U.S.
Securities and Exchange Commission


Washington,
D.C. 20549






Form 10-Q




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




For the
quarterly period ended September 30, 2008




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




For the
transition period from _______________ to ________________




COMMISSION
FILE NO. 000-24921




Power3
Medical Products, Inc.


(Exact
name of small business issuer as specified in its charter)





New
      York
            0-24921
            65-0565144(State
      or other jurisdiction of
              incorporation
      or organization)
            (Commission
      File Number)
            (I.R.S.
      Employer
              Identification
      No.)3400
      Research Forest Drive, Suite B2-3
              Woodlands,
      Texas
              (Address
      of principal executive offices)
            77381
              (Zip
      Code)





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





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





Securities
registered under Section 12(g) of the Exchange Act:


Common
stock, $.001 par value


(Title of
class)




Indicate
by check mark whether the issuer (1) filed all reports required to be filed
by Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes ý
No  ̈




Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, a non-accelerated filer., or a smaller reporting
      company.Large
      accelerated filer
            o
            
            
            Accelerated
      filer
            oNon-accelerated
      filer
            o
            
            
            Smaller
      reporting company
            x





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




The number of shares outstanding of the
registrant’s common stock, par value $.001 per share, as of November 19, 2008,
was 149,859,290 shares.


The number of shares outstanding of the
registrant’s preferred Series B stock, par value $.001 per share, as of November
19, 2008, was 1,500,000 shares.










TABLE
OF CONTENTS




PART
      IITEM
      1.
            Financial
      Statements
            2Balance
      Sheets (unaudited)
            2Statements
      of Operations (unaudited)
            3Statement
      of Stockholders’ Deficit (unaudited)
            5Statements
      of Cash Flows (unaudited)
            7Notes
      to Financial Statements (unaudited)
            9ITEM
      2.
            Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
            20ITEM
      3.
            Quantitative
      and Qualitative Disclosures About Market Risk
            29ITEM
      4.
            Controls
      and Procedures
            29PART
      IIITEM
      1.
            Legal
      Proceedings
            29ITEM
      1A.
            Risk
      Factors
            30ITEM
      2.
            Unregistered
      Sales of Equity Securities and Use of Proceeds
            30ITEM
      3.
            Defaults
      Upon Senior Securities
            30ITEM
      4.
            Submission
      of Matters to a Vote of Security Holders
            30ITEM
      5.
            Other
      Information
            30ITEM
      6.
            Exhibits
            31





2





POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Enterprise)


BALANCE
SHEETS


AS
OF SEPTEMBER 30, 2008 AND DECEMBER 31, 2007


(unaudited)








ASSETS
            
            September
      30,
              2008
            
            
            December
      31,
              2007CURRENT
      ASSETSCash
      and Cash Equivalents
            
            $
            1,850
            
            
            $
            125,679Other
      Current Assets
            
            
            23,778
            
            
            
            23,247TOTAL
      CURRENT ASSETS
            
            
            25,628
            
            
            
            148,926OTHER
      ASSETSDeferred
      Finance Costs, net of accumulated amortization of $319,149 and $176,952 at
      September 30, 2008 and December 31, 2007, respectively
            
            
            —
            
            
            
            127,197Furniture,
      Fixtures and Equipment, net of accumulated depreciation of $100,703 and
      $98,960 at September 30, 2008 and December 31, 2007,
      respectively
            
            
            6,853
            
            
            
            5,799Stock
      Held in Escrow
            
            
            190,000
            
            
            
            —Deposits
            
            
            5,450
            
            
            
            21,598TOTAL
      ASSETS
            
            $
            227,931
            
            
            $
            303,520LIABILITIES
      AND STOCKHOLDERS’ DEFICITCURRENT
      LIABILITIESAccounts
      Payable
            
            $
            979,720
            
            
            $
            969,387Notes
      Payable – in default
            
            
            451,000
            
            
            
            451,000Notes
      Payable
            
            
            52,626
            
            
            
            50,000Notes
      Payable to Related Parties
            
            
            1,025,360
            
            
            
            1,934,816Convertible
      Debentures-in default, net of amortization of $1,524,555 and $1,178,865 at
      September 30, 2008 and December 31, 2007, respectively
            
            
            268,253
            
            
            
            645,190Convertible
      Debentures, net of amortization of $271,351 and $0 at September 30, 2008
      and December 31, 2007, respectively
            
            
            271,351
            
            
            
            —Other
      Current Liabilities
            
            
            608,177
            
            
            
            1,242,936Derivative
      Liabilities
            
            
            648,183
            
            
            
            3,794,305TOTAL
      LIABILITIES
            
            
            4,304,670
            
            
            
            9,087,634STOCKHOLDERS’
      DEFICITPreferred
      Stock - $0.001 par value; 50,000,000 shares authorized; 1,500,000 and 0
      shares issued and outstanding as of September 30, 2008 and December 31,
      2007, respectively
            
            
            1,500
            
            
            
            —Common
      Stock - $0.001 par value; 150,000,000 shares authorized; 149,259,290 and
      108,352,636 shares issued and outstanding as of September 30, 2008 and
      December 31, 2007, respectively
            
            
            149,260
            
            
            
            108,353Additional
      Paid-In Capital
            
            
            63,837,341
            
            
            
            60,191,104Deficit
      Accumulated Before Entering Development Stage
            
            
            (11,681,500
            )
            
            
            (11,681,500
            )Deficit
      Accumulated During Development Stage
            
            
            (56,383,340
            )
            
            
            (57,402,071
            )TOTAL
      STOCKHOLDERS’ DEFICIT
            
            
            (4,076,739
            )
            
            
            (8,784,114
            )TOTAL
      LIABILITIES AND STOCKHOLDERS’ DEFICIT
            
            $
            227,931
            
            
            $
            303,520





The
accompanying notes are an integral part of these financial
statements.


3




POWER3 MEDICAL
      PRODUCTS, INC.(A
      Development Stage Enterprise)STATEMENTS
      OF OPERATIONSFOR
      THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007
              and
      the period from May 18, 2004 (inception) through September 30,
      2008(unaudited)For
      the three month period
              ended
      September 30,
            
            
            For
      the nine month period
              ended
      September 30,
            
            
            Period
      from
              May
      18, 2004
              through
              September
      30,2008
            
            
            2007
              (restated)
            
            
            2008
            
            
            2007
              (restated)
            
            
            2008
              (restated)REVENUESales
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            121,724
            
            
            $
            426,224Total
      revenue
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            121,724
            
            
            $
            426,224OPERATING
      EXPENSESEmployee
      compensation and benefits
            
            
            213,945
            
            
            
            341,980
            
            
            
            740,850
            
            
            
            927,709
            
            
            
            30,748,840Professional
      and consulting fees
            
            
            106,783
            
            
            
            (146,835
            )
            
            
            918,275
            
            
            
            435,949
            
            
            
            10,259,102Impairment
      of goodwill
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            13,371,776Impairment
      of intangible assets
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            179,788Occupancy
      and equipment
            
            
            33,997
            
            
            
            48,323
            
            
            
            101,937
            
            
            
            119,504
            
            
            
            634,341Travel
      and entertainment
            
            
            4,762
            
            
            
            26,796
            
            
            
            83,464
            
            
            
            87,541
            
            
            
            425,956Write
      off lease
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            34,243Other
      selling, general and administrative expenses
            
            
            46,849
            
            
            
            594,085
            
            
            
            202,111
            
            
            
            687,010
            
            
            
            663,729Total
      operating expenses
            
            $
            406,336
            
            
            $
            864,349
            
            
            $
            2,046,637
            
            
            $
            2,257,713
            
            
            $
            56,317,775LOSS
      FROM OPERATIONS
            
            $
            (406,336
            )
            
            $
            (864,349
            )
            
            $
            (2,046,637
            )
            
            $
            (2,135,989
            )
            
            $
            (55,891,551
            )OTHER
      INCOME AND (EXPENSE)Derivative
      gain (loss)
            
            $
            1,235,262
            
            
            $
            4,945,238
            
            
            $
            3,656,122
            
            
            $
            (2,071,614
            )
            
            $
            6,263,985Gain
      on legal settlement
            
            
            -
            
            
            
            -
            
            
            
            17,875
            
            
            
            -
            
            
            
            36,764Interest
      income
            
            
            1,247
            
            
            
            1,533
            
            
            
            1,822
            
            
            
            4,645
            
            
            
            9,113Mandatory
      prepayment penalty
            
            
            -
            
            
            
            
            
            
            
            -
            
            
            
            -
            
            
            
            (420,000
            )Other
      expense
            
            
            -
            
            
            
            398,317
            
            
            
            -
            
            
            
            -
            
            
            
            (196,176
            )Gain
      on conversion of financial instruments
            
            
            382,784
            
            
            
            472,878
            
            
            
            380,400
            
            
            
            1,565,892
            
            
            
            1,924,976Interest
      expense
            
            
            (393,543
            )
            
            
            (712,678
            )
            
            
            (978,780
            )
            
            
            (2,171,826
            )
            
            
            (5,392,746
            )Total
      other income (expense)
            
            
            1,225,750
            
            
            
            5,105,288
            
            
            
            3,077,439
            
            
            
            (2,672,903
            )
            
            
            2,225,916NET
      INCOME (LOSS)
            
            $
            819,414
            
            
            $
            4,240,939
            
            
            $
            1,030,802
            
            
            $
            (4,808,892
            )
            
            $
            (53,665,635
            )Deemed
      Dividend
            
            
            -
            
            
            
            -
            
            
            
            (12,071
            )
            
            
            -
            
            
            
            (29,707
            )NET INCOME (LOSS) ATTRIBUTABLE
      TO COMMON STOCKHOLDERS
            
            $
            819,414
            
            
            $
            4,240,939
            
            
            $
            1,018,731
            
            
            $
            (4,808,892
            )
            
            $
            (53,695,342
            )NET
      INCOME (LOSS) PER SHARE BASIC AND DILUTED
            
            $
            0.01
            
            
            $
            0.04
            
            
            $
            0.01
            
            
            $
            (0.06
            )Weighted
      average number of shares outstanding – Basic
            
            
            146,637,986
            
            
            
            97,933,533
            
            
            
            130,055,978
            
            
            
            84,773,848Weighted
      average number of shares outstanding – Diluted
            
            
            148,543,647
            
            
            
            106,789,359
            
            
            
            136,364,780
            
            
            
            84,773,848









4





POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Enterprise)


STATEMENT
OF STOCKHOLDERS' DEFICIT


FROM
INCEPTION TO SEPTEMBER 30, 2008






Common
      Stock
            
            
            Preferred
      Stock
            
            
            Additional
              Paid
      In
            
            
            Deferred
              Compensation
            
            
            RetainedShares
            
            
            Par
      Value
            
            
            Shares
            
            
            Par
      Value
            
            
            Capital
            
            
            Expense
            
            
            Earnings
            
            
            EquityBalances
      as of beginning of development stage May 18, 2004
            
            
            14,407,630
            
            
            $
            14,407
            
            
            
            3,870,000
            
            
            $
            3,870
            
            
            $
            14,225,974
            
            
            $
            —
            
            
            $
            (11,681,500
            )
            
            $
            2,562,751Issued
      shares for compensation
            
            
            27,945,000
            
            
            
            27,945
            
            
            
            —
            
            
            
            —
            
            
            
            25,423,555
            
            
            
            (25,451,500
            )
            
            
            —
            
            
            
            —Issued
      shares for services
            
            
            4,910,000
            
            
            
            4,910
            
            
            
            —
            
            
            
            —
            
            
            
            4,850,090
            
            
            
            (535,000
            )
            
            
            —
            
            
            
            4,320,000Issued
      shares for acquisition of equipment
            
            
            15,000,000
            
            
            
            15,000
            
            
            
            —
            
            
            
            —
            
            
            
            13,485,000
            
            
            
            —
            
            
            
            —
            
            
            
            13,500,000Stock
      option expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            626,100
            
            
            
            (626,100
            )
            
            
            —
            
            
            
            —Issued
      shares for cash
            
            
            242,167
            
            
            
            242
            
            
            
            —
            
            
            
            —
            
            
            
            314,575
            
            
            
            —
            
            
            
            —
            
            
            
            314,817Cancelled
      shares per cancellation of agreement
            
            
            (160,000
            )
            
            
            (160
            )
            
            
            —
            
            
            
            —
            
            
            
            (71,840
            )
            
            
            —
            
            
            
            —
            
            
            
            (72,000
            )Issued
      shares to convert Series A preferred shares to common
      shares
            
            
            3,000,324
            
            
            
            3,001
            
            
            
            (3,870,000
            )
            
            
            (3,870
            )
            
            
            3,377,974
            
            
            
            —
            
            
            
            (3,380,975
            )
            
            
            (3,870
            )Stock
      based compensation
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            8,311,012
            
            
            
            —
            
            
            
            8,311,012Net
      reclassification of derivative liabilities
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (3,347,077
            )
            
            
            —
            
            
            
            —
            
            
            
            (3,347,077
            )Net
      loss (from May 18, 2004 to December 31, 2004)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (15,236,339
            )
            
            
            (15,236,339
            )Balances,
      December 31, 2004
            
            
            65,345,121
            
            
            $
            65,345
            
            
            
            —
            
            
            $
            —
            
            
            $
            58,884,351
            
            
            $
            (18,301,588
            )
            
            $
            (30,298,814
            )
            
            $
            10,349,294Cancelled
      shares returned from employee
            
            
            (1,120,000
            )
            
            
            (1,120
            )
            
            
            —
            
            
            
            —
            
            
            
            (1,307,855
            )
            
            
            —
            
            
            
            —
            
            
            
            (1,308,975
            )Issued
      shares for compensation
            
            
            140,000
            
            
            
            140
            
            
            
            —
            
            
            
            —
            
            
            
            41,860
            
            
            
            —
            
            
            
            —
            
            
            
            42,000Issued
      shares for services
            
            
            850,000
            
            
            
            850
            
            
            
            —
            
            
            
            —
            
            
            
            155,150
            
            
            
            —
            
            
            
            —
            
            
            
            156,000Amortize
      deferred compensation expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            13,222,517
            
            
            
            —
            
            
            
            13,222,517Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (27,134,865
            )
            
            
            (27,134,865
            )Balances,
      December 31, 2005
            
            
            65,215,121
            
            
            $
            65,215
            
            
            
            —
            
            
            $
            —
            
            
            $
            57,773,506
            
            
            $
            (5,079,071
            )
            
            $
            (57,433,679
            )
            
            $
            (4,674,029
            )Issued
      shares for services
            
            
            2,449,990
            
            
            
            2,449
            
            
            
            —
            
            
            
            —
            
            
            
            311,865
            
            
            
            —
            
            
            
            —
            
            
            
            314,314Issued
      shares for cash
            
            
            2,452,746
            
            
            
            2,452
            
            
            
            —
            
            
            
            —
            
            
            
            222,548
            
            
            
            —
            
            
            
            —
            
            
            
            225,000Issued
      shares for compensation
            
            
            1,253,098
            
            
            
            1,254
            
            
            
            —
            
            
            
            —
            
            
            
            176,763
            
            
            
            —
            
            
            
            —
            
            
            
            178,017Adoption
      of FAS 123R
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (475,324
            )
            
            
            475,324
            
            
            
            —
            
            
            
            —Amortize
      deferred compensation expense
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,603,747
            
            
            
            —
            
            
            
            4,603,747Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (6,415,968
            )
            
            
            (6,415,968
            )Balances,
      December 31, 2006
            
            
            71,370,955
            
            
            $
            71,370
            
            
            
            —
            
            
            $
            —
            
            
            $
            58,009,358
            
            
            $
            —
            
            
            $
            (63,849,648
            )
            
            $
            (5,768,920
            )Issued
      shares for services
            
            
            1,810,000
            
            
            
            1,810
            
            
            
            —
            
            
            
            —
            
            
            
            282,390
            
            
            
            —
            
            
            
            —
            
            
            
            284,200Issued
      shares for conversion of debt
            
            
            22,265,224
            
            
            
            22,264
            
            
            
            —
            
            
            
            —
            
            
            
            606,412
            
            
            
            —
            
            
            
            —
            
            
            
            628,676Issued
      shares for warrants exercised
            
            
            5,270,832
            
            
            
            5,272
            
            
            
            —
            
            
            
            —
            
            
            
            336,396
            
            
            
            —
            
            
            
            —
            
            
            
            341,668Issued
      shares for cash
            
            
            7,630,625
            
            
            
            7,632
            
            
            
            —
            
            
            
            —
            
            
            
            992,818
            
            
            
            —
            
            
            
            —
            
            
            
            1,000,450Placement
      agent fees
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (58,500
            )
            
            
            —
            
            
            
            —
            
            
            
            (58,500
            )Stock
      received
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            100
            
            
            
            —
            
            
            
            —
            
            
            
            100Unreturned
      shares
            
            
            5,000
            
            
            
            5
            
            
            
            —
            
            
            
            —
            
            
            
            4,495
            
            
            
            —
            
            
            
            —
            
            
            
            4,500Deemed
      dividend
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            17,635
            
            
            
            —
            
            
            
            (17,635
            )
            
            
            —Net
      loss
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            
            
            
            
            —
            
            
            
            (5,216,288
            )
            
            
            (5,216,288
            )Balances,
      December 31, 2007
            
            
            108,352,636
            
            
            $
            108,353
            
            
            
            —
            
            
            $
            —
            
            
            $
            60,191,104
            
            
            $
            —
            
            
            $
            (69,083,571
            )
            
            $
            (8,784,114
            )









5





POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Enterprise)


STATEMENT
OF STOCKHOLDERS' DEFICIT (CONTINUED)


FROM
INCEPTION TO SEPTEMBER 30, 2008






Common
      Stock
            
            
            Preferred
      Stock
            
            
            Additional
              Paid
      In
            
            
            Deferred
              Compensation
            
            
            RetainedShares
            
            
            Par
      Value
            
            
            Shares
            
            
            Par
      Value
            
            
            Capital
            
            
            Expense
            
            
            Earnings
            
            
            EquityBalances,
      December 31, 2007
            
            
            108,352,636
            
            
            $
            108,353
            
            
            
            —
            
            
            $
            —
            
            
            $
            60,191,104
            
            
            $
            —
            
            
            $
            (69,083,571
            )
            
            $
            (8,784,114
            )Issued
      shares for services
            
            
            7,082,910
            
            
            
            7,083
            
            
            
            —
            
            
            
            —
            
            
            
            569,258
            
            
            
            —
            
            
            
            —
            
            
            
            576,341Issued
      shares for cash
            
            
            7,492,875
            
            
            
            7,493
            
            
            
            —
            
            
            
            —
            
            
            
            639,911
            
            
            
            —
            
            
            
            —
            
            
            
            647,404Issued
      shares for conversion of debt
            
            
            22,172,536
            
            
            
            22,173
            
            
            
            —
            
            
            
            —
            
            
            
            1,676,280
            
            
            
            —
            
            
            
            —
            
            
            
            1,698,453Issued
      shares for lawsuit settlement
            
            
            325,000
            
            
            
            325
            
            
            
            —
            
            
            
            —
            
            
            
            30,550
            
            
            
            —
            
            
            
            —
            
            
            
            30,875Issued
      shares for payables
            
            
            1,833,333
            
            
            
            1,833
            
            
            
            —
            
            
            
            —
            
            
            
            173,167
            
            
            
            —
            
            
            
            —
            
            
            
            175,000Stock
      held in escrow
            
            
            2,000,000
            
            
            
            2,000
            
            
            
            —
            
            
            
            —
            
            
            
            188,000
            
            
            
            —
            
            
            
            —
            
            
            
            190,000Issued
      preferred shares
            
            
            —
            
            
            
            —
            
            
            
            1,500,000
            
            
            
            1,500
            
            
            
            357,000
            
            
            
            —
            
            
            
            —
            
            
            
            358,500Deemed
      dividend
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            12,071
            
            
            
            —
            
            
            
            (12,071
            )
            
            
            —Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,030,802
            
            
            
            1,030,802Balances,
      September 30, 2008
            
            
            149,259,290
            
            
            $
            149,260
            
            
            
            1,500,000
            
            
            $
            1,500
            
            
            $
            63,837,341
            
            
            $
            —
            
            
            $
            (68,064,840
            )
            
            $
            (4,076,739
            )




The
accompanying notes are an integral part of these financial
statements.




6





POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Enterprise)


STATEMENTS
OF CASH FLOWS


FOR
THE NINE MONTHS ENDED SEPTMEBER 30, 2008 AND 2007


and
the period from May 18, 2004 (inception) through September 30, 2008


(unaudited)






September
      30,
              2008
            
            
            September
      30,
              2007
              (restated)
            
            
            Period
      from
              May
      18, 2004
              through
              September
      30,
              2008Operating
      Activities:Net
      income (loss)
            
            $
            1,030,802
            
            
            $
            (4,808,892
            )
            
            $
            (52,972,661
            )Adjustments
      to reconcile net income (loss) to net cash used in operating
      activities:Gain
      on conversion of financial instruments
            
            
            (380,400
            )
            
            
            (1,565,892
            )
            
            
            (1,924,974
            )Impairment
      of goodwill
            
            
            —
            
            
            
            —
            
            
            
            13,371,776Impairment
      of intangible assets
            
            
            —
            
            
            
            —
            
            
            
            179,788Loss
      on previously capitalized lease
            
            
            —
            
            
            
            —
            
            
            
            34,243Amortization
      of debt discounts and deferred finance costs
            
            
            774,238
            
            
            
            1,795,921
            
            
            
            3,300,980Change
      in derivative liability, net of bifurcation
            
            
            (3,656,122
            )
            
            
            2,071,614
            
            
            
            (5,110,084
            )Stock
      based compensation
            
            
            576,341
            
            
            
            236,200
            
            
            
            33,232,386Stock
      issued for settlement of lawsuit
            
            
            30,875
            
            
            
            —
            
            
            
            30,875Depreciation
      expense
            
            
            1,744
            
            
            
            13,212
            
            
            
            100,704Other
      non cash items
            
            
            —
            
            
            
            —
            
            
            
            (34,933
            )Changes
      in operating assets and liabilities:Prepaid
      expenses and other current assets
            
            
            (14,384
            )
            
            
            (14,508
            )
            
            
            155,553Accounts
      payable and other liabilities
            
            
            343,470
            
            
            
            516,468
            
            
            
            2,958,278Net
      cash used in operating activities
            
            
            (1,293,436
            )
            
            
            (1,755,877
            )
            
            
            (6,678,069
            )Investing
      Activities:Capital
      expenditures, net
            
            
            (2,797
            )
            
            
            (1,984
            )
            
            
            (141,800
            )Increase
      in other assets
            
            
            —
            
            
            
            —
            
            
            
            (179,786
            )Net
      cash used in investing activities
            
            
            (2,797
            )
            
            
            (1,984
            )
            
            
            (321,586
            )Financing
      Activities:Proceeds
      from sale of common stock
            
            
            647,404
            
            
            
            650,000
            
            
            
            2,264,171Borrowings
      on notes payable related party
            
            
            45,000
            
            
            
            107,770
            
            
            
            75,376Borrowings
      on notes payable
            
            
            600,000
            
            
            
            875,000
            
            
            
            3,628,430Principal
      payments on notes payable related party
            
            
            (30,000
            )
            
            
            (17,300
            )
            
            
            (47,300
            )Principal
      payments on notes payable
            
            
            (90,000
            )
            
            
            (20,000
            )
            
            
            (122,478
            )Proceeds
      from CD, warrants and rights net of issuance cost
            
            
            —
            
            
            
            306,667
            
            
            
            1,200,710Net
      cash provided by financing activities
            
            
            1,172,404
            
            
            
            1,902,137
            
            
            
            6,998,909Net
      change in cash and cash equivalents
            
            
            (123,829
            )
            
            
            144,276
            
            
            
            (746
            )Cash
      and cash equivalents, beginning of period
            
            
            125,679
            
            
            
            40,602
            
            
            
            2,596Cash
      and cash equivalents, end of period
            
            $
            1,850
            
            
            $
            184,878
            
            
            $
            1,850





The
accompanying notes are an integral part of these financial
statements.





7





POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Enterprise)


STATEMENTS
OF CASH FLOWS


FOR
THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007


and
the period from May 18, 2004 (inception) through September 30, 2008


(unaudited)








September
      30,
              2008
            
            
            September
      30,
              2007
              (restated)
            
            
            Period
      from
              May 18,
      2004
              through
              September
      30, 2008Supplemental
      disclosures of cash flow informationCash
      paid for:Interest
            
            $
            —
            
            
            $
            —
            
            
            $
            59,840Income
      taxes
            
            $
            —
            
            
            $
            —
            
            
            $
            —Non-cash
      transactionsRestatement
      of notes payable to notes payable related parties
            
            $
            —
            
            
            $
            —
            
            
            $
            1,393,346Exchange
      of convertible notes for stock
            
            $
            1,995,894
            
            
            $
            2,156,937
            
            
            $
            3,555,698Stock
      issued for settlement of payables
            
            $
            175,000
            
            
            $
            —
            
            
            $
            181,697Deemed
      dividend
            
            $
            12,071
            
            
            $
            17,635
            
            
            $
            29,706Exchange
      of convertible preferred stock for
              common
      stock
            
            $
            —
            
            
            $
            —
            
            
            $
            3,380,975Preferred
      stock issued for payables
            
            $
            360,000
            
            
            $
            —
            
            
            $
            360,000Stock
      held in escrow
            
            $
            190,000
            
            
            $
            —
            
            
            $
            190,000





The
accompanying notes are an integral part of these financial
statements.




8




POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Enterprise)




NOTES
TO FINANCIAL STATEMENTS





NOTE 1. BASIS OF
PRESENTATION




The
accompanying unaudited interim financial statements of Power3 Medical Products,
Inc. (“Power3”) or the “Company”) at September 30, 2008, have been prepared
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission.  Certain information and footnote disclosures
normally included in financial statements prepared in conformity with generally
accepted accounting principles have been omitted or condensed pursuant to such
rules and regulations. These statements should be read in conjunction with
Power3’s Form 10-KSB for the year ended December 31, 2007. In
management’s opinion, these interim financial statements reflect all adjustments
(consisting of normal and recurring adjustments) necessary for a fair
presentation of the financial position, results of operations and cash flows for
the interim periods presented herein. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year.




Restatements





Restatements
of previously reported financial results for the nine month period ended
September 30, 2007, were made. See Note 7.





Earnings
Per Share




Basic and
diluted earnings per share calculations are calculated on the basis of the
weighted average number of common shares outstanding during the year. The per
share amounts include the dilutive effect of common stock equivalents in years
with net income.




Earnings
per share for the three and nine month periods ended September 30, 2008, is
computed as follows:




Net
              Income
      (Numerator)
            
            
            Shares
              (Denominator)
            
            
            Per-Share
      AmountFor
      the three month period ended September 30, 2008Net
      Income
            
            $
            819,414Basic
      EPSIncome
      available to common stockholders
            
            $
            819,414
            
            
            
            146,637,986
            
            
            $
            0.01Effective
      Dilutive EPS *Income
      available to common stockholders
            
            $
            819,414
            
            
            
            148,543,647
            
            
            $
            0.01For
      the nine month period ended September 30, 2008Net
      Income
            
            $
            1,030,802Basic
      EPSIncome
      available to common stockholders
            
            $
            1,018,731
            
            
            
            130,055,978
            
            
            $
            0.01Effective
      Dilutive EPS *Income
      available to common stockholders
            
            $
            1,018,731
            
            
            
            136,364,780
            
            
            $
            0.01






*The
Company uses the treasury stock method to determine whether any outstanding
options or warrants are to be included in the diluted earnings per share
calculation.  Power3 had 10,866,667 and 24,545,829 shares issuable on
dilutive warrants exercisable as follows:




9




Exercise
      Price
            
            Number
      Of Shares
              Issuable
            
            ProceedsFor
      the three month period ended September 30, 2008$ 0.03
            
            
            1,666,667
            
            $
            41,6670.06
            
            
            9,200,000
            
            
            552,0000.08
            
            
            —
            
            
            —0.09
            
            
            —
            
            
            —10,866,667
            
            $
            593,667For
      the nine month period ended September 30, 2008$ 0.03
            
            
            1,666,667
            
            $
            41,6670.06
            
            
            9,200,000
            
            
            552,0000.08
            
            
            12,845,829
            
            
            1,027,6660.09
            
            
            833,333
            
            
            75,00024,545,829
            
            $
            1,696,333




Using an
average share price of $0.066 and $0.093 for the three and nine months ended
September 30, 2008, the warrants result in a net additional possible dilution of
1,905,661 and 6,308,802 shares respectively.  This results in 148,543,647
and 136,364,780 shares used in the above calculations. An additional
31,823,261 and 18,144,099 warrants have been issued, but are not “in the money”
and are therefore not included in these calculations, due to their anti-dilutive
effect.




NOTE
2. GOING CONCERN




As shown
in the accompanying financial statements, Power3 has an accumulated deficit of
$68,064,840 as of September 30, 2008, and negative operating cash flow since
inception of approximately $6,700,000.  These conditions create an
uncertainty as to Power3's ability to continue as a going concern.




Management
is trying to raise additional capital through various funding arrangements. The
financial statements do not include any adjustment that might be necessary if
Power3 is unable to continue as a going concern.




NOTE
3. 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 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.




10




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 $1,400,000 aggregate principal amount of debentures
that were issued October 28, 2004 and January 26, 2005 are due and
payable in accordance with their original terms in full three years after the
date of issuance and bear interest at a default rate of 18%. The debentures are
convertible into shares of common stock at the following 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.




Under the
Agreements, the Purchasers also received warrants to purchase an aggregate of up
to 2,500,000 and 333,333 shares of common stock for tranche one and two,
respectively, and additional investment rights to purchase up to an additional
$2,500,000 of convertible debentures. The warrants are exercisable at a price of
$0.08 per share, subject to adjustment, including anti-dilution protection. 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
Company is in default under the provisions of the Agreement, Registration Rights
Agreement and previously issued debentures. The aggregate amount payable upon an
acceleration by reason of an event of default is 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. 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. The
registration statement was withdrawn on June 20, 2007. As of the nine
months ended September 30, 2008, the Company has settled with a number of its
convertible debenture holders and expects to settle with the remaining
convertible debenture holders in 2009.




Of the
$1,400,000 Convertible Debentures mentioned above the Company has settled
$1,284,990 and $884,990 as of September 30, 2008, and December 31, 2007,
respectively, resulting in a balance of $115,010 and $515,010 at September 30,
2008 and December 31, 2007, respectively.




On
April 3, 2007, the Company entered into a joint venture agreement with
NeoGenomics to form a Contract Research Organization (CRO) and collaborate on
research work in the future. Currently, Power3 and NeoGenomics are in discussion
to revise the expired Letter of Intent between the respective
organizations.




On June
30, 2008, the Company issued a $200,000, 15% convertible debenture with
detachable warrants to purchase 3,500,000 shares of common stock to Able Income
Fund LLC.  The note has a maturity date of September 15,
2009.  The warrants have a five-year term and a strike price of
$0.06.




11




On July
29, 2008, the Company issued a $250,000, 15% convertible debenture with
detachable warrants to purchase 4,500,000 shares of common stock to Able Income
Fund LLC.  The note has a maturity date of October 15, 2009. The
warrants have a five-year term and a strike price of $0.06.




Power3
has converted several notes and plans to continue doing so. In some instances,
Power3 has offered terms of conversion lower than the original agreement
including raising the strike price of warrants attached to these instruments. As
a result of this additional consideration, upon conversion the Company recorded
a $380,402 gain on the conversion of notes and settlement of penalties during
the nine months ended September 30, 2008.  The change in the
conversion terms represented greater than 10% of the principal value of the
notes and as a result extinguishment accounting has been applied consistent with
EITF 96-19.




As a
result of the convertible debentures, Power3 has determined that the conversion
feature of the convertible debentures and the warrants issued with the
convertible debentures are embedded derivative instruments pursuant to Statement
of Financial Accounting Standards (SFAS) 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended. Under the provisions of EITF
Issue No. 00−19, “Accounting for Derivative Financial Instruments Indexed
to, and Potentially Settled in, a Company’s Own Stock,” the accounting treatment
of these derivative financial instruments requires that the Company record the
derivatives at their fair values as of the inception date of the note agreements
and at fair value as of each subsequent balance sheet date as a liability. Any
change in fair value is recorded as non-operating, non-cash income or expense at
each balance sheet date. The Company estimates fair value of warrants using the
Black−Scholes option pricing model and the conversion feature of their notes
using the binomial lattice model. The estimates inherent within these models
directly affect the reported amounts of the derivative instrument
liabilities.




Deemed
Dividend




As part
of Power3’s attempt to induce warrant holders to exercise its warrants, the
strike price of certain warrants was reduced resulting in a deemed dividend of
$12,071, consistent with EITF 98-5.  The deemed dividend was valued
using the Black-Scholes model immediately before and after the inducement,
consistent with paragraph 51 of SFAS 123R.




Convertible
Debentures, Warrants and Additional Investment Rights:




The
carrying values of the Company’s convertible debentures amounted to $539,604 and
$645,190, at September 30, 2008 and December 31, 2007, as follows.




Convertible
      Debentures:
            
            As
      of
              September
      30,
              2008
            
            As
      of
              December
      31, 2007Securities
      Purchase Agreement Holders
            
            $
            115,010
            
            $
            515,010Discount
            
            
            —
            
            
            (86,844
            )Note
      3:Chosid
            
            
            —
            
            
            200,000Wood
            
            
            —
            
            
            120,000Seyburn
            
            
            100,000
            
            
            100,000Discount
      on Note 3
            
            
            —
            
            
            (210,417
            )Note
      4:NeoGenomics
            
            
            200,000
            
            
            200,000Discount
      on Note 4
            
            
            (146,757
            )
            
            (192,559
            )Note
      5:Able
      Income Fund
            
            
            200,000
            
            
            —Discount
      on Note 5
            
            
            (116,808
            )
            
            —Note
      6:Able
      Income Fund
            
            
            250,000
            
            
            —Discount
      on Note 5
            
            
            (61,841
            )
            
            —Totals
            
            $
            539,604
            
            $
            645,190




12


The
following tabular presentation reflects the components of derivative financial
instruments on the Company’s balance sheet at September 30, 2008 and
December 31, 2007:





Derivative
      Liabilities:
            
            September
      30,
              2008
            
            
            December
      31, 2007Common
      stock warrants
            
            $
            147,443
            
            
            $
            1,563,183Embedded
      conversion feature
            
            
            468,103
            
            
            
            1,205,719Additional
      investment rights
            
            
            —
            
            
            
            642,792Other
      derivative instruments
            
            
            32,637
            
            
            
            382,611$
            648,183
            
            
            $
            3,794,305





The fair
values of certain other derivative financial instruments (warrants) that existed
at the time of the initial Debenture Financing were re-classed from
stockholders’ equity to liabilities when, in connection with the Debenture
Financing, the Company no longer controlled its ability to share-settle these
instruments.




Other
Notes, Preferred Stock and Warrants:




During
November and December 2005, the Company issued $300,000 (2 tranches of
$150,000) face value, 11% notes and detachable warrants to purchase 2,000,000
shares of common stock to Trinity Financing Investments Corporation. 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 note was paid in full as of
December 31, 2007.




Other
derivative financial instruments consist of various warrants that were issued
prior to and subsequent to the debenture financing and were reclassified from
stockholders’ equity or initially accounted for as liabilities, at fair values,
since share-settlement was not within the Company’s control after the debenture
financing.




Notes
Payable, in Default and to Related Parties




The total
Notes Payable to related parties decreased from $1,934,816 as of December 31,
2007, to $1,025,360 as of September 30, 2008, as follows:




As
      of
              September
      30,2008
            
            
            As
      of
              December
      31, 2007Notes
      payable in default:Cordillera
      I
            
            $
            251,000
            
            
            $
            251,000Cordillera
      II
            
            $
            200,000
            
            
            $
            200,000Totals
            
            $
            451,000
            
            
            $
            451,000Notes
      payable:Kazanowski
            
            $
            80,000
            
            
            $
            50,000Discount
      on Kazanowski note
            
            
            (28,687
            )
            
            
            —Kraniak
            
            $
            30,000
            
            
            $
            —Discount
      on Kraniak note
            
            $
            (28,687
            )
            
            $
            —$
            52,626
            
            
            $
            50,000Notes
      payable - related parties:Rash
            
            $
            15,000
            
            
            $
            924,456Goldknopf
            
            $
            975,360
            
            
            $
            975,360Rosinski
            
            $
            35,000
            
            
            $
            35,0001,025,360
            
            
            
            1,934,816Totals
            
            $
            1,528,986
            
            
            $
            2,435,816




13


NOTE
4. OTHER SIGNIFICANT EQUITY TRANSACTIONS




Deemed
distribution:





During
the 2nd Quarter
of 2004, the Company issued 15,000,000 shares of common stock as consideration
for a set of assets and liabilities purchased from Advanced BioChem in the asset
purchase transaction of May 18, 2004.  Because this transaction was
between individuals and entities considered to be related parties, under the
rules of the SEC, the assets are recorded at historical cost and the amount
in excess of historical cost is considered to be a deemed distribution to the
shareholders. As part of that transaction, the Company recorded a deemed
distribution of $13,371,776 as the difference between the market value of the
stock at $0.90 per share on the date of the agreement ($13,500,000) and
$128,224, debt in excess of the assets received in the transaction.




During
the 4th Quarter
of 2004, the Company converted Series A Preferred Stock owned by former
management of the Company to common shares, per the terms of the Series A
Preferred Stock held by these individuals (Novak, Gray and Leonard).  As
part of that transaction the Company recorded a deemed distribution of
$3,380,975, the market value of the common shares issued at the date of issue of
the common shares.  Since both of these deemed distributions occurred after
May 18, 2004, the date the Company entered the development stage, the total
of these two deemed distributions ($16,752,751) is included in the deficit
accumulated during the development stage in the balance sheet of the
Company.





Deemed
dividend:




As part
of Power3’s attempt to induce exercise, the strike price of several warrants was
reduced resulting in a deemed dividend of $12,071 and $17,635, consistent with
EITF 98-5, for the nine months ended September 30, 2008 and the year ended
December 31, 2007, respectively.  The deemed dividends were valued
using the Black−Scholes model immediately before and after the inducement,
consistent with paragraph 51 of SFAS 123R.




Preferred
shares issued during the nine-month period ended September 30,
2008:




Pursuant
to two employment agreements with two officers, the Company agreed to issue to
such officers an aggregate of 3,000,000 shares of Series B Preferred Stock.
On September 6, 2007, the Company filed the Certificate of Amendment
necessary to designate the Series B Preferred Stock and the powers,
designations and relative rights of the Series B Preferred
Stock.  3,000,000 shares of Series B Preferred Stock were issued
to the two officers on April 23, 2008.




In
September 2008, Steven B. Rash, our Chief Executive Officer and Chairman of the
Board, resigned from all of his positions with the Company.  This
resulted in 1,500,000 shares of the outstanding Series B Preferred Stock
converting to 1,500,000 shares of common stock, which remain unissued due to
insufficient authorized shares.  As of September 30, 2008, these
shares are presented as a stock payable on the balance sheet of $34,500, based
on the closing share price of our common stock.  1,500,000 shares of Series
B Preferred Stock are issued and outstanding as of September 30,
2008.




Shares
issued for cash during the nine-month period ended September 30,
2008:




7,492,875
shares of common stock were issued for cash to private investors in the amount
of $647,404.




Shares
issued for payables during the nine-month period ended September 30,
2008:




1,833,333
shares of common stock were issued in payment on outstanding invoices for
services.  The shares were valued at $175,000 based upon the closing
price of our common stock at the grant date resulting in a loss on
extinguishment of debt of $14,730.




Shares
issued for services during the nine-month period ended September 30,
2008:




9,082,910
shares of common stock were issued for services to employees and
consultants.  The shares were valued at $576,341 based upon the
closing price of our common stock at the grant date.  2,000,000 of
these shares are being held in escrow.  The 2,000,000 shares held in
escrow are being carried as an asset on the balance sheet at a value of
$190,000.




Shares
issued in settlement of legal proceedings during the nine-month period ended
September 30, 2008:




325,000 shares of common stock were
issued in settlement of a dispute with a former employee as mentioned
above.  The shares were valued at $30,875 based upon the closing price
of our common stock at the grant date.




14




Shares
issued for conversion of debt during the nine-month period ended September 30,
2008:




22,172,536
shares of common stock were issued for conversion of convertible notes in the
amount of $1,644,456 as mentioned in Note 3 above.  The shares were
valued at $1,698,453 based upon the closing price of our common stock at the
grant date resulting in a gain on extinguishment of debt of
$312,171.




NOTE 5. COMMITMENTS AND CONTINGENCES




On
October 28, 2005, Power3 received notice of a Petition to Enforce Foreign
Judgment citation filed against the Company by KForce regarding an employment
fee adjudicated in December 2003 in the state of Florida against the Company, in
the amount of $15,873, together with $4,735 in interest. Power3 does not agree
with the Foreign Judgment and is attempting to resolve the issue prior to
enforcement. No resolution has been achieved on this issue at this time; however
the Company is endeavoring to resolve the petition. This debt is not recorded in
accounts payable by the Company because it is the Company’s position that the
judgment should never have been entered against Power3, but rather against a
different corporate entity, not related to Power3 in any way, at this
time.  The Company’s attorney in this matter feels that no loss is
probable, nor will the Company be obligated to pay any sums whatsoever on this
matter. The Company has pled improper party and expects to be vacated from the
suit since it does not apply to the Company.  Power3 has
counterclaimed KForce for frivolous claims, as they know that they have sued the
improper party.




On March
12, 2008, all matters involving the dispute over the taking, by an
ex-employee, of certain trade secrets, defamation and wrongful interference
with Power3's contractual relations with other parties, and a pendent wage claim
for severance pay, were resolved.  In settlement the Company has paid
the ex-employee $35,000 and has issued to the ex-employee 325,000 shares of the
Company’s common stock with restrictions.




In
October of 2006, Trinity Financing filed a lawsuit against the Company claiming
default on a promissory note dated December 9, 2005.  As security for
the Note, Steven Rash and Ira Goldknopf pledged their personal restricted shares
of the Company’s stock.  As a result of the alleged default in payment
of the Note, Trinity Financing seeks to have the restrictive legend removed so
the shares may be sold by Trinity Financing in satisfaction of the
loan.  The Company denied the material allegations and asserted three
counterclaims against Trinity Financing.  The company asserted that
the Note, as well as a prior promissory note executed in favor of Trinity
Financing, are usurious.  The matter was settled February 4, 2008 with
the removal of the restrictive legend.




On July
18, 2008, the Company entered into a private offering with Golden Gate
Investors, Inc. for an aggregate of up to $1,000,000 of 6% convertible
debentures.




On
August 13, 2007, Gryphon Master Fund LP and GSFF Master Fund, LP filed a lawsuit
against the Company claiming a breach of a Securities Purchase Agreement,
Convertible Debentures, and Registration Rights Agreement.  The
plaintiffs claimed the Company failed to timely obtain an effective registration
statement for the shares issued to the plaintiffs and refused to recognize
anti-dilution rights of the plaintiffs. The Company denied the material
allegations of the complaint and asserted numerous affirmative
defenses.  Power3 entered into settlement negotiations as of April 20,
2008.  On August 13, 2008, the claim above, note, warrants, and all
applicable penalties were settled in exchange for 5,240,000 shares of common
stock valued at approximately $233,000 based upon the closing price of our
common stock at the settlement date.




In
October of 2007, Winstead filed suit against the Company for approximately
$17,000 in attorney fees. In March 2008, a settlement was reached. The fees have
been reduced to $9,000 and a payout schedule has been agreed
upon.  The balance of the payout is included in accounts payable at
September 30, 2008.




NOTE
6. SUBSEQUENT EVENTS




On
October 6, 2008, the Company issued 200,000 shares of common stock in payment of
accounts payable.  The shares were valued at $9,000 based upon the
closing price of our common stock at the grant date.




On
October 7, 2008, the Company issued 400,000 shares of common stock in payment of
consulting services.  The shares were valued at $16,000 based upon the
closing price of our common stock at the grant date.




On
November 4, 2008, the Company completed a private placement of its debt and
equity securities.  The private placement was completed pursuant to a
series of convertible promissory notes and warrants that were issued to certain
investors.  The Company sold $2,209,435 in principal amount of the
notes, which are convertible into 73,647,832 shares of the Company’s common
stock, and warrants to purchase an aggregate of 68,059,539 shares of common
stock.  The Company has received $180,000 in cash and $2,029,435 as an
offset against amounts due to the investors by the Company for amounts
previously advanced to the Company or amounts due for services provided to the
Company by the investors.




15




The notes
are unsecured and accrue interest at a rate of 12% per annum.  All
outstanding principal and accrued interest is due and payable on November 4,
2009, and is convertible at the option of the holder into shares of common stock
at a conversion price equal to $0.03 per share.  The Company can
prepay the notes only with ten days prior written notice to the
holders.  The form of note is filed as an exhibit to Form 8-K filed by
the Company with the Securities and Exchange Commission on November 10,
2008.





The
warrants have an exercise price of $0.04 per share of common stock and expire on
the date three years after the issuance of the warrants.  The warrants
include a cashless exercise option. The form of warrant is filed as an
exhibit to Form 8-K filed by the Company with the Securities and Exchange
Commission on November 10, 2008.




One of
the investors has material relationships with the Company.  Ira L.
Goldknopf, the Company’s President, Chief Scientific Officer, interim Chairman
and sole director, received a note with an initial principal amount of
$1,189,435 and warrants to purchase 36,598,000 shares of common
stock.





On
November 13, 2008, the Company filed a preliminary Schedule 14A informing
investors that there will be a Special Meeting of Shareholders of the Company to
approve an amendment to the Company’s Certificate of Incorporation increasing
the authorized amount of the Company’s Common Stock, from 150,000,000 shares to
600,000,000 shares.  The date for the the meeting has not yet been
set.





On
November 18, 2008, the Company issued a $150,000 promissory note to Helen R.
Park for services provided to the Company.  The note is convertible
into 5,000,000 shares of the Company’s common stock at $0.03 per share of common
stock, and warrants to purchase 5,000,000 shares of common stock at $0.04 per
share of common stock.  The note is unsecured and accrues interest at
a rate of 12% per annum. All outstanding principal and accrued interest is due
and payable on November 18, 2009, and is convertible at the option of the
holder.  The warrants include a cashless exercise option and expire
three years after issuance.





NOTE
7. RESTATEMENT





The
Company has identified certain accounting errors related to derivative
liabilities which resulted in changes to derivative loss, interest expense and
loss on conversion of financial instruments among other errors.





The
effect on the statement of operations for the nine months ended September 30,
2007 as a result of the adjustments was an decrease in net loss of $237,567 and
no change in loss per share.





The
effect on the balance sheet was an increase of $831,647 in total
liabilities.





In all
other material respects, the financial statements are unchanged.




16


Following
is a summary of the unaudited restatement adjustments:





As of
September 30, 2007






As
      Reported
              (unaudited)
            
            Adjustment
            
            As
      Restated (unaudited)ASSETSCURRENT
      ASSETSCash
      and Cash Equivalents
            
            $
            184,878
            
            $
            —
            
            $
            184,878Other
      Current Assets
            
            
            900
            
            
            —
            
            
            900TOTAL
      CURRENT ASSETS
            
            
            185,778
            
            
            —
            
            
            185,778OTHER
      ASSETSDeferred
      Finance Costs, net of amortization
            
            
            166,511
            
            
            —
            
            
            166,511Intellectual
      Property
            
            
            179,788
            
            
            —
            
            
            179,788Furniture,
      Fixtures and Equipment, net of accumulated depreciation
            
            
            5,146
            
            
            —
            
            
            5,146Deposits
            
            
            19,508
            
            
            —
            
            
            19,508TOTAL
      ASSETS
            
            $
            556,731
            
            
            —
            
            $
            556,731LIABILITIES
      AND STOCKHOLDERS’ DEFICITCURRENT
      LIABILITIESAccounts
      Payable
            
            $
            970,948
            
            
            —
            
            $
            970,948Notes
      Payable – in default
            
            
            601,000
            
            
            —
            
            
            601,000Notes
      Payable to Related Parties
            
            
            1,784,816
            
            
            —
            
            
            1,784,816Convertible
      Debentures-in default, net of amortization
            
            
            423,386
            
            
            (40,038
            )  (a)
            
            383,348Other
      Current Liabilities
            
            
            1,017,744
            
            
            181,934
            (b)
            
            1,199,678Derivative
      Liabilities
            
            
            3,720,990
            
            
            689,751
            (a)
            
            4,410,741TOTAL
      LIABILITIES
            
            
            8,518,884
            
            
            831,647
            
            
            9,350,531STOCKHOLDERS’
      DEFICITPreferred
      Stock
            
            
            —
            
            
            —
            
            
            —Common
      Stock
            
            
            102,741
            
            
            —
            
            
            102,741Additional
      Paid-In Capital
            
            
            60,831,214
            
            
            (1,051,580
            )  (c)
            
            59,779,634Deficit
      Accumulated Before Entering Development Stage
            
            
            (11,681,500
            )
            
            —
            
            
            (11,681,500
            )Deficit
      Accumulated During Development Stage
            
            
            (57,214,608
            )
            
            219,933
            (d)
            
            (56,994,675
            )TOTAL
      STOCKHOLDERS’ DEFICIT
            
            
            (7,962,153
            )
            
            (831,647
            )
            
            (8,793,800
            )TOTAL
      LIABILITIES AND STOCKHOLDERS’DEFICIT
            
            $
            556,731
            
            
            —
            
            $
            556,731





(a)
            To
      adjust to correct accounts associated with derivatives.(b)
            To
      adjust to correct accounts associated with derivative and to correct
      accrued interest.(c)
            To
      adjust to correct stock for conversion.(d)
            To
      adjust accumulated deficit largely due to errors associated with
      derivatives





17




For
      the three months ended September 30, 2007
              SUMMARY
      STATEMENT OF OPERATIONS
            
            
            Three
      Months Ended
              September
      30, 2007
            
            
            
            
            
            Three
      Months Ended September 30,2007(unaudited)
            
            
            As
      Reported
              (unaudited)
            
            
            Adjustments
              (unaudited)
            
            
            As
      Restated
              (unaudited)REVENUESales
            
            $
            —
            
            $
            —
            
            $
            —Total
      revenue
            
            
            —
            
            
            —
            
            
            —OPERATING
      EXPENSESEmployee
      compensation and benefits
            
            
            341,146
            
            
            834
            (a)
            
            341,980Professional
      and consulting fees
            
            
            169,112
            
            
            (315,947
            ) 
      (a)
            
            (146,835
            )Occupancy
      and equipment
            
            
            53,654
            
            
            (5,331
            ) 
      (a)
            
            48,323Travel
      and entertainment
            
            
            26,796
            
            
            —
            
            
            26,796Other
      selling, general and administrative expenses
            
            
            10,158
            
            
            583,927
            (a)
            
            594,085Total
      operating expenses
            
            
            600,866
            
            
            263,483
            
            
            864,349LOSS
      FROM OPERATIONS
            
            
            (600,866
            )
            
            (263,483
            )
            
            (864,349
            )OTHER
      INCOME AND (EXPENSE)Derivative
      gain
            
            
            2,169,466
            
            
            2,775,772
            (b)
            
            4,945,238Interest
      income
            
            
            1,533
            
            
            —
            
            
            1,533Mandatory
      prepayment penalty
            
            
            230,900
            
            
            (230,900
            )  (c)
            
            —Other
      expense
            
            
            531,062
            
            
            (132,745
            )  (a)
            
            398,317Loss
      on conversion of financial instruments
            
            
            (442,373
            )
            
            915,251
            (b)
            
            472,878Interest
      expense
            
            
            (48,244
            )
            
            (664,434
            )  (b)
            
            (712,678
            )Total
      other income
            
            
            2,442,344
            
            
            2,662,944
            
            
            5,105,288NET
      INCOME
            
            $
            1,841,478
            
            $
            2,399,461
            
            $
            4,240,939NET
      INCOME PER SHAREBASIC
      AND DILUTED
            
            $
            0.02
            
            $
            0.02
            
            $
            0.04Weighted
      average number of sharesoutstanding
            
            
            83,793,113
            
            
            14,140,420
            
            
            97,933,533





(a)
            To
      adjust to correct account to actual based on previous
    errors.(b)
            To
      adjust to correct accounts associated with derivatives.(c)
            To
      adjust to correct account based on conversion of
  debt.





18




For
      the nine months ended September 30, 2007
              SUMMARY
      STATEMENT OF OPERATIONS
            
            
            Nine
      Months Ended
              September
      30, 2007
            
            
            
            
            
            Nine
      Months Ended
              September
      30, 2007(unaudited)
            
            
            As
      Reported
              (unaudited)
            
            
            Adjustments
              (unaudited)
            
            
            As
      Restated
              (unaudited)REVENUESales
            
            $
            121,724
            
            $
            —
            
            $
            121,724Total
      Revenue
            
            
            121,724
            
            
            —
            
            
            121,724OPERATING
      EXPENSESEmployee
      compensation and benefits
            
            
            927,709
            
            
            —
            
            
            927,709Professional
      and consulting fees
            
            
            550,896
            
            
            (114,947
            )  (a)
            
            435,949Occupancy
      and equipment
            
            
            128,036
            
            
            (8,532
            )  (b)
            
            119,504Travel
      and entertainment
            
            
            87,541
            
            
            —
            
            
            87,541Other
      selling, general and administrative expenses
            
            
            99,881
            
            
            587,129
            (c)
            
            687,010Total
      operating expenses
            
            
            1,794,063
            
            
            463,650
            
            
            2,257,713LOSS
      FROM OPERATIONS
            
            
            (1,672,339
            )
            
            (463,650
            )
            
            (2,135,989
            )OTHER
      INCOME AND (EXPENSE)Derivative
      gain (loss)
            
            
            (1,639,641
            )
            
            (431,973
            )  (d)
            
            (2,071,614
            )Interest
      income
            
            
            4,645
            
            
            —
            
            
            4,645Mandatory
      prepayment penalty
            
            
            230,900
            
            
            (230,900
            )  (e)
            
            —Gain
      on conversion of financial instruments
            
            
            (840,244
            )
            
            2,406,136
            (c)
            
            1,565,892Interest
      expense
            
            
            (1,129,780
            )
            
            (1,042,046
            )  (d)
            
            (2,171,826
            )Total
      other income (expense)
            
            
            (3,374,120
            )
            
            701,217
            
            
            (2,672,903
            )NET
      LOSS
            
            $
            (5,046,459
            )
            $
            237,567
            
            $
            (4,808,892
            )NET
      LOSS PER SHAREBASIC
      AND DILUTED
            
            $
            (0.06
            )
            $
            (0.00
            )
            $
            (0.06
            )Weighted
      average number of sharesoutstanding
            
            
            84,773,848
            
            
            —
            
            
            84,773,848





(a)
            To
      adjust to correct account associated with stock for
    services.(b)
            To
      correct account balance due to error in not accruing
  rent.(c)
            To
      adjust to correct account to actual based on previous
    errors.(d)
            To
      adjust to correct accounts associated with derivatives.(e)
            To
      adjust to correct account based on conversion of
  debt.




19


Item
2.  Management’s Discussion and Analysis




This
report contains “forward-looking statements”.  All statements other
than statements of historical fact are “forward-looking statements” for purposes
of federal and state securities laws, including: any projections of earnings,
revenues or other financial items; any statements of the plans, strategies and
objectives of management for future operations; any statements concerning
proposed new products, services or developments; any statements regarding future
economic conditions or performance; any statements of belief; and any statements
of assumptions underlying any of the foregoing.  Forward-looking
statements may include the words “may,” “will,” “estimate,” “intend,”
“continue,” “believe,” “expect,” “plan” or “anticipate” and other similar
words.




Although
we believe that the expectations reflected in our forward-looking statements are
reasonable, actual results could differ materially from those projected or
assumed.  Our future financial condition and results of operations, as
well as any forward-looking statements, are subject to change and to inherent
risks and uncertainties, such as those disclosed in this report.  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, we do not intend, and undertake no obligation, to update any
forward-looking statement. Accordingly, the reader should not rely on
forward-looking statements, because they are subject to known and unknown risks,
uncertainties, and other factors that may cause actual results to differ
materially from those contemplated by the forward-looking
statements.





You
should read the following discussion and analysis of our financial condition and
results of operations should be read in conjunction with our unaudited condensed
consolidated financial statements, including the notes to those financial
statements, included elsewhere in this report.




The
information contained below is subject to the “Risk Factors Relating to our
Operations” and other risks detailed in this report and our other reports filed
with the Securities and Exchange Commission.  We urge you to review
carefully the section “Risk Factors Relating to our Operations” included in this
report for a more complete discussion of the risks associated with an investment
in our securities.




Overview




Power3
Medical Products, Inc has been a development stage company since May 2004, with
our primary business activities focused on the development of our intellectual
property assets in the area of diagnoses for breast cancer, ALS, Alzheimer’s
disease and Parkinson’s disease.  In September 2008, Steven B. Rash,
our Chief Executive Officer and Chairman of the Board, resigned form all of his
positions with us.  Ira L. Goldknopf, our sole remaining director and
Chief Scientific Officer, was appointed as President and interim Chairman of the
Board.  Helen R. Park was appointed Interim Chief Executive
Officer.  Under the direction of our restructured management team, we
implemented a new strategy focusing on commercialization of our intellectual
property assets, with less emphasis on research and development.  In
connection with our new focus, and in an effort to preserve cash and reduce
operating costs, we reduced the amount of space we occupied and implemented a
reduction in force.




Prior to
May 2004, we were engaged in product development, sales, distribution and
services for the healthcare industry.  We transitioned to being a
development stage company on May 18, 2004, when we completed the acquisition of
certain intellectual property assets from Advanced Bio/Chem, Inc. and began
focusing on research and development relating to those assets.  On
September 12, 2003, we completed a one-for-fifty reverse stock split and changed
our name from Surgical Safety Products, Inc. to Power3 Medical Products,
Inc.




Risk
Factors Relating to our Operations




Readers
are cautioned that there are significant risks and uncertainties associated with
investment in the Company’s securities, including, without
limitation:




20




The
Company’s history of operating losses;




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




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




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




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




Development
by competitors of new or competitive products or services;




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




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




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





Series B
Preferred Stock




Pursuant
to two employment agreements with two officers, the Company agreed to issue to
such officers an aggregate of 3,000,000 shares of Series B Preferred Stock.
On September 6, 2007, the Company filed the Certificate of Amendment
necessary to designate the Series B Preferred Stock and the powers,
designations and relative rights of the Series B Preferred
Stock.  3,000,000 shares of Series B Preferred Stock were issued
to the two officers on April 23, 2008.




In
September 2008, Steven B. Rash, our Chief Executive Officer and Chairman of the
Board, resigned from all of his positions with the Company.  This
resulted in 1,500,000 shares of the outstanding Series B Preferred Stock
converting to 1,500,000 shares of common stock, which remain unissued due to
insufficient authorized shares.  As of September 30, 2008, these
shares are presented as a stock payable on the balance sheet of $34,500, based
on the closing share price of our common stock.  1,500,000 shares of Series
B Preferred Stock are issued and outstanding as of September 30,
2008.




SCIENTIFIC
DEVELOPMENTS




CLIA
Certification




On March
25, 2008, Power3 received its CLIA (Clinical Laboratory Improvement Amendment)
compliance recertification following a CLIA regulatory
inspection.  Power3 earned its CLIA recertification to offer high
complexity tests after meeting standards for knowledge, training, expertise,
quality control, quality assurance, and testing proficiency. With CLIA
recertification, Power3 is able to continue offering its blood serum based
tests, BC-SeraProTM and
NuroPro®.  Receipt
of Power3’s CLIA recertification of compliance is a major milestone. This
achievement reflects Power3’s desire to offer the highest quality diagnostic
tests in its continuing mission to commercialize the Company’s discoveries and
serve the medical and scientific communities.





Power3’s
scientific team is currently headed by its President and Chief Scientific
Officer, Dr. Ira L. Goldknopf.  Dr. Goldknopf, a recognized pioneer in
the science of proteomics, protein biochemistry and discovery of new proteins,
who has made significant scientific contributions. The scientific team at Power3
has leveraged these significant insights into the discovery of unique disease
protein footprints of biomarkers in breast cancer, neurodegenerative diseases,
and drug resistance to chemotherapeutic agents.




21


PRODUCT
CANDIDATES





Power3 is
targeting the protein-based diagnostic and drug targeting
markets.  This includes neurodegenerative diseases (Alzheimer’s and
Parkinson’s) and breast cancer utilizing the Company’s portfolio of proprietary
disease biomarkers and tests. In the area of neurodegenerative diseases and
breast cancer, the Company has completed research and clinical validation
studies involving over 1500 patient samples.  Power3 uses
biostatistical analysis to monitor panels of biomarkers for diagnostic
sensitivity and specificity for disease, normal and disease controls. By testing
patient body fluids and tissues, including blood serum (for breast cancer and
neurodegenerative diseases), and bone marrow aspirates (form leukemia patients),
the Company has discovered unique protein biomarker patterns in over 2,000
patient samples that cover a broad range of diseases:





o
            Cancers
      such as breast, leukemia, bladder, stomach, and
  esophageal





o
            Neurodegenerative
      diseases such as Alzheimer’s, ALS, and Parkinson’s
  disease.





The
Company’s discovery platform uses proprietary methodologies, trade secrets, and
accepted technologies that have been optimized and validated for reproducible
discovery and analysis of disease specific protein biomarkers in clinically
relevant patient samples. Following sample preparation, a quantitative 2D Gel
Electrophoresis system is used for the separation of proteins. The gels are
stained, digitally scanned and the digital images are analyzed with
unprecedented reproducibility and sensitivity for quantitative differences of
protein biomarkers in disease vs. control patient samples. These differences are
evaluated using advanced biostatistical analysis to generate statistical models
for the disease and control sample groups. This statistical model is then
applied to new patient samples and used to predict their diagnosis. Biomarkers
of interest can be removed from the 2D gel matrix and analyzed by fingerprinting
on a liquid chromatograph - tandem mass spectrometer. This information is then
cross-referenced on a worldwide database and the results are combined with
results from additional protein chemistry analysis to identify the specific
protein biomarker. This process requires a great deal of experience and
expertise in protein biochemistry to make an accurate
identification.  This is the most critical finding for scalability of
Power3’s diagnostic tests.  The Company delivers significant
discoveries, exhibiting validated, reproducible, and reliable biomarkers, over a
broad quantitative range and linearity which translates into usable diagnostic
assays.





The
Company has successfully identified more than 543 protein biomarkers that are
differentially expressed in response to disease by employing its proprietary
technologies gained from over 40 years of experience in protein
biochemistry.  These biomarkers are used for its specific disease
indication for diagnostic purposes in the evaluation of an individuals
health.





Power3
has transitioned from a company focused 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
has developed a portfolio of products including BC-SeraProTM, a
proteomic blood serum test for the early detection of breast cancer, and
NuroPro®, a serum
test for the detection of neurodegenerative diseases including Alzheimer’s,
Parkinson’s and ALS diseases.  Note: They are not approved by the
FDA





DEVELOPMENT
OF BC-SeraProTM, A BLOOD
SERUM PROTEIN BREAST CANCER TEST





Breast
cancer is the second leading cause of cancer deaths in women and results in
40,000 deaths with over $7 million spent on breast cancer diagnosis annually. 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 for early stages is close to
100%. Due to the limitations of the current diagnostic techniques of mammograms
and self-examination, the presence of breast cancer is often missed or tests are
inconclusive. The limitations and lack of accuracy of the current diagnostic
tests highlight the need for a test that can detect the presence of breast
cancer much earlier and more accurately.





BC-SeraProTM is a
proteomic test for the diagnosis of breast cancer. This test is designed
to measure the quantitative expression level of 22 protein
biomarkers in the serum that differentiate between breast cancer
patients and control subjects. The concentration of the biomarkers from a
patient’s serum sample is compared to Power3 Medical Products’
extensive patient database.  Statistical analysis by linear
discriminate function will analyze the patient’s biomarker
concentrations and assign a probability score for the diagnosis of the patient
sample. The probability score is ranged from 0.0 to 1.0.  Results of the
BC-SeraProTM test
should not be considered a stand alone diagnosis nor a guarantee, but are
intended to be used in conjunction with other breast cancer diagnostic
tools.




22




This test
was developed and its performance characteristics determined by the Power3
Medical Products laboratories. It has not been approved by the U.S. Food and
Drug Administration.  Power3’s laboratory has been certified under the
Clinical Laboratory Improvement Amendment of 1988 (“CLIA”) as qualified to
perform high complexity clinical testing. This test is performed solely at the
Power3 Medical Products’ laboratory and is used for clinical
purposes.





Mammography
often leads to identification of a “probably benign” lesion or an inconclusive
mammogram. Often such patients are referred for frequent repeat mammography
examinations.





The
availability of an accurate and minimally-invasive test would avoid such
repeated mammogram exams, with their discomfort, inconvenience, x-ray exposure,
and emotional stress. In such cases, BC-SeraProTM, which
in a 60 patient blinded study, demonstrated 80% sensitivity and 87% specificity
for the detection of breast cancer, could exclude malignancy at higher accuracy
than mammography. BC-SeraProTM could
detect the disease at a point when treatment is both more effective and less
expensive.





During
the quarter ending September 30, 2008, Power3 continued its blood serum breast
cancer biomarker discovery program using blood serum samples collected from
clinical validation sites, in collaboration with Dr. Alan Hollingsworth at the
Mercy Woman’s Center in Oklahoma City, OK and Dr. Leroy Leeds at Obstetrics
& Gynecological Associates, PA in Houston, TX. To date, in the latest
clinical research/validation study involving Mercy Woman’s Center and Obstetrics
& Gynecological Associates, 97 patient samples have been received and
analyzed.  The results continue to meet the Company’s
expectations.





During
the quarter, discussions were initiated to commence BC-SeraProTM clinical
validation studies in several Middle Eastern countries and in Greece. To
commercialize BC-SeraProTM in the Middle Eastern countries, Power3, in
collaboration with the Princess Haya Biotechnology Center in Irbid, Jordan,
hosted Mr. Yazan Akkam for two weeks of laboratory training in Power3’s
proprietary sample processing and analysis by 2D gel electrophoresis. Mr Akkam’s
training will help Power3 accelerate the process of sample analysis for future
commercialization of the test in Jordan.  Dr. Said Jaradat, the
Director of Princess Haya Biotechnology Center, has acknowledged this
collaboration and shared the Center’s collaboration experience with Power3 in
his talk with the President of the National Institute of Health (NIH) during his
visit to Jordan.  Power3 plans to commercialize BC-SeraProTM in Jordan
as soon as the Company finishes the validation study with the Princess Haya
Biotechnology Center. This clinical validation study is expected to be concluded
by the end of the third quarter, 2009.





Power3 is
finalizing the research and development program for BC-SeraProTM and is
moving forward with a strategy of providing a breast cancer diagnostic test that
is utilitarian, accurate, and inexpensive. Application of this test will have a
future impact on how breast disease will be diagnosed, monitored, and managed
and is intended to be used in conjunction with mammography, breast MRI and other
diagnostic tools used in the detection of breast cancer.





How
BC-SeraProTM
Works




BC-SeraProTM is a
blood serum test designed to diagnose breast cancer in individuals. Blood
serum collection is a routine procedure performed by a clinician. A small sample
of blood is drawn from a vein. This serum sample is then frozen and transported
to the Power3 Medical CLIA certified laboratory, utilizing pre-approved
carriers/delivery services, where sample preparation and analysis
begins.




DEVELOPMENT
OF NuroPro®, A BLOOD
SERUM PROTEIN NEURODEGENERATIVE DISEASE DIAGNOSTIC SCREENING TEST





Early
detection of neurodegenerative disease generally results in better patient
outcomes. Three neurodegenerative diseases of particular interest are
Alzheimer’s disease, Parkinson’s disease and ALS (Amyotrophic Lateral Sclerosis,
aka Lou Gehrig’s disease). The Alzheimer’s Association reports that Alzheimer’s
disease is the most common form of dementia, affecting over 5.1 million
Americans, of which 4.9 million are 65 or older. Every 72 seconds, someone
in America develops Alzheimer’s disease and by mid-century someone will develop
Alzheimer’s every 33 seconds. 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, and a new case of Parkinson’s disease is
diagnosed every 9 minutes. 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.





23




Currently,
Power3 is using a panel of 59 protein biomarkers employed in the development of
the NuroPro®
blood serum-based tests for four disease diagnostics including neurological
diseases of motor control such as Parkinson’s disease, ALS and similarly
presenting 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 diagnostic tests have been filed with the
U.S. Food and Drug Administration (FDA).  With the NuroPro® test,
which involves monitoring the concentration of 59 differentially expressed blood
serum proteins, the Company has identified groups of unique markers that appear
to distinguish normal patients from those with motor neuron, cognitive,
movement, and other neurological disorders.  These biomarkers were
selected from the analysis of over 850 blood serum patient samples.





How
NuroPro®Works




The
NuroPro®
test has the potential to become the first clinical diagnostic test available
for the detection of neurodegenerative diseases.




NuroPro® is a
series of three separate and distinct blood serum tests to be commercialized,
designed to diagnose Alzheimer’s, Parkinson’s or Lou Gehrig’s disease (ALS) in
individuals. The test monitors the concentration of selected proteins residing
in a panel of blood serum protein biomarkers.  It determines if a
patient has a neurodegenerative disease, such as Alzheimer’s, Parkinson’s or Lou
Gehrig’s disease (ALS). The biomarkers in the panel have been selected for their
ability to discriminate patients with these diseases from patients who do not
have the disease (normal and alternate disease controls). Power3’s statistical
model evaluates the quantitative information of the protein biomarkers and
assigns a probability score. The probability score indicates to the physician
that the patient has a particular neurological disease or does not. The score
reflects how strongly the patient sample fits the biostatistical model and if
the patient should be recommended for further follow-up by the
clinician.





Blood
serum collection is a routine procedure performed by a clinician. A small sample
of blood is drawn from a vein, the serum separated and collected, then frozen
and transported to the Power3 Medical CLIA certified laboratory, utilizing
pre-approved carriers/delivery services, where sample preparation and analysis
begins.




NEURODEGENERATIVE
RESEARCH/CLINICAL VALIDATION STUDIES




University
of Thessaly School of Medicine / Dr. Katerina Markopoulou




On
November 11, 2006, University of Thessaly School of Medicine in Larissa, Greece
signed a research agreement with Power3 focusing on the proteomic discovery of
biomarkers for Parkinson’s disease. The collaboration will also extend to cover
other neurodegenerative diseases including Alzheimer’s disease and ALS
(Amyotrophic Lateral Sclerosis - Lou Gehrig's disease). Pursuant to the
agreement, The University of Thessaly is providing Power3 with clinically
confirmed samples of neurodegenerative disease, including age and gender matched
control samples. The Principal Investigator is Katerina Markopoulou, MD PhD, of
the Department of Neurology.




Power3
uses its existing proprietary and patent-pending technologies to analyze the
samples, monitoring existing and seeking new additional protein biomarkers for
the early detection of neurodegenerative diseases to add to its portfolio. To
date, 92 Parkinson’s disease patient samples, as well as age and gender matched
control samples, have been received and analyzed that show greater than expected
sensitivity and specificity. The blood serum samples collected from patients in
Greece utilized Power3’s rigid sample collection protocols and were shipped to
the Company’s CLIA certified laboratory in Houston, Texas, where the analysis
was performed. The consistency in the sample results from both the US and
Greece, indicate how robust this test is in diverse populations. The better than
expected Parkinson's test results and the numerous validation studies that are
underway for Alzheimer's disease, ALS, and similar neurological disorders,
confirm Power3’s commitment to bringing these tests to market in
2009-10.





Linear
discriminate analysis is used for combined analysis of the biomarker protein
quantities.Discriminate
analysis identifies sets of linearly independent functions that will
successfully classify individuals into a well-defined collection of groups (i.e.
disease groups). The statistical model assumes a multivariate normal
distribution for the set of biomarkers identified from each disease group. The
outcome of the discriminate analysis is a collection of linear functions that
maximize the ability to separate individuals into specific disease and groups of
normal and alternate disease controls. This
technique also determines which of the biomarkers provide the best combined
results for diagnosis.




24




Dr.
Marwan N. Sabbagh / Cleo Roberts Center of Clinical Research at the Sun Health
Research Institute




On
October 12, 2007, Power3 appointed Marwan N. Sabbagh, MD FAAN to the
Company's Scientific Advisory Board. Dr. Sabbagh, a national leader in
Alzheimer’s disease, is collaborating with Power3 in a 300 patient validation
study of blood serum samples using Power3's NuroPro®
diagnostic screening test.




Dr.
Sabbagh is currently the Chief Medical-Scientific Officer of the Sun Health
Research Institute of Banner Health located in Sun City, Arizona. Power3 has a
Clinical Trial Agreement with Sun Health. Dr. Sabbagh has published seventy
reviews, and original research articles on Alzheimer's disease and dementia.
Additionally, he has published a book on Alzheimer's prevention.
Dr. Sabbagh received his medical degree from the University of Arizona in
Tucson, completed his residency in Neurology at Baylor College of Medicine in
Houston, and completed his fellowship at the University of California, San Diego
School of Medicine. He also serves as Medical Director of Sun Health Boswell
Hospital where he practices general neurology and specializes in the diagnosis
and treatment of Alzheimer's disease. Dr. Sabbagh is a Clinical Instructor in
Neurology and provides both clinical and didactic expertise for the geriatric
fellowship program.




In
February 2008, the Company commenced the100 patient phase I clinical validation
study of its NuroPro®
diagnostic test for Alzheimer’s disease and Parkinson’s disease. Power3 has
received 92 samples from the clinical validation study to date and the Company
anticipates completion of this clinical validation study in Q4, 2008. Interim
results from completed analyses of 30 Alzheimer’s patients and 70 healthy
control samples from Sun Health Institute show very promising positive
results.  These results will be presented by Dr. Sabbagh to the
American Academy of Neurology Annual Meeting in Seattle in April
2009.  The abstract for the presentation was co-authored by Dr.
Sabbagh and Dr. Ira L. Goldknopf, Power3’s President and Chief Scientific
Officer.





The
completed phase II clinical validation study with Sun Health and Dr. Sabbagh
will include one hundred Alzheimer’s disease patients, one hundred
non-Alzheimer’s disease patients with similar symptoms (other dementias) and one
hundred non-cognitively impaired control subjects.




Parkinson’s
disease patients from Dr. Marwan Sabbagh are also included in the clinical
validation study to augment the Parkinson’s disease validation study presently
ongoing with the Research Institute of Thessaly in Greece led by Dr. Katerina
Markopoulou, the Principal Investigator.




Publications





Power3
has published the discovery of protein biomarkers for esophageal malignancies in
the International Journal of
Cancer.   The article, titled “Alterations in
Barrett’s-related adenocarcinomas: A proteomic approach,” was authored by Dr.
Wael El-Rifai, MD, PhD, Professor of Surgery, Medicine and Cancer Biology and
Director of Surgical Oncology Research at Vanderbilt University Medical Center,
Nashville, TN. Dr. Ira L. Goldknopf  and Dr. Essam A. Sheta, Director
of Biochemistry, at Power3 worked in collaboration with Dr.
El-Rifai.





Esophageal
malignancies are the sixth leading cause of cancer death in the world and
represent about 1% of the cancers diagnosed in the United States. Dr. El Rifai
stated that through the use of Power3’s leading edge proteomic discovery
platform, twenty-three biomarkers were identified that have not been described
before in this lethal malignancy. Dr. El-Rifai confirmed the differential
expression of six of these novel protein biomarkers in a large panel of primary
tumors using Western blot, immunohistochemical, and quantitative real time PCR
techniques.”





Power3
discovered differential expression of these protein biomarkers in esophageal
biopsies of normal, pre-cancerous, and cancerous areas from the same patients,
using the company’s quantitative 2D gel electrophoresis platform. Power3’s
findings identify a previously unknown potential oncogenic signaling mechanism
in Barrett’s tumors, representing a new area that can be
developed.  This finding is further validation of Power3’s proteomic
process as the company continues to build its reputation as leaders in novel
proteomic platforms, while moving ahead in commercialization of the company’s
blood based early detection proteomic tests for breast cancer, Parkinson’s
disease, and Alzheimer’s disease.




25





Power3’s
Dr. Ira L. Goldknopf, published an invited editorial in the February 2008 issue
of Expert Review of
Proteomics.The editorial, entitled “Blood Based Proteomics for
Personalized Medicine, Examples From Neurodegenerative Disease,” outlines how
“proteins in the blood serum can tell us what disease pathways and
mechanisms...are active in patients.” In his editorial, Dr. Goldknopf cited
research completed at Power3 and published in peer reviewed journals. The
results demonstrate, “broad and deep implications which liberate a new paradigm
to unlock the power of personalized medicine, to monitor proteins in the blood
of live patients for diagnosis, differential diagnosis, patient monitoring,
selection of treatment options, and for new drug target discovery.”





In
addition, Dr. Goldknopf presented the Company’s results with Neurodegenerative
diseases and drug resistance in leukemia at the Cambridge Healthtech Biomarker
Discovery Summit in Philadelphia on Oct. 1, 2008 and was invited to present a
keynote address at the International Drug Discovery Science and Technology
conference in Beijing on Oct. 18, 2008.





The
Company is proud that the biotechnology community has recognized and
acknowledged Power3’s efforts and advancements in disease diagnosis through
blood-based testing. This recognition of the company is further validation of
Power3’s leadership position in advancing the science of molecular diagnostics
and targeted therapeutics for neurodegenerative diseases and
cancer.




Intellectual
Property





The
Company filed one US Utility patent application in the first quarter of 2008 for
47 of the Company's identified blood serum protein biomarkers, and one US
Utility patent application on July 9, 2008, comprising parts of Power3's
clinically validated biomarker panel for early detection and differential
diagnosis of multiple forms of neurodegenerative diseases, including
Alzheimer’s, Parkinson’s, and Lou Gehrig’s (ALS) diseases.




The blood
serum protein biomarkers in these patent applications are identified with
sufficiently detailed molecular characterization to specify which protein
isoforms or variants are the actual biomarkers. With the biomarker proteins
fully characterized, and with Power3’s quality controls in place, consistent and
significant differences in the concentration of select groups of these protein
biomarkers in the blood of patients and age matched normal and disease controls,
reflect meaningful indicators of disease processes, processes that also differ
between diseases with similar symptoms.




In these
patent filings, utilizing the patent pending technologies specified in previous
patent application filings, we have demonstrated significant differences in
blood serum concentrations between patients for objective differential diagnosis
that also provides a rational basis for disease specific mechanism
discrimination between:




o
            Similar
      neurodegenerative diseases: Alzheimer’s disease vs. Lou Gehrig’s disease
      (ALS) vs. Parkinson’s disease; Alzheimer’s disease vs. non-Alzheimer’s
      dementias vs. Parkinson’s disease; multiple forms of Alzheimer’s
      disease




o
            Sporadic
      vs. familial neurodegenerative diseases: sporadic vs. familial Alzheimer’s
      and Lou Gehrig’s diseaseo
            Early
      vs. more advanced neurodegenerative
diseases




These
biomarkers provide the capacity for objective blood tests for early, rapid,
sensitive, and specific diagnoses of neurodegenerative diseases, which will be a
substantial benefit to physicians and patients who now rely on subtleties in
symptoms. By the time such symptoms become clear enough to diagnose, the patient
has often suffered substantial irreversible neurological damage. Differences in
these highly characterized protein biomarkers also provide the type of
information that can be employed in the monitoring of patients for potential
drug response, disease severity and progression, as well as for potential new
drug targets.




We
continue to move forward in our commercialization efforts as well as
strengthening our intellectual property portfolio, which currently includes
eleven patents pending and numerous other patent applications in the
pipeline.




26




Patent Application
      Filed in Q1 2008
            
            Application
              Date
            
            Type
              of Patent12/069,807:
      Forty Seven (47) Protein Biomarkers for Neurodegenerative
      Diseases
            
            2/13/08
            
            US
      Utility




Patent Application
      Filed in July 2008
            
            Application
              Date
            
            Type
              of Patent12/217,885:
      Diagnosis of Multiple Forms of Alzheimer’s Disease Based on Differences in
      Concentration of Protein Biomarkers in Blood Serum Of
    Patients
            
            7/9/08
            
            US
      Utility






The
number of pending patent applications as of the period ended September 30, 2008,
is 11 as follows:




Qty
            
            Type
      of Patent1
            
            Breast
      Cancer9
            
            Neurodegenerative1
            
            Drug
      Resistance





Liquidity
and Capital Resources




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, and in addition, is seeking additional
capital from research grants, collaboration agreements, and other strategic
alliances.




Net cash
used in operating activities amounted to $1,293,436 for the nine months ended
September 30, 2008, compared to $1,755,877 for the nine months ended September
30, 2007.  The change in net cash used in operating activities during
2008 was primarily due to changes in the fair value of derivative liabilities,
and net income for the nine months ended September 30, 2008 compared to a net
loss for the nine months ended September 30, 2007.




Net cash
provided by financing activities was $1,172,404 for the nine months ended
September 30, 2008, as compared to $1,902,137 for the nine months ended
September 30, 2007.  The decrease in cash provided by financing
activities during the nine months ended September 30, 2008 as compared to the
nine months ended September 30, 2007 is due to a reduction in borrowing activity
in 2008.




As of
September 30, 2008, the Company’s principal source of liquidity was $1,850 in
cash.




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, distribution 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 when
revenue-generating agreements will result in continuous revenue
streams.




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 $180,000 per month and the
Company anticipates that it will require approximately $2,550,000 for the twelve
months ended December 31, 2008, to continue its development activities,
undertake and perform clinical validation studies, continue its marketing
efforts and maintain its administrative infrastructure, as follows:




27




Estimated
Expenditures Required


During
Next Twelve Months





General
      and administrative
            
            $
            1,800,000Patent
      filings and intellectual property
            
            
            100,000Capital
      expenditures and research agreements
            
            
            650,000Total
            
            $
            2,550,000





The
foregoing is based upon the Company’s current estimated cash requirements. The
Company has no significant capital expenditure requirements and does not plan to
increase its monthly expenditure rate absent an increase in revenues or
additional funding.




The
Company will continue to require additional debt or equity financing for its
operations, which may not be readily available. The Company’s ability to
continue as a going concern is subject to its ability to generate a profit or
obtain necessary funding from outside sources.




Off-Balance
Sheet Arrangements




At
September 30, 2008, the only off balance sheet agreements in place for the
Company were a lease in effect for its office space, leases in effect for phone
equipment, leases in effect for lab equipment and employment agreements entered
with two principal officers.




Accounting for Derivative
Instruments





Statement
of Financial Accounting Standards (SFAS) No. 133, “Accounting for Derivative
Instruments and Hedging Activities,” as amended, requires all derivatives to be
recorded on the balance sheet at fair value. These derivatives, including
embedded derivatives in Power3's structured borrowings, are separately valued
and accounted for on Power3's balance sheet. Fair values for exchange traded
securities and derivatives are based on quoted market prices. Where market
prices are not readily available, fair values are determined using market based
pricing models incorporating readily observable market data and requiring
judgment and estimates.




Lattice Valuation
Model





Power3
valued the conversion features in their convertible notes using a lattice
valuation model, with the assistance of a valuation consultant. The lattice
model values the embedded derivatives based on a probability weighted discounted
cash flow model. This model is based on future projections of the five primary
alternatives possible for settlement of the features included within the
embedded derivative, including: (1) payments are made in cash, (2) payments are
made in stock, (3) the holder exercises its right to convert the debentures, (4)
Power3 exercises its right to convert the debentures and (5) Power3 defaults on
the debentures. Power3 uses the model to analyze (a) the underlying economic
factors that influence which of these events will occur, (b) when they are
likely to occur, and (c) the common stock price and specific terms of the
debentures such as interest rate and conversion price that will be in effect
when they occur. Based on the analysis of these factors, Power3 uses the model
to develop a set of potential scenarios. Probabilities of each scenario
occurring during the remaining term of the debentures are determined based on
management's projections. These probabilities are used to create a cash flow
projection over the term of the debentures and determine the probability that
the projected cash flow will be achieved. A discounted weighted average cash
flow for each scenario is then calculated and compared to the discounted cash
flow of the debentures without the compound embedded derivative in order to
determine a value for the compound embedded derivative.





Black−Scholes Valuation
Model





Power3
uses the Black−Scholes pricing model to determine the fair values of its
warrants. The model uses market sourced inputs such as interest rates, stock
prices, and option volatilities, the selection of which requires management's
judgment, and which may impact net income or loss. In particular, Power3 uses
volatility rates based upon the closing stock price of Power3’s common stock.
Power3 uses a risk free interest rate which is the U.S. Treasury bill rate for a
security with a maturity that approximates the estimated expected life of the
derivative or security.




28


Item
3. Quantitative and Qualitative Disclosures About Market Risk




None.




Item
4. Controls and Procedures




Evaluation
of Disclosure Controls and Procedures




The
Company’s Chief Executive Officer and Chief Accounting Officer have
evaluated the effectiveness of the Company’s disclosure controls and procedures
(as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the
end of the period covered by this report on Form 10-Q.  Based upon
such evaluation, the Chief Executive Officer and Chief Accounting Officer have
concluded that, as of the end of such period, the Company’s disclosure controls
and procedures were not effective as required under Rules 13a-15(e) and
15d-15(e) under the Exchange Act.  This conclusion is based upon the
number and magnitude of the year end and quarterly adjusting entries and the
continued existence of the deficiencies noted below.




Management,
under the supervision of the Company’s Chief Executive Officer and Chief
Accounting Officer, conducted an evaluation of the effectiveness of internal
control over financial reporting at December 31, 2007.  Based on this
evaluation, management concluded that the Company’s internal control over
financial reporting was not effective as of December 31, 2007.  For
the nine months ended September 30, 2008 management concluded that the following
three deficiencies previously identified in our control process still
exist:




·  We did not have
adequate transaction controls over the accounting, review and processing of
certain unusual or complex accounting transactions.




·  We did not have a
systematic and documented program of internal controls and procedures over our
accounting and financial reporting process to ensure that unusual or complex
transactions are recorded, processed, summarized and reported on a timely basis
in our financial disclosures.




·  There is
deficiency in segregation of duties due to the small size of the
Company.




This
quarterly report does not include an attestation report of the Company’s
registered public accounting firm regarding internal control over financial
reporting. Management’s annual report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only management’s report.




Additional
effort is needed to fully remedy our identified deficiencies as discussed above
and we are continuing our efforts to improve and strengthen our control
processes and procedures. Our management intends to continue to work with our
auditors and other outside advisors, as appropriate, to develop and then apply
our controls and procedures with the goal of achieving adequate and effective
disclosure controls. We believe that with a properly planned, designed and
implemented system of internal controls over financial reporting, our disclosure
controls and procedures are expected to become effective.




Changes
in Internal Control Over Financial Reporting




No change
in the Company’s internal control over financial reporting occurred during the
nine months ended September 30, 2008, that materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.




PART
II





Item 1. Legal Proceedings




On
October 28, 2005, Power3 received notice of a Petition to Enforce Foreign
Judgment citation filed against the Company by KForce regarding an employment
fee adjudicated in December 2003 in the state of Florida against the Company, in
the amount of $15,873, together with $4,735 in interest. Power3 does not agree
with the Foreign Judgment and is attempting to resolve the issue prior to
enforcement. No resolution has been achieved on this issue at this time;
however, the Company is endeavoring to resolve the petition. This debt is not
recorded in accounts payable by the Company because it is the Company’s position
that the judgment should never have been entered against Power3, but rather
against a different corporate entity, not related to Power3 in any
way.  The Company’s attorney in this matter feels that no loss is
probable, nor will the Company be obligated to pay any sums whatsoever on this
matter. The Company has pled improper party and expects to be vacated from the
suit since it does not apply to the Company.  Power3 has
counterclaimed KForce for frivolous claims.




29




On March
12, 2008, all matters involving the dispute over the taking, by an
ex-employee, of certain trade secrets, defamation and wrongful interference
with Power3's contractual relations with other parties, and a pendent wage claim
for severance pay, were resolved.  In settlement the Company has paid
the ex-employee $35,000 and has issued to the ex-employee 325,000 shares of the
Company’s common stock with restrictions.




In
October of 2006, Trinity Financing filed a lawsuit against the Company claiming
default on a promissory note dated December 9, 2005.  As security for
the Note, Steven Rash and Ira Goldknopf pledged their personal restricted shares
of the Company’s stock.  As a result of the alleged default in payment
of the Note, Trinity Financing seeks to have the restrictive legend removed so
the shares may be sold by Trinity Financing in satisfaction of the
loan.  The Company denied the material allegations and asserted three
counterclaims against Trinity Financing.  The company asserted that
the Note, as well as a prior promissory note executed in favor of Trinity
Financing, are usurious.  The matter was settled February 4, 2008 with
the removal of the restrictive legend.




On August
13, 2007, Gryphon Master Fund LP and GSFF Master Fund, LP filed a lawsuit
against the Company claiming a breach of a Securities Purchase Agreement,
Convertible Debentures, and Registration Rights Agreement.  The
plaintiffs claimed the Company failed to timely obtain an effective registration
statement for the shares issued to the plaintiffs and refused to recognize
anti-dilution rights of the plaintiffs. The Company denies the material
allegations of the complaint and asserts numerous affirmative
defenses.  Power3 entered into settlement negotiations as of April 20,
2008.  On August 13, 2008 the claim above, note, warrants, and all
applicable penalties were settled in exchange for 5,240,000 shares of common
stock valued at approximately $233,000 based upon the closing price of our
common stock at the settlement date.




In
October of 2007, Winstead filed suit against the Company for approximately
$17,000 in attorney fees. In March 2008, a settlement was reached. The fees have
been reduced to $9,000 and a payout schedule has been agreed upon.




Item
1A.  Risk Factors




None.




Item
2. Unregistered Sales of Equity Securities and Use of Proceeds




During
the nine months ended September 30, 2008, the Company issued 7,492,875
unregistered shares of common stock for cash proceeds of
$647,404.  Proceeds were used to fund operations.





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. The
registration statement was withdrawn on June 20, 2007. As of the nine
months ended September 30, 2008, the Company has settled with a number of its
Convertible Debenture Holders as previously mentioned above.




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




No
matters were submitted to the security holders for a vote during the nine months
ended September 30, 2008.




Item
5. Other Information




None.




30




Item
6. Exhibits




Exhibit
      No.
            
            INDEX10.1
            
            Form
      of Convertible Promissory Note, dated as of November 4, 2008, issued by
      the Company to the Investors (incorporated by reference to Exhibit 10.1 to
      the Company’s Form 8-K filed on November 10, 2008).10.2
            
            Form
      of Warrant, dated as of November 4, 2008, issued by the Company to the
      Investors (incorporated by reference to Exhibit 10.1 to the Company’s Form
      8-K filed on November 10, 2008).31.1*
            
            Certification
      of Power3 Medical Products, Inc. President, Ira L. Goldknopf, pursuant to
      Section 302 of the Sarbanes-Oxley Act of 2002.31.2*
            
            Certification
      of Power3 Medical Products, Inc. Chief Accounting Officer, Marion J.
      McCormick, pursuant to Section 302 of the Sarbanes-Oxley Act of
      2002.32.1*
            
            Certification
      of Power3 Medical Products, Inc. President, Ira L. Goldknopf, pursuant to
      Section 906 of the Sarbanes-Oxley Act of 2002.32.2*
            
            Certification
      of Power3 Medical Products, Inc. Chief Accounting Officer, Marion J.
      McCormick, pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.




31




SIGNATURES




Pursuant
to the requirements of the Exchange Act of 1934, this report has been signed by
the following persons in the capacities and on the dates indicated.






Signature
            
            Title
            
            Date/s/
      Helen R. Park
            
            Interim
      Chief Executive Officer
            
            November
      19, 2008Helen
      R. Park/s/
      Marion J. McCormick
            
            Chief
      Accounting Officer
            
            November
      19, 2008Marion
      J. McCormick








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