U.S. Securities and Exchange Commission

Washington, D.C. 20549

Form 10-QSB

(Mark One)

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

For the quarterly period ended September 30, 2006

[ ] 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.

(Exact name of small business issuer as specified 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

Woodlands, Texas 77381

(Address of principal executive offices)

(281) 466-1600

(Issuer’s telephone number)

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  [   ] No  [X]

As of September 30, 2006, there were 73,704,288 shares of voting common stock of the registrant issued and outstanding.

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

Transitional Small Business Disclosure Format (check one): Yes [ ] No [X]

INDEX

PART I. FINANCIAL INFORMATION	3
Item1. Financial Statements	3
Condensed Balance Sheet (unaudited)	3
Condensed Statements of Operations (unaudited)	5
Condensed Statement of Cash Flows (unaudited)	6
Notes to Condensed Financial Statements (unaudited)	8
Item 1. Organization, Principal Activities and Basis of Presentation	8
Item 2. Management's Discussion and Analysis or Plan of Operation	22
Item 3. Controls and Procedures	30
Part II. OTHER INFORMATION	32
Item 1. Legal Proceedings	32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	33
Item 3. Defaults upon Senior Securities	33
Item 4. Submission of Matters to a Vote of Security Holders	34
Item 5. Other Information	34
Item 6. Exhibits	34
SIGNATURES	36

I. FINANCIAL INFORMATION

Item 1. Financial Statements

POWER3 MEDICAL PRODUCTS, INC.

(A Development Stage Enterprise)

CONDENSED BALANCE SHEET AS OF September 30, 2006

(unaudited)

ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	59,045
All Other Current Assets		34,280
Total Current Assets		93,325
FIXED ASSETS
Furniture, Fixtures and Equipment		51,688
(Net of accumulated depreciation of $85,645)
Intellectual Property		179,786
Total Fixed Assets		231,474
OTHER ASSETS
Goodwill		13,371,776
Deferred Finance Costs		267,416
Deposits		5,900
Total Other Assets		13,645,092
TOTAL ASSETS	$	13,969,891
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts Payable	$	945,033
Notes Payable		2,350,884
Convertible Debentures-in default		169,173
Other Current Liabilities		1,205,251
Derivative Liabilities		1,762,969
TOTAL LIABILITIES	$	6,433,310
STOCKHOLDER'S EQUITY
Common Stock-$0.001 par value:150,000,000 shares authorized;		73,704
73,704,288 shares issued and outstanding
Additional Paid-In Capital		59,092,579
Deferred Compensation Expense		(517,014	)
Deficit accumulated before entering development stage		(11,681,500	)
Deficit accumulated during development stage		(39,431,188	)
Total Stockholder’s Equity		7,536,581
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY	$	13,969,891

See notes to the condensed financial statements.

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POWER3 MEDICAL PRODUCTS, INC.
(A Development Stage Enterprise)
BALANCE SHEETS
AS OF DECEMBER 31, 2005
	2005
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	1,399
Accounts receivable
Prepaid expenses and other current assets		21,092
Total current assets		22,491
OTHER ASSETS
Goodwill		13,371,776
Deferred finance costs, net		290,027
Intangible assets, net		179,786
Furniture, fixtures and equipment, net		70,751
Deposits		25,900
TOTAL ASSETS	$	13,960,730
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	1,003,331
Notes payable—in default		1,285,739
Convertible debentures—in default		75,279
Other current liabilities		916,857
Derivative liabilities		1,454,936
Total current liabilities		4,736,142
STOCKHOLDERS’ EQUITY
Common Stock-$0.001 par value:150,000,000 shares authorized;
65,215,121 shares issued and outstanding		65,215
Additional paid-in capital		57,773,506
Deferred compensation		(4,802,621	)
Loss accumulated before entering development stage		(11,681,500	)
Loss accumulated during the development stage		(32,130,011	)
Total stockholders’ equity		9,224,588
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	13,960,730

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POWER3 MEDICAL PRODUCTS, INC.
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS
(unaudited)
	For the three month period ended September 30, 2006			For the three month period ended September 30, 2005			For the nine month period ended September 30, 2006			For the nine month period ended September 30, 2005			Development Stage from May 18, 2004 to September 30, 2006
				(as restated)						(as restated)
REVENUES:
Sales	$	125,000						225,000						225,000
Other revenue														4,000
Total revenue	$	125,000						225,000						229,000
COST OF GOODS SOLD:
Production costs
Total cost of goods sold	$
GROSS PROFIT	$	125,000						225,000						229,000
OPERATING EXPENSES:	$
Stock based compensation		64,711			3,068,581			4,810,872			9,721,631			25,214,729
Employee compensation and benefits		254,249			332,625			983,796			948,353			3,043,005
Professional and consulting fees		10,145			7,329			367,017			379,710			8,102,007
Occupancy and equipment		32,691			24,278			92,902			95,405			299,579
Travel and entertainment		18,116			16,845			55,014			65,255			210,638
Other selling, general and administrative expenses		15,634			76,667			82,268			496,791			625,193
Total operating expenses		395,546			3,526,325			6,391,869			11,707,145			37,495,151
LOSS FROM OPERATIONS	$	(270,546	)		(3,526,325	)		(6,166,869	)		(11,707,145	)		(37,266,151	)
OTHER INCOME AND (EXPENSE):	$
Derivative income (expense)		128,712			209,087			(16,131	)		1,678,971			3,574,101
Interest income		127						127			259			1,601
Other income (expense)		(1,800	)					(1,800	)		(420,000	)		(716,877	)
Interest (expense)		(192,679	)		(139,426	)		(1,017,637	)		(172,702	)		(1,642,922	)
Total other income(expense)	$	(65,640	)		69,661			(1,035,477	)		1,086,528			1,215,903
NET INCOME (LOSS)		(336,186	)		(3,456,664	)		(7,202,311	)		(10,620,617	)		(36,050,248	)
NET LOSS PER SHARE		(.00	)		(.05	)		(.10	)		(.16	)		(.59	)
Weighted average number of shares outstanding		71,965,399			65,298,967			69,928,320			65,329,680			60,720,621

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POWER 3 MEDICAL PRODUCTS, INC

(A Development Stage Enterprise)

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

							Development
	For the Nine			For the Nine			Stage Results
	Months Ended			Months Ended			May 18, 2004 -
	September 30, 2006			September 30, 2005			September 30, 2006
Operating Activities:					(as restated)
Net Loss		(7,202,346	)		(10,620,617	)		(36,050,248	)
Adjustment to reconcile net loss to net cash
used in operating activities:
Stock based services and compensation		4,810,872			9,721,631			25,214,729
Stock issued to retire preferred stock and debt								4,236
Derivative (income) expense		16,131			(1,678,971	)		(3,574,101	)
Depreciation and amortization		20,463			29,106			85,645
Amortization of debt discount and finance costs		308,080						430,254
Other					420,000			4,576,020
Decrease(increase) in deposits		20,000						(5,900	)
Decrease(increase) in prepaids
Increase (decrease) in Deferred finance costs		(22,611	)		54,293			267,416
Increase(decrease) in accounts payable and accrued liabilities and other		61,077			(249,885	)		2,040,476
Net cash used in Operating Activities		(1,988,334	)		(2,324,443	)		(7,011,473	)
INVESTING ACTIVITIES
Capital expenditures, net					7,172			8,482
Increase (decrease) in other assets		13,188			11,158			699,300
Net cash used in Investing Activities		13,188			18,330			707,782
FINANCING ACTIVITIES
Proceeds from CD, warrants and investment rights					338,000			1,197,041
Adjustment related to derivatives		401,928			1,278,971			1,762,969
Proceeds from borrowings under notes payable (net)		1,125,510			567,150			2,330,883
Proceeds from sale of common stock, net		505,354			-			1,071,746
Net cash provided by financing activities		2,032,792			2,184,121			6,362,639
Net increase (decrease) in cash and cash equivalents		57,646			(121,992	)		58,948
Cash and cash equivalents, beginning of period		1,399			158,301			97
Cash and cash equivalents, end of period		59,045			36,309			59,045

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POWER3 MEDICAL PRODUCTS, INC.

(A Development Stage Enterprise)

STATEMENT OF CASH FLOWS (cont.)

(unaudited)

						Cumulative during
	For the Nine months		For the Nine months			Development Stage
	ended September 30,		ended September 30,			May 18, 2004 to
	2006		2005			September 30, 2006
Cash paid for:
Interest						$	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	$	197,000				$	197,000
Exchange of convertible preferred stock for common stock						$	3,380,975
Conversion of notes payable to advances from stockholders
Common stock issued for services (at market, date of agreement or contract):
For consulting contracts and services	$	375,324				$	10,688,099
For asset acquisition (15,000,000 shares)						$	13,500,000
For compensation contracts				($ 385,000	)	$	25,066,500
Conversion of preferred stock to common stock
Conversion of other liabilities to stockholder advances
Retirement of common stock						$	882,000
Issuance of warrants in connection with services
Issuance of warrants in connection with convertible debentures

See notes to the condensed financial statements.

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POWER 3 MEDICAL PRODUCTS, INC

(A Development Stage Enterprise)

NOTES TO CONDENSED FINANCIAL STATEMENTS

(unaudited)

Note 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.

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, now known as Industrial Enterprises of America, 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.

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.

Note 2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company’s 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 accounting treatment 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 reacquires the ability to share settle the instruments or physically settles the instruments through other means.

-8-

Financial Instruments and Concentrations of Credit Risk

The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, 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. As of September 30, 2006, the convertible debentures have a face value and carrying value of $169,173 and $1,400,000, respectively and the Trinity notes payable have a face value and carrying value of $163,485 and $150,000, respectively

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, as well as certain promissory notes that have warrants associated with the notes. (See Note 8. 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.

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 7) 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 September 30, 2006, certain lab equipment having a net book value of approximately $57,000 serves as security for certain liabilities.

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Debt Discounts and Deferred Finance Costs

Debt discounts and deferred finance costs are being amortized over the maximum term of the convertible debentures of three years using the effective interest method.

Long-Lived Assets

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 September 30, 2006, and for the years ended December 31, 2005 and 2004. 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 year end 2005 and at September 30, 2006.

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.

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

During the 3rd quarter of 2006, the Company amortized $5,359 to stock-based compensation for employees who had been issued stock and $59,352 for warrants issued in 2004 and 2005.

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 September 30, 2006.

Research and Development

Research and development costs, netted to ($34) for the quarter ended September 30, 2006, which represented corrections to previously-expensed research and development costs .

-10-

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.

Advertising Costs

Advertising costs are expenses as incurred. No advertising expenses were incurred during the quarter ended September 30, 2006.

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 2005 and through the end of the quarter ending September 30, 2006..

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 and 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.

Note 4. 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-dilutive:

· 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.

-11-

· 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 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 the quarter ending September 30, 2006, the Company issued 2,833,333 warrants to individuals who had also purchased common stock during the quarter. No stock-based compensation has been recognized as of September 30^th because the warrants were issued at the very end of September, the last month of the quarter.

During each of the first three quarters of 2006, $59,352 was amortized to stock compensation expense for warrants, for a total of $178,056 during the first nine months of 2006.

Note 5. 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 2005 tax return, the Company has net operating loss carryforwards for income tax purposes of approximately $13,611,561 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.

Note 6. RELATED PARTY TRANSACTIONS

During the first three quarters of 2006, holders of several notes payable from the Company began selling shares which had been personally pledged to them by officers of the company, as consideration for said notes and the note holders used the proceeds received from selling these personally pledged shares against the interest and notes payable due on notes they held. In order to recognize this reduction in outstanding balance due to the holders of these notes payable, the Company has converted $496,701 from various notes payable to Due to Officer(R), Steve Rash, and supported by notes payable now due to the officer, representing the total amount of proceeds received from the sales of his pledged shares through September 30, 2006; and $678,887 to Due to Officer (G) representing the total amount of proceeds received through September 30, 2006, by note holders from selling common shares pledged by Dr. Ira Goldknopf.

In addition, as part of the above totals, during the quarter ended September 30, 2006, amounts due to Rash and Goldknopf, previously shown in the Company’s balance sheet as Officer Advances have been reclassed in the accounts styled Due to Officer(R) and Due to Officer(G) respectively.

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Note 7.OTHER COMMITMENTS AND CONTINGENCIES

Operating Lease for Office and Laboratory Space

In August 2004, the Company entered into an office and laboratory space 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, was $21,843 for the quarter ended September 30, 2006.

Other Leases

In June, 2004, the Company entered 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 $554 on this lease during the quarter ended September 30, 2006.

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 $1,032 on this lease during the quarter ended September 30, 2006.

Future lease commitments are as follows:

2006	$	32,043
2007	$	106,420
2008	$	114,800
2009	$	39,434

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. The Company has filed an answer, disputing all allegations in the complaint and expects to settle this suit in upcoming mediation. 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 June, 2005, Charles Caudle et al filed a lawsuit in Harris County, TX against Advanced BioChem, Power3 and the officers and directors of both companies. Power3 has filed an answer denying all claims in the lawsuit. The Company believes that the Plaintiff’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 operations. The Company disputes the allegations in the complaint and the matter has been scheduled for mediation. No effect has been given to any loss that might result from the outcome of this litigation in the accompanying financial statements.

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In May, 2005, Quinn Capital Consulting, Inc. filed suit against Power3 and its Chief Executive Officer, Steven B. Rash, claiming breach of contract regarding payment for services claimed to have been provided to Power3, with payment to have been made by issue of 500,000 shares of Power3’s common stock to Quinn Capital. Power3 believes that it is not liable for the issuance of such shares to Quinn Capital for the services performed, however we cannot be assured we will prevail or if the outcome of this action will affect our financial position or operations.

In September, 2005, Focus Partners LLC filed suit against David Zazoff and Power3 alleging 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. The Company intends to vigorously defend this matter and prosecute its claims and cross-claims. Negotiations between the parties are ongoing, however no resolution has been achieved so far. No effect has been given to any loss that might result from the outcome of this litigation in the accompanying financial statements.

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. Although the Company disputes certain of the claims in these matters, the original debt amounts are recorded in accounts payable on the balance sheet of the Company.

Note 8. 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 26, 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, all 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.

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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 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.

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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;

· 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 one 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;

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· 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 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.

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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 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. The carrying values of the convertible debenture liability was $1,091,394 as of September 30, 2006, while the carrying values of the Company’s other derivative liabilities were $671,575 as of September 30, 2006. The convertible debentures face value was $1,000,000 and $1,400,000, as of December 31, 2004 and 2005, consisting of non-interest bearing convertible debentures funded 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:

	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 shares 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 $10,061 for the quarter ended September 30, 2006.

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:

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(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

(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.

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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	%

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 due on the notes was payable in the amount of $150,000 in March and $150,000 in April, 2006, along with accompanying interest. The first $150,000 note has been redeemed and is no longer outstanding because the note holder sold common shares of Power3, pledged by officers of the company, in satisfaction of both the interest and the note payable itself. The second $150,000 note remains outstanding and payable as of September 30, 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.

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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 $207,900 during the period from issuance of the notes to December 31, 2005.

Note 9. OTHER SIGNIFICANT EQUITY TRANSACTIONS

On June 16, 2006, Power3 engaged Equititrend Advisors, LLC, a San Diego, California based company to provide consulting services to Power3. The consulting services to be provided will focus on the development, implementation and maintenance of an ongoing program to increase the public and investment community’s awareness of Power3’s products, scientific accomplishments and business activities. In addition, Equititrend will endeavor to stimulate the investment community’s interest in Power3. Equititrend will be compensated by receiving 300,000 shares of S-8 common stock of Power3.

During the quarter ending September 30, 2006, the Company sold 2,833,333 shares of restricted common stock to two individuals, in order to raise working capital for operations. In addition the individuals received 2,833,333 warrants to purchase additional stock at exercise prices ranging from $.12 to $.25 per share.

After the quarter end, during October and November, 2006, the Company sold an additional $377,000 in convertible notes. The notes are convertible into 6,283,232 shares of common stock and contain warrants to purchase an additional 6,283,232 shares of common stock at $.08 per share.

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 vested ratably over three years as 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 6,360 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. 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 and the warrants that had been previously issued were cancelled by mutual consent.

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 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 49,834,551 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 11,055,643, based upon 15% of the outstanding shares as of September 30, 2006.

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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.

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

Forward Looking Statements

This report contains certain forward-looking statements of the intentions, hopes, beliefs, expectations, strategies, and predictions of 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 in light of its experience and its perception of historical trends, current conditions, expected future developments and other factors it believes are appropriate. Investors are cautioned that all forward-looking statements involve 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;

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· 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 our actual results to differ materially from those contemplated by the forward-looking statements.

Overview

Power3 Medical Products, Inc. is a late stage development company engaged in the discovery, development, and commercialization of protein biomarkers. The Company has made significant progress in establishing the effectiveness of its patent pending biomarkers in blood serum based test for the early detection and diagnosis of breast cancer, neurodegenerative diseases and drug resistance. Power3’s revenue model, based on the licensing of its technology to diagnostic and pharmaceutical companies, results in royalty and milestone payments over the life of the agreements. Power3 has been successful in signing important license agreements. The Company has an IP portfolio of 521 differentially expressed biomarkers.

As the company has transitioned from research and proof of concept activities to commercialization, the Company’s revenue stream has begun with the receipt of a second milestone payment from delivery of blood samples to a strategic partner who is generating and testing antibodies to Power3’s biomarkers. No revenue has yet been generated from the sale of its products or service. The company is dependent on debt and equity capital for the funding of its current and future operations.

Scientific Developments

The members of the Company’s scientific team have developed a method for the differential diagnosis of neurodegenerative diseases based on identification and changes in the concentrations of protein biomarkers in blood serum. Dr. Stan Appel, now Chair of Neurology and Co-Director of Methodist Neurological Institute in Houston, assisted Power3 in their development efforts by supplying well-diagnosed serum samples. Under the trade name of NuroPro™, the Company is continuing development of a suite of four tests to differentiate individuals with no known neurological disorders from those with Alzheimer’s disease, Parkinson’s disease, ALS, and other disorders that have similar clinical symptoms as these diseases. The Company is also continuing to develop its early breast cancer detection test, in collaboration with Dr. Alan Hollingsworth, breast cancer surgical oncologist and recognized authority in high risk women. This test is also based on the identification and differences in concentration of protein biomarkers in blood serum.

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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. The Company has completed clinical validation studies involving over 1,273 patient samples from neurodegenerative disease, breast cancer and drug resistance and is utilizing biostatistics to monitor appropriate biomarkers for diagnostic sensitivity, specificity, positive predictive value, and negative predictive value. Power3 has an extensive database, consisting of more than 2,000 patient samples, which has been utilized to identify 521 protein biomarkers. Power3’s database represents the platform for Power3's patent-pending proteomic testing and biomarker discovery methods. The database offers a broad spectrum of patient samples from our proteomic research which includes human cells, serum, plasma, bone marrow, tissue, biopsies, and breast ductal fluid, backed by strong clinical documentation. This 'living' database is the foundation for our identification of our protein biomarkers.

By testing patient body fluids and tissues, such as blood serum 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

· neurodegenerative diseases such as Alzheimer’s, ALS, Parkinson’s disease and other neurological like diseases

· drug resistance to chemotherapeutics

The Company’s discovery platform uses both proprietary methodologies owned by or licensed to the Company and accepted technologies to pinpoint precisely the specific protein biomarker molecules that undergo specific changes in concentration in disease samples. The process requires a great deal of proteomics experience and expertise to perform and interpret these results. The Company’s biomarker discovery platform delivers more useful clinical discoveries than competing technologies; exhibiting reproducible and reliable identification; and providing high levels of sensitivity and specificity to meet pressing medical needs.

License and Sponsored Research

Effective June 28, 2004, Power3 entered into an exclusive license agreement with the Baylor College of Medicine which grants 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.

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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 has provided the Company with sample materials for use in diagnosis in drug targeting metabolic syndrome and associated diseases including diabetes, cardiovascular disease, hypertension and stroke. To date Power3 has identified 12 potential protein biomarkers from analyzing the samples. 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.

On May 24, 2005, the Company entered into a Collaboration Agreement with BioSite Inc. 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 has made the second milestone payment to the Company. Royalties will also be paid to the Company on the sale of any BioSite Products containing antibodies to any selected target biomolecule claimed in a patent application or an issued patent.

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.

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 in the quarter ending March, 2006 and the Company received a second payment totaling $125,000, from BioSite in the third quarter ending September 30, 2006, for blood serum samples, provided in association with the BioSite Licensing/Collaboration Agreement.

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 unblinded samples, provided by Pfizer, under controlled conditions. The Company has completed the analysis of the samples and has presented the results to Pfizer.

On May 16, 2006, Power3 entered into a Materials Transfer and Confidential Disclosure Agreement with Innogenetics N.V., a Belgium-based international biopharmaceutical company. The current proposal is an assessment of the utility of the Company’s NuroPro™ to differentiate control subjects from subjects with Alzheimer’s disease. The assessment has begun. Power3 received an initial shipment of samples from Innogenetics N.V. in October 2006.

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.

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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.

Power3 conducted its own biomarker discovery program using blood serum samples collected from clinical validation sites, in collaboration with Dr. Alan Hollingsworth at the Mercy Woman’s Center. Beginning November 2004, Power3 has now analyzed 664 blood serum samples from breast cancer patients, benign patients and normal individuals.

Through the application of Power3’s proteomic discovery platform covered by pending patent applications and trade secrets, the Company identified 12 proteins in blood serum which indicate early detection and stages of breast cancer. This 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. In addition, the Company has identified 11 additional promising blood serum biomarker proteins for breast cancer. These discoveries establish the basis of a very sensitive, non-invasive, early detection breast cancer-screening blood serum test.

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.

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. While in rarer cases, younger people can contract the disease (early onset), and one in ten people age 65 and over have Alzheimer’s disease.

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. There is also a rarer early onset Parkinson’s disease. The ALS Association reports that an average of approximately 30,000 Americans are afflicted with ALS, with 5,000 new cases diagnosed annually with a prognosis of death likely within 3-5 years.

The members of the Company’s scientific team have developed a method for the differential diagnosis of neurodegenerative diseases utilizing blood serum, to which neurologist, Dr. Stan Appel, now Chair of Neurology and Co-Director of Methodist Neurological Institute in Houston, assisted in supplying well-diagnosed serum samples. With this test, which involves monitoring patients blood serum for disease specific changes in the concentrations of select groups of the Company’s 47 neurodegenerative disease proteins, the Company has identified specific sets of unique protein biomarkers that appear to distinguish between normal individuals, patients with Alzheimer’s disease, Parkinson’s disease, Amyotrophic Lateral Sclerosis (ALS, Lou Gehrig’s disease), and with other neurological disorders having similar symptoms.

The Company’s Alzheimer’s disease blood serum biomarkers appear to enable discernment of whether a dementia patient has Alzheimer’s disease, or one of a number of other diseases that are not Alzheimer’s, such as Lewy body dementia, Frontotemporal dementia, Stroke-related dementias, etc. Also the company appears to have discovered a novel stepwise use of a group of 5 blood serum biomarkers that detects the presence of Alzheimer’s disease in early stages, possibly even before the appearance of symptoms..

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In a similar fashion, Power3’s Parkinson’s disease blood serum biomarkers appear to distinguish Parkinson’s disease from other, similar presenting movement 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. The Company’s database continues to increase with unique samples classified either as normal or being clinically diagnosed with ALS, Alzheimer’s, Parkinson’s, and other related neurological disorders. The number of differentially expressed proteins in Neurodegenerative diseases is 47, of which 43 protein biomarkers have been identified. The ability to differentiate diseases from each other and from normal and disease controls has also benefited from the Company’s multivariant biostatistical analysis of 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 Parkinson’s disease-specific tests. Pre-IDE applications for the first two have been filed with the U.S. Food and Drug Administration. In addition, four US Utility patent applications were filed on these tests, conversions of the Company’s pre-existing provisional patent applications.

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. In 2005, additional biomarker discoveries were completed for this indication and a provisional patent application was filed on these new discoveries. 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. No new development activity took place in the third quarter ending September 30, 2006. The Company anticipates increase activity in drug resistance in fiscal year 2007.

Intellectual Property

During the quarter ending September 30, 2006, Power3 filed four utility patent applications with the United States Patent and Trademark Office, entitled “Assay for Neuromuscular Diseases”, “Assay for ALS and ALS-Like Disorders”, “Assay for Differentiating Alzheimer’s Disease and Alzheimer’s-Like Disorders” “Assay for Diagnosis and Therapeutics Employing Similarities and Differences in Blood Serum Concentrations of 3 Forms of Complement C3c and Related Protein Biomarkers in Amyotrophic Lateral Sclerosis and Parkinson’s Disease” These were conversions of previous provisional applications. The number of pending patent applications as of quarter ending September 30, 2006 is 17.

Results of Operations

Three Months Ended September 30, 2006 as Compared to Three Months Ended September 30, 2005

Revenues for the three months ending September 30, 2006 were $125,000 compared to $-0- for the same period in 2005. This revenue resulted from the material transfer/sale of previously gathered blood serum samples, rather than from the commercial production of goods or services. Due to the Company’s focus on disease diagnosis, protein and biomarker identification, and research on drug resistance in the areas of cancer, neurodegenerative and neuromuscular diseases, it is unknown whether or not the Company will receive any revenues from sales of its products or services in the immediate future.

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Total operating expenses were $395,546 during the three months ended September 30, 2006 as compared to $3,526,325 for the three months ended September 30, 2005, a decrease of $3,130,779. The decrease in operating expenses was primarily attributable to a decrease of $3,003,870 in amortization of stock-based compensation as expense. This reduction was not due to any personnel losses, but rather to the end of the accounting amortization period for the stock-based compensation, previously issued by the Company in 2004. Other income and (expenses), including gain from derivatives, were ($65,640) in the quarter ended September 30, 2006 as compared to other income of $69,661 during the quarter ended September 30, 2005.

Interest expense thus far during the nine months in 2006 has amounted to $1,017,673 as compared to $172,702 during the same nine month period of 2005. The increase in interest expense is primarily attributable to the recognition of the additional interest due on the bridge loan notes payable the company has incurred since 2005, the impact of recognizing the derivative liabilities and the amortization of the debt discounts and deferred finance costs.

The above matters result in our Net Loss being $3,120,478 less thus far in 2006 than during the first nine months of 2005.

Liquidity and Capital Resources

The Company has financed its operations since the date of the Advanced BioChem transaction primarily through the net proceeds generated from the sale of common stock, the issuance of convertible debentures and the issuance of notes payable as bridge loans. From the date of the Advanced BioChem transaction through June 30, 2006, the Company has raised approximately $3,292,978 in debt capital. As described in “Recent Financing” below, the Company may 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. The Company is in default under the terms of the Securities Purchase Agreement, the previously issued debentures and related registration rights agreement and there can be no assurance that the existing investors will purchase all or any portion of the additional $1,600,000 aggregate principal amount of debentures. If additional debentures are issued and sold by the Company, the Company will use a portion of the proceeds from the sale and issuance of such debentures to pay the interest due and principal balances owing under the promissory notes incurred in 2005 and 2006, the Officer Advances and other notes payable owed by the Company.

The Company’s liquidity and capital needs relate primarily to working capital, development and other general corporate requirements. The Company has not received any cash from operations, other than from the sale of blood serum samples previously gathered. The Companyhas an immediate need for capital to continue its current operations. In addition to seeking additional capital, the Company will seek revenues from research grants, collaboration agreements, and other strategic alliances.

In the event the sale and issuance of the $1,600,000 aggregate principal amount of 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 fourth quarter of 2006. The foregoing projections are based upon the Company’s existing obligations. If the Company’s obligations are increased, the Company will require additional funding sooner than is currently anticipated.

Net cash used in operating activities amounted to ($1,988,334) for the nine months ended September 30, 2006, compared to ($2,324,443) for the nine months ended September 30, 2005. The change in net cash used in operating activities during 2006 was primarily due to a smaller loss from operations and an increase in accounts payable, as compared to the same three months of 2005.

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Net cash provided by financing activities approximated $2,032,792 for the nine months ended September 30, 2006, as compared to $2,184,121 for the nine months ended September 30, 2005.

As of September 30, 2006, the Company’s principal source of liquidity was approximately $59,045 in cash.

Recent Financing

On June 1, 2006, the Company executed a promissory note with John Fife (the “note holder”) in the principal amount of $266,000 (the “Principal”.) The note was due and payable on the earlier of August 12, 2006 or the fifth day following the effective date of the Company’s registration statement on Form SB-2 becoming effective. In case of default, all amounts due on the note shall bear interest at the rate of 18% per annum from the date such interest is due through and including the date of payment. The note is secured by a stock pledge agreement from the Chief Executive Officer and the Chief Scientific Officers of Power3, as a pledge of their personal shares of common stock of Power3. This note is currently past due and is in default.

Plan of Operation and Cash Requirements

The Company currently does not have significant 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 $250,000 per month and the Company anticipates that it will require approximately $3,000,000 for the twelve months ended September 30, 2007, to continue its development activities, undertake and perform clinical validation studies, continue its marketing efforts and maintain its administrative infrastructure, as follows:

Estimated Expenditures Required During Next Twelve Months
General and Administrative	$	2,450,000
Patent filings and intellectual property	$	100,000
Capital Expenditures and research agreements	$	450,000
Total	$	3,000,000

The foregoing is based upon the Company’s current estimated cash requirements. 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 previously, the Company entered into a securities purchase agreement and an amendment to the securities purchase agreement pursuant to which certain investors agreed to purchase, subject to the satisfaction of certain conditions, convertible debentures in the aggregate principal amount of $3,000,000. 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 loans immediately following the sale and issuance of such debentures, the Company will still require additional cash to allow it to meet its current funding requirements through the end 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 current funding requirements through the end of the quarter ended March 31, 2007.

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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.

Off-Balance Sheet Arrangements

At September 30, 2006, 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

The Company accounts for equity instruments issued to employees for services based on the intrinsic value of the equity instruments issued. Equity instruments issued to non-employees that are fully vested and non-forfeitable are measured at fair value at the issuance date and expensed in the period over which the benefit is expected to be received.

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, FAS 123 (R) is effective for the first reporting period beginning after June 15, 2005.

Item 3.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.

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As reported in the Company’s Quarterly Reports on Form 10-QSB, the Company identified certain deficiencies which caused management to conclude that the Company’s disclosure controls continue to be ineffective as of September 30, 2006. 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 September 30, 2006, including the following:

Although the Company has hired accounting personnel as reported in its previous Form 10-QSB’s, 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.

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.

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.

Limitations on Effectiveness of Controls

Internal control over financial reporting cannot provide absolute assurance of achieving financial reporting objectives because of its inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process, safeguards to reduce, though not eliminate, this risk.

Changes in Internal Control Over Financial Reporting

During 2005, the Company changed its auditing firm and implemented additional internal controls over documents and accounting that are designed to improve its reporting. The Company’s auditors have identified the above issues as material weaknesses and the Company is consulting with its auditors to remediate these issues.

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 September 30, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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PART II. OTHER INFORMATION

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 alledgedly 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 disputes the allegations in the complaint and is vigorously defending this matter. Steven Rash has been dismissed from the suit personally.

An additional action was commenced in April, 2005, by an equipment vendor and concerns equipment which the Company acquired in its May 18, 2004 transaction with Advanced BioChem, now known as Industrial Enterprises of America. Advanced BioChem reached a settlement agreement with the equipment vendor in April of 2003 under which Advanced BioChem would pay the equipment vendor $40,000 in installments through August, 2003. As of 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. The Company has filed an answer, disputing the allegations in the complaint and is vigorously defending this matter, and expects to settle this suit in upcoming mediation.

In June, 2005, Charles Caudle and others 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 plaintiffs for unspecified damages. The Company, and its officers and directors, has filed an answer denying all claims in the lawsuit. The Company disputes the allegations in the complaint and is vigorously defending this matter. In addition, this matter has been scheduled for mediation in Houston, Texas.

Plaintiff, Quinn Capital Consulting, Inc. commenced an action in Harris County, Texas, against Power3 and Steven B. Rash on May 19, 2005, alleging the breach of a consulting agreement and seeking 500,000 shares of the Company’s common stock. Plaintiff claims that pursuant to the agreement, the Company was required to issue Plaintiff 500,000 shares of the Company’s common stock. The Company disputes the allegations in the complaint, has filed an answer and is vigorously defending this matter.

On October 28, 2005, Centigrade Services, Inc. commenced an action in Small Claims Court in Harris County, Texas, against Power3 to collect an outstanding debt of $2,117.09 plus court costs. The Company has settled this matter and no further actions are expected on this issue.

On August 3, 2005, Focus Partners LLC filed suit in the Supreme Court of the State of New York, county of New York, against David Zazoff and Power3, seeking damages in the amount of $480,000 allegedly arising from the Company’s failure to pay consideration, in the form of Company’s stock, to Plaintiff, pursuant to an alleged consulting agreement entered into and between Plaintiff and the Company. Plaintiff alleges that the Company improperly paid such consideration to Zazoff, a former employee of Plaintiff. The Company answered the complaint on December 27, 2005. It denies the material allegations of the complaint and asserts that it has paid all consideration due and owing Plaintiff pursuant to the alleged consulting agreement. The Company has also asserted counterclaims against Plaintiff and cross-claims against Zazoff arising from, among other things, fraudulent acts of Plaintiff and Zazoff committed during the parties’ relationship. The parties are presently engaged in discovery. The Company intends to vigorously defend this matter and prosecute its counterclaims and cross-claims.

On August 30, 2005, Carlotta Lansford, a previous consultant for Advanced BioChem, now known as Industrial Enterprises of America, commenced an action against Advanced BioChem and Power3 in Harris County, Texas. Plaintiff is seeking $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 Company disputes the allegations in this matter and is vigorously defending this matter. The debt is recorded in accounts payable by Power3.

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On February 15, 2006, Bowne of Dallas LP commenced an action in County Court of Dallas County, Texas, against Power3 seeking payment for services allegedly rendered by Plaintiff to Power3. Plaintiff seeks damages 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 Company disputes the allegations in the complaint and is vigorously defending this matter. The debt is recorded in accounts payable by Power3. This matter has entered final settlement negotiations.

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 Harris County, Texas, originally heard 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. In this action, Plaintiff seeks the enforcement of a foreign judgement entered in December, 2003, in the State of Florida, in the amount of $15,872,77, with interest thereon, for non-payment of fees for services rendered by Plaintiff. The Company disputes the allegations in the complaint, is vigorously defending this matter and has filed a counterclaim for its fees.

On June 9, 2006, Power3 received notice of a suit filed in Montgomery County, Texas, by IS&T Consulting Group for collection of $8,769.96 is past due services plus interest thereon. The Company is vigorously defending this suit, however has recorded the amount due in accounts payable in its accounting system.

On October 14, 2006, Power3 received notice/service of suit, by SP&G Media, over $6,505 of advertising services. The Company disagrees with the amount claimed and the services provided and is defending the suit vigorously. The debt has been recorded in the accounts payable of the Company.

Item 2. Unregistered Sale of Equity Securities and use of Proceeds

During the third quarter of 2006, Power3 sold shares of its common stock as follows: 2,833,333 shares of restricted common stock sold to two private investors to raise working capital.

Item 3. Defaults Upon Senior Securities

The Company is in default under the provisions of its October, 2004 Securities Purchase Agreement, and accompanying registration rights agreement and debentures. The default stems from the Company’s inability to obtain effectiveness of the registration statement on Form SB-2, as amended (File No. 333-122227) filed pursuant to the registration rights agreement.

Although 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. 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.

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

No matters were submitted to the security holders for a vote during the quarter ended September 30, 2006.

Item 5. Other Information

None.

Item 6. Exhibits

EXHIBIT NO.	DESCRIPTION
10.1		Securities Purchase Agreement dated 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).
10.2		Amendment to Securities Purchase Agreement dated January 19, 2005, between the Company and each purchaser identified therein (incorporated by reference to Exhibit 10.8 of the Company’s Registration Statement on Form SB-2 (File No. 122227)).
10.3		Power3’s Registration Statement (incorporated by reference to the SB-2 (File No. 122227) as filed on January 21, 2005).
10.4		Promissory Note 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).
10.5		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).
10.6*		Promissory Note, dated June 1, 2006, executed by Power3 and John Fife in the amount of $266,000.
10.7*		Stock Pledge Agreement for Fife Promissory Note, dated June 1, 2006.
10.8		Amended and Restated Employment Agreement for Steven B. Rash (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed January 5, 2005).
10.9		Amended and Restated Employment Agreement for Ira L. Goldknopf, PhD (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K filed on January 5, 2005	)
10.10		Employment Agreement with John Burton dated September 15, 2005 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on September 21, 2005).
10.11		Exclusive License Agreement dated effective June 28, 2005, by and between Power3 and Baylor College of Medicine (incorporated by reference to Exhibit 10.1 to the Company’s Form 10-QSB for the quarter ended September 30, 2004).
10.12		Patent and Technology License Agreement dated September 1, 2003 by and between The University of Texas System, on behalf of The University of Texas M.D. Anderson Cancer Center and Advanced BioChem (incorporated by reference to Exhibit 10.3 to the Company’s Form 10-QSB for the quarter ended September 30, 2004).
10.13		Collaborative Research Agreement dated March 21, 2005, by and between New Horizons Diagnostics and Power3 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed on March 28, 2005).
10.14		Collaborative Research and Licensing Agreement dated May 17, 2005, by and between BioSite Incorporated and Power3 (incorporated by reference to Exhibit 10.13 to the Company’s Form 10-KSB filed on September 9, 2005).
10.15		Agreement between Power3 and Glocap executed on January 5, 2006 (incorporated by reference to Exhibit 10.22 to the Company’s Form 10-QSB for the quarter ended March 31, 2006).

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10.16	Promissory Note dated March 2, 2006 between Power3 and Dr. Ira Goldknopf in the amount of $89,400 (incorporated by reference to Exhibit 10.19 to the Company’s Form 10-QSB for the quarter ended March 31, 2006).
10.17	Promissory Note dated March 1, 2006 between Power3 and Steven B. Rash in the amount of $50,000 (incorporated by reference to Exhibit 10.18 to the Company’s Form 10-QSB for the quarter ended March 31, 2006).
10.18	Promissory Note, dated March 28, 2006, executed by Power3 and John Fife in the amount of $400,000 (incorporated by reference to Exhibit 10.20 to the Company’s Form 10-QSB for the quarter ended March 31, 2006).
10.19	Stock Pledge Agreement for Fife Promissory Note, dated March 28, 2006 (incorporated by reference to Exhibit 10.21 to the Company’s Form 10-QSB for the quarter ended March 31, 2006).

31.1*	Certification
31.2*	Certification
32.1**	Certification Pursuant to Section 906
32.2**	Certification Pursuant to Section 906

*Filed with this report.

**Furnished with this report.

(1) Filed with this report

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SIGNATURES

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	November 14, 2006
Steven B. Rash	Chief Executive Officer
/s/ John P. Burton	Chief Financial Officer	November 14, 2006
John P. Burton

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