UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period ended March 31, 2008

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

For the transition period from to

Commission File Number 000-52647

PERFORMANCE HEALTH TECHNOLOGIES, INC.

(Name of Small Business Issuer in Its Charter)


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

427 RIVERVIEW PLAZA, TRENTON, NEW JERSEY 08611

(Address of Principal Executive Offices) (Zip Code)

(609) 656-0800

(Issuer’s Telephone Number, Including Area Code)

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

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

Large accelerated filer o

Accelerated filer o

Smaller reporting company x

Non-accelerated filer o (Do no check if a smaller reporting company )

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

APPLICABLE ONLY TO CORPORATE ISSUERS

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

PERFORMANCE HEALTH TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, 2008

INDEX

		PAGE
	PART 1—FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS

	Balance Sheets	1

	Statements of Operations	2

	Statements of Cash Flows	3

	Notes to Financial Statements	4

ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION	25

ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	39

ITEM 4T.	CONTROLS AND PROCEDURES	39
	PART II—OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	39

ITEM 1A.	RISK FACTORS	39

ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	40

ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	42

ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	42

ITEM 5.	OTHER INFORMATION	42

ITEM 6.	EXHIBITS	42

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PERFORMANCE HEALTH TECHNOLOGIES, INC.

BALANCE SHEET

	March 31,2008			December 31,
	(unaudited)			2007
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents	$	12,702		$	35,559
Accounts Receivable		2,375			4,720
Inventory		25,311			26,866
Prepaid Expenses		125,658			116,732
Total Current Assets		166,046			183,877

FURNITURE & EQUIPMENT, net		7,388			8,572

OTHER ASSETS:
Debt Issuance Costs, net		228,567			297,591
Security Deposits		4,802			4,802
Total Other Assets		233,369			302,393

TOTAL ASSETS	$	406,803		$	494,842

LIABILITIES & STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES:
Accounts Payable	$	662,277		$	610,840
Accrued Salaries and Interest		342,875			335,740
Accrued Expenses		61,546			50,338
Accrued Interest - Convertible Notes		1,139,155			1,003,568
Non-Convertible Notes Payable		100,000			50,000
Convertible Notes Payable, Net of Debt Discount of $487,816 and $618,708 at March 31, 2008 and December 31, 2007, respectively

		4,636,262			3,538,370
Derivative Liability		2,817,264			2,993,069
Total Current Liabilities		9,759,379			8,581,925

CONVERTIBLE NOTES PAYABLE, Net of
Debt Discount of $134,609 and $242,244, respectively		1,490,391			2,194,756

STOCKHOLDERS’ DEFICIT:
Common Stock, $0.01 Par Value, 500,000,000 Shares Authorized,
53,751,822 and 53,184,604 Shares Issued and Outstanding
at March 31, 2008 and December 31, 2007, respectively		537,519			531,847
Paid-in Capital		15,233,763			15,026,813
Accumulated Deficit		(26,614,249	)		(25,840,499	)
Total Stockholders’ Deficit		(10,842,967	)		(10,281,839	)
TOTAL LIABILITIES & STOCKHOLDERS’
DEFICIT	$	406,803		$	494,842

See Notes to Financial Statements

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PERFORMANCE HEALTH TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended
	March 31,			March 31,
	2008			2007

SALES, net	$	9,440		$	589

COST OF SALES		2,814			—

GROSS PROFIT		6,626			589

OPERATING EXPENSES:
General and Administrative		400,088			764,792
Sales and Marketing		51,224			25,382
Research and Development		6,564			21,861

TOTAL OPERATING EXPENSES		457,876			812,035

LOSS FROM OPERATIONS		(451,250	)		(811,446	)

OTHER INCOME (EXPENSES):
Interest Income		13			6
Interest Expense		(472,761	)		(741,877	)
Amortization - Debt Issuance Costs		(87,236	)		(152,262	)
Gain on Derivative Liability		238,007			368,034

TOTAL OTHER INCOME (EXPENSES)		(321,977	)		(526,099	)

LOSS BEFORE PROVISION FOR TAXES		(773,227	)		(1,337,545	)

PROVISION FOR TAXES		(520	)		(800	)

NET LOSS	$	(773,747	)	$	(1,338,345	)

NET LOSS PER COMMON SHARE - BASIC AND DILUTED	$	(0.01	)	$	(0.03	)
Weighted Average Number of Shares		53,390,852			44,702,852

See Notes to Financial Statements

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PERFORMANCE HEALTH TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Three Months Ended
	March 31, 2008			March 31, 2007

Cash flows from operating activities
Net loss	$	(773,747	)	$	(1,338,345	)

Adjustments to reconcile net loss to net cash
used by operating activities:
Non cash interest expense		323,830			596,747
Non cash consulting expense		9,928			220,800
Non cash stock based compensation		69,521			224,489
Depreciation and amortization		88,421			154,214
Gain on derivative liability		(238,007	)		(368,034	)
(Increase) decrease in accounts receivable		2,345			—
(Increase) decrease in inventories		1,555			(2,070	)
(Increase) decrease in other assets		—			3,271
(Increase) decrease in prepaid expenses		(18,854	)		(87,160	)
Increase (decrease) in accounts payable		46,974			118,021
Increase (decrease) in accrued liabilities		9,635			14,407
Increase (decrease) in interest payable		144,292			137,545

Total adjustments		439,640			1,012,230

Net cash provided (used) by operating activities		(334,107	)		(326,115	)

Cash flows from investing activities:
Cash payments for the purchase of equipment		—			(2,940	)

Net cash (used) by investing activities		—			(2,940	)

Cash flows from financing activities:
Net proceeds from issuance of convertible notes		261,250			240,520
Net proceeds from short term notes		50,000			—

Net cash provided by financing activities		311,250			240,520


Net (decrease) in cash and equivalents		(22,857	)		(88,535	)
Cash and equivalents, beginning of period		35,559			206,725

Cash and equivalents, end of period	$	12,702		$	118,190

Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest expense	$	4,583		$	9,816
Income tax	$	—		$	800

See Notes to Financial Statements

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PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

Organization

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

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

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

Revenue and Cost Recognition

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

Income Taxes

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

Use of Estimates

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

Fair Value of Financial Instruments

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

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PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Property and Equipment

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

Equipment & Computers 3-5 years

Long Lived Assets

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

Inventory

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

Cash and Cash Equivalents

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

Advertising

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

Debt Issuance Costs

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

Research and Development Costs

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

Employee Stock Options

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

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PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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

Estimating the Fair Market Value of our Common Stock

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

Deferred Offering Costs

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

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

Recent Accounting Pronouncements

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

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

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

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PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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

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

NOTE 2 – PROPERTY, PLANT AND EQUIPMENT:

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

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

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

NOTE 3 – DEBT ISSUANCE COSTS:

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

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PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

Debt issuance costs consisted of the following:

	March 31, 2008			December 31, 2007
2003/2004 Private Placement	$	930,476		$	930,476
2005 Bridge Loan A		200,048			200,048
2005 Bridge Loan B		274,114			274,114
2006 Bridge Loans		234,300			234,300
2007 Bridge Loans		248,719			248,719
2008 Bridge Loans		18,213			—
Total Debt Issuance Costs		1,905,870			1,887,657

Less: Accumulated Amortization		(1,677,303	)		(1,590,066	)
	$	228,567		$	297,591

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

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

NOTE 4 –NOTES:

Convertible Notes

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

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

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PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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

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

- 11 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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

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

- 12 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

- 13 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

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

- 14 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

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

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

- 15 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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

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

Non-Convertible Notes

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

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

Maturities of debt are as follows:

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

- 16 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

The derivative liability consists of the following:

Date	Description	Balance
12/31/06	Conversion option 2006 Bridge Loans at fair market value	$	602,341
12/31/06	Warrant liability on 2005 Bridge Loans at fair market value		331,122
12/31/06	Warrant liability on 2006 Bridge Loans issuance at fair market value		854,621
12/31/06	Warrant liability on 2006 advisory contract at fair market value		712,000
12/31/07	Conversion option on 2006 Bridge Loans issued during 2007		13,920
12/31/07	Warrant liability on 2006 Bridge Loans issued during 2007		187,752
12/31/07	Conversion option on 2007 Bridge Loans		259,116
12/31/07	Warrant liability on 2007 Bridge Loans		768,977
12/31/07	Warrant liability on 2007 advisory contract at fair market value		34,750
12/31/07	Fair market value adjustment on the 2006 advisory contract		(140,000	)
12/31/07	Fair market value adjustment on conversion options		(99,207	)
12/31/07	Fair market value adjustment on warrant liabilities		(528,823	)
12/31/07	Fair market value adjustment on the 2007 advisory contract		(3,500	)
03/31/08	Conversion option on 2008 Bridge Loans		14,627
03/31/08	Warrant liability on 2008 Bridge Loans		47,575
03/31/08	Fair market value adjustment on the 2006 advisory contract		(20,000	)
03/31/08	Fair market value adjustment on conversion options		(161,682	)
03/31/08	Fair market value adjustment on warrant liabilities		(56,325	)

Total		$	2,817,264

NOTE 5 – ACCRUED SALARIES AND INTEREST:

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

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

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

NOTE 6 – PROVISION FOR INCOME TAXES:

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

- 17 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

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

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

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

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

Year Ending December 31,
12/31/19	$	1,101,282
12/31/20		2,862,191
12/31/21		1,032,226
12/31/22		2,036,114
12/31/23		2,099,394
12/31/24		2,675,931
12/31/25		2,723,509
12/31/26		4,633,098
12/31/27		5,050,604
	$	24,214,349

NOTE 7 – CONCENTRATION OF CREDIT RISK:

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

- 18 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 8 – CASH FLOW DISCLOSURES:

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

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

NOTE 9 – 401K AND PROFIT SHARING PLAN:

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

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

NOTE 10 – RELATED PARTY TRANSACTIONS:

Consulting

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

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

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

NOTE 11 – STOCK OPTION PLAN:

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

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

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PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

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

	Number		Weighted
	Of		Average
	Shares		Exercise
			Price
Outstanding at December 31, 2007		11,205,333	$	0.25

Granted		1,161,999	$	0.30
Exercised		—		—
Canceled		—		—
Outstanding at December 31, 2007		12,367,332	$	0.26

Granted		—		—
Exercised		—		—
Canceled		—		—
Outstanding at March 31 2008		12,367,332		0.26

Exercisable at March 31, 2008		10,210,324	$	0.26
Exercisable at December 31, 2007		9,750,658	$	0.25

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PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

NOTE 12 – STOCKHOLDERS’ EQUITY:

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

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

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

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

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

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

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

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PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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

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

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

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

Warrants

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

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

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

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PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

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

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

NOTE 13 - EARNINGS (LOSS) PER SHARE:

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

NOTE 14 – LEASING ARRANGEMENTS:

Trenton, New Jersey Facility

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

NOTE 15 – OFFICERS AND DIRECTORS:

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

NOTE 16 – COMMITMENTS, CONTINGENCIES AND UNCERTAINTIES:

Going Concern

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

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PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

(Unaudited)

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

NOTE 17 – SUBSEQUENT EVENTS:

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

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

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

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

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

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PERFORMANCE HEALTH TECHNOLOGIES, INC.
NOTES TO FINANCIAL STATEMENTS

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

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

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

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

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

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

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

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

GENERAL

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

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

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

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

- 26 -

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

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED MARCH 31, 2008 COMPARED TO

THREE MONTHS ENDED MARCH 31, 2007

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

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

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

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

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

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

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

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

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

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

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

LIQUIDITY AND FINANCIAL CONDITION

GENERAL

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

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Our debt at March 31, 2008 was as follows:

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

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

FINANCING TRANSACTIONS

GENERAL

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

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

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

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

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

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

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

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

AGREEMENTS WITH PLACEMENT AGENTS AND FINDERS

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

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

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

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

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

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

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

MANAGEMENT’S PLANS TO OVERCOME OPERATING AND LIQUIDITY DIFFICULTIES

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

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

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

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

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

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

SALES ACTIVITIES AND PRODUCT DEVELOPMENT

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

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

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

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

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

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

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

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

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

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

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

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

GOING CONCERN MATTERS

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

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

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

CRITICAL ACCOUNTING POLICIES

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

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

REVENUES

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

USEFUL LIVES OF TANGIBLE AND INTANGIBLE ASSETS

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

IMPAIRMENT OF LONG-LIVED ASSETS

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

INCOME TAXES

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

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

CONVERTIBLE SECURITIES WITH CONVERSION FEATURES

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

ESTIMATING THE FAIR MARKET VALUE OF OUR COMMON STOCK

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

RISK FACTORS

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

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

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

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

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

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

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

MARKET INFORMATION AND OTHER MATTERS

Market Information

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

Authorized and Outstanding Shares

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

Stock Options

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

Warrants

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

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Convertible Notes

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

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

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

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

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

ITEM 4T.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

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

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

Changes in Internal Controls

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

PART II.

OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS

None.

ITEM 1A.

RISK FACTORS

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

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ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

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

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

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

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

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.

SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS

None.

ITEM 5.

OTHER INFORMATION

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

ITEM 6.

EXHIBITS

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

10.111

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

10.112

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

10.113

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

10.114

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

10.115

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

10.116

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

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10.117

Warrant Amendment issued in 2008 B private placement (1)

10.118

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

10.119

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

10.120

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

10.121

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

10.122

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

10.123

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

10.124

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

10.125

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

10.126

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

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

31.2

Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 +

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

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

______________________

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

+	Exhibit filed herewith in this Report.

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SIGNATURES

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


	PERFORMANCE HEALTH TECHNOLOGIES, INC.
Date: May 20, 2008
	BY:	/s/ Robert D. Prunetti
		Robert D. Prunetti, President and Chief Executive Officer
		(Principal Executive Officer)


	BY:	/s/ James E. Bartolomei
		James E. Bartolomei, Chief Financial Officer
		(Principal Financial and Accounting Officer)

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PERFORMANCE HEALTH TECHNOLOGIES INC 10-Q