Pediatric Prosthetics (PDPR) 10QSB Quarterly report (small business)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB

(Mark One)

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

For the quarterly period ended December 31, 2006

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

For the transition period from ___________ to ___________

Commission file number: 000-51804

PEDIATRIC PROSTHETICS, INC.

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

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

12926 Willow Chase Drive, Houston, Texas 77070

(Address of principal executive offices)

(281) 897-1108

(Registrant's telephone number)

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

As of February 5, 2007, 98,274,889 shares of Common Stock of the issuer were outstanding ("Common Stock").

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

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

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PEDIATRIC PROSTHETICS, INC.

UNAUDITED FINANCIAL STATEMENTS

For the Three and Six Months Ended December 31, 2006 and 2005

PEDIATRIC PROSTHETICS, INC.
TABLE OF CONTENTS
			Page
	Unaudited Balance Sheets as of December 31, 2006 and June 30, 2006			F-3
	Unaudited Statements Of Operations for the three and six
		months ended December 31, 2006 and 2005		F-4
	Unaudited Statement Of Changes in Stockholders’ Deficit for the six months ended
		December 31, 2006		F-5
	Unaudited Statements Of Cash Flows for six months ended
		December 31, 2006 and 2005		F-6
	Notes To Unaudited Financial Statements			F-7
F-2

PEDIATRIC PROSTHETICS, INC.
UNAUDITED BALANCE SHEETS
December 31, 2006 and June 30, 2006
	December 31, 2006			June 30, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	22,857		$	274,641
Trade accounts receivable, net		380,393			268,642
Prepaid expenses and other current assets		11,825			13,396
Current portion of deferred financing costs, net		119,665			109,693
Total current assets		534,740			666,372
Furniture and equipment, net		58,954			59,138
Deferred financing costs		169,530			239,334
Total assets	$	763,224		$	964,844
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities:
Trade accounts payable	$	196,511		$	143,167
Accrued liabilities		268,079			257,680
Current portion of convertible debt, net of discount of
$25,000 at June 30, 2006		75,000			60,000
Due to related party		500			500
Derivative financial instruments		2,766,164			5,119,365
Total current liabilities		3,306,254			5,580,712
Convertible debt, net of discount of $543,358 and $592,716 at
December 31, 2006 and June 30, 2006, respectively		56,642			7,284
Deferred rent		11,871			12,575
Total liabilities		3,374,767			5,600,571
Commitments and contingencies:
Stockholders' deficit:
Preferred stock, par value $0.001; authorized
10,000,000; 1,000,000 issued and outstanding		1,000			1,000
Common stock, par value $0.001; authorized 100,000,000
shares; issued and outstanding 98,274,889 shares		98,275			98,275
Additional paid-in capital		8,210,615			7,764,327
Accumulated deficit		(10,921,433	)		(12,499,329	)
Total stockholders’ deficit		(2,611,543	)		(4,635,727	)
Total liabilities and stockholders' deficit	$	763,224		$	964,844
The accompanying notes are an integral part of these financial statements
F-3

PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended December 31, 2006 and 2005
	Three Months Ended						Six Months Ended
	December 31,						December 31,
	2006			2005			2006			2005
Revenue	$	241,138		$	165,695		$	436,368		$	269,743
Operating expenses:
Cost of sales, except for items
stated separately below		35,640			73,599			111,641			110,815
Selling, general and
administrative expenses		385,212			268,713			928,451			436,823
Depreciation expense		6,038			5,427			11,997			10,115
Total operating expenses		426,890			347,739			1,052,089			557,753
Loss from operations		(185,752	)		(182,044	)		(615,721	)		(288,010	)
Other income and (expenses):
Interest income		-			-			1			-
Interest expense		(69,093	)		(9,480	)		(159,585	)		(15,511	)
Loss on disposal of equipment		-			(2,811	)		-			(2,811	)
Gain on extinguishment of debt		-			310,799			-			310,799
Change in value of derivative
financial instruments		1,150,661			-			2,353,201			-
Total other income, net		1,081,568			298,508			2,193,617			292,477
Net income	$	895,816		$	116,464		$	1,577,896		$	4,467
Net income per common share - basic
and diluted	$	0.01		$	0.00		$	0.02		$	0.00
Weighted average shares of common
stock outstanding - basic and diluted		98,274,889			95,954,539			98,274,889			93,481,713
The accompanying notes are an integral part of these financial statements
F-4

PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Six Months Ended December 31, 2006
									Additional
	Preferred Stock				Common Stock				Paid-In		Accumulated
	Shares		Amount		Shares		Amount		Capital		Deficit			Total
Balance at June 30, 2006		1,000,000	$	1,000		98,274,889	$	98,275	$	7,764,327	$	(12,499,329	)	$	(4,635,727	)
Amortization of stock-based
compensation		-		-		-		-		446,288		-			446,288
Net income		-		-		-		-		-		1,577,896			1,577,896
Balance at March 31, 2006		1,000,000	$	1,000		98,274,889	$	98,275	$	8,210,615	$	(10,921,433	)	$	(2,611,543	)
The accompanying notes are an integral part of these financial statements
F-5

PEDIATRIC PROSTHETICS, INC.
UNAUDITED STATEMENTS OF CASH FLOWS
For the Six Months Ended December 31, 2006 and 2005
	2006			2005
Cash Flows From Operating Activities
Net income	$	1,577,896		$	4,467
Adjustments to reconcile net income to net cash used by
operating activities
Depreciation expense		11,997			10,115
Loss on disposal of equipment		-			2,811
Deferred rent		(704	)		-
Stock-based compensation		446,288			119,108
Provision for doubtful accounts		15,838			22,921
Amortization of debt issue costs		134,190			-
Change in value of derivative financial instruments		(2,353,201	)		-
Gain on extinguishment of debt		-			(310,799	)
Changes in operating assets and liabilities:
Accounts receivable		(127,589	)		(65,372	)
Prepaid expenses and other current assets		1,571			644
Accounts payable		53,344			36,645
Accrued liabilities		10,399			8,964
Net cash used by operating activities		(229,971	)		(170,496	)
Cash Flows From Investing Activities
Purchase of furniture and equipment		(11,813	)		-
Net cash used by investing activities		(11,813	)		-
Cash Flows From Financing Activities:
Payment in settlement of convertible debt		-			(30,000	)
Payment of convertible debt		(10,000	)		-
Proceeds from common stock, net of expenses		-			210,000
Net cash provided (used) by financing activities		(10,000	)		180,000
Net increase (decrease) in cash and cash equivalents		(251,784	)		9,504
Cash and cash equivalents, beginning of period		274,641			29,818
Cash and cash equivalents, end of period	$	22,857		$	39,322
Supplemental Disclosure of Cash Flow Information
Cash paid for interest expense	$	3,000		$	11,731
Cash paid for income taxes		-			-
The accompanying notes are an integral part of these financial statements
F-6

PEDIATRIC PROSTHETICS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES

GENERAL

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

USE OF ESTIMATES

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

INTERIM FINANCIAL STATEMENTS

The unaudited condensed financial statements included herein have been prepared by Pediatric pursuant to the rules and regulations of the Securities and Exchange Commission. The financial statements reflect all adjustments that are, in the opinion of management, necessary to fairly present such information. All such adjustments are of a normal recurring nature. Although Pediatric believes that the disclosures are adequate to make the information presented not misleading, certain information and footnote disclosures, including a description of significant accounting policies normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP), have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements and the notes thereto included in Pediatric's 2006 Annual Report. The results of operations for interim periods are not necessarily indicative of the results for any subsequent quarter or the entire fiscal year ending June 30, 2007.

2. GOING CONCERN CONSIDERATIONS

Since its inception, Pediatric has suffered significant net losses and has been dependent on outside investors to provide the cash resources to sustain its operations. During the years ended June 30, 2006 and 2005, Pediatric reported net losses of $4,413,417 and $4,356,519, respectively, and negative cash flows from operations of $436,226 and $298,454, respectively. For the six months ended December 31, 2006 Pediatric reported net income of $1,577,896 and negative cash flows from operations of $229,971.

Although Pediatric has net income of $1,571,896 for the six months ended December 31, 2006, such net income was the result of changes in the value of derivative financial instruments and not the result of core operations. Negative operating results have produced a working capital deficit of $2,771,514 and a stockholders' deficit of $2,611,543 at December 31, 2006. Pediatric's negative financial results and its current financial position raise substantial doubt about Pediatric's ability to continue as a going concern. The financial statements do not reflect any adjustments relating to the recoverability and classification of recorded asset amounts or liability amounts that might be necessary should Pediatric be unable to continue in existence.

F-7

PEDIATRIC PROSTHETICS, INC.

NOTES TO UNAUDITED FINANCIAL STATEMENTS

2. GOING CONCERN CONSIDERATIONS, continued

Pediatric is currently implementing it plans to deal with going concern issues. The first step in that plan was its recapitalization into a public shell on October 10, 2003. Management believes that the recapitalization and its current plan to become a fully reporting public company will allow Pediatric, through private placements of its common stock, to raise the capital to expand operations to a level that will ultimately produce positive cash flows from operations.

Pediatirc's long-term viability as a going concern is dependent on certain key factors, as follows:

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

· Pediatric's ability to increase its customer base and broaden its service capabilities.

· Pediatric's ability to ultimately achieve adequate profitability and cash flows to sustain continuing operations.

F-8

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

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

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

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

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

We generate an average of approximately $8,000 of gross profit per fitting of the prosthetics devices, however, the exact amount of gross profit we will receive for each fitting, will depend on the exact mix of arms versus legs fitted and the number of re-fittings versus new fittings. From July 1, 2005, until December 31, 2005, we made approximately twenty-seven fittings and from January 1, 2006, until June 30, 2006, we made approximately thirty-six fittings, and from July 1, 2006 until February 15, 2007, we made approximately thirty-nine fittings, two of which were pro bono. We averaged approximately four or five fittings per month through December 2005 and have averaged approximately five to six fittings per month since January 2006.

History of the Company

We were formed as an Idaho corporation on January 29, 1954, under the name Uranium Mines, Inc. From January 1954 onward, we experienced various restructurings and name changes, including a name change effective March 9, 2001, to Grant Douglas Acquisition Corp. On October 10, 2003, a separate Texas corporation Pediatric Prosthetics, Inc. ("Pediatric Texas"), entered into an acquisition agreement with us, whereby Pediatric Texas agreed to exchange 100% of its outstanding stock for 8,011,390 shares of our common stock and 1,000,000 shares of our Series A Convertible Preferred Stock (the "Exchange"). We remained as the surviving accounting entity following the Exchange and Grant Douglas Acquisition Corp., the surviving legal entity, adopted a name change to Pediatric Prosthetics, Inc. on October 31, 2003 in connection with the Exchange. In connection with the Exchange, the shareholders of Pediatric Texas (who became our shareholders subsequent to the Exchange) agreed to assume $443,632 in liabilities related to the assumption of a $350,000 convertible note and $93,632 of accrued interest on such note that was held by us prior to the Exchange. From November 2003 through June of 2005 we repaid $148,955 of note principal through the issuance of common stock with a fair market value of $2,688,734 and recognized a $2,539,779 loss on extinguishment of debt. During the year ended June 30, 2006, we negotiated the extinguishment of the remaining convertible note of $201,045 and accrued interest of $139,754 for a one time cash payment of $30,000 and recognized a gain on extinguishment of debt of $310,799.

We had been a non-operating, non-reporting, corporate shell, without assets or operations since February 6, 2001, but had traded our common stock on the Pinksheets under the symbol "GDRG," prior to the Exchange, and had limited operations, consisting solely of hiring Dan Morgan, our current Vice President and Chief Prosthestist, and seeking a merger and/or acquisition candidate, and had no sales and made no fittings, prior to February 6, 2001. We had not been a reporting company prior to the share exchange. We entered into the Exchange to acquire an operating business, Pediatric, and the shareholders of Pediatric entered into the Exchange to trade Pediatric's common stock on the Pinksheets.

Pediatric, the Texas corporation, had limited operations prior to the share exchange with us through a partnership solely controlled by the owners of Pediatric. Upon the initial funding following the share exchange, in November of 2003 we began start-up activities associated with establishing a prosthetics "patient-care facility" according to the regulations set forth by the Texas Department of Health. We also began recruiting our core team of employees, equipping our prosthesis manufacturing laboratory, and building out and furnishing our facility at 12926 Willow Chase Drive in Houston, Texas, in compliance with the Texas Board of Health and local occupancy permit requirements. Our "patient-care facility" was approved and accredited by the Texas Board of Health on March 18, 2004. We were approved at that time for the clinical fitting of and fabrication of prosthetic devices for the general public, and for the billing of third party payors, such as health insurance companies for those services.

SERVICE AGREEMENT WITH GLOBAL MEDIA

In February 2006, the Company entered into a service agreement (the "Service Agreement") with Global Media Fund Inc. ("Global"), whereby Global agreed to distribute certain newspaper features, which Global has guaranteed will be placed in at least 100 newspapers and radio features regarding the Company, which Global has guaranteed will be placed in at least 400 radio stations. In consideration for executing the Service Agreement, the Company issued Global 250,000 restricted shares of common stock in March 2006. The terms of the agreement call for the Company to issue Global a remaining value of shares equal to $125,000, which will to be paid by issuances of common stock on May 1, 2006, August 1, 2006, November 1, 2006 and February 1, 2007, which shares we anticipate issuing once we are able to increase our authorized but unissued shares of common stock, as described herein. The Service Agreement provides that the Company will issue shares based on the contract payments of $28,125 per payment; however the agreement contains a stock valuation provision that will provide Global with shares that are discounted by 10% of the five day average quoted market prices prior to the issuance dates, therefore Global will receive common stock valued at $31,250 per installment. We also granted Global piggyback registration rights in connection with the shares issued to Global pursuant to the Service Agreement. If we fail to issue Global any consideration owed pursuant to the Service Agreement when due, Global may terminate the Service Agreement with thirty (30) days written notice to us at which time Global will keep all consideration issued as of that date. We have the right to cancel the Service Agreement at anytime with thirty (30) days written notice to Global, at which time Global will keep all consideration issued as of that date.

On or about June 2, 2006, we issued Global 446,427 shares of common stock valued at $31,250, in connection with the May 1, 2006, payment of $28,125 on the Service Agreement. The value of our common stock in connection with the issuance of the additional shares to Global shall be equal to the value of the common stock to be issued divided by 90% of the average of the closing value of the common stock on the five trading days prior to the date such stock is to be issued on the Pinksheets trading market, or Over-The-Counter Bulletin Board, wherever our common stock is then traded. For example, the average of the closing price of our common stock for the five trading days prior to the May 1, 2006 payment on the Pinksheets was $0.07 per share. Therefore, the amount of shares we issued Global for such May 1, 2006 payment was $28,125 divided by $0.063 ($0.07 x 0.90), which was equal to approximately 446,427 shares of common stock which had a fair market value of $31,250.

On March 1, 2006, and March 21, 2006, we entered into two separate loans for $17,500, with two shareholders to provide us with an aggregate of $35,000 in funding. The loans bear interest at the rate of 12% per annum until paid. Both loans became due in May, but have since been extended. In December 2006, $10,000 was repaid on one of the loans, leaving $25,000 outstanding under the loans as of the date of this report. Additionally, the remaining $25,000 owed pursuant to the loans are convertible into an aggregate of 714,286 shares of our common stock, with each $0.035 of each outstanding loan being able to convert into one share of our common stock.

In April 2006, we borrowed $50,000 from a shareholder of the Company and issued a promissory note and warrants in connection with such loan. The promissory note bears interest at the rate of 12% per annum, and was due and payable on September 29, 2006. The promissory note was renewed for an additional six months, at the option of the holder, through March 2007. This loan is also convertible into an aggregate of 1,428,571 shares of common stock at the rate of one share for each $0.035 owed. The shareholder also received as consideration for the $50,000 promissory note, 1,428,571 warrants, which are exercisable for shares of common stock at an exercise price of $0.045 per share, and which expire on May 22, 2008.

In May 2006, we entered into a services agreement with Stock Enterprises, a privately held financial and investor relations services firm ("Stock"), whereby Stock agreed to provide us investor relations services on a non-exclusive basis for the period of one (1) year, and we agreed to issue Stock 2,000,000 restricted shares of our common stock, which shares have not been issued to Stock to date.

MAY 2006 SECURITIES PURCHASE AGREEMENT

On May 30, 2006 (the "Closing"), we entered into a Securities Purchase Agreement ("Purchase Agreement") with AJW Partners, LLC; AJW Offshore, Ltd.; AJW Qualified Partners, LLC; and New Millennium Capital Partners II, LLC (each a "Purchaser" and collectively the "Purchasers"), pursuant to which the Purchasers agreed to purchase $1,500,000 in convertible debt financing from us. Pursuant to the Securities Purchase Agreement, we agreed to sell the investors $1,500,000 in Callable Secured Convertible Notes (the "Debentures"), which are to be payable in three tranches, $600,000 of which was received by the Company on or around May 31, 2006, in connection with the entry into the Securities Purchase Agreement; $400,000 upon the filing of a registration statement to register shares of common stock which the Debentures are convertible into as well as the shares of common stock issuable in connection with the exercise of the Warrants (defined below), which registration statement we have filed to date; and $500,000 upon the effectiveness of such registration statement. The Debentures are convertible into our common stock at a discount to the then trading value of our common stock as described in greater detail below. Additionally, in connection with the Securities Purchase Agreement, we agreed to issue the Purchasers warrants to purchase an aggregate of 50,000,000 shares of our common stock at an exercise price of $0.10 per share (the "Warrants"). We agreed to register the shares of common stock which the Debentures are convertible into and the shares of common stock which the Warrants are exercisable for, on a Form SB-2 registration statement. We secured the Debentures pursuant to the Security Agreement and Intellectual Property Security Agreement, described below.

We also agreed in the Purchase Agreement to use our best efforts to increase our key man life insurance on our President and Director, Linda Putback-Bean and our Vice President and Director Kenneth W. Bean on or before fifteen (15) business days from the Closing. In June 2006, we submitted applications and had physical exams to increase our key man life insurance through the agent the Purchasers recommended to us, but so far have not received the policies or paid any premiums in connection with the increased key man life insurance to date.

The $600,000 we received from the Purchasers at the Closing, in connection with the sales of the Debentures was distributed as follows:

o $100,000 to Lionheart Associates, LLC doing business as Fairhills Capital ("Lionheart" or “Fairhills”), as a finder's fee in connection with the funding (we also have agreed to pay Lionheart an additional $50,000 upon the payment of the next tranche of the funding by the Purchasers);

o $18,000 to OTC Financial Network, as a finder's fee in connection with the funding (we also have agreed to pay OTC Financial Network an additional $27,000 upon the payment of additional tranches of funding by the Purchasers);

o $75,000 in legal fees and closing payments to our counsel, the Purchaser's counsel and certain companies working on the Purchaser's behalf;

o $10,000 to be held in escrow for the payment of additional key man life insurance on Linda Putback-Bean and Kenneth W. Bean; and

o $370,000 to us, which we spent on legal and accounting fees in connection with the filing of our amended Form 10-SB, outstanding reports on Form 10-QSB, and Form SB-2 registration statement, as well as marketing and promotional fees and inventory costs, as well as other general working capital purposes.

We plan to use the $900,000 in proceeds from the sale of the additional Convertible Debentures, including the $400,000 we plan to receive within the next week, due to our filing of our registration statement with the Commission on February 9, 2007, which filing triggered the sale of an additional $400,000 in debentures, and the $500,000 we plan to receive once the registration statement is declared effective with the Commission, of which there can be no assurance, as follows:

o $200,000 - Accounting, auditing and attorney’s fees in connection with our periodic reports, the Form 10-SB registration statement and the Form SB-2 registration statement to register the shares issuable upon conversion of the Convertible Debentures;

o $125,000 - Inventory for our prosthetics operations;

o $75,000 - Equipment and building improvements;

o $300,000 - Promotional, marketing and travel costs associated with our increased marketing campaign;

o $100,000 - Closing costs and finders fees in connection with the funding; and

o $100,000 - General working capital, including certain amounts for officers and directors salaries, rent and office expenses.

CALLABLE SECURED CONVERTIBLE NOTES

Pursuant to the Purchase Agreement, we agreed to sell the Purchasers an aggregate of $1,500,000 in Debentures, which Debentures have a three year term and bear interest at the rate of six percent (6%) per annum, payable quarterly in arrears, provided that no interest shall be due and payable for any month in which the trading value of our common stock is greater than $0.10375 for each day that our common stock trades. Any amounts not paid under the Debentures when due bear interest at the rate of fifteen percent (15%) per annum until paid. The conversion price of the Debentures is equal to 50% of the trading price of our common stock on any trading day, during which we receive a notice of conversion from the Purchasers (the "Conversion Price").

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

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

"Events of Default" under the Debentures include:

1.	Our failure to pay any principal or interest when due;
2.	Our failure to issue shares of common stock to the Purchasers in connection with any conversion as provided in the Debentures;
3.	Our failure to file a Registration Statement covering the shares of common stock which the Debentures are convertible into within sixty (60) days of the Closing (July 31, 2006), or obtain effectiveness of such Registration Statement within one hundred and forty-five (145) days of the Closing (October 22, 2006), which dates have been amended to January 15, 2007 (which filing date was not met by us, but which failure has since been waived by the Purchasers) and April 16, 2007, respectively in connection with the Waiver of Rights Agreement, described in greater detail below, or if such Registration Statement once effective, ceases to be effective for more than ten (10) consecutive days or more than twenty (20) days in any twelve (12) month period;
4.	Our entry into bankruptcy or the appointment of a receiver or trustee;

5.	Our breach of any covenants in the Debentures or Purchase Agreement, if such breach continues for a period of ten (10) days after written notice thereof by the Purchasers, or our breach of any representations or warranties included in any of the other agreements entered into in connection with the Closing;
6.	If any judgment is entered against us or our property for more than $100,000, and such judgment is unvacated, unbonded or unstayed for a period of twenty (20) days, unless otherwise consented to by the Purchasers, which consent will not be unreasonably withheld; or
7.	If we fail to maintain the listing of our common stock on the OTCBB or an equivalent replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American Stock Exchange within 180 days from the date of Closing.

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

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

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

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

STOCK PURCHASE WARRANTS

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

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

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

REGISTRATION RIGHTS AGREEMENT

Pursuant to the Registration Rights Agreement entered into at the Closing, we agreed to file a registration statement on Form SB-2, to register two (2) times the shares of common stock which the Debentures are convertible into (to account for changes in the Conversion Rate and the conversion of interest on the Debentures) as well as the shares of common stock issuable in connection with the exercise of the

Warrants, within sixty (60) days of the Closing which we were not able to accomplish, but which date was amended from sixty (60) days from the Closing until January 15, 2007 in connection with the Waiver of Rights Agreement (described below), which date such Registration Statement was not filed by, but which registration statement has been filed as of the date of filing of this report, and to obtain effectiveness of such registration statement by April 16, 2007. However, we do not currently have enough authorized but unissued shares to allow for such conversion and/or exercise by the Purchasers and therefore have filed an information statement with the SEC to allow for shareholder approval to affect an increase in our authorized shares in connection with such registration statement filing.

If we do not obtain effectiveness of our registration statement with the SEC by April 16, 2007, or if after the registration statement has been declared effective by the SEC, sales of common stock cannot be made pursuant to the registration statement, or our common stock ceases to be traded on the Over-the-Counter Bulletin Board (the "OTCBB") or any equivalent replacement exchange, then we are required to make payments to the Purchasers in connection with their inability and/or delay to sell their securities. The payments are to be equal to the then outstanding amount of the principal amount of the Debentures, multiplied by $0.02, multiplied by the number of months after April 16, 2007 and/or the date sales are not able to be effected under the registration statement, pro rated for partial months. For example, for each month that passes in which we fail to obtain effectiveness of our registration statement, after April 16, 2007, we would owe the Purchasers an aggregate of $20,000 in penalty payments, based on $1,000,000 then outstanding under the Debentures ($600,000 in debentures sold to the Purchasers at the Closing, plus $400,000 in Debentures sold to the Purchasers upon filing the registration statement).

RECENT EVENTS

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

PLAN OF OPERATIONS

During October 2005, management contracted with three (3) consultants to commence a national multi-media publicity campaign based upon the success stories of the children for which we have provided services. Management's goal is to provide awareness of our commitment to provide superior pediatric prosthetic care on a national level. We paid the consultants an aggregate of 7,000,000 shares of our common stock in connection with such contracts.

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

As of December 2006, based on our current monthly gross profits generated in connection with fitting prosthetic limbs, which approximately totals our monthly overhead of $54,000, we believe we will be able to continue our operations throughout fiscal 2007, assuming we sell an additional $500,000 in Convertible Debentures to the Purchasers pursuant to the Securities Purchase Agreement, due to the $400,000 in Convertible Debentures we plan to sell to the Purchasers within the next week, due to our filing of our required registration statement with the Commission, which registration statement filing triggers the sale of an additional $400,000 in debentures pursuant to the Securities Purchase Agreement entered into with the Purchasers. However, if we are unable to gain effectiveness of the registration statement to register the shares of common stock issuable upon conversion of the Convertible Debentures and are therefore unable to sell the additional tranche of Convertible Debentures, we anticipate being forced to curtail our marketing efforts disclosed above. If we are required to raise additional funding other than through the sale of the additional tranches of Convertible Debentures, we anticipate such funds to be raised through the sale of debt and/or equity securities. We received $600,000 on May 30, 2006 (less closing costs and structuring fees), from the sale of certain Convertible Debentures described above and anticipate receiving an additional $400,000 through the sale of additional Convertible Debentures within the next week due to our filing of a registration statement with the Commission to register the shares convertible into common stock pursuant to the Convertible Debentures. Assuming we receive these additional funds subsequent to the filing of this report and are able to sell the additional tranche of Convertible Debentures, we expect to increase our fiscal 2007 cash advertising and marketing budget five fold over our fiscal 2006 advertising budget. We believe the five fold increase in our advertising and marketing budget will generate a substantial ramp-up of our monthly prosthetic fittings rate and resulting gross profits due to a growing national awareness of our specialization in personalized pediatric services, combined with the re-fitting of the growing number of clients we have already fitted.

The increases in our advertising and marketing budget have already allowed us to undertake the following advertising and marketing activities:

o The composition of and distribution of certain feature newspaper articles through our agreement with Global, pursuant to which we agreed to pay Global an aggregate of $150,000 worth of our common stock, based on the trading value of our common stock on certain payment dates, as described in greater detail above under “Recent Events,” of which $48,750 in common stock has been issued to date; and

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

Additionally, we believe the increases in our advertising and marketing budget will allow us to undertake the following activities during the next twelve (12) months, assuming the Purchasers purchase the additional $500,000 in additional Convertible Debentures, and that we sell the $400,000 in additional Convertible Debentures, which the Purchasers are required to purchase due to our filing of our registration statement:

o The production, filming, editing and narration of informational videos on the value of modern prosthetic options for children, which videos describe the success stories we have had in helping children overcome limb loss by fitting such children with artificial limbs, as well as the distribution of such videos to fellow pediatric professionals such as nurses, physical therapists, doctors and hospital-based family counselors nationally, at a cost of approximately $300,000;

o Costs associated with publicizing and scholarships for our four day “whole family summer get-together” for children with a limb-loss and their families, at a cost of approximately $50,000;

o Travel and associated costs involved with appearances on television shows, medical conventions and nursing schools at a cost of approximately $20,000; and

o Sponsorship costs of non-profit organizations such as the “Amputee Coalition of American” and the Para-Olympics, at a cost of approximately $50,000.

As stated above, we anticipate receiving approximately $900,000 in subsequent tranches in connection with the funding agreement described above, however, investors should keep in mind that any amounts of funding we receive pursuant to the funding will be reduced by fees paid to the lending source in connection with closing costs and legal and accounting costs associated with our need to file amendments and obtain effectiveness of this Form SB-2 Registration Statement.

Moving forward, we plan to work towards becoming traded on the Over-The-Counter Bulletin Board (“OTCBB”) by responding to the Commission’s comments to this Form SB-2 registration statement, obtaining shareholder approval to increase our authorized shares of common stock to allow for sufficient authorized but unissued shares of common stock for the holders of the Convertible Debentures and Warrants to convert such Debentures and exercise such Warrants. Furthermore, we hope to request and/or encourage a broker-dealer to act as a market maker for our common stock so that we can gain approval to quote our common stock on the OTCBB during fiscal 2007, which we believe will increase the liquidity of our common stock, of which there can be no assurance. As of the filing of this Report, we have not engaged any specific market makers regarding the quoting of our common stock on the OTCBB.

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COMPARISON OF OPERATING RESULTS

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED DECEMBER 31, 2006 COMPARED TO THE THREE MONTHS ENDED DECEMBER 31, 2005

We had revenue of $241,138 for the three months ended December 31, 2006, compared to revenue of $165,695 for the three months ended December 31, 2005, an increase in revenue of $75,443 or 45.5% from the prior period. The increase in revenue for the three months ended December 31, 2006, compared to the three months ended December 31, 2005, was mainly due to increased fees received from our Host Affiliates in connection with increased fittings due to our national awareness and marketing program, which we began during the fiscal year ended 2006 (described above), as well as a significant number of re-fittings of existing patients due to such patients’ physical growth.

We had total operating expenses of $426,890 for the three months ended December 31, 2006, compared to total operating expenses of $347,739 for the three months ended December 31, 2005, an increase in total operating expenses of $79,151 or 22.8% from the previous year’s period. The increase in total operating expenses was mainly due to a $116,499 or 43.3% increase in selling, general and administrative expenses for the three months ended December 31, 2006, compared to the three months ended December 31, 2005, which increase was due to increased marketing expenses in connection with our advertising and marketing campaign (described above), and increases in our legal and accounting expenses in connection with our amended Form 10-SB registration statement, as well as the preparation by our legal counsel, and the review of by our auditors, of our other public filings and required financial statements, which expenses were not present during the three months ended December 31, 2005, as we were not a public reporting company at that time, as well as an increase of $611 in depreciation expense, to $6,038 for the three months ended December 31, 2006, compared to $5,427 for the three months ended December 31, 2005, in connection with an increase in our depreciable asset base during the year ended June 30, 2006, offset by a $37,959 decrease in our cost of sales, to $35,640 for the three months ended December 31, 2006, compared to $73,599 for the three months ended December 31, 2005, which decrease in cost of sales was directly attributable to a larger portion of our fittings being “re-fittings” of previously fitted prosthesis, due to our pediatric patients growth, during the three months ended December 31, 2006, compared to the prior period in 2005, which re-fittings required less expensive components than each original fitting.

Selling, general and administrative expenses as a percentage of revenue for the three months ended December 31, 2006 were 160%, compared to selling, general and administrative expenses as a percentage of revenue of 162% for the three months ended December 31, 2005, which represented a decrease in selling, general and administrative expenses as a percentage of revenue of 2% from the prior period. This decrease was mainly due to the 45.5% increase in revenue for the three months ended December 31, 2006, offset by the 43.3% increase in selling, general and administrative expenses for the three months ended December 31, 2006. We expect our selling, general and administrative expenses as a percentage of revenue to initially be higher than future percentages due to early stage startup costs associated with building an administrative infrastructure

We had a loss from operations of $185,752 for the three months ended December 31, 2006, compared to a loss from operations of $182,044 for the three months ended December 31, 2005, an increase of $3,708 or 2% from the prior period. The increase in loss from operations was mainly caused by the 22.8% increase in total operating expenses for the three months ended December 31, 2006, compared to the prior year’s period.

We had total other income, net of $1,081,568 for the three months ended December 31, 2006, compared to total income, net of $298,508 for the three months ended December 31, 2005, which represented an increase in other income of $783,060 or 262.3% from the prior period. The increase in net other income was mainly due to the $1,150,661 increase in the change in value of the derivative financial instruments for the three months ended December 31, 2006, that was not represented for the three months ended December 31, 2005, which was offset by an increase of $59,613 of interest expense also in connection with our outstanding Convertible Debentures, to interest expense of $69,093 for the three months ended December 31, 2006, compared to interest expense of $9,480 for the three months ended December 31, 2005, as well as $310,799 in gain on extinguishment of debt during the six months ended December 31, 2005, which gain was not present during the three months ended December 31, 2006.

The gain on extinguishment of debt for the three months ended December 31, 2005, was in connection with a Settlement Agreement and Release, we entered into in November 2005, with Secured Releases, LLC ("Secured" and the "Release"). Pursuant to the Release, we and Secured agreed to settle our claims against each other in connection with a convertible promissory note issued in February 2001. In connection with the Release, we agreed to pay Secured $30,000, which has been paid to date and we and Secured agreed to release each other, our officers, directors, shareholders, members, agents, employees, representatives and assigns from any and all causes of action, suits, claims, demands, obligations, liabilities, damages of any nature, whatsoever, known or unknown in connection with the promissory note or any other dealings, negotiations or transactions between us and Secured. Under the settlement agreement, we paid $30,000 for the compete discharge of $201,045 of convertible debt and $139,754 of related accrued interest, resulting in a gain on extinguishment of debt of $310,799 for the three months ended December 31, 2005.

We had net income of $895,816 for the three months ended December 31, 2006, compared to net income of $116,464 for the three months ended December 31, 2005, an increase in net income of $779,352 or 669% from the previous period. The increase in net income was mainly due to the $1,081,568 net increase in total other income, which was mainly due to the $1,150,661 change in the value of derivative financial instruments in connection with the fair value of our Convertible Debentures and our $75,443 or 45.5% increase in revenues, which was offset by our $79,151 or 22.8% increase in total operating expenses for the three months ended December 31, 2006, compared to the three months ended December 31, 2005. Investors should keep in mind that our net income for the three months ended December 31, 2006, was the result of changes in the value of our derivative financial instruments and not the result of our core operations.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED DECEMBER 31, 2006 COMPARED TO THE SIX MONTHS ENDED DECEMBER 31, 2005

We had revenue from operations of $436,368 for the six months ended December 31, 2006, compared to revenue of $269,743 for the six months ended December 31, 2005, an increase in revenue of $166,625 or 61.8% from the prior period. The increase in revenue for the six months ended December 31, 2006, compared to the six months ended December 31, 2005, was mainly due to increased fees received from our Host Affiliates in connection with increased fittings due to our national awareness and marketing program, which we began during the fiscal year ended 2006 (described above), as well as a significant number of re-fittings of existing patients due to such patients’ physical growth.

We had total operating expenses of $1,052,089 for the six months ended December 31, 2006, compared to total operating expenses of $557,753 for the six months ended December 31, 2005, an increase in total operating expenses of $494,336 or 88.6% from the previous year’s period. The increase in total operating expenses was mainly due to a $491,628 or 112.5% increase in selling, general and administrative expenses for the six months ended December 31, 2006, compared to the six months ended December 31, 2005, which increase was due to increased marketing expenses in connection with our advertising and marketing campaign (described above), and increases in our legal and accounting expenses in connection with our amended Form 10-SB registration statement filings and the preparation of our public filings, which expenses were not present during the six months ended December 31, 2005, as we were not a public reporting company at that time, as well as an increase of $1,882 or 18.6% in depreciation expense, to $11,997 for the six months ended December 31, 2006, compared to $10,115 for the six months ended December 31, 2005, in connection with an increase in our depreciable asset base during the year ended June 30, 2006, and an $826 increase in cost of sales, to $111,641 for the six months ended December 31, 2006, compared to $110,815 for the six months ended December 31, 2005, which increase in cost of sales was directly attributable to increased purchases of parts and components in connection with our increased sales for the six months ended December 31, 2006, compared to the prior period.

Selling, general and administrative expenses as a percentage of revenue for the six months ended December 31, 2006 were 213%, compared to selling, general and administrative expenses as a percentage of revenue of 162% for the six months ended December 31, 2005, which represented an increase in selling, general and administrative expenses as a percentage of revenue of 51% from the prior period. This increase was mainly due to the 112.5% increase in selling, general and administrative expenses for the six months ended December 31, 2006, which was not sufficiently offset by the 61.8% increase in revenue from operations for the six months ended December 31, 2006. We expect our selling, general and administrative expenses as a percentage of revenue to initially be higher than future percentages due to early stage startup costs associated with building an administrative infrastructure.

We had a loss from operations of $615,721 for the six months ended December 31, 2006, compared to a loss from operations of $288,010 for the six months ended December 31, 2005, an increase of $327,711 or 113.8% from the prior period. The increase in loss from operations was mainly caused by the $494,336 or 88.6% increase in total operating expenses (which was mainly due to the 112.5% increase in selling, general and administrative expenses) for the six months ended December 31, 2006, compared to the six months ended December 31, 2005, which was not sufficiently offset by the 61.8% increase in revenue for the six months ended December 31, 2006, compared to the prior period.

We had total other income, net of $2,193,617 for the six months ended December 31, 2006, compared to total other income, net of $292,477 for the six months ended December 31, 2005, which represented an increase in other income, net of $1,901,140 or 650% from the prior period. The increase in other income, net was mainly due to the $2,353,201 increase in the change in value of the derivative financial instruments that was not represented for the six months ended December 31, 2005, which was offset by an increase of $144,074 of interest expense also in connection with our outstanding Convertible Debentures, to interest expense of $159,585 for the six months ended December 31, 2006, compared to interest expense of $15,511 for the six months ended December 31, 2005, and a decrease in gain on extinguishment of debt of $310,799, in connection with the Release, described above.

We had net income of $1,577,896 for the six months ended December 31, 2006, compared to net income of $4,467 for the six months ended December 31, 2005, an increase in net income of $1,573,429 from the previous period. The increase in net income was mainly due to the $1,901,140 increase in total other income, which was mainly due to the $2,353,201 of change in the value of the derivative financial instruments in connection with the fair value of our Convertible Debentures and our $166,625 or 61.8% increase in revenues, which was offset by our $491,628 or 112.5% increase in general and administrative expenses for the six months ended December 31, 2006, compared to the six months ended December 31, 2005. Investors should keep in mind that our net income for the six months ended December 31, 2006, was the result of changes in the value of our derivative financial instruments and not the result of our core operations.

LIQUIDITY AND CAPITAL RESOURCES

We had total assets of $763,224 as of December 31, 2006, compared with total assets of $964,844 as of June 30, 2006, which represented a $201,620 or 20.9% decrease in total assets from June 30, 2006.

Total assets as of December 31, 2006, included current assets of $534,740, furniture and equipment, net of accumulated depreciation, of $58,954, and deferred financing cost of $169,530. Current assets included cash and cash equivalents of $22,857, trade and accounts receivable, net of $380,393, prepaid expenses and other current assets of $11,825, and current portion of net deferred financing cost of $119,665.

We had total liabilities of $3,374,767 as of December 31, 2006, compared to total liabilities of $5,600,571 at June 30, 2006, representing a decrease in total liabilities of $2,225,804 or 39.7%.

Total liabilities as of December 31, 2006 included current liabilities of $3,306,254, consisting of trade accounts payable of $196,511; accrued liabilities of $268,079, which included deferred salary payable to our officers; current portion of convertible debt of $75,000 which includes the loans entered into in March 2006 and April 2006, as described in greater detail below; amounts due to related party of $500, which amounts were owed to our Chief Executive Officer, Linda Putback-Bean, in connection with the initial funding of our corporate bank account, which amounts have not been repaid to date; and derivative financial instruments of $2,766,164, in connection with our Convertible Debentures and Warrants (explained in greater detail above); and non-current liabilities consisting of deferred rent of $11,871 and long term portion of convertible debt of $56,642.

We had a working capital deficit of $2,771,514 and an accumulated deficit of $10,921,433 as of December 31, 2006.

We had total net cash used by operating activities of $229,971 for the six months ended December 31, 2006, which was mainly due to $2,353,201 of change in value of derivative liability, offset by $1,577,896 of net income and $446,288 of stock-based compensation, which included amounts amortized in connection with Global Media and other stock-based consulting agreements, as described above.

We had net cash used in investing activities of $11,813 for the six months ended December 31, 2006, which was used solely in connection with the purchase of furniture and equipment.

We had $10,000 in net cash used by financing activities for the six months ended December 31, 2006, which included $10,000 paid on an outstanding convertible note held by a shareholder of the Company.

Since we began business, our trade accounts receivable balance has consistently risen over time. The primary reason for this constant increase in receivables is that our trade accounts receivable are often for substantial amounts that can generate challenges by insurance companies and, in certain cases, the need to pursue collections directly from the patients. These challenges have continually increased our days in receivables because our sales have continually increased. We believe that our trade accounts receivable balances will continue to increase at a greater rate than revenue growth until such revenue growth subsides. Management constantly reviews receivables for collectibility issues and has recognized a provision for bad debts of approximately 16% of revenue in fiscal 2006.

The growth in trade accounts receivable is expected to present liquidity issues in future periods if we do not substantially increase sales and/or raise funds from other sources.

Our accounts payable have also grown with the increase in our business over time and include a substantial amount of professional fees related to our SEC filings. Accrued liabilities include accrued salaries and accrued stock based compensation, and as with accounts payable, the balance of accrued liabilities has increased based on the growth of our business. Timely payment of accounts payable and accrued liabilities will require that we raise additional debt or equity funding in the near term.

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In April 2006, we borrowed $50,000 from a shareholder of the Company, and issued that individual a promissory note and warrants in connection with such loan. The promissory note bears interest at the rate of 12% per annum, and was due and payable on September 29, 2006. The promissory note was renewed for an additional six months, at the option of the holder, through March 2007. The shareholder has the option to convert this loan into 1,428,571 shares of our common stock at the rate of one share for each $0.035 then owed. The shareholder also has 1,428,571 outstanding warrants to purchase shares of our common stock at an exercise price of $0.045 per share, which warrants expire if unexercised on May 22, 2008.

On March 1, 2006, and March 21, 2006, we entered into two separate loans for $17,500, with two separate shareholders to provide us with an aggregate of $35,000 in funding. The loans bear interest at the rate of 12% per annum until paid. Both loans became due in May, but have since been extended. In December 2006, $10,000 was repaid on one of the loans, leaving $25,000 outstanding under the loans as of the date of this report. Additionally, the remaining $25,000 owed pursuant to the loans are convertible into an aggregate of 714,286 shares of our common stock, with each $0.035 of each outstanding loan being able to convert into one share of our common stock.

In May 2006, we entered into a Securities Purchase Agreement with certain third parties to provide us $1,500,000 in convertible debt financing (the "Purchase Agreement"). Pursuant to the Purchase Agreement, we agreed to sell the investors an aggregate of $1,500,000 in Convertible Debentures, which are to be payable in three tranches, $600,000 upon signing the definitive agreements on May 30, 2006, which are due May 30, 2009, $400,000 upon the filing of our Registration Statement to register shares of common stock which the Convertible Debentures are convertible into (defined and described in greater detail above), which Registration Statement we filed on February 9, 2007, and which Convertible Debentures we anticipate selling shortly after the filing of this report, and $500,000 upon the effectiveness of our registration statement. The Convertible Debentures are to be convertible into shares of our common stock at a discount to the then trading value of our common stock. Additionally, in connection with the Securities Purchase Agreement, we agreed to issue the third parties warrants to purchase an aggregate of 50,000,000 shares of our common stock at an exercise price of $0.10 per share (the "Warrants").

We received $600,000 from the sale of Convertible Debentures in May 2006, and anticipate using the $900,000 in proceeds from the sale of the additional Convertible Debentures (including the $400,000 which we anticipate the Purchasers to purchase shortly after the filing of this report) as follows:

o $200,000 - Accounting, auditing and attorney’s fees in connection with our periodic reports, this Form 10-SB registration statement and a to be filed Form SB-2 registration statement to register the shares underlying the Convertible Debentures;

o $125,000 - Inventory for our prosthetics operations;

o $75,000 - Equipment and building improvements;

o $300,000 - Promotional, marketing and travel costs associated with our increased marketing campaign;

o $100,000 - Closing costs and finders fees in connection with the funding; and

o $100,000 - General working capital, including certain amounts for officers and directors salaries, rent and office expenses.

We have historically been dependent upon the sale of common stock for funding our operations. In connection with such funding, we issued 4,700,000 shares of common stock at prices ranging from $0.035 to $0.05 per share during the year ended June 30, 2006, for aggregate net proceeds of $220,000. Additionally, we issued 8,696,437 shares of common stock to consultants ranging from $0.08 and $0.11 per share during the year ended June 30, 2006 and recognized compensation expense of $482,360.

As of December 2006, we believe we can operate for approximately the next twelve (12) months assuming we receive the proceeds of the sale of $400,000 in Convertible Debentures which the Purchasers are obligated to purchase within the next few days, and assuming that we sell an additional $500,000 in Convertible Debentures subsequent to the filing of this report, based on our current approximate overhead of $54,000 per month, and monthly gross profits of approximately $50,000 per month we receive in connection with fittings of our prosthetic limbs. However, we believe that we will need to raise additional financing in the next three to four months if we are unable to obtain effectiveness of a registration statement with the Commission, which filing and effectiveness trigger the additional sales of the $900,000 in additional Convertible Debentures. If we are required to raise additional funding, we will likely do so through the sale of debt or equity securities.

We also plan to increase our yearly advertising and marketing budget approximately five fold, for the fiscal year ending June 30, 2007, compared to the fiscal year ending June 30, 2006, by utilizing a large portion of the $900,000 which we plan to receive pursuant to the subsequent funding tranches ($400,000 of which we anticipate receiving shortly after

the filing of this report), assuming such funds are received, which we believe will allow us to increase our monthly sales and gross profits substantially over the next fiscal year, due to our increased advertising and marketing of our services, explained above. However, investors should keep in mind that any amounts of funding we receive pursuant to the Convertible Debentures will be reduced by fees paid to the lending source and legal and accounting costs associated with our need to file and obtain effectiveness of this Form SB-2 Registration Statement.

Other than the funding transaction described above, no additional financing has been secured. The Company has no commitments from officers, directors or affiliates to provide funding. However, management does not see the need for any additional financing in the foreseeable future, other than the money the Company will receive from the sale of the Debentures. We currently anticipate that our operations will continue to grow as a result of our increased advertising and marketing expenditures, which has allowed a greater number of potential clients to become aware of our operations and services, as we have already seen a higher volume of sales due to such advertising over the past several months.

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RISK FACTORS

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

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

During the fiscal years ended June 30, 2006 and 2005, we incurred net losses of $4,413,417 and $4,356,519, respectively, and experienced negative cash flows from operations of $436,226 and $298,454, respectively. During the six months ended December 31, 2006, we had net income of $1,577,896, which net income was the result of changes in the value of our derivative financial instruments and not the result of our core operations, and negative cash flows from operations of $229,971. Additionally, we had negative working capital of $2,771,514 as of December 31, 2006. Our historical losses have been related to two primary factors as follows: 1) we are not currently generating sufficient revenue to cover our fixed costs and we believe that the break-even point from a cash flow standpoint may require that we fit as many as 100 clients, up from 79 fitted in fiscal 2006; 2) we have issued a significant number of our shares of common stock to compensate employees and consultants and those stock issuances have resulted in charges to income of $482,360 and $4,020,264 during the years ended June 30, 2006 and 2005, costs that we believe will not be recurring in future periods. In the event we are unable to increase our gross margins, reduce our costs and/or generate sufficient additional revenues, we may continue to sustain losses and our business plan and financial condition will be materially and adversely affected.

WE WILL NEED ADDITIONAL FINANCING TO REPAY THE $1,500,000 IN CONVERTIBLE DEBENTURES WHICH WE AGREED TO SELL IN MAY 2006, AND GROW OUR OPERATIONS.

We have limited financial resources. In May 2006, we sold certain third party investors an aggregate of $600,000 in Convertible Debentures and agreed to sell them an additional $900,000 in Convertible Debentures, $400,000 of which we anticipate selling shortly after the filing of this report. These Convertible Debentures and interest may be converted into shares of our common stock at a discount to market. However, if such Convertible Debentures are not converted into shares of our common stock, we will need to obtain outside financing to fund our business operations and to repay the Convertible Debentures. If we are forced to raise additional debt or equity financing, such financing may be dilutive to our shareholders. The sale of equity securities, including the conversion of outstanding amounts under the Convertible Debentures, could dilute our existing stockholders' interest, and borrowings from third parties could result in our assets being pledged as collateral and loan terms that would increase our debt service requirements and/or restrict our operations. There is no assurance that capital will be available from any of these sources, or, if available, upon terms and conditions acceptable to us. If we are unable to repay the Convertible Debentures and/or raise additional capital, we may be forced to curtail or abandon our business operations.

WE DEPEND SUBSTANTIALLY UPON OUR PRESIDENT TO IMPLEMENT OUR BUSINESS PLAN, AND LOSING HER SERVICES WOULD BE INJURIOUS TO OUR BUSINESS.

Our success is substantially dependent upon the time, talent, and experience of Linda Putback-Bean, our President and Chief Executive Officer. Mrs. Putback-Bean possesses a comprehensive knowledge of our business and has built numerous relationships with industry representatives. We have no employment agreement with Ms. Putback-Bean. While Mrs. Putback-Bean has no present plans to leave or retire, her loss would have a negative effect on our operating, marketing and financial performance if we are unable to find an adequate replacement with similar knowledge and experience within our industry. We maintain key-man life insurance in the amount of $1,000,000 with respect to Mrs. Putback-Bean. If we were to lose the services of Mrs. Putback-Bean, our operations may suffer and we may be forced to curtail or abandon our business plan.

Additionally, in order for us to expand, we must continue to improve and expand the level of expertise of our personnel and we must attract, train and manage qualified managers and employees to oversee and manage our operations. As demand for qualified personnel is high, there is no assurance that we will be in a position to offer competitive compensation packages to attract or retain such qualified personnel in the future. If we are not able to obtain qualified personnel in the future, if our operations grow, of which there can be no assurance, we may be forced to curtail or abandon our plans for future growth.

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

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

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

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

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

We derived a significant percentage of our net sales for the years ended June 30, 2005 and 2006, from reimbursements for prosthetic services and products from programs administered by Medicare, or Medicaid. Each of these programs sets maximum reimbursement levels for prosthetic services and products. If these agencies reduce reimbursement levels for prosthetic services and products in the future, our net sales could substantially decline. Additionally, reduced government reimbursement levels could result in reduced private payor reimbursement levels because fee schedules of certain third-party payors are indexed to Medicare. Furthermore, the healthcare industry is experiencing a trend towards cost containment as government and other third-party payors seek to impose lower reimbursement rates and negotiate reduced contract rates with service providers. This trend could adversely affect our net sales. Medicare provides for reimbursement for prosthetic products and services based on prices set forth in fee schedules for ten regional service areas. Additionally, if the U.S. Congress were to legislate modifications to the Medicare fee schedules, our net sales from Medicare and other payors could be adversely and materially affected. We cannot predict whether any such modifications to the fee schedules will be enacted or what the final form of any modifications might be. As such, modifications to government reimbursement levels could reduce our revenues and/or cause individuals who would have otherwise retained our services to look for cheaper alternatives.

OUR INDEPENDENT AUDITOR HAS EXPRESSED DOUBT REGARDING OUR ABILITY TO CONTINUE AS A GOING CONCERN.

Since our inception, we have suffered significant net losses. During the years ended June 30, 2006 and 2005 we had net losses of $4,413,417 and $4,356,519, respectively and net cash flows used in operating activities of $436,226 and $298,454, respectively. During the six months ended December 31, 2006, we had net income of $1,577,896, which net income was the result of changes in the value of our derivative financial instruments and not the result of our core operations, and we had a working capital deficit of $2,771,514 as of December 31, 2006. Furthermore, we had an accumulated deficit of $10,921,433 at December 31, 2006. Due to our negative financial results and our current financial position, our independent auditor has raised substantial doubt about our ability to continue as a going concern.

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

As of December 31, 2006, our accounts receivable over 120 days old represented more than 50% of total accounts receivable outstanding. If we cannot collect our accounts receivable, our business, results of operations, and financial condition could be adversely affected.

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

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

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

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

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

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

o refunding of amounts we have been paid pursuant to our government contracts;

o imposition of fines, penalties and other sanctions on us;

o loss of our right to participate in various federal programs;

o damage to our reputation in various markets; or

o material and/or adverse effects on the business, financial condition and results of operations.

WE CURRENTLY ONLY HAVE A LIMITED NUMBER OF AUTHORIZED BUT UNISSUED SHARES, WHICH MAY CAUSE US TO FACE PENALTIES IN CONNECTION WITH OUR INABILITY TO CONVERT OUR DEBENTURES INTO COMMON STOCK AT THE OPTION OF THE DEBENTURE HOLDERS AND/OR TO ISSUE SHARES OF COMMON STOCK IN CONNECTION WITH THE EXERCISE OF OUR OUTSTANDING WARRANTS.

As of February 5, 2007, we had 98,274,889 shares of common stock issued and outstanding out of a total of 100,000,000 shares of common stock authorized, leaving us the ability to issue only approximately 1,725,111 shares of our common stock. As a result, we do not have a sufficient number of authorized but unissued shares to allow for the conversion of our outstanding Debentures by the Debenture holders and/or the exercise of the Warrants. As a result, we may face penalties in connection with such conversions and/or exercises and/or be forced to repay such Debentures in cash, which cash may not be available on favorable terms, if at all. We are currently taking steps to obtain shareholder approval and increase our authorized common stock. If we do not increase our authorized shares in the future, we could face penalties in connection with our inability to allow the Debenture holders to convert their Debentures into shares of common stock and/or to allow them to exercise their Warrants. These penalties and/or the requirement that we repay the Debentures in cash could have a material adverse effect on our results of operations, working capital and ability to pay our current liabilities. If we are unable to increase our authorized shares in the future, we could be forced to curtail and/or abandon our business plan.

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

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

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

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

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

The Board of Directors has the authority to issue up to 10,000,000 shares of Preferred Stock. As of February 5, 2007, 1,000,000 shares of the Series A Convertible Preferred Shares have been issued. Additional shares of preferred stock, if issued, could be entitled to preferences over our outstanding common stock. The shares of preferred stock, when and if issued, could adversely affect the rights of the holders of common stock, and could prevent holders of common stock from receiving a premium for their common stock. An issuance of preferred stock could result in a class of securities outstanding that could have preferences with respect to voting rights and dividends and in liquidation over the common stock, and could (upon conversion or otherwise) enjoy all of the rights of holders of common stock. Additionally, we may issue a series of preferred stock in the future, which may convert into common stock, which conversion would cause immediate dilution to our then shareholders. The Board of Directors’ authority to issue preferred stock could discourage potential takeover attempts and could delay or prevent a change in control through merger, tender offer, proxy contest or otherwise by making such attempts more difficult to achieve or more costly and/or otherwise cause the value of our common stock to decrease in value.

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

As of February 5, 2007, our President and Chief Executive Officer, Linda Putback-Bean beneficially owned 30,210,251 shares of common stock or approximately 31% of our outstanding common stock. Additionally, Ms. Putback-Bean owns 900,000 shares of our Series A Convertible Preferred Stock which represents 90% of the issued and outstanding shares of preferred stock. Dan Morgan, our Vice President/Chief Prosthetist owns 9,198,861 shares of our common stock as well as the remaining 100,000 shares of our Series A Convertible Preferred Stock which represents 10% of the Series A Convertible Preferred Stock. Thus, management owns 100% of our Series A Convertible Preferred Stock. The Series A Convertible Preferred Stock is convertible on a one-to-one basis for our common stock but has voting rights of 20-to-1, giving our management the right to vote a total of 59,409,112 shares of our voting shares, representing the 30,210,251 shares held by Ms. Putback-Bean, the 900,000 shares of Series A Convertible Preferred Stock which has the right to vote 18,000,000 shares of common stock, the 9,198,861 shares of common stock held by Mr. Morgan, and the 100,000 shares of Series A Convertible Preferred

 Stock which has the right to vote 2,000,000 shares of common stock, for a total of a total of approximately 50.2% of our total voting power based on 118,274,889 voting shares, which includes the 98,274,889 shares of common stock outstanding and the 20,000,000 shares which our Series A Convertible Preferred Stock are able to vote. This concentration of a significant percentage of voting power provides our management substantial influence over any matters that require a shareholder vote, including, without limitation, the election of Directors and/or approving or preventing a merger or acquisition, even if their interests may conflict with those of other shareholders. Such control could also have the effect of delaying or preventing a change in control or otherwise discouraging a potential acquirer from attempting to obtain control of the Company. Such control could have a material adverse effect on the market price of our common stock or prevent our shareholders from realizing a premium over the then prevailing market prices for their shares of common stock.

WE MAY BE REQUIRED TO IMMEDIATELY PAY THE $1,500,000 IN OUTSTANDING DEBENTURES OF WHICH $600,000 IS CURRENTLY OUTSTANDING AND/OR BE FORCED TO PAY SUBSTANTIAL PENALTIES TO THE DEBENTURE HOLDERS UPON THE OCCURRENCE OF AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT.

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

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

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

o Our failure to obtain effectiveness of our Registration Statement by April 16, 2007, or if such Registration Statement once effective, ceases to be effective for more than ten (10) consecutive days or more than twenty (20) days in any twelve (12) month period;

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

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

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

o If we fail to maintain the listing of our common stock on the OTCBB or an equivalent replacement exchange, the Nasdaq National Market, the Nasdaq SmallCap Market, the New York Stock Exchange, or the American Stock Exchange within 180 days from the date of Closing, which has not occurred to date;

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

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

The conversion price of the Debentures is equal to 50% of the trading price of our common stock, which will likely cause the value of our common stock, if any, to decline in value as subsequent conversions are made, as described in greater detail under the Risk Factors below.

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

As sequential conversions of the Debentures and sales of such converted shares take place, the price of our common stock may decline, and as a result, the holders of the Debentures will be entitled to receive an increasing number of shares in connection with their conversions, which shares could then be sold in the market, triggering further price declines and conversions for even larger numbers of shares, to the detriment of our investors. Upon the successful registration of the shares of common stock which the Debentures are convertible into and the Warrants are exercisable for, all of the shares issuable upon conversion of the Debentures and upon exercise of the Warrants, may be sold without restriction. The sale of these shares may adversely affect the market price, if any, of our common stock.

In addition, the common stock issuable upon conversion of the Debentures and exercise of the Warrants may represent overhang that may also adversely affect the market price of our common stock. Overhang occurs when there is a greater supply of a company's stock in the market than there is demand for that stock. When this happens the price of the company's stock will decrease, and any additional shares which shareholders attempt to sell in the market will only further decrease the share price. The Debentures may be converted into common stock at a discount to the market price of our common stock of 50% of the then trading value of our common stock, and such discount to market, provides the holders with the ability to sell their common stock at or below market and still make a profit. In the event of such overhang, holders will have an incentive to sell their common stock as quickly as possible. If the share volume of our common stock cannot absorb the discounted shares, the value of our common stock will likely decrease.

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

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

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

Our existing stockholders will experience substantial dilution of their investment upon conversion of the Debentures and exercise of the Warrants. The Debentures will be convertible into shares of our common stock at a discount to market of 50% of the trading value of our common stock. As a result, the number of shares issuable could prove to be significantly greater in the event of a decrease in the trading price of our common stock, which decrease would cause substantial dilution to our existing stockholders. As sequential conversions and sales take place, the price of our common stock may decline and if so, the holders of the Debentures would be entitled to receive an increasing number of shares, which could then be sold, triggering further price declines and conversions for even larger numbers of shares, which would cause additional dilution to our existing stockholders and would likely cause the value of our common stock to decline.

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

The Debentures will be convertible into shares of our common stock at a discount to market of 50%. The significant downward pressure on the price of our common stock as the Debenture holders convert and sell material amounts of our common stock could encourage investors to short sell our common stock. This could place further downward pressure on the price of our common stock. In addition, not only the sale of shares issued upon conversion of the Debentures or exercise of the Warrants, but also the mere perception that these sales could occur, may adversely affect the market price of our common stock.

WE MUST SATISFY CERTAIN CONDITIONS BEFORE THE SELLING SECURITY HOLDERS ARE OBLIGATED TO PURCHASE THE REMAINING $900,000 OF DEBENTURES.

We sold $600,000 of Debentures in May 2006. We also received a commitment to purchase an additional $400,000 of Debentures upon our filing of a Registration Statement to register the shares convertible into common stock in connection with the Debentures, which Registration Statement we filed on February 9, 2007, and which Debentures we anticipate selling shortly after the filing of this report, and $500,000 of Debentures, upon the effectiveness of such Registration Statement. If the Registration Statement is not declared effective or an Event of Default occurs under the Debentures, as defined herein, the Debenture holders will have no obligation to purchase the remaining tranches of Debentures. If the Debenture holders do not purchase the remaining Debentures, we will not raise the additional $500,000. This could force us to curtail or abandon our business plan, which would decrease the value of our securities.

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

Our common stock is currently listed on the Pink Sheets, an over-the-counter electronic quotation service, which stock currently trades below $4.00 per share. We anticipate the trading price of our common stock will continue to be below $4.00 per share. As a result of this price level, trading in our common stock would be subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). These rules require additional disclosure by broker-dealers in connection with any trades generally involving any non-NASDAQ equity security that has a market price of less than $4.00 per share, subject to certain exceptions. Such rules require the delivery, before any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions). For these types of transactions, the broker-dealer must determine the suitability of the penny stock for the purchaser and receive the purchaser's written consent to the transaction before sale. The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our common stock. As a consequence, the market liquidity of our common stock could be severely affected or limited by these regulatory requirements.

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

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

Government Regulation

We are subject to a variety of federal, state and local governmental regulations. We make every effort to comply with all applicable regulations through compliance programs, manuals and personnel training. Despite these efforts, we cannot guarantee that we will be in absolute compliance with all regulations at all times. Failure to comply with applicable governmental regulations may result in significant penalties, including exclusion from the Medicare and Medicaid programs, which could have a material adverse effect on our business. In November 2003, Congress initiated a three-year freeze on reimbursement levels

for all orthotic and prosthetic services starting January 1, 2004. The effect of this legislation has been a downward pressure on our gross profit; however, we have initiated certain purchasing and efficiency programs which we believe will minimize such effects. The most important efficiency program we have instituted to date was entering into contracts with our Host affiliates. By acquiring laboratory access from such Host Affiliates, and acquiring the Host Affiliates help in billing and collections from third party payers such as insurance companies and their respective state-centered Medicaid programs, we have also cut down our travel costs, and our costs of added staff to invoice and collect receivables. Additionally, in an attempt to maximize our efficiency, we modified our "just in time" inventorying of components for prosthetic devices to allow sufficient time for us to send such components via less expensive ground freight instead of higher priced overnight delivery. Finally, we have instituted a ten day lead-time policy on our airline reservations to achieve lower air-fares to our patients, when we are required to travel across the country, except in cases of emergencies.

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

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

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

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

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

Confidentiality and Privacy Laws. The Administrative Simplification Provisions of HIPAA, and their implementing regulations, set forth privacy standards and implementation specifications concerning the use and disclosure of individually identifiable health information (referred to as "protected health information") by health plans, healthcare clearinghouses and healthcare providers that transmit health information electronically in connection with certain standard transactions ("Covered Entities"). HIPAA further requires Covered Entities to protect the confidentiality of health information by meeting certain security standards and implementation specifications. In addition, under HIPAA, Covered Entities that electronically transmit certain administrative and financial transactions must utilize standardized formats and data elements ("the transactions/code sets standards"). HIPAA imposes civil monetary penalties for non-compliance, and, with respect to knowing violations of the privacy standards, or violations of such standards committed under false pretenses or with the intent to sell, transfer or use individually identifiable health information for commercial advantage, criminal penalties.  The privacy standards and

 transactions/code sets standards went into effect on April 16, 2003 and required compliance by April 21, 2005. We believe that we are subject to the Administrative Simplification Provisions of HIPAA and have taken steps necessary to meet applicable standards and implementation specifications; however, these requirements have had a significant effect on the manner in which we handle health data and communicate with payors. Our added costs of complying with the HIPPA requirements relate primarily to attaining the on-going educational credits needed for our Prosthetists to remain current with the professional standards of practice. These credits are achieved by attending work-shops and seminars in various locations throughout North America. During fiscal year ended June 30, 2006 we spent approximately $5,000 complying with these on-going educational needs. However, since our original formation, we have been aware of impending HIPPA regulations, and have set up our systems and procedures to comply with HIPPA requirements in view of such regulations. As a result, added costs due to compliance with HIPPA guidelines have been minimal and immaterial.

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

ITEM 3. CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures. Our Chief Executive Officer and Principal Financial Officer, after evaluating the effectiveness of our "disclosure controls and procedures" (as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) as of the end of the period covered by this Quarterly Report on Form 10-QSB (the "Evaluation Date"), have concluded that as of the Evaluation Date, our disclosure controls and procedures were not effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. Our controls were not effective, as we failed to timely file our Quarterly Reports on Form 10-QSB for the quarters ended December 31, 2005, March 31, 2006, and September 30, 2006 and we failed to timely file our Annual Report on Form 10-KSB for the period ending June 30, 2006. Moving forward, our management believes that as we become more familiar and gain more experience in completing our periodic filings and providing our outside auditors with the required financial information on a timely basis, we will be able to file our periodic reports within the time periods set forth by the Securities and Exchange Commission.

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

PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 2. CHANGES IN SECURITIES

None.

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

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

Exhibit No.	Description
Exhibit 10.1(1)	Sample Host Affiliate Agreement
Exhibit 10.2(2)	Settlement Agreement with Secured Releases, LLC
Exhibit 10.3(3)	Securities Purchase Agreement
Exhibit 10.4(3)	Callable Secured Convertible Note with AJW Offshore, Ltd.
Exhibit 10.5(3)	Callable Secured Convertible Note with AJW Partners, LLC
Exhibit 10.6(3)	Callable Secured Convertible Note with AJW Qualified Partners, LLC
Exhibit 10.7(3)	Callable Secured Convertible Note with New Millennium Capital Partners II, LLC

Exhibit 10.8(3)	Stock Purchase Warrant with AJW Offshore, Ltd.
Exhibit 10.9(3)	Stock Purchase Warrant with AJW Partners, LLC
Exhibit 10.10(3)	Stock Purchase Warrant with AJW Qualified Partners, LLC
Exhibit 10.11(3)	Stock Purchase Warrant with New Millennium Capital Partners II, LLC
Exhibit 10.12(3)	Security Agreement
Exhibit 10.13(3)	Intellectual Property Security Agreement
Exhibit 10.14(3)	Registration Rights Agreement
Exhibit 10.15(1)	Consulting Agreement with National Financial Communications Corp.
Exhibit 10.16(1)	Warrant Agreement with Lionheart Associates, LLC doing business as Fairhills Capital
Exhibit 10.17(1)	Investor Relations Consulting Agreement with Joe Gordon
Exhibit 10.18(4)	Waiver of Rights Agreement
Exhibit 10.20(5)	Kertes Convertible Note and Warrant
Exhibit 10.21(5)	Global Media Agreement
Exhibit 31.1*	Certificate of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 31.2*	Certificate of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1*	Certificate of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
Exhibit 32.2*	Certificate of the Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

* Filed Herein.

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

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

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

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

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

REPORTS ON FORM 8-K

We filed no reports on Form 8-K during the six months ended December 31, 2006.

We filed the following reports on Form 8-K during the period subsequent to December 31, 2006:

o January 23, 2007, to report that the Company had concluded in August 2006, that it would need to restate certain of its previously filed financial information for the quarters ended March 31, 2006, December 31, 2005 and December 31, 2005.

o February 8, 2007, to report that the Company had cleared comments in connection with its Form 10-SB Registration Statement with the Commission.

SIGNATURES

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

PEDIATRIC PROSTHETICS, INC.

DATED: February 20, 2007

By: /s/ Kenneth W. Bean

Kenneth W. Bean

Principal Financial Officer