10KSB

U.S. SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-KSB

ý    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2005

o         TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     

COMMISSION FILE NO. 0-24921

POWER3 MEDICAL PRODUCTS, INC.

(Name of small business issuer in its charter)

New York	65-0565144
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3400 Research Forest Drive, Suite B2-3 The Woodlands, Texas	77381
(Address of principal executive offices)	(Zip Code)

Issuer’s Telephone Number:   (281) 466-1600

Securities registered under Section 12(b) of the Exchange Act:  None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.001 par value

(Title of class)

Check whether the issuer: (1) 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 ý No o

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-KSB or any amendment to this Form 10-KSB. o

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

Revenues for the issuer’s fiscal year ended December 31, 2005 were $ -0-.  The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant, computed by reference to the closing price of such stock on the Over-the-Counter Bulletin Board (“OTCBB”) administered by the National Association of Securities Dealers (“Nasdaq”) on December 31, 2005 was $6,602,561.  For purposes of this calculation, affiliates include directors, executive officers and current employees.

The number of shares outstanding of the registrant’s common stock, par value .001 per share, as of March 1, 2006was 68,613,700 shares.

Documents incorporated by reference:  None.

TABLE OF CONTENTS

Item 2. Description of Property

Item 3. Legal Proceedings

Item 4. Submission of Matters to a Vote of Security Holders

PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Item 6. Management’s Discussion and Analysis or Plan of Operation

Item 7. Financial Statements

Item 8. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure

Item 8a. Controls and Procedures

Item 8b. Other Information

PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act

Item 10. Executive Compensation

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 12. Certain Relationships and Related Transactions

Item 13. Exhibits

Item 14. Principal Accountant Fees and Services

SIGNATURES

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FORWARD-LOOKING STATEMENT

This Report contains certain forward-looking statements of the intentions, hopes, beliefs, expectations, strategies, and predictions of Power3 Medical Products, Inc. (“Power3” or the “Company”) or its management with respect to future activities or other future events or conditions 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. These statements are usually identified by the use of words such as “believes,” “will,” “anticipates,” “estimates,” “expects,” “projects,” “plans,” “intends,” “should,” “could,” or similar expressions.  These statements are based on certain assumptions and analyses made by the Company’s management in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors believed appropriate.  Readers are cautioned that these forward-looking statements are only predictions and that the Company’s business is subject to significant risks and uncertainties, including, without limitation:

•The Company’s history of operating losses;

•The Company’s need and ability to raise significant capital and obtain adequate financing for its development efforts;

•The Company’s ability to successfully develop and complete validation studies for its products;

•The Company’s dependence upon and the uncertainties associated with obtaining and enforcing patents and intellectual property rights important to its business;

•The uncertainties associated with the lengthy regulatory approval process, including uncertainties associated with the United States Food and Drug Administration (“FDA”) decisions and timing of product development or approval;

•Development by competitors of new or competitive products or services;

•The Company’s ability to retain management, implement its business strategy, assimilate and integrate any acquisitions;

•The Company’s lack of operating experience and present commercial production capabilities; and

•The increasing emphasis on controlling healthcare costs and potential legislation or regulation of healthcare pricing.

Although the Company believes that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of the assumptions could be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this report, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. Except for its ongoing obligation to disclose material information as required by the federal securities laws, the Company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Accordingly, the reader should not rely on forward-looking statements, because they are subject to known and unknown risks, uncertainties, and other factors that may cause actual results to differ materially from those contemplated by the forward-looking statements.

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PART I

Except for historical information, the matters set forth in this report include forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially from those set forth herein.  Power3 Medical Products, Inc. refers you to cautionary information and risk factors contained elsewhere herein and in other documents filed with the Securities and Exchange Commission (“SEC”) from time to time.

Item 1. Description of Business.

Overview and Corporate History

Power3 Medical Products, Inc. (the “Company” or “Power3 “) was incorporated in the State of Florida on May 15, 1992 and merged into a New York Corporation in 1994, under the name Sheffield Acres, Inc. Power3 and its wholly owned subsidiaries, C5 Health, Inc. (C5), which was officially dissolved in the State of Delaware and the State of Florida effective December 31, 2003 and Power3 Medical, Inc., a Nevada Corporation, were engaged in sales, distribution and services for the healthcare industry. On September 12, 2003  Surgical Safety Products, Inc. amended its Certificate of Incorporation to (a) declare a 1:50 reverse split of its common stock; (b) increase its authorized capital to 150,000,000 shares of common stock and 50,000,000 shares of preferred stock; and (c) change its name to Power3 Medical Products, Inc.

Prior to May 17, 2004, the Company had one direct subsidiary, Tenthgate, Inc. (“Tenthgate”), a Nevada corporation formerly known as Power3 Medical, Inc.  Prior to this date, Tenthgate was accounted for, by Power3, as a wholly-owned subsidiary, operating as a “development stage company”, under the cost method.  Prior to the acquisition of substantially all the assets and certain liabilities from Advanced BioChem, now known as Industrial Enterprises of America, it was contemplated that Power3 would distribute the shares of its subsidiary, Tenthgate, to its shareholders of record, as of May 17, 2004.  To fulfill this obligation, the shares of Tenthgate were transferred to a trustee for distribution to the shareholders of Power3 as of May 17, 2004, before the Advanced BioChem transaction and the takeover by present management.  Tenthgate was spun off because the management of Power3, in place prior to May 17, 2004, desired to continue to own and eventually operate this subsidiary.  At the time of the spinoff, Tenthgate was granted the rights to market a product line that had previously been marketed by Power3, but which the company had decided to abandon.  Tenthgate was not an operating company, and their management has apparently abandoned any plans to market the product as evidenced by their SEC filings, specifically their amended 10-QSB filed for the quarterly period ending January 31, 2005, wherein they specifically state that they are a “development stage company.”  As of May 17, 2004, at the time of the transfer of shares to a trustee for distribution to the previous shareholders of Power3, Tenthgate was spun off to the previous shareholders of Power3 as of May 17, 2004, and was deconsolidated from Power3 at that time.  The new owners of Tenthgate, i.e. the previous shareholders of Power3 as of May 17, 2004, have been independently operating Tenthgate since May 17, 2004 and Power3 does not now own or control the operations or activities of Tenthgate, nor are their activities associated with Power3 in any manner whatsoever.

The Company’s common stock is quoted on the Pink Sheets Electronic Quotation Service under the symbol “PWRM.PK”. The Company’s principal executive offices are located at 3400 Research Forest Drive, Suite B2-3, The Woodlands, Texas 77381.  The Company’s telephone number is (281) 466-1600 and its facsimile number is (281) 466-1681.  During 2005, the Company’s failure to timely file its Form 10-KSB caused the OTCBB to append the symbol “E” to the Company’s trading symbol.  On June 14, 2005, the Company was notified of the OTCBB’s action to not allow the Company’s securities to be quoted on the OTCBB, as of June 16, 2005, pending the filing of the Company’s Form 10-KSB for 2004.  The Company’s Form 10-KSB for 2004 was filed on September 6, 2006.  The Company has reapplied for quotation on the OTCBB and all quotations of the Company’s securities are deleted from the OTCBB.  Power3 filed a Form 211 to be reinstated to the OTCBB, but was informed by NASD that restoration to the OTCBB was not possible until the Company’s SB-2, filed to register shares associated with the convertible debentures issued in October, 2004, was effective.  Power3 has been informed by the NASD that the only issue remaining, before it can be relisted to the Bulletin Board, is the effectiveness of the SB-2, filed by the Company to register the shares associated with the convertible debenture and warrant agreements, originally issued in October, 2004.

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The Company transitioned to the development stage, from previously being an operating company, as of the asset purchase transaction with Advanced BioChem on May 18, 2004, as referenced below.  As a development stage company, Power3 is primarily engaged in commercializing its intellectual properties in the area of diagnosis and treatment of breast cancer, ALS, Alzheimer’s disease and Parkinson’s disease.

Purchase of a Set of Assets and Assumption of a Set of Liabilities from Advanced Bio/Chem, Inc.

On May 18, 2004, Power3 purchased substantially all the assets of Advanced Bio/Chem, doing business as ProteEx.  Since the May 18, 2004 transaction, Advanced Bio/Chem has changed its name to Industrial Enterprises of America, Inc.  In this transaction, Power3 purchased substantially all the assets and intellectual properties of Advanced Bio/Chem and assumed certain liabilities in exchange for the issuance of 15,000,000 shares of its common stock pursuant to an Asset Purchase Agreement of even date therewith. For financial statement purposes, the transaction has been accounted for as a purchase transaction.  Unless otherwise stated in this report, all financial information presented in this report is for Power3 Medical Products, Inc., in accordance with Regulation S-B for reporting the purchase of a set of assets and liabilities not constituting a change in control of Advanced BioChem or a merger or acquisition of Advanced BioChem into Power3 Medical Products, Inc .

The transaction between Power3 and Advanced BioChem was evaluated by an independent appraiser and was determined to be a fair value transaction.  Power3 exchanged 15,000,000 shares of common stock for a set of assets and certain liabilities it received in the transaction from Advanced BioChem.  The physical assets acquired consisting primarily of lab equipment were transferred to the Balance Sheet of Power3, at cost, which is estimated to be substantially the same as their value.  In addition, the liabilities acquired were transferred to the Balance Sheet of Power3 at the remaining outstanding balances due.  A subset of legal fees transferred to Power3, which had previously been capitalized by Advanced BioChem, were expensed at the time of the transaction.  No other intangible assets were identified or recognized as obtained from Advanced BioChem since all such expenditures had been previously expensed by Advanced BioChem as research and development expenditures.  Therefore, Power3 recognized the difference in the market value of the stock given up in the transaction versus the assets and liabilities acquired as Goodwill.

This accounting treatment represents a change in the accounting treatment previously used to report the Advanced BioChem transaction as a recapitalization of Power3 as in a reverse acquisition, as previously shown in the Form 10-QSB issued by Power3 for the 2^nd Quarter, 2004.  The Company, and its auditors, are in complete agreement as to the accounting treatment of purchase accounting as an appropriate treatment to account for its acquisition of the assets and a certain set of liabilities of Advanced BioChem, now known as Industrial Enterprises of America, on May 18, 2004.

Business of Issuer

As of the Company’s acquisition of assets from Advanced Bio/Chem on May 18, 2004, the Company’s overall business strategy was changed.  The Company’s current business directive is to engage in the early detection, monitoring, and targeting of diseases through the analysis of proteins. Power3’s development stage business objective is to commercialize its intellectual properties by focusing on disease diagnosis, protein and biomarkers identification, and drug resistance in the areas of cancers, neurodegenerative and neuromuscular diseases. Coincident with the acquisition of assets from Advanced BioChem, the Company changed its management team and established a Scientific Advisory Board to assist in the research and development of its products. The members of this Scientific Advisory Board are recognized leaders in their chosen fields and the Company is working with them to find effective therapeutics and novel predictive medicine for important human diseases.

The Company’s business strategy, which is dependent upon obtaining sufficient additional financing, is to enhance the commercialization of its existing diagnostic products and to aggressively pursue appropriate product and company strategic partnerships.

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As a result of the acquisition of assets and certain liabilities of Advanced Bio/Chem, Power3 has transitioned into an advanced proteomics company that applies existing proprietary methodologies to discover and identify protein biomarkers associated with diseases. By discovery and development of protein-based disease biomarkers, the Company has begun the development of tools for diagnosis, prognosis, early detection and identification of new targets for drugs in cancer, and neurodegenerative and neuromuscular diseases such as amyotrophic lateral sclerosis (commonly known as ALS or Lou Gehrig’s disease), Alzheimer’s disease, and Parkinson’s disease.

Power3’s scientific team is headed by its Chief Scientific Officer, Dr. Ira L. Goldknopf.  Dr. Goldknopf was a pioneer in the science of clinical proteomics in the 1970s and 1980s and in so doing made a significant biochemistry discovery – the ubiquitin conjugation of proteins.  This discovery was cited in the announcement of the 2004 Nobel Prize for chemistry.  The team has leveraged these significant insights and has made progress in the discovery of unique disease protein footprints of biomarkers in breast cancer, neurodegenerative disease, and drug resistance to chemotherapeutic agents.

Proteomics is the study and analysis of proteins. Through proteomics, scientists can more accurately understand the functioning of a healthy body and are assisted in the identification of the proteins associated with specific diseases. Proteins that change in the course of disease are the building blocks for new screening and diagnostic tests which the Company is developing to provide earlier disease detection, enhanced treatment and monitoring assistance.

Product Candidates

The Company plans to target the protein-based diagnostic and drug targeting markets utilizing the Company’s portfolio of proprietary biomarker disease footprints.  In the area of neurodegenerative disease, the Company has completed clinical validation studies involving over 650 patient samples and is utilizing biostatistics to monitor appropriate biomarkers for diagnostic sensitivity, specificity, positive predictive value, and negative predictive value.  By testing patient body fluids and tissues, such as serum, nipple aspirate fluid, and bone marrow, the Company has discovered unique snapshots of protein patterns in diseases including:

•cancers such as breast, leukemia, prostate, bladder, stomach, and esophageal;and

•neurodegenerative diseases such as Alzheimer’s, ALS, and Parkinson’s disease.

The Company’s discovery platform uses both proprietary methodologies owned by or licensed to the Company and accepted technologies to discover biomarkers in clinical samples. Following sample preparation, a 2D Gel system is used for the separation of protein. The gels are stained, imaged and analyzed with unprecedented sensitivity for differences in the diseased vs. normal samples. The significance of these differences is evaluated relative to the status of the health of the individual. The proteins of interest are removed from the gel matrix and analyzed on a mass spectrometer. This information is then cross-referenced on a worldwide database to identify the protein of origin. This process requires a great deal of proteomics experience and expertise to make the end-data interpretable. In addition, all of the procedures are scaleable.  The Company’s biomarker discovery platform delivers significant discoveries that are capable of detecting up to 20 times as many proteins in nipple aspirate fluids as Mud Pit or SELDI TOF (competing technologies); exhibiting reproducible and reliable identification; and displaying broad dynamic range and linearity of disease protein footprints.

The Company has successfully identified more than 400 proteins, protein fragments and isoforms that are differentially expressed in response to disease by employing proprietary technologies gained from over 50 years of combined experience in protein biochemistry.

Power3 is transitioning from a company focused only on research and development to one that is demonstrating “proof of concept” of its technology as it enters the commercialization stage for its technology, products and services.  The Company is engaged in the process of developing a portfolio of products including the biomarkers and blood serum tests (for early detection of breast cancer), NuroPro™ biomarkers and blood

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serum tests (for neurodegenerative diseases including Alzheimer’s, Parkinson’s and ALS diseases) and biomarkers, tests and drug targets for drug resistance to chemotherapeutics.

License and Sponsored Research

Advanced Bio/Chem entered into a license agreement with the Board of Regents of The University of Texas System, an agency of the State of Texas, on behalf of The University of Texas M.D. Anderson Cancer Center in September 2003, which the Company acquired in its transaction with Advanced Bio/Chem.  The license agreement gives the Company an exclusive, worldwide, royalty-bearing license to certain patent rights and technology rights for proteomic methods of diagnosis and monitoring of breast cancer using nipple aspirate fluids.  The license agreement also gives the Company a non-exclusive, worldwide, royalty-bearing license to certain patent rights and technology rights for methods of identifying specific nipple aspirate fluid proteins for diagnosis and monitoring of breast cancer.  The Company is permitted to grant sublicenses under the license agreement except for the identification of biological markers.  The Company is obligated to pay to M.D. Anderson an initial license fee, and a subsequent license fee, both of which have been paid.  The Company is also obligated to pay annual license maintenance fees, royalties and additional milestone payments upon the occurrence of certain designated events.  The license agreement imposes upon the Company an obligation to indemnify the Board of Regents, The University of Texas System, M.D. Anderson, the regents, officers, employees, students, and agents against claims arising on account of any injury or death, or damage to property caused by the exercise of the rights granted under the license agreement to the Company, its officers and affiliates.  The term of the license agreement is based on the date of expiration of the last patent rights to expire or, in the case of licensed technology rights, for a term of fifteen (15) years.  However, in addition to customary termination provisions, M.D. Anderson has the right to terminate the license in any country if the Company fails, within ninety (90) days after receiving written notification from M.D. Anderson, to provide satisfactory evidence that it has commercialized or is attempting to commercialize the licensed invention in such country.

Effective June 28, 2004, Power3 entered into an exclusive license agreement with the Baylor College of Medicine which grants to the Company an exclusive, worldwide, sublicensable license for serum proteomics methods under certain patent rights for all biomarkers for both diagnostic and therapeutic use in neurodegenerative disease. Under the terms of the agreement, Power3 paid Baylor an initial license fee and it has the obligation to pay future royalties and additional licensing fees upon the achievement of certain milestones.  The Company is obligated under the license agreement to indemnify Baylor, its faculty members, scientists, researchers, employees, officers, trustees and agents against claims arising from the design, process, manufacture or use of any of the patent rights or licensed products that are developed through the use of the license from Baylor.  Subject to customary termination provisions, the term of the agreement is established on a country-by-country basis and expires on the date of expiration of the last patent rights to expire in that country or the tenth anniversary of the first commercial sale of licensed products in countries where no patents exist in such country. After such expiration the Company will have a perpetual paid in full license in such country.

On August 1, 2004, Power3 entered into an exclusive license agreement with M.D. Anderson which grants the Company an exclusive, worldwide, sublicensable license to patents and technologies for early detection screening tests, identified protein biomarkers and drug targets for cancer patient’s resistance to drug therapy. The licensed technology was developed through joint collaboration between the Company’s scientific team and M.D. Anderson. Under the terms of the agreement, the Company paid M.D. Anderson an initial license fee and the Company has the obligation to pay further royalties and additional licensing fees upon the achievement of certain milestones.  The license agreement imposes upon the Company an obligation to indemnify the Board of Regents, The University of Texas System, M.D. Anderson, the regents, officers, employees, students, and agents against claims arising on account of any injury or death or damage to property caused by the exercise of the rights granted under the license agreement to the Company, its officers and affiliates.  The term of the license agreement is based on the date of expiration of the last patent rights to expire or, in the case of licensed technology rights, for a term of fifteen (15) years.  However, in addition to customary termination provisions, M.D. Anderson has the right to terminate the license in any country if the Company fails, within ninety (90) days after receiving written notification from M.D. Anderson, to provide satisfactory evidence that it has commercialized or is attempting to commercialize the licensed invention in such country.

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On August 31, 2004 the Company entered into a research agreement with Baylor College of Medicine for the purpose of discovering biomarkers in serum and plasma that are of particular utility in the diagnosis and drug targeting for metabolic syndrome and associated disorders including diabetes, cardiovascular disease, hypertension and stroke.  Under the terms of the agreement, Baylor College of Medicine will provide the Company sample materials for use in diagnosis in drug targeting metabolic syndrome and associated diseases including diabetes, cardiovascular disease, hypertension and stroke.  With respect to any inventions developed pursuant to the agreement, the party who develops such invention will retain sole and exclusive rights to such invention.  The other party will have the right to an exclusive license for the invention, which has been developed.  Inventions developed jointly by the parties will be jointly owned.  Power3 does not have any obligations for the payment of fees or royalties pursuant to this agreement.  The agreement has a term ending June 30, 2007 and may be renewed for successive one-year periods.

The Company has entered into a collaborative research agreement with New Horizons Diagnostic effective March 21, 2005 for the development of antibody based diagnostic tests for neurodegenerative disease utilizing the Company’s identified biomarkers.  The research agreement is based on groups of biomarkers whose profiles are relatively sensitive and specific in distinguishing patients with ALS, Alzheimer’s disease and Parkinson’s disease from each other, as well as from normal patients and patients with other neuromuscular and neurological disorders. The purpose of the agreement is to tailor monoclonal and polyclonal antibodies to the biomarkers, which will be incorporated into immunoassays.  Once the assays are available, they will be developed to validate diagnostic tests specifically designed to detect and discriminate among the neurodegenerative diseases.  The research agreement provides that the parties will develop an agreed upon schedule and budget for the work contemplated thereunder within sixty (60) days of the effective date.  The agreement provides that in the event the parties are able to achieve specified goals relating to the development of a diagnostic kit as contemplated by the research agreement, New Horizons would be compensated in any one of the following manners with respect to such diagnostic kit:  (i) a contract to manufacture at least one key component of such diagnostic kit; (ii) royalties on the sale of such diagnostic kit; (iii) the opportunity to form a joint venture with the Company for the commercialization of such diagnostic kit; or (iv) a reasonable percentage of any cash consideration that the Company receives from a third party for such diagnostic kit.  Although the form and amounts of any consideration to be paid have not been agreed upon, the parties have agreed to be reasonable in negotiating such consideration.

On May 24, 2005, the Company entered into a Collaboration Agreement with BioSite Incorporated . The Agreement provides that the Company and Biosite will engage in a collaborative research program in which Biosite will attempt to develop antibodies and diagnostic assays for selected target biomolecules proposed by the Company. The Company and Biosite will then assess the diagnostic and therapeutic potential of these antibodies and diagnostic assays for breast cancer and neurological diseases. If the antibodies and diagnostic assays are found to have diagnostic and/or therapeutic potential, Biosite will develop and commercialize Biosite Products for the detection and/or treatment of breast cancer and/or neurological diseases. Biosite will make milestone payments to the Company, as well as pay royalties on the sale of any Biosite Products containing antibodies to any selected target biomolecule claimed in a patent application or an issued patent.

More specifically, the Agreement provides that the Company shall propose target biomolecules for the collaborative research program; Biosite and the Company shall mutually select certain target biomolecules for immunization (“Program Target”); and Biosite shall use commercially reasonable efforts to develop monoclonal and omniclonal antibodies to the selected target biomolecules that meet the specification set out by the parties (“Program Antibodies”). Upon Biosite’s written request subsequent to the delivery of Program Antibodies to the Company, the Company will provide Biosite with blood-based clinical samples useful in the assessment of the Program Antibodies.

Biosite will use commercially reasonable efforts to generate an ELISA-based assay for each Program Target for which Biosite has generated Program Antibodies. If Biosite successfully develops an ELISA-based assay for any such Program Target, Biosite shall analyze each of the clinical samples provided by Power3 with such assay and shall provide the resulting data to Power3.

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Under the terms of the Agreement, Power3 grants to Biosite a worldwide, royalty-bearing license under the Power3 patent rights for the target biomolecules and Power3 know-how rights to develop, make, have made, use, offer for sale, sell and import Biosite Products for use in the detection, prognosis, diagnosis or monitoring of any breast cancer-related disease. This license is exclusive with the right to grant sublicenses for the assay of less than or equal to 100 patient samples per hour. This license is semi-exclusive, with the right for each party to grant one sublicense, for the assay of 100 or more patient samples per hour.

Under the terms of the Agreement, Power3 grants to Biosite a non-exclusive, worldwide, royalty-bearing license under the Power3 patent rights for the target biomolecules and Power3 know-how rights to develop, make, have made, use, offer for sale, sell and import Biosite Products for use in the detection, prognosis, diagnosis or monitoring of any neurological-related disease. This license includes the right for Biosite to grant one sublicense for each Program Target, provided that the grant of such sublicense will replace Biosite’s own rights under the license.

In consideration for the collection and transfer of samples, Biosite shall pay specified fees to Power3 based on a minimum number of samples delivered to Biosite and per unit fees for samples delivered in excess of the minimum.

Biosite shall pay the Company milestone payments based on certain specified events as follows:

• upon the earlier of (a) the First Commercial Sale by Biosite of a Biosite Product, or the effective date of the first written agreement between Biosite and a Third Party sublicensee for a sublicense,

• upon demonstration, as determined in Biosite’s sole and reasonable discretion, that a panel of antibodies (including one or more antibodies to a Program Target) is suitable for development of a commercial product,

• upon the first submission by Biosite of the first 510(k) (premarket notification) or PMA (pre-market approval application) to the FDA for the first Biosite Product; and

• upon the first FDA approval of the first 510k or PMA submitted by Biosite for the first Biosite Product.

Commencing at the end of the first full calendar year following the date of First Commercial Sale for the first Biosite product, and at the end of each subsequent calendar year during the term of this Agreement, Biosite shall pay the Company specified annual minimum royalties.  During the applicable Royalty Term for a Biosite Product, on a country-by-country basis, Biosite shall pay the Company royalties, with respect to each Biosite Product equal to a specified percentage of Net Sales of each Biosite product in that country.  In addition to the specified royalty payments, to the extent that Biosite reaches certain specified sales targets, then Biosite shall be obligated to make additional payment to the Company.  The Agreement expires upon the expiration of the last to expire applicable Power3 patent right. The agreement may be terminated for cause, by either party or upon written notice by either party following the twenty four month anniversary date of the Agreement, or by Biosite if it is unable to develop and deliver Program antibodies to the to the Program Targets.

On October 13, 2005, Power3 executed a Research Agreement with Pfizer, Inc. to further evaluate the Company’s NuroPro™ test capabilities and to test blind and unblended samples, provided by Pfizer, under controlled conditions.  The Company is completing the analysis of the results with the blinded samples in preparation to present them to Pfizer.

On December 28, 2005, the Company submitted 6 breast cancer blood serum biomarkers to Biosite, for consideration under the agreement.  The development of antibodies was begun by Biosite for the first of this series.

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Breast Cancer Screening Test

An important factor in surviving cancer is early detection and treatment. According to the American Cancer Society Surveillance Research, when breast cancer is confined to the breast, the five-year survival rate is close to 100%.  Breast cancer is the second leading cause of cancer deaths in women, with over $7 billion spent on breast cancer diagnosis annually.  Due to the limitations of the current diagnostic techniques of mammograms and self-examination, diagnosis of cancer is often missed or inconclusive.  The Company’s proteomic discovery platform covered by pending patent applications and trade secrets for identifying proteins which signal pre-mammography stages of breast cancer has led to what the Company believes to be one of the first tests of its type that may detect breast cancer earlier than current technology allows. These discoveries establish the basis of a very sensitive, non-invasive, early detection breast cancer-screening test.

The Company has decided to focus development efforts for its early-detection tests for breast cancer on blood serum.  The Company has successfully used blood serum as the platform for its NuroPro™ neurodegenerative tests and believes that blood serum as a single platform is the best medium for the development and commercialization of proteomics diagnostic tests.

The Company’s Breast Cancer NAFTest™ analyzes fluids from the breast called nipple aspirates fluid (NAF). Initial success yielded the identification of groups of breast cancer proteins in the aspirates. The procedure utilizes a breast pump to obtain a drop of fluid from the nipple. The aspirate is analyzed to identify specific breast cancer protein footprints.

During the past year, Power3 has conducted clinical validation studies of its breast nipple aspirate fluid breast cancer test a three clinical sites:  Mercy Woman’s Center in Oklahoma City, the NYU Medical Center in New York City and Obstetrics and Gynecological Associates at The Woman’s Hospital in Houston.  The use of breast duct fluid samples for this purpose is the subject of an issued patent and patent pending license from MD Anderson Cancer Center.

Concurrently, Power3 conducted its own biomarker discovery program using blood serum samples collected from the same clinical validation sites, in collaboration with Dr. Alan Hollingsworth at the Mercy Woman’s Center.

The blood serum biomarkers and tests for early-detection of breast cancer discovered by comparing blood serum samples, distinguish between women with breast cancer, women with benign breast disease, and normal women with high sensitivity and specificity.  The Company believes that there are many advantages to a simple blood test over other samples taken from patients, not the least of which is the ready acceptance by patients to having blood drawn.  This, along with numerous complaints from patients about the discomfort of the procedure, as well as the low success rate in getting nipple aspirate samples (less than 50%) and the experience that even when samples were successfully drawn, they were often not representative enough for accurate testing, has led the Company to decide that nipple aspirate testing is not commercially viable.

Since the Company has elected to not pursue nipple aspirate testing for commercialization, the license agreement with MD Anderson has not been renewed by the Company.  The blood serum biomarkers and tests, discovered directly using blood serum, are covered under intellectual property solely owned by the Company.

Neurodegenerative Screening Test

Early detection of neurodegenerative disease generally results in better patient outcomes. Three diseases of particular interest are Alzheimer’s disease, Parkinson’s disease and ALS.  The Alzheimer’s Association reports that Alzheimer’s disease is the most common form of dementia affecting over 4 million Americans.  People as young as 30 years old can contract the disease and one in ten people age 65 and over have Alzheimer’s disease. In addition, the American Parkinson’s Disease Association reports that more than 1.5 million people in the U.S. have Parkinson’s disease, affecting about 1 in 100 Americans over the age of 60. On a smaller scale, the ALS Association reports that an average of approximately 30,000 Americans are afflicted with ALS, with 5,000 new cases diagnosed annually.

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The members of the Company’s scientific team have developed a method for the differential diagnosis of neurodegenerative diseases utilizing blood serum, which was co-developed with neurologist, Dr. Stan Appel, now Chair of Neurology and Co-Director of Methodist Neurological Institute in Houston. With this test, which involves monitoring the concentration of differentially expressed proteins, the Company has identified groups of unique markers that appear to distinguish normal patients from those with motor neuron, cognitive, and other neurological disorders.

The Company is continuing its ongoing clinical validation program in collaboration with the Methodist Neurological Institute.  The initial phase was completed in July 2004 and the latest phase was completed in March, 2006.  During this time period, the Company’s database has increased from 183 to over 650 unique samples classified either as normal or being clinically diagnosed with ALS, Alzheimer’s, Parkinson’s, and other related neurological disorders.  During this time, the number of differentially expressed proteins used in the discriminant analysis has increased from 9 to 47.  The ability to differentiate diseases from each other and from normal and disease controls has improved using the proprietary PD3™ process, including Polyiterative™ biostatistical analysis on the larger database and the expanded set of biomarkers.  Currently, select panels of biomarkers are being employed in development of the NuroPro™ blood serum-based tests for four disease diagnostics including neurological diseases of motor control such as Parkinson’s disease, ALS and their like disorders; ALS specific tests for ALS vs. ALS-like disorders; Alzheimer’s disease specific tests; and a Parkinson’s disease-specific test.  Pre-IDE applications for the first two have been filed with the U.S. Food and Drug Administration.

Drug Resistance to Chemotherapeutic Agents

By the time a patient’s development of resistance to chemotherapeutic agents is detected, it is often too late to revise treatment or otherwise save the patient.  In 2002, the Company completed an initial “proof of concept,” which addresses drug resistance to a major chemotherapy agent.  Determining that a cancer patient is sensitive or detecting a development of resistance during the early stages of treatment may eliminate toxic effects from the treatment drugs, and the need for trial-and-error treatment regimens. These findings may ultimately provide the pharmaceutical industry with the technology to screen patients, on a molecular level, prior to clinical trials and design new drugs to overcome resistance.

Strategic Partners Initiative

In January of 2006, the Company retained GloCap Advisors, LLC, as exclusive advisor for strategic alternatives.  As the Company continues to seek synergistic strategic partners to license and develop its growing portfolio of protein biomarkers and tests, it believes Glocap Advisors assistance, business introductions and advice will increase the Company’s exposure in target markets, provide important strategic relationships and identify appropriate strategic partners, instrumental and essential for overall successful execution of the Company’s business plan.  The Company’s business plan includes the development of these strategic partnerships which it anticipates will assist in the Company’s evolution over the next several years including the commercialization of its proprietary technologies.

The Company recognizes that the licensing of its proprietary technologies to industry leaders is one of the most expedient approaches to develop the Company’s technology into important diagnostic tools for the detection of diseases.  The Company believes this focused positioning of its products and services will enable the Company to capture clinical and public awareness of its proprietary technologies, and apply a major portion of that technology to the early detection and screening markets.

Competition

The industry in which the Company operates is intensely competitive, and subject to significant change with respect to technology for diagnosis and treatment of disease.  Existing or future biotechnology, biomedical, pharmaceutical and other companies, government entities and universities may create developments that accomplish similar functions to the Company’s technologies in ways that are less expensive, receive faster regulatory approval or receive greater market acceptance than the Company’s potential products.  The Company

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expects that competition in the biomarker discovery field will be based primarily on each product’s efficacy, stability, timing of entry of the product into the market, cost, and acceptance by health care providers and health care payers.

The Company’s competitors have, in general, been in existence for considerably longer than the Company has, and may have greater capital resources and access to capital; greater internal resources for activities in research and development, clinical testing and trials, production and distribution; and existing collaborative relationships with third parties.

The existing market for biomarker discovery platforms and processes for Alzheimer’s disease alone has been estimated to be in excess of $4 billion in the U.S. based on a study prepared by Frost & Sullivan.  There are several other companies engaged in the research of proteomics and its application to biomarker discovery capabilities.  Some of these companies include:

•Celera Genomics, which is engaged in proteomics, bioinformatics and geonomics to identify and develop drug targets and discover and develop new therapeutics;

•Ciphergen Biosystems, which is active in biomarker discovery assay development and characterization;

•Europroteome, which applies proteomics to human epithelial cancers to identify cancer specific protein expression patterns for clinical applications;

•Matritech, which is a developer of proteomics-based diagnostic products for the early detection of cancer;

•Myriad Genetics, which is focused on the development of therapeutic and diagnostic products using genomic and proteomic technologies; and

•WITA Proteomics, which focuses on the potential role of proteins from specific cellular sources under particular conditions and analysis of the presence of modified proteins and the strategic use of this information for drug development and diagnostic use.

Sources and Availability of Raw Materials and Names of Principal Suppliers

The Company is, as previously discussed in this section, in the developmental stage and has not commenced commercial production of products for sale.  Therefore the Company does not acquire, purchase, nor use any significant quantities of raw materials whatsoever and consequently has no principal suppliers.

Dependence on One or on a Few Major Customers

The Company is, as discussed in this section, in the developmental stage and has not commenced producing or marketing any products to customers at this stage and has no dependence on one customer or on a few major customers.  The Company does have a limited set of institutions and laboratories that it is currently involved with doing testing and development work, however these associations could change and the Company is not limited to which institutions, hospitals or laboratories it works with in the future.

Research and Development

The Company believes that research and development is an important factor in its future growth and operates a state of the art proteomics laboratory.  The Company has restricted the initiation of new research activities during 2005 because of funding limitations and has focused its efforts on commercializing its current inventory of test products.

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Patents, Copyrights and Trademarks

The Company is continuing to pursue patent protection for its proprietary technologies with the U.S. Patent and Trademark Office and in foreign jurisdictions.  The Company plans to prosecute, assert and defend any patent rights it may obtain, whenever appropriate.  However, securing patent protection does not necessarily assure the Company of competitive success.

With respect to the Company’s biomarker discovery process, antibody detection system and breast cancer biomarkers, the Company has two provisional patents pending and four utility patents pending.  The Company’s work in breast cancer no longer depends on certain technologies that it has licensed from M.D. Anderson Cancer Center, as those licenses are for nipple aspirate technology that the Company has determined to be not commercially viable.  The Company’s blood serum biomarkers and tests are solely owned by the Company.

In cooperation with Baylor College of Medicine, the Company has discovered 47 biomarkers for neurodegenerative diseases such as ALS, Alzheimer’s disease, and Parkinson’s disease.  The Company has received an exclusive license for the rights in this technology and is responsible for the filing, prosecution and maintenance of all patent applications covering this licensed technology.  To date, the Company has seven provisional patent applications pending for the neurodegenerative biomarkers and assays using these biomarkers and has also converted four of those provisional patents into utility applications.

In cooperation with the Leukemia Group at MD Anderson Cancer Center, the Company has joint ownership of one utility patent pending and one PCT international application in the area of drug resistance to chemotherapy in chronic myelogenous leukemia.  The Company has also recently discovered a new biomarker for drug resistance in Leukemia that exerts its effect on the drug target, which will shortly be filed as a provisional patent application.  The Company also has joint inventorship of a provisional patent application for biomarkers in gastrointestinal cancer with the University of Virginia.

The Company also attempts to protect its proprietary products, processes and other information by relying on trade secret laws and nondisclosure and confidentiality agreements with its employees, consultants and certain other persons who have access to such products, processes and information.  The agreements affirm that all inventions conceived by employees are the exclusive property of the company.  Nevertheless, there can be no assurance that these agreements will afford significant protection against or adequate compensation for misappropriation or unauthorized disclosure of the Company’s trade secrets.

Scientific Publications and Presentations

In February, 2006, the Company published two peer reviewed scientific articles.  Establishing the scientific basis of their NuroPro™ neurodegenerative disease biomarkers and tests is an invited review entitled “2D gel blood serum biomarkers reveal differential clinical proteomics of the neurodegenerative diseases” by Essam A. Sheta, Stanley H. Appel and Ira L. Goldknopf, Expert Review of Proteomics 3, 45-62 (2006).  And the second scientific article “Complement C3c and related protein biomarkers in amyotrophic lateral sclerosis and Parkinson’s disease”, by Ira L. Goldknopf, et al. Biochemical and Biophysica Research Communications 342, 1034-1039 (2006), details a breakthrough discovery of differences in a key protein that drives neurodegeneration between Parkinson’s disease and ALS.

The Company is also scheduled to deliver three presentations to major scientific meetings in April 2006: “Blood Serum Biomarkers for Differential Diagnosis of Parkinson’s Disease” and “Biomarkers for Diagnosis and Targeting of Resistance and Sensitivity to Imatinib Mesylate in Chronic Myelogenous Leukemia” delivered at Experimental Biology 2006 in San Francisco in early April; and “Convergence of Proteomic-Diagnostics and Pharmaco-Proteomics toward Personalized Medicine-Examples from Breast Cancer and Leukemia” given at the OncoProteomics World Congress in San Francisco in late April, 2006.

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The Company believes its growing IP portfolio, industry papers and presentations demonstrate the value of its visionary approach to medically-useful product development and anticipates further acceptance by the scientific and business communities as it transitions its technologies into commercially-viable products.

Governmental Regulation

The Food and Drug Administration establishes guidelines for clinical trials which are conducted in order to obtain FDA approval.  Clinical trials are required to find effective treatments to improve health.  All clinical trials are based on a protocol which is a study plan that describes the type of people who may participate in the trial, the schedule of tests and procedures, and the length of the study.

Clinical trials in the United States must be approved and monitored by an Institutional Review Board (IRB) to make sure the risks of the trial are as low as possible and are worth any potential benefits.  All institutions that conduct or support biomedical research are required by federal regulation to have an IRB that initially approves and periodically reviews the research.

Upon successful completion of a clinical trial validation study, an application based on the results of the clinical trial is submitted for FDA approval.  Upon receipt of FDA approval, the diagnostic screening test would be ready for commercialization.

In the United States, clearance or approval to commercially distribute new medical devices or products is received from the FDA through clearance of a 510(k) premarket notification, or 510(k), approval of a premarket approval application, or PMA.  It may take from three to nine months from submission to obtain 510(k) clearance, but may take longer or clearance may not be obtained at all.  The FDA may determine that additional information is needed before approval to distribute the product is given.

For any products that are cleared through the 510(k) premarket notification process, modifications or enhancements that could significantly affect safety or constitute a major change in the intended use of the product will require new 510(k) submissions.

A PMA application must be filed if a proposed product is not substantially equivalent to a medical product first marketed prior to May 1976, or if otherwise required by the FDA.  The PMA approval process can be expensive, uncertain and lengthy, and a number of products for which other companies have sought FDA approval of a PMA application have never been approved for marketing.  It generally takes from six to eighteen months from submission to obtain PMA approval, but it may take longer or the submission may not be approved at all.

On May 5, 2005 the Company submitted a pre-IDE application to the FDA on its blood test for neurodegenerative diseases of motor control, including Parkinson’s disease, ALS and their like disorders in order to obtain the Agency’s guidance regarding: the appropriate regulatory pathway to pursue; the proper approach to refine and/or define its data and statistical analyses; and the study design for the Company’s pending neurodegenerative disease diagnostic blood tests. A submission made under the pre-IDE process is not an official IDE application as described in 21 CFR Part 812. The Pre-IDE process is designed to help companies obtain early, informal input on aspects of a future IDE application and offers assistance in establishing the parameters for official IDE applications when unique diagnostic tests involving innovative technologies are being pursued. The Company met with the Food and Drug Administration on June 1, 2005 regarding its Pre-IDE submission for the first in a series of its NuroPro™ Blood Tests for the early detection and differentiation of neuromuscular diseases, such as ALS and Parkinson’s disease.

In the meeting with the FDA, guidance was offered regarding requirements for study design, patient risk assessment and intended use.  In addition, the FDA concurred with how the Company had approached the biostatistics analysis utilized to interpret the test results.  Based on the FDA’s advice in preliminary discussions, Power3 presented optimized results with an increase in specificity to more than 92% and an increase in Positive Predicted Value to more than 96%.

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Now, the Company is proceeding to make preparations for FDA applicable multiple site clinical studies for the NuroPro™ suite of blood serum tests.  On August 17, 2005, the Company submitted its second Pre-IDE application on its ALS specific blood test for distinguishing ALS from normal and disease controls.

The Company is also subject to the regulatory approval and compliance requirements for each foreign country to which it exports products.  In the European Union, a single regulatory approval process has been created, and approval is represented by the CE Mark.

Both before and after a product is commercialized, the Company has ongoing responsibilities under the regulations of the FDA and other agencies.  The Company’s manufacturing facilities and those of its contract manufacturers are, or can be, subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies, as well as civil penalties, recall or seizure of products, total or partial suspension of production, failure of the government to grant premarket clearance approval for products, withdrawal of marketing clearances or approvals, and criminal prosecution.  The FDA has the authority to request recall, repair, replacement or refund of the cost of any product, which the Company manufactures or distributes.  The FDA also administers certain controls over the export of medical devices from the United States.  The Company is also subject to routine inspection and must file periodic reports after the product is approved by the FDA for compliance with quality system requirements, or QSR, and medical device reporting requirements in the United States and other applicable regulations worldwide.  Changes in existing requirements or adoption of new laws or requirements could have a material adverse effect on the Company’s business, financial condition and results of operation.  The Company will incur significant costs to comply with laws and regulations.

The Company is also subject to numerous federal, state and local laws relating to such matters as safe working conditions, manufacturing practices, environmental protection, fire hazard control and disposal of hazardous or potentially hazardous substances.  The Company may incur significant costs to comply with laws and regulations, or such laws or regulations in the future may have a material adverse effect upon its business, financial condition and results of operations.

Sales and Marketing

The Company currently has no sales or marketing employees, and no immediate plans to hire any personnel devoted to this area.  The Company will make decisions about sales and marketing at a later date, when its products are further along in the development stage.

Manufacturing

The Company does not currently have manufacturing capabilities, but it is exploring opportunities to produce and manufacture the Company’s diagnostic tests through collaborative agreements and strategic alliances.  Exploitation of these opportunities will depend on the availability of further capital, qualified personnel, sufficient production resources and the Company’s ability to establish these relationships with other parties who have existing manufacturing and distribution capabilities.  The Company does not currently have plans to manufacture any products in the near future.  The Company will make decisions about manufacturing at a later date, when its product portfolio is further along in the development stage.

Costs and Effects of Compliance with Environmental Laws (Federal, State or Local)

The Company, as discussed earlier in this section, does not manufacture any products, nor does it purchase, store or ship any products.  Consequently the Company does not have any compliance issues with regard to environmental laws as they relate to commercial operations.

The Company does store and handle certain organic wastes and human tissue samples in its laboratory operations.  The cost of complying with environmental laws which govern our research and development laboratory operations, during 2005, was $1,155 .

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Employees and Consultants

At December 31, 2005, the Company had fourteen (14) full-time employees.  None of the Company’s employees are represented by collective bargaining agreements, and the Company considers its employee relations to be good.  The Company utilizes part-time consultants as well as contract research organizations and other outside specialty firms for various services such as clinical trial support, manufacturing and regulatory approval advice.

Divestiture of Subsidiaries

Prior to May 17, 2004, the Company had one direct subsidiary, Tenthgate, Inc. (“Tenthgate”), a Nevada corporation formerly known as Power3 Medical, Inc.  Prior to this date, Tenthgate was accounted for, by Power3, as a wholly-owned subsidiary, operating as a “development stage company”, under the cost method.  Prior to the acquisition of substantially all the assets and certain liabilities from Advanced BioChem, now known as Industrial Enterprises of America, Power3 agreed to distribute the shares of its subsidiary, Tenthgate, to its shareholders of record, as of May 17, 2004.  To fulfill this obligation, the shares of Tenthgate were transferred to a trustee for distribution to the previous shareholders of Power3 on May 17, 2004, before the Advanced BioChem transaction and the takeover by present management.  Tenthgate was spun off because the previous owners and management of Power3, in place prior to May 17, 2004, desired to continue to own and eventually operate this inactive subsidiary, and to pursue the prior operations of Power3.  Apparently the current management of Tenthgate has decided to abandon that product, because their SEC filings state that they are a “development stage company.”  Since May 17, 2004, Tenthgate has been deconsolidated from Power3.  Tenthgate has been independently operating since May 17, 2004 and Power3 did not own or control the operations or activities of Tenthgate in any manner whatsoever, after May 17, 2004.

Risk Factors

In addition to the other information contained in this report, the following risks may affect us.  If any of these risks occurs, our business, financial condition or operating results could be adversely affected.

We have a history of operating losses, and we may not achieve or maintain profitability in the future.

We have experienced a net loss of ($13,512,696) for calendar year 2005. We expect these losses to continue and it is uncertain when, if ever, we will become profitable. These losses have resulted primarily from non-cash, stock-based compensation costs incurred in consulting contracts, stock issued for compensation, research and development activities and from general and administrative costs associated with operations. Stock issued for compensation and for consulting fees has been valued at market price on the effective date of the agreement, per SEC requirement.  We expect to incur increasing operating losses in the future as a result of expenses associated with research and product development as well as general and administrative costs and we have estimated that we will require approximately $2,500,000 to carry out our business plan through the period ending December 31, 2006.  Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis.

We will need significant additional capital in the future and, if additional capital is not available, we may have to curtail or cease operations.

We have an immediate need for capital to continue our operations, and we will need to raise significant additional funds to implement our business plan.  Our current plans indicate we will need significant additional capital for research and development before we have any anticipated revenue generating products. The actual amount of funds that we will need will be determined by many factors, some of which are beyond our control, and we may need funds sooner than currently anticipated. These factors include:

•the extent to which we enter into licensing arrangements, collaborations or joint ventures;

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•our progress with research and product development;

•the costs and timing of obtaining new patent rights;

•the extent to which we acquire or license other technologies; and

•regulatory changes and competition and technological developments in the market.

Our continued operations will therefore depend upon our ability to raise additional funds through additional equity or debt financing.  We may seek additional funding through private sales of our securities, public sales of our securities, strategic alliances or by licensing all or a portion of our technology.  Any such funding may significantly dilute existing shareholders or may limit our rights to our technology.  Moreover, the increase in the number of shares available in the public marketplace may reduce the market price for our common stock and, consequently, the price investors may receive at the time of sale.  When we require additional funds, general market conditions or the then-current market price of our common stock may not support capital raising transactions such as additional public or private offerings of our common stock.  If we are unable to obtain additional funds on a timely basis or on terms favorable to the Company, we may be required to scale back our development of new products, sell or license some or all of our technology or assets, or curtail or cease operations.

We may not be successful in developing or commercializing our products, which would harm the Company and force the Company to curtail or cease operations.

We have only recently commenced our business operations and our technologies are still in the early stages of development. The products we are currently developing may not be successfully developed or commercialized on a timely basis, or at all. If we are unable, for technological or other reasons, to complete the development, introduction or scale up of manufacturing of these products or other potential products, or if our products do not achieve a significant level of market acceptance, we would be forced to curtail or cease operations. Even if we develop our products for commercial use and obtain all necessary regulatory approvals, we may not be able to develop products that:

•are accepted by, and marketed successfully to, the marketplace;

•are safe and effective;

•are protected from competition by others;

•do not infringe the intellectual property rights of others;

•are developed prior to the successful marketing of similar products by competitors; or

•can be manufactured in sufficient quantities or at a reasonable cost.

Many of our research and development programs rely on technology licensed from third parties, and termination of any of those licenses would result in loss of significant rights to develop and market our products, which would impair our business.

We have rights to technology through license agreements with third parties.  We rely upon an exclusive license agreement from Baylor College of Medicine for identification and use of biomarkers for neurodegenerative diseases.  We have two license agreements from The University of Texas M.D. Anderson Cancer Center.  One license agreement from M.D. Anderson grants the Company an exclusive license for identifying specific proteins associated with sensitivity or resistance to kinase inhibitor.  The second license agreement from M.D. Anderson grants the Company an exclusive license to employ proteomic methods for diagnosis and monitoring of breast cancer using nipple aspirate fluid and a non-exclusive license for methods of identifying specific nipple aspirate fluid proteins for diagnosis and monitoring of breast cancer.  Our licenses

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generally may be terminated by the other party if we fail to perform our obligations, including milestone obligations to conduct a research and development program and develop the licensed products for commercialization. If terminated, we would lose the right to develop the licensed products, which would significantly harm our business. The license agreements include payments contingent upon achieving specified milestones toward commercialization of the licensed products. If disputes arise over the definition of these requirements or whether we have satisfied the requirements in a timely manner, or if any other obligations in the license agreement are disputed by the other party, the other party could terminate the agreement and we could lose our rights to develop the licensed technology.

If we are unable to form and maintain the collaborative relationships that our business strategy requires, our ability to develop products and revenue will suffer.

We must form research collaborations and licensing arrangements with several partners to operate our business successfully. To succeed, we will have to further develop our existing relationships and establish additional collaborations. We cannot be sure that we will be able to establish any additional research collaborations or licensing arrangements necessary to develop and commercialize products using our technology or that we can do so on terms favorable to the Company. If our collaborations are not successful or we are not able to manage multiple collaborations successfully, our programs may suffer.

Collaborative agreements generally pose the following risks:

•collaborators may not pursue further development and commercialization of products resulting from collaborations or may elect not to continue or renew research and development programs;

•collaborators may delay clinical trials, under fund a clinical trial program, stop a clinical trial or abandon a product, repeat or conduct new clinical trials or require a new formulation of a product for clinical testing;

•collaborators could independently develop, or develop with third parties, products that could compete with our future products;

•the terms of our agreements with our current or future collaborators may not be favorable to the Company;

•a collaborator with marketing and distribution rights to one or more products may not commit enough resources to the marketing and distribution of our products, limiting our potential revenues from the commercialization of a product;

•disputes may arise delaying or terminating the research, development or commercialization of our products, or result in significant litigation or arbitration; and

•collaborations may be terminated and, if terminated, we would experience increased capital requirements if we elected to pursue further development of the product.

In addition, business combinations or alliances among large pharmaceutical companies could result in a reduced number of potential future collaborators. If business combinations involving our collaborators were to occur, the effect could be to diminish, terminate or cause delays in one or more of our product development programs.

Our products are subject to United States, European Union and international medical regulations and controls, which impose substantial financial costs on the Company and which can prevent or delay the introduction of new products.  As a result, we may not obtain required approvals for the commercialization of our products.

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Our ability to sell our products is subject to various federal, state and international rules and regulations.  In the United States, we are subject to inspection and market surveillance by the Food and Drug Administration, or FDA, to determine compliance with regulatory requirements.  The regulatory process is costly, lengthy and uncertain.

Our future performance depends on, among other matters, estimates as to when and at what cost we will receive regulatory approval for our new products.  Regulatory approval can be a lengthy, expensive and uncertain process, making the timing and cost of obtaining approvals difficult to predict.

In the United States, clearance or approval to commercially distribute new medical devices or products is received from the FDA through clearance of a 510(k) premarket notification, or 510(k), approval of a premarket approval application or PMA.  The process to obtain 510(k) clearance is lengthy and there is no assurance clearance will be obtained.

For any products that are cleared through the 510(k) premarket notification process, modifications or enhancements that could significantly affect safety or constitute a major change in the intended use of the product, will require new 510(k) submissions.

A PMA application must be filed if proposed products are not substantially equivalent to a medical product first marketed prior to May 1976, or if otherwise required by the FDA.  The PMA approval process can be expensive, uncertain and lengthy, and a number of products for which other companies have sought FDA approval of a PMA application have never been approved for marketing.

We are also subject to the regulatory approval and compliance requirements for each foreign country to which we export our products.  In the European Union, a single regulatory approval process has been created, and approval is represented by the CE Mark.

Both before and after products are commercialized, we have ongoing responsibilities under the regulations of the FDA and other agencies.  Our manufacturing facilities and those of our contract manufacturers are, or can be, subject to periodic regulatory inspections by the FDA and other federal and state regulatory agencies.  The FDA has the authority to request recall, repair, replace or refund of the cost of any product manufactured or distributed by the Company.  The FDA also administers certain controls over the export of medical devices from the United States.  We are also subject to routine inspection and must file periodic reports after the product is approved by the FDA for compliance with quality system requirements, or QSR, and medical device reporting requirements in the United States and other applicable regulations worldwide.  Changes in existing requirements or adoption of new laws or requirements could have a material adverse effect on our business, financial condition and results of operation.  We will incur significant costs to comply with laws and regulations.

Regulatory agencies have made, and continue to make, changes in their approval and compliance requirements and process.  We cannot predict what, how or when these changes will occur or what effect the changes will have on the regulation of our products.  Any new legislation may impose additional costs or lengthen review times of our products.  We may not be able to obtain necessary worldwide regulatory approvals or clearances for our products on a timely basis, if at all.  Delays in receipts of or failure to receive such approvals or clearances, the loss of previously received approvals or clearances, or failure to comply with existing or future regulatory requirements would have a material adverse effect on our business, financial condition and results of operations.

Because many of our competitors have substantially greater capital resources and more experience in research and development, manufacturing and marketing than we do, we may not succeed in developing our proposed products and bringing them to market in a cost-effective, timely manner.

We expect to compete with a broad range of organizations that are engaged in the development and production of products, services and strategies relating to the diagnosis, prognosis, early detection and development of new drugs in cancer, neurodegenerative and neuromuscular diseases.  They include:

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•biotechnology, biomedical, pharmaceutical and other companies;

•academic and scientific institutions;

•governmental agencies; and

•public and private research organizations.

We are an early stage development company engaged primarily in new product development.  Early in its existence, Power3 was a development stage company, striving to develop products for sale to the surgical industry.  After this stage, Power3 entered the operating company stage selling the products they had developed to hospitals and medical care providers, up until May 17, 2004.  At the time of the May 18, 2004 asset purchase transaction, Power3 changed its business model and entered back into the development stage to commercialize its intellectual properties acquired in the transaction. We have not yet completed the development of our first product and have no revenue from operations. Since the change of our focus, we may have difficulty competing with larger, established biomedical and pharmaceutical companies and organizations. These companies and organizations have much greater financial, technical, research, marketing, sales, distribution, service and other resources than the Company. Moreover, they may offer broader product lines, services and have greater name recognition than we do, and may offer discounts as a competitive tactic.

In addition, several early stage companies are currently developing products that may compete with our potential products.  We anticipate strong competition from several companies that include:

•Medarex, which is a biopharmaceutical company focused on the development of antibody-based therapeutics to treat life threatening and debilitating diseases including cancer and infectious diseases;

•Matritech, which is a developer of proteomics-based diagnostic products for the early detection of cancer;

•Ciphergen Biosystems, which is active in biomarker discovery assay development and characterization;

•Lexicon Genetics, which is using gene knockout technology for a number of therapeutic areas which include neurological disorders and cancer; and

•Cyberonics, which designs, develops, manufactures and markets medical devices for the treatment of Alzheimer’s disease and other chronic disorders.

Our competitive position depends on protection of our intellectual property.

Our success will depend on our ability to obtain and protect patents on our technology and to protect our trade secrets. The patents we currently license, and any future patents we may obtain or license, may not afford meaningful protection for our technology and products. Others may challenge our patents and, as a result, our patents could be narrowed, invalidated or unenforceable.  In addition, our current and future patent applications may not result in the issuance of patents in the United States or foreign countries. Competitors may develop products similar to ours that conflict with our patent applications and any patents we ultimately receive. In order to protect or enforce our patent rights, we may initiate interference proceedings, oppositions, or patent litigation against third parties, such as infringement suits. These lawsuits could be expensive, take significant time and divert management’s attention from other business concerns. The patent position of biotechnology firms generally is highly uncertain, involves complex legal and factual questions, and has recently been the subject of much litigation. No consistent policy has emerged from the U.S. Patent and Trademark Office or the courts regarding the breadth of claims allowed or the degree of protection afforded under biotechnology patents. In

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addition, there is a substantial backlog of biotechnology patent applications at the U.S. Patent and Trademark Office, and the approval or rejection of patent applications may take several years.

We also rely upon trade secrets, proprietary know-how and continuing technological innovation to remain competitive. Third parties may independently develop such know-how or otherwise obtain access to our technology. While our employees, consultants and corporate partners with access to proprietary information generally will be required to enter into confidentiality agreements, we cannot guarantee that these agreements will provide the Company with adequate protection against improper use or disclosure of confidential information. In addition, in some situations, these agreements may conflict with, or be subject to, the rights of third parties with whom our employees, consultants or advisors have prior employment or consulting relationships. Further, others may gain access to our trade secrets or independently develop substantially equivalent proprietary information and techniques.

Our products could infringe on the intellectual property rights of others.

Third parties may challenge the patents that have been issued or licensed to the Company. We may have to pay substantial damages, possibly including treble damages, for past infringement if it is ultimately determined that our products infringe a third party’s patents. Further, we may be prohibited from selling our products before we obtain a license, which, if available at all, may require the Company to pay substantial royalties. Even if infringement claims against the Company are without merit, defending a lawsuit takes significant time, may be expensive and may divert management attention from other business concerns.

We depend on our key scientific and management personnel to develop our products and pursue collaborations.

Our performance is substantially dependent on the performance of our current senior management, board of directors and key scientific and technical personnel and advisers. The loss of the services of any member of our senior management, board of directors, scientific or technical staff or scientific advisory board may significantly delay or prevent the achievement of product development and other business objectives and could have a material adverse effect on our business, operating results and financial condition.

Recruiting and retaining qualified scientific personnel to perform research and development work are critical to our success. There is intense competition for qualified scientists and managerial personnel from numerous pharmaceutical, biomedical and biotechnology companies, as well as from academic and government organizations, research institutions and other entities. In addition, we may face particular difficulties because there is a limited number of scientists specializing in proteomics and its use for the discovery of diseases, the principal focus of our company. We expect to rely on consultants and advisors, including our scientific and clinical advisors, to assist the Company in formulating our research and development strategy. Any of those consultants or advisors could be employed by other employers, or be self-employed, and might have commitments to, or consulting or advisory contracts with, other entities that may limit their availability to the Company. Such other employment, consulting or advisory relationships could place our trade secrets at risk, even if we require non-disclosure agreements.

Our lack of operating experience may cause the Company difficulty in managing our growth.

We have no experience in manufacturing or procuring products in commercial quantities, conducting other later-stage phases of the regulatory approval process or selling our products, and we have only limited experience in negotiating, establishing and maintaining strategic relationships. We have no experience with respect to the launch of a commercial product. Our ability to manage our growth, if any, will require the Company to improve and expand our management and our operational and financial systems and controls. If our management is unable to manage growth effectively, our business and financial condition would be materially harmed. In addition, if rapid growth occurs, it may strain our operational, managerial and financial resources.

We have no commercial production capability and we may encounter production problems or delays, which could result in lower revenue.

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To date, we have not produced any product in commercial quantities. Customers for any potential products and regulatory agencies will require that we comply with current good manufacturing practices prescribed by the FDA that we may not be able to meet.  We have established and are in the process of establishing agreements with contract manufacturers to supply sufficient quantities of our products to conduct clinical trials as well as for the manufacture, packaging, labeling and distribution of finished products if our potential products are approved for commercialization.  If such arrangements are terminated and if we are unable to manufacture or contract for a sufficient supply of our potential products on acceptable terms, our clinical testing schedule may be delayed, resulting in the delay of submission of products for regulatory approval and initiation of new development programs.  If we determine to manufacture products ourselves, we may not be able to maintain acceptable quality standards if we ramp up production. To achieve anticipated customer demand levels, we will need to scale-up our production capability and maintain adequate levels of inventory. We may not be able to produce sufficient quantities to meet market demand. If we cannot achieve the required level and quality of production, we may need to outsource production or rely on licensing and other arrangements with third parties. This reliance could reduce our gross margins and expose the Company to the risks inherent in relying on others. We may not be able to successfully outsource our production or enter into licensing or other arrangements under acceptable terms with these third parties, which could adversely affect our business.

We have no marketing or sales staff, and if we are unable to develop sales and marketing capability, we may not be successful in commercializing our products.

We currently have no sales, marketing or distribution capability. As a result, we will depend on collaborations or agreements with third parties that have established distribution systems and direct sales forces. To the extent that we enter into co-promotion or other licensing arrangements, our revenues will depend upon the efforts of third parties, over which we may have little or no control.

If we are unable to reach and maintain agreement with one or more pharmaceutical, biomedical or biotechnology companies or other potential collaborators under acceptable terms, we may be required to market our products directly. We may elect to establish our own specialized sales force and marketing organization to market our products.  If we are unable to develop a marketing and sales force with technical expertise and with supporting distribution capability, we may not be able to successfully commercialize our products.

Our business is subject to technological obsolescence.

Proteomics, biotechnology and related pharmaceutical technology have undergone and are subject to rapid and significant change. We expect that the technologies associated with proteomics, biotechnology research and development will continue to develop rapidly. Our future will depend in large part on our ability to maintain a competitive position with respect to these technologies. Any processes, discovery platforms or products that we develop may become obsolete before we recover any expenses incurred in connection with developing these products.

We face intense competition in the proteomics, biotechnology and pharmaceutical industries.

The proteomics, biotechnology and pharmaceutical industries are intensely competitive. We have numerous competitors in the United States and elsewhere. Our competitors include major multinational pharmaceutical, biomedical and biotechnology companies, specialized firms and universities and other research institutions. Many of these competitors have greater financial and other resources, larger research and development staffs and more effective marketing and manufacturing organizations, than we do. In addition, academic and government institutions have become increasingly aware of the commercial value of their research findings. These institutions are now more likely to enter into exclusive licensing agreements with commercial enterprises, including our competitors, to market commercial products. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large pharmaceutical and established biotechnology companies. Many of these competitors have significant products that have been approved or are in development and operate large, well-funded research and development programs.

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Our competitors may succeed in developing or licensing technologies and products that are more effective or less costly than any we are developing. Our competitors may succeed in obtaining FDA or other regulatory approvals for product candidates before we do.  Products resulting from our research and development efforts, if approved for sale, may not compete successfully with our competitors’ existing products or products under development.

We face potential difficulties in obtaining product liability and related insurance.  If we are subject to product liability claims and have not obtained adequate insurance to protect against these claims, our financial condition would suffer.

We do not have product liability or other professional liability insurance. In the future, we may, in the ordinary course of business, be subject to substantial claims by, and liability to, persons alleging injury from the use of our products.  If we are successful in having products approved by the FDA, the sale of such products would expose the Company to additional potential product liability and other claims resulting from their use. This liability may result from claims made directly by consumers or by others selling such products. We do not currently have any product liability or professional liability insurance, and it is possible that we will not be able to obtain or maintain such insurance on acceptable terms or that any insurance obtained will provide adequate coverage against potential liabilities. Our inability to obtain sufficient insurance coverage at an acceptable cost or otherwise to protect against potential product liability claims could prevent or limit the commercialization of any products we develop. A successful product liability claim in excess of any insurance coverage we may procure could exceed our net worth. While we desire to reduce our risk by obtaining indemnity undertakings with respect to such claims from licensees and distributors of our products, we may not be able to obtain such undertakings and, even if we do, they may not be sufficient to limit our exposure to claims.

If we are subject to claims relating to improper handling, storage or disposal of the hazardous materials we use in our business, our financial condition would suffer.

Our research and development processes involve the controlled storage, use and disposal of hazardous materials including biological hazardous materials of which we have contracts in place for proper disposal. We are subject to federal, state and local regulations governing the use, manufacture, storage, handling and disposal of materials and waste products. Although we believe that our safety procedures for handling and disposing of these hazardous materials comply with the standards prescribed by law and regulation, the risk of accidental contamination or injury from hazardous materials cannot be completely eliminated. In the event of an accident, we could be held liable for any damages that result. We currently do not have insurance which covers any such accident and may not be able to maintain insurance on acceptable terms, or at all. We could be required to incur significant costs to comply with current or future environmental laws and regulations.

Health care cost containment initiatives may limit our returns.

Our ability to commercialize our products successfully will be affected by the ongoing efforts of governmental and third-party payers to contain or reduce the cost of health care. Governmental and other third-party payers increasingly are attempting to contain health care costs by:

•challenging the prices charged for health care products and services;

•limiting both coverage and the amount of reimbursement for new therapeutic products;

•denying or limiting coverage for products that are approved by the FDA but are considered experimental or investigational by third-party payors; and

•refusing in some cases to provide coverage when an approved product is used for disease indications in a way that has not received FDA marketing approval.

In addition, the trend toward managed health care in the United States, the growth of organizations such as health maintenance organizations, and legislative proposals to reform healthcare and government insurance

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programs could significantly influence the purchase of healthcare services and products, resulting in lower prices and reducing demand for our products.

Even if we succeed in bringing any products to the market, they may not be considered cost-effective and third-party reimbursement might not be available or sufficient. If adequate third-party coverage is not available, we may not be able to maintain price levels sufficient to realize an appropriate return on our investment in research and product development. In addition, legislation and regulations affecting the pricing of diagnostic services and testing may change in ways adverse to the Company before or after any of our proposed products are approved for marketing. While we cannot predict whether any such legislative or regulatory changes will be adopted, the adoption of such changes could make it difficult or impossible to sell our products.

Stock prices for biomedical and biotechnology companies are volatile.

The market price for securities of biomedical and biotechnology companies historically has been highly volatile, and the market from time to time has experienced significant price and volume fluctuations that are unrelated to the operating performance of such companies. Fluctuations in the trading price or liquidity of our common stock may adversely affect our ability to raise capital through future equity financings.

Factors that may have a significant impact on the market price and marketability of our common stock include:

•announcements of technological innovations or new commercial therapeutic products by the Company, our collaborative partners or our present or potential competitors;

•announcements by the Company or others of results of validation studies and clinical trials;

•developments or disputes concerning patent or other proprietary rights;

•adverse legislation, including changes in governmental regulation and the status of our regulatory approvals or applications;

•changes in health care policies and practices; and

•economic and other external factors, including general market conditions.

In the past, following periods of volatility in the market price of a company’s securities, securities class action litigation has often been instituted. If a securities class action suit is filed against the Company, we would incur substantial legal fees and our management’s attention and resources would be diverted from operating our business in order to respond to the litigation.

The resale in the open market of the shares we have issued, or shares issuable upon conversion or exercise of securities we have issued, in exempt transactions might adversely affect our stock price.

As of December 31, 2005, 65,215,121 shares of our common stock were outstanding.  We also intend to register, pursuant to a Registration Statement on Form SB-2, approximately 13,600,000 shares issuable upon outstanding convertible debentures and warrants.  In addition to the shares included in the registration statement, the investors have additional investment rights to purchase additional convertible debentures in the aggregate principal amount of $2,500,000.  These additional convertible debentures are convertible into 2,314,815 shares of common stock, subject to adjustment.  The investors will be permitted to sell the shares covered by the registration statement in the open market from time to time without advance notice to the Company or to the market and without limitations on volume.  The sale of a substantial number of shares of our common stock by the investors, or the anticipation of such sales, could make it more difficult for the Company to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.  In addition to the shares listed in this prospectus, approximately 15,000,000 shares of common stock issued to Advanced Bio/Chem in our acquisition of substantially all of its assets may become available for resale.  Sales

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of shares pursuant to other exercisable options and warrants we have issued could also lead to subsequent sales of the shares in the public market. These sales could depress the market price of our stock by creating an excess in supply of shares for sale. Availability of these shares for sale in the public market could also impair our ability to raise capital by selling equity securities.

Our stock is thinly traded, which could lead to price volatility and difficulty liquidating your investment.

The trading volume of our stock has been low, which can cause the trading price of our stock to change substantially in response to relatively small orders. During the quarter ended December 31, 2005, the average daily trading volume of our stock was approximately 162,500 shares and the shares traded as low as $0.10 and as high as $0.26 per share. Both volume and price could also be subject to wide fluctuations in response to various factors, many of which are beyond our control, including:

•actual or anticipated variations in quarterly and annual operating results;

•announcements of technological innovations by the Company or our competitors;

•developments or disputes concerning patent or proprietary rights; and

•general market perception of biotechnology and pharmaceutical companies.

Because our stock currently trades below $5.00 per share, and is traded on the Pink Sheets, our stock is considered by the SEC a “penny stock,” which can adversely affect its liquidity.

Our common stock does not currently qualify for listing on the Nasdaq Stock Market or the OTCBB.. If the trading price of our common stock remains less than $5.00 per share, our common stock is considered a “penny stock,” and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, brokers or dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker or dealer must make an individualized written suitability determination for the purchaser and receive the purchaser’s written consent prior to the transaction.

SEC regulations also require additional disclosure in connection with any trades involving a penny stock, including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements could severely limit the liquidity of such securities in the secondary market because few brokers or dealers are likely to undertake these compliance activities. In addition to the applicability of the penny stock rules, another risk associated with trading in penny stocks may be high price fluctuations. Purchasers of stock may be subject to substantial dilution.

As stated in “Market Information”, during 2005, upon the Company’s failure to timely file its Form 10-KSB, the OTCBB appended the symbol “E” to the Company’s trading symbol and notified the Company of its jeopardy of having its securities no longer quoted on the OTCBB, pending the Company’s filing of its Form 10-KSB for 2004.  On June 14, 2005, the Company was notified of the OTCBB’s action to not allow the Company’s securities to be quoted on the OTCBB, as of June 16, 2005, pending the filing of the Company’s Form 10-KSB for 2004.  The 10-KSB for 2004 was filed in September, 2005, however the Company, per SEC comments, is now restating its financials for 2004 in this Form 10-KSB for the year ended December 31, 20005.  Accordingly, at time of this filing, the Company’s common shares are only available for trading through the Pink Sheets.

If the ownership of our common stock continues to be highly concentrated, it may prevent you from influencing significant corporate decisions and may result in conflicts of interest that could cause our stock price to decline.

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As of December 31, 2005, our executive officers, directors and their affiliates beneficially own or control approximately 21.7% of the outstanding shares of our common stock (after giving effect to the exercise of all options and warrants held by them which are exercisable within sixty days of such date).  Additionally, based upon our stock records, Industrial Enterprises of America, previously known as Advanced Bio/Chem, is the record owner of approximately 22% of the outstanding shares of our common stock as ofMarch 24, 2005.  Accordingly, our current executive officers, directors and their affiliates, as well as Advanced Bio/Chem, will have substantial control over the outcome of corporate actions requiring shareholder approval, including the election of directors, any merger, consolidation or sale of all or substantially all of our assets or any other significant corporate transactions.  These shareholders may also delay or prevent a change of control of the Company, even if such a change of control would benefit our other shareholders. The significant concentration of stock ownership may adversely affect the trading price of our common stock due to investors’ perception that conflicts of interest may exist or arise.

The terms of our convertible debentures have materially modified the rights of common shareholders, and the holders of preferred stock may be able to delay or prevent a change of control of the company.

We are authorized to issue up to 50,000,000 shares of preferred stock in one or more series.  Our board of directors will be able to determine the terms of preferred stock without further action by our shareholders. If we issue preferred stock, it could affect your rights or reduce the value of your common stock. In particular, specific rights granted to future holders of preferred stock could be used to restrict our ability to merge with or sell our assets to a third party. These terms may include voting rights, preferences as to dividends and liquidation, conversion and redemption rights, and sinking fund provisions.

Under the terms of our convertible debentures, we are prohibited from taking certain actions without the approval of the holders of a two-thirds majority of the then-outstanding principal amount of the debentures.  Specifically, we have agreed not to, so long as any portion of the debentures are outstanding, (1) amend its certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the holders of the debentures (with exception for the Series B preferred stock to be issued by the Company), or (2) repurchase more than a de minimis number of shares of its common stock or other equity securities other than as to the shares of common stock issuable upon conversion of the debentures described above.

We are contractually obligated to issue shares of a Series B preferred stock to our two directors and principal officers.  The Series B preferred stock will have special voting rights such that the holders of the Series B preferred stock will hold a majority of the voting rights of the company.

We previously entered into employment agreements with our two directors and executive officers in which we agreed to issue 1,500,000 shares of Series B preferred stock to each officer.  The shares were intended to be issued following the Advanced Bio/Chem transaction; however, we did not file the certificate of amendment necessary to designate powers and relative rights of the Series B preferred stock.  As a result of certain restrictions agreed to by the Company in connection with the sale of our convertible debentures, we are not permitted to issue common shares or common share equivalents such as the Series B preferred stock until 90 days after the effective date of the registration statement.  After such restrictions lapse, we intend to designate and issue the Series B preferred stock.  It is contemplated that the Series B preferred stock will have special voting rights such that the holders of the Series B preferred stock will hold a majority of the voting rights of the company.  Upon issuance of the Series B preferred stock, our current executive officers and directors may restrict our ability to merge with, or sell our assets to, a third party.

We do not anticipate paying dividends on our common stock.

We do not plan to pay dividends on our common stock for the foreseeable future. We currently intend to retain future earnings, if any, to finance operations, capital expenditures and the expansion of our business.

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Item 2. Description of Property

The Company does not own any real estate.  The Company conducts its operations from leased premises of approximately 7,200 square feet in The Woodlands, Texas.

At this facility the Company maintains its executive offices and conducts development and product prototyping activities.   The Company expects this space will be adequate for its needs for the remainder of the lease term.

Item 3. Legal Proceedings

In November 2004, Chapman Spira & Carson, LLC (“Chapman Spira”), an investment banking firm, filed a lawsuit in the Supreme Court of the State of New York for the County of New York against Advanced BioChem (the Predecessor), Power3 and Steven Rash.  The suit alleges that Advanced BioChem and Power3 are liable to Chapman Spira for damages allegedly resulting from the breach of a letter agreement between Chapman Spira and Advanced BioChem relating to the performance of strategic and investment banking services.  Chapman Spira is seeking damages in the amount of $1,522,000 plus interest.  The Company has filed an answer in the lawsuit.  The Company believes that Chapman Spira’s claims are without merit; however, the Company cannot be assured it will prevail or if the outcome of the action will adversely affect the Company’s business, financial position or results of operations.  Settlement negotiations are ongoing between the parties and their attorneys, however no resolution has been achieved thus far.

An equipment vendor filed a complaint, regarding equipment which the Company acquired in its May 18, 2004 transaction with Advanced BioChem, now known as Industrial Enterprises of America, and against Advanced BioChem in April of 2002 in a California court alleging breach of contract and seeking damages.  Advanced BioChem reached a settlement agreement in April of 2003 under which Advanced BioChem would pay the vendor $40,000 in installments through August, 2003.  At December 31, 2003, Advanced BioChem had a balance remaining of $20,000. In April, 2005, the equipment vendor filed a lawsuit against Advanced BioChem, certain former officers of Advanced BioChem and against Power3 in order to enforce its claim for the remaining balance which is past due and may have been assumed by the Company as part of the settlement of the dispute with Advanced BioChem.  Settlement negotiations are ongoing, however no resolution has been achieved thus far.

On May 17, 2005, the Law Offices of Jerry Scheff, Spencer and Associates and Proteomic Research Services filed suit against the Company seeking recovery of amounts billed to Power3 for services and legal fees invoiced in November, 2004.  In February, 2006, a settlement was reached between all parties and all legal actions between the parties have been completed.

In June, 2005, Charles Caudle et al filed a lawsuit in Harris County, Texas, against Advanced BioChem, Power3 and the officers and directors of both companies.  The suit alleges that Advanced BioChem, Power3 and the officers and directors of Power3, are liable to Charles Caudle et al for damages resulting from funds loaned to Advanced BioChem and which were subsequently converted into common stock of Advanced BioChem.  It is unclear as to the specific dollar amount of the claim.  The Company, and its officers and directors, has filed an answer denying all claims in the lawsuit.  The Company believes that Charles Caudle et al’s claims are without merit, however the Company cannot be assured it will prevail or if the outcome of the action will adversely affect the Company’s financial position or results of operations.  Settlement negotiations between the parties are ongoing, however no resolution has been achieved thus far.

On June 27, 2005, the Company received a subpoena for documents regarding the SEC’s Division of Enforcement investigation In The Matter of Maui General Store, Inc.  It is the Company’s understanding that the Maui General Store matter relates to a promotional scheme by certain individuals to promote the stock and stock price of certain companies, during 2004.  The Company provided all documents in its possession pursuant to the subpoena and complied fully with the subpoena on July 11, 2005.  In February, 2006, Steven B. Rash and Dr. Ira Goldknopf gave testimony regarding this matter to the SEC’s Division of Enforcement in Washington, D.C.

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The Company has received no further correspondence from the Enforcement Division of the SEC.  The Company has not been notified that it is a subject of this investigation.

On August 8, 2005, Advanced BioChem, now known as Industrial Enterprises of America, filed suit against Power3, Steven B. Rash and Ira Goldknopf claiming damages of at least $3,000,000 including the costs of litigation and of addressing the claims of the creditors of Advanced BioChem that remain unpaid.  Advanced BioChem had, in its public reports, announced their assertion that the parties to the law suit are responsible for all of the liabilities of Advanced BioChem, at the date of the asset purchase transaction on May 18, 2004.   On October 25, 2005, this action was dismissed, without prejudice, by Industrial Enterprises of America.   Power3 has consulted with its attorneys on this matter and has been informed that no further action will be filed on this matter, based on information received from Industrial Enterprises of America.

In January of 2005, Kamy Behzadi, a previous employee of Advanced BioChem and Power3, filed suit against Advanced BioChem and Power3 claiming his entitlement to 1,000,000 common shares of Power3 per an Employment Agreement with the Company.  In May, 2005, Power3 filed a countersuit against Behzadi regarding his employment with the Company.  On March 22, 2006, both lawsuits were settled and all actions between the parties have been completed, assuming fulfillment of the Settlement Agreement clauses, which specify that Behzadi is to retain 25,000 shares of common stock of Power3 and Power3 agreed to compensate Behzadi for his legal fees.

On October 28, 2005, Centigrade Services, Inc. filed suit against Power3 to collect an outstanding debt of $2,117.09 plus court costs.  The Company believes that this lawsuit will be settled prior to the court date, however no resolution has been achieved thus far.  The debt is recorded in accounts payable by Power3.

On September 12, 2005, Focus Partners LLC filed suit against David Zazoff and Power3 alledging that Power3 breached its agreement with Focus Partners in that it failed to issue stock to the Plaintiff according to the terms of their agreement, that the stock in question was issued to Zazoff and that Zazoff later sold the stock in question for $480,000.  Settlement discussions between the Power3 and Focus Partners are ongoing, however no resolution has been achieved thus far.

On August 30, 2005, Carlotta Lansford, a previous consultant for Advanced BioChem, now known as Industrial Enterprises of America, filed suit against Advanced BioChem and Power3, claiming $3,295 in unpaid consulting and accounting fees.  The Company believes this lawsuit will be settled prior to the court date, however no resolution has been achieved thus far.  The debt is recorded in accounts payable by Power3.

On February 15, 2006, Bowne of Dallas LP filed suit against Power3 to collect a debt for services in the amount of $17,315.03.  The Company believes this lawsuit will be settled prior to the court date, however no resolution has been achieved thus far.  The debt is recorded in accounts payable by Power3.

On October 28, 2005, Power3 received notice of a Petition to Enforce Foreign Judgement citation filed against the Company by KForce regarding an employment fee adjudicated in December, 2003 in the state of Florida against the Company, in the amount of $15,872.77, together with $4,735.02 in interest.  Power3 does not agree with the Foreign Judgement and is attempting to resolve the issue prior to enforcement.  No resolution has been achieved on this issue at this time, however the Company is endeavoring to resolve the petition.  This debt is recorded and outstanding in accounts payable by the Company.

Item 4. Submission of Matters to a Vote of Security Holders

There were no matters submitted to the vote of the security holders during 2005.

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PART II

Item 5. Market for Common Equity and Related Stockholder Matters

Market Information

During 2004, the Company’s common stock was traded on the OTC Bulletin Board under the symbol “PWRM.”  As of June, 2005, as reported previously, the Company’s common stock has been quoted on the Pink Sheets.  The high and low bid information for each quarter for the years ending December 31, 2005 and 2004, as reported by National Quotation Bureau, Inc., are as follows:

Quarter	Pre or Post Split Price(1)	High Bid		Low Bid
First Quarter 2005	Post-Split	$	0.89	$	0.48
Second Quarter 2005	Post-Split	$	0.695	$	0.14
Third Quarter 2005	Post-Split	$	0.85	$	0.14
Fourth Quarter 2005	Post-Split	$	0.26	$	0.10
First Quarter 2004	Post-Split	$	0.87	$	0.15
Second Quarter 2004	Post-Split	$	2.87	$	0.28
Third Quarter 2004	Post-Split	$	7.79	$	1.70
Fourth Quarter 2004	Post-Split	$	2.23	$	0.67

(1)  On September 24, 2003, the Company effected a 1-for-50 reverse stock split of its common stock.

The quotations above reflect inter-dealer prices, without adjustment for retail mark-up, markdown or commissions and may not reflect actual transactions.

During 2005, upon the Company’s failure to timely file its Form 10-KSB, the OTCBB appended the symbol “E” to the Company’s trading symbol and notified the Company of its jeopardy of having its securities no longer quoted on the OTCBB, pending the Company’s filing of its Form 10-KSB for 2004.  On June 14, the Company was notified of the OTCBB’s action to not allow the Company’s securities to be quoted on the OTCBB, as of June 16, 2005, pending the filing of the Company’s Form 10-KSB for 2004.  Accordingly, the Company’s securities are no longer eligible for quotation on the OTCBB, as of June 16, 2005, all quotations of the Company’s securities are deleted from the OTCBB and the Company’s common stock is traded on the Pink Sheets under the symbol PWRM.PK.

Holders

As of December 31, 2005, there were 1,109 shareholders of record of the Company’s common stock.  The transfer agent for the Company’s common stock was Cottonwood Stock Transfer, through June 30, 2005.  In early July, 2005, the management and Board of Directors of Power3 terminated its relationship with Cottonwood Stock Transfer and contractually agreed to employ Integrity Stock Transfer as its new stock transfer agent.

Dividends

The Company has not paid or declared any dividends on its common stock for the last two fiscal years and does not anticipate paying cash dividends in the foreseeable future. There are no limitations on the ability of the Company to declare dividends; except those set forth in § 510 of the New York Business Corporation Laws which prohibits dividends if the Company is insolvent or would be made insolvent by the declaration of a dividend and all dividends must be made out of surplus only.

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Recent Sales of Securities under the 2004 Stock Compensation Plan

The following summarizes information relating to the Company’s sale of equity securities that were not registered under the Securities Act of 1933 during the period covered by this annual report and which have not been previously disclosed by the Company in a Quarterly Report on Form 10-QSB or a Current Report on Form 8-K.

On September 1, 2005, the Company issued 140,000 shares of restricted common stock to John P. Burton, according to the terms of his Employment Agreement.  The shares were issued according to the 2004 Stock Compensation Plan, allowing issuance of shares to employees and consultants.

On October 31, 2005, the Company issued 300,000 shares of common stock to Billings & Solomon, a law firm representing the Company in debt settlement negotiations.  The shares were issued according to the 2004 Stock Compensation Plan, allowing issuance of shares to employees and consultants.

On November 11, 2005, the Company issued 250,000 shares of common stock to Sichenzia Ross Friedman and Ferrence, a law firm representing the Company as an SEC attorney and in legal matters.  The shares were issued according to the 2004 Stock Compensation Plan, allowing issuance of shares to employees and consultants.

On December 6, 2005, the Company issued 300,000 shares of common stock to Billings & Solomon, a law firm representing the Company in debt settlement negotiations.  The shares were issued according to the 2004 Stock Compensation Plan, allowing issuance of shares to employees and consultants.

Item 6. Management’s Discussion and Analysis or Plan of Operation

Overview

The Company is an early stage development company engaged in the early detection, monitoring, and targeting of diseases through the analysis of proteins.  As previously stated, the Company’s previous operating assets were abandoned and spun off to a trustee for the shareholders of record as of May 17, 2004, prior to the date of the asset purchase transaction on May 18, 2004. Coincident with the acquisition, the Company significantly changed its business activity from being an operating company and returned to being a development stage company with its focus on commercializing the intellectual properties it acquired in the asset purchase transaction.  The Company’s business objective is to focus on disease diagnosis, protein and biomarkers identification, and drug resistance in the areas of cancers, neurodegenerative and neuromuscular diseases.  The Company has established a scientific advisory board to assist in the research and development of its products. The members of the scientific advisory board are recognized leaders in their chosen fields, and the Company is working with them in the development of effective early diagnosis and drug targets for early treatment of cancers, neurodegenerative and neuromuscular diseases.

On May 18, 2004, the Company acquired substantially all the assets and intellectual properties of Advanced BioChem and assumed a set of liabilities in exchange for the issuance of 15,000,000 shares of the Company’s common stock. As of May 18, 2004, the Company established the new business direction described in the “Business of Issuer” section of this document, completely changed its business activity and became an advanced proteomics company applying existing certain proprietary methodologies to discover and identify protein biomarkers associated with diseases.  The Company currently has no products or services for sale and is principally focused on research and development activities and, to a certain extent, initiating the “proof of concept” of its technologies.

The Company has had significant losses during 2004 and 2005.  The Company anticipates that it will continue to incur substantial operating losses in future years as it progresses in its research and development activities as well as the commercializing of its technologies.  The Company does not expect to produce revenues from operations in the near term and expects that its revenues will be limited to research grants, collaboration agreements, and other strategic alliances which the Company is able to obtain.  The Company has an immediate

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need for capital to continue its current operations.  Assuming the Company successfully closes the final stage of its private placement, the Company anticipates that it will need to raise additional capital prior to May, 2006, to meet its operating costs.  At December 31, 2005, the Company had an accumulated Stockholder’s equity of $9,182,895.  The following discussion should be read in conjunction with the Company’s audited financial statements as of December 31, 2005 and for the years ended December 31, 2005 and 2004, including the notes to those financial statements.  The following discussion contains forward-looking statements that reflect the Company’s plans, estimates and beliefs.  Actual results could differ materially from those discussed in the forward-looking statements.  See “Item 1. Description of Business – Risk Factors” for additional discussion of these factors and risks.

Results of Operations

Year Ended December 31, 2005 as Compared to Year Ended December 31, 2004

Revenues from operations for the year ended December 31, 2005 were $-0- compared to $15,491 for the prior year, resulting in a decrease of $15,491.

Cost of Goods Sold for the year ended December 31, 2005 were $-0-, compared to $5,174 for the prior year, resulting in a decrease of $5,174.

Operating expenses were $15,027,193 for 2005 as compared to a restated Operating Expenses figure of 19,678,470, a decrease of $4,651,277.  The decrease in operating expenses was primarily due to a $9,059,950 reduction in consulting fees in 2005, compared to 2004, offset by a $3,973,375 increase in stock-based compensation due to amortizing 12 full months of stock compensation compared to only 7 months in 2004..

Employee compensation and benefits were $1,278,633 in 2005 compared to $938,195 in 2004, the increase primarily due to employee compensation increases and costs associated with hiring additional employees to handle administrative, laboratory, financial and governmental compliance measures.

Occupancy and equipment expenses were $135,903 in 2005.  This resulted primarily from the Company’s office lease and utilities during 2005.

Derivative income (expense) amounted to $2,019,884 and $1,570,348 during the years ended December 31, 2005 and 2004, respectively, and arises from both freestanding derivatives (warrants) and embedded derivatives (embedded conversion features). We generally don’t use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of its financial instruments. However, certain other financial instruments, such as warrants and embedded conversion features that are indexed to our common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within our control. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period. We will experience fair value adjustements to our derivative financial instruments, which amounts will result in charges or credits to our income, until we reaquire the ability to settle these instruments with our common stock.

Interest expense amounted to ($505,647) and ($16,728) for the years ended December 31, 2005 and 2004, respectively. Interest expense increased due to (i) increases in our average borrowings and (ii) amortizations associated with our discounted debt and deferred financing costs.

The above matters result in net loss decreasing from ($17,471,463) in 2004 as compared to ($13,512,696) in 2005.

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Liquidity and Capital Resources

Our financial statements are presented on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. We are in the development stage and have primarily been involved in research and development and capital raising activities; as such we have incurred significant losses from operations during both 2004 and 2005.

We have an immediate need for capital to continue our operations, and we will need to raise significant additional funds to implement our business plan.  This cash will have to come from equity sales and/or borrowings as management has projected that we will need significant additional capital for development and other ongoing operational activities before we will have any anticipated revenue generating products. The actual amount of funds that we will need will be determined by many factors, some of which are beyond our control.  These factors include:

•The extent to which we enter into licensing arrangements, collaborations or joint ventures;

•The progress and results of research and product development;

•The costs and timing of obtaining new patent rights;

•The extent to which we require or license other technologies; and

•Regulatory changes and competition and technological developments in the market.

We have financed our operations primarily through the net proceeds generated from the sale of common stock and the recent sale of convertible debentures.  From the date of the Advanced Bio/Chem transaction to December 31, 2004, the Company raised approximately $1,000,000.  Then in January, 2005, the Company raised an additional $400,000 from a limited set of the original convertible debenture holders.  As described in “Recent Financing” below, the Company intends to sell an additional $1,600,000 in aggregate principal amount of convertible debentures following the effectiveness of the Registration Statement on Form SB-2 filed by the Company for the resale of certain shares of the Company’s stock by the purchasers of the Company’s convertible debentures.

Net cash infrom operating activities approximated 825,208 for the year ended December 31, 2005, compared to $2,104,180 for the year ended December 31, 2004.  The decrease in net cash from operating activities during 2004 was primarily due to an adjustment to stock-based compensation expense from cancellation of previously-issued stock to employees.

Net cash used in investing activities during 2005 was ($66,026) as compared to $(331,061) in 2004.  Net cash provided by financing activities approximated ($916,565) for the year ended December 31, 2005, as compared to ($1,614,885) for the year ended December 31, 2004.  The increase in net cash provided by financing activities is primarily due to net proceeds received from the closing of the Company’s 2^nd tranche of convertible debentures in January, 2005 and borrowings made by the Company during 2005 as Notes Payable.  In addition, cash proceeds from the sales of stock decreased from $449,807 for the year ended December 31, 2004 to $156,000 for the year ended December 31, 2005.

As of December 31, 2005, the Company’s principal source of liquidity was approximately $1,399 in cash.  As of the date of filing this report, the Company has approximately $100,000 on hand to pay operating expenses.  We also have no confirmed source of funds for the next twelve months, although we expect that after filing this report and an amended SB-2 registration statement, additional debt and equity capital will become available to the Company.

Pursuant to the financing described below, it is anticipated that the Company will receive an additional $1,600,000 upon the sale and issuance of $1,600,000 in aggregate principal amount of debentures at the final closing of the private placement, which is to occur on or before the fifth trading day after the effective date of the registration statement filed by the Company for the resale of securities by the investors.  In addition, the Company has received several bridge loans and officer advances during 2005.  It is expected that a portion of the proceeds received by the Company from the issuance and sale of the $1,600,000 aggregate principal amount of debentures will be used to repay certain bridge loans received during 2005.  The Company has thus far, been

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unable to complete the funding of the convertible debentures, described below in “Recent Financing” due to its failure to obtain effectiveness of its SB-2 to register the shares associated with the debentures, the warrants and additional investment rights covered in the securities purchase agreements.

Recent Financing

The Company entered into a securities purchase agreement, dated as of October 28, 2004, with certain investors.  Pursuant to the securities purchase agreement, the investors agreed to purchase from the Company convertible debentures due three (3) years from the date of issuance in the aggregate principal amount of $3,000,000.  Effective January 26, 2005, the Company entered into an amendment to the securities purchase agreement with each of the investors.  The securities purchase agreement, as amended, also provides for the issuance to the investors of warrants to purchase shares of the Company’s common stock and additional investment rights to purchase additional convertible debentures. In connection with the securities purchase agreement, the Company entered into a registration rights agreement which requires the Company to file a registration statement registering on behalf of the investors the resale of the shares of common stock issuable upon conversion of the debentures and the exercise of the warrants.  The Company will also file a registration statement registering on behalf of the investors the resale of shares of common stock issuable upon conversion of the debentures issued upon exercise of the additional investment rights previously issued by the Company.

Effective October 28, 2004, the Company issued and sold to the investors the first $1,000,000 in aggregate principal amount of such debentures at the initial closing under the securities purchase agreement.  Pursuant to the securities purchase agreement, as amended, effective January 26, 2005 the Company issued and sold to certain investors $400,000 aggregate principal amount of convertible debentures.  Subject to the Company’s satisfaction of the conditions set forth in the securities purchase agreement (which includes the effectiveness of the registration statement) the investors are required to purchase the remaining $1,600,000 in aggregate principal amount of such debentures at the final closing, which is to occur on or before the fifth trading day after the effective date of the registration statement.

The $1,000,000 aggregate principal amount of debentures issued on October 28, 2004 and the $400,000 aggregate principal amount of debentures issued January 26, 2005 are due and payable in full three (3) years after issuance and do not bear interest. The $1,600,000 aggregate principal amount of debentures issuable at the final closing will be due and payable in full three (3) years after the date of their issuance, and will not bear interest. The aggregate cash purchase price for the debentures will be $3,000,000, which is equal to the full face amount of the debentures. At any time from the closing date until the maturity date of the debentures, the purchasers have the right to convert the debentures, in whole or in part, into common stock at the then effective conversion price. The conversion price for the previously issued $1,400,000 aggregate principal amount of debentures is $0.90 per share, provided however if the lessor of (i) 75% of the average of the 5 consecutive Closing Prices immediately prior to the Effective Date, as defined in the Purchase Agreement, and (ii) the Closing Price on the Effective Date (the lessor of (i) and (ii) being referred to as the “Effective Date Price”) is less than the Conversion Price, the Conversion Price shall be reduced to equal the Effective Date Price, the now designated Effective Date Price.  The remaining 3^rd tranche, when and if made, of $1,600,000 aggregate principal amount of debentures issuable at the final closing will have a conversion price equal to the above.  The debentures contain covenants that will limit the Company’s ability to, among other things: incur or guarantee additional indebtedness; incur or create liens; amend the Company’s certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the holders of the debentures; and repay or repurchase more than a de minimis number of shares of common stock other than as permitted in the debentures and other documents executed with the purchasers.

If Power3, at any time while the debentures are outstanding, shall offer, sell or grant any option to purchase or offer, sell or grant any right to reprice its securities, or otherwise dispose of or issue any common stock or common stock equivalents, entitle any person to acquire shares of common stock at an effective price per share less than the then effective Conversion Price, as calculated by the formula described above, then the Conversion Price for the convertible debenture shares shall be reduced to equal any such new effective Conversion Price, as defined in the Agreement, regardless of whether or not such common stock or common

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stock equivalents are issued to convertible debenture holders.  In case of any such adjustment in the effective Conversion Price for the convertible debenture shares, this could significantly dilute existing investors.

The debentures include default provisions and an event of default includes, among other things, a change of control of the Company, the sale of all or substantially all of the Company’s assets, the failure to have the registration statement declared effective on or before the 180th day after the initial closing date, and the lapse of the effectiveness of the registration statement for more than 30 consecutive trading days during any 12-month period (with certain exceptions), the Company’s failure to timely deliver certificates to holders upon conversion and a default by the Company in any obligations under any indebtedness of at least $150,000 which results in such indebtedness being accelerated. Upon the occurrence of an event of default, each debenture may become immediately due and payable, either automatically or by declaration of the holder of such debenture. The aggregate amount payable upon an acceleration by reason of an event of default shall be equal to the greater of 130% of the principal amount of the debentures to be prepaid or the principal amount of the debentures to be prepaid, divided by the conversion price on the date specified in the debenture, multiplied by the closing price on the date set forth in the debenture.  Specific provisions exist in the Securities Purchase Agreement which subject the Company to liabilities for liquidated damages if the registration statement covering the shares does not become effective within 180 days after the October 28, 2004 purchase, which they did not, or if the registration statement does not remain effective.  In addition, if the Company is not able to deliver said share certificates, upon conversion, the Company becomes subject to partial liquidated damages, as specified in the Notes to the Financial Statements section of this report, based on the number of days required to deliver said shares.

Because the Company’s investors could be significantly diluted in their ownership position, the Company is further bound, by the Securities Purchase Agreement covering the debentures and the warrants, to not offer, sell or grant shares to other persons or companies at prices below the effective conversion prices available to the convertible debenture holders in the Agreements.  In such case, the specific details of the conversion price formulas can be found in the Notes to the Financial Statements in this report or in the actual Securities Purchase Agreement documents as previously filed in publicly-filed reports.

Concurrent with the issuance of the initial $1,000,000 aggregate principal amount of debentures dated October 28, 2004, the purchasers also received warrants to purchase an aggregate of up to 2,500,000 shares of common stock and additional investment rights to purchase up to an additional $2,500,000 principal amount of convertible debentures. On January 26, 2005, an amendment to the Securities Purchase Agreement was executed with four of the original purchasers of the initial $1,000,000 debenture purchase.  Pursuant to the terms of the amendment, concurrent with the issuance of the $400,000 aggregate principal amount of convertible debentures, the Company issued additional warrants to purchase an aggregate of up to 333,333 shares of its common stock, but no additional investment rights.  The warrants are exercisable at a price of $1.44 per share (subject to adjustment), for a period of five (5) years from October 28, 2004.  If Power3, at any time the warrants are outstanding, pays a stock dividend or other distribution on its shares; subdivides outstanding shares into a larger number of shares; combines outstanding shares into a smaller number of shares; or issues by reclassification any shares of capital stock of the Company, then the Exercise Price of the warrants shall be adjusted by a formula based on the number of common shares then outstanding, and the number of shares issuable upon exercise of the warrants shall be proportionately adjusted.  In addition, if the Company shall offer, sell, grant any option to purchase or reprice its securities, or otherwise dispose of or issue any common stock, at an effective price per share less than the then existing Exercise Price of the warrants, then the Exercise Price shall be reduced to equal this lower Base Share Price, as defined in the Securities Purchase Agreement for the warrants.

The additional investment rights are exercisable at a price equal to the principal amount of the debentures for a period until the earlier of (1) nine months following the effective date of the registration statement, or (2) April 28, 2006, whichever comes first. The debentures to be purchased upon the exercise of the additional investment rights will have the same terms as the debentures described above, except that the conversion price will be equal to $1.08, subject to adjustment according to the terms of the Agreement.

Each selling shareholder has contractually agreed to restrict its ability to convert the debentures, exercise the warrants and additional investment rights and receive shares of the Company’s common stock such

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that the number of shares of common stock held by them and their affiliates after such conversion or exercise does not exceed 4.99% of the number of shares of the Company’s common stock outstanding immediately after giving effect to such conversion or exercise.

Additional terms and specifics of the Convertible Debenture agreements, including Events of Default and the consequences thereof, are detailed in the Notes to the Financial Statements.

Other Recent Financing

On April 5, 2005, the Company received a bridge loan in the amount of $251,000.  This bridge loan was due and payable on the sooner of August 15, 2005 or one business day following the closing of the Company’s sale and issuance of the remaining $1,600,000 aggregate principal amount of debentures.  The Company expects to use proceeds from the sale and issuance of such debentures to repay this bridge loan.  The bridge loan bears interest at a rate of 10% per annum which, at the holder’s option, may be paid in (a) cash, or (b) that number of shares of the Company’s common stock determined by dividing $251,000 by the common stock price on date of payment and multiplying the quotient so obtained by 20%.  This note is in default and remains outstanding at this time and no payments of principal or interest have been made thus far on this loan, either in cash or shares.  At the time of this report, the note holder has not made demand for payment of principal or interest on this note.

On September 1, 2005, the Company received a bridge loan in the amount of $200,000.  This bridge loan is due and payable on the sooner of November 15, 2005 or immediately following the closing of the Company’s sale and issuance of the remaining $1,600,000 aggregate principal amount of debentures.  The Company expects to use the proceeds from the sale and issuance of such debentures to repay this bridge loan.  The loan bears interest at rate of 10% until payment, however the interest rate increases to 12% after an event of default.  The note contains a provision that the accrued interest on this note shall be considered paid in full upon issuance of 166,000 shares of restricted stock at $0.00 cost basis per share to the note holder.  In addition, the Note contains a provision for the issue of Penalty Shares to the note holder, in an event of default, calculated as 8,300 shares per month for each 30-day period the note is in default.  This note is in default and remains outstanding and neither principal, interest, nor penalty shares have been paid or issued on this note.  At the time of this report, the note holder has not made demand for payment of principal or interest on this note.

On May 31, 2005, the Company received an Officer Advance in the amount of $ 55,000.   This advance is in the form of a short-term Note Payable, to the Officer, Mr. Steven Rash, President and CEO, by the Company.  The Note Payable was originally due on June 30, 2005, and bears interest at 6 % per annum until paid.  The Company used the proceeds from this note as working capital.  The Company expects to use the proceeds from later permanent financing obtained from issuing additional debentures to repay this Officer Advance.  This note is in default, however the Officer has agreed to allow the Company an indefinite extension of time to repay this Note Payable.

On June 3, 2005, the Company received an Officer Advance in the amount of $ 50,000.  This advance is in the form of a short-term Note Payable, to the Officer, Dr. Ira Goldknopf, Chief Scientific Officer, by the Company.  The Note Payable was due on June 30, 2005, and bears interest at 6% per annum until paid.  The Company used the proceeds from this note as working capital.  The Company expects to use the proceeds from later permanent financing obtained from issuing additional debentures to repay this Officer Advance.  This note is in default, however the Officer has agreed to allow the Company an indefinite extension of time to repay this Note.

On March 31, 2005, the Company received an Officer Advance in the amount of $35,000 from the Chief Financial Officer.  This Note was due on April 30, 2005, and bears interest at a rate of 6% per annum until paid.  The Company expects to use the proceeds from later permanent financing obtained from issuing additional debentures to repay this Officer Advance.  This note is in default, however the note holder has agreed to allow the Company an indefinite extension of time to repay this Note.

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On June 13, 2005, the Company received a bridge loan in the amount of $ 396,500.   This bridge loan was due and payable on the sooner of August 11, 2005 or the fifth day following the effective date of the Company’s registration statement on Form SB-2.  The Company expects to use the proceeds from the sale and issuance of the remaining $1,600,000 of convertible debentures to repay the loan.  The note is secured by a Stock Pledge Agreement, entered into on June 17, 2005, by Steven B. Rash, Chairman and CEO of Power3, wherein Mr. Rash pledged 6,000,000 shares of common stock as security for the performance of the Company under the note.  On September 30, 2005, in consideration of an additional $50,000 added to the principal amount of the Note, which was expensed to Interest Expense, and making the total principal due $446,500, the payee of this Note agreed to allow the Company an extension of time to repay such bridge loan, until October 31, 2005.  This note is in default and no payments of principal or interest have been made on this loan by Power3.  It is the Company’s understanding that the Note holder has sold a certain number of the common shares pledged to him and individually owned by Steve Rash and the note is no longer in default.

During the latter half of 2005, the Company’s Chief Scientific Officer advanced the Company $159,231 as short-term Officer Advances in order to enable the Company to meet certain payment obligations.  These advances were in the form of short-term 180 day notes and bear interest at a rate of 6% per annum.   None of these short-term Officer Advances were due as of December 31, 2005 and the Company expects to use the proceeds from later permanent financing obtained from issuing additional debentures to repay these Officer Advances.

On November 2, 2005, the Company received a bridge loan in the amount of $150,000 from Trinity Financing Investments.  This bridge loan is due and payable on March 2, 2006 and bears interest at a rate of 11% until maturity and 18% thereafter until the loan is repaid.  In addition to the note, the holder received 1,000,000 warrants to purchase common shares of the Company at $.25 per share.  This note is secured by a pledge of common shares individually owned by Steven B. Rash and Dr. Ira L. Goldknopf.

On December 12, 2005, the Company received a bridge loan in the amount of $150,000 from Trinity Financing Investments.  This bridge loan is due and payable on April 9, 2006 and bears interest at a rate of 11% until maturity and 24% thereafter until the loan is repaid.  In addition to the note, the holder received 1,000,000 warrants to purchase common shares of the Company at $.14 per share.  This note is secured by a pledge of common shares owned individually by Dr. Ira Goldknopf.

On December 14, 2005, the Company received an Officer Advance in the amount of $50,000 from the Chief Scientific Officer.  This Note is due on June 15, 2006 and bears interest at a rate of 6% per annum until paid.  The Company expects to use the proceeds from later permanent financing obtained from issuing additional debentures to repay this Officer Advance.

Plan of Operations and Cash Requirements

The Company currently does not have operating revenues from product sales or the performance of services and it continues to experience net operating losses.  The Company is actively pursuing third party licensing agreements, collaboration agreements and similar business arrangements in order to establish a revenue base utilizing its capabilities in disease diagnosis based on protein and biomarker identification, and drug resistance in the areas of cancers, neurodegenerative and neuromuscular diseases.  The Company has undertaken clinical validation studies to demonstrate the diagnostic capabilities of its technologies. However, there can be no assurances that revenue generating agreements will be in place in the next twelve months.

Absent a source of revenues, the Company will require funding in order to carry out its business plan until such time as it is able to generate sustained revenues.  The Company’s current cash requirements are approximately $300,000 per month and the Company anticipates that it will require approximately $3,950,000 for the twelve months ended March 31, 2007 to continue its development activities, undertake and perform

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clinical validation studies, continue its marketing efforts and maintain its administrative infrastructure, broken down as follows:

Expenditures Required
During Next Twelve Months

General and Administrative	$	2,750,000
Capital Expenditures	$	250,000
Patent filings and intellectual property	$	200,000
NAF clinical validation studies	$	500,000
Testing for Research Agreements	$	250,000
Total	$	3,950,000

The Company has no significant capital expenditure requirements and does not plan to increase its monthly expenditure rate absent an increase in revenues or additional funding.

As noted in “Liquidity and Capital Resources” above, the Company entered into a securities purchase agreement and an amendment to the securities purchase agreement pursuant to which certain investors agreed to purchase convertible debentures in the aggregate principal amount of $3,000,000. The securities purchase agreement, as amended, also provides for the issuance of warrants to purchase shares of the Company’s common stock and additional investment rights to purchase additional convertible debentures. On the initial closing under the securities purchase agreement, which occurred effective as of October 28, 2004, the investors purchased the first $1,000,000 in aggregate principal amount of the convertible debentures of which the Company received approximately $860,000 after payment of fees and expenses.  Pursuant to the securities purchase agreement, as amended, a sub-group of the original investors purchased an additional $400,000 aggregate principal amount of convertible debentures on January 26, 2005 as a second tranche of the total investment.  Subject to the Company’s satisfaction of the conditions set forth in the securities purchase agreement (which includes the effectiveness of the registration statement), the investors are required to purchase the remaining $1,600,000 in aggregate principal amount of such convertible debentures on or before the fifth trading day after the effective date of the registration statement.  Assuming the completion of the remaining closing and sale and issuance of the remaining $1,600,000 in aggregate principal amount of the convertible debentures, the Company estimates that, after repayment of the bridge note of $446,500, the bridge note of $251,500 and the bridge note of $200,000, immediately following the sale and issuance of such debentures, the Company will have adequate cash to allow it to meet its funding requirements through the third quarter of 2006.  In the event the sale and issuance of such debentures occurs and the investors exercise their warrants and additional investment rights, the Company anticipates it will have adequate cash to meet its funding requirements through the first quarter of 2007.

In addition to the convertible debentures, the Company also issued warrants to purchase up to 2,500,000 shares of common stock, with an exercise price equal to $1.44.  The Company issued additional warrants to purchase up to 333,333 shares of common stock concurrent with its issuance of the $400,000 aggregate principal amount of debentures.  Full exercise of the warrants would generate funds in excess of $3,000,000.  The Company also issued additional investment rights, which give the investors the right to purchase up to an aggregate of $2,500,000 of convertible debentures with a conversion price of $1.08. However, the exercise of these warrants and additional investment rights is at the discretion of the purchasers and there are no assurances that the purchasers will exercise their rights under such securities.

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The Company will continue to require additional debt or equity financing for its operations which may not be readily available.  The Company’s ability to continue as a going concern is subject to its ability to generate a profit or obtain necessary funding from outside sources.  Management believes that even though the Company currently has limited cash resources and liquidity, assuming exercise of the warrants and additional investment rights, the net funds available from the final closing under the Securities Purchase Agreement financing, after repayment of the bridge loans,will allow the Company to continue operations through October 2006.  In the event the final closing and sale of $1,600,000 in aggregate principal amount of debentures occurs but the warrants and additional investment rights are not exercised, the Company anticipates that it will need to raise additional capital prior to October 2006 to meet its operating costs.  The Company’s actual results may differ materially from these estimates, and no assurance can be given that additional funding will not be required sooner than anticipated or that such additional funding will be available when needed or on terms acceptable to the Company.  Insufficient funding will require the Company to curtail or terminate operations.

Off-Balance Sheet Arrangements

At December 31, 2005, with the exception of the lease for its operating facility, and employment agreements entered with its three principal officers, the Company did not have any significant off balance sheet commitments.

Critical Accounting Policies

Stock-Based Compensation

The Company accounts for equity instruments issued to employees that are fully vested and non-forfeitable based on the market value of the stock issued as of the effective date of the agreement, per SEC requirement.  Equity instruments issued to non-employees for services are also measured at market value on the effective date of the agreement.

The Company has adopted Statement of Financial Accounting Standards No. 148 “Accounting for Stock-Based Compensation - Transition and Disclosure” (SFAS No. 148). This statement amends FASB statement No. 123, “Accounting for Stock Based Compensation”. It provides alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for employee stock based compensation. It also amends the disclosure provision of FASB statement No. 123 to require prominent disclosure about the effects on reported net income of an entity’s accounting policy decisions with respect to stock-based employee compensation. As permitted by SFAS No. 123 and amended by SFAS No. 148, the Company continues to apply the intrinsic value method under Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” to account for its stock-based employee compensation arrangements.

In December 2004, the Financial Accounting Standards Board issued Statement Number 123 (“FAS 123 (R)”), Share-Based Payments.  FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of share-based payments such as stock options granted to employees.  The Company will be required to apply FAS 123 (R) on a modified prospective method.  Under this method, the Company will be required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption.  In addition, the Company may elect to adopt FAS 123 (R) by restating previously issued financial statements, basing the amounts on the expense previously calculated and reported in the pro forma disclosures that had been required by FAS 123, effective for the first reporting period during which the Company has such compensation.  The Company has not yet determined the impact that FAS 123 (R) will have on its financial statements; however, it does not believe the impact of adopting this Statement is material to this report as there are no unvested options and warrants at December 31, 2004.

Power3’s stock-based compensation expense consists primarily of amortized costs for stock issued to consultants, to employees and for warrants, covered by the 2004 Stock Compensation Plan.  Total stock-based compensation expense for 2004 amounted to $8,215,241 compared to $12,188,616 in 2005.  The increase is

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primarily due to the amortization, over 12 full months in 2005 compared to only approximately 7 full months in 2004, since most of the stock was originally issued on or about May 18, 2004.  Most of the stock issued to employees is being amortized over 24 months, and since this is the bulk of the stock compensation expense, most of the stock-based compensation will be fully amortized to deferred compensation expense during 2006.

 Stock-based compensation expense during 2005 amounted to:

Stock-based Expense to:	1st Quarter		2nd Quarter		3rd Quarter		4th Quarter
Consultants	$	136,875	$	109,786			$	45,000
Employees	$	3,181,443	$	3,181,443	$	3,129,629	$	2,209,179	*
Warrants	$	47,208	$	47,208	$	47,208	$	53,637

* Includes adjustment for stock returned to Power3 due to settlement and terminations of employment in 2005 and credit to Stock Compensation Expense for $675,000+$2,820+$213,504=$891,324 for returned company stock.

Stock-based compensation expense during 2004 amounted to:

	1st Quarter	2nd Quarter		3rd Quarter		4th Quarter
For Consultants		$	42,708	$	128,124	$	128,124
For Employees		$	1,464,213	$	3,181,443	$	3,181,443
For Warrants		$	10,055	$	35,841	$	43,290

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Item 7.  Financial Statements

POWER3 MEDICAL PRODUCTS, INC.

FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2005 AND 2004 (RESTATED)

FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004 (RESTATED)

Notes to Financial Statements

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

TO THE SHAREHOLDERS AND BOARD OF DIRECTORS OF POWER3 MEDICAL PRODUCTS, INC.:

We have audited the accompanying balance sheets of Power3 Medical Products, Inc.. (a New York corporation in the development stage) (“the Company”) as of December 31, 2004 (restated) and 2005, and the related statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2004 (restated) and 2005, and for the period from May 18, 2004 (date of entry into development stage) to December 31, 2005.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit. .

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Power3 Medical Products, Inc.at December 31, 2004 (restated) and 2005, and the related results of their operations and cash flows for the years ended December 31, 2004 (restated) and 2005 and for the period from May 18, 2004 (date of entry into development stage) to December 31, 2005 in conformity with accounting principles generally accepted in the United States of America.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company is in the development stage and is primarily involved in research and development and capital raising activities.  There is no assurance that research activities that the Company is involved in will generate sufficient funds that will be available for operations. The Company’s limited revenue history, its dependence on a narrow customer base and limited funding raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

As discussed in note 7 to the financial statements, the Company is the defendant in certain lawsuits and is involved in a dispute with Advanced Biochem.   The Company believes these claims are without merit and intends to resolve them in the best interest of the Company.   Accordingly no provision for any liabilities related to the matters has been accrued.   However, due to the uncertainties with these legal issues, it is at least reasonably possible that adverse results will occur, although any such amount cannot be estimated.

John A. Braden & Company, PC

Houston, Texas

April 14, 2006

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POWER3 MEDICAL PRODUCTS, INC.

(A Development Stage Enterprise)

BALANCE SHEETS

AS OF DECEMBER 31, 2005 AND 2004 (RESTATED)

	2005			2004
				(Restated)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,398		$	158,301
Accounts receivable				2,350
Prepaid expenses and other current assets	21,092			4,352
Total current assets	22,490			165,003
OTHER ASSETS
Goodwill	13,371,776			13,371,776
Deferred finance costs, net	290,027			239,682
Intangible assets, net	179,786			96,424
Furniture, fixtures and equipment, net	70,751			85,025
Deposits	25,900			25,900
TOTAL ASSETS	$	13,960,730		$	13,983,810
LIABILITIES AND STOCKHOLDER’S EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	1,024,935		$	631,560
Notes payable—in default	1,520,477			20,000
Convertible debentures—in default	75,279			14,254
Other current liabilities	702,208			132,481
Derivative liabilities	1,454,936			2,877,919
Total current liabilities	4,777,835			3,676,211
STOCKHOLDERS’ EQUITY
Common Stock-$0.001 par value:150,000,000 shares authorized; 65,215,121 shares issued and outstanding	65,545			65,675
Additional paid-in capital	57,773,506			58,884,351
Deferred compensation	(4,802,621		)	(18,301,588		)
Loss accumulated before entering development stage	(11,681,500		)	(11,681,500		)
Loss accumulated during the development stage	(32,172,035		)	(18,659,339		)
Total stockholders’ equity	9,182,895			10,307,599
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	13,670,703		$	13,983,810

See accompanying notes to the financial statements.

40

STATEMENT OF OPERATIONS

POWER3 MEDICAL PRODUCTS, INC.

(A Development Stage Enterprise)

STATEMENTS OF OPERATIONS

YEARS ENDED DECEMBER 31, 2005 AND 2004 (RESTATED)

	2005			2004			Period from May 18, 2004 - December 31, 2005
				(Restated)
REVENUES:
Sales				11,491
Other revenue				4,000			4,000
Total revenue				15,491			4,000
COST OF GOODS SOLD:
Production costs				5,174
Total cost of goods sold				5,174
GROSS PROFIT				10,317			4,000
OPERATING EXPENSES:
Stock based compensation	12,188,616			8,215,241			20,403,857
Employee compensation and benefits	1,278,633			938,195			2,110,548
Professional and consulting fees	590,352			9,650,302			10,240,654
Occupancy and equipment	135,903			49,895			180,798
Travel and entertainment	89,490			72,375			156,113
Other selling, general and administrative expenses	744,199			752,462			(1,533,008		)
Total operating expenses	(15,027,193		)	(19,678,470		)	(31,558,962		)
LOSS FROM OPERATIONS	(15,027,193		)	(19,668,153		)	31,554,962		)
OTHER INCOME AND (EXPENSE):
Derivative income (expense)	2,019,884			1,570,348			1,371,984
Interest income				1,215			1,215
Other income	260			641,855			(294,817		)
Interest expense	(505,647		)	(16,728		)	(625,524		)
Total other income(expense)	1,514,497			2,196,690			452,858
NET LOSS	$	(13,512,696	)	$	(17,471,463	)	(31,102,104		)
NET LOSS PER SHARE	$	(0.21	)	$	(0.42	)	$	(0.48	)
Weighted average number of shares outstanding	65,428,847			42,034,796			64,391,890

See accompanying notes to the financial statements.

41

POWER3 MEDICAL PRODUCTS, INC.

A Development Stage Enterprise

STATEMENT OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2005, 2004 (RESTATED)AND 2003

							Additional
	Common Stock		Preferred Stock				Paid In
	Shares	Par Value	Shares		Par Value		Capital		Other	Deficit
BALANCES, DECEMBER 31, 2002	997,830	997					6,315,951			(7,600,881	)
Issuance of preferred stock for cash and conversion of accred payroll			3,990,000		3,990		1,991,010
Issuance of common stock for services rendered	100,000	100					37,400
Conversion of convertible notes payable to common stock	95,000	95					27,405
Conversion of other note payable to common stock	50,000	50					12,450
Common stock subscriptions							89,700		300
Conversion of preferred stock	1,200,000	1,200	(120,000	)	(120	)	(1,080	)
Net Loss for the year										(1,845,496	)
BALANCES, DECEMBER 31, 2003	2,442,830	2,442	3,870,000		3,870		8,472,836		300	(9,446,377	)

42

POWER3 MEDICAL PRODUCTS, INC.

A Development Stage Enterprise

STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2005, 2004 (RESTATED)AND 2003

									Additional		Deferred
	Common Stock				Preferred Stock				Paid In		Compensation
	Shares		Par Value		Shares		Par Value		Capital		Expense		Other		Deficit
BALANCES, DECEMBER 31, 2003	2,442,830		2,442		3,870,000		3,870		8,472,836				300		(9,446,377	)
Correct beginning balance per transfer agent	433		1
Issued effective January 23, 2004, services	6,000,000		6,000						3,055,327
Issued effective April 1, 2004 for cash	583,334		583						134,417
Issued effective April 27,2004 for services	440,000		440						197,560
Issued effective May 10, 2004 to retire debt	300,000		300						194,700				(300	)
Issued effective May 11, 2004 for services	4,500,000		4,500						2,065,500
Issued effective May 17, 2004 for services	141,033		141						105,634
Issued effective May 18, 2004 compensation	27,805,000		27,805						24,996,695		(25,024,500	)
Issued effective May 18, 2004 for services	4,550,000		4,550						4,090,450
Issued effective May 18, 2004 for acquisition	15,000,000		15,000						13,485,000
Issued effective June 1, 2004 for services	125,000		125						249,875		(250,000	)
Issued effective June 11, 2004 for services	100,000		100						211,900
Record stock option expense									626,100		(626,100	)
Issued effective July 1, 2004 compensation	140,000		140						426,860		(427,000	)
Issued effective July 23, 2004 for services	125,000		125						284,875		(285,000	)
Issued November 10, 2004 for cash	242,167		242						314,575
Issued November 10, 2004 for services	10,000		10						12,990
Cancelled November 15, 2004 (agreement)	(160,000	)	(160	)					(71,840	)
Issued November 17, 2004 to convert Series A Preferred Shares to Common Shares	1,031,316		1,031		(1,331,280	)	(1,330	)	1,391,246						(1,392,277	)
Issued November 23, 2004 to convert Series A Preferred Shares to common shares	1,969,008		1,970		(2,538,720	)	(2,540	)	1,986,728						(1,988,698	)
Stock based compensation expensed during the year											8,215,241
Net reclassifications of derivative liabilities									(3,347,077	)
Other equity															(42,021	)
Net loss															(17,471,463	)
Balances, December 31, 2004 (restated)	65,345,121		65,345		0		0		58,884,351		(18,301,588	)			(30,340,836	)

43

POWER3 MEDICAL PRODUCTS, INC.

A Development Stage Enterprise

STATEMENT OF STOCKHOLDERS’ EQUITY

Years Ended December 31, 2005, 2004 (RESTATED)AND 2003

					Additional		Deferred
	Common Stock				Paid In		Compensation
	Shares		Par Value		Capital		Expense		Equity
Balances, December 31, 2004 (restated)	65,345,121		65,345		58,884,351		(18,301,588	)	(30,340,836	)
Cancelled Shares from 7/01/04	(140,000	)	(140	)	(426,860	)
Issued Shares on 9/14/05	140,000		140		41,860
Issued Shares on 10/31/05	300,000		300		65,700
Issued Shares on 11/11/05	250,000		250		44,750
Issued Shares on 12/06/05	300,000		300		44,700
Cancelled Shares on 12/31/05	(975,000	)	(975	)	(876,500	)
Cancelled Shares on 12/31/05	(5,000	)	(5	)	(4,495	)
Settlement on employee stock, net							441,302
Amortization							13,057,665
Net loss									(13,512,696	)
BALANCES, DECEMBER 31, 2005	65,215,121		65,215		57,773,506		(4,802,621	)	(43,853,535	)

See accompanying notes to the financial statements.

44

POWER3 MEDICAL PRODUCTS, INC.

(A Development Stage Enterprise)

STATEMENTS OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2005 AND 2004 (RESTATED)

	2005			2004			Period from May 18, 2004 to December 31, 2005
				(Restated)			(Restated)
Operating activities:
Net loss	$	(13,512,696	)	$	(17,471,463	)	$	(30,358,917	)
Adjustments to reconcile net loss to net cash from operating activities:
Derivative income (expense)	2,019,884			1,570,348			3,590,232
Stock based services and compensation	12,295,216			17,932,787			27,450,704
Stock issued to retire preferred stock and debt				4,236			4,236
Adj to Stock based compensation due to cancellation	(891,324		)				(891,324		)
Amortization of debt discount and finance costs	105,446			16,728			105,446
Depreciation and amortization	20,158			45,024			65,182
Changes in operation assets and liabilities:
Decrease (increase) in receivables				9,006			6,656
Decrease (increase) in deposits				(25,900		)	(25,900		)
Decrease (increase) in prepaid and other				(4,352		)	(4,352		)
Increase (decrease) in interest payable	255,467						255,467
Increase (decrease) in accounts payable and accrued liabilities	533,057			27,766			980,823
Net cash from operating activities	825,208			2,104,180			1,178,253
Investing Activities:
Capital expenditures, net	3,061			(331,061		)	(328,000		)
Increase in other assets.	(69,087		)				(69,087		)
Net cash from investing activities	(66,026		)	(331,061		)	(397,087		)
Financing Activities:
Proceeds from sale of common stock, net	156,000			449,807			605,807
Proceeds from borrowings under notes payable	1,546,731						1,546,731
Proceeds from convertible debentures, warrants and rights, net of costs	338,000			859,041			1,197,041
Derivatives and Other Liabilities	(2,957,296		)	(2,923,733		)	(3,831,942		)
Net cash from financing activities	(916,565		)	(1,614,885		)	(482,363		)
Net increase in cash and cash equivalents	(157,383		)	158,234			(1,197		)
Cash and cash equivalents, beginning of period	158,782			548			2,596
Cash and cash equivalents, end of period	$	1,399		$	158,782		$	1,399

45

POWER3 MEDICAL PRODUCTS, INC.

(A Development Stage Enterprise)

STATEMENT OF CASH FLOWS

YEARS ENDED DECEMBER 31, 2005 AND 2004 (RESTATED)

	2005			2004		Period from May 18, 2004 to December 31, 2005
				(Restated)		(Restated)
Cash paid for:
Interest				$	59,840	$	59,840
Income taxes						—
Non-cash transactions:
Conversion of convertible notes payable and accrued interest to common stock
Conversion of accrued payroll to preferred stock
Conversion of stockholder advances to notes payable
Conversion of notes payable to equity						—
Conversion of preferred stock to common stock
Conversion of other liabilities to stockholder advances
Exchange of convertible preferred stock for common stock 3,000,324 shares				3,380,975		3,380,975
Common stock issued for services (At market, date of effective agreement):
For consulting contracts	$	156,000		10,156,775		10,312,775
For asset acquisition 15,000,000 shares				13,500,000		13,500,000
For compensation contracts	$	(385,000	)	25,451,500		25,066,500
Issuance of warrants in connection with services
Issuance of warrants in connection with convertible debentures
Asset retirement obligation
Retirement of common stock	$	882,000				882,000

See accompanying notes to the financial statements..

46

POWER3 MEDICAL PRODUCTS, INC

(A Development Stage Enterprise)

NOTES TO FINANCIAL STATEMENTS

Item 1. ORGANIZATION, PRINCIPAL ACTIVITIES AND BASIS OF PRESENTATION

Power3 Medical Products, Inc. (the “Company” or “Power3 “) was incorporated in the State of Florida on May 15, 1992 and merged into a New York Corporation in 1994, under the name Sheffield Acres, Inc..  Power3 and its wholly owned subsidiaries, C5 Health, Inc. (C5), which was officially dissolved in the State of Delaware and the State of Florida effective December 31, 2003 and Power3 Medical, Inc., a Nevada Corporation, now known as Tenthgate, Inc., were engaged in product development, sales, distribution and services for the healthcare industry.  On September 12, 2003, Surgical Safety Products, Inc. amended its Certificate of Incorporation to (a) declare a 1:50 reverse split of its common stock; (b) increase its authorized capital to 150,000,000 shares of common stock and 50,000,000 shares of preferred stock; and (c) change its name to Power3 Medical Products, Inc.  All references to the number of shares in the accompanying financial statements and notes thereto have been adjusted to reflect the stock split as if it occurred on January 1, 2004.

Prior to May 17, 2004, the Company had one direct subsidiary, Tenthgate, Inc. (“Tenthgate”), a Nevada corporation formerly known as Power3 Medical, Inc.  Prior to this date, Tenthgate was accounted for, by Power3, as a wholly-owned subsidiary, operating as a “development stage company”, under the cost method.  As part of the transaction which involved the acquisition of substantially all the assets and certain liabilities from Advanced BioChem, now known as Industrial Enterprises of America, it was agreed that Power3 would distribute the shares of its subsidiary, Tenthgate, to its then existing shareholders .  To fulfill this obligation, the shares of Tenthgate were transferred to a trustee for distribution to the shareholders of Power3 as of May 17, 2004.  Tenthgate was spun off because the management of Power3, in place prior to May 17, 2004, desired to continue to own and eventually operate this subsidiary.  At the time of the spinoff, Tenthgate was granted the rights to market a product line that had previously been marketed by Power3, but which the company had decided to abandon.  Tenthgate had not been an operating company, and their management has apparently abandoned any plans to market the product as evidenced by their SEC filings, specifically their amended 10-QSB filed for the quarterly period ending January 31, 2005, wherein they specifically state that they are a “development stage company.”  The prior operations of the company which are reflected in the financial statements as occurring prior to reentering the development stage were the operations the Company had decided to abandon and which were transfewrred to the prior shareholders under the control of prior management.  Any activities since May 17, 2004, are not consolidated from Power3 because Power3 does not now own or control the operations or activities of Tenthgate, nor are their activities associated with Power3 in any manner whatsoever.

In 2003, the Company was an operating company, marketing devices to aid surgical procedures. Prior to May 18, 2004, the products had received only minor market acceptance and sales had slowed to the point that Power3 was searching for other products and markets to increase its presence in the healthcare industry.  In early 2004, Power3 became aware of a biotech company that appeared to have a set of assets and intellectual properties that it required to more effectively pursue its business model.  That company, named Advanced BioChem, doing business as ProteEx, provided contract-for-fee lab services analyzing protein biomarkers. At the conclusion of negotiations with Advanced BioChem, Power3 entered into an Asset Purchase Agreement dated May 18, 2004, whereby it purchased substantially all the assets and intellectual properties of Advanced BioChem, and assumed certain liabilities, as scheduled in the agreement, from Advanced BioChem.  After the transaction, certain employees from Advanced BioChem became employees of Power3 and were later issued Employment Agreements by Power3.  As consideration in the Asset Purchase Agreement, Power3 issued 15,000,000 shares of common stock to Advanced BioChem.

47

Power3 Medical Products, Inc. did not continue the business activity of Advanced BioChem and never conducted any contract-for-fee lab service work.  Subsequent to the asset purchase, the business model of Power3 was significantly changed, the Company entered into the development stage and began to commercialize the intellectual property it acquired in the transaction, with its focus in the early detection, monitoring and targeting of diseases through the analysis of proteins.  Power3’s new developmental stage objective, and activity, is to develop its intellectual properties by focusing on disease diagnosis, protein and biomarker identification and early detection indicators in the areas of cancers, neurodegenerative and neuromuscular diseases, as well as other scientific areas of interest associated with protein biomarkers.

Coincident with the asset purchase transaction on May 18, 2004, the previous management of Power3 resigned and left the employ of the Company.  Immediatelly thereafter, two employees of Advanced BioChem were granted employment agreements by Power3.  These two employees were Steven B. Rash as President and CEO and Dr. Ira Goldknopf as Chief Scientific Officer.

Restatement of Financial Information

The following tabular presentation summarizes the net loss and net loss per share as originally reported and as restated, and the quarterly effects of each adjustement, for each year ended December 31, 2004:

Details of the 2004 restatement adjustments are as follows:

	As Originally			As
	Reported			Restated
Net Loss	$	(19,081,344	)	$	(17,471,463	)
Net Loss per share	(0.45		)	(0.42		)

The Company has restated its financial statements to correct its accounting for the issuance of convertible debentures, warrants and investment rights. The revised financial statements provide for (i) the classification of warrants as liabilities, at fair value, (ii) the classification of embedded conversion and other features embedded in the convertible debentures and investment rights as liabilities at fair value and (iii) the amortization of discounts that resulted in the host instruments using the effective interest method. This revised accounting is required because, under current accounting standards, financial instruments, such as warrants and embedded conversion features that are indexed to a Company’s common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period. This accounting will be utilized in the accounting for these instruments until the Company reaquires the ability to share settle the instruments or physically settles the instruments through other means. Also see Note 5.

On May 18, 2004, Power3 executed the Asset Purchase Agreement (“the Agreement”) referred to above, to purchase substantially all the assets of Advanced BioChem and assume certain liabilities in exchange for the issuance of 15,000,000 shares of common stock of Power3.  For financial statement purposes, the transaction was treated, at the time, as a recapitalization of the equity structure of Power3 and therefore, the accumulated deficit of Power3 was eliminated, no stock-based expenses were recorded as a result of this transaction, and the assets and liabilities of Power3 and Advanced BioChem were combined, based on the accounting treatment as recapitalization, in a reverse acquisition.  Subsequent to the filing of Form 10-QSB for the quarter ended March 31, 2005, during its interim revue, Power3 determined that the purchase of assets and the acquisition of certain

48

liabilities of Advanced BioChem, which occurred on May 18, 2004, is properly accounted for as a purchase transaction.  In addition, management determined that, due to the specific nature of the transaction and because Power3 did not continue the business activity of Advanced BioChem whatsoever, Advanced BioChem cannot be considered a predecessor.  In addition, because the asset acquisition by Power3 was a purchase of equipment and intellectual property from an entity that continued its existence and its previous business activity after the purchase transaction, rather than being merged into Power3, and because the combination did not contain other elements of an equity merger of the two companies, the Company determined that the facts of the transaction had been misapplied and that purchase accounting is the more appropriate accounting treatment and Advanced BioChem would not be presented as a predecessor.  This accounting treatment represents a restatement of the transaction referenced above, which was previously characterized as a recapitalization of Power3, as in a reverse acquisition.  The Balance Sheet, Statement of Operations and the Statement of Cash Flow shown in Part I, Item 1, display the financial statements of the Company consistent with the restatement of the asset acquisition as purchase accounting.  On August 10, 2005, the Company issued an 8-K reporting non-reliance on previously issued financial statements for the quarter ended June 30, 2004, September 30, 2004 and March 30, 2005, which had been previously presented under the previous accounting treatment.

On April 12, 2006, during interim review of its previously issued financial statements in preparation for production of the 10-KSB for 2005, management determined that the following changes were necessary in its previously published financial statements as follows:

•Legal Fees, in the amount of $17,676, acquired in the transaction with Advanced BioChem discussed above and capitalized in the 10-KSB previously issued for December 31, 2004, should be expensed as of May 18, 2004;

•Difference in the value of stock issued in the transaction with Advanced BioChem discussed above and the assets and liabilities acquired from Advanced BioChem, previously accounted for as a deemed distribution, should be accounted for as Goodwill in the amount of $13,371,776;

•Licensing expenses in the amount of $50,000 for 2004 and $38,767 in 2005, paid to Baylor College of Medicine and MD Anderson which had previously been capitalized, should be expensed;

•The convertible debentures issued in October, 2004 and January, 2005, which had previously been accounted for as Long Term Liabilities should, as of April 25, 2005, be reclassified as Current Liabilities on that date because as of that date, the debentures were in default (due to our failure to have the SB-2 relating to the conversion option, the warrants and the additional investment rights associated with the convertible debentures, effective within 180 days of the original issue of debenture date) and thereby became a current liability rather than a long term liability as of the date of this Event of Default;

•Because the Event of Default discussed above, occurred for the convertible debentures we issued in October, 2004 and in January, 2005, on April 25, 2005, the Mandatory Prepayment Amount of 130% of the original principal amounts, became due as of that date and recognition of this $420,000 due, as a current liability, should have been effective as of April 25, 2005; and

•Additional evaluations were required to properly value the conversion option issued with the Convertible Debentures, the warrants issued with these debenture, evaluation of the additional investment rights and calculations to determine the fair value any embedded derivatives existing in these agreements.

49

During interim revue on April 12, 2005, and in preparation for the production of our 10-KSB for 2005, management determined that these changes were necessary because the facts of each situation had been misapplied and each of the above items needed to be restated in our financial statements, as they apply, for the previously published reports for June 30, 2004, September 30, 2004, December 31, 2004, March 31, 2005, June 30, 2005, and September 30, 2005.

Since Power3’s planned principal operations have not yet commenced, it was and is considered to be in the developmental stage, as of May 18, 2004, as defined in Financial Accounting Standards Board Statement No. 7.  Accordingly, some of the Company’s accounting policies and procedures have not yet been established.  The Company has been in its current developmental stage since its acquisition of its set of intellectual properties on May 18, 2004.

Note 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Item 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Financial Instruments and Concentrations of Credit Risk

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, and accrued expenses, notes payable, derivative financial instruments, other current liabilities, and convertible debentures. Management believes the carrying values of cash and cash equivalents, accounts payable, accounts payable and accrued expenses, notes payable, and other current liabilities approximate their fair values due to their short-term nature. The fair value of convertible debentures, which have a face value and carrying value of $75,279 and $1,400,000, respectively, is estimated to be approximately $987,000. The fair value of the Trinity notes payable, which have a face value and carrying value of $302,750 and $135,873, respectively, is estimated to be approximately $311,000.

The Company generally does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of its financial instruments. However, certain other financial instruments, such as warrants and embedded conversion features that are indexed to the Company’s common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.

The caption Derivative Financial Instruments consists of (i) the fair values associated with derivative features embedded in the Convertible Debentures and (ii) the fair values of the detachable warrants and additional investment rights that were issued in connection with the debenture financing arrangements. (See Item 5. Financing Arrangements)

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company occasionally maintains cash and cash equivalents balances in excess of federally insured limits. The Company has not experienced any losses in such accounts.

Principles of Consolidation and Investments

During 2003, the Company accounted for its investment in its subisidiary, Tenthgate, Inc. under the cost method.  As described in Note 1, the Company’s former subsidiary, known as Tenthgate, Inc., is not consolidated for periods after May 17,  2004, because the Company, in May of 2004, distributed its common

50

stock ownership in Tenthgate to a trustee for distribution to the shareholders of record as of May 17, 2004.  Power3 does not now own or control Tenthgate, Inc.’s activities or operations in any manner whatsoever.  Since Tenthgate, Inc. was spun off in May, 2004, as described in Item I, it is not consolidated for periods subsequent to that transaction..

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. The reported amounts of revenues and expenses during the reporting period may be affected by the estimates and assumptions management is required to make.  Estimates that are critical to the accompanying financial statements include assessing the impact of contingencies and the amortization periods for the debt issuance costs and debt discount on the convertible debentures (see Note 8) as well as estimating depreciation and amortization periods of tangible and intangible assets, and long-lived impairments, among others.  The markets for the Company’s products are characterized by intense competition, evolving standards and price competition, all of which could impact the future realizability of the Company’s assets.  Estimates and assumptions are reviewed periodically and the effects of revisions are reflected in the financial statements in the period they are determined to be necessary.

Furniture, Fixtures and Lab Equipment

Furniture, fixtures and lab equipment are stated at cost.  Major additions are capitalized, while minor additions and maintenance and repairs, which do not extend the useful life of an asset, are expensed as incurred. Depreciation and amortization are provided using the straight-line method over the assets’ estimated useful lives.  At December 31, 2005, certain lab equipment having a net book value of approximately $37,500 serves as security for certain liabilities.

Debt Discounts and Deferred Finance Costs

Debt discounts and deferred finance costs are being amortized through periodic charges to interest expense over the maximum term of the convertible debentures of three years using the effective interest method. Amortization of debt discounts amounted to $93,801 and $14,251 during the years ended December 31, 2005 and 2004, respectively.

Other Intangibles

Other intangibles, which consist primarily of patent applications, are recorded at cost and arise from legal and filing fees.  Since these are only patent applications, and not approved patents yet, no legal life exists for.these applications and therefore no amortization is taken for these costs, until they become legal patents.

Legal fees incurred for patent protection applications, expended by Advanced BioChem and obtained in the May 18, 2004 transaction with Advanced BioChem, were expensed.

Long-Lived Assets

Statement of Financial Accounting Standards (SFAS) 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” requires that long-lived assets, including certain identifiable intangibles, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying value of the assets in question may not be recoverable. The Company evaluated its long-lived assets at December 31, 2005 and determined that certain impairment losses were necessary. As a result, operations were charged for $20,158

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during the year ended December 31, 2005.  Management believes that the remaining balances of the Company’s long-lived assets are recoverable.

Statement of Financial Accounting Standards (SFAS) 142 “Accounting for Intangible Assets” provides that goodwill is not subject to periodic amortization, but is evaluated at least annually for impairments. The goodwill acquired by the Company at the time of the May 18, 2004 transaction was evaluated at both December 31, 2004 and 2005. Goodwill was determined to not be impaired because the fair value of the reporting unit, based on the market capitalization of the Company, exceeded the carrying value of the reporting unit, based on assets minus liabilities, at both December 31, 2004 and 2005.

Net Loss Per Share

Net loss per share is computed in accordance with SFAS No. 128 “Earnings per Share” (“SFAS No. 128”) and SEC Staff Accounting Bulletin No. 98 (“SAB 98”).  Under the provisions of SFAS No. 128 and SAB 98, basic net loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period.  Diluted net loss per share is computed by dividing the net loss, adjusted for using the “if-converted method” for convertible securities, for the period by the weighted average number of common and common equivalent shares (using the “treasury-stock” method) outstanding during the period.  In periods in which common stock equivalents would be anti-dilutive, such shares are ignored in the loss per share calculations because they would have an anti-dilutive effect.

Reclassification of Liabilities

Based on the Event of Default, resulting from the Company’s failure to get an SB-2 effective for the shares involved with conversion of the debentures and warrant shares, that occurred on April 25, 2005 for the convertible debentures issued in October, 2004 and January, 2005, Power3 has reclassified the convertible debentures as a Current Liability, rather than as a Long Term Liability as they were previously shown in our financial statements in both the original 10-KSB filed for 2004 and in quarterly reports for June 30, 2005 and September 30, 2005.

In addition, since the Event of Default occurred on April 25, 2005, Power3 has now recognized the Mandatory Prepayment Amount, as a Current Liability, as described in the debenture agreements as due in case an Event of Default occurs.

The only Accounts Payable amount extinguished during 2004 was a balance due to a CPA firm, dated January 10, 2003, which totaled $19,961.  On or about May 4, 2004, a settlement was reached with this CPA firm in which they accepted $4,236 in cash as full payment for the balance due.  While management has no written documentation as to why the vendor agreed to settle for less than the original amount billed, our understanding is that there was a dispute over the extent of the services actually rendered and it was agreed that the CPA firm would accept the lesser amount in full settlement of the bill.

No amounts from Accounts Payable were reclassified during 2005.

Stock – Based Compensation

The Company accounts for equity instruments awarded to employees for services based on the fair value of common stock issued and the intrinsic value of stock options and warrants. The accompany accounts for all equity instruments issued to those other than employees based on the fair value of the consideration received or the fair value of the equity instruments, whichever is more reliably measurable.  Fair value is measured based on

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the closing market price of the common stock on the effective date of the agreement or Board resolution, using the Black Scholes valuation model.

Income Taxes

The Company computes income taxes using the asset and liability method in accordance with Financial Accounting Standards Statement No. 109 “Accounting for Income Taxes” (“SFAS 109”). Under SFAS 109, deferred taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities. Also, the effect on deferred taxes of a change in tax rates is recognized in income in the period that included the enactment date. There were no significant temporary differences at December 31, 2005.

Research and Development

Research and development costs, which approximated $501,245 for the year ended December 31, 2005 are expensed as incurred.

In 2004, the Company paid $10,000 to Baylor College of Medicine and $40,000 to M.D. Anderson for research agreements with both institutions.  These research agreements covered the provision of human tissue samples by Baylor (400 patient samples) and M.D. Anderson (60 patient samples), the exchange of technology and the testing of the patient samples provided using Power3’s biomarker technology.  Power3 executed licensing agreements with both Baylor College of Medicine and M.D. Anderson to insure that the research partnerships and cooperative technology would be continued and eventually benefit both Power3 and the respective institutions, if and when Power3 commercially developed its testing and diagnostic capabilities.  These payments were expensed under FAS guidelines for research and development accounting.

Cash Equivalents

For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents.

Revenue Recognition

In 2004, the Company shipped its product directly from the outsource manufacturer to the customer without taking ownership or possession of its products.  All shipments were FOB destination with freight allowed and payment terms were net 30 days after shipment. Accordingly, revenue was recognized upon delivery.

The Company’s revenue recognition policy is consistent with the criteria set forth in Staff Accounting Bulletin 104-Revenue Recognition in Financial Statements (SAB 104) for determining when revenue is realized or realizable and earned.  In accordance with the requirements of SAB 104 the Company recognizes revenue when (1) Persuasive evidence of an arrangement exists; (2) Delivery has occurred; (3) the Seller’s price is fixed or determinable; and (4) collectibility is reasonably assured.

Advertising Costs

Advertising costs are expenses as incurred. Advertising expenses were $-0- for each of the years ended December 31, 2005 and December 31, 2004.

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Other Income

In 2005, Other Income consisted of only one item which was $260 of Interest Income earned from deposits in a money market account as the Company’s primary bank.

In 2004, Other Income consisted of $641,855 as follows:

•$412,500 from write off of Accrued Officer Salaries, as of May 17, 2004, originally due to the previous officers of Power3, but agreed, by them, to be forgiven at the time of the May 18, 2004 transaction which transferred control of the Company to the new owners and management.  These two individuals were not controlling shareholders of the Company as of December 31, 2004;, nor were they members of management at the time of the debt forgiveness.

•$121,500 from write off of previously-existing debt to consultant, as of May 17, 2004, due to forgiveness of the debt by the consultant on that date;

•$19,961 from a settlement reached with a previous consultant wherein the Company paid $4,236 in full payment of the debt obligation and the consultant agreed to accept this amount as full payment due to a dispute over services performed;

•      $39,627 from a settlement reached with a previous creditor, who was also a minority shareholder, to whom the Company paid $47,188 in cash and issued 300,000 shares of common stock in full settlement of the $90,000 alledged obligation;

•      $20,267 from write off of interest that had been accrued on the $90,000 obligation mentioned above;

•$28,000 from write off of Accrued Compensation, as of May 17, 2004, that had been previously accrued to a consultant which was settled in negotiations in exchange for a note for $2,000 due to this consultant.

Note 3.  GOING CONCERN

The Company’s financial statements are presented on a going concern basis, which contemplates the realization

of assets and satisfaction of liabilities in the normal course of business. The Company is in the development stage and has primarily been involved in research and development and capital raising activities; as such the Company has incurred significant losses from operations during 2004 and 2005.

As a result, the Company has an immediate need for capital to continue its operations, and it will need to raise significant additional funds to implement its business plan.  This cash will have to come from equity sales and/or borrowings as management has projected that the Company will need significant additional capital for development and other ongoing operational activities before it will have any anticipated revenue generating products. The actual amount of funds that the Company will need will be determined by many factors, some of which are beyond the Company’s control.  These factors include:

•The extent to which the Company enters into licensing arrangements, collaborations or joint ventures;

•The progress and results of research and product development;

•The costs and timing of obtaining new patent rights;

•The extent to which the Company requires or licenses other technologies; and

•Regulatory changes and competition and technological developments in the market.

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A current possibility available to the Company is to raise the remaining funds of $1,600,000 potentially available to them pursuant to the Securities Purchase Agreement dated October 28, 2004 (the “Agreement”). These funds will be immediately reduced by the payment of certain delinquent payables of approximately $251,000 and $200,000 of certain bridge financing received in April and November, 2005, the $446,500 of bridge loan financing and the Officer Advances that are to be repaid upon the receipt of the $1,600,000. The Company is in immediate need for capital to continue its operations and as such its ability to continue as a going concern is subject to its ability to generate a profit or obtain necessary funding from outside sources. . Management believes that even though the Company currently has limited cash resources and liquidity, assuming exercise of the warrants and additional investment rights specified in the Agreement, that the net funds available from the final closing under such Agreement will allow the Company to continue operations through December 2006.  In the event the final closing and sale of $1,600,000 in aggregate principal amount of debentures occurs, but the warrants and additional investment rights are not exercised, the Company anticipates that it will need to raise additional capital prior to October 2006 to meet its operating costs. However, the Company is currently in default under the conditions set forth in the Agreement as well as the debentures and registration rights agreement and consequently, there is no assurance that the Company will be successful in completing the sale and issuance of the remaining $1,600,000 aggregate principal amount of debentures and/or the additional investments rights pursuant to the Agreement.  If the Company is unsuccessful in the closing of the sale and issuance of the $1,600,000 aggregate principal amount of debentures at the final closing, the Company will be required to obtain alternative financing, sell or license some of its technology, and/or curtail or cease its operations. Any such funding may significantly further dilute existing shareholders or may limit the Company’s rights to its technology.  Moreover, the increase in the number of shares available in the public marketplace may reduce the market price for the Company’s common stock, and consequently, the price investors may receive at the time of sale.  The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

LOSS PER SHARE

At December 31, 2005, common stock options were excluded from the fully diluted loss per share calculations because the effects would be anti-dillutive:

•2,500,000 warrants, and additional investment rights having a value of $2,500,000, which were issued to certain accredited investors on October 28, 2004 under the Agreement. In addition, pursuant to the Agreement, the investors purchased certain convertible debentures that if exercised, will result in the issuance of an indeterminate number of shares of common stock.

•333,333 warrants which were issued to certain accredited investors on January 26, 2005 under the Amended Agreement. In addition, pursuant to the Agreement, the investors purchased certain convertible debentures that if exercised, will result in the issuance of an indeterminate number of shares of common stock

•580,000 shares of warrants which were issued to members of the Company’s Scientific Advisory Board and various other consultants in 2004 (including 100,000 to the agent that placed the convertible debentures discussed above).  The warrants, which expire three to five years from the dates of the respective grants and were issued at no cost to such personnel, may be converted to a like number of shares of the Company’s common stock at any time prior to their expiration(s).  As a result, during the period May 18, 2004 (date of acquisition) to December 31, 2005, the Company has recorded $284,447 of stock based compensation as a result of the issuance of these warrants.

•2,000,000 shares of warrants were issued in November and December of 2005 to Trinity Finance Investments associated with two Notes, 1,000,000 warrants each, for invested funds.  The warrants

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which expire in 7-8 years may be converted to a like number of shares at any time prior to their expiration date.  As a result the Company recorded $6,429 of stock-based compensation as a result of the issuance of these warrants during 2005.

In addition, at December 31, 2005, loss per share excludes 34,222,222 shares that are indexed to convertible debentures and investment rights. These instruments would also have an anti-dilutive effect on loss per share.

Note 4. INCOME TAXES

The Company recognized losses for both financial and tax reporting purposes during each of the periods in the accompanying statements of operations.  Accordingly, no provisions for income taxes and/or deferred income taxes payable have been provided for in the accompanying financial statements.

Based on the Company’s 2004 tax return, the Company has net operating loss carryforwards for income tax purposes of approximately $12,957,858 arising primarily from stock based expenses that are considered to be permanent differences.  These net operating loss carryforwards expire at various times through the period ended December 31, 2022 however because the Company has experienced changes in control and has incurred significant operating losses, utilization of the income tax loss carryforwards are not assured. As a result, the non-current deferred income tax asset arising from these net operating loss carryforwards is not recorded in the accompanying balance sheet because the Company established a valuation allowance to fully reserve such assets as their realization did not meet the required asset recognition standard established by SFAS 109.  The tax return for 2005 has not been finalized at the time of this report, however it is expected that additional net operating loss carryforwards will result from the Company’s 2005 operations.

Note 5.  RELATED PARTY TRANSACTIONS

As reported earlier in “General and Corporate History”, on May 18, 2004, the Company purchased substantially all the assets of Advanced BioChem in exchange for 15,000,000 shares of common stock of Power3 and assumed certain liabilities as part of the purchase transaction.  During 2004, employment agreements were issued to two former employees of Advanced BioChem, specifically Steven B. Rash, the new Chief Executive Officer of Power3 and Dr. Ira Goldknopf as Chief Scientific Officer of Power3.  These agreements are specifically discussed in “Employment Agreements” later.

On October 13, 2004, the Chief Financial Officer loaned the Company $75,000 as a short-term bridge loan, with no interest and no maturity date specified.  On November 11, 2004, the loan was paid back with no interest.

On March 31, 2003, the Company’s Board of Directors authorized 4,000,000 shares of Series A Preferred Stock.  Simultaneously, the Company issued 2,660,000 shares of Series A Preferred Stock in consideration of accrued and unpaid salary totaling $200,000 to two officers of the Company and 1,330,000 shares of Series A Preferred Stock in consideration of $100,000 cash by an individual investor.  The Company recorded $1,695,000 of non-cash compensation expense as a result of this transaction during 2003.  The transaction was recorded in the fourth quarter of 2003 based on the value of the Company’s stock immediately subsequent to the stock split discussed previously.  On December 31, 2003 the two officers mentioned above converted a total of 120,000 shares of their Series A Preferred Stock into 1,200,000 common shares.  In November, 2004, the Series A Preferred stockholders converted their remaining preferred shares into 3,000,324 shares of common stock.  The stock was issued to previous officers of the Company, both related parties and an outside consultant, for past compensation due.  When the compensation was originally recorded, accrued compensation was charged, with the offset to preferred stock.  The entry to record the preferred stock was made in the fourth quarter of 2003 because it was discovered as part of the 2003 audit, by the audit firm, and a decision was made by previous management, not to amend the 10-QSB for the three month period ending March 31, 2003.  The conversion terms at the date of the original issuance were 10:1.  However, subsequently the Board of Directors and the

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shareholders agreed to change the conversion factor to .7752:1, did a Board Resolution to that effect and the preferred stock was converted to common stock, in 2004, in accordance with the revised conversion terms.

During the three months ended March 31, 2005 the chief financial officer advanced $35,000 to the Company.  The advance, which is due on demand and unsecured, bears interest at 6% per annum.  At June 30, 2005, the balance of the advance is included in accounts payable and accrued and other liabilities in the accompanying condensed balance sheet.

On May 31, 2005, the Company received an Officer Advance in the amount of $ 55,000.  This advance is in the form of a short-term Note Payable to the Officer, is payable on June 30, 2005, and bears interest at a rate of 6 % per annum until paid.  The Officer has agreed to allow the Company an extension of time to repay this Note.

On June 3, 2005, the Company received an Officer Advance in the amount of $ 50,000.  This advance is in the form of a short-term Note Payable to the Officer, is payable on June 30, 2005, and bears interest at a rate of 6 % per annum until paid.  The Officer has agreed to allow the Company an extension of time to repay this Note.

During the latter half of 2005, the Chief Scientific Officer advanced the Company $159,231 as short-term Officer Advances in order to enable the Company to meet certain payment obligations.  These advances were in the form of 180 day notes and bear interest at a rate of 6% per annum until the outstanding balance is paid in full.  None of these short-term Officer Advances were due as of December 31, 2005.

On December 14, 2005, the Company received an Officer Advance in the amount of $50,000 from the Chief Scientific Officer.  This note is due on June 13, 2006 and bears interest at a rate of 6% per annum until paid.

Other Commitments and Contingencies

Operating Lease for Office and Laboratory Space

In August 2004, the Company entered into a new lease which expires on August 31, 2009, has an initial term of sixty-three months, and requires base monthly minimum lease payments ranging from approximately $6,000 to $9,600 (plus utilities and operating expenses) over the lease term.  The lease contains a provision which allows the Company to extend the lease for two additional terms of sixty months.  Rent expense (for the office lease) approximated $68,944 during the year ended December 31, 2005 and $28,952 during the year ended December 31, 2004.

Other Leases

In June, 2004, the Company entererd into a new lease for a telephone system which expires in June, 2009, has an initial term of 60 months and requires base monthly minimum lease payments in the amount of $184.51 per month over the lease term.  The Company paid $2,269 on this lease during the year ended December 31, 2005.

In October, 2004, the Company entered into a new lease for computers which expires in September, 2006, has an initial term of 24 months and requires base monthly minimum lease payments in the amount of $344 per month over the lease term.  The Company paid $4,136 on this lease during the year ended December 31, 2005.

Future lease commitments are as follows:

2006	$	5,109
2007	2,220
2008	2,220
2009	1,110

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Employment Agreements

The Company is obligated under amended and restated employment agreements with its Chief Executive Officer, Chief Scientific Officer and Chief Financial Officer.  The significant terms of the agreements are as follows:

Chief Executive Officer – The amended and restated employment agreement is effective as of May 18, 2004 and has an initial term of five years, subject to each party’s termination rights.  The agreement provides for a base salary of $250,000 per year and the opportunity to receive cash bonuses based on performance upon the discretion of the board of directors.  The agreement also includes participation in employee benefit plans offered to employees, as well as a grant of 13,250,000 shares of restricted common stock and 1,500,000 shares of restricted Series B preferred stock (the Series B preferred shares have not yet been issued).  Either party may terminate the Chief Executive Officer’s employment under the contract, either with or without cause upon giving the other party at least thirty days notice.  If the Company terminates the chief executive officer’s employment at any time during the initial term without cause, he will be entitled to receive compensation provided under the agreement for the remaining initial term of employment.  In addition, in the event of a change in control as defined in the agreement, the Company may waive, in whole or in part, any and all remaining restrictions on the restricted shares of common stock and Series B preferred stock granted to him.

Chief Scientific Officer – The amended and restated employment agreement is effective as of May 18, 2004 and has an initial term of five years, subject to each party’s termination rights.  The agreement provides for a current base salary of $125,000 through December 18, 2004 and $100,000 thereafter and the opportunity to receive cash bonuses based on performance upon the discretion of the board of directors.  The agreement also includes participation in employee benefit plans offered to employees, as well as a grant of 13,250,000 shares of restricted common stock and 1,500,000 shares of restricted Series B preferred stock (the Series B preferred shares have not yet been issued).  Either party may terminate the chief scientific officer’s employment under the contract, either with or without cause upon giving the other party at least thirty days notice.  If the Company terminates the Chief Scientific Officer’s employment at any time during the initial term without cause, he will be entitled to receive compensation provided under the agreement for the remaining initial term of employment.  In addition, in the event of a change in control as defined in the agreement, the Company may waive, in whole or in part, any and all remaining restrictions on the restricted shares of common stock and Series B preferred stock granted to him.

Chief Financial Officer – The employment agreement is effective as of September 1, 2005 and has an initial term of three years, subject to each party’s termination rights.  The agreement provides for a base salary of $100,000 per year and the opportunity to receive cash bonuses based on performance upon the discretion of our board of directors.  The agreement also includes participation in employee benefit plans offered by us to our employees, as well as a grant of 140,000 shares of restricted common stock.  Either party may terminate the Chief Financial Officer’s employment under the contract, either with or without cause upon giving the other party at least thirty days notice.  If the Company terminates the chief financial officer’s employment at any time during the initial term without cause, he will be entitled to receive compensation provided under the agreement for the remaining initial term of employment.  In addition, in the event of a change in control as defined in the agreement, the Company may waive, in whole or in part, any and all remaining restrictions on the restricted shares of common stock granted to him.

Other Common Stock Grants

In addition to the above common stock grants, during 2004, the Company granted 1,445,000 shares of its common stock to various other employees.  Because all of the shares were granted at no cost to the employees,

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and because the shares generally vest over a period of two years, the total value of the grants, to all employees, was recorded as $25,451,500 of deferred compensation expense upon the date of the grant (which amount was determined based on the total number of shares granted times the trading values of the shares on the dates the stock grants were made).  This amount is being amortized to stock based compensation expense over the vesting period.  The specific allocations for stock compensation expense in 2004 and 2005 are previously exhibited in this report In Management Discussion and Analysis.

As a matter of explanation, during the quarter ended September 30, 2004, Power3 amortized three months of employee stock grants, three months of the first-mentioned consulting contract and 2.3 months of the second-mentioned consulting contract.  However, after reviewing our accounting for the quarter ended September 30, 2004, at time of the end of year audit, it was determined that a later adjusting entry was made, as of September 30, 2004, which credited stock compensation expense for $1,533,505, credited consulting fees for $455,633 and debited deferred compensation expense for the offset.  At the time of the end of year audit, it was determined that this entry was erroneous and was based on a misunderstanding of the transactions involved.  As soon as this was noted, as part of the year end audit, the correction was made and the total shown for stock compensation expense for 2004 is correctly reported.

As mentioned above, the Company has agreed to issue a total of 3,000,000 shares of Series B Preferred Stock to two of its officers.  However, for various reasons, including certain restrictions required by the indebtedness (which preclude the shares from being issued for at least 90 days after the effective date of the registration statement that has been filed to cover the resale of the shares of common stock that will be issued upon the conversion or exercise of the securities issued by the Company for such indebtedness), the shares have not yet been issued.  The Company intends to issue such shares of the Series B Preferred Stock at such time as it is permitted.

The only stock grant made during 2005 was 140,000 shares to the Chief Financial Officer which represented a -0- net increase in the number of shares outstanding, because the shares previously granted to the previous Chief Financial Officer had been returned. There was, however, a significant difference in the Deferred Compensation Expense because the unamortized portion of the previous grant was offset by the significantly lower new Deferred Compensation Expense debit, resulting from the replacement issue of shares in 2005.  This resulted from the difference in the value of the shares as being $3.05 in July of 2004 when the original 140,000 shares were issued as compared to the shares being valued at $.30 when those 140,000 shares were reissued to the incoming Chief Financial Officer.

As mentioned above, the Company has agreed to issue a total of 3,000,000 shares of Series B Preferred Stock to two of its officers.  However, for various reasons, including certain restrictions required by the indebtedness (which preclude the shares from being issued for at least 90 days after the effective date of the registration statement that has been filed to cover the resale of the shares of common stock that will be issued upon the conversion or exercise of the securities issued by the Company for such indebtedness), the shares have not yet been issued.  The Company intends to issue such shares of the Series B Preferred Stock at such time as it is permitted.

Future required payments for base compensation under all of the employment agreements discussed above are approximately as follows:

Periods Ending December 31,	Amounts
2005	$	470,000
2006	470,000
2007	410,000
2008	350,000
2009	131,250
Total	$	1,831,250

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Other Contingencies

In the normal course of business, the Company is involved in certain litigation, including one matter in which the plaintiff is seeking $1,522,000 in damages.  Management believes the claim is without merit, and intends to vigorously contest such claim.  This matter is currently in ongoing negotiations between the parties and their attorneys and accordingly its ultimate resolution cannot be determined at this time.  As such, no effect has been given to any loss that might result from the outcome of this litigation in the accompanying financial statements.

In addition, an equipment vendor filed a complaint against Advanced BioChem (which related to equipment acquired by Power3 in the May 18, 2004 transaction) in April of 2002 in a California court alleging breach of contract and seeking damages. Advanced BioChem reached a settlement agreement in April of 2003 under which Advanced BioChem agreed to pay the vendor $40,000 in installments through August of 2003.  At December 31, 2003, Advanced BioChem had a balance remaining of $20,000. In April 2005 the equipment vendor filed a lawsuit against Advanced BioChem and certain former officers of Advanced BioChem, and

against Power3, in order to enforce its claim for the remaining balance which is past due and may be assumed

by the Company as part of the settlement of the dispute with Advanced BioChem as to liabilities assumed in the May 18, 2004 transaction.

In September, 2005, a New York corporation filed suit against Power3 alledging breach of an agreement and damages totaling approximately $480,000 plus court costs and legal fees.  Settlement discussions are currently ongoing, however no resolution has been achieved thus far.  The Company does not believe it will ultimately be held liable for this claim and has not made any provision for this claim on its balance sheet.

The Company is involved in several other debt collection lawsuits totaling approximately $38,600 plus court costs and interest.  Since none of these matters has come to court, or is expected to within a short amount of time, the Company cannot be certain how any of these four matters will be resolved and therefore has not made any provision for these claims on its balance sheet.

Subpoena from the SEC, Division of Enforcement

On June 27, 2005, the Company received a subpoena for documents regarding the SEC’s Division of Enforcement investigation In The Matter of Maui General Store, Inc.  It is the Company’s understanding that the Maui General Store matter relates to a promotional scheme by certain individuals to promote the stock and stock price of certain entities during 2004.  The Company provided all documents in its possession pursuant to the subpoena and complied fully with the subpoena on July 11, 2005.  In February, 2006, Steven B. Rash and Dr. Ira Goldknopf appeared before a Grand Jury in Washington, D.C., as witnesses, for the SEC Division of Enforcement.  The Company has received no further correspondence from the Enforcement Division of the SEC.  The Company has not been notified that it is a subject of this investigation.

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Financing Arrangements:

Securities Purchase Agreement—Convertible Debentures

The Company entered into a Securities Purchase Agreement, dated October 28, 2004 (the “Agreement”) with certain accredited investors (the “Purchasers”). Pursuant to the Agreement, the Purchasers agreed to purchase convertible debentures due three (3) years from the date of issuance in the aggregate principal amount of $3,000,000. The Agreement also provides for the issuance to the Purchasers, at no additional cost to the purchasers, warrants to purchase shares of the Company’s common stock and additional investment rights to purchase additional convertible debentures. In connection with the Agreement, the Company also entered into a Registration Rights Agreement with the Purchasers that requires the Company to (i) file a registration statement with the SEC registering the resale of the shares of common stock issuable upon conversion of the debentures and the exercise of the warrants, (ii) achieve effectiveness within a stated period and (iii) maintain effectiveness of the registration statement. Failure to meet these requirements will require the Company to incur liquidating damages amounting to 2.0% for each month.

On October 28, 2004, the Company issued the Purchasers the first $1,000,000 in aggregate principal amount of such debentures at the initial closing under the Agreement. Effective January 19, 2005, the Company issued and sold, to a sub-group of the original investors, a second tranche of $400,000 aggregate principal amount of debentures.  Subject to the conditions set forth in the Agreement, the purchasers are required to purchase the remaining $1,600,000 in aggregate principal amount of such debentures at the final closing, which is to occur on or before the fifth trading day after the effective date of the registration statement. The Company is currently in default under the Agreement and the previously issued debentures and related registration rights agreement, and therefore the conditions of the Agreement will not be satisfied or otherwise met on a timely basis. Consequently, there are no assurances that the Purchasers will purchase all or any portion of the remaining $1,600,000 aggregate principal amount of debentures. The $1,000,000 aggregate principal amount of debentures issued in the initial closing and the $400,000 aggregate principal amount of debentures issued on January 19, 2005 are due and payable in accordance with their original terms in full three years after the date of issuance and do not bear interest. The debentures which may be issued at the final closing will be due and payable in full three (3) years after the date of their issuance, and will also not bear interest. At any time from the closing date until the maturity date of the debentures, the Purchasers have the right to convert the debentures, in whole or in part, into common stock of the Company at the then effective conversion price, which varies relative to the Company’s trading stock price, as follows: $0.90 per share, provided however if the lesser of (i) 75% of the average of the 5 consecutive Closing Prices immediately prior to the Effective Date, as defined in the Securities Purchase Agreement, and (ii) the Closing Price on the Effective Date (the lesser of (i) and (ii) being referred to as the “Effective Date Price”) is less than the Conversion Price, the Conversion Price shall be reduced to equal the Effective Date Price.

The debentures also afford the Purchasers anti-dilution protection should, at any time while the debentures are outstanding, the Company offer, sell or grant any option to purchase or offer, sell or grant any right to reprice its securities, or otherwise dispose of or issue any common stock or common stock equivalents, entitle any person to acquire shares of common stock at an effective price per share less than the then effective Conversion Price, as calculated by the formula described above; then, in such instance, the Conversion Price for the convertible debenture shares shall be reduced to the lower price. In case of any such adjustment in the effective Conversion Price for the convertible debenture shares, this could significantly dilute existing investors.

Under the Agreement, the Purchasers also received warrants to purchase an aggregate of up to 2,500,000 shares of common stock and additional investment rights to purchase up to an additional $2,500,000 principal amount of convertible debentures. The warrants are exercisable at a price of $1.44 per share, subject to adjustment, including under anti-dilution protection similar to that described above.

The additional investment rights are exercisable at a price equal to the principal amount of the debentures to be purchased, for (1) a period of nine months following the effective date of the registration statement to be filed pursuant to the Registration Rights Agreement, or (2) a period of 18 months from the date of issuance of the

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additional investment rights, whichever is shorter. The rights debentures will have the same terms as the debentures described above, except that the conversion price will be equal to $1.08.

The debentures contain covenants that limit the Company’s ability to, among other things: incur or guarantee additional indebtedness; incur or create liens; amend the Company’s certificate of incorporation, bylaws or other charter documents so as to adversely affect any rights of the holders of the debentures; and repay or repurchase more than a de minimus number of shares of common stock other than as permitted in the debentures and other documents executed with the purchasers.

The convertible debentures contain consequences in case of default.  Events of default which could subject the Company to penalties and liabilities as specified in the Agreement include:

•Any default in the payment of the principal amount of the debentures or the liquidated damages;

•Any untrue or incorrect representation or warranty in the Transaction document or any other report, financial statement or certificate made to Holder(s);

•Any case or action of bankruptcy or insolvency commenced by the Company, against the Company or adjudicated by a court against the Company for the benefit of creditors;

•Any default in its obligations under a mortgage or debt in excess of $150,000;

•Any cease in the eligibility of the Company’s stock to be quoted on a Trading Market;

•Any Change in Control or sale or disposal of 33% or more of the assets of the Company;

•Any lapse in the effectiveness of the Registration Statement covering the shares related to the debenture conversion option, the warrants or the additional investment rights as described and transacted in the Securities Purchase Agreement and accompanying documents;

•Any failure to deliver certificates within the specified time; and

•Any failure, by the Company, to pay in full the amount of cash due pursuant to a Buy-In or failure to pay any amounts owed on account on account of an Event of Default within 10 days of the date due.

Upon the occurrence of an event of default, each debenture may become immediately due and payable, either automatically or by declaration of the holder of such debenture. The aggregate amount payable upon an acceleration by reason of an event of default shall be equal to the greater of 130% of the principal amount of the debentures to be prepaid or the principal amount of the debentures to be prepaid, divided by the conversion price on the date specified in the debenture, multiplied by the closing price on the date set forth in the debenture.

Other provisions included in the Securities Purchase Agreement include the following:

•The debenture may be exchanged for an equal aggregate principal amount of debentures in different authorized denominations;

•The debenture is convertible into common stock, at the option of the Holder, at any time after the effective date of the debenture, any time after an event of default and from time to time subject to limitations on conversion specified in the Agreement;

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•Conversions can be made in smaller increments and from time to time.  If smaller amounts of the debentures are converted, the Holder will not be required to physically surrender the debentures;

•The Company has 1 business day after receipt of conversion notice to object to any such request to convert;

•The Holder shall not have the right to convert any portion of his debenture if such conversion would enable him to own in excess of 4.99% of the outstanding common stock of the Company;

•No later than 3 trading days after any conversion date, the Company will deliver a certificate representing the converted shares, free of any legends and trading restrictions for the number of shares converted;

•If the Company fails to deliver said certificates, liquidated damages of $1,000 per day will be paid;

•The Company will reserve and keep available authorized and unissued registered shares available to be issued upon conversion;

•Holder will not be responsible for any transfer taxes relative to issuance of shares;

•If the Company pays a stock dividend or other distribution on its shares, or splits or subdivides its shares or issue by reclassification or any such change in its common shares outstanding, then the number of shares available to Holder shall be adjusted proportionally;

•If the Company shall offer, sell, grant any option or otherwise distribute shares to holders of common stock, the number of shares available to Holder shall be adjusted proportionally;

•If the Company is involved in any merger or acquisition, the conversion price of the stock shall be adjusted to reflect the effects of such previous adjustment;

•During the term of the debentures, the Company is not permitted to do certain things unless approved by the holders of 2/3 majority of the debentures such as create any indebtedness senior to the Company’s debenture obligations, amend its certificate of incorporation or buy back any amount of its common stock;

•If the Company offers, sells or grants stock at an effective per share price less than the then Conversion Price, then the Conversion Price shall be reduced to equal the effective conversion, exchange or purchase price for such common stock or common stock equivalents;

•If the Company offers, sells or grants securities that have a price less than the otherwise calculated Conversion Price, then the current exercise price of the warrants is thereby adjusted to be the lower of the offered or sold price or the otherwise calculated Conversion Price;

•If there is an Event of Default, all amounts become due in the form of a Mandatory Prepayment Amount (discussed as follows), with maximum interest and penalty payments; and

•Miscellaneous other provisions such as notice in writing, governing law, waiver and severability.

As mentioned above, the Company is in default under the provisions of the Agreement, Registration Rights Agreement and previously issued debentures.  The events of default principally relate to the Company’s inability to have its registration statement declared effective within the time period required by the agreements.  Although

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the Company intends to seek waivers or forbearance agreements from the holders of its debentures, there is no assurance that the Company will receive such concessions.  As such, the indebtedness has been classified as a current liability in the accompanying balance sheet.  If the Company is unable to obtain such concessions, the aggregate amount payable under the outstanding debentures due to the acceleration thereof by reason of the default is equal to the “Mandatory Prepayment Amount” as specified in the debentures.  The Mandatory Prepayment Amount equals the sum of (i) the greater of:  (a) 130% of the principal amount of the debentures to be prepaid, or (b) the principal amount of the debentures to be prepaid, divided by the conversion price on (x) the date the payment is demanded or otherwise due, or (y) the date the payment is paid in full, whichever is less, multiplied by the closing price of the Company’s common stock on (x) the date the payment is demanded or otherwise due, or (y) the date the payment is paid in full, whichever is greater, and (ii) all other amounts, costs, expenses and liquidated damages due in respect of the debentures.

The Company is in default on the Convertible Debentures with regard to the deadline for having the registration statement be effective, the withdrawal of the Company’s stock from trading on the OTCBB and several other default clauses.  Besides the provisions for the Mandatory Prepayment provisions which become effective if the Company is in default on these debentures and the liquidated damages resulting from the registration statement not being effective, as discussed immediately above, the Company is also subject to partial liquidated damages for not being able to deliver share certificates, if such were demanded in a conversion action by a debenture holder.  These partial liquidated damages amount to $10 per trading day, for each $1,000 of principal amount being converted, increasing to $20 per trading day after 5 trading days from when such damages begin to accrue, until the share certificates are delivered by the Company.

The Company has received notice from one of the Purchasers informing the Company that it is in default under the debentures and demanding payment of the Mandatory Prepayment Amount, together with the liquidated damages, to which it is entitled pursuant to the agreement. The Company has filed an SB-2 to register the shares of stock associated with the convertible debenture agreements and is endeavoring to have it declared effective as soon as practicable.  The Company is in discussion with its debenture holders regarding a resolution of this matter.

In connection with such financing, the Company issued, a warrant to purchase 100,000 shares of common stock at an exercise price of $3.00 to its placement agent, Westor Online and Kogan and Associates. If any investor exercises their additional investment rights and purchases additional debentures, the placement agent will be entitled to receive additional warrants to purchase up to a number of shares of common stock equal to ten percent (10%) of the exercise price paid upon exercise of the additional investment rights divided by ninety percent (90%) of the market price as of the initial closing. The Company accounted for the warrants as deferred financing costs and is amortizing the fair values thereof ($101,000) through periodic charges to interest expense using the effective method.

Convertible Debentures, Warrants and Additional Investment Rights:

The carrying values of the Company’s convertible debentures amounted to $14,251 and $75,279, at December 31, 2004 and 2005, respectively. Convertible debentures consist of face value $1,000,000 and $1,400,000, as of December 31, 2004 and 2005, respectively, non-interest bearing convertible debentures due in two traunches: $1,000,000 on October 28, 2007 and $400,000 due on January 26, 2008. The convertible debentures arose from the aforementioned financing, where the proceeds were allocated among the components of the financing arrangement, as follows:

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	Traunch 1			Traunch 2
Instrument:	October 28, 2004			January 26, 2005			Total
Convertible debentures (1)	$	—		$	—		$	—
Common stock warrants (2)	3,070,750			135,000			3,205,750
Embedded conversion feature	882,556			266,592			1,149,148
Additional investment rights	606,867			225,415			832,282
Derivative loss	(3,560,173		)	(227,006		)	(3,787,179		)
Total gross proceeds (3)	$	1,000,000		$	400,000		$	1,400,000

(1)The discount to the face value of the convertible debentures that resulted from the allocation is being amortized through periodic charges to interest expense using the effective method. Amortization of the discount amounted to $14,251 and $61,028 during the years ended December 31, 2004 and 2005, respectively.

(2)The Company issued additional warrants to purchase 333,333 share of common stock in connection with Traunch 2, which was not contemplated in the initial financing agreement. Current accounting standards require that these warrants be allocated between the debt (and recorded as deferred financing costs) and the derivative instruments (and allocated directly to derivative expense). Since the initial allocation of proceeds did not result in any initial value allocated to the debt, the fair value of these warrants was charged to derivative expense, as reflected in the table.

(3)Direct financing costs associated with the offerings amounted to $140,959 and $62,000 for Traunch 1 and Traunch 2, respectively. Deferred financing costs are being amortized through periodic charges to interest expense using the effective method. Amortization of the deferred financing costs amounted to $2,009 and $8,071 during the years ended December 31, 2004 and 2005, respectively.

Derivative financial instruments arising from the financing are initially recorded and continuously carried at fair values. The following tabular presentation reflects the components of derivative financial instruments on the Company’s balance sheet at December 31, 2004 and 2005:

(Assets) Liabilities:	2004		2005
Common stock warrants	$	1,227,250	$	57,250
Embedded conversion feature	464,941		632,000
Additional investment rights	423,137		537,778
Other derivative instruments (1)	762,591		229,124
	$	2,877,919	$	1,454,936

(1)The fair values of certain other derivative financial instruments (warrants and convertible preferred stock) that existed at the time of the initial Debenture Financing were reclassed from stockholders’ equity to liabilities when, in connection with the Debenture Financing, the Company no longer controlled its ability to share-settle these instruments. These derivative financial instruments had a fair value of $5,835,443 on October 28, 2004, when the Company no longer controlled its ability to share-settle the instruments. Prior to December 31, 2004, the Company settled the preferred stock with the issuance of common stock. As a result, the derivative liability associated with the preferred stock was adjusted to fair value immediately before the settlement and reclassed to common equity. The remaining instruments will be reclassified to stockholders’ equity when the Company reacquires the ability to share-settle the instruments.

The following tabular presentation reflects the number of common shares into which the aforementioned derivative financial instruments are indexed at December 31, 2004 and 2005:

Shares of common stock	2004	2005
Common stock warrants	2,500,000	2,833,333
Embedded conversion feature (1)	2,039,216	18,666,666
Additional investment rights (1)	1,699,346	15,555,555
Other derivative instruments (2)	1,480,000	3,480,000
	7,718,562	40,535,556

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(1)The terms of the embedded conversion features in the debentures and additional investment rights provide for variable conversion rates that are indexed to the Company’s trading common stock price. As a result, the number of indexed shares is subject to continuous fluctuation. The substantial increase in the number of shares from December 31, 2004 to December 31, 2005 is indicative of a significant decline in the Company’s trading common stock prices.

(2)During November and December 2005, the Company issued the Trinity notes payable that had detachable warrants for the purchase of 2,000,000 shares of common stock. These warrants constitute the incremental increase in other derivative instruments. Because share settlement of these warrants is not within the control of the Company, the warrants were classified as derivative financial instruments at their initial fair value. See Trinity Notes Payable, below.

Derivative income (expense) for the years ended December 31, 2004 and 2005 associated with adjustments recorded to reflect the aforementioned derivatives at fair value (in addition to the initial allocation, above) amounted to $5,130,521 and $2,246,890, respectively.

Fair value considerations for derivative financial instruments:

Freestanding derivative financial instruments, consisting of warrants that arose from the debenture financing, are valued using the Black-Scholes-Merton valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions included in this model are as follows:

	Traunch 1			Traunch 2
Instrument	Warrants			Warrants
Exercise prices	$	1.44		$	1.44
Initial term (years)	5.0			5.0
Volatility	84.90		%	84.90		%
Risk-free rate	3.34		%	3.73		%

Embedded derivative financial instruments, arising from the debentures and the additional investment rights, consist of multiple individual features that were embedded in the convertible debentures. The Company evaluated all significant features of the hybrid instruments and, where required under current accounting standards, bifurcated features for separate report classification. These features were, as attributable to each convertible debenture and additional investment right, aggregated into one compound derivative financial instrument for financial reporting purposes. The compound embedded derivative instruments are valued using the Flexible Monte Carlo methodology because that model embodies certain relevant assumptions (including, but not limited to, interest rate risk, credit risk, and conversion/redemption privileges) that are necessary to value these complex derivatives.

Assumptions included exercise estimates/behaviors and the following other significant estimates:

	Traunch 1	Traunch 2
Instrument	Features	Features
Conversion prices	$0.10—$0.90	$0.10—$1.08
Remaining terms (years)	1.6—4.5	1.8—4.5
Equivalent volatility	78.17%—81.53%	78.17%—81.53%
Equivalent interest-risk adjusted rate	5.18%—5.43%	5.20%—5.24%
Equivalent credit-risk adjusted yield rate	23.1%—45.7%	12.8%—14.2%

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Equivalent amounts reflect the net results of multiple modeling simulations that the Monte Carlo Simulation methodology applies to underlying assumptions.

Other derivative financial instruments consist of warrants and Series A Preferred stock that were issued prior to and subsequent to the debenture financing and were reclassified from stockholders’ equity or initially accounted as liabilities, at fair values, since share-settlement was not within the Company’s control after the debenture financing. The other warrants are valued using the Black-Scholes-Merton valuation methodology because that model embodies all of the relevant assumptions that address the features underlying those instruments. The preferred stock was determined by management to contain simple, non-complex conversion features and was, therefore, also valued using Black-Scholes-Merton methodology. Significant assumptions included in this model are as follows:

Instrument	Other Warrants	Preferred Stock
Exercise prices (1)	$0.14—$3.00	$	1.00
Initial term (years)	5.0—8.0	5.0
Volatility	84.90%—171.12%	84.90		%
Risk-free rate	3.34%—3.73%	3.34		%

(1)The weighted average exercise price of the other 3,480,000 common stock warrants is $0.61. As previously discussed, the preferred stock was converted to common stock before the close of the 2004 year end.

Trinity Notes Payable

During November and December 2005, the Company issued $300,000 face value, 11% notes payable and detachable warrants to purchase 2,000,000 shares of common stock to Trinity Financing Investments Corporation. Principal and interest on the notes are payable $150,000 in March and $150,000 in April 2006. The warrants have eight-year terms and strike prices of $0.25 for 1,000,000 shares and $0.14 for 1,000,000 shares.

The proceeds from the Trinity financing were allocated first to the warrants, based upon their fair values, with the balance of $103,100 allocated to the notes. The allocation of proceeds to the fair value to the warrants was performed because, as discussed in the previous section, share settlement is not within management’s control. Such amount was initially classified as a derivative liability. The resulting note discount is being amortized through periodic charges to interest expense using the effective method. Amortization of note discount amounted to $32,773 during the period from issuance of the notes to December 31, 2005.

The Company did not make its required debt service payments in March and April 2006. As a result of this default, the Company is required to accrue interest at a composite rate of 21%.

Other Significant Equity Transactions

During the year ended December 31, 2003, Power3 owed a stockholder for previous advances made to the Company, and had agreed to issue common stock to the stockholder to settle this outstanding obligation, thereby resulting in 300,000 shares of common stock being entered as Common Stock Subscribed in the Company’s Equity secion of its Balance Sheet.  In May, 2004, an agreement was completed with the stockholder, wherein he agreed to accept $47,188 in cash and the issuance of the subscribed 300,000 shares of common stock in full settlement of the $90,000 owed to him by the Company.  These shares were not issued as of December 31, 2003, and accordingly the par value of such shares is reflected as common stock subscribed as of December 31, 2003.  The common shares were issued in May, 2004 and the amount in Common Stock Subscribed was thereby eliminated.

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Series A Preferred Stock

On March 31, 2003, the Company’s Board of Directors authorized 4,000,000 shares of Series A Preferred Stock.  Simultaneously, the Company issued 2,660,000 shares of Series A Preferred Stock in consideration of accrued and unpaid salary totaling $200,000 to two officers of the Company and 1,330,000 shares of Series A Preferred Stock in consideration of $100,000 cash by an individual investor.  The Company recorded $1,695,000 of non-cash compensation expense as a result of this transaction during 2003.  The transaction was recorded in the fourth quarter of 2003 based on the value of the Company’s stock immediately subsequent to the stock split discussed previously.  On December 31, 2003 the two officers mentioned above converted a total of 120,000 shares of their Series A Preferred Stock into 1,200,000 common shares.  In November, 2004, the Series A Preferred stockholders converted their remaining preferred shares into 3,000,324 shares of common stock.

The stock was issued to previous officers of the Company, both related parties and an outside consultant, for past compensation due.  When the compensation was originally recorded, accrued compensation was charged, with the offset to preferred stock.  The entry to record the preferred stock was made in the fourth quarter of 2003 because it was discovered as part of the 2003 audit, by the audit firm, and a decision was made by previous management, not to amend the 10-QSB for the three month period ending March 31, 2003.  The conversion terms at the date of the original issuance were 10:1.  However, subsequently the Board of Directors and the shareholders agreed to change the conversion factor to .7752:1, did a Board Resolution to that effect and the preferred stock was converted to common stock, in 2004, in accordance with the revised conversion terms.

Stock Option Plans

The Company has various stock option and warrant plans outstanding.  Options granted under the 1998 stock

option plans are exercisable only after the respective vesting period, which is determined by the Company’s stock option committee. Options expire seven years from the date of grant. Under the 1999 stock option plan, options granted to employees vest ratably over three years; vesting is determined by the Company’s stock option committee for options granted to officers, directors, and consultants. Options expire ten years from the date of grant.  A total of 5,460 options remained in effect for warrants granted in 2000.  The fair value of these warrants was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for warrants granted in 2000:  risk-free interest rate of 6.03%;dividend yield of 0%; volatility factor of the expected market price of the Company’s common stock of $.34; and a weighted-average expected life of the options of 2.7 years.

In March 2003, the Company’s board of directors approved a 2003 Stock Compensation Plan, which provided for the granting of common stock, options and/or warrants to officers, directors and employees as well as consultants and attorneys who provide services to the Company. On September 25, 2003, the Company filed a Post-Effective Amendment No. 1, to it’s previously filed Form S-8 Registration Statement for the 2003 Stock Compensation Plan, to deregister the 2003 Stock Compensation Plan as well as the 8,000,000 shares of Power3’s common stock previously registered in the previous S-8 filed.  The Company stated therein that all such securities were unissued and remain available for issuance.  In addition, the 8,000,000 warrants issued by Power3, under this Plan, in March, 2003, were cancelled by mutual consent of Power3 and the persons to whom the warrants had been issued.  Therefore no valid options or shares were issued or remain outstanding under this 2003 Stock Compensation Plan.

In January 2004, the Company’s Board of Directors approved the 2004 Directors, Officers and Consultants Stock Option, Stock Warrant, and Stock Award Plan (the 2004 Plan).  Pursuant to the 2004 Plan, initially 10,000,000 shares of common stock, warrants, options, preferred stock or any combination thereof may be optioned.  After the grant of any option, warrant or share of preferred stock, the number of shares that may be

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optioned under the 2004 Plan will be increased.  The number of shares of such increase shall be an amount such that immediately following such increase, the total number of shares issuable under this plan and reserved for issuance upon exercise of options, warrants, or conversion of shares of preferred stock will equal 15% of the total number of issued and outstanding shares of the Company’s common stock.  The Company has issued 38,926,466 shares of common stock and 580,000 warrants under the 2004 Plan.  Based upon the automatic increase provisions above, the number of shares available for issue under the Plan is 9,929,269, based upon 15% of the outstanding shares as of December 31, 2005.

Pro forma information regarding net income and earnings per share is required by SFAS 123, and has been determined as if the Company had accounted for all of its options and warrants (the “Warrants”)  under the fair value method of that Statement. The fair value for the Warrants was estimated at the date of grant using a Black-Scholes option pricing model with the following assumptions for Warrants granted in 2000: risk-free interest rate of 6.03%; dividend yield of 0%; volatility factor of the expected market price of the Company’s common stock of .34; and a weighted-average expected life of the options of 2.7 years. The following assumptions were used for Warrants granted in 2004: Risk-free interest rate of 5.0%; dividend yield of 0%; volatility factor of the expected market price of the Company’s common stock of 1.86 and a weighted-average expected life of the options of -0- years (as all were immediately vested). The following assumptions were used for Warrants granted in 2005:  Risk-free interest rate of 5.5%; dividend yield of 0%, volatility factor of the expected market price of the Company’s common stock of 1.86 and a weighted-average expected life of the 2005 options for 7 years.  The Black-Scholes option valuation model was developed for use in estimating the fair value of traded Warrants that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s Warrants have characteristics significantly different from those of traded Warrants, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its stock options.

All of the Company’s warrants were recorded at their fair values; accordingly stock based compensation actually recorded and stock based compensation that would be recorded using a fair value based method are identical.  For purposes of pro forma disclosures, the estimated fair value of the options is charged to expense over the options’ vesting period.

The Company’s pro forma information for the years ended December 31, 2005 and 2004 is as follows:

	2005			2004
Net Loss:
As reported	$	(13,512,696	)	$	(17,471,463	)
Stock based employee compensation expense
Determined under fair value based methods, net of tax
Option Expense	$	(360,000	)	$	(626,100	)
Pro forma net loss	$	(13,872,696	)	$	(18,097,563	)
Loss per share, basic and diluted:
As reported	$	(0.21	)	$	(0.42	)
Pro forma	$	(0.23	)	$	(0.44	)

A summary of the Company’s warrant activity and related information for the years ended December 31, 2005 and 2004 is as follows:

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	2005		2004
		Weighted		Weighted
		Average		Average
		Exercise		Exercise
	Warrants	Price	Warrants	Price
Outstanding at beginning of year	3,086,360	1.46	6,360	12.50
Cancelled	—	—	—	—
Granted	2,333,333	.32	3,080,000	1.44
Exercised	—	—	—	—
Outstanding at end of year	5,419,693	.97	3,086,360	1.46
Exercisable at the end of the year	5,419,693	.97	3,086,360	1.46

The following table summarizes information about the Company’s Warrants outstanding at December 31, 2005:

				Weighted
			Weighted Average	Average
Exercise		Number	Remaining Contractual	Exercise
Price		Outstanding	Life (in years)	Price
$	.14	1,000,000	8.0	$	.14
$	.25	1,000,000	7.0	$	.25
$	.98	300,000	2.0	$	.98
$	1.00	100,000	1.5	$	1.00
$	1.08	333,333	2.0	$	1.08
$	1.43	50,000	1.8	$	1.43
$	1.44	2,500,000	1.9	$	1.44
$	2.77	30,000	2.0	$	2.77
$	3.00	100,000	1.9	$	3.00
$	6.50	5,460	5.0	$	6.50
$	50.00	900	2.0	$	50.00
		5,419,693		$	.97

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Note  6.  RECENT PRONOUNCEMENTS

FIN 46 – Consolidation of Variable Interest Entities

In January 2003, the FASB issued FIN 46, (revised in December 2003 as FIN46R) “Consolidation of Variable Interest Entities,” which clarifies the application of Accounting Research Bulletin (“ARB”) 51, Consolidated Financial Statements, to certain entities (called variable interest entities) in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. The disclosure requirements of this Interpretation are effective for all financial statements issued after January 31, 2003. The consolidation requirements apply to all variable interest entities created after January 31, 2003. In addition,

public companies must apply the consolidation requirements to variable interest entities that existed prior to February 1, 2003 and remain in existence as of the beginning of annual or interim periods beginning after June

15, 2003. The adoption of FIN 46R had no impact on the financial statements of the Company as the Company has no variable interests in variable interest entities.

SFAS 150 - Accounting for Certain ‘Financial Instruments with Characteristics of Both Liabilities and Equity

In May 2003, SFAS No. 150 “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity,” was issued to establish new standards for how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity.  It requires that an entity classify a financial instrument that is within its scope as a liability (or an asset in some circumstances).  Many of these instruments were previously classified as equity.  This statement was effective when issued for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for calendar year public companies for the third quarter of 2003.  The adoption of SFAS 150 had no impact on the financial statements of the Company.

SFAS 132 - Employers’ Disclosures about Pensions and Other Postretirement Benefits

In December 2003, FASB Statement No. 132 (revised) was issued which prescribes the required employers’ disclosures about pension plans and other postretirement benefit plans; but it does not change the measurement or recognition of those plans.  The Statement retains and revises the disclosure requirements contained in the original Statement 132.  It also requires additional disclosures about the assets, obligations, cash flows, and net periodic benefit cost of defined benefit pension plans and other postretirement benefit plans.  The Statement generally is effective for fiscal years ending after December 15, 2003.  Since the Company does not have any types of pension plans or other postretirement benefits, the adoption of this Statement did not have an effect on the Company’s financial statements.

SFAS 123(R) ‘Share-Based Payments’

In December 2004, the Financial Accounting Standards Board issued Statement Number 123 (“FAS 123 (R)”), Share-Based Payments. FAS 123 (R) requires all entities to recognize compensation expense in an amount equal to the fair value of shared-based payments such as stock options granted to employees. The Company will be required to apply FAS 123 (R) on a modified prospective method. Under this method, the Company is required to record compensation expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In addition, the Company may elect to adopt FAS 123 (R) by restating previously issued financial statements, basing the amounts on the expense previously calculated and reported in the pro forma disclosures that had been required by FAS 123. FAS 123 (R) is effective for the first reporting period beginning after June 15, 2005. The Company does not believe the impact of adopting this Statement will be material as there are no unvested options and warrants at December 31, 2004.

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SFAS 153 - Exchanges of Non-monetary Assets an Amendment of APB Opinion No. 29

In December 2004, FASB Statement No. 153 was issued amending APB Opinion No. 29 to eliminate the exception allowing non-monetary exchanges of similar productive assets to be measured based on the carrying value of the assets exchanged as opposed to at their fair values. This exception was replaced with a general exception for exchanges of non-monetary assets that do not have commercial substance. A non-monetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this statement are effective for non-monetary asset exchanges occurring in fiscal periods beginning after the June 15, 2005. The adoption of this statement did not have a material impact on the Company’s financial statements.

FIN- 45 Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others

In November 2002, the FASB issued FASB Interpretation (“FIN”) 45 “Guarantor’s Accounting and Disclosure

Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” which elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of the guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applied prospectively to guarantees issued or modified after December 31, 2002. The adoption of these recognition provisions will result in recording liabilities associated with certain guarantees provided by us. The disclosure requirements of this Interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. FIN 45 has no impact on the Company’s financial statements

Note 7. SUBSEQUENT EVENTS

Events that have occurred since December 31, 2005 include the following:

On March 1, 2006, Power3 Medical Products, Inc. (“the Company” or “Power3”) executed a promissory note in the principal amount of $80,000 payable to Steven B. Rash, CEO of Power3 (“the Payee”.)  Under the terms of the note, the principal amount of Eighty thousand dollars ($80,000.00), the (“Principal”) shall be due and payable on or before September 1, 2006 (the “Maturity Date”). Should the Principal not be repaid as of September 1, 2006, interest of 6% per year on any unpaid Principal amount will be earned by the Payee until such time as all of the Principal amount is repaid. This Note may be repaid at any time prior to September 1, 2006, without interest or penalty.

On March 1, 2006, Power3 Medical Products, Inc. executed a promissory note in the principal amount of $50,000 payable to Dr. Ira L. Goldknopf, the Chief Scientific Officer of Power3 (“the Payee”). Under the terms of the note, the principal amount of Fifty thousand dollars ($50,000), “the Principal”) shall be due and payable on or before September 1, 2006 (the “Maturity Date”). Should the Principal not be repaid as of September 1, 2006, interest of 6% per year on any unpaid Principal amount will be earned by the Payee until such time as all of the Principal amount is repaid. This Note may be repaid at any time prior to September 1, 2006, without interest or penalty.

On January 5, 2006, Power3 Medical Products, Inc. executed an Agreement with Glocap Advisors LLC (“Glocap”) wherein the Company engaged Glocap to act as financial advisors and provide the Company with financial advice and strategic consulting services. The Company agreed to provide Glocap with a Retainer equal to $30,000 in free-trading common stock of the Company upon the signing of the engagement letter. In confirmation of this agreement, the Company issued 2226,415 shares of common stock to Glocap, as S-8 shares issued under its 2004 Stock Compensation Plan. In addition, the Company agreed to compensate Glocap Advisors with a cash success fee based on capital input secured by Glocap based upon an agreed-upon formula,

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but completely dependent on success and not payable to Glocap unless capital is actually invested in the Company by an outside investor sourced by Glocap.

On January 3, 2006, Power3 Medical Products, Inc. executed an Agreement with Stonemill Consulting Company (“Stonemill”) wherein the Company engaged Stonemill to find and bring in investor capital from a third party investor. The Company agreed to provide Stonemill with 50,000 shares of common stock of Power3, together with warrants to purchase up to 500,000 shares of the Company’s common stock with an exercise price of $0.18 per share. The warrants will be exercisable for a period of five years from January 3, 2006. The Company issued 50,000 shares of common stock to Stonemill as S-8 stock issued under its 2004 Stock Compensation Plan.

On February 9, 2006, Power3 Medical Products, Inc. executed an Agreement with The Kaminer Group wherein the Company engaged The Kaminer Group to create and implement programs designed to generate awareness, credibility, media coverage and interest from strategic partners and investors. The Agreement covers a 12-month period commencing January 1, 2006 through December 31, 2006 and may be terminated by either rparty by a one-month written notice to terminate. As compensation for the above-described services, the Company agreed to a monthly retainer fee of $3,000 in cash. In addition the Kaminer Group will receive the equivalent of $2,000 in options per month to purchase Power3 common shares at the average daily closing market price for share during the previous month. In addition, Power3 will be billed for expenses incurred on its behalf at the close of each month during the Agreement.

On February 17 ,2006, Power3 received notice from UT MD Anderson Cancer Center confirming that the License Agreements between Power3 and UT MD Anderson Cancer Center were terminated under Section 13.3 of the License Agreement for breach of certain payment obligations as outlined in the License Agreement. The letter further described maintenance fees, license documentation fees and patent costs due to UT MD Anderson in the amounts of $46,945.62, prior to the termination date. In addition, the letter stated that Power3 was obligated to grant UT MD Anderson a nonexclusive royalty-bearing license to improvements made by Power3 and asked the Company to immediately disclose those improvements so that UT MD Anderson could consider whether it wished to license them.

Item 8.  CHANGES IN ACCOUNTANTS AND FINANCIAL DISCLOSURE

On July 28, 2005, the management of Power3 Medical Products, Inc. (“the Company”) decided upon a change in its independent public accounting firm and confirmed that the Company would no longer engage Kingery & Crouse, P.A. as its independent public accounting firm. On that same date, the Company engaged the services of John A. Braden & Company, PC, as its independent public accounting firm for its fiscal year ending December 31, 2004. The Company’s Board of Directors authorized the engagement of John A. Braden & Company, PC as the Company’s independent public accounting firm.

The audit report of Kingery & Crouse on the Company’s financial statements as of and for the fiscal year ended December 31, 2003 did not contain any adverse opinion or disclaimer of opinion, nor was it qualified or modified as to uncertainty, audit scope or accounting principles, but did contain modifications as to the Registrant’s ability to continue as a going concern. From the date of Kingery & Crouse’s appointment through the date of their dismissal on July 28, 2005, there were no disagreements between the Company and Kingery & Crouse, P.A. on any matter listed under Item 304, Section (a) (1) (iv) A to E of Regulation S-B, including accounting principles or practices, financial statement disclosure or auditing scope or procedure which, if not resolved to the satisfaction of Kingery & Crouse, P.A. would have caused them to make reference to the matter in its reports on the Company’s financial statements.

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In deciding to select John A. Braden & Company, the Board of Directors of Power3 reviewed auditor independence issues and existing commercial relationships with John A. Braden & Company and concluded that John A. Braden & Company has no commercial relationship with the Company that would impair its independence.

During the two most recent fiscal years ended December 31, 2003 and December 31, 2004, and the subsequent interim period through July 28, 2005, the Company did not consult with John A. Braden & Company, PC, regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) of Regulation S-K.

Item 8a.  Controls and Procedures

Disclosure Controls and Procedures

Under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of its disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based on this evaluation and for the reasons set forth below, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective as of December 31, 2005, the end of the period covered by this annual report.

As reported in the Company’s Quarterly Reports on Form 10-QSB for the quarterly periods ended September 30, 2004 and March 31, 2005, the Company identified certain deficiencies which caused management to conclude that the Company’s disclosure controls were ineffective as of September 30, 2004. The Company has undertaken steps and implemented actions as disclosed in its previous Form 10-QSB’s in an effort to resolve these deficiencies. While the actions identified in the previously filed Form 10-QSB’s and the actions identified below have addressed many of these deficiencies, the Company continued to have deficiencies with respect to its disclosure controls and procedures at December 31, 2005 including the following:

Deficiencies have arisen from a lack of supporting documentation and records relating to periods prior to the Advanced Bio/Chem transaction and a lack of communication between the Company, its auditors and the management of Advanced Bio/Chem. The Company had encountered delays in obtaining necessary supporting documentation and records for the audit of Advanced BioChem previously during 2004 prior to the date of the Advanced Bio/Chem transaction. The delay in obtaining this supporting documentation resulted in a delay in the completion of the Company’s financial statements and the filing of this Annual Report on Form 10-KSB. Under the purchase accounting treatment of the Advanced BioChem transaction discussed previously, this is no longer an issue because the financial statements of Advanced BioChem are no longer required for this report.

Although the Company has hired accounting personnel as reported in its previous Form 10-QSB, the Company’s limited financing and available capital have restricted the Company’s ability to fully implement its procedures for the improvement of its internal control over financial reporting and to engage outside professionals and advisors to the extent the Company has desired to support the Company’s accounting personnel in the preparation and/or audit of financial statements and reports to be filed with the SEC.

The Company continues to believe that the deficiencies are attributable to many factors including issues relating to the quality of the Company’s disclosure controls and procedures at the time of the Advanced Bio/Chem transaction and the transition following the transaction. Management is committed to a sound disclosure control and internal control environment and is continuing its efforts to improve the Company’s infrastructure, personnel, processes and controls to help ensure that the Company is able to produce accurate financial statements on a timely basis.

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In addition, during the past year, Power3 faced staffing issues relative to its cash flow situation. The Company has retained outside consultants, on an interim basis, to provide accounting and legal expertise directed toward improving its reporting and control procedures. The Company has implemented additional controls over its daily operations and has drafted various Internal Controls memoranda.

Changes in Internal Control Over Financial Reporting

As previously disclosed in the Company’s Quarterly Report on Form 10-QSB for the quarterly period ending September 30, 2004, the Company implemented several actions during the third quarter of 2004 in an effort to improve its internal control over financial reporting. During the fourth quarter of 2004, the Company continued the implementation of more rigorous policies with respect to its disclosure and financial reporting review process including improvements of its infrastructure and processes to improve its internal control over financial reporting. The Company also is continuing its implementation of procedures to improve its review and processing of non-accounting documentation and contracts.

During 2005, the Company changed its auditing firm and implemented additional internal controls over documents and accounting that are designed to improve its reporting. Further, in mid-summer of 2005, Power3 changed its auditing firm to further improve its financial reporting.

Other than the changes described above, there were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended December 31, 2005 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

Item 8b.  Other Information

None.

PART III

Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION (16a) OF THE EXCHANGE ACT

Directors, Executive Officers, Promoters and Control Persons

Set forth below is certain information concerning each of the Company’s directors, executive officers and significant employees. All directors of the Company hold office until the next annual meeting of shareholders or until their successors have been elected and qualified. The officers of the Company are appointed by the board of directors and hold office until their death, resignation or removal from office. The Company’s directors, executive officers, significant employees, and their ages, positions held and duration as such are as follows:

Name	Position Held with the Company	Age	Date First Elected or Appointed
Steven B. Rash	Chief Executive Officer and Director	58	May 18, 2004
Ira L. Goldknopf	Chief Scientific Officer and Director	60	May 18, 2004
Brian R. Folsom	Director of Laboratory Operations	49	July 12, 2004
John P. Burton	Chief Financial Officer	60	June 3, 2005

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Certain additional information concerning the individuals named above is set forth below. This information is based on information furnished by each director, executive officer and significant employee.

Steven B. Rash joined the Company in May 2004 as Chairman of the Board of Directors and Chief Executive Officer. Mr. Rash was Chairman of the Board of Directors and Chief Executive Officer of Advanced Bio/Chem, Inc. from September 2003 to May 2004. Prior to that time he was an independent consultant from February 2003 until September 2003. In April 2001, Mr. Rash was employed as a consultant to Global Water Technologies, Inc. and was hired as President and interim CFO of the company in January 2002 and retained that position until February 2003. From April 2000 until April 2001, he was an independent consultant. From June 1995 until March 2000, Mr. Rash was employed as President and CEO of American Biomed, Inc., a publicly traded medical device company. Mr. Rash has a B.S. in Business Administration from the University of Delaware and an M.B.A. from Southern Illinois University.

Ira L. Goldknopf, Ph.D. joined the Company in May 2004 as Chief Scientific Officer and Director. From August 2000 until May 2004, Dr. Goldknopf was Chief Scientific Officer of Advanced Bio/Chem, which he co-founded in 2000. From August 1997 until August 2000, Dr. Goldknopf was a biotechnology consultant. Dr. Goldknopf has a B.A. in Chemistry from Hunter College and a Ph.D. in Biochemistry from Kansas State University. Dr. Goldknopf spent ten years on the faculty of Baylor College of Medicine and is the author of over 70 publications and a principal inventor of the Company’s intellectual property. Dr. Goldknopf also serves on the Company’s Scientific Advisory Board.

On June 3, 2005, John P. Burton was named Chief Accounting Officer and Controller of the Company. On September 15, 2005, the Company executed an Employment Agreement with Mr. Burton, effective September 1, 2005. The Employment Agreement named Mr. Burton as Chief Financial Officer of the Company and granted Mr. Burton 140,000 shares of restricted common stock. Prior to joining the Company, Mr. Burton was employed at Affiniscape, Inc. where he served as Chief Financial Officer from December, 2003 until August, 2004. From December, 1999 to March, 2003, he was employed at Bob Johnson & Associates, Inc. as Controller. Mr. Burton has a BBA and MBA from The University of Texas at Austin.

Brian R. Folsom, Ph.D. joined the Company on July 12, 2004 as Director of Laboratory Operations. From January 2001 to July 2003, he was a Staff Engineer at Diosynth-RTP. From July 2003 until July 2004 he was an independent consultant. From March 1995 until January 2001, he was the Manager, Process Development for Enchira Biotechnology Corporation. In his prior positions, Dr. Folsom has been responsible for the management of laboratories involved in the development of biotechnological intellectual property over the past ten years. Dr. Folsom has a B.A. in Chemistry from MacAlester College and a Ph.D. in Biochemistry from Washington State University. Dr. Folsom is the author of 15 scientific publications and holds two patents.

There are no family relationships among any of the directors or executive officers of the Company. Except as disclosed below with respect to the amended and restated employment agreements of Messrs. Rash, Goldknopf and Rosinski, no arrangement or understanding exists between any director or executive officer and any other person pursuant to which any director or executive officer was elected to serve.

Mr. Rash has many years of experience in corporate reorganizations, finance and new business development. Mr. Rash was hired by American Biomed, Inc. in June 1995 to assist in the reorganization and turnaround of the company. Mr. Rash remained with American Biomed until March 2000 as president and CEO during which time the company was restructured. In July 2000, approximately four (4) months after Mr. Rash’s departure, American Biomed filed for Chapter 7 bankruptcy proceedings. Mr. Rash was initially retained as a consultant in April 2001 to assist Global Water Technologies, Inc. and its Chairman/CEO in formulating a turnaround strategy for the company. Mr. Rash was subsequently employed as president and interim CFO in January 2002. Global Water was declared in default of its bank loan in January 2003 and sold its operating

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division in February 2003. Mr. Rash resigned in February 2003 and, in May 2003, Global Water filed for Chapter 11 bankruptcy proceedings.

Except as described above with respect to Mr. Rash, none of the Company’s directors, executive officers, promoters or control persons have been involved in any of the following events during the past five years:

•any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;

•any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);

•being subject to any order, judgment or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or

•being found by a court of competent jurisdiction (in a civil action), the SEC or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended or vacated.

The board of directors has not established an audit committee or any committee performing similar functions. Consequently, the Company does not have an audit committee financial expert as defined in Item 401(3) of Regulation S-B. Management believes that in light of the Company’s current size and its status as a company with no operations, the establishment of an audit committee and the retention of an audit committee financial expert is not necessary at this time and is cost-prohibitive. The Company also does not have a standing nominating committee of its board of directors or any committee performing a similar function.

Scientific Advisory Board

The Company’s Scientific Advisory Board provides assistance in the research and development of the Company’s products. Unlike members of the Company’s Board of Directors, members of the Scientific Advisory Board, other than Dr. Goldknopf, are not involved in the management or operations of the Company. The members of the Scientific Advisory Board are as follows:

Dr. Stanley H. Appel, M. D. is Professor and Chair of Neurology at the Methodist Hospital Neurological Institute,  Professor of Neurology at Baylor College of Medicine, Director of the Vicki Appel MDA/ALS Clinic, and past-Director of the Alzheimer’s Disease Research Center at Baylor College of Medicine in Houston, Texas. He also serves as the Director of the Jerry Lewis Neuromuscular Research Center. Dr. Appel is a leading authority on degenerative neurological diseases, such as Parkinson’s, Alzheimer’s and ALS. Specifically, Dr. Appel focuses on the importance of neurotrophic factors and immune mechanisms, including the role of inflammatory cytokines in these diseases. He has served as an Advisory Board member of the Alzheimer’s Disease and Related Disorders Association and as a Council member of the American Society of Neurochemistry.

Dr. Zouhair Atassi, Ph. D. is the current Robert A. Welch Chair of Chemistry and the Professor of Biochemistry and Molecular Biology at Baylor College of Medicine, Houston, Texas. After completing his Ph.D. in Chemistry, University of Birmingham, England, Dr. Atassi started his career in 1960 as Postdoctoral Research Fellow in Chemistry at the University of Birmingham. Dr. Atassi was the 2003 President of the Institute of Immunobiology and he is the current Editor-in-Chief for The Protein Journal, Protein Reviews and Critical Reviews in Immunology. Dr. Atassi has published 14 books and several volumes in Immunochemistry

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of Proteins and Immunobiology of Proteins and Peptides. He has given more than 150 lectures in national and international conferences and more than 180 invited seminars in U.S. and foreign universities and research institutions. In addition Dr. Atassi has more than several hundred scientific publications and has been awarded five United States patents between 1996 and 2000.

Dr. Ira L. Goldknopf, Ph. D. began his scientific career over 30 years ago, pioneering the field that is now known as Proteomics. More than a decade before the start of the Human Genome Project, Dr. Goldknopf made the earliest proteomic discovery at Baylor College of Medicine with Harris Busch, the isolation, identification, and sequencing of a new protein from a two-dimensional gel, Protein A24. During the course of these investigations, he discovered that protein A24 was the first known conjugate of two very important proteins, Histone H2A, a part of the subunit structure that packages DNA in the cell nucleus, and Ubiquitin. Through the work of Dr. Goldknopf and many others (over 9,000 publications in the ensuing years) – including Drs. Avram Hershko, Aaron Ciechanover, and Alex Varshavsky, who shared the 2000 Lasker Award for their achievements – the Ubiquitin Conjugation System is now known to play a major role in the management of the inventories of proteins in the cell, cell proliferation, programmed cell death, and most if not all major regulatory functions in health and disease at the cellular level.

Dr. Thomas E. Watts, M. D. received his M.D. in 1975 from Baylor College of Medicine. Dr. Watts is board certified, from American Board of Family Practice since 1972 and practiced medicine at Blue Earth Medical Center in Minnesota from 1975 to 1996 and is now practicing at the Kelsey-Seybold Clinic, The Woodlands, Texas. As a physician with more than 30 years of practice experience, Dr. Watts provides the Company with insights from the perspective of the end user of the Company’s products.

Dr. Alan B. Hollingsworth, M. D. received his M.D. with Distinction from the University of Oklahoma College of Medicine in 1975 where he served as First Vice-President of Alpha Omega Alpha Honor Medical Society. In addition to his general surgery residency at the University of Oklahoma, he completed a one-year fellowship in surgical pathology at U.C.L.A. In the 1980s, he joined the first wave of surgeons who chose to limit their practices to breast cancer. He was the Founding Medical Director of the University of Oklahoma Institute for Breast Health in 1993 where he held the G. Rainey Williams Chair of Surgical Breast Oncology. Currently, he serves as Medical Director of Mercy Women’s Center (Mercy Health Center, Oklahoma City) and Medical Director, Breast MRI of Oklahoma. His interest in breast cancer risk assessment led to the publication of the first lay book on the subject, The Truth About Breast Cancer Risk Assessment, and he served as lead author for the multi-institutional consensus paper published in the American Journal of Surgery by the national breast cancer risk assessment working group.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Exchange Act requires the Company’s directors, executive officers, and the persons who beneficially own more than ten percent (10%) of the Company’s common stock to file reports of ownership and changes in ownership with the SEC. Copies of all filed reports are required to be furnished to the Company. Based solely on the reports received by the Company and on representations of the reporting persons, the Company determined that there were a number of transactions that were not timely reported. With respect to its current directors, executive officers, and persons beneficially owning more than ten percent (10%) of the Company’s common stock, the Company undertook to file forms throughout the year. The Company has implemented new procedures to ensure improved compliance with the reporting requirements on an on-going basis. To the Company’s knowledge, based solely on its review of the reports received and on representations of the reporting persons, the Company believes that these persons have complied with all applicable filing requirements during the fiscal year ended December 31, 2004, except:  (i) Mr. Rash did not timely file a Form 3 which was subsequently filed with the SEC; (ii) Dr. Goldknopf did not timely file a Form 3 which was subsequently filed with the SEC; (iii) Mr. Rosinski did not timely file a Form 3 and Form 4, each of which was subsequently filed with the SEC; (iv) Advanced Bio/Chem, Inc. did not timely file a Form 3 which was

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subsequently filed with the SEC; (v) Mr. Behzadi, a former executive officer of the Company, did not timely file a Form 3 which was subsequently filed with the SEC; and (vi) Mr. Novak, a former executive officer and director of the Company, reported several transactions on five Form 5s rather than on Form 4 after he was no longer an executive officer or director of the Company and has not corrected such filings.

Code of Ethics

The Company has adopted a code of ethics applicable to its principal executive officer and principal financial officer, a copy of which is filed with this Annual Report.

Item 10. EXECUTIVE COMPENSATION

The following table sets forth information concerning the compensation for services in all capacities rendered to us for the three fiscal years ended December 31, 2005, of our Chief Executive Officer and our other executive officers:

Summary Compensation Table

					Long Term Compensation
					Awards
		Annual Compensation(1)			Restricted Stock		Securities Underlying	All Other
Name and Principal Position	Year	Salary		Bonus	Award(s)(2)		Options/SARs	Compensation
		($)		($)	($)		(#)
Steven B. Rash, Chairman of the Board and Chief Executive Officer(3)	2005	248,426		0	0		0	0
	2004	190,623		0	11,925,000	(4)		0
Ira L. Goldknopf, Chief Scientific Officer(6)	2005	78,948		0	0		0	0
	2004	96,214			11,925,000	(7)	0	0
John P. Burton, Chief Financial Officer	2005	57,138		0	42,000		0	0
Michael J. Rosinski, Chief Financial Officer(8)	2004	60,000		0	483,000	(8)	0	0
					(483,000	)(9)
Timothy S. Novak, Former Chairman of the Board and Chief Executive Officer (10)	2004	13,706		0	0		0	0
	2003	157,500	(11)	0	0		0	0
	2002	139,000		0	0		0	0
R. Paul Gray, Former Chief Financial Officer, Secretary and Treasurer(10)	2004	4,960		0	0		0	0
	2003	157,500	(11)	0	0		0	0
	2002	87,500		0	0		0	0

(1)Other annual compensation provided to the named executive officers did not exceed the applicable disclosure requirements.

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(2)At December 31, 2004 the aggregate number and value of all restricted shares held by each of the named executive officers was as follows:  Rash – 13,250,000 restricted shares, $12,190,000 value; Goldknopf – 13,250,000 restricted shares, $12,190,000 value; and Rosinski – 140,000 restricted shares, $128,800 value. The values are based on the closing price of $0.90 of the Company’s common stock on May 18, 2004. Although the Company does not expect to pay dividends on its common stock, any dividends which may be paid on its common stock will not be paid on the restricted stock unless and until such time as the restricted stock becomes nonforfeitable.

(3)Mr. Rash joined the Company in May 2004 with the completion of the acquisition of assets from Advanced Bio/Chem. Mr. Rash was the Chairman of the Board and Chief Executive Officer of Advanced Bio/Chem.  Mr. Rash has entered into an employment agreement with the Company which is described below.

(4)Pursuant to Mr. Rash’s employment agreement, he was awarded 13,250,000 shares of restricted common stock. The value is based upon a closing price of $0.90 of the Company’s common stock on May 18, 2004. All of the shares are restricted stock and shall vest on May 18, 2006 if Mr. Rash continues to be employed by the Company on such date. In addition, Mr. Rash is entitled to receive 1,500,000 shares of restricted Series B preferred stock to be designated by the Company.

(5)In 2003, Mr. Rash was granted by Advanced Bio/Chem pursuant to his employment agreement 825,000 shares of Advanced Bio/Chem’s common stock and the option to purchase 200,000 shares of common stock at $0.80 per share. At the time the 825,000 shares were granted, the fair market value of such stock was $0.80 per share for a total of $660,000. Mr. Rash continues to hold such shares and the value of such restricted stock holdings at December 31, 2004 was $206,250. Advanced Bio/Chem was to enter into an option agreement with Mr. Rash; however, no such option agreement has been executed nor is it expected since Mr. Rash is no longer an officer of Advanced Bio/Chem.

(6)Dr. Goldknopf joined the Company in May 2004 with the completion of the acquisition of the assets of Advanced Bio/Chem. Dr. Goldknopf was the Chief Scientific Officer of Advanced Bio/Chem. Dr. Goldknopf has entered into an employment agreement with the Company described below.

(7)Pursuant to Dr. Goldknopf’s employment agreement, he was awarded 13,250,000 shares of restricted common stock. The value is based upon a closing price of $0.90 of the Company’s common stock on May 18, 2004. All of the shares are restricted stock and shall vest on May 18, 2006 if Dr. Goldknopf continues to be employed by the Company on such date. In addition, Dr. Goldknopf is entitled to receive 1,500,000 shares of restricted Series B preferred stock to be designated by the Company.

(8)Mr. Rosinski joined the Company on a full-time basis in July 2004.

(9)Pursuant to Mr. Rosinski’s employment agreement, he was awarded 140,000 shares of restricted common stock. The value is based upon a closing price of $3.45 of the Company’s common stock on July 2, 2004. On June 3, 2005, Mr. Rosinski resigned and terminated his employment with the Company. Therefore, according to his Employment Agreement, his shares were returned to the Company.

(10)Timothy S. Novak and R. Paul Gray each resigned from their respective positions with Power3 Medical at the time of the Company’s acquisition of the assets of Advanced Bio/Chem in May 2004. Messrs. Novak and Gray continue to be the president, and secretary/treasurer, respectively, of Tenthgate.

(11)On March 31, 2003, each of Messrs. Novak and Gray were issued 1,330,000 shares of Series A Preferred Stock in consideration of accrued and unpaid salary. At the time of such issuance, the Series A Preferred Stock issued to each had a value of $100,000 which is reflected in the salary figure for 2003.

Director Compensation

Mr. Rash and Dr. Goldknopf are the Company’s directors at this time. Except for the compensation to which each is entitled pursuant to the terms of their respective employment agreements, neither Mr. Rash nor Dr. Goldknopf receive any further compensation for service as directors. The Company has no formal plan for compensating outside directors at this time. However, at such time as the Company has outside directors, the Company expects to compensate its outside directors and to reimburse them for reasonable travel and other out-of-pocket expenses incurred in connection with the attendance at meetings.

Option Grants in Last Fiscal Year

No options were granted to the above named officers in 2004 or 2005.

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Employment Agreements

The Company has entered into an amended and restated employment agreement with Mr. Rash. The employment agreement is effective as of May 18, 2004 and has an initial term of five years, subject to each party’s termination rights. The agreement provides for a base salary of $250,000 per year and the opportunity to receive cash bonuses based on performance upon the discretion of the Company’s board of directors. The agreement also includes participation in employee benefit plans offered by the Company to its employees, as well as a grant of 13,250,000 shares of restricted common stock and 1,500,000 shares of restricted Series B preferred stock. The agreement contains a covenant not to compete with the Company during the period of employment and for a period of two years following the termination or expiration of his employment. The employment agreement also contains a non-disclosure and non-use of proprietary information clause and a non-interference clause covering the period of employment and for a period of five (5) years thereafter. Either party may terminate Mr. Rash’s employment under the contract, either with or without cause upon giving the other party at least thirty days notice. If the Company terminates Mr. Rash’s employment at any time during the initial term without cause, Mr. Rash will be entitled to receive compensation provided under the agreement for the remaining initial term of employment. In addition, in the event of a change in control as defined in the agreement, the Company may waive, in whole or in part, any and all remaining restrictions on the restricted shares of common stock and Series B preferred stock granted to Mr. Rash.

The Company has entered into an amended and restated employment agreement with Dr. Goldknopf. The employment agreement is effective as of May 18, 2004 and has an initial term of five years, subject to each party’s termination rights. The agreement provides for a base salary of $125,000 per year through December 18, 2004 and $100,000 per year thereafter, with an opportunity to receive cash bonuses based on performance upon the discretion of the Company’s board of directors. The agreement also includes participation in employee benefit plans offered by the Company to its employees, as well as a grant of 13,250,000 shares of restricted common stock and 1,500,000 shares of restricted Series B preferred stock. The agreement contains a covenant not to compete with the Company during the period of employment and for a period of two years following the termination or expiration of his employment. The employment agreement also contains a non-disclosure and non-use of proprietary information clause and a non-interference clause covering the period of employment and for a period of five (5) years thereafter. Either party may terminate Dr. Goldknopf’s employment under the contract, either with or without cause upon giving the other party at least thirty days notice. If the Company terminates Dr. Goldknopf’s employment at any time during the initial term without cause, Dr. Goldknopf will be entitled to receive compensation provided under the agreement for the remaining initial term of employment. In addition, in the event of a change in control as defined in the agreement, the Company may waive, in whole or in part, any and all remaining restrictions on the restricted shares of common stock and Series B preferred stock granted to Dr. Goldknopf.

The Company entered into an employment agreement with Mr. Burton. The employment agreement is effective as of September 1, 2005 and has an initial term of three years, subject to each party’s termination rights. The agreement provides for a base salary of $100,000 per year and the opportunity to receive cash bonuses based on performance upon the discretion of the Company’s board of directors. The agreement also includes participation in employee benefit plans offered by the Company to its employees, as well as a grant of 140,000 shares of restricted common stock. The agreement contains a covenant not to compete with the Company during the period of employment and for a period of two (2) years following the termination or expiration of his employment. The employment agreement also contains a non-disclosure and non-use of proprietary information clause and a non-interference clause covering the period of employment and for a period of five (5) years thereafter. Either party may terminate Mr. Burton’s employment under the contract, either with or without cause upon giving the other party at least thirty days notice. If the Company terminates Mr. Burton’s employment at any time during the initial term without cause, Mr. Burton will be entitled to receive compensation provided under the agreement for the remaining initial term of employment. In addition, in the

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event of a change in control as defined in the agreement, the Company will waive, in whole or in part, any and all remaining restrictions on the restricted shares of common stock granted to Mr. Burton.

On June 3, 2005, Mr. Rosinski, then Chief Financial Officer of the Company, resigned and terminated his employment at the Company as of that date. In accordance with his resignation, the employment agreement with Mr. Rosinski terminated, on June 3, 2005, and the stock grant of 140,000 shares of Restricted Stock to Mr. Rosinski is terminated. Mr. Rosinski has returned his stock shares in accordance with this forfeiture.

Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder’s Matters

SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth information as of December 31, 2005, the most recent practicable date, regarding beneficial ownership of the Company’s common stock by the following persons:  (i) each person who is known to the Company to beneficially own more than 5% of the outstanding shares of common stock; (ii) each of the Company’s directors; (iii) each of the Company’s executive officers named in the executive compensation table; and (iv) all of the Company’s directors and executive officers as a group. There has been no change to any of the amounts reported in the table below, as of the date of filing this report.

Unless otherwise indicated below, to the Company’s knowledge, all persons listed below have sole voting and investment power with respect to their shares of common stock, except to the extent authority is shared by spouses under applicable law. Beneficial ownership is determined in accordance with the rules of the SEC based on factors including voting and investment power with respect to shares, subject to applicable community property laws. Shares of common stock subject to options or warrants exercisable within 60 days of December 31, 2005, are deemed outstanding for the purpose of computing the percentage ownership of the person holding such options or warrants, but are not deemed outstanding for computing the percentage ownership of any other person.

Name of Beneficial Owner	Number of Shares of Common Stock	Percent of Class
Industrial Enterprises of America, Inc. (formerly known as Advanced Bio/Chem, Inc.) 770 South Post Oak Lane, Suite 330 Houston, Texas 77056	14,346,549	21.68	%
Steven B. Rash 3400 Research Forest Dr., Suite B2-3 The Woodlands, Texas 77381	9,039,647	13.66	%
Trinity Financing Investments 300 East 55th St Apt 14D New York, NY 10022	5,000,000	7.56	%
Ira L. Goldknopf 3400 Research Forest Dr., Suite B2-3 The Woodlands, Texas 77381	4,946,549	7.48	%
John P. Burton 3400 Research Forest Dr., Suite B2-3 The Woodlands, Texas 77381	140,000		*
All current directors and executive officers as a group (3 persons)	14,126,196	21.34	%

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*Indicates less than one percent.

Changes of Control

In addition to the shares of the Company’s common stock beneficially owned by Mr. Rash and Dr. Goldknopf described above, the Company has entered into amended and restated employment agreements with Mr. Rash and Dr. Goldknopf which require the Company to issue 1,500,000 shares of restricted Series B preferred stock to each of Mr. Rash and Dr. Goldknopf. The Company has not filed the certificate of amendment designating the Series B preferred stock and its powers, designations and relative rights and has not issued the shares of the Series B preferred stock. As a result of certain restrictions agreed upon with the investors in connection with the Company’s recent financing, the Company may not issue the Series B preferred stock until 90 days after the effective date of the registration statement filed by the Company on behalf of the investors. After such restrictions lapse, the Company intends to file the certificate of amendment and issue the Series B preferred stock.

The terms of the Series B preferred stock agreed upon by the Company provide that while the shares of Series B preferred stock are held by Mr. Rash and Dr. Goldknopf, they will have the right to vote that number of votes equal to the number of outstanding shares of the Company’s common stock plus one additional vote such that they will hold a majority of the voting rights of the Company. In the event of the death or termination of employment of either Mr. Rash or Dr. Goldknopf, the remaining holder of the Series B preferred stock will continue to hold such voting rights. The issuance of such shares of Series B preferred stock will result in a change of control of the Company.

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Employee Stock Option Plans

Securities Authorized for Issuance Under Equity Compensation Plans

	Number of securities to be issued upon exercise of outstanding options, warrants and rights	Weighted-average exercise price of outstanding options, warrants and rights		Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
	(a)	(b)		(c)
Equity compensation plans approved by security holders	0	0		0
Equity compensation plans enacted by management and approved by the Board of Directors, but not submitted for a vote or approved by all holders of the Company’s securities	580,000	$	1.44	9,929,268
Total	580,000	$	1.44	9,929,268

The 9,929,268 securities that remain available for future issuance under equity compensation plans arise from the Company’s 2004 Directors, Officers and Consultants Stock Option, Stock Warrant, and Stock Award Plan (“2004 Plan”). The Company has issued 38,926,466 shares of common stock under the 2004 Plan. The 2004 Plan initially authorized the issuance of 10,000,000 shares of the Company’s common stock pursuant to the Plan; however, the number of shares available under the 2004 Plan shall increase so that immediately following any grant of securities under the 2004 Plan, the total number of shares issuable under the 2004 Plan and reserved for issuance upon exercise of options, warrants, or conversion of shares of preferred stock will equal 15% of the total number of the Company’s issued and outstanding shares of common stock.

In March 2003, the Company’s board of directors approved a 2003 Stock Compensation Plan, which provided for the granting of common stock, options and/or warrants to officers, directors and employees as well as consultants and attorneys who provide services to the Company. Later, on September 25, 2003, the Company issued a Post-Effective Amendment No. 1 to its Form S-8 Registration Statement previously filed on April 18, 2003 and previously issued for this 2003 Stock Compensation Plan. This amendment deregistered the 2003 Stock Compensation Plan, the 8,000,000 shares of Power3’s common stock previously registered under this Plan and any shares of stock or warrants contemplated to be issued within this Plan.

Item 12. Certain Relationships and Related Transactions

On May 18, 2004, the Company acquired a set of assets from Advanced Bio/Chem and assumed certain of its liabilities in exchange for the issuance of 15,000,000 shares of the Company’s common stock to Advanced

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Bio/Chem. At the time of the acquisition, Mr. Rash owned approximately 3.92% of the common stock of Advanced Bio/Chem, thus resulting in indirect beneficial ownership at the time of the transaction of approximately 588,000 shares of the Company’s common stock through Advanced Bio/Chem. Additionally, Dr. Goldknopf held approximately 8.23% of the common stock of Advanced Bio/Chem at the time of the transactions, thus resulting in his indirect beneficial ownership at the time of the transaction of approximately 1,234,500 shares of the Company’s common stock through Advanced Bio/Chem.

In October 2004, Mr. Rosinski loaned the Company $75,000. The loan was repaid to Mr. Rosinski, without interest, in November 2004 with proceeds from the Company’s financing on October 28, 2004.

In March, 2005, Mr. Rosinski loaned the Company $ 35,000. The loan, due to be repaid on or before April 30, 2005, is to be repaid with proceeds from later issue of permanent financing and is payable, with interest at rate of 6% per annum,  The loan remains outstanding and is carried on the Balance Sheet of the Company in Notes Payable.

On May 31, 2005, the Company received an Officer Advance in the amount of $55,000. This advance is in the form of a short-term Note Payable, to the Officer, and is payable on June 30, 2005, and bears interest at a rate of 6 % per annum until paid.

On June 3, 2005, the Company received an Officer Advance in the amount of $50,000. This advance is in the form of a short-term Note Payable, to the Officer, and is payable on June 30, 2005, and bears interest at a rate of 6 % per annum until paid.

During the latter half of 2005, the Chief Scientific Officer advanced the Company $159,231 as short-term Officer Advances in order to enable the Company to meet certain payment obligations. These advances were in the form of 180 day notes and bear interest at a rate of 6% per annum until the outstanding balance is paid in full. None of these short-term Officer Advances were due as of December 31, 2005.

On December 14, 2005, the Company received an Officer Advance in the amount of $50,000 from the Chief Scientific Officer. This Note is due on June 15, 2006, and bears interest at a rate of 6% per annum until paid.

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Item 13. Exhibits

(a)Exhibits

Exhibit No.	INDEX
2.1	Asset Purchase Agreement dated as of May 11, 2004 by and among Power 3 Medical Products, Inc., Advanced Bio/Chem, Inc. d/b/a ProteEx, Steven B. Rash and Ira Goldknopf (incorporated by reference to Exhibit 2.1 to the Company’s Registration State on Form SB-2 (File No. 333-122227).
3.1	Certificate of Incorporation (incorporated by reference to Exhibit 2.5 to the Company’s Form 10-SB filed on September 28, 1998).
3.2	Certificate of Merger (incorporated by reference to Exhibit 2.7 to the Company’s Form 10-SB filed on September 28, 1998).
3.3	Certificate of Amendment of the Certificate of Incorporation (incorporated by reference to Exhibit 2.9 to the Company’s Form 10-SB filed on September 28, 1998).
3.4	Certificate of Amendment of the Certificate of Incorporation (incorporated by reference to Exhibit 3.(I).10 to the Company’s Form S-3 filed on March 2, 2000).
3.5	Certificate of Amendment to the Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on November 5, 2004).
3.6	Bylaws (incorporated by reference to Exhibit 2.10 to the Company’s Form 10-SB filed on September 28, 1998).
4.1	Form of Convertible Debenture Due October 28, 2007 (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K filed on November 3, 2004).
4.2	Form of Common Stock Purchase Warrant (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K filed on November 3, 2004).
4.3	Form of Additional Investment Right (incorporated by reference to Exhibit 4.3 to the Company’s Form 8-K filed on November 3, 2004).
10.1	Form 10-QSB for quarter ended June 30, 2005 as filed on August 22, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10QSB filed November 11, 2005).
10.2	Form 8-K/A, as filed on August 29, 2005 (incorporated by reference to Exhibit 10.2 to the Company’s Form 10QSB filed November 11, 2005).
10.3	Form 10-QSB/A for quarter ended June 30, 2004 as filed on September 9, 2005 (incorporated by reference to Exhibit 10.3 to the Company’s Form 10QSB filed November 11, 2005).
10.4	Form 10-QSB/A for quarter ended September 30, 2004 as filed on September 9, 2005 (incorporated by reference to Exhibit 10.4 to the Company’s Form 10QSB filed November 11, 2005).
10.5	Form 10-QSB/A for quarter ended March 31, 2004 as filed on September 9, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10QSB filed November 11, 2005).
10.6	Form 10-KSB for year ended December 31, 2004 as filed on September 9, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10QSB filed November 11, 2005).
10.7	Amendment #1 to Sb-2 filed October 6, 2005 as filed on October 6, 2005 (incorporated by reference to Exhibit 10.7 to the Company’s Form 10QSB filed November 11, 2005).
10.8(3)	Amended and Restated Employment Agreementfor Steven B. Rash (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed January 5, 2005).
10.9(3)	Amended and Restated Employment Agreement for Ira L. Goldknopf, Ph.D. (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed January 5, 2005).
10.10(3)	Amended and Restated Employment Agreementfor Michael J. Rosinski (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K filed January 5, 2005).
10.11(3)	Employment Agreement for John P. Burton (incorporated by reference to Exhibit 10.1 to the

86

Exhibit No.	INDEX
	Company’s Form 8-K filed September 21, 2005).
10.12(4)	Exclusive License Agreement dated effective as of June 28, 2004 by and between Baylor College of Medicine and Power3 Medical Products, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-QSB/A for the quarter ended September 30, 2004).
10.13(1),(4)	Research Agreement signed August 17, 2004 by and between Baylor College of Medicine and Power3 Medical Products, Inc.
10.14(4)	Patent and Technology License Agreement dated August 1, 2004 by and between The Board of Regents of The University of Texas System, on behalf of The University of Texas M.D. Anderson Cancer Center, and Power3 Medical Products, Inc. (incorporated by reference to Exhibit 10.2 to the Company’s Form 10-QSB/A for the quarter ended September 30, 2004).
10.15(4)	Patent and Technology License Agreement dated September 1, 2003 by and between The Board of Regents of The University of Texas System, on behalf of The University of Texas M.D. Anderson Cancer Center, and Advanced Bio/Chem, Inc. (d/b/a ProteEx) (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-QSB/A for the quarter ended September 30, 2004).
10.16	Securities Purchase Agreement dated as of October 28, 2004, among the Company and each purchaser identified therein (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on November 3, 2004).
10.17	Amendment to Securities Purchase Agreement dated January 19, 2005 among the Company and each purchaser identified therein (incorporated by reference to Exhibit 10.8 of the Company’s Registration Statement on Form SB2 (File No.333-122227)).
10.18	Registration Rights Agreement dated as of October 28, 2004, among the Company and each purchaser identified therein (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on November 3, 2004).
10.19	Power3’s Registration Statement (incorporated by reference to the SB-2 (File No. 122227) as filed on January 21, 2005.
10.20(3)	2003 Stock Compensation Plan (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-8 filed April 18, 2003).
10.21 (3)	2004 Directors, Officers and Consultants Stock Option, Stock Warrant and Stock Award Plan (incorporated by reference to Exhibit 4.1 of the Company’s Registration Statement on Form S-8 filed January 20, 2004).
10.22(3)	Collaborative Research Agreement, dated March 21, 2005, by and between New Horizons Diagnostics and Power3 (incorporated by reference to Exhibit 16.1 of the Company’s Registration Statement on Form 10KSB filed September 9, 2005).
10.23(3)	Collaborative Research and Licensing Agreement, dated May 17, 2005, by and between BioSite Incorporated and Power3 for collaborative research and worldwide licensing to BioSite Incorporated. (incorporated by reference to Exhibit 16.1 of the Company’s Registration Statement on Form 10KSB filed September 9, 2005).
10.24	Research Agreement, dated October 13, 2005, between Power3 and Pfizer, Inc. (incorporated by reference to Exhibit 10.1 to the Company’s Form 8K filed October 19, 2005).
10.25	Promissory Note executed by Power3 and Cordillera Fund LP in the amount of $251,000, dated April 5, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Form 10QSB filed August 22, 2005).
10.26(1)	Promissory Note executed by Power3 and Michael J. Rosinski in the amount of $35,000
10.27	Promissory Note, dated May 31, 2005, executed by Power3 and Steven B. Rash in the amount of $55,000 (incorporated by reference to Exhibit 26.4 to the Company’s Form SB2/A filed on October 6, 2005).
10.28	Promissory Note, dated June 3, 2005, executed by Power3 and Dr. Ira Goldknopf in the amount

87

Exhibit No.	INDEX
	of $50,000 (incorporated by reference to Exhibit 26.5 to the Company’s Form SB2/A filed on October 6, 2005).
10.29	Promissory Note, dated June 13, 2005, executed June 17, 2005 between Power3 and John Fife in the amount of $396,500 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8K filed on June 22, 2005).
10.30	Promissory Note (Amended version), dated August 29, 2005, executed by Power3 and John Fife in the amended amount of $446,500 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8K filed on September 9, 2005).
10.31	Promissory Note executed by Power3 and Cordillera Fund LP in the amount of $200,000, dated September 5, 2005 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8K filed on September 9, 2005).
10.32	Promissory Note, dated October 17, 2005, between Power3 and Dr. Ira Goldknopf in the amount of $39,231 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8K filed October 19, 2005).
10.33	Promissory Note, dated September 6, 2005, between Power3 and Dr. Ira Goldknopf in the amount of $80,000 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8K filed September 9, 2005).
10.34	Promissory Noted dated November 3, 2005 between Power3 and Trinity financing in the amount of $150,000 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8K filed on November 8, 2005).
10.35(1)	Promissory Note, dated November 23, 2005, between Power3 and Dr. Ira Goldknopf in the amount of $52,000.
10.36	Promissory Note executed on December 12, 2005 between Power3 and Trinity Financing (incorporated by reference to Exhibit 10.1 to the Company’s Form 8K filed December 12, 2005)
10.37(1)	Promissory Note, dated December 14, 2005, between Power3 and Dr. Ira Goldknopf in the amount of $50,000.
14.1	Code of Ethics for Chief Executive Officer, Chief Financial Officer and Principal Accounting Officer (incorporated by reference to Exhibit 14.1 to the Company’s Form 10KSB filed September 9, 2005) .
16.1	Letter re: change in certifying accountant (incorporated by reference to Exhibit 16.1 of the Company’s Registration Statement on Form 10KSB filed September 9, 2005).
16.2	Letter from Kingery & Crouse P.A. regarding agreement with 8K statements (incorporated by reference to Exhibit 16.1 of the Company’s Registration Statement on Form 18K filed August 2, 2005).
21.1	List of subsidiaries (incorporated by reference to Exhibit 21.1 to the Company’s Form 10KSB filed September 9, 2005).
31.1(2)	Certification of Power 3 Medical Products, Inc. Chief Executive Officer, Steven B. Rash, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2(2)	Certification of Power 3 Medical Products, Inc. Chief Accounting Officer, John P. Burton, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1(2)	Certification of Power 3 Medical Products, Inc. Chief Executive Officer, Steven B. Rash, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2(2)	Certification of Power 3 Medical Products, Inc. Chief Accounting Officer, John P. Burton, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.1	Press Release dated April 18, 2005 (incorporated by reference to Exhibit 99.1 to the Company’s Form 8K filed April 18, 2005).
99.2	Press Release dated April 27, 2005 (incorporated by reference to Exhibit 99.1 to the Company’s Form 8K filed April 29, 2005).

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(1)	Filed herewith
(2)	Furnished herewith
(3)	Management contract or compensatory plan or arrangement
(4)	Confidential treatment has been requested with respect to certain portions of this exhibit. Omitted portions have been filed separately with the Securities and Exchange Commission.

Item 14. Principal Accountant Fees and Services

The following table sets forth the aggregate amount of fees billed by the Company’s independent accountants for the year ended December 31, 2005 and the year ended December 31, 2004:

	2004		2004
Audit Fees:	$	101,743	$	55,747
Audit Related Fees:	$	46,163	—
Tax Fees:	$	5,081	—
All Other Fees:	$	3,925	—
Total Fees:	$	156,912	$	55,747

The Company does not have an Audit Committee of the Board of Directors. All activities of the Company’s independent accountants are reviewed and approved prior to the engagement by the Board of Directors, who consider whether such activities could affect the independence of such accountants.

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SIGNATURES

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

	Power3 Medical Products, Inc.
	By:	/s/ Steven B. Rash
	Name:	Steven B. Rash
	Title:	Chairman and Chief Executive Officer
Date: April 17, 2006		(Principal Executive Officer)

Pursuant to the requirements of the Exchange Act, this report has been signed by the following persons in the capacities and on the dates indicated.

Signature	Title	Date
/s/ Steven B. Rash	Chairman and Chief Executive Officer	April 17, 2006
Steven B. Rash	(Principal Executive Officer)
/s/ Ira L. Goldknopf	Chief Scientific Officer and Director	April 17, 2006
Ira L. Goldknopf, Ph.D.
/s/ John P. Burton	Chief Financial Officer	April 17, 2006
John P. Burton	(Principal Financial and Accounting Officer)

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EX-10.13

Exhibit 10.13

RESEARCH AGREEMENT

THIS RESEARCH AGREEMENT (hereinafter called “Agreement”), to be effective as of the 1st day of June, 2004 (hereinafter called “Agreement Date”), is by and between Baylor College of Medicine (hereinafter called “BAYLOR”), a Texas nonprofit corporation having its principal place of business at One Baylor Plaza, Houston, Texas 77030, and Power3 Medical Products, Inc., a corporation organized under the laws of Nevada and having a principal place of business at 3400 Research Forest Drive, The Woodlands, Texas 77381, and its Affiliates (hereinafter, collectively referred to as “Power3”).

WITNESSETH:

WHEREAS, Power3 desires to collaborate with Baylor in order to obtain certain biological materials and associated experimental or clinical information, and to use such materials and information for the analysis, validation and identification of protein structure and function; and Baylor agrees to provide such materials and associated experimental or clinical information to Power3; and

WHEREAS, Baylor desires to obtain certain data derived by Power3 from such biological materials for research purposes, and Power3 agrees to provide such data for such research purposes;

NOW, THEREFORE, for and in consideration of the premises and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties hereto expressly agree as follows:

1.DEFINITIONS AS USED HEREIN

1.1The term “Affiliates” shall mean any corporation, partnership, joint venture or other entity of which the common stock or other equity ownership thereof is twenty five percent (25%) or more owned by Power3 or Baylor.

1.2The term “Biological Material” shall mean, collectively, Human Material, Animal Material and Cell Culture Material that are provided by Baylor to Power3 under this Agreement.

(i)  “Human Material” means human tissue and associated human and experimental data.

(ii)  “Animal Material” means animal tissues and associated experimental data.

(iii)  “Cell Culture Material” means cell cultures and materials derived therefrom and also associated experimental data.

1.3The term “Confidential Information” shall mean all information relating to the business of a party that is not available to the general public, including but not

1

limited to its technical and business information, products, assets, inventions, know-how, research programs, biological materials, software, trade secrets, designs, personnel, financial condition, business plans or prospects, protocols, clinical parameters or markers and other information associated with this Agreement, whether or not patentable or copyrightable, delivered or communicated to the other party.

Confidential Information includes not only written information, but information transferred orally, visually, electronically or by any other means, that is designated as being confidential. Confidential Information also includes any copies, notes or summaries prepared from the Confidential Information provided by either party.

1.4The term “Research Project” shall mean the research project described in Appendix A to be conducted pursuant to this Agreement, which specifies certain Biological Material, their quantities and delivery schedules to Power3.

1.5The term “Project Investigator” shall mean Dr. Christi Ballantyne, Baylor’s lead investigator for the Research Project.

1.6The term “Program Manager” shall mean the person designated by Power3 to serve as the primary liaison between Power3 and Baylor during the Research Term.

1.7The term “Research Term” shall mean the period of time beginning on the Agreement Date of this Agreement and ending on June 30, 2007 during which the Research Project shall be conducted. The Research Term of this Agreement shall automatically be extended for additional one-year periods unless either party gives written notice of intent to terminate at least sixty (60) days prior to the end of the initial or any extended Research Term.

2.BAYLOR’S OBLIGATIONS

2.1Baylor will use its reasonable efforts to provide Biological Material to Power3 in the quantities and with the specifications as set forth in Appendix A.

2.2Baylor agrees to provide Power3 with Human Material that satisfies all requirements of Baylor’s Institutional Review Board and all applicable laws and regulations. A copy of the approval document from Baylor’s Institutional Review Board for the Research Project, if applicable, shall be provided to Power3 by Baylor upon request. Also, Baylor agrees to provide Power3 with Animal Material that satisfies all requirements of Baylor’s Animal Use and Care Authority and all applicable laws and regulations. A copy of the approval document from Baylor’s Animal Use and Care Authority for the Research Project shall be provided to Power3 by Baylor upon request.

2.3If for any reason the Project Investigator is unable to continue in this capacity, and a successor acceptable to both Baylor and Power3 is not available, the Research Project may be terminated as provided in this Agreement.

2

2.4Baylor shall promptly notify Power3 of any safety issues concerning handling and processing of which it becomes aware associated with any Biological Material.

2.5Baylor shall promptly notify Power3 if it will be unable to provide Biological Material in the quantities, on the schedule and meeting the specifications set forth in this Agreement.

2.6Consistent with IRB requirements, Baylor shall use its best efforts to prevent the disclosure of information to Power3 that would identify specific patients. If such information is inadvertently revealed, Power3 will destroy such information and notify Baylor in writing.

2.7Baylor is entitled to provide portions of the same Biological Material to third parties.

3.POWER3’S OBLIGATIONS

3.1Power3 shall commence the performance of the Research Project promptly after the Agreement Date and shall use its reasonable efforts to perform the Research Project in accordance with the terms and conditions of this Agreement.

3.2Within sixty (60) days after the expiration or termination of the Research Term, including any extensions, Power3 will make all protein data available to Baylor.

4.CONFIDENTIALITY

4.1Because Baylor and Power3 will be cooperating with each other in this Research Project, and because each may reveal to the other certain Confidential Information, Baylor and Power3 agree to hold any Confidential Information that is obtained in connection with this Agreement or the Research Project as confidential.

4.2A party receiving Confidential Information shall use its best efforts to ensure that all Confidential Information of the disclosing party is kept confidential. Thus, for example, neither party will disclose Confidential Information to any third party without the express written consent of the disclosing party and no receiving party will use such Confidential Information except pursuant to this Agreement. A receiving party also agrees to notify the disclosing party immediately upon discovery of any unauthorized use or disclosure of Confidential Information and, in every reasonable way, to cooperate and to assist the disclosing party to regain possession of the Confidential Information and to prevent its further unauthorized use.

4.3Each party’s confidentiality obligations and the limitations upon the right to use the Confidential Information shall not apply to the extent that the receiving party can demonstrate that the same:  (a) was already known by the receiving party prior to the

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disclosure by the disclosing party; (b) becomes patented, published or otherwise part of the public domain through no fault or omission of the receiving party; (c) is disclosed to the receiving party by a third party that has the right to make such disclosure; (d) is independently developed by the receiving party without any use of the Confidential Information and otherwise in a manner not inconsistent with this Agreement; (e) is authorized to be disclosed by the disclosing party in writing; or (f) is required to be disclosed by applicable law, rule or regulation, by order of governmental or judicial authority; provided that the receiving party shall use reasonable efforts to obtain confidential treatment of such information and notifies the disclosing party prior to making such disclosure.

5.PUBLICATION RIGHTS

5.1Power3 acknowledges Baylor’s strong institutional policy favoring the retention of publication rights and dependence upon publication as an essential means of intellectual exchange. Baylor acknowledges that Power3 has an interest in publishing the results of the Research project, as well as protecting its Confidential Information.

5.2Subject to the provisions of Article 4 and Section 5.3, the Project Investigator and Program Manager shall cooperate to publish the results of and disseminate information pertaining to research conducted under the Research Project to the extent that Confidential Information of Power3 is not disclosed. All such published data must be associated with particular research studies conducted by Baylor and Power3 pursuant to the Research Project.

5.3Baylor and Power3 agree to submit any proposed publication or presentation of results from the Research Project to Power3’s Program Manager (or other representative designated by Power3 for this purpose) or to the Project Investigator for review within a reasonable time prior to publication or presentation. For purposes of clarity, a reasonable time prior to publication or presentation shall be, by way of example:  (i) for manuscripts written by the Project Investigator or Program Manager at least thirty (30) days prior to submission of such manuscripts for publication; (ii) for written abstracts prepared by the Project Investigator or Program Manager at least fourteen (14) days prior to submission of such abstracts for publication; and (iii) for hard copies of slides and other audiovisual aids at least seven (7) days prior to presentation of such materials at scientific meetings open to non-Baylor and non-Power3 personnel.

5.4Power3 shall advise Baylor in writing if any Confidential Information or patentable information contained in any proposed publication or presentation materials should not be published. Baylor agrees to delete Confidential Information as requested by Power3. Baylor agrees to refrain from publishing any patentable information for a period not to exceed sixty (60) days upon written request, to enable Power3 to appropriately coordinate with Baylor to seek patent or other applicable intellectual property rights.

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6.INVENTION RIGHTS

6.1Baylor shall have sole and exclusive ownership rights to any invention of a product, device, process, or method, whether patentable or unpatentable developed solely by Baylor employees (a “Baylor Invention”) arising under this Agreement subject to the right of Power3 to take an exclusive, or non-exclusive, fee-bearing, royalty-bearing license to the Invention, as set forth in Section 6.2 below. Likewise, Power3 shall have sole and exclusive ownership rights to any invention of a product, device, process, or method, whether patentable or unpatentable developed solely by Power3 employees (a “Power3 Invention”) arising under this Agreement subject to the right of Baylor to take a non-exclusive, non-fee-bearing, non-royalty-bearing license to make and use the Invention for non-commercial research, patient care, teaching and other educationally related purposes. All right, title and interest to inventions made jointly by Baylor employees with one or more employees of Power3 shall belong jointly to Baylor and Power3 (a “Joint Invention”), and Baylor’s interest shall be disposed of in accordance with Section 6.2 of this agreement. Inventorship of inventions shall be determined in accordance with U.S. patent law or by mutual agreement if the invention is not patentable; provided however, that the Parties agree that Inventions either solely or jointly-owned by Baylor shall be commercially exploited by the Parties solely in accordance with Section 6.2 of this Agreement.

6.2Baylor grants to Power3 the right of first review with respect to any Baylor Invention, or any ownership rights that Baylor may have in a Joint Invention discovered under this Agreement, under the following the terms:

(a)Power3 shall comply with the terms of non-disclosure, as set forth in Article 4 of this Agreement.

(b)Baylor shall notify Power3, in writing, of the Invention and provide Power3 with sufficient detail to evaluate the Invention.

(c)Power3 shall have sixty (60) days after such notification to evaluate the Invention and notify Baylor, in writing, that Power3 desires to license the Invention.

(d)Upon notification by Power3 of its desire to acquire rights to the Invention, Power3 and Baylor shall negotiate, in good faith, for a period not to exceed sixty (60) days, unless extended by mutual written agreement of Baylor and Power3, in an effort to arrive at terms and conditions satisfactory to Baylor and Power3 for the license by Power3 of the Invention (a “Baylor License Agreement”).

(e)If Baylor and Power3 do not reach such agreement within said sixty-day (60-day) period, or if Power3 fails to notify Baylor within said forty-five-day (45-day) period, or if Power3 decides not to acquire a Baylor License Agreement to the Baylor rights in a Baylor Invention or a Joint Invention, Baylor shall be free to deal with Baylor’s rights in the Baylor Invention or Joint Invention as Baylor in its discretion may decide, and Baylor shall have no further obligations to Power3 with respect to the Baylor rights in an Invention.

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6.3With respect to Baylor Inventions or Baylor’s rights in a Joint Invention that Power3 has elected to take an exclusive, or non-exclusive, royalty-bearing license, as provided in Sections 6.1 and 6.2, Baylor shall be responsible for the preparation, filing, and prosecution of all patent applications covering any such Baylor Invention or Joint Invention arising out of the Research Project. Power3 shall be responsible for all costs and fees associated therewith from and after the Agreement Date of such license and shall reimburse Baylor for such costs accrued prior to the Agreement Date of such license. Baylor shall seek and consider the advice and counsel of Power3 in such filing / prosecution of patent applications. Power3 and its employees shall reasonably assist Baylor in the preparation, filing, and prosecution of such patent applications.

6.4With respect to Power3 Inventions, Power3 shall be responsible for the preparation, filing and prosecution of all patent applications covering any such Power3 Invention. Power3 will notify Baylor of such Power3 Inventions and will grant Baylor a non-exclusive, non-fee-bearing, non-royalty-bearing license to make and use the Invention for non-commercial research, patient care, teaching and other educationally related purposes.

7.WARRANTIES

7.1The parties represent and warrant that each has the full authority to enter into this Agreement and to disclose any Confidential Information that is disclosed to the other party. As of the Agreement Date, to the best of their knowledge, neither is a party to any agreement or other instrument and has no by-law or charter provision and knows of no law or regulation that would prohibit it from entering into this Agreement.

7.2Baylor warrants that all Human Material provided to Power3 under this Agreement will be obtained in accordance with all applicable rules and regulations, including with patient informed consent, as stipulated by Baylor’s Institutional Review Board, and allowing for the use by Power3 of such Human Material as described in this Agreement. Baylor acknowledges that Power3 endorses the use of ethically approved protocols that follow the guidelines recommended by the National Bioethics Advisory Committee, the American College of Pathologists, and the American Society of Human Genetics for the donation and retention of samples and data for use in biomedical research.

7.3Baylor warrants that all Animal Material provided to Power3 under this Agreement will be obtained in accordance with all applicable rules and regulations, including all requirements of Baylor Animal Safety and Use Authority.

7.4DISCLAIMER OF WARRANTY. WITH THE EXCEPTION OF SECTIONS 7.1- 7.3, BAYLOR MAKES NO WARRANTIES OR REPRESENTATIONS, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, WARRANTIES OF FITNESS OR MERCHANTABILITY, REGARDING OR WITH RESPECT TO THE BIOLOGICAL MATERIALS OR INVENTIONS AND BAYLOR MAKES NO WARRANTIES OR

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REPRESENTATIONS, EXPRESS OR IMPLIED, OF THE PATENTABILITY OF THE BIOLOGICAL MATERIALS OR INVENTIONS OR OF THE ENFORCEABILITY OF ANY PATENTS ISSUING THEREUPON, IF ANY, OR THAT THE BIOLOGICAL MATERIALS OR INVENTIONS ARE OR SHALL BE FREE FROM INFRINGEMENT OF ANY PATENT OR OTHER RIGHTS OF THIRD PARTIES.

8.INDEMNIFICATION

8.1Power3 agrees to defend, indemnify and hold harmless Baylor, the Project Investigator, Baylor’s trustees, officers, agents, staff, employees, students, and faculty members, and its affiliated hospitals (all such parties are hereinafter referred to collectively as the “Indemnified Parties”) from and against any and all liability, claims, lawsuits, losses, demands, damages, costs, and expenses (including reasonable attorney’s fees and court costs), arising directly or indirectly out of the Research Project or the design, manufacture, sale or use of any embodiment or manifestation of the Research Project regardless of whether any and all such liability, claims, lawsuits, losses, demands, damages, costs, and expenses (including attorney’s fees and court costs) arise in whole or in part from the negligence of any of the Indemnified Parties. Notwithstanding the foregoing, Power3 will not be responsible for any liability, claims, lawsuits, losses, demands, damages, costs, and expenses (including attorney’s fees and court costs) which arise solely from:

(i)the gross negligence or intentional misconduct of Baylor or the Project Investigator; and

(ii)actions by Baylor or the Project Investigator in violation of applicable laws or regulations.

8.2Power3 agrees to provide a diligent defense against any and all liability, claims, lawsuits, losses, demands, damages, costs, and expenses (including attorney’s fees and court costs), brought against the Indemnified Parties with respect to the subject of the indemnity contained in Section 8.1, whether such claims or actions are rightfully or wrongfully brought or filed.

8.3Any Indemnified Party wishing to be indemnified as provided in Sections 8.1 and 8.2 shall:

(a)promptly after receipt of notice of any and all liability, claims, lawsuits losses, demands, damages, costs, and expenses, or after the commencement of any action, suit, or proceeding giving rise to the right of indemnification, notify Power3, in writing, of said liability, claims, lawsuits, losses, demands, damages, costs, and expenses and send to Power3 a copy of all papers served on the Indemnified Party; the Indemnified Party’s failure to notify Power3 will not relieve Power3 from any liability to the Indemnified Party;

(b)permit Power3 to retain counsel of its choosing to represent the Indemnified Party (but in the event that Power3 does not select counsel to represent the Indemnified Party

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within ten (10) days, the Indemnified Party may select its own counsel, the fees and all costs of which counsel will be borne by Power3); and

(c)allow Power3 to retain exclusive control of any such liability, claims, lawsuits, losses, demands, damages, costs, and expenses, including the right to make any settlement, except that Power3 will not have the right to make any settlement or take any other action which would be deemed to confess wrongdoing by any of the Indemnified Parties or could reasonably be expected to have a negative effect on the reputation of one of the Indemnified Parties, without the prior written consent of Baylor and the Indemnified Party involved.

9.INSURANCE

9.1During the term of this Agreement, Power3 shall maintain in full force and effect a general liability insurance policy with limits of not less than $2,000,000.

9.2Power3 agrees to obtain and maintain a products liability insurance policy that is acceptable to Baylor, said policy to be in effect before the commercialization of any product under a Baylor License Agreement.

9.3Such policies shall name Baylor, the Project Investigator, Baylor’s trustees, officers, agents, staff, employees, students, and faculty members, and its affiliated hospitals as additional insureds. Such coverage(s) shall be purchased from a carrier or carriers deemed acceptable to Baylor which shall provide certificates evidencing the coverage(s) maintained and specifying that Baylor will be given no less than sixty (60) days prior written notice of any change in or cancellation of such coverage(s).

10.TERMINATION

10.1The Research Term shall automatically renew at the end of its initial term as indicated in Section 1.7 and shall expire at the end of any renewal period that is not extended. The Research Project shall expire simultaneously.

10.2This Agreement shall terminate upon the expiration of the Research Term, including any extensions.

10.3This Agreement may be terminated at the option of the notifying party should any one or more of the following events occur:  (a) the notifying party provides the other party with sixty (60) days advance written notice; (b) either party materially breaches this Agreement, and the non-breaching party provides the other with thirty (30) days advance written notice of termination and such breach is not remedied within such thirty (30) day period.

10.4Termination of this Agreement shall not affect any accrued rights and obligations of the parties.

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11.CONFLICT OF INTEREST

Baylor institutional policy states that persons engaged in project research may not purchase or sell shares in a company which sponsors such research. Faculty members of Baylor are further required to disclose to the College under applicable policies certain consulting, stock ownership, or other relationships with a company which sponsors such research. By signing below, Project Investigator agrees to comply with Baylor institutional policy and requirements governing conflict of interest.

12.INDEPENDENT CONTRACTORS

Power3 and Baylor shall at all time act as independent parties and nothing contained in this Agreement shall be construed or implied to create an agency or partnership. Neither party shall have the authority to contract or incur expenses on behalf of the other except as may be expressly authorized by collateral agreements. The Project Investigator and members of the Project Team shall not be deemed to be employees of Power3.

13.OTHER EMPLOYMENT

13.1Baylor warrants that the Project Investigator is permitted to enter into this Agreement and that the terms and conditions hereof are consistent with the Project Investigator’s obligations to Baylor.

13.2Dr. Christi Ballantyne’s work as Project Investigator is essential to the work to be performed under this Agreement. Other investigators may not be substituted nor can substantial changes in the level of effort of the Project Investigator be made without the prior written approval of Power3.

14.USE OF INSTITUTION NAME/PUBLIC STATEMENTS

14.1Power3 agrees that it will not at any time during or following termination of this Agreement use the name of Baylor or any other names, insignia, symbol(s), or logotypes associated with Baylor or any variant or variants thereof or the names of the Project Investigator or any other Baylor faculty member or employee orally or in any literature, advertising, or other materials without the prior written consent of Baylor, which consent may be withheld at Baylor’s sole discretion. Notwithstanding the foregoing, Baylor acknowledges Power3’s intention to distribute periodic informational releases and announcements to the news media regarding the progress of the Research Project. Accordingly, Baylor agrees that Power3 may identify the existence of the Research Project and its general nature and progress, and the names of the Project Investigators.

14.2Baylor agrees to make no public presentations about the Research Project outside of appropriate scientific meetings, to issue no news releases about the Research Project, and not to use Power3’s name, insignia, (symbol(s), or logotypes in any form of public information without the written permission of Power3; provided that Baylor may 

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identify the existence of the Research Project and its general nature and progress and the names of Power3 employees involved in the Research Project.

15.CHOICE OF LAW

Any disputes or claims arising under this Agreement shall be governed by the laws of the State of Texas, Harris County, City of Houston as the site for the performance of the Research Project.

16.SEVERABILITY

If any one or more of the provisions of this Agreement shall be held to be invalid, illegal or unenforceable, the validity, legality or enforceability of the remaining provisions of this Agreement shall not in any way be affected or impaired thereby.

17.WAIVER

The failure of any party hereto to insist upon strict performance of any provision of this Agreement or to exercise any right hereunder will not constitute a waiver of that provision or right.

18.NOTICES

All notices, reports or other communication pursuant to this Agreement shall be sent to such party via (i) United States Postal Service postage prepaid, (ii) overnight courier, or (iii) facsimile transmission, addressed to it at its address set forth below or as it shall designate by written notice given to the other party. Notice shall be sufficiently made, or given and received (a) on the date of mailing or (b) when a facsimile printer reflects transmission.

If to Power3:

Steven Rash

Chief Executive Officer

Power3 Medical Products, Inc.

3400 Research Forest Drive

The Woodlands, TX  77381

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If to Baylor with respect to all non-technical matters:

Barbara Cochran

Director of Sponsored Programs

Office of Research

Baylor College of Medicine

One Baylor Plaza, BCM310-600D

Houston, Texas 77030-3498

Facsimile No. 713-798-6990

If to Baylor with respect to technical questions:

Dr. Christi Ballantyne

Baylor College of Medicine

6501 Fannin Street

Houston, TX  77030

19.ASSIGNMENT

This Agreement may be assigned by Power3 to any parent, subsidiary, or affiliate of Power3 or to any successor in interest only by reason of any merger, acquisition, partnership, or license agreement only with Baylor’s prior written approval which shall not be unreasonably withheld. Any assignment or attempt to assign, or any delegation or attempt to delegate, in the absence of such prior written consent, shall be void and without effect. This Agreement may not be assigned by Baylor.

20.ENTIRETY

This Agreement represents the entire agreement of the parties and it expressly supersedes all previous written and oral communications between the parties. No amendment, alteration, or modification of this Agreement or any exhibits attached hereto shall be valid unless executed in writing by authorized signatories of both parties.

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IN WITNESS WHEREOF, the parties hereto have executed and delivered this Agreement in multiple originals by their duly authorized officers and representatives on the respective dates shown below, but effective as of the Agreement Date.

POWER3 MEDICAL PRODUCTS, INC.BAYLOR COLLEGE OF MEDICINE

By:	/s/:Ira L Goldknopf PhD	7/23/04	By:	/s/: B. Cochran	8/17/04
	Signature	Date		Signature	Date
	Ira L. Goldknopf, Ph.D.			Barbara Cochran
	Chief Scientific Officer			Director, Sponsored Programs

I, Dr. Christie M. Ballantyne, named as Project Investigator in this Agreement, acknowledge that I have read this Agreement in its entirety and that I shall use reasonable efforts to uphold my individual obligations and responsibilities set forth herein:

By:	/s/: Christie M. Ballantyne		By:
	Signature	Date		Signature	Date
	Project Investigator			Co-Project Investigator
	Christie M. Ballantyne
	Typed Name			Typed Name
	Professor of Medicine
	Title			Title

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Appendix A

Project Research

The purpose of this research is to discover biomarkers in serum and plasma that are of particular utility in diagnosis and drug targeting for metabolic syndrome and associated disorders including diabetes, cardiovascular disease, hypertension, and stroke. Included are discoveries of previously unknown utilities for known and unknown proteins.

Going forward, the project will entail:

1.Screening metabolic syndrome patient and control samples, including and disease controls, provided by Baylor, using2D gel electrophoresis (Power3) and immunochemical techniques, and ELISA and Immunohistochemistry (Baylor), the application of statistical methods and disease severity correlations (Baylor), as well as 1D and 2D Westerns (Power3), for biomarker validation.

2.Expanding the study at Power3 to other cardiovascular and metabolic related diseases, utilizing samples provided by Baylor.

3.The development of diagnostic tests and drug targets using the biomarkers and utilities discovered in 1 and 2 by Power3.

. The research includes consultation between Dr. Christie Ballantyne and Dr. Ira L. Goldknopf on study design and results interpretation as well as the extension of the study to clinical trials to be conducted by Power3 using patients recruited by Baylor.

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EX-10.26

Exhibit 10.26

NOTE (“the Note”)

Power3 Medical Products, Inc., a New York corporation (the “Company”) for value received hereby promises to pay Michael J. Rosinski (“Payee”) on or before April 30, 2005, (“Maturity Date”); the principal amount of thirty five thousand dollars ($35,000.00) (“Principal”). Payment of the Principal amount shall be paid by the Company from first available funds from any financing the Company may undertake or any other source of funds which may become available to the Company.

Should the Principal not be repaid as of April 30, 2005 interest of 6 % per year on any unpaid Principal amount will be earned by the Payee until such time as all of the Principal amount is repaid. This Note may be repaid at any time prior to April 30, 2004 without interest or penalty.

Notices, payments, requests, and other communications to the respective parties hereunder shall be in writing, and shall be deemed received when delivered personally, by facsimile, or first class certified mail, return receipt requested and postage prepaid, as follows:

If to the lender:

Michael J. Rosinski

3 West Windward Cove

The Woodlands, Texas 77381

If to the Company:

Power3 Medical Products, Inc.

3400 Research Forest Parkway

Woodlands, Texas 77381

This Note is governed by and is to be construed in accordance with the law of the State of Texas.

Payee	Power3 Medical Products, Inc.
/s/: Michael J. Roskinski	/s/: Steven B. Rash
Michael J. Rosinski	By: Steven B. Rash
	Its: Chairman and CEO

EX-10.35

Exhibit 10.35

NOTE (“the Note”)

Power3 Medical Products, Inc., a New York corporation (the “Company”) for value received hereby promises to pay Ira L. Goldknopf (“Payee”) on or before May 23, 2006, (“Maturity Date”); the principal amount of fifty-two thousand dollars ($52,000.00) (“Principal”).

Should the Principal not be repaid as of May 23, 2006 interest of 6 % per year on any unpaid Principal amount will be earned by the Payee until such time as all of the Principal amount is repaid. This Note may be repaid at any time prior to May 23, 2006 without interest or penalty.

In no event shall interest contracted for, charged or received hereunder, plus any other charges in connection herewith which constitute interest, exceed the maximum interest permitted by applicable law. The amounts of such interest or other charges previously paid to the holder of the Note, if any, in excess of the amounts permitted by applicable law shall be applied by the holder of the Note to reduce the principal of the indebtedness evidenced by the Note, or, at the option of the holder of the Note, be refunded. To the extent permitted by applicable law, determination of the legal maximum amount of interest shall at all times be made by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the loan and indebtedness, all interest at any time contracted for, charged or received from the Maker hereof in connection with the loan and indebtedness evidenced hereby, so that the actual rate of interest on account of such indebtedness is uniform throughout the term hereof.

Notices, payments, requests, and other communications to the respective parties hereunder shall be in writing, and shall be deemed received when delivered personally, by facsimile, or first class certified mail, return receipt requested and postage prepaid, as follows:

If to the lender:

Ira L. Goldknopf

3400 Research Forest Parkway

Woodlands, Texas 77381

If to the Company:

Power3 Medical Products, Inc.

3400 Research Forest Parkway

Woodlands, Texas 77381

This Note is governed by and is to be construed in accordance with the law of the State of Texas.

Payee	Power3 Medical Products, Inc.	Date
/s/: Ira L Goldknopf	/s/: John P. Burton	November 23, 2005
Ira L. Goldknopf	By: John P. Burton
	Its: CFO

EX-10.37

Exhibit 10.37

NOTE (“the Note”)

Power3 Medical Products, Inc., a New York corporation (the “Company”) for value received hereby promises to pay Ira L. Goldknopf (“Payee”) on or before June 14, 2006, (“Maturity Date”); the principal amount of fifty thousand dollars ($50,000.00) (“Principal”).

Should the Principal not be repaid as of June 14, 2006 interest of 6 % per year on any unpaid Principal amount will be earned by the Payee until such time as all of the Principal amount is repaid. This Note may be repaid at any time prior to June 14, 2006 without interest or penalty.

In no event shall interest contracted for, charged or received hereunder, plus any other charges in connection herewith which constitute interest, exceed the maximum interest permitted by applicable law. The amounts of such interest or other charges previously paid to the holder of the Note, if any, in excess of the amounts permitted by applicable law shall be applied by the holder of the Note to reduce the principal of the indebtedness evidenced by the Note, or, at the option of the holder of the Note, be refunded. To the extent permitted by applicable law, determination of the legal maximum amount of interest shall at all times be made by amortizing, prorating, allocating and spreading in equal parts during the period of the full stated term of the loan and indebtedness, all interest at any time contracted for, charged or received from the Maker hereof in connection with the loan and indebtedness evidenced hereby, so that the actual rate of interest on account of such indebtedness is uniform throughout the term hereof.

Notices, payments, requests, and other communications to the respective parties hereunder shall be in writing, and shall be deemed received when delivered personally, by facsimile, or first class certified mail, return receipt requested and postage prepaid, as follows:

If to the lender:

Ira L. Goldknopf

3400 Research Forest Parkway

Woodlands, Texas 77381

If to the Company:

Power3 Medical Products, Inc.

3400 Research Forest Parkway

Woodlands, Texas 77381

This Note is governed by and is to be construed in accordance with the law of the State of Texas.

Payee	Power3 Medical Products, Inc.	Date
/s/ Ira L Goldknopf	/s/ John P. Burton	December 14, 2005
Ira L. Goldknopf	By: John P. Burton
	Its: CFO

EX-31.1

Exhibit 31.1

CERTIFICATION

I, Steven B. Rash, certify that:

1.I have reviewed this report on Form 10-KSB for the year ended December 31, 2005 of Power3 Medical Products, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for the periods presented in this report;

4.The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c.Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize, and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

	By:	/s/ Steven B. Rash
	Name:	Steven B. Rash, Chariman and CEO
Date: April 17, 2006	(Principal Executive Officer)

EX-31.2

Exhibit 31.2

CERTIFICATION

I, John P. Burton, certify that:

1.I have reviewed this report on Form 10-KSB for the year ended December 31, 2005 of Power3 Medical Products, Inc.;

2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for the periods presented in this report;

4.The small business issuer’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have:

a.Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b.Evaluated the effectiveness of the small business issuer’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

c.Disclosed in this report any change in the small business issuer’s internal control over financial reporting that occurred during the small business issuer’s most recent fiscal quarter (the small business issuer’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer’s internal control over financial reporting; and

5.The small business issuer’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer’s auditors and audit committee of the small business issuer’s board of directors (or persons performing the equivalent functions):

a.All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer’s ability to record, process, summarize, and report financial information; and

b.Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer’s internal control over financial reporting.

	By:	/s/ John P. Burton
	Name:	John P. Burton Chief Financial Officer (Principal
Date: April 17, 2006	Financial and Accounting Officer)

EX-32.1

Exhibit 32.1

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Power3 Medical Products, Inc. (the “Company”) on Form 10-KSB for the year ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Steven B. Rash, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	By:	/s/ Steven B. Rash
	Name:	Steven B. Rash
	Title:	Chief Executive Officer (Principal Executive Officer)
Date: April 17, 2006		Power3 Medical Products, Inc.

EX-32.2

Exhibit 32.2

CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of Power3 Medical Products, Inc. (the “Company”) on Form 10-KSB for the year ending December 31, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, John P. Burton, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

	By:	/s/ John P. Burton
	Name:	John P. Burton Chief Financial Officer
Date: April 17, 2006	(Principal Financial and Accounting Officer)