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 March 31, 2007

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

For the transition period from _______________ to ________________

Commission file no. 0-24921

Power3 Medical Products, Inc.

(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 o     No x

As of April 30, 2007 there were 76,975,509 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 o     No x

Transitional Small Business Disclosure Format (check one):

Yes o     No x

-1-

INDEX

Explanatory Note	3
PART I. FINANCIAL INFORMATION	4
Condensed Balance Sheet (unaudited)	4
Condensed Statements of Operations (unaudited)	6
Condensed Statement of Cash Flows (unaudited)	7
Notes to Condensed Financial Statements (unaudited)	9
Item 1. Organization, Principal Activities and Basis of Presentation	9
Item 2. Management's Discussion and Analysis or Plan of Operation	23
Item 3. Controls and Procedures	32
Part II. OTHER INFORMATION	33
Item 1. Legal Proceedings	33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3. Defaults upon Senior Securities	34
Item 4. Submission of Matters to a Vote of Security Holders	34
Item 5. Other Information	35
Item 6. Exhibits	35
SIGNATURES	37

-2-

Explanatory Note

This quarterly report on Form 10-QSB for the quarter ended March 31, 2007, has not been reviewed by the Company’s independent registered public accountants.

The financial statements and accompanying Notes to the Financial Statements have not been reviewed by the Company’s independent registered public accountants due to a delay in the completion of the audit of the Company’s financial statements for the year ended December 31, 2006. This delay is primarily due to a recent change in the Company’s independent registered public accounting firm, as reported in a Form 8-K filed by the Company with the Securities and Exchange Commission on March 14, 2007.

There are no disputes or differences of opinion that the Company is aware of, between the Company and its independent registered public accounting firm, for the quarter ended March 31, 2007.

-3-

I. FINANCIAL INFORMATION

Item 1. Financial Statements

POWER3 MEDICAL PRODUCTS, INC.

(A Development Stage Enterprise)

CONDENSED BALANCE SHEET AS OF March 31, 2007

(unaudited)

ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	217,808
All Other Current Assets		123,335
Total Current Assets		341,143
FIXED ASSETS
Furniture, Fixtures and Equipment		9,485
(Net of accumulated depreciation of $92,204)
Intellectual Property		179,786
Total Fixed Assets		189,271
OTHER ASSETS
Goodwill		11,583,431
Deferred Finance Costs		233,817
Deposits		5,350
Stock held in Escrow		120,000
Total Other Assets		11,942,598
TOTAL ASSETS	$	12,473,012
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts Payable	$	917,724
Notes Payable		672,527
Notes Payable to Related Parties		1,511,708
Convertible Debentures-in default		394,996
Other Current Liabilities		1,364,022
Derivative Liabilities		5,391,023
TOTAL LIABILITIES	$	10,252,000
STOCKHOLDER'S EQUITY
Common Stock-$0.001 par value:150,000,000 shares authorized;		76,970
76,970,955 shares issued and outstanding
Additional Paid-In Capital		62,402,938
Deferred Compensation Expense		(2,986,053	)
Deficit accumulated before entering development stage		(11,681,500	)
Deficit accumulated during development stage		(45,591,343	)
Total Stockholder’s Equity		2,221,012
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY	$	12,473,012

See notes to the condensed financial statements.

-4-

POWER3 MEDICAL PRODUCTS, INC.

(A Development Stage Enterprise)

CONDENSED BALANCE SHEET

AS OF DECEMBER 31, 2006

(unaudited)

ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	40,602
Accounts receivable
Prepaid expenses and other current assets		34,111
Total current assets		74,713
OTHER ASSETS
Goodwill		11,583,431
Deferred finance costs		253,336
Intangible assets		179,786
Furniture, fixtures and equipment, net		16,374
Deposits		5,900
TOTAL ASSETS	$	12,113,540
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities	$	878,811
Notes payable—in default		902,000
Convertible debentures—in default		310,496
Other current liabilities		2,739,168
Derivative liabilities		1,999,904
Total current liabilities	$	6,830,379
STOCKHOLDERS’ EQUITY
Common Stock-$0.001 par value:150,000,000 shares authorized;
71,370,955 shares issued and outstanding		71,370
Additional paid-in capital		59,723,638
Deferred compensation		(1,207,440	)
Loss accumulated before entering development stage		(11,681,500	)
Loss accumulated during the development stage		(41,622,907	)
Total stockholders’ equity		5,283,161
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	12,113,540

-5-

POWER3 MEDICAL PRODUCTS, INC.

(A Development Stage Enterprise)

STATEMENTS OF OPERATIONS

(unaudited)

	For the three month period ended March 31, 2007			For the three month period ended March 31, 2006			Development Stage from May 18, 2004 to March 31, 2007
REVENUES:
Sales	$	121,724						421,724
Other revenue								4,000
Total revenue	$	121,724						425,724
COST OF GOODS SOLD:
Production costs
Total cost of goods sold	$
GROSS PROFIT	$	121,724						425,724
OPERATING EXPENSES:	$
Stock based compensation		186,387			3,084,855			24,952,710
Employee compensation and benefits		264,826			451,788			3,605,950
Professional and consulting fees		204,445			187,924			8,692,983
Occupancy and equipment		32,972			39,345			289,597
Travel and entertainment		17,810			15,391			246,307
Other selling, general and administrative expenses		49,072			28,684			402,035
Total operating expenses		755,512			3,807,987			38,189,582
LOSS FROM OPERATIONS	$	(633,788	)		(3,807,987	)		(37,763,858	)
OTHER INCOME AND (EXPENSE):	$
Derivative income (expense)		(2,879,169	)		(520,154	)		776,897
Interest income		1,020						3,286
Other income (expense)								(3,029,442	)
Interest (expense)		(456,498	)		(577,607	)		(2,197,251	)
Total other income(expense)	$	(3,334,648	)		(1,097,761	)		(4,446,510	)
NET INCOME (LOSS)		(3,968,436	)		(4,905,748	)		(42,210,368	)
NET LOSS PER SHARE		(.05	)		(.07	)		(.67	)
Weighted average number of shares outstanding		73,014,288			65,298,967			62,983,480

-6-

POWER 3 MEDICAL PRODUCTS, INC

(A Development Stage Enterprise)

CONDENSED STATEMENTS OF CASH FLOWS

(unaudited)

							Development
	For the Three			For the Three			Stage Results
	Months Ended			Months Ended			May 18, 2004 -
	March 31, 2007			March 31, 2006			March 31, 2007
OPERATING ACTIVITIES:
Net Loss	$	(3,968,436	)		(4,905,748	)		(42,210,368	)
Adjustment to reconcile net loss to net cash
used in operating activities:
Stock based services and compensation		186,387			3,442,507			32,639,456
Stock issued to retire preferred stock and debt								4,236
Derivative (income) expense		2,879,169			520,154			(776,897	)
Depreciation and amortization		6,888			6,820			92,204
Amortization of debt discount and finance costs		104,085			212,440			240,474
Other		(89,224	)					7,455,897
Decrease(increase) in deposits		550						(5,350	)
Decrease(increase) in prepaids					(15,057	)		(750,067	)
Increase (decrease) in Deferred finance costs		19,519						272,855
Increase(decrease) in accounts payable and accrued liabilities and other		318,268			23,482			(3,691,910	)
Net cash used in Operating Activities	$	(542,794	)		(715,402	)		(6,729,470	)
INVESTING ACTIVITIES
Capital expenditures, net	$							(27,161	)
Increase (decrease) in other assets		120,000						299,786
Net cash used in Investing Activities	$	120,000						(272,625	)
FINANCING ACTIVITIES
Proceeds from CD, warrants and investment rights	$							1,197,041
Proceeds from borrowings under notes payable		600,000			429,400			3,523,808
Notes Payable to Related parties								1,393,346
Proceeds from sale of common stock, net					248,929			906,746
Adjustments related to derivatives					198,865			198,865
Net cash provided by financing activities	$	600,000			877,194			7,219,806
Net increase (decrease) in cash and cash equivalents	$	177,206			161,792			217,711
Cash and cash equivalents, beginning of period	$	40,602			1,399			97
Cash and cash equivalents, end of period	$	217,808			163,191			217,808

-7-

POWER3 MEDICAL PRODUCTS, INC.

(A Development Stage Enterprise)

STATEMENT OF CASH FLOWS (cont.)

(unaudited)

	For the Three months ended March 31, 2007		For the Three months ended March 31, 2006		Cumulative during Development Stage May 18, 2004 to March 31, 2007
Cash paid for:
Interest					$	59,840
Income taxes
Non-cash transactions:
Exchange of convertible preferred stock for common stock					$	3,380,975
Conversion of notes payable to amounts due to stockholders	$	83,362			$	1,264,765
Issuance of common stock to retire Notes Payable	$	190,000			$	190,000
Issuance of common stock to retire Convertible Debenture	$	480,000			$	480,000
Common stock issued for services (at market, date of agreement or contract):
For consulting contracts and services	$	7,400			$	10,792,089
For asset acquisition (15,000,000 shares)					$	13,500,000
For compensation contracts and to employees					$	25,066,500
Issuance of warrants in connection with services	$	1,540,000	$	90,000	$	1,605,000
Issuance of warrants in connection with notes payable	$	425,000			$	1,140,000
Retirement of common stock					$	882,000

See notes to the condensed financial statements.

-8-

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.

Power3 Medical Products, Inc. is in the development stage since it is focused on commercializing the intellectual properties acquired in its transaction with Advanced BioChem in May, 2004. Its focus is in the early detection, monitoring and targeting of diseases through the analysis of proteins, 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.

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 receivable, accounts payable, accrued expenses, notes payable, and other current liabilities approximate their fair values due to their short-term nature.

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.

-9-

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)

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.

The company uses in house evaluation techniques to estimate the fair value of the new warrants issued at the end of the quarter ended March 31, 2007, and to account for the impact of these warrants on the account entitled Derivative Liability (Other).

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 March 31, 2007, certain lab equipment having a net book value of approximately $57,000 serves as security for certain liabilities.

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 with Advanced BioChem was evaluated at December 31, 2006. As of December 31, 2006, Goodwill was determined to be impaired because the fair value of the reporting unit, based on the market capitalization of the Company, did not exceed the carrying value of the reporting unit, based on assets minus liabilities, at year end 2006.

-10-

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.

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 March 31, 2007.

Research and Development

Research and development costs amounted to $19,904 for the quarter ended March 31, 2007.

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 expensed as incurred. No advertising expenses were incurred during the quarter ended March 31, 2007.

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, 2006 and through the end of the quarter ending March 31, 2007.

-11-

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 produce sufficient anticipated revenue to support its operations. 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, 2006, 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 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 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 recorded $284,447 of stock based compensation as a result of the issuance of these warrants.

· 2,000,000 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 5,949,998 warrants to individuals who had provided bridge loans to the company by purchasing convertible notes.

· During the quarter ending March 31, 2007, the Company issued 9,166,664 warrants to individuals who had provided financing to the Company through the purchase of convertible Notes Payable. In addition, on February 28, 2007, the Company granted 6,000,000 warrants to Noble International Investments in exchange for services provided under a consulting agreement.

During the first quarter of 2007, $324,091 was amortized to stock option expense for warrants.

-12-

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 year ended December 31, 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. As of March 31, 2007, in order to recognize this reduction in outstanding balances due to the holders of these notes payable, the Company has converted $687,524 from various notes payable to Due to Officer(R), Steve Rash, representing the total amount of proceeds received from the sales of his pledged shares through March 31, 2007; and $789,184 to Due to Officer (G) representing the total amount of proceeds received through March 31, 2007, by note holders from selling common shares pledged by Dr. Ira Goldknopf.

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 $24,837 for the quarter ended March 31, 2007.

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 March 31, 2007

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 March 31, 2007.

Future lease commitments are as follows:

2007	$	106,420
2008	$	114,800
2009	$	39,434

-13-

Other Contingencies

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.

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 less than $15,000, 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.

-14-

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.

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:

-15-

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

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

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

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

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

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

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

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

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

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

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

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

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

· 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;

-16-

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

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

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

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

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

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

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

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

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

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

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

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

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

-17-

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

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

In connection with such financing, the Company issued, a warrant to purchase 100,000 shares of common stock at an exercise price of $3.00 to its placement agent, Westor Online and Kogan and Associates. If any investor exercises their additional investment rights and purchases additional debentures, the placement agent will be entitled to receive additional warrants to purchase up to a number of shares of common stock equal to ten percent (10%) of the exercise price paid upon exercise of the additional investment rights divided by ninety percent (90%) of the market price as of the initial closing. The Company accounted for the warrants as deferred financing costs and is amortizing the fair values thereof 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 $75,279, at December 31, 2005, and $310,496 at December 31, 2006. The fair values of the liabilities associated with the convertible debenture issue in October, 2004 and January, 2005, were $1,252,633 as of March 31, 2007, and the fair values of the Company’s other derivative liabilities were $4,138,390 as of March 31, 2007. 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.

-18-

(2) The Company issued additional warrants to purchase 333,333 shares of common stock in connection with Traunche 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 Traunche 1 and Traunche 2, respectively. These 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 March 31, 2007.

Derivative financial instruments arising from the financing are initially recorded and continuously carried at fair values. The following tabular presentation reflects the fair values of the components of derivative financial instruments on the Company’s balance sheet at December 31, 2005 and 2006:

(Assets) Liabilities:	2005		2006
Common stock warrants	$	57,250	$	38,947
Embedded conversion feature		632,000		553,785
Additional investment rights		537,778		481,636
Other derivative instruments (1)		229,124		397,602
	$	1,454,936	$	1,471,970

(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, 2005 and 2006:

Shares of common stock	2005		2006
Common stock warrants from debentures		2,833,333		2,833,333
Embedded conversion feature (1)		18,666,666		18,918,919
Additional investment rights (1)		15,555,555		15,555,555
Other derivative instruments (2)		3,480,000		12,899,996
		40,535,556		50,207,803

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.

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 and other warrants issued by the Company 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.

-19-

Derivative Gain for the years ended December 31, 2005 and 2006 associated with adjustments recorded to reflect the aforementioned derivatives at fair value (in addition to the initial allocation, above) amounted to $2,019,884 and $65,834, respectively. These gains were primarily a result of the market price of the Company’s common stock declining during these periods.

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	81.25%	81.25%
Interest rate	8.25%	8.25%

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	$0.06—$0.90	$0.06—$1.08
Remaining terms (years)	.6—3.5	.8—3.5
Equivalent volatility	78.17%--81.53%	78.17%--81.53%
Equivalent interest-risk adjusted rate	5.18%--8.25%	5.20%--8.25%
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:

-20-

Instrument	Other Warrants	Preferred Stock(1)
Exercise prices (1)	$0.06--$3.00	$1.00
Initial term (years)	3.0—8.0	5.0
Volatility	81.25%	84.90%
Interest rate	8.25%	3.34%

(1) 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. Although the Company has been informed that sufficient pledged shares have been sold to extinguish the outstanding debt for the second $150,000 note payable, the Company has no paperwork or documentation to support that claim. Therefore, the second $150,000 note remains outstanding and payable as of March 31, 2007. The warrants associated with these two notes have eight-year terms and strike prices of $0.25 for 1,000,000 shares and $0.14 for 1,000,000 shares.

The proceeds from the Trinity financing were allocated first to the warrants, based upon their fair values, with the balance of $103,100 allocated to the notes. The allocation of proceeds to the fair value of the warrants was performed because, as discussed in the previous section, share settlement is not within management’s control. Such amount was initially classified as a derivative liability. The resulting note discount is being amortized through periodic charges to interest expense using the effective method. Amortization of note discount amounted to $32,773 during the period from issuance of the notes to December 31, 2005 and $175,127 for the year ended December 31, 2006.

Other Notes Payable

During the last half of 2006 and the first quarter of 2007, the Company issued convertible Notes Payable to various investors. The principal amounts of the individual notes varied from $12,000 to $200,000 and total $1,157,000. These Notes Payable are convertible at $.06 per share and the term of the notes are for a period of 1 year. The fair value of the derivative liability associated with these Notes Payable, as of March 31, 2007, is carried at $1,300,836.

Other Warrants

In addition, the purchasers of the Notes Payable mentioned above, received warrants to purchase additional common shares of the Company’s stock, generally at an exercise price of $.08 per share. The warrants are valid for a period of 3 years. The total number of warrants issued to these Note Payable purchasers is 18,283,327.

Further, in late February, the Company issued 6,000,000 warrants to a consultant, for services rendered. These warrants are exercisable at $.08 per share and are valid for 5 years.

The fair value of the derivative liability associated with all outstanding warrants issued by the Company, as of March 31, 2007, is $2,899,071.

-21-

Note 9. OTHER SIGNIFICANT EQUITY TRANSACTIONS

In early January, 2007, the Company agreed to issue 100,000 shares of common stock to a consultant for services provided.

In February, 2007, a note holder chose to convert his $60,000 convertible Note Payable into common shares and he was issued 1,000,000 shares of common stock. The note holder retained the warrants he had received previously when he entered into the Note Payable, during 2006.

In late February, 2007, the Company reached a settlement with Quinn Capital, a previous claimant in a law suit. As part of this settlement, the Company agreed to issue 500,000 shares to Quinn Capital.

In February, 2007, the Company reached an agreement with a convertible debenture holder to allow the holder to convert his debenture to common stock. The debenture holder received 3,000,000 shares of stock directly and another 1,000,000 shares was put in the name of the debenture holder, but held in escrow with Power3’s SEC counsel, to insure that sales of the common stock received in the conversion, would allow the debenture holder to receive a minimum agreed upon amount, as per the settlement. If the debenture holder does not receive the agreed upon amount, at time of sale of the first 3,000,000 shares, the remaining 1,000,000 shares will be released, as required, by the escrow agent, to the debenture holder.

During the quarter ending March 31, 2007, the Company issued 9,166,665 warrants to individuals, in conjunction with the issuance of convertible Notes Payable, in order to raise working capital for operations. The notes are convertible into 9,166,665 shares of common stock, at an exercise price of $.06 per share, at the option of the note holder.

In mid March, 2007, the Company entered into a consulting agreement with Noble International Investments and as a part of and condition to the agreement, Noble was granted warrants for the purchase of 6,000,000 shares of common stock of the Company, exercisable at $.08 per share for a period of five years.

In early April, 2007, the Company signed an agreement to form a Joint Venture with and issue a convertible debenture to Neogenomics, Inc., a Florida-based research and bioscience company. As part of this agreement, Neogenomics receives a First Option to purchase voting, convertible preferred stock that is convertible into such number of shares of common stock of the Company equal to a maximum of 20% of the Company’s voting Common Stock, after taking into consideration all outstanding First Option Preferred Stock on an as-converted basis. This First Option is irrevocable to the fullest extent permitted by law, and must be exercised before November 16, 2007 or 10 business days after a set of conditions have been satisfied, as specified in pages 3 and 4 of the agreement. In addition, Neogenomics received a Second Option to purchase voting convertible preferred stock that is convertible into such number of shares of common stock as is necessary to increase its ownership of the voting Common Stock of the Company, on an as-converted basis, up to 60% of the Company’s voting Common Stock, after taking into consideration all outstanding First Option Preferred Stock and Second Option Preferred Stock. Such Second Option will only be exercisable following exercise of the First Option, discussed previously, and will expire 12 months after the First Option Expiration Date as specified in paragraph 6 of the agreement.

Stock Option Plans

The Company has various stock option and warrant plans outstanding. Options granted under the 1998 stock option plans are exercisable only after the respective vesting period, which is determined by the Company's stock option committee. Options expire seven years from the date of grant. Under the 1999 stock option plan, options granted to employees vest ratably over three years 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.

-22-

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 approximately 53,697,700 shares of common stock and 26,833,327 warrants under the 2004 Plan. Based upon the automatic increase provisions above, the number of shares available for issue under the Plan is 11,546,393, based upon 15% of the outstanding shares as of March 31, 2007.

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.

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:

-23-

· The Company’s history of operating losses;

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

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

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

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

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

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

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

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

Although the Company believes that the assumptions underlying the forward-looking statements contained in this report are reasonable, any of the assumptions could be inaccurate, and, therefore, there can be no assurance that the forward-looking statements included in this report will prove to be accurate. In light of the significant uncertainties inherent in the forward-looking statements included in this report, the inclusion of such information should not be regarded as a representation by the Company or any other person that the objectives and plans of the Company will be achieved. Except for its ongoing obligation to disclose material information as required by the federal securities laws, the Company undertakes no obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this report or to reflect the occurrence of unanticipated events. Accordingly, the reader should not rely on forward-looking statements, because they are subject to known and unknown risks, uncertainties, and other factors that may cause 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 tests 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 534 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 its fifth 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.

-24-

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 women at high risk for breast cancer. This test is also based on the identification and changes in concentration of protein biomarkers in blood serum.

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 534 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 for 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, 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.

-25-

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 payments totaling 421,724.00 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.

-26-

On April 4, 2007 Power3 Medical Products, Inc. announced that it has entered into a collaboration agreement with NeoGenomics, Inc. (NASDAQ: NGNM - News) of Fort Myers, Florida, to form a joint venture Contract Research Organization (CRO). Under the terms of the agreement, Power3 and NeoGenomics will jointly own the CRO, whose mission will be commercialization of Power3's portfolio of Intellectual Property, centering on the 534 biomarkers it has discovered from a broad range of diseases, centering on the blood-based tests for breast cancer, ALS, Alzheimer's and Parkinson's Diseases. The CRO will work to further develop diagnostic tests and other services.

Breast Cancer Screening Test

An important factor in surviving cancer is early detection and treatment. According to the American Cancer Society Surveillance Research, when breast cancer is confined to the breast, the five-year survival rate is close to 100%. Breast cancer is the second leading cause of cancer deaths in women, with over $7 billion spent on breast cancer diagnosis annually. Due to the limitations of the current diagnostic techniques of mammograms and self-examination, diagnosis of cancer is often missed or inconclusive.

The Company 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 10 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. One in ten people age 65 and over have Alzheimer’s disease, while in rarer cases; younger people can contract the disease (early onset).

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.

-27-

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 patients 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 dementia related 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.

In a similar fashion, Power3’s blood serum biomarkers for Parkinson’s disease 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 biomarkers 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, selected 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 in the area of drug resistance research took place in the quarter ending March 31, 2007. The Company anticipates increased activity in the drug resistance arena during 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 March 31, 2007, is 17.

-28-

Results of Operations

Three Months Ended March 31, 2007 as Compared to Three Months Ended March 31, 2006

Revenues for the three months ending March 31, 2007 were $121,724 compared to $-0- for the same period in 2006. 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.

Total operating expenses were $755,512 during the three months ended March 31, 2007 as compared to $3,807,987 for the same three months ending March 31, 2006. The decrease in operating expenses was primarily attributable to a significant decrease 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) amounted to ($3,334,647) for the quarter ended March 31, 2007 as compared to other expenses of ($1,097,761) during the quarter ended March 31, 2006. The difference in 2007 and 2006 here is the additional $2,359,015 of derivative expense incurred in 2007 due to the stock price doubling during the quarter ending March 31, 2007.

Interest expense thus far during the three months in 2007 has amounted to $456,498 as compared to $577,607 during the same three month period of 2006.

The above matters result in our Net Loss being $3,968,436 thus far in 2007, resulting primarily from the $2,879,169 loss due to the change in our derivative liability which resulted when our common stock went from $.074 to $.15 during the quarter.

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 March 31, 2007, the Company has raised approximately $3,892,978 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. As such, 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, 2006 and 2007, 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, and in addition, is seeking additional capital from research grants, collaboration agreements, and other strategic alliances.

-29-

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 second quarter of 2007. 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 ($542,794) for the three months ended March 31, 2007, compared to ($715,402) for the three months ended March 31, 2006. The change in net cash used in operating activities during 2007 was primarily due to a smaller loss from operations and an increase in accounts payable and accrued liabilities, as compared to the same three months of 2006.

Net cash provided by financing activities was $600,000 for the three months ended March 31, 2007, as compared to $877,194 for the three months ended March 31, 2006.

As of March 31, 2007, the Company’s principal source of liquidity was approximately $217,808 in cash.

Recent Financing

During the quarter ended March 31, 2007, the Company issued seven convertible Notes Payable, raising

a total of $600,000 in additional working capital. These notes are convertible at $.06 per share, at the note holder’s option, and the lenders also received warrants to purchase common stock as additional incentive to enter into each Note Payable.

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 March 31, 2008, 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

-30-

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 middle of 2007. 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 June 30, 2007.

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 March 31, 2007, the only off balance sheet agreements in place for the Company were a lease in effect for its office space, leases in effect for computer equipment, leases in effect for lab equipment and employment agreements entered with its three principal officers.

However, in early April, 2007, the Company signed an agreement to form a Joint Venture with and issue a convertible debenture to Neogenomics, Inc., a Florida-based research and bioscience company. As part of this agreement, Neogenomics receives a First Option to purchase voting, convertible preferred stock that is convertible into such number of shares of common stock of the Company equal to a maximum of 20% of the Company’s voting Common Stock, after taking into consideration all outstanding First Option Preferred Stock on an as-converted basis. This First Option is irrevocable to the fullest extent permitted by law, and must be exercised before November 16, 2007 or 10 business days after a set of conditions have been satisfied, as specified in pages 3 and 4 of the agreement. In addition, Neogenomics received a Second Option to purchase voting convertible preferred stock that is convertible into such number of shares of common stock as is necessary to increase its ownership of the voting Common Stock of the Company, on an as-converted basis, up to 60% of the Company’s voting Common Stock, after taking into consideration all outstanding First Option Preferred Stock and Second Option Preferred Stock. Such Second Option will only be exercisable following exercise of the First Option, discussed previously, and will expire 12 months after the First Option Expiration Date as specified in paragraph 6 of the agreement

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.

-31-

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, 2006.

As reported in the Company’s previous 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 March 31, 2007. 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 March 31, 2007, 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.

-32-

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 were designed to improve its reporting. Further, in March, 2007, the Company changed its auditing firm once more and improved its control procedures, in order to improve its reporting.

Other than the changes described above, there were no changes in the Company’s internal control over financial reporting that occurred during the Company’s fiscal quarter ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal controls over financial reporting.

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 alleged that Advanced BioChem and Power3 were liable to Chapman Spira for damages allegedly resulting from the breach of a letter agreement between Chapman Spira and Advanced BioChem relating to the performance of strategic and investment banking services. Chapman Spira was seeking damages in the amount of $1,522,000 plus interest. On March 1, 2007, the Company received notice from its attorney in this matter, that the action described above has been discontinued without prejudice and without costs to any party.

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

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

-33-

On May 19, 2005, Quinn Capital Consulting, Inc. filed suit against Power3 and Steven B. Rash claiming breach of contract regarding payment for services claimed to be provided to Power3, with payment to have been made by issue of 500,000 shares to Quinn Capital, which Power3 later cancelled or otherwise converted. In February, 2007, the Company and Quinn Capital reached a settlement agreement in this matter and the Company will issue 500,000 shares to Quinn Capital and pay $75,000, over time, as settlement of any and all claims in this matter.

On September 12, 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. Settlement discussions between the Power3 and Focus Partners are ongoing; however no resolution has been achieved thus far.

On February 15, 2006, Bowne of Dallas LP filed suit against Power3 to collect a debt for services in the amount of $17,315.03. On November 30, 2006, Bowne obtained a judgement against the Company and obtained a Writ of Garnishment against the Company’s bank account J.P. Morgan Chase Bank. On Thursday, March 22, 2007, Chase Bank froze a bank account of Power3 in compliance with the notice of garnishment it had received, in the amount of $25,624.23. The Company has discontinued use of that particular bank account.

On October 28, 2005, Power3 received notice of a Petition to Enforce Foreign Judgment citation filed against the Company by KForce regarding an employment fee adjudicated in December, 2003 in the state of Florida against the Company, in the amount of $15,872.77, together with $4,735.02 in interest. Power3 does not agree with the Foreign Judgment 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 not recorded in accounts payable by the Company because it is the Company’s position that the judgment should never have been entered against Power3, but rather against a different corporate entity, not related to Power3 in any way, at this time.

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

During the quarter ended March 31, 2007, the Company issued 100,000 shares of S-8 common stock for services under its 2004 Stock Compensation Plan and 5,500,000 shares of restricted common stock.

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.

-34-

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 March 31, 2007.

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).

-35-

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).
10.20*	Promissory Note, dated January 16, 2007, executed by Power3 and Rich Kraniak in the amount of $50,000
10.21*	Promissory Note, dated September 14, 2006, executed by Power3 and Majic Arts & Entertainment, in the amount of $49,999.98
10.22*	Promissory Note, dated February 8, 2007, executed by Power3 and Paul Chosid, in the amount of $200,000.00
10.23*	Promissory Note, dated August 8, 2006, executed by Power3 and Rich Kraniak, in the amount of $100,000.00
10.24*	Promissory Note, dated February 8, 2007, executed by Power3 and Stephen Wood, in the amount of $120,000.00
10.25*	Promissory Note, dated October 27, 2006, executed by Power3 and Roger Kazanowski, in the amount of $150,000.00
10.26*	Promissory Note, dated February 27, 2007, executed by Power3 and Bruce Seyburn, in the amount of $100,000.00
10.27*	Promissory Note, dated October 27, 2006, executed by Power3 and Rich Kraniak, in the amount of $100,000.00
10.28*	Promissory Note, dated October 27, 2006, executed by Power3 and Steve Scott, in the amount of $25,000.00
10.29*	Promissory Note, dated October 31, 2006, executed by Power3 and Andrew Dahl, in the amount of $12,000.00
10.30*	Promissory Note, dated November 30, 2006, executed by Power3 and Jeffrey Hyde, in the amount of $10,000.00
10.31*	Promissory Note, dated October 31, 2006, executed by Power3 and Mike and Janet Lee, in the amount of $60,000.00
10.32*	Warrant Agreement with Mike and Janet Lee, dated October 30, 2006, for warrants to purchase 1,000,000 shares of common stock
10.33*	Warrant Agreement with Andrew Dahl, dated October 31, 2006, for warrants to purchase 200,000 shares of common stock
10.34*	Warrant Agreement with Rich Kraniak, dated August 27, 2006, for warrants to purchase 333,333 shares of common stock
10.35*	Warrant Agreement with Steve Scott, dated October 27, 2006, for warrants to purchase 416,666 shares of common stock
10.36*	Warrant Agreement with Roger Kazanowski, dated October 27, 2006, for warrants to purchase 2,500,000 shares of common stock
10.37*	Warrant Agreement with Rich Kraniak, dated October 27, 2006, for warrants to purchase 1,666,666 shares of common stock
10.38*	Warrant Agreement with Majic Arts & Entertainment, dated September 14, 2006, for warrants to purchase 833,333 shares of common stock
10.39*	Warrant Agreement with Rich Kraniak, dated January 16, 2007, for warrants to purchase 833,333 shares of common stock
10.40*	Warrant Agreement with Paul Chosid, dated February 8, 2007, for warrants to purchase 3,333,333 shares of common stock
10.41*	Warrant Agreement with Stephen Wood, dated February 8, 2007, for warrants to purchase 2,000,000 shares of common stock
10.42*	Warrant Agreement with Bruce Seyburn, dated February 27, 2007, for warrants to purchase 833,333 shares of common stock
10.43*	Consulting Agreement signed with Noble Investments, dated March 1, 2007
10.44	Agreement signed with Neogenomics (incorporated by reference to Exhibit 10.1 in the Form 8-K filed by the Company on April 3, 2007.

-36-

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

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	May 21, 2007
Steven B. Rash	Chief Executive Officer
/s/ John P. Burton	Chief Financial Officer	May 21, 2007
John P. Burton

-37-