**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 June 30,
                2006





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
      August 8, 2006, there were 70,470,955 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















**INDEX**





PART
                I. FINANCIAL INFORMATION
            3Item1.
                Financial Statements
            3Condensed
                Balance Sheet (unaudited)
            3Condensed
                Statements of Operations (unaudited)
            4Condensed
                Statement of Cash Flows (unaudited)
            5Notes
                to Condensed Financial Statements (unaudited)
            8Item
                1. Organization, Principal Activities and Basis of
                Presentation
            8Item
                2. Management's Discussion and Analysis or Plan of
                Operation
            27Item
                3. Controls and Procedures
            38Part
                II. OTHER INFORMATION
            39Item
                1. Legal Proceedings
            39Item
                2. Unregistered Sales of Equity Securities and Use of
                Proceeds
            41Item
                3. Defaults upon Senior Securities
            42Item
                4. Submission of Matters to a Vote of Security Holders
            42Item
                5. Other Information
            42Item
                6. Exhibits
            42SIGNATURES
            43





-2-





**I.
      FINANCIAL INFORMATION**


**Item 1.
      Financial Statements**





**POWER3
      MEDICAL PRODUCTS, INC.** ****


**(A
      Development Stage Enterprise)**


**CONDENSED
      BALANCE SHEET AS OF June 30, 2006**


**(unaudited)**




**ASSETS**CURRENT
                ASSETSCash
                and cash equivalents
            
            $
            152,869All
                Other Current Assets
            
            
            31,625Total
                Current Assets
            
            
            184,494FIXED
                ASSETSFurniture,
                Fixtures and Equipment
            
            
            57,109(Net
                of accumulated depreciation of $78,824)Intellectual
                Property
            
            
            179,786Total
                Fixed Assets
            
            
            236,895OTHER
                ASSETSGoodwill
            
            
            13,371,776Deferred
                Finance Costs
            
            
            277,477Deposits
            
            
            25,900Total
                Other Assets
            
            
            13,675,153**TOTAL
                ASSETS**
            
            **$**
            14,096,542**LIABILITIES
                AND STOCKHOLDER'S EQUITY**CURRENT
                LIABILITIESAccounts
                Payable
            
            $
            1,077,792Notes
                Payable-in default
            
            
            1,622,153Convertible
                Debentures-in default
            
            
            119,136Other
                Current Liabilities
            
            
            2,079,626Derivative
                Liabilities
            
            
            1,599,778TOTAL
                LIABILITIES
            
            $
            6,498,485STOCKHOLDER'S
                EQUITYCommon
                Stock-$0.001 par value:150,000,000 shares authorized;
            
            
            70,47070,470,955
                shares issued and outstandingAdditional
                Paid-In Capital
            
            
            58,885,813Deferred
                Compensation Expense
            
            
            (581,725
            )Deficit
                accumulated before entering development stage
            
            
            (11,681,500
            )Deficit
                accumulated during development stage
            
            
            (39,095,002
            )Total
                Stockholder’s Equity
            
            
            7,598,056**TOTAL
                LIABILITIES AND STOCKHOLDERS EQUITY**
            
            **$**
            14,096,542




See
      notes
      to the condensed financial statements.





-3-




**POWER3
        MEDICAL PRODUCTS, INC.**
 **(A
        Development Stage Enterprise)**
 **BALANCE
        SHEETS**
 **AS
        OF DECEMBER 31, 2005**





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





-4-
 
 **POWER3
          MEDICAL PRODUCTS, INC.**
 **(A
          Development Stage Enterprise)**
 **STATEMENTS
          OF OPERATIONS**
 **(unaudited)**





**For
                the three month period ended June 30,**
              **2006**
            
            **For
                the three month period ended June 30, 2005**
            
            **For
                the six month period ended June 30, 2006**
            
            **For
                the six month period ended June 30, 2005**
            
            **Development
                Stage from**
              **May
                18, 2004 to**
              **June
                30, 2006**(as
                restated)
            
            
            
            (as
                restated)**REVENUES**:Sales
            
            $
            100,000
            
            
            
            
            
            100,000
            
            
            
            
            
            100,000Other
                revenue
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            4,000Total
                revenue
            
            $
            100,000
            
            
            
            
            
            100,000
            
            
            
            
            
            104,000**COST
                OF GOODS SOLD:**Production
                costsTotal
                cost of goods sold
            
            $**GROSS
                PROFIT**
            
            
            100,000
            
            
            
            
            
            100,000
            
            
            
            
            
            104,000**OPERATING
                EXPENSES**:Stock
                based compensation
            
            $
            1,661,306
            
            
            3,296,275
            
            
            4,746,161
            
            
            6,653,050
            
            
            25,150,018Employee
                compensation and benefits
            
            
            276,331
            
            
            303,497
            
            
            728,119
            
            
            613,454
            
            
            2,784,977Professional
                and consulting fees
            
            
            168,949
            
            
            197,311
            
            
            356,872
            
            
            380,077
            
            
            8,122,043Occupancy
                and equipment
            
            
            25,122
            
            
            27,209
            
            
            51,996
            
            
            63,362
            
            
            232,051Travel
                and entertainment
            
            
            21,508
            
            
            26,404
            
            
            35,898
            
            
            48,410
            
            
            192,522Other
                selling, general and administrative expenses
            
            
            35,086
            
            
            259,681
            
            
            77,242
            
            
            455,743
            
            
            617,960Total
                operating expenses
            
            
            2,188,302
            
            
            4,110,377
            
            
            5,996,288
            
            
            8,214,096
            
            
            37,099,571**LOSS
                FROM OPERATIONS**
            
            **$**
            (2,088,302
            )
            
            (4,110,377
            )
            
            (5,896,288
            )
            
            (8,214,096
            )
            
            (36,995,571
            )**OTHER
                INCOME AND (EXPENSE)**:Derivative
                income (expense)
            
            $
            375,311
            
            
            751,038
            
            
            (144,843
            )
            
            1,469,884
            
            
            3,445,389Interest
                income
            
            
            
            
            
            35
            
            
            
            
            
            259
            
            
            1,475Other
                income (expense)
            
            
            
            
            
            (420,000
            )
            
            
            
            
            (420,000
            )
            
            (715,077
            )Interest
                (expense)
            
            
            (247,386
            )
            
            (13,770
            )
            
            (824,994
            )
            
            
            
            
            (1,450,243
            )Total
                other income(expense)
            
            $
            127,925
            
            
            317,303
            
            
            (969,837
            )
            
            1,050,143
            
            
            1,281,544**NET
                LOSS**
            
            $
            (1,960,377
            )
            $
            (3,793,074
            )
            
            (6,866,125
            )
            
            (7,163,954
            )
            
            (35,714,027
            )**NET
                LOSS PER SHARE**
            
            $
            (0.03
            )
            
            (0.06
            )
            
            (.10
            )
            
            (.11
            )
            $
            (0.51
            )Weighted
                average number of shares outstanding
            
            
            70,058,188
            
            
            65,345,121
            
            
            70,058,188
            
            
            65,345,121
            
            
            70,058,188





-5-





**POWER
      3 MEDICAL PRODUCTS, INC**


**(A
      Development Stage** **Enterprise)**


**CONDENSED
      STATEMENTS OF CASH FLOWS**


**(unaudited)**





DevelopmentFor
                the Six
            
            For
                the Six
            
            Stage
                ResultsMonths
                Ended
            
            Months
                Ended
            
            May
                18, 2004 -June
                30, 2006
            
            June
                30, 2005
            
            June
                30, 2006Operating
                Activities:
            
            
            
            (as
                restated)Net
                Loss
            
            
            (6,866,125
            )
            
            (7,163,954
            )
            
            (35,714,027
            )Adjustment
                to reconcile net loss to net cashused
                in operating activities:Stock
                based services and compensation
            
            
            4,746,161
            
            
            6,653,050
            
            
            31,976,518Stock
                issued to retire preferred stock and debtDerivative
                (income) expense
            
            
            (144,843
            )
            
            (1,469,884
            )
            
            (3,445,389
            )Depreciation
                and amortization
            
            
            13,642
            
            
            22,325
            
            
            78,824Amortization
                of debt discount and finance costs
            
            
            
            
            
            5,000OtherDecrease(increase)
                in deposits
            
            
            
            
            
            
            
            
            (25,900
            )Decrease(increase)
                in prepaidsIncrease
                (decrease) in Deferred finance costs
            
            
            (12,550
            )
            
            57,265
            
            
            277,477Increase(decrease)
                in accounts payable and accrued liabilities and other
            
            
            1,575,775
            
            
            536,635
            
            
            2,997,538Net
                cash used in Operating Activities
            
            
            (687,940
            )
            
            (1,359,563
            )
            
            (3,854,959
            )INVESTING
                ACTIVITIESCapital
                expenditures, net
            
            
            (13,642
            )
            
            36,637
            
            
            (71,842
            )Increase
                (decrease) in other assets
            
            
            10,488
            
            
            53,673
            
            
            25,693Net
                cash used in Investing Activities
            
            
            (3,254
            )
            
            90,310
            
            
            (46,149
            )FINANCING
                ACTIVITIESProceeds
                from CD, warrants and investment rights
            
            
            
            
            
            385,600
            
            
            1,197,041Adjustment
                related to derivatives
            
            
            
            
            
            
            
            
            198,865Proceeds
                from borrowings under notes payable (net)
            
            
            588,780
            
            
            761,650
            
            
            1,756,273Proceeds
                from sale of common stock, net
            
            
            253,929
            
            
            
            
            
            901,746Net
                cash provided by financing activities
            
            
            842,709
            
            
            1,147,250
            
            
            4,053,925Net
                increase (decrease) in cash and cash equivalents
            
            
            151,515
            
            
            (122,003
            )
            
            152,817Cash
                and cash equivalents, beginning of period
            
            
            1,399
            
            
            158,301
            
            
            97Cash
                and cash equivalents, end of period
            
            
            152,914
            
            
            36,298
            
            
            152,914








-6-





**POWER3
        MEDICAL PRODUCTS, INC.**
 **(A
        Development Stage Enterprise)**
 **STATEMENT
        OF CASH FLOWS (cont.)**
 **(unaudited)**




For
                the Six months endedJune 30, 2006
            
            For
                the Six months ended June 30, 2005
            
            Cumulative
                during Development Stage
              May
                18, 2004 to June 30, 2006Cash
                paid for:Interest
            
            
            0
            
            
            0
            
            
            59,840Income
                taxes
            
            
            0
            
            
            0
            
            
            0Non-cash
                transactions:Conversion
                of convertible notes payable and accrued interest to common stockConversion
                of accrued payroll to preferred stockConversion
                of stockholder advances to notes payable
            
            
            
            
            
            
            
            
            -Conversion
                of notes payable to advances from stockholders
            
            
            384,959Common
                stock issued for services (at market, date of agreement or
                contract):For
                consulting contracts and services
            
            
            244,314
            
            
            
            
            
            10,377,454For
                asset acquisition (15,000,000 shares)
            
            
            
            
            
            
            
            
            13,500,000For
                compensation contracts
            
            
            
            
            
            
            
            
            25,066,500Conversion
                of preferred stock to common stock
            
            
            
            
            
            
            
            
            3,380,975Conversion
                of other liabilities to stockholder advancesIssuance
                of warrants in connection with servicesIssuance
                of warrants in connection with convertible debentures
            
            
            -





See
      notes
      to the condensed financial statements. ****


-7-


**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.





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





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




-8-


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





***Note
      2.*** **** ***SUMMARY
      OF SIGNIFICANT ACCOUNTING POLICIES***




The
      Company’s financial statements provide for (i) the classification of warrants as
      liabilities, at fair value, (ii) the classification of embedded conversion
      and
      other features embedded in the convertible debentures and investment rights
      as
      liabilities at fair value and (iii) the amortization of discounts that resulted
      in the host instruments using the effective interest method. This revised
      accounting is required because, under current accounting standards, financial
      instruments, such as warrants and embedded conversion features that are indexed
      to a Company’s common stock, are classified as liabilities when either (a) the
      holder possesses rights to net-cash settlement or (b) physical or net-share
      settlement is not within the control of the Company. In such instances, net-cash
      settlement is assumed for financial accounting and reporting, even when the
      terms of the underlying contracts do not provide for net-cash settlement. Such
      financial instruments are initially recorded at fair value and subsequently
      adjusted to fair value at the close of each reporting period. This accounting
      will be utilized in the accounting for these instruments until the Company
      reaquires the ability to share settle the instruments or physically settles
      the
      instruments through other means. Also see Note 8.





Financial
      Instruments and Concentrations of Credit Risk





The
      Company’s financial instruments consist of cash and cash equivalents, accounts
      receivable, accounts payable, accrued expenses, notes payable, derivative
      financial instruments, other current liabilities, and convertible debentures.
      Management believes the carrying values of cash and cash equivalents, accounts
      payable, accounts payable and accrued expenses, notes payable, and other current
      liabilities approximate their fair values due to their short-term nature. The
      convertible debentures have a face value and carrying value of $152,874 and
      $1,400,000, respectively and the Trinity notes payable have a face value and
      carrying value of $326,970 and $315,000, respectively





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





The
      caption Derivative Financial Instruments consists of (i) the fair values
      associated with derivative features embedded in the Convertible Debentures
      and
      (ii) the fair values of the detachable warrants and additional investment rights
      that were issued in connection with the debenture financing arrangements. (See
      Note 8. Financing Arrangements)





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





-9-


Principles
      of Consolidation and Investments





During
      2003, the Company accounted for its investment in its subsidiary, Tenthgate,
      Inc. under the cost method. As described in Note 1, the Company’s former
      subsidiary, known as Tenthgate, Inc., is not consolidated for periods after
      May
      17, 2004, because the Company, in May of 2004, distributed its common stock
      ownership in Tenthgate to a trustee for distribution to the shareholders of
      record as of May 17, 2004. Power3 does not now own or control Tenthgate, Inc.’s
      activities or operations in any manner whatsoever. Since Tenthgate, Inc. was
      spun off in May, 2004, as described in Item I, it is not consolidated for
      periods subsequent to that transaction..





Use
      of
      Estimates





The
      preparation of financial statements in conformity with accounting principles
      generally accepted in the United States of America requires management to make
      certain estimates and assumptions that affect the reported amounts of assets
      and
      liabilities and disclosure of contingent assets and liabilities at the date
      of
      the financial statements. The reported amounts of revenues and expenses during
      the reporting period may be affected by the estimates and assumptions management
      is required to make. Estimates that are critical to the accompanying financial
      statements include assessing the impact of contingencies and the amortization
      periods for the debt issuance costs and debt discount on the convertible
      debentures (see Note 7) as well as estimating depreciation and amortization
      periods of tangible and intangible assets, and long-lived impairments, among
      others. The markets for the Company’s products are characterized by intense
      competition, evolving standards and price competition, all of which could impact
      the future realizability of the Company’s assets. Estimates and assumptions are
      reviewed periodically and the effects of revisions are reflected in the
      financial statements in the period they are determined to be necessary.





Furniture,
      Fixtures and Lab Equipment





Furniture,
      fixtures and lab equipment are stated at cost. Major additions are capitalized,
      while minor additions and maintenance and repairs, which do not extend the
      useful life of an asset, are expensed as incurred. Depreciation and amortization
      are provided using the straight-line method over the assets’ estimated useful
      lives. At June 30, 2006, 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 through periodic
      charges to interest expense over the maximum term of the convertible debentures
      of three years using the effective interest method. Amortization
      of debt discounts to interest expense amounted to $45,603 for the quarter ended
      June 30, 2006.





Long-Lived
      Assets





Statement
      of Financial Accounting Standards (SFAS) 142 “Accounting for Intangible Assets”
provides that goodwill is not subject to periodic amortization, but is evaluated
      at least annually for impairments. The goodwill acquired by the Company at
      the
      time of the May 18, 2004 transaction was evaluated at June 30, 2006, and for
      the
      years ended December 31, 2005 and 2004. Goodwill was determined to not be
      impaired because the fair value of the reporting unit, based on the market
      capitalization of the Company, exceeded the carrying value of the reporting
      unit, based on assets minus liabilities, at year end 2005 and at June 30,
      2006.





Net
      Loss Per Share





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





-10-


Stock
      - Based Compensation





The
      Company accounts for equity instruments awarded to employees for services based
      on the fair value of common stock issued and the intrinsic value of stock
      options and warrants. The company accounts for all equity instruments issued
      to
      those other than employees based on the fair value of the consideration received
      or the fair value of the equity instruments, whichever is more reliably
      measurable. Fair value is measured based on the closing market price of the
      common stock on the effective date of the agreement or Board resolution, using
      the Black Scholes valuation model.





During
      the 2nd quarter of 2006, the Company amortized $1,601,954 to stock-based
      compensation for employees who had been issued stock and $59,362 for warrants
      issued in 2004 and 2005.





Income
      Taxes





The
      Company computes income taxes using the asset and liability method in accordance
      with Financial Accounting Standards Statement No. 109 “Accounting for Income
      Taxes” (“SFAS 109”). Under SFAS 109, deferred taxes are recognized for the tax
      consequences of temporary differences by applying enacted statutory rates
      applicable to future years to differences between the financial statement
      carrying amounts and the tax basis of existing assets and liabilities. Also,
      the
      effect on deferred taxes of a change in tax rates is recognized in income in
      the
      period that included the enactment date. There were no significant temporary
      differences at June 30, 2006.





Research
      and Development





Research
      and development costs, which approximated $62,066 for the quarter ended June
      30,
      2006, were expensed as incurred.





Cash
      Equivalents





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





Advertising
      Costs





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





***Note
      3.*** **** ***GOING
      CONCERN*** ****





The
      Company's financial statements are presented on a going concern basis, which
      contemplates the realization of assets and satisfaction of liabilities in the
      normal course of business. The Company is in the development stage and has
      primarily been involved in research and development and capital raising
      activities. As such the Company has incurred significant losses from operations
      during 2004 and 2005 and in 2006, through the end of the quarter ending June
      30,
      2006..





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





-11-


§
            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.





A
      current
      possibility available to the Company is to raise the remaining funds of
      $1,600,000 potentially available to them pursuant to the Securities Purchase
      Agreement dated October 28, 2004 (the “Agreement”). These funds will be
      immediately reduced by the payment of certain delinquent payables of
      approximately $1,597,500 of certain bridge financing received in 2005 and 2006.
      The Company is in immediate need for capital to continue its operations and
      as
      such its ability to continue as a going concern is subject to its ability to
      generate a profit or obtain necessary funding from outside sources. Management
      believes that even though the Company currently has limited cash resources
      and
      liquidity, assuming exercise of the warrants and additional investment rights
      specified in the Agreement, that the net funds available from the final closing
      under such Agreement will allow the Company to continue operations through
      December, 2006. In the event the final closing and sale of $1,600,000 in
      aggregate principal amount of debentures occurs, but the warrants and additional
      investment rights are not exercised, the Company anticipates that it will need
      to raise additional capital prior to September, 2006 to meet its operating
      costs. However, the Company is currently in default under the conditions set
      forth in the Agreement as well as the debentures and registration rights
      agreement and consequently, there is no assurance that the Company will be
      successful in completing the sale and issuance of the remaining $1,600,000
      aggregate principal amount of debentures and/or the additional investments
      rights pursuant to the Agreement. If the Company is unsuccessful in the closing
      of the sale and issuance of the $1,600,000 aggregate principal amount of
      debentures at the final closing, the Company will be required to obtain
      alternative financing, sell or license some of its technology, and/or curtail
      or
      cease its operations. Any such funding may significantly further dilute existing
      shareholders or may limit the Company’s rights to its technology. Moreover, the
      increase in the number of shares available in the public marketplace may reduce
      the market price for the Company’s common stock, and consequently, the price
      investors may receive at the time of sale. The financial statements do not
      include any adjustments to reflect the possible future effects on the
      recoverability and classification of assets or the amounts and classification
      of
      liabilities that may result from the possible inability of the Company to
      continue as a going concern.





***Note
      4. LOSS PER SHARE***





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





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





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





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





-12-


·
            2,000,000
                shares of warrants were issued in November and December of 2005 to
                Trinity
                Finance Investments associated with two Notes, 1,000,000 warrants
                each,
                for invested funds. The warrants which expire in 7-8 years may be
                converted to a like number of shares at any time prior to their expiration
                date. As a result the Company recorded $6,429 of stock-based compensation
                as a result of the issuance of these warrants during 2005.





During
      each of the 1 st two
      quarters of 2006, $59,352 was amotized to stock compensation expense for
      warrants.





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





***Note
      6*** **.** ***RELATED
      PARTY TRANSACTIONS***





During
      the 1 st and
      2 nd quarters
      of 2006, a holder of a Note Payable from the Company began selling shares which
      had been personally pledged to him by officers of the company, as consideration
      for the Note, and the note holder offset the revenue received from selling
      these
      personally pledged shares against the Note Payable due to him. In order to
      recognize this change in Note Payable balance due to the holder, the Company
      has
      converted $297,698 from Note Payable (Fife) to Due to Officer(R), representing
      the total amount of proceeds received through June 30, 2006, from the sale
      of
      common shares pledged by Steven B. Rash and $87,261 to Due to Officer (G)
      representing the total amount of proceeds received through June 30, 2006, 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 a new lease which expires on August 31, 2009,
      has
      an initial term of sixty-three months, and requires base monthly minimum lease
      payments ranging from approximately $6,000 to $9,600 (plus utilities and
      operating expenses) over the lease term. The lease contains a provision which
      allows the Company to extend the lease for two additional terms of sixty months.
      Rent expense (for the office lease) was $20,236 for the quarter ended June
      30,
      2006.





-13-


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, 2006.





In
      October, 2004, the Company entered into a new lease for computers which expires
      in September, 2006, has an initial term of 24 months and requires base monthly
      minimum lease payments in the amount of $344 per month over the lease term.
      The
      Company paid $1,032 on this lease during the quarter ended March 31, 2006.





Future
      lease commitments are as follows:





2006
            
            $
            64,0862007
            
            $
            106,4202008
            
            $
            114,8002009
            
            $
            39,434





Employment
      Agreements





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





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





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





-14-


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





Other
      Common Stock Grants





In
      addition to the above common stock grants, during 2004, the Company granted
      1,445,000 shares of its common stock to various other employees. Because all
      of
      the shares were granted at no cost to the employees, and because the shares
      generally vest over a period of two years, the total value of the grants, to
      all
      employees, was recorded as $25,451,500 of deferred compensation expense upon
      the
      date of the grant (which amount was determined based on the total number of
      shares granted times the trading values of the shares on the dates the stock
      grants were made). This amount is being amortized to stock based compensation
      expense over the vesting period.





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





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




**Periods
                Ending**
              **December
                31,**
            
            **Amounts**2006
            
            
            313,3332007
            
            
            410,0002008
            
            
            350,0002009
            
            
            131,250Total
            
            $
            1,204,583





Other
      Contingencies





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





-15-


In
      addition, an equipment vendor filed a complaint against Advanced BioChem (which
      related to equipment acquired by Power3 in the May 18, 2004 transaction) in
      April of 2002 in a California court alleging breach of contract and seeking
      damages. Advanced BioChem reached a settlement agreement in April of 2003 under
      which Advanced BioChem agreed to pay the vendor $40,000 in installments through
      August of 2003. At December 31, 2003, Advanced BioChem had a balance remaining
      of $20,000. In April 2005 the equipment vendor filed a lawsuit against Advanced
      BioChem and certain former officers of Advanced BioChem, and against Power3,
      in
      order to enforce its claim for the remaining balance which is past due and
      may
      be assumed by the Company as part of the settlement of the dispute with Advanced
      BioChem as to liabilities assumed in the May 18, 2004 transaction. The Company
      has filed an answer, disputing all allegations in the complaint and expects
      to
      settle this suit in upcoming mediation. As such, no effect has been given to
      any
      loss that might result from the outcome of this litigation in the accompanying
      financial statements.





In
      June,
      2005, Charles Caudle et al filed a lawsuit in Harris County, TX against Advanced
      BioChem, Power3 and the officers and directors of both companies. Power3 has
      filed an answer denying all claims in the lawsuit. The Company believes that
      the
      Plaintiff’s claims are without merit, however the Company cannot be assured it
      will prevail or if the outcome of the action will adversely affect the Company’s
      financial position or operations. The Company disputes the allegations in the
      complaint and the matter has been scheduled for mediation on August 25, 2006.
      No
      effect has been given to any loss that might result from the outcome of this
      litigation in the accompanying financial statements.





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





In
      September, 2005, Focus Partners LLC filed suit against David Zazoff and Power3
      alleging that Power3 breached its agreement with Focus Partners in that it
      failed to issue stock to the Plaintiff according to the terms of their
      agreement, that the stock in question was issued to Zazoff and that Zazoff
      later
      sold the stock in question for $480,000. The Company intends to vigorously
      defend this matter and prosecute its claims and cross-claims. Negotiations
      between the parties are ongoing, however no resolution has been achieved so
      far.
      No effect has been given to any loss that might result from the outcome of
      this
      litigation in the accompanying financial statements.





The
      Company is involved in several other debt collection lawsuits totaling
      approximately $38,600 plus court costs and interest. Since none of these matters
      has come to court, or is expected to within a short amount of time, the Company
      cannot be certain how any of these four matters will be resolved. Although
      the
      Company disputes certain of the claims in these matters, the original debt
      amounts are recorded in accounts payable on the balance sheet of the
      Company.





***Note
      8. FINANCING ARRANGEMENTS*** **:**





**Securities
      Purchase Agreement—Convertible Debentures**





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





-16-


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.





-17-


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





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





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





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





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





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





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





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





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





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





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





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





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





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





·
            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;





-18-


·
            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.





-19-


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 $14,251 and
      $75,279, at December 31, 2004 and 2005, respectively. The carrying values were
      increased to $107,280 as of March 31, 2006 and $152,874 as of June 30, 2006.
      Convertible debentures consist of face value $1,000,000 and $1,400,000, as
      of
      December 31, 2004 and 2005, respectively, non-interest bearing convertible
      debentures due in two traunches: $1,000,000 on October 28, 2007 and $400,000
      due
      on January 26, 2008. The convertible debentures arose from the aforementioned
      financing, where the proceeds were allocated among the components of the
      financing arrangement, as follows:





**Traunch
                1**
            
            **Traunch
                2****Instrument:**
            
            **October
                28, 2004**
            
            **January
                26, 2005**
            
            **Total**Convertible
                debentures (1)
            
            $
            --
            
            $
            --
            
            $
            --Common
                stock warrants (2)
            
            
            3,070,750
            
            
            135,000
            
            
            3,205,750Embedded
                conversion feature
            
            
            882,556
            
            
            266,592
            
            
            1,149,148Additional
                investment rights
            
            
            606,867
            
            
            225,415
            
            
            832,282Derivative
                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, and $45,603 for quarter ended June 30,
                2006.





-20-


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





(3)
            Direct
                financing costs associated with the offerings amounted to $140,959
                and
                $62,000 for Traunch 1 and Traunch 2, respectively. Deferred financing
                costs are being amortized through periodic charges to interest expense
                using the effective method. Amortization of the deferred financing
                costs
                amounted to $7,238 for the quarter ended June 30, 2006.





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





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





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





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





**Shares
                of common stock**
            
            **2004**
            
            **2005**Common
                stock warrants
            
            
            2,500,000
            
            
            2,833,333Embedded
                conversion feature (1)
            
            
            2,039,216
            
            
            18,666,666Additional
                investment rights (1)
            
            
            1,699,346
            
            
            15,555,555Other
                derivative instruments (2)
            
            
            1,480,000
            
            
            3,480,0007,718,562
            
            
            40,535,556





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





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





-21-


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





Fair
      value considerations for derivative financial instruments :





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


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





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





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


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





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





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





-22-


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





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





Trinity
      Notes Payable





During
      November and December 2005, the Company issued $300,000 face value, 11% notes
      payable and detachable warrants to purchase 2,000,000 shares of common stock
      to
      Trinity Financing Investments Corporation. Principal due on the notes was
      payable in the amount of $150,000 in March and $150,000 in April, 2006, along
      with accompanying interest. The notes remain outstanding and payable as of
      June
      30, 2006. The warrants have eight-year terms and strike prices of $0.25 for
      1,000,000 shares and $0.14 for 1,000,000 shares.





The
      proceeds from the Trinity financing were allocated first to the warrants, based
      upon their fair values, with the balance of $103,100 allocated to the notes.
      The
      allocation of proceeds to the fair value to the warrants was performed because,
      as discussed in the previous section, share settlement is not within
      management’s control. Such amount was initially classified as a derivative
      liability. The resulting note discount is being amortized through periodic
      charges to interest expense using the effective method. Amortization of note
      discount amounted to $207,900 during the period from issuance of the notes
      to
      December 31, 2005.





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





***Note
      9. OTHER SIGNIFICANT EQUITY TRANSACTIONS***





On
      January, 5, 2006, Power3 executed an agreement with Glocap Advisors LLC
      (“Glocap”) wherein the Company engaged Glocap to act as financial advisors and
      provide the Company with financial advice and strategic consulting services.
      The
      Company agreed to provide Glocap with a retainer equal to $30,000 in
      free-trading common stock of the Company upon the signing of the engagement
      letter. In confirmation of this agreement, Power3 issued 226,415 shares of
      common stock to Glocap, as S-8 shares issued under its 2004 Stock Compensation
      Plan. Power3 continues to work closely with Glocap in the area of potential
      strategic and financial partners. ****





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





Stock
      Option Plans





The
      Company has various stock option and warrant plans outstanding. Options granted
      under the 1998 stock option plans are exercisable only after the respective
      vesting period, which is determined by the Company's stock option committee.
      Options expire seven years from the date of grant. Under the 1999 stock option
      plan, options granted to employees vested ratably over three years as determined
      by the Company's stock option committee for options granted to officers,
      directors, and consultants. Options expire ten years from the date of grant.
      A
      total of 6,360 options remained in effect for warrants granted in 2000. The
      fair
      value of these warrants was estimated at the date of grant using a Black-Scholes
      option pricing model with the following assumptions for warrants granted in
      2000: risk-free interest rate of 6.03%;dividend yield of 0%; volatility factor
      of the expected market price of the Company’s common stock of $.34; and a
      weighted-average expected life of the options of 2.7 years.





-23-


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
      39,497,073 shares of common stock and 580,000 warrants under the 2004 Plan.
      Based upon the automatic increase provisions above, the number of shares
      available for issue under the Plan is 10,570,644, based upon 15% of the
      outstanding shares as of June 30, 2006.





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





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





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





-24-





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





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





Weighted
                Average
            
            WeightedNumber
            
            Remaining
                Contractual
            
            AverageExercise
                Price
            
            Outstanding
            
            Life
                (in years)
            
            Exercise
                Price$
            .14
            
            
            1,000,000
            
            
            8.0
            
            $
            .14$
            .25
            
            
            1,000,000
            
            
            7.0
            
            $
            .25$
            .98
            
            
            300,000
            
            
            2.0
            
            $
            .98$
            1.00
            
            
            100,000
            
            
            1.5
            
            $
            1.00$
            1.08
            
            
            333,333
            
            
            2.0
            
            $
            1.08$
            1.43
            
            
            50,000
            
            
            1.8
            
            $
            1.43$
            1.44
            
            
            2,500,000
            
            
            1.9
            
            $
            1.44$
            2.77
            
            
            30,000
            
            
            2.0
            
            $
            2.77$
            3.00
            
            
            100,000
            
            
            1.9
            
            $
            3.00$
            6.50
            
            
            5,460
            
            
            5.0
            
            $
            6.50$
            50.00
            
            
            900
            
            
            2.0
            
            $
            50.005,419,693
            
            
            
            
            $
            .97





In
      February, 2006, Power3 executed an agreement to issue warrants allowing the
      holder, The Kaminer Group, to purchase the equivalent of $2,000 per month in
      common stock, based upon the average daily closing market price for the stock
      during the previous month.





***Note*** **** ***10.*** **** ***RECENT
      PRONOUNCEMENTS***




*FIN
      46 - Consolidation of Variable Interest Entities*





In
      January 2003, the FASB issued FIN 46, (revised in December 2003 as FIN46R)
      "Consolidation of Variable Interest Entities," which clarifies the application
      of Accounting Research Bulletin ("ARB") 51, Consolidated Financial Statements,
      to certain entities (called variable interest entities) in which equity
      investors do not have the characteristics of a controlling financial interest
      or
      do not have sufficient equity at risk for the entity to finance its activities
      without additional subordinated financial support from other parties. The
      disclosure requirements of this Interpretation are effective for all financial
      statements issued after January 31, 2003. The consolidation requirements apply
      to all variable interest entities created after January 31, 2003. In addition,
      public companies must apply the consolidation requirements to variable interest
      entities that existed prior to February 1, 2003 and remain in existence as
      of
      the beginning of annual or interim periods beginning after June 15, 2003. The
      adoption of FIN 46R had no impact on the financial statements of the Company
      as
      the Company has no variable interests in variable interest entities.





-25-


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





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





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





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





*SFAS
      123(R) ‘Share-Based Payments’*





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





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





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





-26-


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





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





*FASB
      154 Accounting Changes and Error Corrections.*





SFAS
      No.
      154 replaces APB Opinion No. 20, Accounting Changes and SFAS No. 3, Reporting
      Accounting Changes in Internal Financial Statements, and changes the
      requirements for the accounting for and reporting of a change in accounting
      principle. SFAS No. 154 requires retrospective application of changes in
      accounting principle to prior periods’ financial statements unless it is
      impracticable to determine either the period-specific effects or the cumulative
      effect of the change. SFAS No. 154 is effective for accounting changes and
      corrections of errors made in fiscal years beginning after December 15, 2005.
      We
      adopted SFAS No. 154 on January 1, 2006. Any impact on our results of operations
      and earnings per share have been recognized where appropriate.





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





Forward
      Looking Statements





This
      report contains certain forward-looking statements of the intentions, hopes,
      beliefs, expectations, strategies, and predictions of the Company or its
      management with respect to future activities or other future events or
      conditions within the meaning of Section 27A of the Securities Act of 1933,
      as
      amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
      These statements are usually identified by the use of words such as “believes,”
“will,” “anticipates,” “estimates,” “expects,” “projects,” “plans,” “intends,”
“should,” “could,” or similar expressions. These statements are based on certain
      assumptions and analyses made by the Company in light of its experience and
      its
      perception of historical trends, current conditions, expected future
      developments and other factors it believes are appropriate. Investors are
      cautioned that all forward-looking statements involve risks and uncertainties,
      including, without limitation:





·
            The
                Company’s history of operating
                losses;





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





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





-27-


·
            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





The
      Company is an early stage development company engaged in the early detection,
      monitoring, and targeting of diseases through the analysis of proteins. The
      Company’s business objective is to commercialize its intellectual property by
      focusing on disease diagnosis, protein and biomarkers identification and drug
      resistance in the areas of cancers, neurodegenerative and neuromuscular
      diseases. The Company has established a scientific advisory board to assist
      in
      the research and development of its products. The members of the scientific
      advisory board are recognized leaders in their chosen fields, and the Company
      is
      working with them in the development of effective early diagnosis and drug
      targets for early treatment of cancers, neurodegenerative and neuromuscular
      diseases.





Prior
      to
      the Company’s acquisition of the assets of Advanced BioChem, Inc. on
      May 18, 2004, the Company was primarily engaged in the production and
      distribution of surgical safety devices through the operations of its
      subsidiary, Power3 Medical, Inc. On May 18, 2004, the Company completed its
      acquisition of the assets of Advanced BioChem. The Company acquired all assets
      and intellectual properties of Advanced BioChem and assumed certain liabilities
      in exchange for the issuance of 15,000,000 shares of the Company’s common stock.
      Subsequent to the Advanced BioChem transaction, the Company established the
      new
      business direction described above. After the acquisition of the assets and
      certain liabilities of Advanced BioChem, the Company transformed into an
      advanced proteomics company applying existing proprietary methodologies to
      commercialize the intellectual property it acquired in the Advanced BioChem
      transaction and subsequently developed new proprietary methodologies related
      to
      the discovery and identification of protein biomarkers associated with diseases.
      The Company currently has no products for sale nor does it provide any service
      for hire. The Company is focused on research and development activities and
      initiating the “proof of concept” of its technologies.





-28-


The
      Company is in the developmental stage. As such, it has not begun generating
      revenue from the sales of products or services, nor has it produced such for
      sale at this time. The Company is dependent on debt and equity capital for
      its
      activities. Our ongoing operations consist of research and development
      operations and activities directed toward commercializing the intellectual
      property of the Company at this time. The Company has been in its current
      developmental stage since its acquisition of its current set of intellectual
      properties on May 18, 2004.





The
      Company has incurred significant losses since inception. The Company anticipates
      that it will continue to incur substantial operating losses as it progresses
      in
      its research and development activities as well as the commercialization of
      its
      technologies. The Company does not expect to produce revenues from operations
      in
      the near term and expects that its revenues will be limited to research grants,
      collaboration agreements, and other strategic alliances which the Company is
      able to obtain. The Company has an immediate need for capital to continue its
      current operations





*Scientific
      Developments*





The
      members of the Company’s scientific team have developed a method for the
      differential diagnosis of neurodegenerative diseases utilizing blood serum,
      which was co-developed with neurologist, Dr. Stan Appel, Chair of Neurology
      and
      his team at The Methodist Hospital Neurological Research Institute in Houston.
      Under the trade name of NuroProTM, 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 do research in the area of early breast cancer
      detection, based on the identification and study 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.
      In the area of neurodegenerative disease, the Company has completed clinical
      validation studies involving over 650 patient samples and is utilizing
      biostatistics to monitor appropriate biomarkers for diagnostic sensitivity,
      specificity, positive predictive value, and negative predictive value. By
      testing patient body fluids and tissues, such as serum, nipple aspirate fluid,
      and bone marrow, the Company has discovered unique snapshots of protein patterns
      in diseases including:




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




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




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




The
      Company has successfully identified more than 500 potential protein biomarkers.
      Of these, 350 were identified by mass spectroscopy.




-29-


Power3
      is
      transitioning from a company focused only on research and development to one
      that is demonstrating “proof of concept” of its technology as it enters the
      commercialization stage for its technology, products and services. The Company
      is engaged in the process of developing a portfolio of products including the
      biomarkers and blood serum tests (for early detection of breast cancer),
      NuroProTM biomarkers and blood serum tests (for neurodegenerative diseases
      including Alzheimer’s, Parkinson’s and ALS diseases) and biomarkers, tests and
      drug targets for drug resistance to chemotherapeutics.




**License
      and Sponsored Research**




Advanced
      Bio/Chem entered into a license agreement with the Board of Regents of The
      University of Texas System, an agency of the State of Texas, on behalf of The
      University of Texas M.D. Anderson Cancer Center in September 2003, which the
      Company acquired in its transaction with Advanced Bio/Chem. The license
      agreement gives the Company an exclusive, worldwide, royalty-bearing license
      to
      certain patent rights and technology rights for proteomic methods of diagnosis
      and monitoring of breast cancer using nipple aspirate fluids .
      On
      February 17, 2006, Power3 received notice from UT M.D. Anderson Cancer Center
      confirming that the license agreements between Power3 and UT M.D. Anderson
      Cancer Center were terminated under Section 13.3 of the license agreement for
      breach of certain payment obligations as outlined in the License Agreement.
      The
      letter further described maintenance fees, license documentation fees and patent
      costs due to UT M.D. Anderson in the amounts of $46,945.62, prior to the
      termination date. In addition, the letter stated that Power3 was obligated
      to
      grant UT M.D. Anderson a non-exclusive royalty-bearing license to improvements
      made by Power3 and asked the Company to immediately disclose these improvements
      so that UT M.D. Anderson could consider whether it wished to license them.





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




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




-30-


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




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





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





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





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





-31-


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





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





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





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





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





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





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





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





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





On
      October 13, 2005, Power3 executed a Research Agreement with Pfizer, Inc. to
      further evaluate the Company’s NuroProTM test capabilities and to test blind and
      unblinded samples, provided by Pfizer, under controlled conditions. The Company
      has completed the analysis of the results and has presented them to
      Pfizer.





-32-


On
      December 28, 2005, the Company submitted 6 breast cancer blood serum biomarkers
      to Biosite, for consideration under the agreement. The development of antibodies
      was begun by Biosite in the quarter ending March, 2006 and the Company received
      its first payment, from Biosite in the second quarter ending June 30, 2006,
      for
      blood serum samples only, collected in association with the Biosite
      Licensing/Collaboration Agreement.





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 NuroProTM to differentiate control subjects from subjects with
      Alzheimer’s disease. It is anticipated the assessment will begin in third
      quarter 2006.




**Breast
      Cancer Screening Test**




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





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




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





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





Concurrently,
      Power3 conducted its own biomarker discovery program using blood serum samples
      collected from the same clinical validation sites, in collaboration with Dr.
      Alan Hollingsworth at the Mercy Woman’s Center. Starting November 2004, Power3
      analyzed 548 sera from breast cancer, benign patients and normal
      individuals.





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





-33-


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





**Neurodegenerative
      Screening Test**




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




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




The
      Company is continuing its ongoing clinical validation program in collaboration
      with the Methodist Neurological Institute. The initial phase was completed
      in
      July 2004 and the latest phase was completed in March, 2006. The Company’s
      database continues to increase with unique samples classified either as normal
      or being clinically diagnosed with ALS, Alzheimer’s, Parkinson’s, and other
      related neurological disorders. The number of differentially expressed proteins
      used in the discriminant analysis 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 improved using the proprietary PD3TM process,
      including PolyiterativeTM biostatistical analysis on the larger database and the
      expanded set of biomarkers. Currently, select panels of biomarkers are being
      employed in development of the NuroProTM blood serum-based tests for four disease
      diagnostics including neurological diseases of motor control such as Parkinson’s
      disease, ALS and their like disorders; ALS specific tests for ALS vs. ALS-like
      disorders; Alzheimer’s disease specific tests; and a Parkinson’s
      disease-specific test. Pre-IDE applications for the first two have been filed
      with the U.S. Food and Drug Administration.





**Drug
      Resistance to Chemotherapeutic Agents**




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





**Intellectual
      Property**





During
      the quarter ended June 30, 2006, Power3 filed one utility patent application
      with the United States Patent and Trademark Office, entitled “Assay for
      Neuromuscular Diseases”. The filing of this patent increases the number of
      pending patent applications to 21.





-34-





**Strategic
      Partners Initiative**




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





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





**Results
      of Operations**





*Three
      Months Ended June 30, 2006 as Compared to Three Months Ended June 30, 2005*





Revenues
      for the three months ending June 30, 2006 were $100,000 and $-0- for the same
      period in 2005. This revenue resulted from the 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 unlikely that the Company
      will receive any revenues from commercial operations in the immediate
      future.





Total
      operating expenses were $2,188,302 during the three months ended June 30, 2006
      as compared to $4,110,377 for the three months ended June 30, 2005, a decrease
      of $1,922,075. The decrease in operating expenses was primarily attributable
      to
      a decrease of $1,634,969 in stock-based compensation expense and amortized
      costs
      of the warrants issued to consultants and to the convertible debenture holders.
      This reduction was not due to any personnel losses, but rather to the end of
      the
      accounting amortization period for the stock-based compensation costs. Other
      income and expenses, including gain from derivatives, were $127,925 in the
      quarter ended June 30, 2006 as compared to $317,303 during the quarter ended
      June 30, 2005.





Interest
      expense thus far in 2006 has amounted to $824,994 as compared to $-0- during
      the
      same six month period of 2005. The increase in interest expense is primarily
      attributable to the recognition of the additional interest due on the notes
      payable the company has taken on and the amortization of the debt discounts
      and
      deferred finance costs.





The
      above
      matters result in our Net Loss being $1,832,697 less thus far in 2006 than
      during the first six months of 2005.





Liquidity
      and Capital Resources





The
      Company has financed its operations since the date of the Advanced BioChem
      transaction primarily through the net proceeds generated from the sale of common
      stock, the issuance of convertible debentures and the issuance of notes payable
      as bridge loans. From the date of the Advanced BioChem transaction through
      June
      30, 2006, the Company has raised approximately $3,292,978 in debt capital.
      As
      described in “Recent Financing” below, the Company may sell an additional
      $1,600,000 in aggregate principal amount of convertible debentures following
      the
      effectiveness of the Registration Statement on Form SB-2 filed by the
      Company for the resale of certain shares of the Company’s stock by the
      purchasers of the Company’s convertible debentures. The Company is in default
      under the terms of the Securities Purchase Agreement, the previously issued
      debentures and related registration rights agreement and there can be no
      assurance that the existing investors will purchase all or any portion of the
      additional $1,600,000 aggregate principal amount of debentures. If additional
      debentures are issued and sold by the Company, the Company will use a portion
      of
      the proceeds from the sale and issuance of such debentures to pay the principal
      balance owing under the promissory notes dated April and September, 2005,
      the principal balance owing under the promissory note dated June 17, 2005,
      amended in September, 2005 and the Officer Advances.





-35-


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 Company  has
      an
      immediate need for capital to continue its current operations. In addition
      to
      seeking additional capital, the Company will seek revenues from research grants,
      collaboration agreements, and other strategic alliances.





In
      the
      event the sale and issuance of the $1,600,000 aggregate principal amount of
      debentures occurs and the investors exercise their warrants and additional
      investment rights, the Company anticipates it will have adequate cash to meet
      its funding requirements through the fourth quarter of 2006. The foregoing
      projections are based upon the Company’s existing obligations. If the Company’s
      obligations are increased, the Company will require additional funding sooner
      than is currently anticipated.





Net
      cash
      used in operating activities amounted to ($687,940) for the six months ended
      June 30, 2006, compared to ($1,359,563) for the six months ended June 30, 2005.
      The change in net cash used in operating activities during 2006 was primarily
      due to a smaller loss from operations and an increase in accounts payable,
      as
      compared to the same three months of 2005.





Net
      cash
      provided by financing activities approximated $842,709 for the six months ended
      June 30, 2006, as compared to $1,147,250 for the six months ended June 30,
      2005.
      The decline was based primarily on lower amounts of new bridge loans taken
      out
      during the second quarter of 2006.





As
      of
      June 30, 2006, the Company’s principal source of liquidity was approximately
      $152,914 in cash.





*Recent
      Financing*





On
      March
      29, 2006, the Company executed a promissory note with John Fife (the “note
      holder”) in the principal amount of $400,000 (the “Principal”.) The note is due
      and payable on the earlier of June 28, 2006 or the fifth day following the
      effective date of the Company’s registration statement on Form SB-2 becoming
      effective. In case of default, all amounts due on the note shall bear interest
      at the rate of 18% per annum from the date such interest is due through and
      including the date of payment. The note is secured by a stock pledge agreement
      from the Chief Executive Officer and the Chief Scientific Officer of Power3,
      as
      a pledge of their personal shares of common stock of Power3.





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





*Plan
      of Operation and Cash Requirements*





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





-36-


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 June 30, 2007, to continue its development activities, undertake
      and perform clinical validation studies, continue its marketing efforts and
      maintain its administrative infrastructure, broken down as follows:





Estimated
        Expenditures Required
 During
        Next Twelve Months


General
                and Administrative
            
            $
            2,450,000Patent
                filings and intellectual property
            
            $
            100,000Capital
                Expenditures and research agreements
            
            $
            450,000Total
            
            $
            3,000,000





The
      foregoing is based upon the Company’s current estimated cash requirements. The
      resolution of the Company’s current dispute with Advanced BioChem regarding the
      liabilities assumed by the Company in the parties’ transaction may result in an
      increase in the Company’s liabilities and 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 second quarter of 2006. In the event the sale and issuance of such
      debentures occurs and the investors exercise their warrants and additional
      investment rights, the Company anticipates it will have adequate cash to meet
      its current funding requirements through the end of 2006.





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
      June
      30, 2006, with the exception of the lease for its operating facility, and
      employment agreements entered with its three principal officers, the Company
      did
      not have any significant off balance sheet commitments.





*Critical
      Accounting Policies*





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





-37-


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





In
      December 2004, the Financial Accounting Standards Board issued Statement Number
      123 (“FAS 123 (R)”), Share-Based Payments. FAS 123 (R)
      requires all entities to recognize compensation expense in an amount equal
      to
      the fair value of share-based payments such as stock options granted to
      employees. The Company will be required to apply FAS 123 (R) on a
      modified prospective method. Under this method, the Company will be required
      to
      record compensation expense (as previous awards continue to vest) for the
      unvested portion of previously granted awards that remain outstanding at the
      date of adoption. In addition, the Company may elect to adopt
      FAS 123 (R) by restating previously issued financial statements,
      basing the amounts on the expense previously calculated and reported in the
      pro
      forma disclosures that had been required by FAS 123, FAS 123 (R)
      is effective for the first reporting period beginning after June 15, 2005.
      The Company has not yet determined the impact that FAS 123 (R) will
      have on its financial statements.





*Item
      3.* ** *CONTROLS
      AND PROCEDURES*





*Disclosure
      Controls and Procedures*




Under
      the
      supervision and with the participation of the Company’s management, including
      its Chief Executive Officer and Chief Financial Officer, the Company conducted
      an evaluation of its disclosure controls and procedures (as defined in Rules
      13a-15(e) and 15d-15(e) of the Exchange Act). Based on this evaluation and
      for
      the reasons set forth below, the Chief Executive Officer and Chief Financial
      Officer concluded that the Company’s disclosure controls and procedures were
      ineffective as of December 31, 2005 and June 30, 2006.




As
      reported in the Company’s Quarterly Reports on Form 10-QSB, the Company
      identified certain deficiencies which caused management to conclude that the
      Company’s disclosure controls continue to be ineffective as of June 30, 2006.
      The Company has undertaken steps and implemented actions as disclosed in its
      previous Form 10-QSB’s in an effort to resolve these deficiencies. While the
      actions identified in the previously filed Form 10-QSB’s and the actions
      identified below have addressed many of these deficiencies, the Company
      continued to have deficiencies with respect to its disclosure controls and
      procedures at June 30, 2006, including the following:




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




-38-


Management
      is committed to a sound disclosure control and internal control environment
      and
      is continuing its efforts to improve the Company’s infrastructure, personnel,
      processes and controls to help ensure that the Company is able to produce
      accurate financial statements on a timely basis.





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





Limitations
      on Effectiveness of Controls





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




*Changes
      in Internal Control Over Financial Reporting*




During
      the last two quarters of 2004, the Company continued the implementation of
      more
      rigorous policies with respect to its disclosure and financial reporting review
      process including improvements of its infrastructure and processes to improve
      its internal control over financial reporting. The Company also is continuing
      its implementation of procedures to improve its review and processing of
      non-accounting documentation and contracts.





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





Other
      than the changes described above, there were no changes in the Company’s
      internal control over financial reporting that occurred during the Company’s
      fiscal quarter ended June 30, 2006 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 alleges that Advanced BioChem and Power3 are
      liable to Chapman Spira for damages allegedly resulting from the breach of
      a
      letter agreement between Chapman Spira and Advanced BioChem relating to the
      performance of strategic and investment banking services. Chapman Spira is
      seeking damages in the amount of $1,522,000 plus interest. The Company has
      filed
      an answer in the lawsuit. The Company disputes the allegations in the complaint
      and is vigorously defending this matter. Steven Rash has been dismissed from
      the
      suit personally.





-39-


An
      additional action was commenced in April, 2005, by an equipment vendor and
      concerns equipment which the Company acquired in its May 18, 2004 transaction
      with Advanced BioChem, now known as Industrial Enterprises of America. Advanced
      BioChem reached a settlement agreement with the equipment vendor in April of
      2003 under which Advanced BioChem would pay the equipment vendor $40,000 in
      installments through August, 2003. As of December 31, 2003, Advanced BioChem
      had
      a balance remaining of $20,000. In April, 2005, the equipment vendor filed
      a
      lawsuit against Advanced BioChem, certain former officers of Advanced BioChem
      and against Power3 in order to enforce its claim for the remaining balance
      which
      is past due. The Company has filed an answer, disputing the allegations in
      the
      complaint and is vigorously defending this matter, and expects to settle this
      suit in upcoming mediation.





In
      June,
      2005, Charles Caudle and others filed a lawsuit in Harris County, Texas, against
      Advanced BioChem, Power3 and the officers and directors of both companies.
      The
      suit alleges that Advanced BioChem, Power3 and the officers and directors of
      Power3, are liable to plaintiffs for unspecified damages. The Company, and
      its
      officers and directors, has filed an answer denying all claims in the lawsuit.
      The Company disputes the allegations in the complaint and is vigorously
      defending this matter. In addition, this matter has been scheduled for mediation
      on August 25, 2006, in Houston, Texas.





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




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





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





On
      August
      30, 2005, Carlotta Lansford, a previous consultant for Advanced BioChem, now
      known as Industrial Enterprises of America, commenced an action against Advanced
      BioChem and Power3 in Harris County, Texas. Plaintiff is seeking $3,295 in
      unpaid consulting and accounting fees. The Company believes this lawsuit will
      be
      settled prior to the court date, however no resolution has been achieved thus
      far. The Company disputes the allegations in this matter and is vigorously
      defending this matter. The debt is recorded in accounts payable by
      Power3.





On
      February 15, 2006, Bowne of Dallas LP commenced an action in County Court of
      Dallas County, Texas, against Power3 seeking payment for services allegedly
      rendered by Plaintiff to Power3. Plaintiff seeks damages in the amount of
      $17,315.03. The Company believes this lawsuit will be settled prior to the
      court
      date, however no resolution has been achieved thus far. The Company disputes
      the
      allegations in the complaint and is vigorously defending this matter. The debt
      is recorded in accounts payable by Power3. This matter has entered final
      settlement negotiations.





-40-


On
      October 28, 2005, Power3 received Notice of a Petition to Enforce Foreign
      Judgement citation filed against the Company by KForce regarding an employment
      fee adjudicated in December, 2003 in Harris County, Texas, originally heard
      in
      the state of Florida, against the Company, in the amount of $15,872.77, together
      with $4,735.02 in interest. Power3 does not agree with the Foreign Judgement
      and
      is attempting to resolve the issue prior to enforcement. No resolution has
      been
      achieved on this issue at this time, however the Company is endeavoring to
      resolve the petition. This debt is recorded and outstanding in accounts payable
      by the Company. In this action, Plaintiff seeks the enforcement of a foreign
      judgement entered in December, 2003, in the State of Florida, in the amount
      of
      $15,872,77, with interest thereon, for non-payment of fees for services rendered
      by Plaintiff. The Company disputes the allegations in the complaint and is
      vigorously defending this matter.





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




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





During
      the 2 nd quarter
      of 2006, Power3 sold shares of its common stock under its 2004 Stock
      Compensation Plan as follows: on June 8, 2006, Power3 sold 38,460 shares of
      restricted common stock to a private investor to raise working capital.





**Item
      3. Defaults Upon Senior Securities**





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





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





**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 June 30, 2006.





**Item
      5. Other Information**





None.





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**Item
      6. Exhibits**





**EXHIBIT
                NO.**
            **DESCRIPTION**10.1
            Securities
                Purchase Agreement dated October 28, 2004 among the Company and each
                purchaser identified therein (incorporated by reference to Exhibit
                10.1 to
                the Company’s Form 8-K filed on November 3, 2004).10.2
            Amendment
                to Securities Purchase Agreement dated January 19, 2005, between
                the
                Company and each purchaser identified therein (incorporated by reference
                to Exhibit 10.8 of the Company’s Registration Statement on Form SB-2 (File
                No. 122227)).10.3
            Power3’s
                Registration Statement (incorporated by reference to the SB-2 (File
                No.
                122227) as filed on January 21, 2005).10.4
            Promissory
                Note dated November 3, 2005 between Power3 and Trinity financing
                in the
                amount of $150,000 (incorporated by reference to Exhibit 10.1 to
                the
                Company’s Form 8K filed on November 8, 2005).10.5
            Promissory
                Note executed on December 12, 2005 between Power3 and Trinity Financing
                (incorporated by reference to Exhibit 10.1 to the Company’s Form 8K filed
                December 12, 2005).10.6*
            Promissory
                Note, dated June 1, 2006, executed by Power3 and John Fife in the
                amount
                of $266,000.10.7*
            Stock
                Pledge Agreement for Fife Promissory Note, dated June 1,
                2006.10.8
            Amended
                and Restated Employment Agreement for Steven B. Rash (incorporated
                by
                reference to Exhibit 10.1 to the Company’s Form 8-K filed January 5,
                2005).10.9
            Amended
                and Restated Employment Agreement for Ira L. Goldknopf, PhD (incorporated
                by reference to Exhibit 10.2 to the Company’s Form 8-K filed on January 5,
                2005)10.10
            Employment
                Agreement with John Burton dated September 15, 2005 (incorporated
                by
                reference to Exhibit 10.1 to the Company’s Form 8-K filed on September 21,
                2005).10.11
            Exclusive
                License Agreement dated effective June 28, 2005, by and between Power3
                and
                Baylor College of Medicine (incorporated by reference to Exhibit
                10.1 to
                the Company’s Form 10-QSB for the quarter ended September 30,
                2004).10.12
            Patent
                and Technology License Agreement dated September 1, 2003 by and between
                The University of Texas System, on behalf of The University of Texas
                M.D.
                Anderson Cancer Center and Advanced BioChem (incorporated by reference
                to
                Exhibit 10.3 to the Company’s Form 10-QSB for the quarter ended September
                30, 2004).10.13
            Collaborative
                Research Agreement dated March 21, 2005, by and between New Horizons
                Diagnostics and Power3 (incorporated by reference to Exhibit 10.1
                to the
                Company’s Form 8-K filed on March 28, 2005).10.14
            Collaborative
                Research and Licensing Agreement dated May 17, 2005, by and between
                BioSite Incorporated and Power3 (incorporated by reference to Exhibit
                10.13 to the Company’s Form 10-KSB filed on September 9,
                2005).10.15
            Agreement
                between Power3 and Glocap executed on January 5, 2006(incorporated
                by reference to Exhibit 10.22 to the Company’s Form 10-QSB for the quarter
                ended March 31, 2006).





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10.16
            Promissory
                Note dated March 2, 2006 between Power3 and Dr. Ira Goldknopf in
                the
                amount of $89,400 (incorporated by reference to Exhibit 10.19 to
                the
                Company’s Form 10-QSB for the quarter ended March 31,
                2006).10.17
            Promissory
                Note dated March 1, 2006 between Power3 and Steven B. Rash in the
                amount
                of $50,000 (incorporated by reference to Exhibit 10.18 to the Company’s
                Form 10-QSB for the quarter ended March 31, 2006).10.18
            Promissory
                Note, dated March 28, 2006, executed by Power3 and John Fife in the
                amount
                of $400,000 (incorporated by reference to Exhibit 10.20 to the Company’s
                Form 10-QSB for the quarter ended March 31, 2006).10.19
            Stock
                Pledge Agreement for Fife Promissory Note, dated March 28, 2006
                (incorporated by reference to Exhibit 10.21 to the Company’s Form 10-QSB
                for the quarter ended March 31, 2006).31.1*
            Certification31.2*
            Certification32.1**
            Certification
                Pursuant to Section 90632.2**
            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
              August
                  11, 2006Steven
                  B. Rash
              Chief
                  Executive Officer/s/
                  John P.
                  Burton
              Chief
                  Financial Officer
              August
                  11, 2006John
                  P. Burton






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