UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 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.

(Exact name of Registrant as Specified in Its Charter)

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

427 RIVERVIEW PLAZA, TRENTON, NEW JERSEY 08611

(Address of Principal Executive Offices) (Zip Code)

(609) 656-0800

(Registrant’s Telephone Number, Including Area Code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 accelerated 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
Non-accelerated filer o (Do no check if a smaller reporting company)		Smaller reporting company x

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

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of November 10, 2008, 67,746,493 shares of common stock.

PERFORMANCE HEALTH TECHNOLOGIES, INC.

FORM 10-Q

FOR THE QUARTER ENDED SEPTEMBER 30, 2008

INDEX

		PAGE
	PART 1—FINANCIAL INFORMATION
ITEM 1.	FINANCIAL STATEMENTS

	Balance Sheet	2

	Statements of Operations	4

	Statements of Cash Flows	5

	Notes to Financial Statements	6


ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	44


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	60


ITEM 4.	CONTROLS AND PROCEDURES	60
	PART II—OTHER INFORMATION
ITEM 1.	LEGAL PROCEEDINGS	61


ITEM 1A.	RISK FACTORS	61


ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	61


ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	62


ITEM 4.	SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	62


ITEM 5.	OTHER INFORMATION	62


ITEM 6.	EXHIBITS	63

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PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS.

PERFORMANCE HEALTH TECHNOLOGIES, INC.

BALANCE SHEETS


	September 30,		December 31,
	2008		2007*
	(unaudited)

ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents	$	29,536	$	35,559
Accounts Receivable		—		4,720
Inventory		24,469		26,866
Prepaid Expenses		169,581		116,732

Total Current Assets		223,586		183,877


FURNITURE & EQUIPMENT, net		5,614		8,572


OTHER ASSETS:
Debt Issuance Costs, net		71,667		297,591
Security Deposits		4,802		4,802

Total Other Assets		76,469		302,393


TOTAL ASSETS	$	305,669	$	494,842

*Derived from audited financial statements for the year ended December 31, 2007 (see Form 10-KSB Annual Report filed on April 15, 2008 with the Securities and Exchange Commission).

See Notes to Financial Statements

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	September 30,			December 31,
	2008			2007*
	(unaudited)
LIABILITIES & STOCKHOLDERS’ DEFICIT

CURRENT LIABILITIES:
Accounts Payable	$	787,999		$	610,840
Accrued Salaries and Interest		357,144			335,740
Accrued Expenses		107,324			50,338
Accrued Interest - Non-Convertible Notes		38,675			—
Accrued Interest - Convertible Notes		837,246			1,003,568
Non-Convertible Notes Payable, Net of Debt
Discount of $222,369 and $0 at September 30, 2008
and December 31, 2007, respectively		663,781			50,000
Convertible Notes Payable, Net of Debt
Discount of $64,945 and $618,708 at September 30, 2008
and December 31, 2007, respectively		4,058,270			3,538,370
Derivative Liability		5,745,886			2,993,069

Total Current Liabilities		12,596,325			8,581,925

CONVERTIBLE NOTES PAYABLE, Net of Debt
Discount of $0 and $242,244 at September 30, 2008
and December 31, 2007, respectively		—			2,194,756


STOCKHOLDERS’ DEFICIT:
Common Stock, $0.01 Par Value, 500,000,000 Shares Authorized,
67,188,638 and 53,184,604 Shares Issued and Outstanding
at September 30, 2008 and December 31, 2007, respectively		671,887			531,847
Paid-in Capital		20,668,217			15,026,813
Accumulated Deficit		(33,630,760	)		(25,840,499	)

Total Stockholders’ Deficit		(12,290,656	)		(10,281,839	)
TOTAL LIABILITIES & STOCKHOLDERS’
DEFICIT	$	305,669		$	494,842

*Derived from audited financial statements for the year ended December 31, 2007 (see Form 10-KSB Annual Report filed on April 15, 2008 with the Securities and Exchange Commission).

 
 
 
 
 
 
 
 
 
See Notes to Financial Statements

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PERFORMANCE HEALTH TECHNOLOGIES, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

	For the Three Months Ended						For the Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2008			2007			2008			2007



SALES, net	$	2,723		$	—		$	12,163		$	589

COST OF SALES		842			—			3,656			—


GROSS PROFIT		1,881			—			8,507			589

OPERATING EXPENSES:
General and Administrative		433,021			604,867			1,220,572			2,383,354
Sales and Marketing		50,324			60,420			141,396			115,197
Research and Development		6,414			15,759			19,378			67,509

TOTAL OPERATING EXPENSES		489,759			681,046			1,381,346			2,566,060


LOSS FROM OPERATIONS		(487,878	)		(681,046	)		(1,372,839	)		(2,565,471	)

OTHER INCOME (EXPENSES):
Interest Income		12			12			82			27
Interest Expense		(428,712	)		(453,202	)		(1,511,988	)		(1,980,256	)
Amortization - Debt Issuance Costs		(159,541	)		(76,774	)		(372,798	)		(298,654	)
Gain (Loss) on Derivative Liability		(4,703,294	)		122,770			(4,532,060	)		579,554

TOTAL OTHER INCOME (EXPENSES)		(5,291,535	)		(407,194	)		(6,416,764	)		(1,699,329	)

LOSS BEFORE PROVISION FOR TAXES		(5,779,413	)		(1,088,240	)		(7,789,603	)		(4,264,800	)

PROVISION FOR TAXES		—			(986	)		(655	)		(2,587	)


NET LOSS	$	(5,779,413	)	$	(1,089,226	)	$	(7,790,258	)	$	(4,267,387	)



NET LOSS PER COMMON SHARE - BASIC AND DILUTED	$	(0.10	)	$	(0.02	)	$	(0.14	)	$	(0.09	)
Weighted Average Number of Shares		59,258,776			48,649,764			55,871,302			48,544,918

See Notes to Financial Statements

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PERFORMANCE HEALTH TECHNOLOGIES, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

	For the Nine Months Ended
	September 30,			September 30,
	2008			2007

Cash flows from operating activities
Net loss	$	(7,790,258	)	$	(4,267,387	)

Adjustments to reconcile net loss to net cash provided
(used) by operating activities:
Non cash interest expense		1,562,852			1,605,718
Non cash consulting expense		26,474			299,364
Non cash stock based compensation		242,424			658,202
Depreciation and amortization		375,756			304,498
(Gain) Loss on derivative liability		4,532,060			(579,554	)
Decrease in deferred offering costs		—			333,704
(Increase) decrease in accounts receivable		4,720			—
(Increase) decrease in inventories		2,397			(27,544	)
(Increase) decrease in other assets		—			3,271
(Increase) in prepaid expenses		(66,223	)		(197,501	)
Increase in accounts payable		172,696			333,946
Increase in accrued liabilities		9,250			79,480
Increase (decrease) in interest payable		(58,510	)		333,099

Total adjustments		6,803,896			3,146,683

Net cash provided (used) by operating activities		(986,362	)		(1,120,704	)


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

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

Cash flows from financing activities:
Net proceeds from issuance of convertible notes		261,250			1,058,641
Net proceeds from issuance of non-convertible notes		719,089			—
Net proceeds from short term notes		50,000			—
Principal payments on short term notes		(50,000	)		—

Net cash provided by financing activities		980,339			1,058,641


Net (decrease) in cash and equivalents		(6,023	)		(65,003	)
Cash and equivalents, beginning of period		35,559			206,725

Cash and equivalents, end of period	$	29,536		$	141,722


Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest expense	$	7,643		$	37,248
Income tax	$	520		$	2,587

See Notes to Financial Statements

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PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

Note 1 – Summary of Significant Accounting Policies:

Organization

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

On July 13, 2007, we became a reporting company under the Securities Exchange Act of 1934. Our common stock commenced trading on the OTC Bulletin Board on August 8, 2008.

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary in order to make the interim financials not misleading have been included and all such adjustments are of normal recurring nature. The operating results for the three and nine months ended September 30, 2008 are not necessarily indicative of the results that can be expected for the year ending December 31, 2008.

Revenue and Cost 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.

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PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

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 September 30, 2008 and December 31, 2007. The carrying amounts of cash and cash equivalents, accounts payable, accrued expenses and short-term notes payable approximate fair value due to the short-term nature of the instruments. Long-term liabilities are comprised of the convertible notes which approximate fair value based on borrowing rates available to the Company.

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

Inventory

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

Cash and Cash Equivalents

For purposes of the Statements of Cash Flows, all highly liquid investments with a maturity of three months or less are included in cash equivalents. As of September 30, 2008, cash and cash equivalents included $25,001 of cash held in commercial banks, petty cash fund of $250, and $4,285 of money market securities. As of December 31, 2007, cash and cash equivalents included $31,060 of cash held in commercial banks, petty cash fund of $250, and $4,249 of money market securities.

- 7 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

Advertising

The Company expenses advertising costs as they are incurred. Advertising expense for the three and nine months ended September 30, 2008 amounted to $8,300 and $17,450, respectively. Advertising expense for the three and nine months ended September 30, 2007 amounted to $3,004 and $11,471, respectively.

Research and Development Costs

Expenses for research and development are charged to expense when incurred. The total amount of research and development expenses incurred during the three and nine months ended September 30, 2008 amounted to $6,414 and $19,378, respectively. The total amount of research and development expenses incurred during the three and nine months ended September 30, 2007 amounted to $15,579 and $67,509, respectively

Employee Stock Options

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

Beginning in the 2006 calendar year, with the adoption of SFAS 123R, the Company included stock-based compensation in general and administrative expenses for the cost of stock options. Stock based compensation expense for the three and nine months ended September 30, 2008 was $103,303 and $242,424, respectively. Stock based compensation expense for the three and nine months ended September 30, 2007 was $264,931 and $658,202, respectively.

- 8 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

No stock options were exercised during the three and nine months ended September 30, 2008 and 2007.

Estimating the Fair Market Value of our Common Stock

The fair market value of our common stock is a significant estimate used in determining the value of our various equity related instruments (options, warrants, conversion features, etc.). In determining the fair market value of our stock we consider such things as the most recent equity transaction, changes in the Company’s financial position, progressions in product development and the effects of dilutive debt conversions. Our common stock commenced trading on the OTC Bulletin Board on August 8, 2008.

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.

- 9 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS No. 141R”), Business Combinations, which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No. 141R is not expected to have a material effect on the Company’s financial statements.

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

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

- 10 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets.” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 applies prospectively to intangible assets that are acquired, individually or with a group of other assets, after the effective date in either a business combination or asset acquisition. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the impact of adopting FSP. 142-3 on its financial statements.

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS 162”). SFAS 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. It is effective 60 days following the Securities and Exchange Commission’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The adoption of SFAS 162 is not expected to have a material effect on the Company’s financial statements.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts - An interpretation of FASB Statement No. 60” (“SFAS 163”). SFAS No. 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities, and requires expanded disclosures about financial guarantee insurance contracts. It is effective for financial statements issued for fiscal years beginning after December 15, 2008, except for some disclosures about the insurance enterprise’s risk-management activities. SFAS No. 163 requires that disclosures about the risk-management activities of the insurance enterprise be effective for the first period beginning after issuance. Except for those disclosures, earlier application is not permitted. The adoption of SFAS No. 163 is not expected to have a material effect on the Company’s financial statements.

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PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

In May 2008, the FASB issued Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP APB 14-1”). FSP APB 14-1 states that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of Accounting Principles Board Opinion No. 14 and that issuers of such instruments should account separately for the liability and equity components of the instruments in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. FSP APB 14-1 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and must be applied retrospectively to all periods presented. The Company is currently evaluating the impact that FSP APB 14-1 will have on its financial statements

In June 2008, the FASB issued FASB Staff Position (“FSP”) EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF No. 03-6-1”). FSP EITF No. 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings per Share”. FSP EITF No. 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. FSP EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. The adoption of FSP EITF No. 03-6-1 is not expected to have a material effect on the Company’s financial statements.

Note 2 – Property, Plant and Equipment:

Property, plant and equipment as of September 30, 2008 and December 31, 2007 are as follows:

	September 30, 2008			December 31, 2007
Equipment and Computers	$	52,568		$	52,568
Less: Accumulated depreciation		(46,954	)		(43,996	)

	$	5,614		$	8,572

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PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

Depreciation expense charged to income for three and nine months ended September 30, 2008 amounted to $ 824 and $ 2,958, respectively.

Depreciation expense charged to income for three and nine months ended September 30, 2007 amounted to $ 1,754 and $5,844, respectively.

Note 3 – Debt Issuance Costs:

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

Debt issuance costs consisted of the following:

	September 30, 2008			December 31, 2007
2003/2004 Private Placement	$	930,476		$	930,476
2005 Bridge Loan A		200,048			200,048
2005 Bridge Loan B		274,114			274,114
2006 Bridge Loans		234,300			234,300
2007 Bridge Loans		248,719			248,719
2008 Bridge Loans		146,874			—

Total Debt Issuance Costs		2,034,531			1,887,657

Less: Accumulated
Amortization		(1,962,864	)		(1,590,066	)

	$	71,667		$	297,591

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

- 13 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

Amortization expense charged to income for the three and nine months ended September 30, 2008 amounted to $ 159,542 and $ 372,798, respectively.

Amortization expense charged to income for the three and nine months ended September 30, 2007 amounted to $ 76,774 and $298,654, respectively.

Note 4 –Notes:

Convertible Notes:

The Company accounts for the value of warrants and the intrinsic value of beneficial conversion rights arising from the issuance of convertible debt instruments with nondetachable conversion rights that are in-the-money at the commitment date pursuant to EITF Issue. 98-5, EITF Issue No. 00-19 and EITF Issue No. 00-27. Such values are determined by first allocating an appropriate portion of the proceeds received from the debt instruments to the warrants or any other detachable instrument included in the exchange. The intrinsic value of the beneficial conversion rights at the commitment date may also be recorded as additional paid-in capital and debt discount as of that date or, if the terms of the debt instrument are contingently adjustable, may only be recorded if a triggering event occurs and the contingency is resolved. Since the conversion rights associated with the convertible notes were initially exercisable into an indeterminable number of common shares, the Company has determined that under the guidance of EITF 00-19, the Company could not conclude that it had sufficient authorized and unissued shares to net-share settle any warrants or options issued to non-employees. Therefore, as of September 30, 2008, the Company had classified the fair value of all warrants and conversion features as a derivative liability.

In January and February 2008, the Company sold $275,000 of equity units (“2008 A Units”) in a private placement. Each 2008 A Unit consists of an unsecured convertible promissory note in the principal amount of $1,000 (the “2008 A Notes”) and 2,000 warrants (the “Warrants”) to purchase one share of Company common stock. The 2008 A Notes bear interest at 10% per annum and will mature 180 days from the date of issuance (the “Maturity Date”). The 2008 A Notes were extended until November 30, 2008. The 2008 A Notes are convertible

- 14 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

into shares of Company common stock at a price equal to 80% of the average of the closing bid price for our common stock for the 20 days preceding the Conversion Notice, as reported by the exchange on which our common stock is then traded but in any event not less than $0.40 (the “Conversion Price”). The 2008 A Notes may be redeemed by the Company, upon ten trading days prior notice, during which time the Noteholder may convert the 2008 A Notes into Company common stock. The Notes will be redeemed by the Company on the 20th day after the Mandatory Redemption Event (as herein defined) at a redemption price equal to 100% the principal amount of Notes to be redeemed plus accrued and unpaid interest upon ten trading days prior notice, during which time the Noteholder may convert the Notes into Company common stock (“Mandatory Redemption”). The Mandatory Redemption Event will be the date on which the Company has closed on aggregate gross equity financings of $1 million prior to the Maturity Date. If the 2008 A Notes have not been redeemed or converted as of the Maturity Date, the principal and interest due thereunder will be paid by the Company in shares of Company common stock valued at the then applicable Conversion Price. Sixty days of pre-paid interest was paid by the Company at the time of closing along with an origination fee of 5% of the principal of the 2008 A Notes purchased. The exercise price is $1.00 for 1,000 of the Warrants and $1.50 per share for the remaining 1,000 Warrants. On March 26, 2008, 200,000 of the Warrants with an original exercise price of $1.00 were reduced to $0.30. (See 2008 Note B) The Warrants will be exercisable for a period of five years from the date of issuance. In August 2008, the Company reduced the exercise price from $1.50 to $.50 for 275,000 Warrants in exchange for the extension of the maturity date of the Note and/or for additional loans made to us by the holders of the adjusted warrants in connection with our 2008 C Unit and 2008 D Unit financings. The shares issuable upon conversion of the Notes and exercise of the Warrants have piggyback registration rights. There is no penalty provision in the event we do not register such shares. The conversion feature and the warrants were valued using a Black Scholes Option Pricing Model, utilizing the following assumptions: Volatility: 78.0%, Straight Bond Yield: 5.0%, Risk-Free Rate: 4.7%, and Dividend Growth Rate: 0%. The warrants were detached and accounted for as a derivative liability. The warrants were recorded as a discount of $47,575 which is being amortized over the life of the convertible note. As of September 30, 2008, there was $275,000 in principal of the 2008 A Notes outstanding.

- 15 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

From August 15, 2007 through November 30, 2007, the Company sold $656,000 of equity units (“2007 F Units”) in a private placement. Each 2007 F Unit consists of an unsecured convertible promissory note in the principal amount of $1,000 (the “2007 F Notes”) and 4,000 warrants (the “Warrants”) to purchase one share of Company common stock. The 2007 F Notes bear interest at 10% per annum and will mature one year from the date of issuance (the “Maturity Date”). $333,700 of the 2007 F Units matured during the third quarter 20008. $77,200 of the units were extended until November 30, 2008 and $256,500 of the 2007 F Notes were extended until December 31, 2008 and/or for additional loans made to us by the holders of the adjusted warrants in connection with our 2008 C Unit and 2008 D Unit financings. The 2007 F Notes are convertible into shares of Company common stock at a price equal to the lesser of (i) $0.75 or (ii) 70% of the average of the closing bid price for our common stock for the 20 days preceding the Conversion Notice, as reported by the exchange on which our common stock is then traded but in any event not less than $0.30 (the “Conversion Price”). The 2007 F Notes may be redeemed by the Company, upon ten trading days prior notice, during which time the Noteholder may convert the 2007 F Notes into Company common stock. If the 2007 F Notes have not been redeemed or converted as of the Maturity Date, the principal and interest due thereunder will be paid by the Company in shares of our common stock valued at the then applicable Conversion Price. The exercise price is $0.75 for 2,000 of the Warrants and $1.50 per share for the remaining 2,000 Warrants. (See 2008 Note B) On March 26, 2008, 150,000 of the Warrants with an original exercise price of $1.50 were reduced to $0.50. In August 2008, the Company reduced the exercise price from $.75 to $.25 for 50,000 Warrants, from $1.50 to $.50 for 711,600 Warrants and from $1.50 to .30 for 50,000 Warrants in exchange for the extension of the maturity date of the Note and/or for additional loans made to us by the holders of the adjusted warrants in connection with our 2008 C Unit and 2008 D Unit financings. The Warrants will be exercisable for a period of five years from the date of issuance. The shares issuable upon conversion of the Notes and exercise of the Warrants have piggyback registration rights. There is no penalty provision in the event we do not register such shares. The conversion feature and the warrants were valued using a Black Scholes Option Pricing Model, utilizing the following assumptions: Volatility: 78.0%-82.0%, Straight Bond Yield: 5.0%, Risk-Free Rate: 4.7%, and Dividend Growth Rate: 0%. The warrants were detached and accounted for as a derivative liability. The warrants were recorded as a discount of $ 258,002 which is being amortized over the life of the convertible note. As of September 30, 2008, there was $606,000 in principal of the 2007 F Notes outstanding.

On June 27, 2007, the Company sold $250,000 of equity units (“2007 E Units”) in a private placement. Each 2007 E Unit consists of an unsecured convertible promissory note in the principal amount of $1,000 (the “2007 E Notes”) and 4,000 warrants (the “Warrants”) to purchase one share of our common stock. The 2007 E Notes bear interest at 10%

- 16 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

per annum and will mature one year from the date of issuance (the “Maturity Date”). The principal balance of the 2007 E Note, along with accrued and unpaid interest, was payable on June 27, 2008. The 2007 E Note was extended until November 30, 2008. The 2007 E Notes are convertible into shares of our common stock at a price equal to the lesser of (i) $0.75 or (ii) 70% of the average of the closing bid price for our common stock for the 20 days preceding the Conversion Notice, as reported by the exchange on which our common stock is then traded but in any event not less than $0.30 (the “Conversion Price”). The 2007 E Notes may be redeemed by us once the Company is a reporting Company under the Exchange Act, upon ten trading days prior notice, during which time the Noteholder may convert the 2007 E Notes into our common stock. If the 2007 E Notes have not been redeemed or converted as of the Maturity Date, the principal and interest due thereunder will be paid by us in shares of our common stock valued at the then applicable Conversion Price. The exercise price is $0.75 for 2,000 of the Warrants and $1.50 per share for the remaining 2,000 Warrants. In August 2008, the Company reduced the exercise price from $.75 to $.25 for 90,000 Warrants, from $1.50 to $.50 for 330,000 Warrants and from $1.50 to .30 for 90,000 Warrants in exchange for the extension of the maturity date of the Note and/or for additional loans made to us by the holders of the adjusted warrants in connection with our 2008 C Unit and 2008 D Unit financings. The Warrants will be exercisable for a period of five years from the date of issuance. The shares issuable upon conversion of the Notes and exercise of the warrants have piggyback registration rights. There is no penalty provision in the event we do not register such shares. The conversion feature and the stock purchase warrants were valued using a Black Scholes Option Pricing Model using the following assumptions: Volatility: 82%, Straight Bond Yield: 5.0%, Risk-free Rate: 4.7% and Dividend Growth Rate: 0. The warrants were detached and accounted for as a derivative liability. The warrants were recorded as a discount of $ 102,500 which is being amortized over the life of the convertible note. As of September 30, 2008, there was $240,000 in principal of the 2007 E Notes outstanding.

On June 15, 2007, the holders of $300,000 of principal of our non-convertible 2006 E Notes, 2006 F Notes and 2007 B Notes exchanged principal and interest due thereunder for $315,000 of equity units (“2007 D Units”) in a private exchange transaction. Each 2007 D Unit consists of an unsecured convertible promissory note in the principal amount of $1,000 (the “2007 D Notes”) and 4,000 warrants (the “Warrants”) to purchase one share of our common stock. The 2007 D Notes bear interest at 10% per annum and will mature one year from the date of issuance (the “Maturity Date”). The principal balance of the 2007 D Note, along with accrued and unpaid interest, was payable on June 15,

- 17 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

2008. The 2007 D Note was extended until November 30, 2008. The 2007 D Notes are convertible into shares of our common stock at a price equal to the lesser of (i) $0.75 or (ii) 70% of the average of the closing bid price for our common stock for the 20 days preceding the Conversion Notice, as reported by the exchange on which our common stock is then traded but in any event not less than $0.30 (the “Conversion Price”). The 2007 D Notes may be redeemed by us once the Company is a reporting company under the Exchange Act, upon ten trading days prior notice, during which time the Noteholder may convert the 2007 D Notes into our common stock. If the 2007 D Notes have not been redeemed or converted as of the Maturity Date, the principal and interest due thereunder will be paid by us in shares of our common stock valued at the then applicable Conversion Price. The exercise price is $0.75 for 2,000 of the Warrants and $1.50 per share for the remaining 2,000 Warrants. In August 2008, the Company reduced the exercise price from $.75 to $.30 for 44,000 Warrants, from $.75 to $.25 for 180,000 Warrants and from $1.50 to .50 for 630,000 Warrants in exchange for the extension of the maturity date of the Note and/or for additional loans made to us by the holders of the adjusted warrants in connection with our 2008 C Unit and 2008 D Unit financings. The Warrants will be exercisable for a period of five years from the date of issuance. The shares issuable upon conversion of the Notes and exercise of the warrants have piggyback registration rights. There is no penalty provision in the event we do not register such shares. The conversion feature and the stock purchase warrants were valued using a Black Scholes Option Pricing Model using the following assumptions: Volatility:82.0%, Straight Bond Yield: 5.0%, Risk-free Rate: 4.7% and Dividend Growth Rate: 0. The warrants were detached and accounted for as a derivative liability. The warrants were recorded as a discount of $ 129.2 thousand which is being amortized over the life of the convertible note. There are amounts due of less than $1,000 in cash to the exchanging noteholders for an aggregate $1,693. As of September 30, 2008, there was $162,000 in principal of the 2007 D Notes outstanding.

On May 14, 2007, the Company sold $300,000 of equity units (the “2007 C Units”) in a private placement. The 2007 C Units consist of a 15% convertible note in the principal amount of $300,000 (the “2007 C Note”) and 1,500,000 five year warrants to purchase our common stock at an exercise price of $0.30 (the “Original 2007 C Warrants”) pursuant to a Subscription Agreement dated May 14, 2007 (the “Subscription Agreement”) between the Company and the investor (the “Investor”). The 2007 C Note had an original conversion price of $0.50 per share. The principal balance of the 2007 C Note, along with accrued and unpaid interest, was payable on July 13, 2007. Section 2.3 (b) of the Subscription Agreement provides that in the event the 2007 C Note was

- 18 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

not repaid on July 13, 2007, the Company would issue to the Investor an additional 50,000 warrant to purchase shares of Company common stock for each 45 days that the Note was unpaid past July 13, 2007, with such warrants having substantially the same terms as the Original 2007 C Warrants. Pursuant to Section 2.3(b) of the Subscription Agreement, on May 1, 2008 the Company issued to the Investor five year Warrants to purchase 300,000 shares of the Company with an exercise price of $0.30 per share (the “Non Payment Warrants”). Upon the issuance of the Non Payment Warrants, Section 2.3(b) of the Subscription Agreement was deleted in its entirety. The 2007 C Note was extended until November 1, 2007 and subsequently extended to June 1, 2008. An amendment agreement (the “Amendment”) was entered into as of May 1, 2008 with the Investor pursuant to which the parties agreed to amend the Subscription Agreement, the 2007 C Note and the Original 2007 C Warrants as follows. The Maturity Date of the 2007 C Note was amended to December 31, 2008. The Conversion Price of the 2007 C Note was amended to a price per share equal to the lesser of (i) $0.35 per share or (ii) 70% of the average of the closing bid price for the Company’s common stock for the 20 days preceding the notice of conversion, as reported by the exchange on which the Company’ common stock is then traded with a floor of $0.15. The Company agreed in the Amendment to issue to the Investor five year Warrants to purchase 150,000 shares of Company common stock having an exercise price of $0.30. The Original 2007 C Warrants were amended as follows: (i) 300,000 of the Original 2007 C Warrants shall have an exercise price of $0.10 per share, and (ii) 1,200,000 of the Original 2007 C Warrants shall have an exercise price of $0.30 per share.

The 2007 C Note bears interest at 15% per annum. Any unpaid amounts of interest are payable in cash at maturity. We paid a total of $7,398 in prepaid interest to the 2007 C Noteholder on the date of closing, representing two months worth of interest on the 2007 C Note plus a 5% origination fee of $15,000. The 2007 C Note is secured by a security interest in all of the assets of the Company, which the investor agreed to subordinate in favor of financing from a bank or other traditional lending institution. The Warrants will be exercisable for a period of five years from the date of issuance. The shares issuable upon conversion of the Notes and exercise of the warrants have piggyback registration rights. There is no penalty provision in the event we do not register such shares.

The conversion feature and the original stock purchase warrants were valued using a Black Scholes Option Pricing Model using the following assumptions: Volatility:82.0%, Straight Bond Yield: 5.0%, Risk-free Rate: 4.7% and Dividend Growth Rate: 0. The original warrants were

- 19 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

detached and accounted for as a derivative liability. The original warrants were recorded as a discount of $ 243,000 which is being amortized over the life of the convertible note. As of September 30, 2008, there was $248,137 in principal of the 2007 C Notes outstanding.

During January of 2007, the Company sold $101,000 of equity units (the “2006 G Units”) in a private placement in an offshore transaction under Regulation S of the Securities Act of 1933. Each 2006 G Unit, with a purchase price of $1,000 per unit, consists of a 10% convertible note in the principal amount of $1,000 (the “10% 2006 G Notes”), 2,000 five year warrants to purchase our common stock at an exercise price of $0.75 and 2,000 five year warrants to purchase our common stock at an exercise price of $1.50. In August 2008, the Company reduced the exercise price from $1.50 to .50 for 202,000 Warrants in exchange for the extension of the maturity date of the Note and/or for additional loans made to us by the holders of the adjusted warrants in connection with our 2008 C Unit and 2008 D Unit financings. The principal balance of each 10% 2006 G Note, along with accrued and unpaid interest, was payable 120 days after issuance. As per an extension agreement entered into with the holders of the 2006 G Note, the principal balance of each 2006 G Note, along with accrued and unpaid interest, was extended until July 15, 2007, subsequently extended to November 01, 2007, subsequently extended to May 01, 2008, subsequently extended to September 30, 2008, and subsequently extended to December 31, 2008. The holders of each 10% 2006 G Note may elect to convert the principal balance of the 10% 2006 G Notes into shares of our common stock at a price equal to the lesser of (i) $0.75 or (ii) 70% of the average of the closing bid price for the Company’s common stock for the 20 days preceding the conversion notice, as reported by the exchange on which the Company’s common stock is then traded, but in any event not less than $0.30 (the “Conversion Rate”). This conversion feature was recorded as a discount of $13,900 and is being amortized over the life of the convertible note. Each 10% 2006 G Note bears interest at 10% per annum payable at maturity or at the time of conversion in arrears, in cash, or at the option of the noteholder in common stock at the conversion rate. As of the September 30, 2008, there was $101,000 in principal of 10% 2006 G Notes outstanding. The conversion feature and the stock purchase warrants were valued using a Black Scholes Option Pricing Model using the following assumptions: Volatility:82.0%, Straight Bond Yield: 5.0%, Risk-free Rate: 4.7% and Dividend Growth Rate: 0. The warrants were detached and accounted for as a derivative liability. The warrants were recorded as a discount of $53,100 which is being amortized over the life of the convertible note.

On December 27, 2006 the Company sold $149,000 of equity units (the “2006 G Units”) in a private placement in an offshore transaction under

- 20 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

Regulation S of the Securities Act of 1933. Each 2006 G Unit, with a purchase price of $1,000 per unit, consists of a 10% convertible note in the principal amount of $1,000 (the “10% 2006 G Notes”), 2,000 five year warrants to purchase our common stock at an exercise price of $0.75 and 2,000 five year warrants to purchase our common stock at an exercise price of $1.50. In August 2008, the Company reduced the exercise price from $1.50 to .50 for 298,000 Warrants in exchange for the extension of the maturity date of the Note and/or for additional loans made to us by the holders of the adjusted warrants in connection with our 2008 C Unit and 2008 D Unit financings. The principal balance of each 10% 2006 G Note, along with accrued and unpaid interest, was payable 120 days after issuance. As per an extension agreement entered into with the holders of the 2006 G Note, the principal balance of each 2006 G Note, along with accrued and unpaid interest, was extended until July 15, 2007, subsequently extended to November 01, 2007, subsequently extended to May 01, 2008, subsequently extended to September 30, 2008, and subsequently extended to December 31, 2008. The holders of each 10% 2006 G Note may elect to convert the principal balance of the 10% 2006 G Notes into shares of our common stock at a price equal to the lesser of (i) $0.75 or (ii) 70% of the average of the closing bid price for the Company’s common stock for the 20 days preceding the conversion notice, as reported by the exchange on which the Company’s common stock is then traded, but in any event not less than $0.30 (the “Conversion Rate”). This conversion feature was recorded as a discount of $19,400 and is being amortized over the life of the convertible note. Each 10% 2006 G Note bears interest at 10% per annum payable at maturity or at the time of conversion in arrears, in cash, or at the option of the noteholder in common stock at the conversion rate. The conversion feature and the stock purchase warrants were valued using a Black Scholes Option Pricing Model using the following assumptions: Volatility:93.5%, Straight Bond Yield: 5.0%, Risk-free Rate: 4.7% and Dividend Growth Rate: 0. The warrants were detached and accounted for as a derivative liability. The warrants were recorded as a discount of $75,100 which is being amortized over the life of the convertible note. As of September 30, 2008 there were $138,078 in principal of 2006 G Notes outstanding that were issued on December 27, 2006.

On October 13, 2006 the Company sold $250,000 of equity units (the “2006 D Units”) in a private placement. The 2006 D Units consist of a 13% convertible note (the “2006 D Notes”) in the principal amount of $250,000 and 625,000 five year warrants to purchase our common stock at an exercise price of $.50. The principal balance of the 2006 D Note, along with accrued and unpaid interest, is payable on the earlier of (i) 30 days after the effective date of a registration statement filed by the Company that includes the warrant shares, or (ii) April 13, 2007. As per

- 21 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

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

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

On June 30, 2006, the Company sold $250,000 of equity units (the “2006 C Units”) in a private placement. Each 2006 C Unit, with a purchase price of $1,000 per unit consists of a 10% convertible note (the “2006 C Notes”) in the principal amount of $1,000 and 6,000 warrants to purchase our common stock. The principal balance of each 2006 C

- 22 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

Note, along with accrued and unpaid interest, was payable 6 months after the date of issuance. The 2006 C Note was extended until June 30, 2007, subsequently extended to November 01, 2007, subsequently extended to May 01, 2008, subsequently extended to September 30, 2008, and subsequently extended to December 31, 2008. The holder of each 2006 C Note may elect to convert the principal balance of the Convertible Note into shares of common stock. The 2006 C Notes are convertible at a price equal to the lesser of (i) $0.60 (the “Conversion Price”) or (ii) 70% of the average of the closing bid price for the Company’s common stock for the 20 days preceding the Conversion Notice, as reported by the exchange on which the Company’s common stock is then traded (the “Conversion Rate”). This conversion feature was recorded as a discount of $170,200 and is being amortized over the life of the convertible note. The conversion feature and the stock purchase warrants were valued using a Black Scholes Option Pricing Model using the following assumptions: Volatility:93.5%, Straight Bond Yield: 5.0%, Risk-free Rate: 4.7% and Dividend Growth Rate: 0. The need for bifurcation and fair market value will be assessed on each balance sheet date over the maturity of the note. Each 2006 C Note bears interest at 10% per annum payable at maturity or at the time of conversion in arrears, in cash, or at the option of the noteholder in common stock at the conversion rate. As of September 30, 2008, there was $250,000 in principal of the 2006 C Notes outstanding.

Each investor participating in the Offering received a Warrant to purchase 6,000 shares of common stock for every $1,000 invested. The exercise price of 3,000 of the warrants is $.60 per share and the exercise price for 3,000 warrants is $1.25 per share. The warrants are exercisable for a period of five years from the date of issuance. The warrants were detached and accounted for as a derivative liability. The warrants were recorded as a discount of $201,750 which is being amortized over the life of the convertible note. In August 2008, the Company reduced the exercise price from $.60 to $.25 for 45,000 Warrants and from $1.25 to $.40 for 675,000 Warrants in exchange for the extension of the maturity date of the Note and/or for additional loans made to us by the holders of the adjusted warrants in connection with our 2008 C Unit and 2008 D Unit financings.

On May 24, 2006, the Company sold $250,000 of equity units (the “2006 B Units”) in a private placement. Each 2006 B Unit, with a purchase price of $1,000 per unit consists of a 10% convertible note (the “2006 B Notes”) in the principal amount of $1,000 and 6,000 warrants to purchase our common stock. The principal balance of each 2006 B Note, along with accrued and unpaid interest, was payable 6 months after the date of issuance. The 2006 B Note was extended until June 30,

- 23 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

2007, subsequently extended to November 01, 2007, subsequently extended to May 01, 2008, subsequently extended to September 30, 2008, and subsequently extended to December 31, 2008. The holder of each 2006 B Note may elect to convert the principal balance of the 2006 B Note into shares of common stock. The 2006 B Notes are convertible at a price equal to the lesser of (i) $0.50 (the “Conversion Price”) or (ii) 70% of the average of the closing bid price for the Company’s common stock for the 20 days preceding the Conversion Notice, as reported by the exchange on which the Company’s common stock is then traded (the “Conversion Rate”). This conversion feature was recorded as a discount of $175.6 thousand and is being amortized over the life of the convertible note. The conversion feature and the stock purchase warrants were valued using a Black Scholes Option Pricing Model using the following assumptions: Volatility:93.5%, Straight Bond Yield: 5.0%, Risk-free Rate: 4.7% and Dividend Growth Rate: 0. The need for bifurcation and fair market value will be assessed on each balance sheet date over the maturity of the note. Each 2006 B Note bears interest at 10% per annum payable at maturity or at the time of conversion in arrears, in cash, or at the option of the noteholder in common stock at the conversion rate. As of September 30, 2008, there was $250,000 in principal of the 2006 B Notes outstanding.

Each investor participating in the Offering received a Warrant to purchase 6,000 shares of common stock for every $1,000 invested. The exercise price of 3,000 of the warrants is $.50 per share and the exercise price for 3000 warrants is $1.00 per share. The warrants are exercisable for a period of five years from the date of issuance. The warrants were detached and accounted for as a derivative liability. The warrants were recorded as a discount of $214,500 which is being amortized over the life of the convertible note. In August 2008, the Company reduced the exercise price from $1.00 to $.35 for 750,000 of the Warrants in exchange for the extension of the maturity date of the Note.

On May 15, 2006, the Company sold $250,000 of equity units (the “2006 A Units”) in a private placement. Each 2006 A Unit, with a purchase price of $1,000 per unit consists of a 10% convertible note (the “2006 A Notes”) in the principal amount of $1,000 and 6,000 warrants to purchase our common stock. The principal balance of each 2006 A Note, along with accrued and unpaid interest, was payable 6 months after the date of issuance. The 2006 A Note was extended until June 30, 2007, subsequently extended to November 01, 2007, subsequently extended to May 01, 2008, subsequently extended to September 30, 2008, and subsequently extended to December 31, 2008. The holder of each 2006 A Note may elect to convert the principal balance of the 2006 A Note into shares of common stock. The 2006 A Notes are convertible

- 24 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

at a price equal to the lower of (i) 70% of the average closing price of our common stock on the exchange on which the Company’s stock is trading for the 20 trading days immediately preceding the day upon which we receive a conversion notice from the Noteholder or (ii) $.30 per share (the “Conversion Rate”). This conversion feature was recorded as a discount of $175,600 and is being amortized over the life of the convertible note. The conversion feature and the stock purchase warrants were valued using a Black Scholes Option Pricing Model using the following assumptions: Volatility:93.5%, Straight Bond Yield: 5.0%, Risk-free Rate: 4.7% and Dividend Growth Rate: 0. The need for bifurcation and fair market value will be assessed on each balance sheet date over the maturity of the note. Each 2006 A Note bears interest at 10% per annum payable at maturity or at the time of conversion in arrears, in cash, or at the option of the noteholder in common stock at the conversion rate. As of September 30, 2008, there was $200,000 in principal of the 2006 A Notes outstanding.

Each investor participating in the Offering received a Warrant to purchase 6,000 shares of common stock for every $1,000 invested. The exercise price of the warrants is $.50 per share. The warrants are exercisable for a period of five years from the date of issuance. The warrants were detached and accounted for as a derivative liability. The warrants were recorded as a discount of $285,000 which is being amortized over the life of the convertible note. In August 2008, the Company reduced the exercise price from $.50 to $.17 for 1,350,000 of the Warrants in exchange for the extension of the maturity date of the Note and/or for additional loans made to us by the holders of the adjusted warrants in connection with our 2008 C Unit and 2008 D Unit financings.

On April 4, 2006, we sold $50,000 of equity units (the “April 2006 Units”) in a private placement. Each April 2006 Unit, with a purchase price of $1,000 per unit consists of a 15% convertible note (the “15% April 2006 Notes”) in the principal amount of $1,000 and 3,000 warrants to purchase our common stock. The original maturity date of the 15% April 2006 Note was extended to June 30, 2007, subsequently to November 01, 2007 and subsequently to May 01, 2008. The holder delivered a waiver of any event of default of the Note as of May 1, 2008, the maturity date of such Note. The holder of the 15% April 2006 Note may elect to convert the principal balance of the 15% April 2006 Note into shares of our common stock at a price equal to $0.30 per share (the “Conversion Rate”). Each 15% April 2006 Note bears interest at 15% per annum payable at maturity or at the time of conversion in arrears, in cash, or at the option of the noteholder in common stock (at the

- 25 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

Conversion Rate). We paid a total of $2,466 in prepaid interest to the 15% April 2006 Noteholder on the date of closing, representing four months worth of interest on the 15% April 2006 Note. As of March 31, 2008, there were $50,000 in principal of 15% April 2006 Notes outstanding. The conversion feature and the stock purchase warrants were valued using a Black Scholes Option Pricing Model using the following assumptions: Volatility:93.5%, Straight Bond Yield: 5.0%, Risk-free Rate: 4.7% and Dividend Growth Rate: 0. The need for bifurcation and fair market value will be assessed on each balance sheet date over the maturity of the note. As of September 30, 2008, there was $50,000 in principal of the April 04, 2006 Note outstanding.

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

A convertible note in accordance with the Company’s private placement memorandum dated February 24, 2005 of $750,000 is due on the earlier of the first anniversary of the closing for the convertible note or the occurrence of a fundamental change in capital structure. The convertible note is convertible into approximately 3.75 million shares of common stock at an effective conversion price equal to 80% of the price of common stock in the next equity offering conducted by us or, if no such offering occurs, at the rate of one share per $2.00 converted. This conversion feature was recorded as at a discount of $604,400 and is being amortized over the life of the convertible note. The conversion feature and the stock purchase warrants were valued using a Black Scholes Option Pricing Model using the following assumptions: volatility:97.6%, Straight Bond Yield: 5.0%, Risk-free Rate: 4.7% and Dividend Growth Rate: 0. The need for bifurcation and fair market value will be assessed on each balance sheet date over the maturity of the note. The notes are available for conversion into approximately 5,000 shares of the Company’s common stock for each $1,000 note. The notes are issued at par and pay interest of 10% annually. The interest is payable at the option of the Company, in cash, or common stock, or a combination of cash and common stock. The holder may elect at any time after purchase prior to maturity or redemption to convert the note into the Company’s common stock. The convertible notes are unsecured obligations of the Company. As of September 30, 2008, $750,000 of the convertible notes has been converted to common stock.

- 26 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

A convertible note in accordance with the Company’s private placement memorandum dated October 24, 2003 of $4.9 million is due on the earlier of the fifth anniversary of the closing for the convertible notes or the occurrence of a fundamental change in capital structure. The convertible notes are convertible into approximately 19.2 million shares of common stock at $0.25 per share. The notes are available for conversion into approximately 4,000 shares of the Company’s common stock for each $1,000 note. The notes are issued at par and pay interest of 8.5% annually. The interest is payable at the option of the Company, in cash, common stock, or a combination of cash and common stock. The holder may elect at any time after purchase prior to maturity or redemption to convert the note into the Company’s common stock. The convertible notes are unsecured obligations of the Company. As of September 30, 2008, $3,547,000 of the convertible notes has been converted to common stock.

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

All derivative liabilities are assessed at each balance sheet date and are marked to market. At June 30, 2008, the following assumptions were utilized using the Black Scholes option pricing model: Volatility: 78.0%, Straight Bond Yield: 5.0%, Risk-free Rate: 4.7% and Dividend Growth Rate: 0.

Non-Convertible Notes:

- 27 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

the 20th day after the Mandatory Redemption Event (as herein defined) at a redemption price equal to 100% the principal amount of 2008 D Notes to be redeemed plus accrued and unpaid interest upon ten trading days prior notice (“Mandatory Redemption”). The Mandatory Redemption Event shall be the date on which we close on aggregate gross equity financings of $1 million prior to the Maturity Date. If the 2008 D Notes have not been redeemed as of the Maturity Date, the principal and interest due thereunder will be paid by us in cash. The Warrants included in the Units are exercisable for shares of our common stock at any time beginning on the date of issuance and ending five years from the date of issuance at an exercise price of $0.30 per share. The warrants were valued using a Black Scholes Option Pricing Model, utilizing the following assumptions: Volatility: 78%-100%, Risk-Free Rate: 4.7%, and Dividend Growth Rate: 0%. The warrants were detached and accounted for as a derivative liability. The warrants were recorded as a discount of $ 344,218 which is being amortized over the life of the note. As of September 30, 2008, there was $536,150 in principal of the 2008 D Notes outstanding.

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

- 28 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

assumptions: Volatility: 78.0%, Risk-Free Rate: 4.7%, and Dividend Growth Rate: 0%. The warrants were detached and accounted for as a derivative liability. The warrants were recorded as a discount of $ 140,400 which is being amortized over the life of the note. As of September 30, 2008, there was $300,000 in principal of the 2008 C Notes outstanding.

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

On March 27, 2007 we sold $50,000 of non-convertible 13% promissory notes (the “13% 2007 A Notes”) to a lender in a private transaction. The principal balance of the 13% 2007 A Notes, along with accrued and unpaid interest, was payable on September 1, 2007. The 2007 A Note was extended until November 01, 2007, subsequently extended to May 01, 2008 and subsequently extended to September 30, 2008. The holder delivered a waiver of any event of default of the Note as of September 30, 2008, the maturity date of such Note. The 13% 2007 A Notes bear interest at 13% per annum payable in cash at maturity in arrears. We paid a total of $1,625 in prepaid interest to the 13% 2007 A Noteholder on the date of closing, representing three months worth of interest on the 13% 2007 A Notes plus a 5% origination fee of $2,500. As of September 30, 2008, there was $50,000 in principal of the 2007 A Notes outstanding.

Maturities of debt are as follows:

For the year ended December 31, 2008	$	4,081,365
For the year ended December 31, 2009 & thereafter		928,000

Total	$	5,009,365

- 29 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(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	)
09/30/08	Conversion option on 2008 Bridge Loans		14,627
09/30/08	Warrant liability on 2008 Bridge Loans		543,793
09/30/08	Warrant liability on amended 2007 advisory contract at fair market value		13,100
09/30/08	Warrant liability on 2007 Bridge Loans		70,200
09/30/08	Fair market value adjustment on the 2006 advisory contract		1,179,520
09/30/08	Fair market value adjustment on conversion options		737,736
09/30/08	Fair market value adjustment on warrant liabilities		2,614,804
09/30/08	Cashless Exercise of Warrants		(2,420,963	)

Total		$	5,745,886

- 30 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

FAIR VALUE MEASUREMENTS

Effective January 1, 2008, we adopted SFAS No. 157, Fair Value Measurements (SFAS No. 157). SFAS No. 157 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The adoption of SFAS No. 157 did not have a material impact on our fair value measurements.

The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

			Fair Value Measurements at Reporting Date Using
Description	September 30, 2008		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

Liabilities - warrants	$	4,217,353	$	—	$	4,217,353	$	—
Liabilities - conversion options		1,528,533		—		1,528,533		—
Total Liabilities	$	5,745,886	$	—	$	5,745,886	$	—

Note 5 – Accrued Salaries and Interest:

Accrued salaries and interest represents salaries and interest due to officers of the Company. During the three and nine months ended September 30, 2008, the Company accrued interest on the salaries of $7,134 and $ 21,402, respectively. At September 30, 2008 the officers were due $287,597 in accrued salaries along with interest on the accrued salaries of $69,547. At December 31, 2007 the officers were due $287,597 in accrued salaries along with interest on the accrued salaries of $48,143. Interest is accrued at a rate of 8.500% per annum.

- 31 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

During the three and nine months ended September 30, 2008 there were no accrued salary and interest repayments related to the above.

Accrued salary and interest repayments related to the above during the three and nine months ended September 30, 2007 amounted to $21,875 and $65,625, respectively.

Accrued salary and interest repayments related to the above during the year ended December 31, 2007 amounted to $27,956.

Note 6 – Provision for Income Taxes:

As of September 30, 2008 and December 31, 2007, non-current deferred tax assets recognized for deductible temporary differences total $7,142,077 and $8,446,101, respectively.

The Company’s deferred tax assets and liabilities consist of the following at September 30, 2008:

Deferred tax assets:
Net operating loss carryforwards	$	6,964,137
Excess of tax basis over financial statement of intangible assets		177,113
Excess of tax basis over financial statement of property, plant and equipment		827
Valuation allowance for deferred tax assets		(7,142,077	)
	$	0

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

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

- 32 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

A valuation allowance has been established to eliminate the net deferred tax benefit since it is uncertain if the tax benefits will be realized. This allowance was increased by $2,085,096 to $8,446,101 at December 31, 2007, increased by $314,251 to $8,760,352 at March 31, 2008, increased by $329,416 to $9,089,768 at June 30, 2008 and decreased by $1,947,692 at September 30, 2008.

Income tax expense for the nine months ended September 30, 2008 and 2007 consisted of the following:

	September 30, 2008		September 30, 2007

Current State Tax	$	655	$	2,587

As of September 30, 2008, the Company had net operating loss carryforwards of $18,938,595 that can be deducted against future taxable income. These tax carryforward amounts expire as follows:

Year 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		1,781,136
12/31/27		2,626,812

	$	18,938,595

Due to changes in control, which may be deemed to have taken place, a portion of the tax carryforward amount listed above may not be available for use in the future.

Note 7 – Concentration of Credit Risk:

The Company maintains its cash balances in two financial institutions. As of September 30, 2008 and December 31, 2007, the Company’s cash and cash equivalents did not exceed federally insured limits.

Note 8 – Cash Flow Disclosures:

Non-cash investing and financing transactions for the nine months ended September 30, 2008 included the following:

- 33 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

4,555,347 warrants were exercised into 3,172,406 shares of common stock using a cashless exercise feature.

Convertible notes along with accrued interest totaling $3,316,765 were converted into common stock.

Non-cash investing and financing transactions for the nine months ended September 30, 2007 included the following:

Convertible notes along with accrued interest totaling $ 1,041,897 were converted into common stock.

Debt issuance costs paid in the form of stock warrants in the amount of $19,640 were valued at fair market value using a Black Scholes pricing model.

Note 9 – 401K and Profit Sharing Plan:

The Company maintains a 401K and Profit Sharing Plan. Contributions to the Profit Sharing Plan are at management’s discretion. For the nine months ended September 30, 2008 and 2007, respectively, management has not contributed to the plan.

Matching corporate contributions to the 401K plan are at management’s discretion and only apply to those employees who choose to participate. For the nine months ended September 30, 2008 and 2007, respectively, no matching contributions were made to the 401K plan.

Note 10 – Related Party Transactions:

Consulting

In September 2007, the Company signed a consulting agreement with Phoenix Ventures. The Chief Executive Officer of the Company has an ownership interest in Phoenix Ventures. The agreement, starting November 01, 2007, calls for monthly consulting fees of $3,000. In addition, the

- 34 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

Company will issue to Phoenix Ventures 12,000 option shares at an exercise price of $0.30 per share. 1,000 options will vest each month this contract is in effect. The vested options shall be exercisable for ten years regardless of whether or not this contract is in effect at the time of exercise. This agreement is set to end on October 31, 2008. Consulting fees pertaining to this contract amounted to $9,000 and $27,000 during the three and nine months ended September 30, 2008 along with 3,000 and 9,000 stock options vesting which were granted during 2007.

Consulting fees pertaining to a prior contract with Phoenix Ventures amounted to $18,000 and $54,000 during the three months and nine months ended September 30, 2007 along with 7,500 and 22,500 stock options vesting which were granted during 2006.

In June 2006, the Company entered into a services agreement with Bartolomei Pucciarelli, LLC, a related party. Fees will be paid to Bartolomei Pucciarelli, LLC on an hourly basis for financial reporting and related services. As of September 30, 2008, the Company incurred fees of approximately $407,324 relating to this agreement. As of September 30, 2008, $251,949 of these fees are still outstanding. Fees incurred during the nine months ended September 30, 2008 and September 30, 2007 were $108,299 and $172,107, respectively. On September 17, 2007 Bartolomei Pucciarelli, LLC was granted 100,000 stock options for services rendered.

Note 11 – Stock Option Plan:

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

The Company issued employee stock options through stock-based compensation plans. Effective January 1, 2006, the Company adopted the fair value method of recording stock-based compensation, as defined in SFAS No. 123(R) “Stock-Based Payments”, under the modified prospective transition method for stock options awarded to employees after the date of adoption and for previously issued stock options that were not vested as of January 1, 2006 which were issued under the Company’s stock based compensation plan. Under the modified prospective transition method, the Company is required to recognize compensation expense for

- 35 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

options granted commencing January 1, 2006 and thereafter. Additionally, the fair value of existing unvested awards at the date of adoption is recorded in compensation expense over the remaining requisite service period. Prior to January 1, 2006, the Company applied Accounting Principles Board Opinion (APB) No. 25 “Accounting for Stock Issued to Employees” and related interpretations in accounting for stock options and other stock-based compensation. APB No. 25 required the use of the intrinsic value method, which measured compensation cost as the excess, if any, of the quoted market price of the stock at the measurement date over the amount an employee must pay to acquire the stock.

Compensation cost recognized for the three and nine months ended September 30, 2008 was $103,303 and $242,424, respectively. Compensation cost recognized for the three and nine months ended September 30, 2007 was $224,489 and $393,271, respectively.

The following assumptions were used in the Black Scholes pricing model for the 2008 option issuances:

Fair Market Value	Exercise Price	Expected Term	Dividend Yield	Interest Rate	Volatility
$0.25-$0.90	$0.25-$0.75	10 years	-0-	4.7%	78%-100%

The status of the stock option plan is as follows at September 30, 2008:

			Weighted
	Number		Average
	Of		Exercise
	Shares		Price
Outstanding at January 1, 2007		11,205,334	$	0.25

Granted		1,161,999	$	0.30
Exercised		—		—
Canceled		—		—
Outstanding at December 31, 2007		12,367,333	$	0.26

Granted		1,100,000	$	0.31
Exercised		—		—
Canceled		—		—
Outstanding at September 30, 2008		13,467,333	$	0.26

Exercisable at September 30, 2008		11,257,989	$	0.26
Exercisable at December 31, 2007		9,750,658	$	0.25

- 36 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

Note 12 – Stockholders’ Equity:

During 2008, the Company converted $2,431,000 of the Company’s 2003 convertible debt and $532,583 of accrued interest on the 2003 convertible debt into 11,854,362 shares of the Company’s common stock.

During 2008, the Company converted $264,863 of the Company’s 2007 convertible debt and $26,688 of accrued interest on the 2007 convertible debt into 657,526 shares of the Company’s common stock.

During 2008, the Company converted $50,000 of the Company’s 2006 convertible debt and $11,631 of accrued interest on the 2006 convertible debt into 205,435 shares of the Company’s common stock.

During the third quarter of 2008, 4,555,347 warrants were exercised into 3,172,406 shares of common stock using a cashless exercise feature.

In September 2008, 2,000,000 shares of common stock issued in connection with the Standby Equity Distribution Agreement (SEDA) were returned to the Company by YA Global Investments, L.P. and retired.

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

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

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

On January 23, 2006, the Company entered into a Standby Equity Distribution Agreement (SEDA) with YA Global Investments, L.P. (formerly known as Cornell Capital Partners, L.P.) (“YA Global”) which provided for the periodic sale by us to YA Global of shares of our common stock for a total purchase price of up to $10 million, subject to the conditions and limitations set forth in that agreement. In consideration of the commitment of YA Global to purchase up to $10 million of our shares of common stock pursuant to the standby equity distribution agreement YA Global received a one-time commitment fee in the form of 2,000,000 shares of the Company’s common stock equaling approximately $500,000 (the “YA Global Shares”). We engaged Newbridge Securities Corporation, a registered broker-dealer, to advise us in connection with the

- 37 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

standby equity distribution agreement. We were introduced to Newbridge Securities Corporation by YA Global. No written material was provided to us by Newbridge Securities Corporation in connection with this transaction. We have no knowledge as to whether Newbridge Securities Corporation studied the effect of standby equity distribution agreements on the market price of an issuer’s securities. While we are aware of the fact that Newbridge Securities Corporation has advised other companies that have entered into standby equity distribution agreements with YA Global as reported in the public filings of such companies, we have no other knowledge of the relationship between Newbridge Securities Corporation and YA Global, any compensation that Newbridge Securities Corporation receives from YA Global except as reported in the public filings of such companies or the portion of Newbridge Securities Corporation’s business that is derived from transactions involving YA Global. For its services to us in connection with this transaction, Newbridge Securities Corporation received a fee of $10,000 by the issuance of 40,000 shares of our common stock (the “Newbridge Shares”). These shares were accounted for at fair market value and were recorded to stock issuance costs in 2006.

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

On November 14, 2007, we entered into a Termination Agreement with YA Global and Newbridge Securities Corporation (the “Termination Agreement”) pursuant to which the parties terminated the standby equity distribution agreement, the registration rights agreement and the placement agent agreement, each dated as of January 23, 2006. Pursuant to the Termination Agreement, Newbridge Securities Corporation will retain the 40,000 Newbridge Shares. YA Global agreed in March 2008 to return the 2,000,000 YA Global Shares to us. No shares were issued under the standby equity distribution agreement. We are currently pursuing other financing in lieu of the standby equity distribution agreement financing.

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

- 38 -

PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

In an effort to determine the fair market value of our common stock, which was not readily determinable or actively traded through August 07, 2008, we applied SFAS No. 157 “Fair Value Measurements” to derive the historical and the current fair market value of our common stock. SFAS No. 157 states, “This Statement emphasizes that fair value is a market-based measurement, not an entity specific measurement. Therefore, fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset.”

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

Fair market value during 2007 was set at $.25 as a result of the following considerations: As part of the negotiations of the aforementioned Standby Equity Distribution Agreement, YA Partners was seeking initial compensation in the amount of $500,000. YA Partners agreed to accept 2,000,000 shares of our common stock as such compensation. This transaction resulted in a fair market value of $.25 per share. The amount of shares issued as compensation was the result of an arms length negotiation between unrelated parties and this is the only capital transaction during the time period under consideration. Furthermore, we also considered the fair market value of our common stock in the previous issuances, the changes in the Company’s financial position, progressions in product development and the effects of dilutive debt conversions in determining the fair market value of our stock during 2007. Accordingly, we believe that $.25 is the best indication of fair market value for our stock during 2007 and through August 07, 2008.

Our common stock commenced trading on the OTC Bulletin Board on August 8, 2008.

Warrants

On June 23, 2008, the Company issued Warrants to purchase 100,000 shares of the Company’s common stock, $0.01 par value. The exercise price of the warrants is $0.50 per share and the warrants expire June 23, 2013. The warrants were valued using a Black Scholes Option Pricing Model, utilizing the following assumptions: Volatility: 78.0%, Risk-Free Rate: 4.7%, and Dividend Growth Rate: 0%.

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PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

The aforementioned warrants were issued in conjunction with an amendment to a consulting agreement with Dawson James Securities, Inc. (Dawson James.) Accordingly, the cost of these warrants has been recorded as a prepaid expense with the appropriate charges to income as time passes. The warrants were also accounted for as a derivative liability. The warrants were recorded as a discount of $13,100 and are being amortized over the life of the consulting agreement. Under this agreement Dawson James is contracted to assist the Company with investment banking and public relations services.

On April 15, 2008, the Company issued 100,000 warrants to an individual for services provided to the Company, having an exercise price of $0.30 per share and an expiration date of December 31, 2010. The warrants were valued using a Black Scholes Option Pricing Model, utilizing the following assumptions: Volatility: 78.0%, Risk-Free Rate: 4.7%, and Dividend Growth Rate: 0%.

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

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

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

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PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

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

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

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

Note 13 - Earnings (Loss) Per Share

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

Note 14 – Leasing Arrangements:

Trenton, New Jersey Facility

In September of 2006, the Company assumed a lease for their facility in Trenton, NJ. The lease requires a base rent of $3,738.46 (increasing to $3,897.54 on January 1, 2007) per month along with its proportionate share of taxes, common area maintenance charges and insurance beginning on September 01, 2006 for a period of sixteen months. On December 31, 2007 the Company extended this lease for an additional five years. The term of this lease agreement expires December 31, 2012. The total rent incurred for the three and nine months ended September 30, 2008 was $13,473 and $ 36,033, respectively. The total rent incurred for the three and nine months ended September 30, 2007 was $13,203 and $40,781, respectively.

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PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

Note 15 – Officers and Directors:

On June 10, 2008, Roger G. Harrison, PhD, 60, was appointed President of Performance Health Technologies, Inc. (the “Company”). Dr. Harrison has been serving as a director of the Company since January 16, 2005 and as its Chairman of the Board since March 7, 2006.

On June 10, 2008, Timothy F. Parshall, 49, was appointed Executive Vice President for Corporate Development of the Company. Mr. Parshall has been serving as a director of the Company since September 20, 2006.

Robert D. Prunetti will continue to serve as the Company’s Chief Executive Officer. Mr. Prunetti has been serving as Chief Executive Officer since February 21, 2006 and as a director of the Company since January 19, 2005.

Note 16 – Commitments, Contingencies and Uncertainties:

Going Concern

As shown in the accompanying financial statements, the Company incurred a net loss of $7,790,258 during the nine months ended September 30, 2008, and as of that date, the Company’s current liabilities exceeded its current assets by $12,372,739. Those factors raise substantial doubt about the Company’s ability to continue as a going concern. Management of the Company plans to raise additional capital through private placement offerings. The ability of the Company to continue as a going concern is dependent on its ability to raise additional capital through private placement offerings. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

Recent Events in the Financial Markets

During recent weeks the US and global financial markets have undergone extreme levels of volatility. In addition, the Global and US credit markets have become more restrictive than in the past. The Company has primarily utilized these markets for financing and capital. As a result of the recent changes in these markets, it may not be possible for the Company to continue to raise capital. As mentioned above, the ability of the Company to continue as a going concern is dependent on its ability to raise additional capital through private placements or debt financings. The financial statements do not include any adjustments that might be necessary if the Company is unable to raise additional capital and continue as a going concern.

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PERFORMANCE HEALTH TECHNOLOGIES, INC.

NOTES TO FINANCIAL STATEMENTS

September 30, 2008

(Unaudited)

Note 17 – Subsequent Events:

The Company has obtained the consent of the holders of the following notes to a new maturity date of December 31, 2008 and a waiver of any event of default as of the previous maturity date: 2006 A Notes, 2006 B Notes, 2006 C Notes, 2006 G Notes, certain 2007 F Notes and 2008 C Notes. The holder of the April 4, 2006 Note delivered a waiver of any event of default of the April 4, 2006 Note through December 31, 2008; the maturity date of such April 4, 2006 Note was May 1, 2008.

Effective October 22, 2008, the holder of $50,000 of principal of our non-convertible 2007 A Notes exchanged principal and interest due thereunder for $58,000 of equity units (“2008 E Units”) in a private exchange transaction. Each 2008 E Unit consists of an unsecured convertible promissory note in the principal amount of $1,000 (the “2008 E Notes”) and 2,000 warrants (the “Warrants”) each to purchase one share of our common stock. The 2008 E Notes bear interest at 13% per annum and will mature on September 30, 2009 (the “Maturity Date”). The 2008 E Notes are convertible into shares of our common stock at a per share price of $0.25 (the “Conversion Price”). The 2008 E Notes may be redeemed by us, upon ten trading days’ prior notice, during which time the holder may convert the 2007 D Notes into our common stock. If the 2008 E Notes have not been redeemed or converted as of the Maturity Date, the principal and interest due thereunder will be paid by us in shares of our common stock valued at the then applicable Conversion Price. The exercise price is $0.75 for 1,000 of the Warrants and $1.00 per share for the remaining 1,000 Warrants. The Warrants are exercisable for a period of five years from their date of issuance. The shares issuable upon conversion of the Notes and exercise of the Warrants have piggyback registration rights. We repaid amounts due of less than $1,000 in cash to the exchanging noteholder for a total of $614.73.

On October 14, 2008, Tommy J. Harris, 61, was appointed as a Director of Performance Health Technologies, Inc.

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ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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

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

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

GENERAL

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

Our products have been tested, accepted, and endorsed by leaders in the medical, rehabilitation and athletic communities. Our SportsRAC Shoulder, Knee and Forearm systems are installed in physical therapy clinics and university athletic departments and with professional sports teams in the United States and Canada. The SportsRAC Shoulder, Knee and Forearm systems are no longer being produced or sold as all of our efforts are now being directed towards marketing of our Core:Tx product line.

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

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The inherent versatility designed into the MotionTrack technology affords the opportunity to explore numerous additional markets, including personal fitness, athletic training, and occupational health and safety. Accordingly, we intend to develop and market additional PC-based products that will function with an upgraded MotionTrack technology system and communicate with a higher performing Core:Tx device. This new family of Core:Tx products will focus on training for the health and fitness consumer market be designed to be especially easy to understand and use, and be manufactured at a lower price point. These products will be internet ready, and will include the ability to collect and distribute human motion data among multiple users.

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

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO

THREE MONTHS ENDED SEPTEMBER 30, 2007

Revenues during the three months ended September 30, 2008 of $2,783 increased by $2,783 from $0 in the corresponding three months ended September 30, 2007. During the three months ended September 30, 2008, the Company sold two Core:Tx for Stroke Survivors units and one Core:Tx for Professionals unit. During the three months ended September 30, 2007, the Company was in the process of designing enhancements to the Core: TX product, thus sales were not procured. The product is now being marketed through the Company’s contract with Interactive Metronome, Inc. (“Interactive Metronome”) as well as through direct marketing efforts by Company personnel.

Cost of Goods Sold during the three months ended September 30, 2008 of $842 increased by $842 from $0 in the corresponding three months ended September 30, 2007. The increase in cost of goods sold during the three months ended September 30, 2008 is primarily attributable to the costs associated with the three units sold during the period as compared to no units sold during the comparable period ended September 30, 2007.

Research and Development Expenses during the three months ended September 30, 2008 of $6,414 decreased by $9,345, or 59%, from $15,759 in the corresponding three months ended September 30, 2007. The decrease in research and development expenses is primarily attributable to the Company completing product enhancements during 2007. Management engaged outside contractors for research and development needs during the third quarter of 2007 in the amount of $14,080 as compared to salary expenses of $5,760 for the corresponding quarter ended September 30, 2008.

General and Administrative Expenses during the three months ended September 30, 2008 of $433,021 decreased by $171,846, or 28%, from $604,867 in the corresponding three months ended September 30, 2007. This decrease is primarily attributable to a decrease in legal and accounting expenses of approximately $49,000, a decrease in stock option expenses of approximately $161,000, offset by an increase in outside consulting expenses of approximately $34,000 relating to product enhancements and stock marketing expenses. These decreases relate in large part to management’s efforts to raise capital, and the registration of the Company’s common stock with the Securities Exchange Commission (“SEC”) during 2007.

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Sales and Marketing Expenses during the three months ended September 30, 2008 of $50,324 decreased by $10,096, or 17%, from $60,420 in the corresponding three months ended September 30, 2007. The decrease is primarily attributable to a decrease in website design expenses of approximately $28,000 offset by an increase in marketing consultant fees in the amount of approximately $20,000. Advertising salaries also decreased approximately $2,300.

Amortization during the three months ended September 30, 2008 of $159,541 increased by $82,767, or 108%, from $76,774 during the corresponding three months ended September 30, 2007. The increase is primarily attributable to amortization expense on the debt issuance costs associated with the 2008 bridge loans and the write-off of the debt issuance costs associated with conversions of outstanding convertible notes during the period. The increase was offset by 2006 bridge loans that were fully amortized during the year ended December 31, 2007.

Interest expense, net of interest income and interest expense related to beneficial conversion during the three months ended September 30, 2008 of $428,712 decreased by $24,490, or 5%, from $453,202 during the corresponding three months ended September 30, 2007. The decrease is primarily attributable to cashless exercises of stock purchase warrants offset by the maturity and conversions of outstanding convertible notes during the period.

Gain (Loss) on Conversion Liability during the three months ended September 30, 2008 of $(4,703,294) decreased by $4,826,064, or 3931%, from $122,770 during the corresponding three months ended September 30, 2007. The decrease is primarily attributable to the valuation of the derivative liability at the end of the reporting period in accordance with Statement of Financial Accounting Standards (SFAS) 133, which requires embedded derivatives to be marked to market at each balance sheet date. The volatility assumption used increased from 78% to 100% during the period. The fair market value assumption utilized increased from $0.25 to $0.34.

Net loss to common shareholders was $(5,779,413) or $(0.10) per share for the three months ended September 30, 2008 as compared to a net loss to common shareholders to common shareholders of $(1,089,226) or $(0.02) per share for the corresponding three months ended September 30, 2007. The increase in net loss is primarily attributable to an increase in losses on conversion liabilities and an increase in amortization expense associated with the Company’s convertible debt outstanding, offset by a decrease in legal expenses, a decrease in consulting expenses, a decrease in stock option expenses, and a decrease in interest expense.

Accumulated Deficit. Since inception, we have incurred substantial operating losses and expect to incur substantial additional operating losses over the next few years unless the sales from our products and licensing efforts yield a sustainable income stream. As of September 30, 2008, our accumulated deficit was $(33,630,760).

NINE MONTHS ENDED SEPTEMBER 30, 2008 COMPARED TO

NINE MONTHS ENDED SEPTEMBER 30, 2007

Revenues during the nine months ended September 30, 2008 of $12,163 increased by $11,574, or 1965%, from $589 in the corresponding nine months ended September 30, 2007 primarily resulting from an increase in sales of the Core: TX products in the amount of $11,574. During the nine months ended September 30, 2007, the Company was in the process of completing enhancements to the Core: TX product, thus sales were limited. The product is marketed through the Company’s contract with Interactive Metronome. During the nine months ended September 30, 2008, the Company sold 13 Core:TX units and two Core:TX units during the nine months ended September 30, 2007.

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Cost of Goods Sold in the nine months ended September 30, 2008 of $3,656 increased by $3,656 from $0 in the corresponding nine months ended September 30, 2007. The increase in cost of goods sold during the nine months ended September 30, 2008 is primarily attributable to the costs associated with the increase in units sold. Thirteen units were sold during the period as compared to no units sold during the comparable period ended September 30, 2007.

Research and Development Expenses during the nine months ended September 30, 2008 of $19,378 decreased by $48,131, or 71%, from $67,509 in the corresponding nine months ended September 30, 2007. The decrease in research and development expenses is primarily attributable to the Company completing product enhancements during 2007. Management engaged outside contractors for research and development needs during the nine months ended September 30, 2007 in the amount of $65,459 as compared to salary expenses of $19,120 for the corresponding nine months ended September 30, 2008.

General and Administrative Expenses during the nine months ended September 30, 2008 of $1,220,572 decreased by $1,162,782, or 49%, from $2,383,354 in the corresponding nine months ended September 30, 2007. This decrease is primarily attributable to a decrease in legal and accounting expenses of approximately $490,000, a decrease in stock option expenses of approximately $416,000, a decrease in salaries of approximately $25,000 offset by an increase in outside consulting expenses of approximately $63,000 relating to product enhancements and stock marketing expenses. Approximately $334,000 of the decrease in legal fees were related to deferred offering costs capitalized in 2006 relating to the Company’s Standby Equity Distribution Agreement (“SEDA”) and subsequently expensed in 2007.

Sales and Marketing Expenses during the nine months ended September 30, 2008 of $141,396 increased by $26,199, or 23%, from $115,197 in the corresponding nine months ended September 30, 2007. The increase is primarily attributable to an increase in marketing consultants’ fees in the amount of approximately $57,000. Advertising salaries increased approximately $1,100. These increases were offset by a decrease in trade show and advertising expenses of approximately $34,400. During the nine months ended September 30, 2007, the Company’s focus was on product enhancements and registering the Company’s common stock with the SEC.

Amortization during the nine months ended September 30, 2008 of $372,798 increased by $74,144, or 25%, from $298,654 during the corresponding nine months ended September 30, 2007. The increase is primarily attributable to amortization expense on the debt issuance costs associated with the 2008 bridge loans and the write-off of the debt issuance costs associated with conversions of outstanding convertible notes during the period. The increase was offset by 2006 bridge loans that were fully amortized during the year ended December 31, 2007.

Interest expense, net of interest income and interest expense related to beneficial conversion during the nine months ended September 30, 2008 of $1,511,988 decreased by $468,268, or 24%, from $1,980,256 during the corresponding nine months ended September 30, 2007. The decrease is primarily attributable to cashless exercises of stock purchase warrants offset by maturity and conversions of outstanding convertible notes during the period.

Gain (Loss) on Conversion Liability during the nine months ended September 30, 2008 of $(4,532,060) decreased by $5,111,614, or 882%, from $579,554 during the corresponding nine months ended September 30, 2007. The decrease is primarily attributable to the valuation of the derivative liability at the end of the reporting period in accordance with SFAS 133, which requires embedded derivatives to be marked to market at each balance sheet date. The volatility assumption used increased from 78% to 100% during the period. The fair market value assumption utilized increased from $0.25 to $0.34.

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Net loss to common shareholders was $(7,790,258) or $(0.14) per share for the nine months ended September 30, 2008 as compared to a net loss to common shareholders of $(4,267,387) or $(0.09) per share for the corresponding nine months ended September 30, 2007. The increase in net loss is primarily attributable to an increase in losses on conversion liabilities and an increase in amortization expense associated with the Company’s convertible debt outstanding, offset by a decrease in legal expenses, a decrease in consulting expenses, a decrease in stock option expenses, and a decrease in interest expense.

LIQUIDITY AND FINANCIAL CONDITION

At September 30, 2008, cash and cash equivalents were $29,536. Total liabilities at September 30, 2008 were $12,596,325, consisting of current liabilities in the aggregate amount of $12,596,325 and long-term liabilities in the amount of $0. At September 30, 2008, assets included $0 in accounts receivable, $24,469 in product inventory, $169,581 in prepaid expenses, $5,614 in furniture and equipment, net of depreciation; $71,667 in debt issuance costs, net of amortization; and other assets of $4,802. As of September 30, 2008, our working capital deficit was $(12,372,739) as compared to $(8,398,048) at December 31, 2007. We expect to incur substantial operating losses as we continue our commercialization efforts.

Our debt at September 30, 2008 was as follows:

	September 30, 2008
Non-convertible notes	$	886,150
Short-term bridge loans		2,770,215
Convertible notes		1,353,000

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

FINANCING TRANSACTIONS

We have financed our operations since inception primarily through equity and debt financings and, loans from shareholders and other related parties. We have entered into a number of financing transactions during 2005, 2006, 2007 and 2008 and are continuing to seek other financing initiatives. We will need to raise additional capital to meet our working capital needs, to complete our product commercialization process and to execute our marketing strategy. Such capital is expected to come from convertible debt securities and the sale of our common stock. No assurances can be given that such financing will be available in sufficient amounts or at all. See “Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations-Going Concern Matters.”

The Company used the proceeds from the 2005, 2006, 2007 and 2008 private placement offerings to fund continued research and development and marketing of the Core:Tx Stroke and Core:Tx for Professionals products. The Company used approximately $668,000 on the continued development of the products. The Company also used approximately $696,000 on selling and marketing campaigns. The remaining proceeds from the issuances have been used to fund the Company’s general operating costs and a portion

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of the expenses associated with the registration of the Company’s common stock under the Securities Exchange Act of 1934. The Company has incurred approximately $1,310,000 of professional fees in conjunction with the SEC registration. At September 30, 2008, $540,624 of these fees are unpaid and included in Accounts Payable.

Currently, the Company is burning approximately $125,000 per month on recurring expenses. Of the $125,000 monthly burn rate, 82% is comprised of general and administrative costs, 13% is comprised of sales and marketing and 5% is comprised of continued product refinement and support costs.

The following is a general description of our financing transactions consummated during our most recent fiscal quarter ended September 30, 2008 and thereafter. See also the Notes to Financial Statements included with this Report on Form 10-Q. See our Annual Report on Form 10-KSB for our fiscal year ended December 31, 2007 and Quarterly Reports on Form 10-Qs for our fiscal quarters ended March 31, 2008 and June 30, 2008 for descriptions of our previous financing transactions in 2007 and 2008.

2008 D UNITS. On June 23, 2008, June 27, 2008, July 18, 2008, July 31, 2008 and August 28, 2008 we sold $66,150, $200,000, $125,000, $95,000 and $50,000 of units, respectively, to lenders in a private transaction. Each Unit consists of an unsecured non-convertible promissory note in the principal amount of $1,000 (the “2008 D Notes”), and 3,000 warrants to purchase one share of our common stock at $0.30 per share (the “Warrants”). The 2008 D Notes will bear interest at 12% per annum and will mature 180 days from the date of issuance if not redeemed by such date (the “Maturity Date”). The 2008 D Notes may be redeemed by us in whole or in part at any time at a redemption price equal to 100% the principal amount of 2008 D Notes to be redeemed plus accrued and unpaid interest upon ten trading days prior notice (“Optional Redemption”). The 2008 D Notes will be redeemed by us on the 20th day after the Mandatory Redemption Event (as herein defined) at a redemption price equal to 100% the principal amount of 2008 D Notes to be redeemed plus accrued and unpaid interest upon ten trading days prior notice (“Mandatory Redemption”). The Mandatory Redemption Event shall be the date on which we close on equity financings grossing an aggregate of $1 million commencing upon the date of issuance of the 2008 D Notes and ending upon the Maturity Date. If the 2008 D Notes have not been redeemed as of the Maturity Date, the principal and interest due thereunder will be paid by us in cash. The Warrants included in the Units are exercisable for shares of our common stock at any time beginning on the date of issuance and ending five years from the date of issuance at an exercise price of $0.30 per share. For the $66,150 of 2008 D Units sold on June 23, 2008, the total offering price and total fees paid to broker-dealers were $66,150 and $9,261, respectively. For the $200,000 of 2008 D Units sold on June 27, 2008, the total offering price and total fees paid to broker-dealers were $200,000 and $28,000, respectively. For the $125,000 of 2008 D Units sold on July 18, 2008, the total offering price and total fees paid to broker-dealers were $125,000 and $17,500, respectively. For the $95,000 of 2008 D Units sold on July 31, 2008, the total offering price and total fees paid to broker-dealers were $95,000 and $13,300, respectively. For the $50,000 of 2008 D Units sold on August 28, 2008, the total offering price and total fees paid to broker-dealers were $50,000 and $7,000, respectively. Broker-dealer fees consisted of a finder’s fee of 14% of the gross offering proceeds raised by the finder in this offering. Such fees were deducted from the offering proceeds.

Effective in August 2008, we reduced the exercise prices of approximately 2,565,000 of our outstanding warrants by approximately two-thirds in exchange for the extension of the maturity dates of certain outstanding notes held by the holders of the adjusted warrants that would have otherwise been in default. Effective in August 2008, we also reduced the exercise prices of approximately 3,355,600 of our outstanding warrants by approximately two-thirds in exchange for additional loans made to us by the holders of the adjusted warrants in connection with our 2008 C Unit and 2008 D Unit financings.

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2008 E UNITS. Effective October 22, 2008, the holder of $50,000 of principal of our non-convertible 2007 A Notes exchanged principal and interest due thereunder for $58,000 of equity units (“2008 E Units”) in a private exchange transaction. Each 2008 E Unit consists of an unsecured convertible promissory note in the principal amount of $1,000 (the “2008 E Notes”) and 2,000 warrants (the “Warrants”) each to purchase one share of our common stock. The 2008 E Notes bear interest at 13% per annum and will mature on September 30, 2009 (the “Maturity Date”). The 2008 E Notes are convertible into shares of our common stock at a per share price of $0.25 (the “Conversion Price”). The 2008 E Notes may be redeemed by us, upon ten trading days’ prior notice, during which time the holder may convert the 2007 D Notes into our common stock. If the 2008 E Notes have not been redeemed or converted as of the Maturity Date, the principal and interest due thereunder will be paid by us in shares of our common stock valued at the then applicable Conversion Price. The exercise price is $0.75 for 1,000 of the Warrants and $1.00 per share for the remaining 1,000 Warrants. The Warrants are exercisable for a period of five years from their date of issuance. The shares issuable upon conversion of the Notes and exercise of the Warrants have piggyback registration rights. We repaid amounts due of less than $1,000 in cash to the exchanging noteholder for a total of $614.73.

AGREEMENTS WITH PLACEMENT AGENTS AND FINDERS

We entered into a Financial Advisory and Investment Banking Agreement with Dawson James Securities (“Dawson James”) dated July 5, 2007 as amended (as amended, the “DJ Financial Advisory Agreement”). Pursuant to the DJ Financial Advisory Agreement, we paid to Dawson James a fee of $100,000 in exchange for certain financial advisory services to be provided during the term of the Financial Advisory Agreement and on August 15, 2007, we issued 250,000 five year warrants exercisable at $0.50 per share to Dawson James as consideration under the DJ Financial Advisory Agreement. Pursuant to an amendment of DJ Financial Advisory Agreement entered into on June 23, 2008 which extended the term thereof for an additional six month period through January 5, 2009, we paid to Dawson James a fee of $60,000 and we issued 100,000 additional five year warrants exercisable at $0.50 per share to Dawson James as consideration under the amendment to the DJ Financial Advisory Agreement. In addition, the DJ Financial Advisory Agreement provides for payment of a fee equal to 5% of the total consideration received by us either in a debt or equity financing arrangement with an investor introduced to us by Dawson James, or in the event of a sale, merger or sale of significant assets of us and/or our affiliates with an investor introduced to us by Dawson James.

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

We and Dawson James also entered into a Placement Agreement dated January 24, 2008 and amended on June 25, 2008 to extend the term thereof and increase the maximum offering size (as amended, the “2008 Placement Agreement”) pursuant to which Dawson James has agreed to act as a placement agent for the placement of up to $3.0 million of our securities on a best efforts basis. Dawson James will receive cash compensation equal to 12% of the gross offering price, plus an additional non-accountable expense allowance equal to 3% of the gross offering price, of the securities sold by or through Dawson James. The 2008 Placement Agreement also provides for the payment of a fee of $100,000 for due diligence and pre-marketing expenses, $75,000 of which was paid in January 2008. At each closing of the offering of the securities, Dawson James will also receive warrants to purchase such number of shares of

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common stock as equals 10% of the common stock issued to investors in the offering. Such warrants will be exercisable at a price equal to 100% of the price of common stock in the offering. No securities have been sold by us as of the date hereof under the 2008 Placement Agreement.

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

MANAGEMENT’S PLANS TO OVERCOME OPERATING AND LIQUIDITY DIFFICULTIES

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

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

We have recently entered into a number of financing transactions (see Notes 4 and 17). We are continuing to seek other financing initiatives. We need to raise additional capital to meet our working capital needs, for the repayment of debt and for capital expenditures. Such capital is expected to come from the sale of debt and/or equity securities through private placement offerings and/or the sale of common stock. (See Note 17). We believe that if we raise approximately $8.9 million in debt and equity financings we would have sufficient funds to meet our needs for working capital ($1.5 million), repayment of debt (approximately $5.0 million expected to mature from October 1, 2008 to September 30, 2009), accounts payable and accrued expenses (approximately $2.1 million) and the balance to be utilized for marketing and development over the next twelve months. As of September 30, 2008, we had cash balances of $29,536.

We recently signed a private placement agreement for the sale of up to $3.0 million of our common stock. We expect selling activities to begin in the first quarter of 2009 with completion of the offering at the end of the second quarter of 2009. In the meantime we are presently offering private debt securities to provide capital until the common stock offering is completed and the funds realized.

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

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SALES ACTIVITIES AND PRODUCT DEVELOPMENT

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

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

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

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

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

Pursuant to the IM Agreement, Interactive Metronome has been appointed a non-exclusive distributor for PHT Products with respect to all other markets within the Territory; provided however, if we appoint an exclusive distributor for any or all such markets during the term of the IM Agreement, Interactive Metronome is obligated to respect that exclusivity.

The exclusivity granted becomes null and void should IM fail to sell 120 Core:Tx(R) Neuro units during the first eight months of the IM Agreement, and an additional 120 Core:Tx(R) Neuro units during the remaining four months of the IM Agreement (240 units total during term).

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

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

During the term of the IM Agreement and for a period of two years after termination of the IM Agreement, Interactive Metronome may not contact or solicit the trade or patronage of any of our

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customers for itself or any other person or entity with respect to any products that are designed for or may be used to measure a person’s range of motion, or solicit, induce or attempt to induce any or our employees to leave our employ to become connected in any way with, or employ or utilize any such employee in, any other business engaged in the sale or distribution of products similar to the PHT Products. The amount of expected revenues from the IM Agreement is undeterminable as of the date of this Report on Form 10-Q.

We engaged Minneapolis-based Logic Product Development (“Logic”), a product development and manufacturing company, to improve the usability and design of the next-generation Core:Tx rehabilitation device in September 2008. The updated product design is intended to utilize our existing Core:Tx platform, be significantly smaller and lighter, read movement in multiple directions, and have multi-use capabilities for a more complex exercise program. The product design is also intended to run on bluetooth technology for greater accuracy and improved signal strength enabling the Core:Tx to account for a more peripheral movement. The product is intended to be released along with the next generation of Core:Tx software, which is planned to be web-enabled to allow for remote access to the therapy. With this product, patients will be able to remain connected to their physical therapists via the internet. Our agreement with Logic provides that Logic will be paid for its services at an hourly rate based upon the nature of the services provided and for materials purchased at cost plus an 18% materials acquisition fee. The project labor and materials fees and expenses are estimated to total approximately $154,000. To date, the Company has paid a $40,000 retainer fee to Logic. A termination fee of $8,000 plus the costs of work performed to date would apply in the event of a delay in the performance of the project under the agreement or an early termination of the agreement. Logic commenced work on this project in September 2008. The project was placed on hold in November 2008, pending the Company obtaining further financing. No fees will apply in connection with this project delay.

GOING CONCERN 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 September 30, 2008, we had an accumulated deficit of approximately $33.6 million.

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

In addition, during recent weeks the United States and global financial markets have undergone extreme levels of volatility. The United States and global credit markets have also become more restrictive than in the past. We have primarily utilized these markets for financing and raising capital. As a result of the recent changes in these markets, it may not be possible for us to continue to raise capital.

Our ability to continue as a going concern is dependent on our ability to raise additional capital through private placements or debt financings. Continuing our operations in 2008 is dependent upon obtaining such further financing. Our accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to raise additional capital and continue as a going concern.

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CRITICAL ACCOUNTING POLICIES

The SEC defines “critical accounting policies” as those that require application of management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain and may change in subsequent periods. Our significant accounting policies are described in Note 1 in the Notes to the financial statements. Not all of these significant accounting policies require management to make difficult, subjective or complex judgments or estimates. However, the policies set out in Note 1 could be deemed to be critical within the SEC definition.

REVENUES

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

USEFUL LIVES OF TANGIBLE AND INTANGIBLE ASSETS

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

IMPAIRMENT OF LONG-LIVED ASSETS

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

INCOME TAXES

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

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FAIR VALUE OF FINANCIAL INSTRUMENTS

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

CONVERTIBLE SECURITIES WITH CONVERSION FEATURES

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

ESTIMATING THE FAIR MARKET VALUE OF OUR COMMON STOCK

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

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

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

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

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In December 2007, the FASB issued SFAS No. 141 (revised 2007) (“SFAS No. 141R”), “Business Combinations”, which replaces SFAS No. 141. The statement retains the purchase method of accounting for acquisitions, but requires a number of changes, including changes in the way assets and liabilities are recognized in the purchase accounting. It also changes the recognition of assets acquired and liabilities assumed arising from contingencies, requires the capitalization of in-process research and development at fair value, and requires the expensing of acquisition-related costs as incurred. SFAS No. 141R is effective for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The adoption of SFAS No. 141R is not expected to have a material effect on the Company’s financial statements.

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

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

In April 2008, the FASB issued FASB Staff Position (“FSP”) 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP 142-3 applies prospectively to intangible assets that are acquired, individually or with a group of other assets, after the effective date in either a business combination or asset acquisition. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating the impact of adopting FSP 142-3 on its financial statements.

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In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. It is effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles”. The adoption of SFAS No. 162 is not expected to have a material effect on the Company’s financial statements.

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts - An interpretation of FASB Statement No. 60” (“SFAS No. 163”). SFAS No. 163 requires that an insurance enterprise recognize a claim liability prior to an event of default when there is evidence that credit deterioration has occurred in an insured financial obligation. It also clarifies how Statement 60 applies to financial guarantee insurance contracts, including the recognition and measurement to be used to account for premium revenue and claim liabilities, and requires expanded disclosures about financial guarantee insurance contracts. It is effective for financial statements issued for fiscal years beginning after December 15, 2008, except for some disclosures about the insurance enterprise’s risk-management activities. SFAS No. 163 requires that disclosures about the risk-management activities of the insurance enterprise be effective for the first period beginning after issuance. Except for those disclosures, earlier application is not permitted. The adoption of SFAS No. 163 is not expected to have a material effect on the Company’s financial statements.

In June 2008, the FASB issued FSP EITF No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities” (“FSP EITF No. 03-6-1”). FSP EITF No. 03-6-1 addresses whether instruments granted in share-based payment transactions are participating securities prior to vesting and therefore need to be included in the earnings allocation in calculating earnings per share under the two-class method described in SFAS No. 128, “Earnings per Share”. FSP EITF No. 03-6-1 requires companies to treat unvested share-based payment awards that have non-forfeitable rights to dividend or dividend equivalents as a separate class of securities in calculating earnings per share. FSP EITF No. 03-6-1 is effective for fiscal years beginning after December 15, 2008; earlier application is not permitted. The adoption of FSP EITF No. 03-6-1 is not expected to have a material effect on the Company’s financial statements.

RISK FACTORS

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

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

We have had limited sales of our products to date. We incurred net losses of approximately $(5.8) million during the quarter ended September 30, 2008. We expect to incur substantial additional operating losses in the future. During the quarter ended September 30, 2008, we generated revenues from product sales in the amount of $2,723. We cannot assure you that we will continue to generate revenues from operations or achieve profitability in the near future or at all.

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WE HAVE A WORKING CAPITAL LOSS, WHICH MEANS THAT OUR CURRENT ASSETS WERE NOT SUFFICIENT TO SATISFY OUR CURRENT LIABILITIES ON SEPTEMBER 30, 2008.

We had a working capital deficit of $(12,372,739) at September 30, 2008, which means that our current liabilities exceeded our current assets on September 30, 2008 by $12,372,739. Current assets are assets that are expected to be converted to cash or otherwise utilized within one year and, therefore, may be used to pay current liabilities as they become due. Our working capital deficit means that our current assets on September 30, 2008 were not sufficient to satisfy all of our current liabilities on that date.

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

We have recently entered into a number of financing transactions. We are continuing to seek other financing initiatives. We need to raise additional capital to meet our working capital needs, for the repayment of debt and for capital expenditures. Such capital is expected to come from the sale of our debt and/or equity securities through private placement offerings and/or the sale of common stock. We believe that if we raise approximately $8.9 million we will be able to service our debt obligations, continue operations and begin market penetration for the CoreTx product line. During recent weeks the United States and global financial markets have undergone extreme levels of volatility. The United States and global credit markets have also become more restrictive than in the past. We have primarily utilized these markets for financing and raising capital. As a result of the recent changes in these markets, it may not be possible for us to continue to raise capital. No assurance can be given that we will be successful in completing any financings at the minimum level necessary to fund our working capital, debt repayment or other expenses, or at all. If we are unsuccessful in completing these financings, we will not be able to meet our working capital, debt repayment or other capital needs or execute our business plan. In such case we will assess all available alternatives including a sale of our assets or merger, the suspension of operations and possibly liquidation, auction, bankruptcy, or other measures.

MARKET INFORMATION AND OTHER MATTERS

Market Information

On July 13, 2007, we became a reporting company under the Securities Exchange Act of 1934. Our common stock has been quoted on the OTC Bulletin Board since August 8, 2008. There is currently a low volume public trading market for our common stock. There can be no assurance that an active public trading market for our common stock will develop. Absence of an active trading market could adversely affect our stockholders’ ability to sell our common stock in short time periods, or possibly at all. Our common stock has experienced, and is likely to experience in the future, significant price and volume fluctuations that could adversely affect the market price of our common stock without regard to our operating performance. In addition, we believe that factors such as fluctuations in our financial results and changes in the overall economy or the condition of the financial markets could cause the price of our common stock to fluctuate substantially.

Authorized and Outstanding 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 September 30, 2008, we had 67,188,638 shares of common stock outstanding and no shares of preferred stock outstanding.

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Stock Options

As of September 30, 2008, there were (i) 6,340,333 shares of our common stock issuable upon exercise of outstanding stock options under our 1999 Stock Incentive Plan at $0.25 per share and (ii) 7,127,000 shares of our common stock issuable upon exercise of outstanding stock options under our 2006 Plan at $0.25 to $0.75 per share.

Warrants

As of September 30, 2008, there were outstanding warrants to purchase 31,465,083 shares of our common stock at prices ranging from $0.10 to $1.50 per share.

Convertible Notes

Conversion into Common Stock. As of September 30, 2008, there were outstanding promissory notes convertible into shares of our common stock as follows:

Principal	Type of Note	Conversion Terms	Conversion Shares
$1,353,000	2003 Notes	Convertible into common stock at $0.25 per share.	5,412,000
$50,000	April 2006 Notes	Convertible into common stock at $0.30 per share.	166,667
$200,000	2006 A Note	Convertible into common stock at the lower of $0.30 and 70% of the average closing bid price for the 20 trading days before conversion [at an assumed market price of $0.25 the assumed conversion price is $0.175].	1,142,858
$250,000	2006 B Notes	Convertible into common stock at the lower of $0.50 and 70% of the average closing bid price for the 20 trading days before conversion [at an assumed market price of $0.25 the assumed conversion price is $0.175].	1,428,572
$250,000	2006 C Notes	Convertible into common stock at the lower of $0.60 and 70% of the average closing bid price for the 20 trading days before conversion [at an assumed market price of $0.25 the assumed conversion price is $0.175].	1,428,572
$250,000	2006 D Notes	Convertible into common stock at the lower of $0.50 and 70% of the average closing bid price for the 20 trading days before conversion [at an assumed market price of $0.25 the assumed conversion price is $0.175].	1,428,572
$239,078	2006 G Notes	Convertible into common stock at the lower of $0.75 and 70% of the average closing bid price for the 20 trading days before conversion but in no event less than $0.30 [at an assumed market price of $0.25 the assumed conversion price is $0.30].	796,927
$248,137	2007 C Note	Convertible into common stock at $0.35 per share.	708,963
$162,000	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].	540,000

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$240,000	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].	800,000
$606,000	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].	2,020,000
$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
$4,123,215			16,560,631

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, we are not required to provide information required by this Item.

ITEM 4.

CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports filed pursuant to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules, regulations and related forms, and that such information is accumulated and communicated to our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

As of September 30, 2008, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and our principal financial officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Controls

There have been no changes in our internal controls over financial reporting during the quarter ended September 30, 2008 that have materially affected or are reasonably likely to materially affect our internal controls.

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PART II - OTHER INFORMATION

ITEM 1.

LEGAL PROCEEDINGS.

There are no material legal proceedings pending against the Company except as described below.

On June 18, 2008, Marc R. Silverman, a former President and Chief Executive Officer of the Company and a former member of the Company’s Board of Directors, filed a lawsuit against the Company in the District Court for Boulder County, Colorado. Mr. Silverman claims that salary and consulting fees which Mr. Silverman had previously agreed to defer are now due and owing to him from the Company. Mr. Silverman alleges claims for relief based upon violation of the Colorado Wage Act and breach of contract. Mr. Silverman seeks relief including alleged unpaid wages due and owing, statutory liquidated damages under the Colorado Wage Act, actual damages, costs and expenses of prosecution, attorney fees and pre- and post-judgment interest. The Company believes that this complaint is without merit and filed an answer to defend against such complaint on July 31, 2008. The matter is scheduled for trial on March 2, 2009.

ITEM 1A.

RISK FACTORS.

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

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

2008 D UNITS. On June 23, 2008, June 27, 2008, July 18, 2008, July 31, 2008 and August 28, 2008, the Company sold $66,150, $200,000, $125,000, $95,000 and $50,000 of units, respectively, to lenders in a private transaction. Each Unit consists of an unsecured non-convertible promissory note in the principal amount of $1,000 (the “2008 D Notes”), and 3,000 warrants to purchase one share of our common stock at $0.30 per share (the “Warrants”). The 2008 D Notes will bear interest at 12% per annum and will mature 180 days from the date of issuance if not redeemed by such date (the “Maturity Date”). The 2008 D Notes may be redeemed by the Company in whole or in part at any time at a redemption price equal to 100% the principal amount of 2008 D Notes to be redeemed plus accrued and unpaid interest upon ten trading days prior notice (“Optional Redemption”). The 2008 D Notes will be redeemed by the Company on the 20th day after the Mandatory Redemption Event (as herein defined) at a redemption price equal to 100% the principal amount of 2008 D Notes to be redeemed plus accrued and unpaid interest upon ten trading days prior notice (“Mandatory Redemption”). The Mandatory Redemption Event shall be the date on which the Company has closed on equity financings grossing an aggregate of $1 million commencing upon the date of issuance of the 2008 D Notes and ending upon the Maturity Date. If the 2008 D Notes have not been redeemed as of the Maturity Date, the principal and interest due thereunder will be paid by the Company in cash. The Warrants included in the Units are exercisable for shares of Company common stock at any time beginning on the date of issuance and ending five years from the date of issuance at an exercise price of $0.30 per share. For the $66,150 of 2008 D Units sold on June 23, 2008, the total offering price and total fees paid to broker-dealers were $66,150 and $9,261, respectively. For the $200,000 of 2008 D Units sold on June 27, 2008, the total offering price and total fees paid to broker-dealers were $200,000 and $28,000, respectively. For the $125,000 of 2008 D Units sold on July 18, 2008, the total offering price and total fees paid to broker-dealers were $125,000 and $17,500, respectively. For the $95,000 of 2008 D Units sold on July 31, 2008, the total offering price and total fees paid to broker-dealers were $95,000 and $13,300, respectively. For the $50,000 of 2008 D Units sold on August 28, 2008, the total offering price and total fees paid to broker-dealers were $50,000 and $7,000, respectively. Broker-dealer fees consisted of a finder’s fee of 14% of the gross offering proceeds raised by the finder in this offering. Such fees were deducted from the offering proceeds. This issuance was exempt from registration requirements pursuant to Section 4(2) of the Securities Act of 1933. The proceeds from the 2008 D Units were used for working capital purposes.

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On August 18, 2008, the Company granted 100,000 options with an exercise price of $0.75 to Dr. August Leming upon his joining the Company’s Advisory Board which vest 1/3 on August 18, 2008, 1/3 on August 18, 2009 and 1/3 on August 18, 2010, provided the optionee is providing services to the Company on such dates. This issuance was exempt from registration requirements pursuant to Section 4(2) of the Securities Act of 1933.

On October 14, 2008, the Company granted 150,000 options with an exercise price of $0.30 to Tommy Harris upon his joining the Company’s Board of Directors which vest 1/3 on October 14, 2008, 1/3 on October 14, 2009 and 1/3 on October 14, 2010, provided the optionee is providing services to the Company on such dates. This issuance was exempt from registration requirements pursuant to Section 4(2) of the Securities Act of 1933.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITYHOLDERS.

None.

ITEM 5. OTHER INFORMATION.

The Company has obtained the consent of the holders of the following notes to a new maturity date of December 31, 2008 and a waiver of any event of default as of the previous maturity date: 2006 A Notes, 2006 B Notes, 2006 C Notes, 2006 G Notes, certain 2007 F Notes, and 2008 C Notes. The holder of the April 4, 2006 Note delivered a waiver of any event of default of the April 4, 2006 Note through December 31, 2008; the maturity date of such April 4, 2006 Note was May 1, 2008.

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ITEM 6. EXHIBITS.

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

10.121

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

10.122

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

10.127

Amendment No. 1 to Consulting Agreement dated June 23, 2008 between Performance Health Technologies, Inc. and Dawson James Securities (3)

10.128

Amendment No. 1 to Selling Agreement dated June 25, 2008 between Performance Health Technologies, Inc. and Dawson James Securities (3)

10.129

Form of Subscription Agreement entered into in 2008 D private placement (3)

10.130

Form of 12% Non-Convertible Note issued in 2008 D private placement (3)

10.131	Form of $0.30 Warrants issued in 2008 D private placement (3)

10.132	Time and Materials Contract dated August 8, 2008 between Logic Product Development and Performance Health Technologies, Inc. +

10.133	Form of Amendment to Notes to extend maturity dates +

10.134	Form of Waiver Letter to Note dated April 4, 2006 +

10.135	Form of Debt Exchange Agreement and Investor Questionnaire dated as of October 22, 2008 (including forms of notes and warrants) +

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

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

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

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

______________________

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

(2)	Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2008 and incorporated herein by reference.

(3)	Filed as an exhibit to the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2008 and incorporated herein by reference.

+ Exhibit filed herewith in this Report.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	PERFORMANCE HEALTH TECHNOLOGIES, INC.


Date: November 19, 2008	By:	/s/ Robert D. Prunetti
		Robert D. Prunetti, Chief Executive Officer
		(Principal Executive Officer)



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

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PERFORMANCE HEALTH TECHNOLOGIES INC 10-Q