, compared to $111,641 for the
six months ended December 31, 2006, and a larger number of re-fittings during
the six month period ended December 31, 2007, compared to the same period in
2006, which re-fittings require less new components and generate higher margins
for the Company.





Our cost
of sales as a percentage of revenue for the six months ended December 31, 2007
was 18.8%, compared to 25.6% for the three months ended December 31, 2006, a
decrease in cost of sales as a percentage of revenues of 6.8% from the prior
period, which was mainly the result of the decrease in cost of sales offset by
the decrease in revenues for the six months ended December 31, 2007, compared to
the six months ended December 31, 2006.





We had a
loss from operations of $307,565 for the six months ended December 31, 2007,
compared to $615,721 for the six months ended December 31, 2006, a decrease in
loss from operations of $308,156 or 50% from the prior period.  The
decrease in our loss from operations was the result of lower share-based
compensation expense and legal and accounting expenses.  Share-based
compensation decreased as a result of consulting contracts expiring during the
six months ended December 31, 2007.  Legal and accounting expenses
decreased as a result of higher than normal administrative expenses during the
three months ended December 31, 2006, in connection with certain one-time legal
and accounting fees associated with the revision of and refiling of our amended
Form 10-SB and correspondence filings, compared to the three months ended
December 31, 2007.





We had
total other income, net of $1,561,366 for the six months ended December 31,
2007, compared to $2,193,617 for the six months ended December 31, 2006, which
represented a decrease in other income of $632,251
or 28.8% from the prior period. The decrease was mainly due to an increase of
$167,301 in interest expense to $326,886 for the six months ended December 31,
2007, as compared to interest expense of $159,585 for the six months ended
December 31, 2006, which interest was mainly in connection with the amortization
of the deferred financing cost and accretion of debt discount related to the
Convertible Notes, and a $477,434 or 20.3% decrease in change in value of
derivative financial instruments, to $1,875,767 for the six months ended
December 31, 2007, compared to $2,353,201 for the six months ended December 31,
2006.


-16-





We had
net income of $1,253,801 for the six months ended December 31, 2007, compared to
$1,577,896 for the six months ended December 31, 2006, a decrease of $324,095
from the previous period. The decrease in net income was mainly due to the
decrease in revenue and total other income, offset by the decrease in cost of
sales and selling, general and administrative expenses.





Investors
should keep in mind that our net income for the six months ended December 31,
2007 was the result of changes in the value of our derivative financial
instruments and not the result of our core operations.  Without the
changes to net income due to the changes in the fair value of derivative
instruments, we would have had a significant net loss for the
period.








LIQUIDITY
AND CAPITAL RESOURCES





We had
total assets of $620,355 as of December 31, 2007, which included current assets
of $517,303, furniture and equipment, net of accumulated depreciation, of
$35,582, and deferred financing cost, net of amortization, of $67,470. Current
assets included cash and cash equivalents of $9,021, trade and accounts
receivable, net of $339,067, prepaid expenses and other current assets of
$8,920, and current portion of deferred financing cost of $160,295.




We had
total liabilities of $2,167,747 as of December 31, 2007, which included current
liabilities of $1,747,986, consisting of trade accounts payable of $166,506;
accrued liabilities of $150,309; which included deferred salary payable to our
officers; amounts due to related party of $500, which amounts were owed to our
Chief Executive Officer, Linda Putback-Bean, in connection with the initial
funding of our corporate bank account, which amounts have not been repaid to
date; derivative financial instruments of $1,430,671, in connection with our
Convertible Debentures and Warrants; and non-current liabilities consisting of
deferred rent of $7,848 and long term portion of convertible debt, net of
discount of $411,913.





We had a
working capital deficit of $1,230,683 and an accumulated deficit of $10,402,332
as of


December
31, 2007.





We had
total net cash used by operating activities of $426,536 for the six months ended
December 31, 2007, which was mainly due to the loss from operations of
$307,565, as well as the net decrease of $185,404 for various trade accounts
payable which had accumulated prior to our most recent funding related to the
Convertible Debentures.





We had
$410,000 in net cash provided by financing activities for the six months ended
December 31, 2007, which included $500,000 raised through the third tranche of
Convertible Debentures sold during the period offset by $15,000 of debt
issuance costs associated with fees paid to finders in connection with the sale
and the $75,000 repayment of outstanding convertible notes held by certain
shareholders of the Company.





Our trade
accounts receivable are often for substantial amounts that can generate
challenges by insurance companies and, in certain cases, the need to pursue
collections directly from the patients. These challenges have continually
increased the collection period for our receivables. We believe that our trade
accounts receivable balances will increase at a greater rate than revenue growth
until such revenue growth subsides for a meaningful period of time. Management
constantly reviews receivables for collectibility issues and has recognized a
provision for bad debts of approximately 22% of revenue thus far for fiscal
2008.


-17-




These
collection challenges in trade accounts receivable are expected to present
liquidity issues in future periods if we do not substantially increase sales
and/or raise funds from other sources.  Historically, our Host Affiliates,
which represent the majority of our receivables, have been slow to collect
receivables and/or answer billing appeals, which in turn has led to our large
accounts receivable balances.  During the six months ended December 31,
2007, we conducted approximately three, three-day classes, which were attended
by six total Host Affiliates to help our Host Affiliates with their collection
issues. We believe that those classes, and any similar classes we may arrange in
the future, will help us improve our collections moving
forward.





We expect
our accounts payable to grow with the increase in our business over time.
Accrued liabilities include accrued salaries and accrued stock based
compensation, and as with accounts payable, the balance of accrued liabilities
will increase based on the growth of our business. Timely payment of accounts
payable and accrued liabilities will require that we raise additional debt or
equity funding in the near term.




As of
February 19, 2008, we believe we can operate for at least the next twelve months
with revenues we will receive from our fittings, based on our current estimate
of non-discretionary and recurring cash overhead of approximately $64,000 per
month and monthly gross profits of approximately $50,000 per month. We currently
anticipate that our operations will continue to grow as a result of our
increased advertising and marketing expenditures, which has allowed a greater
number of potential clients to become aware of our operations and services and
that the increase in revenues and gross profits associated with such growth
will substantially fund future operations.





As of the
filing of this report, we owed approximately $1,398,078 to the Purchasers in
connection with the principal amount of the outstanding Debentures (not
including any accrued and unpaid interest on such Debentures).  This
debt is due on May 31, 2009.  We do not currently have sufficient
funds to repay the outstanding principal amount of the Debentures and/or stay
the conversions of such Debentures as provided above.  The shares of
common stock which the Debentures are convertible into and which the Warrants
are exercisable for may be sold without restriction pursuant to Rule 144, as
amended and the Purchasers have expressed their desire to convert an increasing
number of shares underlying the Debentures. As a result, the sale of these
shares may adversely affect the market price, if any, of our common
stock.





If
we are required to raise additional funding, we will likely do so through the
sale of debt or equity securities. Other than the funding transaction described
above, no additional financing has been secured and the Company has no
commitments from officers, directors or affiliates to provide
funding.




In
February 2008, the Company reissued its President, Linda Putback-Bean an
aggregate of 4,000,000 shares of the Company’s common stock which she cancelled
on or around September 30, 2005, to reduce the number of issued shares of the
Company and to increase the number of authorized but unissued shares of the
Company to allow the Company sufficient shares of common stock to pay various
consultants for services rendered.


-18-


RISK
FACTORS





Any
investment in shares of our common stock involves a high degree of risk. You
should carefully consider the following information about these risks before you
decide to buy our common stock. If any of the following risks actually occur,
our business would likely suffer. In such circumstances, the market price of our
common stock could decline, and you may lose all or part of the money you paid
to buy our common stock.





WE
HAVE EXPERIENCED SUBSTANTIAL OPERATING LOSSES AND MAY INCUR ADDITIONAL OPERATING
LOSSES IN THE FUTURE.





During
the fiscal years ended June 30, 2007 and 2006, we incurred net income of
$843,103 and a net loss of $4,413,417, respectively, and experienced negative
cash flows from operations of $554,271 and $436,226, respectively. During the
six months ended December 31, 2007, we had net income of $1,253,801, which net
income was mainly the result of changes in the value of our derivative financial
instruments and not the result of our core operations, and negative cash flows
from operations of $426,536. Additionally, we had negative working capital of
$1,230,683 and a total accumulated deficit of $10,402,332 as of December 31,
2007. Our historical losses have been related to two primary factors as follows:
1) we are not currently generating sufficient revenue to cover our fixed costs
and we believe that the break-even point from a cash flow standpoint may require
that we fit as many as 100 clients, up from 59 fitted in fiscal 2007; and 2) we
have issued a significant number of our shares of common stock to compensate
employees and consultants and those stock issuances have resulted in non-cash
charges to income of $585,946 and $482,360 during the years ended June 30, 2007
and 2006, costs that we believe will not be recurring in such large amounts in
future periods. In the event we are unable to increase our gross margins, reduce
our costs and/or generate sufficient additional revenues, we may continue to
sustain losses and our business plan and financial condition will be materially
and adversely affected.





THERE
IS DOUBT REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN.





Since our
inception, we have suffered significant net losses. During the six months ended
December 31, 2007 we had a loss from operations of $307,565 and we had a working
capital deficit of $1,230,683 as of December 31, 2007. Furthermore, we had an
accumulated deficit of $10,402,332 at December 31, 2007. Due to our negative
financial results and our current financial position, there is substantial doubt
about our ability to continue as a going concern.





OUR
BUSINESS DEPENDS UPON OUR ABILITY TO MARKET OUR SERVICES TO AND SUCCESSFULLY FIT
CHILDREN BORN WITH A LIMB-LOSS.





Our
growth prospects depend upon our ability to identify and subsequently fit the
small minority of children born with a limb-loss. The LLR&SP Report
(referred to above) indicates that approximately 26 out of every 100,000 live
births in the United States result in a possible need for prosthetic
rehabilitation. In addition, our business model demands that we continue to
successfully fit infants and children each year as they outgrow their
prostheses. Because of the relatively small number of these children born each
year and the fact that each child is different, there can be no assurance that
we will be able to identify and market our services to such children (or the
parents or doctors of such children) and/or that we will be able to successfully
fit such children with prosthetic’s devices if retained. If we are unable to
successfully market our services to the small number of children born with a
limb-loss each year and/or successfully fit such children if marketed to, our
results of operations and revenues could be adversely affected and/or may not
grow.











-19-


DUE
TO IMPROVED HEALTHCARE, THERE COULD BE FEWER AND FEWER CHILDREN EACH YEAR WITH
PRE-NATAL LIMB-LOSS.





Since the
majority of our first-time prospective fittings are assumed to be with children
with a pre-natal limb-loss, breakthroughs in pre-natal safety regimens and
treatment could end the need for the vast majority of future fittings of
pediatric prosthetics. As such, there can be no assurance that the number of
children requiring our services will continue to grow in the future, and in fact
the number of such children may decline as breakthroughs occur.





CHANGES
IN GOVERNMENT REIMBURSEMENT LEVELS COULD ADVERSELY AFFECT OUR NET SALES, CASH
FLOWS AND PROFITABILITY.





We
derived a significant percentage of our net sales for the years ended June 30,
2006 and 2007, from reimbursements for prosthetic services and products from
programs administered by Medicare, or Medicaid. Each of these programs sets
maximum reimbursement levels for prosthetic services and products. If these
agencies reduce reimbursement levels for prosthetic services and products in the
future, our net sales could substantially decline. Additionally, reduced
government reimbursement levels could result in reduced private payor
reimbursement levels because fee schedules of certain third-party payors are
indexed to Medicare. Furthermore, the healthcare industry is experiencing a
trend towards cost containment as government and other third-party payors seek
to impose lower reimbursement rates and negotiate reduced contract rates with
service providers. This trend could adversely affect our net sales. Medicare
provides for reimbursement for prosthetic products and services based on prices
set forth in fee schedules for ten regional service areas. Additionally, if the
U.S. Congress were to legislate modifications to the Medicare fee schedules, our
net sales from Medicare and other payors could be adversely and materially
affected. We cannot predict whether any such modifications to the fee schedules
will be enacted or what the final form of any modifications might be. As such,
modifications to government reimbursement levels could reduce our revenues
and/or cause individuals who would have otherwise retained our services to look
for cheaper alternatives.





IF
WE CANNOT COLLECT OUR ACCOUNTS RECEIVABLE OUR BUSINESS, RESULTS OF OPERATIONS,
AND FINANCIAL CONDITION COULD BE ADVERSELY AFFECTED.





As of
December 31, 2007, our accounts receivable over 120 days old represented
approximately one-third of total accounts receivable outstanding. If we cannot
collect our accounts receivable, our business, results of operations, and
financial condition could be adversely affected.





IF
WE ARE UNABLE TO MAINTAIN GOOD RELATIONS WITH OUR SUPPLIERS, OUR EXISTING
PURCHASING COSTS MAY BE JEOPARDIZED, WHICH COULD ADVERSELY AFFECT OUR GROSS
MARGINS.





Our gross
margins have been, and will continue to be, dependent, in part, on our ability
to continue to obtain favorable terms from our suppliers. These terms may be
subject to changes in suppliers' strategies from time to time, which could
adversely affect our gross margins over time. The profitability of our business
depends, in part, upon our ability to maintain good relations with these
suppliers, of which there can be no assurance.





-20-


WE
DEPEND ON THE CONTINUED EMPLOYMENT OF OUR TWO PROSTHETISTS WHO WORK AT OUR
HOUSTON PATIENT-CARE FACILITY AND THEIR RELATIONSHIPS WITH REFERRAL SOURCES AND
PATIENTS. OUR ABILITY TO PROVIDE PEDIATRIC PROSTHETIC SERVICES AT OUR
PATIENT-CARE FACILITY WOULD BE IMPAIRED AND OUR NET SALES REDUCED IF WE WERE
UNABLE TO MAINTAIN THESE EMPLOYMENT AND REFERRAL RELATIONSHIPS.





Our net
sales would be reduced if either of our two (2) practitioners leaves us. In
addition, any failure of these practitioners to maintain the quality of care
provided or to otherwise adhere to certain general operating procedures at our
facility, or among our Host Affiliates, or any damage to the reputation of any
of our practitioners could damage our reputation, subject us to liability and/or
significantly reduce our net sales.





WE
FACE REVIEWS, AUDITS AND INVESTIGATIONS UNDER OUR CONTRACTS WITH FEDERAL AND
STATE GOVERNMENT AGENCIES, AND THESE AUDITS COULD HAVE ADVERSE FINDINGS THAT MAY
NEGATIVELY IMPACT OUR BUSINESS.





We
contract with various federal and state governmental agencies to provide
prosthetic services. Pursuant to these contracts, we are subject to various
governmental reviews, audits and investigations to verify our compliance with
the contracts and applicable laws and regulations, including reviews from
Medicare and Texas Medicaid, in connection with rules and regulations we are
required to follow and comply with as a result of our position as a Medicare and
Texas Medicaid approved provider. Any adverse review, audit or investigation
could result in:





o
            refunding
      of amounts we have been paid pursuant to our government
      contracts;o
            imposition
      of fines, penalties and other sanctions on us;o
            loss
      of our right to participate in various federal
programs;o
            damage
      to our reputation in various markets; oro
            material
      and/or adverse effects on the business, financial condition and results of
      operations.




WE
HAVE NEVER PAID A CASH DIVIDEND AND IT IS LIKELY THAT THE ONLY WAY OUR
SHAREHOLDERS WILL REALIZE A RETURN ON THEIR INVESTMENT IS BY SELLING THEIR
SHARES.





We have
never paid cash dividends on any of our securities. Our Board of Directors does
not anticipate paying cash dividends in the foreseeable future. We currently
intend to retain future earnings to finance our growth. As a result, the ability
of our investors to generate a profit our common stock will likely depend on
their ability to sell our stock at a profit, of which there can be no
assurance.




WE
MAY ISSUE ADDITIONAL SHARES OF COMMON STOCK IN THE FUTURE, WHICH COULD CAUSE
DILUTION TO OUR THEN EXISTING SHAREHOLDERS.





We may
seek to raise additional equity capital in the future. Any issuance of
additional shares of our common stock will dilute the percentage ownership
interest of all our then shareholders and may dilute the book value per share of
our common stock, which would likely cause a decrease in value of our common
stock.





WE
MAY ISSUE ADDITIONAL SHARES OF PREFERRED STOCK WHICH PREFERRED STOCK MAY HAVE
RIGHTS AND PREFERENCES GREATER THAN OUR COMMON STOCK.




The Board
of Directors has the authority to issue up to 10,000,000 shares of Preferred
Stock. As of February 14, 2008, 1,000,000 shares of the Series A Convertible
Preferred Shares have been issued.


-21-


Additional
shares of preferred stock, if issued, could be entitled to preferences over our
outstanding common stock. The shares of preferred stock, when and if issued,
could adversely affect the rights of the holders of common stock, and could
prevent holders of common stock from receiving a premium for their common stock.
An issuance of preferred stock could result in a class of securities outstanding
that could have preferences with respect to voting rights and dividends and in
liquidation over the common stock, and could (upon conversion or otherwise)
enjoy all of the rights of holders of common stock. Additionally, we may issue a
series of preferred stock in the future, which may convert into common stock,
which conversion would cause immediate dilution to our then shareholders. The
Board of Directors’ authority to issue preferred stock could discourage
potential takeover attempts and could delay or prevent a change in control
through merger, tender offer, proxy contest or otherwise by making such attempts
more difficult to achieve or more costly and/or otherwise cause the value of our
common stock to decrease in value.





OUR
MANAGEMENT CONTROLS A SIGNIFICANT PERCENTAGE OF OUR CURRENTLY OUTSTANDING COMMON
STOCK AND THEIR INTERESTS MAY CONFLICT WITH THOSE OF OUR
SHAREHOLDERS.





As of
February 18, 2008, our President and Chief Executive Officer, Linda Putback-Bean
beneficially owned 34,210,251 shares of common stock or approximately 30.2% of
our outstanding common stock. Additionally, Ms. Putback-Bean owns 900,000 shares
of our Series A Convertible Preferred Stock which represents 90% of the issued
and outstanding shares of preferred stock. Dan Morgan, our Vice President/Chief
Prosthetist owns 9,198,861 shares of our common stock as well as the remaining
100,000 shares of our Series A Convertible Preferred Stock which represents 10%
of the Series A Convertible Preferred Stock. Thus, management owns 100% of our
Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock
is convertible on a one-to-one basis for our common stock but has voting rights
of 20-to-1, giving our management the right to vote a total of 63,409,112 shares
of our voting shares, representing the 30,210,251 shares held by Ms.
Putback-Bean, the 900,000 shares of Series A Convertible Preferred Stock which
has the right to vote 18,000,000 shares of common stock, the 9,198,861 shares of
common stock held by Mr. Morgan, and the 100,000 shares of Series A Convertible
Preferred Stock which has the right to vote 2,000,000 shares of common stock,
for a total of a total of approximately 46% of our total voting power based on
133,247,181 voting shares, which includes the 113,247,181 shares of common stock
outstanding and the 20,000,000 shares which our Series A Convertible Preferred
Stock are able to vote. This concentration of a significant percentage of voting
power provides our management substantial influence over any matters that
require a shareholder vote, including, without limitation, the election of
Directors and/or approving or preventing a merger or acquisition, even if their
interests may conflict with those of other shareholders. Such control could also
have the effect of delaying or preventing a change in control or otherwise
discouraging a potential acquirer from attempting to obtain control of the
Company. Such control could have a material adverse effect on the market price
of our common stock or prevent our shareholders from realizing a premium over
the then prevailing market prices for their shares of common stock.





WE
MAY BE REQUIRED TO IMMEDIATELY PAY THE $1,500,000 IN OUTSTANDING DEBENTURES
AND/OR BE FORCED TO PAY SUBSTANTIAL PENALTIES TO THE DEBENTURE HOLDERS UPON THE
OCCURRENCE OF AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT.





Upon the
occurrence of and during the continuance of any Event of Default under the
Debentures, which includes the following events:





o
            Our
      failure to pay any principal or interest on the Debentures when
      due;





o
            Our
      failure to issue shares of common stock to the Purchasers in connection
      with any conversion as provided in the
  Debentures;





-22-





o
            Our
      Registration Statement ceases to be effective for more than ten (10)
      consecutive days or more than twenty (20) days in any twelve (12) month
      period;





o
            Our
      entry into bankruptcy or the appointment of a receiver or
      trustee;




o
            Our
      breach of any covenants in the Debentures or Purchase Agreement, or our
      breach of any representations or warranties included in any of the other
      agreements entered into in connection with the Closing;
  or





o
            If
      any judgment is entered against us or our property for more than
      $100,000,




the
Purchasers can make the Debentures immediately due and payable, and can make us
pay the greater of (a) 130% of the total remaining outstanding principal amount
of the Debentures, plus accrued and unpaid interest thereunder, or (b) the total
dollar value of the number of shares of common stock which the funds referenced
in section (a) would be convertible into (as calculated in the Debentures),
multiplied by the highest closing price for our common stock during the period
we are in default. As we do not currently have sufficient cash on hand to repay
the debentures, if an Event of Default occurs under the Debentures, we could be
forced to curtail or abandon our operations and/or sell substantially all of our
assets in order to repay all or a part of the Debentures.





THE
DEBENTURES ARE CONVERTIBLE INTO SHARES OF OUR COMMON STOCK AT A DISCOUNT TO
MARKET.





The
conversion price of the Debentures is equal to 60% of the trading price of our
common stock, which will likely cause the value of our common stock, if any, to
decline in value as subsequent conversions are made, as described in greater
detail under the Risk Factors below.





THE
ISSUANCE AND SALE OF COMMON STOCK UPON CONVERSION OF THE CONVERTIBLE NOTES AND
EXERCISE OF THE WARRANTS MAY DEPRESS THE MARKET PRICE OF OUR COMMON
STOCK.





As
sequential conversions of the Debentures and sales of such converted shares take
place, the price of our common stock may decline, and as a result, the holders
of the Debentures will be entitled to receive an increasing number of shares in
connection with their conversions, which shares could then be sold in the
market, triggering further price declines and conversions for even larger
numbers of shares, to the detriment of our investors. The shares of common stock
which the Debentures are convertible into and which the Warrants are exercisable
for may be sold without restriction pursuant to Rule 144, as amended and the
Purchasers have expressed their desire to convert an increasing number of shares
underlying the Debentures. As a result, the sale of these shares may adversely
affect the market price, if any, of our common stock.





In
addition, the common stock issuable upon conversion of the Debentures and
exercise of the Warrants may represent overhang that may also adversely affect
the market price of our common stock. Overhang occurs when there is a greater
supply of a company's stock in the market than there is demand for that stock.
When this happens the price of the company's stock will decrease, and any
additional shares which shareholders attempt to sell in the market will only
further decrease the share price. The Debentures may be converted into common
stock at a discount to the market price of our common stock of 40% of the
average of the three lowest intraday trading prices which our common stock
trades on the market or exchange which it then trades over the most recent
twenty (20) day trading period, ending one day prior to the date a conversion
notice is received, and such discount to market, provides the holders with the
ability to sell their common stock at or below market and still make a profit.
In the event of such overhang, holders will have an
incentive to sell their common stock as quickly as possible. If the share volume
of our common stock cannot absorb the discounted shares, then the value of our
common stock will likely decrease.


-23-





THE
ISSUANCE OF COMMON STOCK UPON CONVERSION OF THE DEBENTURES AND UPON EXERCISE OF
THE WARRANTS WILL CAUSE IMMEDIATE AND SUBSTANTIAL DILUTION.





The
issuance of common stock upon conversion of the Debentures and exercise of the
Warrants will result in immediate and substantial dilution to the interests of
other stockholders since the Debenture holders may ultimately receive and sell
the full amount issuable on conversion or exercise. Although the Debenture
holders may not convert the Debentures and/or exercise their Warrants if such
conversion or exercise would cause them to own more than 4.99% of our
outstanding common stock, this restriction does not prevent the Debenture
holders from converting and/or exercising some of their holdings, selling those
shares, and then converting the rest of their holdings, while still staying
below the 4.99% limit. In this way, the Debenture holders could sell more than
this limit while never actually holding more shares than this limit allows. If
the Debenture holders choose to do this it will cause substantial dilution to
the then holders of our common stock.





THE
CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR DEBENTURES COULD REQUIRE
US TO ISSUE A SUBSTANTIALLY GREATER NUMBER OF SHARES, WHICH MAY ADVERSELY AFFECT
THE MARKET PRICE OF OUR COMMON STOCK AND CAUSE DILUTION TO OUR EXISTING
STOCKHOLDERS.





Our
existing stockholders will experience substantial dilution of their investment
upon conversion of the Debentures and exercise of the Warrants. The Debentures
will be convertible into shares of our common stock at a discount to market of
40% of the trading value of our common stock. As a result, the number of shares
issuable could prove to be significantly greater in the event of a decrease in
the trading price of our common stock, which decrease would cause substantial
dilution to our existing stockholders. As sequential conversions and sales take
place, the price of our common stock may decline and if so, the holders of the
Debentures would be entitled to receive an increasing number of shares, which
could then be sold, triggering further price declines and conversions for even
larger numbers of shares, which would cause additional dilution to our existing
stockholders and would likely cause the value of our common stock to
decline.




THE
CONTINUOUSLY ADJUSTABLE CONVERSION PRICE FEATURE OF OUR DEBENTURES MAY ENCOURAGE
INVESTORS TO SELL SHORT OUR COMMON STOCK, WHICH COULD HAVE A DEPRESSIVE EFFECT
ON THE PRICE OF OUR COMMON STOCK.





The
Debentures will be convertible into shares of our common stock at a discount to
market of 40% of the average of the three lowest intraday trading prices which
our common stock trades on the market or exchange which it then trades over the
most recent twenty (20) day trading period, ending one day prior to the date a
conversion notice is received (the “Conversion Price”). The significant downward
pressure on the price of our common stock as the Debenture holders convert and
sell material amounts of our common stock could encourage investors to short
sell our common stock. This could place further downward pressure on the price
of our common stock. In addition, not only the sale of shares issued upon
conversion of the Debentures or exercise of the Warrants, but also the mere
perception that these sales could occur, may adversely affect the market price
of our common stock.




THE
TRADING PRICE OF OUR COMMON STOCK ENTAILS ADDITIONAL REGULATORY REQUIREMENTS,
WHICH MAY NEGATIVELY AFFECT SUCH TRADING PRICE.





Our
common stock is currently listed on the Pink Sheets, an over-the-counter
electronic quotation service, which stock currently trades below $5.00 per
share. We anticipate the trading price of our common stock will continue to be
below $5.00 per share. As a result of this price level, trading in our common
stock would be
subject to the requirements of certain rules promulgated under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). These rules require
additional disclosure by broker-dealers in connection with any trades generally
involving any non-NASDAQ equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. Such rules require the delivery,
before any penny stock transaction, of a disclosure schedule explaining the
penny stock market and the risks associated therewith, and impose various sales
practice requirements on broker-dealers who sell penny stocks to persons other
than established customers and accredited investors (generally institutions).
For these types of transactions, the broker-dealer must determine the
suitability of the penny stock for the purchaser and receive the purchaser's
written consent to the transaction before sale. The additional burdens imposed
upon broker-dealers by such requirements may discourage broker-dealers from
effecting transactions in our common stock. As a consequence, the market
liquidity of our common stock could be severely affected or limited by these
regulatory requirements.


-24-





IN
THE FUTURE, WE WILL INCUR SIGNIFICANT INCREASED COSTS AS A RESULT OF OPERATING
AS A FULLY REPORTING COMPANY UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED, AND OUR MANAGEMENT WILL BE REQUIRED TO DEVOTE SUBSTANTIAL TIME TO NEW
COMPLIANCE INITIATIVES.





Moving
forward, we anticipate incurring significant legal, accounting and other
expenses in connection with our status as a fully reporting public company. The
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act") and new rules subsequently
implemented by the SEC have imposed various new requirements on public
companies, including requiring changes in corporate governance practices. As
such, and as a result of the filing of our Form 10-SB to become a publicly
reporting company, our management and other personnel will need to devote a
substantial amount of time to these new compliance initiatives. Moreover, these
rules and regulations will increase our legal and financial compliance costs and
will make some activities more time-consuming and costly. For example, we expect
these new rules and regulations to make it more difficult and more expensive for
us to obtain director and officer liability insurance, and we may be required to
incur substantial costs to maintain the same or similar coverage. In addition,
the Sarbanes-Oxley Act requires, among other things, that we maintain effective
internal controls for financial reporting and disclosure of controls and
procedures. In particular, commencing in fiscal 2008, we must perform system and
process evaluation and testing of our internal controls over financial reporting
to allow management and our independent registered public accounting firm to
report on the effectiveness of our internal controls over financial reporting,
as required by Section 404 of the Sarbanes-Oxley Act. Our testing, or the
subsequent testing by our independent registered public accounting firm, may
reveal deficiencies in our internal controls over financial reporting that are
deemed to be material weaknesses. Our compliance with Section 404 will require
that we incur substantial accounting expense and expend significant management
efforts. We currently do not have an internal audit group, and we will need to
hire additional accounting and financial staff with appropriate public company
experience and technical accounting knowledge. Moreover, if we are not able to
comply with the requirements of Section 404 in a timely manner, or if we or our
independent registered public accounting firm identifies deficiencies in our
internal controls over financial reporting that are deemed to be material
weaknesses, the market price of our stock could decline, and we could be subject
to sanctions or investigations by the SEC or other regulatory authorities, which
would require additional financial and management resources.





Government Regulation





We are
subject to a variety of federal, state and local governmental regulations. We
make every effort to comply with all applicable regulations through compliance
programs, manuals and personnel training. Despite these efforts, we cannot
guarantee that we will be in absolute compliance with all regulations at all
times. Failure to comply with applicable governmental regulations may result in
significant penalties, including exclusion from the Medicare and Medicaid
programs, which could have a material adverse effect on our business. We have
initiated certain purchasing and efficiency programs in the past. The most
important efficiency program we have instituted to date was entering into
contracts with our Host affiliates. By acquiring laboratory access from such
Host Affiliates, and acquiring the Host Affiliates help in billing and
collections from third party payers such as insurance companies and their
respective state-centered Medicaid
programs, we have also cut down our travel costs, and our costs of added staff
to invoice and collect receivables. Additionally, in an attempt to maximize our
efficiency, we modified our "just in time" inventorying of components for
prosthetic devices to allow sufficient time for us to send such components via
less expensive ground freight instead of higher priced overnight delivery.
Finally, we have instituted a ten day lead-time policy on our airline
reservations to achieve lower air-fares to our patients, when we are required to
travel across the country, except in cases of
emergencies.


-25-





HIPAA
Violations. The Health Insurance Portability and Accountability Act ("HIPAA")
provides for criminal penalties for, among other offenses, healthcare fraud,
theft or embezzlement in connection with healthcare, false statements related to
healthcare matters, and obstruction of criminal investigation of healthcare
offenses. Unlike the federal anti-kickback laws, these offenses are not limited
to federal healthcare programs. In addition, HIPAA authorizes the imposition of
civil monetary penalties where a person offers or pays remuneration to any
individual eligible for benefits under a federal healthcare program that such
person knows or should know is likely to influence the individual to order or
receive covered items or services from a particular provider, practitioner or
supplier. Excluded from the definition of "remuneration" are incentives given to
individuals to promote the delivery of preventive care (excluding cash or cash
equivalents), incentives of nominal value and certain differentials in or
waivers of coinsurance and deductible amounts. These laws may apply to certain
of our operations. Our billing practices could be subject to scrutiny and
challenge under HIPAA.





Physician
Self-Referral Laws. We are also subject to federal and state physician
self-referral laws. With certain exceptions, the federal Medicare/Medicaid
physician self-referral law (the "Stark II" law) (Section 1877 of the Social
Security Act) prohibits a physician from referring Medicare and Medicaid
beneficiaries to an entity for "designated health services" - including
prosthetic and orthotic devices and supplies - if the physician or the
physician's immediate family member has a financial relationship with the
entity. A financial relationship includes both ownership or investment interests
and compensation arrangements. A violation occurs when any person presents or
causes to be presented to the Medicare or Medicaid program a claim for payment
in violation of Stark II. With respect to ownership/investment interests, there
is an exception under Stark II for referrals made to a publicly traded entity in
which the physician has an investment interest if the entity's shares are traded
on certain exchanges, including the New York Stock Exchange, and had
shareholders' equity exceeding $75.0 million for its most recent fiscal year, or
an average of $75.0 million during the three previous fiscal years.




With
respect to compensation arrangements, there are exceptions under Stark II that
permit physicians to maintain certain business arrangements, such as personal
service contracts and equipment or space leases, with healthcare entities to
which they refer. We believe that our compensation arrangements comply with
Stark II, either because the physician's relationship fits within a regulatory
exception or does not generate prohibited referrals. Because we have financial
arrangements with physicians and possibly their immediate family members, and
because we may not be aware of all those financial arrangements, we must rely on
physicians and their immediate family members to avoid making referrals to us in
violation of Stark II or similar state laws. If, however, we receive a
prohibited referral without knowing that the referral was prohibited, our
submission of a bill for services rendered pursuant to a referral could subject
us to sanctions under Stark II and applicable state laws.





Certification
and Licensure. Most states do not require separate licensure for practitioners.
However, several states currently require practitioners to be certified by an
organization such as the American Board for Certification ("ABC"). Our
Prosthetists are certified by the State of Texas and by the ABC. When we fit
children in other States which have state licensure laws, we work, under the
supervision of licensed Prosthetists in those states.





The
American Board for Certification Orthotics and Prosthetics conducts a
certification program for practitioners and an accreditation program for
patient-care centers. The minimum requirements for a certified practitioner are
a college degree, completion of an accredited academic program, one to four
years of residency at a patient-care center under the supervision of a certified
practitioner and successful completion of certain examinations. Minimum
requirements for an accredited patient-care center include the
presence of a certified practitioner and specific plant and equipment
requirements. While we endeavor to comply with all state licensure requirements,
we cannot assure that we will be in compliance at all times with these
requirements. Failure to comply with state licensure requirements could result
in civil penalties, termination of our Medicare agreements, and repayment of
amounts received from Medicare for services and supplies furnished by an
unlicensed individual or entity.


-26-





Confidentiality
and Privacy Laws. The Administrative Simplification Provisions of HIPAA, and
their implementing regulations, set forth privacy standards and implementation
specifications concerning the use and disclosure of individually identifiable
health information (referred to as "protected health information") by health
plans, healthcare clearinghouses and healthcare providers that transmit health
information electronically in connection with certain standard transactions
("Covered Entities"). HIPAA further requires Covered Entities to protect the
confidentiality of health information by meeting certain security standards and
implementation specifications. In addition, under HIPAA, Covered Entities that
electronically transmit certain administrative and financial transactions must
utilize standardized formats and data elements ("the transactions/code sets
standards"). HIPAA imposes civil monetary penalties for non-compliance, and,
with respect to knowing violations of the privacy standards, or violations of
such standards committed under false pretenses or with the intent to sell,
transfer or use individually identifiable health information for commercial
advantage, criminal penalties.  The privacy standards and transactions/code
sets standards went into effect on April 16, 2003 and required compliance by
April 21, 2005. We believe that we are subject to the Administrative
Simplification Provisions of HIPAA and have taken steps necessary to meet
applicable standards and implementation specifications; however, these
requirements have had a significant effect on the manner in which we handle
health data and communicate with payors. Our added costs of complying with the
HIPAA requirements relate primarily to attaining the on-going educational
credits needed for our Prosthetists to remain current with the professional
standards of practice. These credits are achieved by attending work-shops and
seminars in various locations throughout North America. During fiscal year ended
June 30, 2007 we spent approximately $14,350 complying with these on-going
educational needs. However, since our original formation, we have been aware of
impending HIPAA regulations, and have set up our systems and procedures to
comply with HIPAA requirements in view of such regulations. As a result, added
costs due to compliance with HIPAA guidelines have been minimal and
immaterial.





In
addition, state confidentiality and privacy laws may impose civil and/or
criminal penalties for certain unauthorized or other uses or disclosures of
individually identifiable health information. We are also subject to these laws.
While we endeavor to assure that our operations comply with applicable laws
governing the confidentiality and privacy of health information, we could face
liability in the event of a use or disclosure of health information in violation
of one or more of these laws.





ITEM 3. CONTROLS AND
PROCEDURES





(a)
Evaluation of disclosure controls and procedures. Our Chief Executive Officer
and Principal Financial Officer, after evaluating the effectiveness of our
"disclosure controls and procedures" (as defined in the Securities Exchange Act
of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the quarterly period
covered by this Report (the "Evaluation Date"), have concluded that as of the
Evaluation Date, our disclosure controls and procedures were not effective to
provide reasonable assurance that information we are required to disclose in
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. Our controls were not effective, as our auditors discovered
significant adjustments relating to revenue recognition and derivative liability
valuation.  Moving forward, our management believes that as we become more
familiar and gain more experience in providing our outside auditors with the
required financial information on a timely basis, we will be able to file our
periodic reports within the time periods set forth by the Securities and
Exchange Commission.


(b)
Changes in internal control over financial reporting. There were no changes in
our internal control over financial reporting during our most recent fiscal
quarter that materially affected, or were reasonably likely to materially
affect, our internal control over financial reporting.






-27-


PART
II - OTHER INFORMATION





ITEM 1. LEGAL
PROCEEDINGS





We are
not aware of any pending or threatened legal proceeding to which we are a
party.





ITEM 2. CHANGES IN
SECURITIES





Between
July 23, 2007 and December 31, 2007, the Purchasers individually provided us
notice of their intention to convert an aggregate of approximately $97,716 of
principal of the May 30, 2006, Debentures into an aggregate of approximately
8,250,900 shares of our common stock (the “Shares”) based on Conversion Prices
of between $0.006 and $0.0126 per share, as of the date of each of the
Notices of Conversions.   We subsequently issued the Purchasers the
Shares, which Shares were registered by us on our Form SB-2 Registration
Statement declared effective by the Commission on July 20,
2007.





Between
January 1, 2008 and January 18, 2008, the Purchasers individually provided us
notice of their intention to convert an aggregate of approximately $4,207 of
principal of the May 30, 2006, Debentures into an aggregate of approximately
721,392 shares of our common stock (the “Shares”) based on a Conversion Price of
$0.006 per share, as of the date of each of the Notices of
Conversions.   We subsequently issued the Purchasers the Shares, which
Shares were registered by us on our Form SB-2 Registration Statement declared
effective by the Commission on July 20, 2007.





As a
result of the conversions, we owed an aggregate of approximately $1,398,078 to
the Purchasers in connection with the principal amount of the outstanding
Debentures as of February 12, 2008 (not including any accrued and unpaid
interest on such Debentures).





In
February 2008, the Company reissued its President, Linda Putback-Bean an
aggregate of 4,000,000 shares of the Company’s common stock which she cancelled
on or around September 30, 2005, to reduce the number of issued shares of the
Company and to increase the number of authorized but unissued shares of the
Company to allow the Company sufficient shares of common stock to pay various
consultants for services rendered. The shares were earned prior to their
original issuance in December 2004.  We claim an exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended,
for the above issuance, since the issuance did not involve a public offering,
the recipient took the securities for investment and
not resale and the Company took appropriate measures to restrict
transfer.
  ITEM 3. DEFAULTS UPON SENIOR
SECURITIES.





None.





ITEM 4. SUBMISSION OF
MATTERS TO A VOTE OF SECURITY HOLDERS





None.





ITEM 5. OTHER
INFORMATION





None.





-28-
 ITEM 6.
EXHIBITS
  (a)
EXHIBITS:





Exhibit Number
            Description of ExhibitExhibit
      3.1(A)
            Articles
      of Incorporation (Pediatric Prosthetics, Inc.-Texas) dated September 15,
      2003Exhibit
      3.2(4)
            Restated
      Articles of Incorporation of the Company  (March 9,
    2001)Exhibit
      3.3(4)
            Reinstatement
      (June 29, 2003)Exhibit
      3.4(A)
            Amendment
      to Articles of Incorporation of the Company (October 31,
    2003)Exhibit
      3.5(A)
            Amendment
      to Articles of Incorporation of the Company (November 7,
    2003)(Series
      A Convertible Preferred Stock Designation of Rights)Exhibit
      3.6(6)
            Amendment
      to Articles of Incorporation of the Company (March 15,
    2007)Exhibit
      3.7(4)
            Bylaws
      of the Company





Exhibit
      10.1(4)
            Sample
      Host Affiliate AgreementExhibit
      10.2(2)
            Settlement
      Agreement with Secured Releases, LLCExhibit
      10.3(3)
            Securities
      Purchase AgreementExhibit
      10.4(3)
            Callable
      Secured Convertible Note with AJW Offshore, Ltd.Exhibit
      10.5(3)
            Callable
      Secured Convertible Note with AJW Partners, LLCExhibit
      10.6(3)
            Callable
      Secured Convertible Note with AJW Qualified Partners,
  LLCExhibit
      10.7(3)
            Callable
      Secured Convertible Note with New Millennium Capital Partners II,
      LLCExhibit
      10.8(3)
            Stock
      Purchase Warrant with AJW Offshore, Ltd.Exhibit
      10.9(3)
            Stock
      Purchase Warrant with AJW Partners, LLCExhibit
      10.10(3)
            Stock
      Purchase Warrant with AJW Qualified Partners, LLCExhibit
      10.11(3)
            Stock
      Purchase Warrant with New Millennium Capital Partners II,
    LLCExhibit
      10.12(3)
            Security
      AgreementExhibit
      10.13(3)
            Intellectual
      Property Security AgreementExhibit
      10.14(3)
            Registration
      Rights AgreementExhibit
      10.15(4)
            Consulting
      Agreement with National Financial Communications
    Corp.Exhibit
      10.16(4)
            Warrant
      Agreement with Lionheart Associates, LLC doing business as Fairhills
      Capital


-29-





Exhibit
      10.17(4)
            Investor
      Relations Consulting Agreement with Joe GordonExhibit
      10.18(5)
            Waiver
      of Rights AgreementExhibit
      10.20(6)
            Kertes
      Convertible Note and WarrantExhibit
      10.21(6)
            Global
      Media AgreementExhibit
      10.22(7)
            Second
      Closing - Callable Secured Convertible Note with AJW Offshore,
      Ltd.Exhibit
      10.23(7)
            Second
      Closing - Callable Secured Convertible Note with AJW Partners,
      LLCExhibit
      10.24(7)
            Second
      Closing - Callable Secured Convertible Note with AJW Qualified Partners,
      LLCExhibit
      10.25(7)
            Second
      Closing - Callable Secured Convertible Note with New Millennium Capital
      Partners II, LLCExhibit
      10.26(8)
            Second
      Waiver of Rights AgreementExhibit
      10.27(9)
            Stock
      Purchase Warrant with AJW Offshore, Ltd.Exhibit
      10.28(9)
            Stock
      Purchase Warrant with AJW Partners, LLCExhibit
      10.29(9)
            Stock
      Purchase Warrant with AJW Qualified Partners, LLCExhibit
      10.30(9)
            Stock
      Purchase Warrant with New Millennium Capital Partners,
  LLCExhibit
      10.31(10)
            Third
      Closing - Callable Secured Convertible Note with AJW Offshore,
      Ltd.Exhibit
      10.31(10)
            Third
      Closing - Callable Secured Convertible Note with AJW Partners,
      LLCExhibit
      10.32(10)
            Third
      Closing - Callable Secured Convertible Note with AJW Qualified Partners,
      LLCExhibit
      10.33(10)
            Third
      Closing - Callable Secured Convertible Note with New Millennium Capital
      Partners II, LLCExhibit
      31.1*
            Certificate
      of the Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002Exhibit
      31.2*
            Certificate
      of the Principal Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002Exhibit
      32.1*
            Certificate
      of the Chief Executive Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002Exhibit
      32.2*
            Certificate
      of the Principal Financial Officer pursuant to Section 906 of the
      Sarbanes-Oxley Act of 2002


-30-











* Filed
Herein.





(A) Filed
as exhibits to our Form 10-SB, filed with the Commission on February 13, 2006,
and incorporated herein by reference.





(1) Filed
as an exhibit to our report on Form 8-K filed with the Commission on March 20,
2007, and incorporated herein by reference.





(2) Filed
as an exhibit to our quarterly report on Form 10-QSB, filed with the Commission
on July 5, 2006, and incorporated herein by reference.





(3) Filed
as exhibits to our report on Form 8-K, filed with the Commission on June 2,
2006, and incorporated herein by reference.





(4) Filed
as exhibits to our Form 10-SB, filed with the Commission on July 14, 2006, and
incorporated herein by reference.





(5) Filed
as an exhibit to our Form 10-KSB filed with the Commission on October 27, 2006,
and incorporated herein by reference.





(6) Filed
as exhibits to our Form SB-2 Registration Statement filed with the Commission on
February 9, 2007, and incorporated herein by reference.





(7) Filed
as exhibits to our report on Form 8-K filed with the Commission on February 26,
2007, and incorporated herein by reference.





(8) Filed
as an exhibit to our report on Form 8-K filed with the Commission on April 18,
2007, and incorporated herein by reference.





(9) Filed
as exhibits to our Form SB-2A Registration Statement filed with the Commission
on April 30, 2007, and incorporated herein by reference.





(10)
Filed as exhibits to our Form 8-K, filed with the Commission on August 1, 2007,
and incorporated herein by reference.





-31-


SIGNATURES





In
accordance with the requirements of the Exchange Act, the registrant caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.





PEDIATRIC PROSTHETICS,
INC.





DATED:
February 19, 2008





By: /s/ Kenneth W.
Bean


Kenneth
W. Bean


Chief
Financial Officer (Principal Accounting Officer)







-32-