Robert Bates wrote:
It's my understanding that you must have a second class medical if you will
be the pilot in command of the training flight. If you fly with a:
1. non rated student
2. non current pilot

your understanding is wrong I am afraid, but it is indeed
a common misconception; All you need in both cases that you
are mentioning is a class-III medical, the class-II allows
you to exercise the privileges of commercial pilot, and
not that of a CFI.

Actually, if your student is already rated and current, i.e.,
can act as PIC, you do not even need a medical certificate
at all -- see 14 CFR 61.3(c)(2)(viii).

You'll find an explanation about it in the often cited
part 61 FAQ. You might also want to google similar threads
on rec.aviation.* newsgroups as this comes up every so often;

--Sylvain