**UNITED
      STATES**




**SECURITIES
      AND EXCHANGE COMMISSION**




Washington,
      DC 20549




**FORM
      10-Q**




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




**EXCHANGE
      ACT OF 1934**




For
      the
      quarterly period ended September 30, 2006




**[
      ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
      SECURITIES**




**EXCHANGE
      ACT OF 1934**




For
      the
      transition period from: ____________ to ____________




*Commission
      file number: 33-55254-26*




**POWERLINX,
      INC.**




(exact
      name of registrant as specified in its charter)





NEVADA
            50-0006815(State
                or other jurisdiction of incorporation
                or organization)
            (I.R.S.
                Employer  Identification
                No.)








10901-A
                Roosevelt Blvd., Suite 200, ST.PETERSBURG, FL
            33716(Address
                of principal executive offices)
            (Zip
                Code)





(727)
      866-7440


(Registrant's
      telephone number, including area code)








Indicate
      by check mark whether the registrant (1) has filed all reports required to
      be
      filed by Section 13 or 15d of the Securities and Exchange Act of 1934 during
      the
      preceding 12 months (or 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. [X] Yes [ ] No





Indicate
      by check mark whether the registrant is a large accelerated filer, an
      accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of
      the
      Exchange Act).




Large
                accelerated filer [ ]
            Accelerated
                filer [ ]
            Non-accelerated
                filer [X]





Indicate
      by check mark whether registrant is a shell company (as defined in Rule 12b-2
      of
      the Exchange Act).




Yes
      [ ]
      No [X]





The
      number of shares outstanding of Registrant’s Common Stock, as of November 14,
      2006: 5,053,687








1




POWERLINX,
      INC.




INDEX


Part
      I -
      FINANCIAL INFORMATION






Item
                  1.
              Financial
                Statements.Condensed
                Financial Statements
              Page
                  No.PowerLinx,
                    Inc. Condensed ConsolidatedBalance
                    Sheets (Unaudited)
              F-1PowerLinx,
                    Inc. Condensed ConsolidatedStatements
                    of Operations (Unaudited)
              F-2PowerLinx,
                    Inc. Condensed ConsolidatedStatements
                    of Cash Flows (Unaudited)
              F-3PowerLinx,
                    Inc. Notes to the Condensed ConsolidatedFinancial
                    Statements (Unaudited)
              F-5Item
                  2.
              Management's
                    Discussion and Analysis of FinancialCondition and
                    results of Operations
              4Item
                  3.
              Quantitative
                    and Qualitative DisclosuresAbout
                    Market Risk
              5Item
                  4.
              Controls
                  and Procedures
              13Part
                  II. OTHER INFORMATIONItem
                  1.
              Legal
                  Proceedings
              14Item
                  1A.
              Risk
                  Factors
              15Item
                  2.
              Unregistered
                  Sales of Equity Securities and Use of Proceeds
              17Item
                  3.
              Defaults
                  Upon Senior Securities
              17Item
                  4.
              Submission
                  of Matters to a Vote of Security Holders
              17Item
                  5.
              Other
                  Information
              19Item
                  6.
              Exhibits
              20









2











**PART
      I - FINANCIAL INFORMATION**





**Item
      1. Financial Statements**







3










POWERLINX,
      INC.


CONDENSED
      CONSOLIDATED BALANCE SHEETS


(Unaudited)


September
                  30,
              
              December
                    31,2006
              
              2005ASSETSCurrent
                  Assets:Cash
                  and cash equivalents
              
              $
              83,740
              
              $
              255,293Accounts
                  receivable, net
              
              
              952,628
              
              
              157,221Employee
                  advances
              
              
              54,113
              
              
              31,161Inventories
              
              
              823,692
              
              
              589,495Prepaid
                  expenses and other current assets
              
              
              47,886
              
              
              134,518Deferred
                  financing costs
              
              
              79,407
              
              
              -Assets
                  of discontinued operations
              
              
              -
              
              
              16,588Total
                  current assets
              
              
              2,041,466
              
              
              1,184,276Intangible
                  assets, net
              
              
              407,858
              
              
              555,411Deposits
              
              
              22,716
              
              
              18,460Property
                  and equipment, net
              
              
              156,657
              
              
              203,453Total
                  assets
              
              $
              2,628,697
              
              $
              1,961,600LIABILITIES
                  & STOCKHOLDERS' DEFICITCurrent
                  liabilities:Accounts
                  payable
              
              $
              670,240
              
              $
              834,558Accrued
                  expenses
              
              
              93,144
              
              
              467,826Accrued
                  severance payable, current portion
              
              
              66,000
              
              
              112,500Current
                  maturities of notes payable
              
              
              319,411
              
              
              22,942Litigation
                  settlement
              
              
              -
              
              
              90,000Other
                  current liabilities
              
              
              24,099
              
              
              61,070Liabilities
                  of discontinued operations
              
              
              88,804
              
              
              155,128Derivative
                  liability
              
              
              3,641,199
              
              
              -Total
                  current liabilities
              
              
              4,902,897
              
              
              1,744,024Accrued
                  severance payable, less current portion
              
              
              -
              
              
              34,500Notes
                  payable, less current maturities
              
              
              -
              
              
              1,108,462Convertible
                  debentures
              
              
              158,929
              
              
              **-**Total
                  Liabilities
              
              
              5,061,826
              
              
              2,886,986Commitments
                  and contingencies (Note 11)Stockholders'
                  deficitSeries
                  A convertible preferred stock, $1.00 par value;
              
              
              512,685
              
              
              534,730authorized
                  30,000,000 shares; shares issued 1,825,520;outstanding
                  (581,408 - 2006; 606,408 -2005)Common
                  stock, $.001 par value, authorized 50,000,000
              
              
              4,917
              
              
              4,408shares;
                  issued (4,917,501 - 2006; 4,408,142 - 2005)outstanding
                  (4,908,029 - 2006; 4,398,670 -2005)Additional
                  paid-in capital
              
              
              25,332,954
              
              
              24,616,698Treasury
                  stock, at cost, 9,472 shares
              
              
              (287,757
              )
              
              (287,757
              )Accumulated
                  deficit
              
              
              (27,995,928
              )
              
              (25,793,465
              )Total
                  stockholders' deficit
              
              
              (2,433,129
              )
              
              (925,386
              )Total
                  liabilities and stockholders' deficit
              
              $
              2,628,697
              
              $
              1,961,600







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








F-1


POWERLINX,
      INC.


CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS


(Unaudited)




Three
                  Months Ended September 30,
              
              
              Nine
                  Months Ended September 30,2006
              
              
              2005
              
              
              2006
              
              
              2005Net
                  revenue
              
              $
              1,004,564
              
              $
              223,945
              
              $
              1,503,980
              
              $
              1,155,573Cost
                  of goods sold
              
              
              731,688
              
              
              136,529
              
              
              1,013,734
              
              
              804,100Gross
                  Profit
              
              
              272,876
              
              
              87,416
              
              
              490,246
              
              
              351,473Operating
                  expenses:Salaries
                  and wages
              
              
              306,757
              
              
              285,809
              
              
              1,020,978
              
              
              1,246,092Professional
                  and consulting fees
              
              
              121,779
              
              
              201,042
              
              
              1,027,101
              
              
              730,215Depreciation
                  and amortization
              
              
              52,818
              
              
              165,326
              
              
              214,454
              
              
              500,941Research
                  and development
              
              
              152,932
              
              
              178,129
              
              
              507,667
              
              
              498,288Advertising
                  and promotions
              
              
              22,158
              
              
              30,875
              
              
              106,558
              
              
              149,914Rent
                  and utilities
              
              
              29,689
              
              
              36,965
              
              
              145,263
              
              
              144,150Travel
                  and entertainment
              
              
              31,832
              
              
              47,885
              
              
              102,686
              
              
              158,004Other
                  expenses
              
              
              79,841
              
              
              65,614
              
              
              278,794
              
              
              264,279Restructuring
                  expense
              
              
              -
              
              
              -
              
              
              -
              
              
              598,286Total
                  operating expenses
              
              
              797,806
              
              
              1,011,645
              
              
              3,403,501
              
              
              4,290,169Loss
                  from operations
              
              
              (524,930
              )
              
              (924,229
              )
              
              (2,913,255
              )
              
              (3,938,696
              )Interest
                  expense, net
              
              
              69,333
              
              
              6,156
              
              
              160,503
              
              
              20,255Other
                  income, net
              
              
              (47,200
              )
              
              -
              
              
              (72,200
              )
              
              -Loss
                  on extinguishment of debt
              
              
              
              
              
              -
              
              
              (1,502,286
              )
              
              -Derivative
                  gain (loss)
              
              
              (37,718
              )
              
              -
              
              
              2,317,969
              
              
              -Loss
                  before discontinued operations
              
              
              (584,781
              )
              
              (930,385
              )
              
              (2,185,875
              )
              
              (3,958,951
              )Loss
                  from discontinued operations
              
              
              -
              
              
              (10,638
              )
              
              (16,588
              )
              
              (181,726
              )Net
                  loss
              
              $
              (584,781
              )
              $
              (941,023
              )
              $
              (2,202,463
              )
              $
              (4,140,677
              )Net
                  loss per common share, basicand
                  diluted: Continuing Operations
              
              $
              (0.12
              )
              $
              (0.24
              )
              $
              (0.47
              )
              $
              (1.08
              )Discontinued
                  Operations
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              (0.05
              )$
              (0.12
              )
              $
              (0.24
              )
              $
              (0.47
              )
              $
              (1.13
              )Weighted
                  average common sharesoutstanding,
                  basic and diluted
              
              
              4,872,712
              
              
              4,005,393
              
              
              4,699,305
              
              
              3,670,170Net
                  loss per common share, diluted:Continuing
                  Operations
              
              $
              (0.15
              )
              $
              (0.24
              )
              $
              (0.62
              )
              $
              (1.08
              )Discontinued
                  Operations
              
              $
              -
              
              $
              -
              
              $
              -
              
              $
              (0.05
              )$
              (0.15
              )
              $
              (0.24
              )
              $
              (0.62
              )
              $
              (1.13
              )Weighted
                  average common sharesoutstanding,
                  diluted:
              
              
              5,089,682
              
              
              4,005,393
              
              
              5,771,442
              
              
              3,670,170






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


F-2





POWERLINX,
      INC.


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS


(Unaudited)


Nine
                  Months EndedSeptember 302006
              
              2005Cash
                  flows from operating activities:Net
                  loss
              
              $
              (2,202,463
              )
              $
              (4,140,677
              )Adjustments
                  to reconcile net loss to net cash flowsfrom
                  operating activities:Stock-based
                  compensation
              
              
              408,960
              
              
              670,861Amortization
              
              
              147,553
              
              
              426,801Accretion
                  of debt discount
              
              
              161,522
              
              
              -Loss
                  on debt extinquishment
              
              
              1,502,286
              
              
              -Derivative
                  (gain) loss
              
              
              (2,317,969
              )
              
              -Depreciation
              
              
              66,901
              
              
              74,140Bad
                  debt expense
              
              
              41,200
              
              
              13,166Changes
                  in operating assets and liabilitiesAccounts
                  receivable
              
              
              (836,608
              )
              
              (20,379
              )Employee
                  advances
              
              
              (22,952
              )
              
              (16,327
              )Inventories
              
              
              (234,197
              )
              
              489,539Prepaid
                  expenses and other current assets
              
              
              95,033
              
              
              (51,691
              )Assets
                  of discontinued operation
              
              
              16,588
              
              
              120,967Deposits
              
              
              (4,256
              )
              
              20,874Accounts
                  payable
              
              
              (119,413
              )
              
              124,884Accrued
                  expenses
              
              
              (267,819
              )
              
              33,339Accrued
                  severance
              
              
              (81,000
              )
              
              169,500Due
                  to related parties
              
              
              -
              
              
              (60,151
              )Deferred
                  revenue
              
              
              24,099
              
              
              (173,483
              )Liabilities
                  of discontinued operation
              
              
              (66,324
              )
              
              74,523Net
                  cash flows from operating activities
              
              
              (3,688,859
              )
              
              (2,244,114
              )Cash
                  flows from investing activities:Purchase
                  of property and equipment
              
              
              (20,015
              )
              
              (3,945
              )Net
                  cash flows from investing activities
              
              
              (20,015
              )
              
              (3,945
              )Cash
                  flows from financing activities:Proceeds
                  from sales of common stock, netcosts
                  of $30,168
              
              
              184,145
              
              
              1,161,298Proceeds
                  from convertible debentures, netcosts
                  of $82,000
              
              
              3,018,000
              
              
              -Repayment
                  of related party debt
              
              
              (31,000
              )
              
              -Proceeds
                  from notes payable
              
              
              375,000
              
              
              800,000Repayment
                  of notes payable
              
              
              (8,824
              )
              
              (200,000
              )Net
                  cash flows from financing activities
              
              
              3,537,321
              
              
              1,761,298Net
                  change in cash and cash equivalents
              
              
              (171,553
              )
              
              (486,761
              )Cash
                  and cash equivalents at beginning of period
              
              
              255,293
              
              
              497,663Cash
                  and cash equivalents at end of period
              
              $
              83,740
              
              $
              10,902


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





F-3





POWERLINX,
      INC.


CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS - CONTINUED


(Unaudited)





NON-CASH
      INVESTING AND FINANCING ACTIVITIES











For
                  the nine months ended September
                  30,2006
              
              
              2005Issuance
                  of common stock for liabilities
              
              $
              192,129
              
              $
              -Issuance
                  of common stock for financing fees
              
              $
              46,055
              
              $
              -Conversion
                  of notes payable to convertible debentures
              
              $
              1,373,933
              
              $
              -Conversion
                  of Series A preferred stock to common stock
              
              $
              22,045
              
              $
              241,798OTHER
                  CASH FLOWS INFORMATIONCash
                  paid for taxes
              
              $
              -
              
              $
              -Cash
                  paid for interest
              
              $
              2,733
              
              $
              -


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





F-4


POWERLINX,
      INC.


NOTES
      TO
      CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


FOR
      THREE AND  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005


UNAUDITED





**1.**
            **Basis
                of presentation and significant accounting
                policies:**





The
      accompanying unaudited condensed consolidated financial statements have been
      prepared in accordance with generally accepted accounting principles (United
      States) for interim financial information and with the instructions to Form
      10-Q
      and Rule 10-01 of Regulation S-X. Accordingly, they do not contain all of the
      information and footnotes required by generally accepted accounting principles
      (United States) for complete financial statements.





In
      the
      opinion of management, the accompanying unaudited condensed consolidated
      financial statements reflect all adjustments (consisting only of normal
      recurring adjustments) considered necessary for a fair presentation of
      PowerLinx, Inc.’s (the “Company”) financial position and the results of its
      operations and its cash flows for the three and nine months ended September
      30, 2006 and 2005. These unaudited consolidated financial statements should
      be
      read in conjunction with the Company’s audited 2005 financial statements,
      including the notes thereto, and the other information set forth therein in
      the
      Company’s Annual Report on Form 10-K/A for the year ended December 31, 2005.
      Operating results for the nine month period ended September 30, 2006, are not
      necessarily indicative of the results that can be expected for a full fiscal
      year.





*Revenue
      recognition:*





Revenue
      is recognized when the earnings process is complete and the risks and rewards
      of
      ownership of the product, including title, have been transferred to the
      customer, which is generally considered to have occurred upon shipment of the
      product. Shipping costs, which have been nominal, are billed to the customer
      and
      are included as a component of cost of goods sold. Estimated returns are
      provided for as reductions of revenue based upon the Company’s historical return
      experience.





Fee
      revenue is recognized over the life of the respective agreements. The related
      deferred revenue represents fees received for which the revenue has not been
      earned.




*Cash*





As
      of
      September 30, 2006, the Company had $83,740 in cash with which to satisfy any
      future cash requirements. The Company maintains its cash in bank deposit
      accounts, which at times, exceeds federally insured limits. The Company has
      not
      experienced any losses in such accounts. The Company believes it is not exposed
      to any significant credit risk on cash and cash equivalents which includes
      certificates of deposit that have an original maturity of three months or less
      when purchased. The Company’s cash balance includes $17,032 of cash that is
      restricted in accordance with the terms of the lease agreement for the Company’s
      headquarters.





*Stock-Based
      Compensation:*





Effective
      January 1, 2006, the Company adopted Statement of Financial Accounting Standards
      No. 123R, “Share Based Payments” (FAS 123R) using the modified
      prospective-transition method. Under this transition method, compensation cost
      in 2006 would include the fair value of the vesting portion of previously issued
      options granted prior to December 31, 2005 and options granted and vested in
      2006. Prior period results would not be restated.





The
      adoption of FAS 123R had no effect on net income for the three and nine months
      ended September 30, 2006, compared to accounting for share based compensation
      using the previously adopted intrinsic value method under APB No. 25,
“Accounting for Stock Issued to Employees” since there was no unrecognized
      compensation cost related to unvested share awards at December 31, 2005 
and there were no employee option grants during the three and nine months
      ended September 30, 2006





F-5


POWERLINX,
          INC.
 NOTES
          TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THREE AND  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 UNAUDITED






The
      following table represents stock option activity for the nine months ended
      September 30, 2006:








Options
              
              
              WeightedAverage
                Exercise
                  PriceOptions
                  Outstanding - December 31, 2005
              
              
              190,631
              
              $
              5.21Granted
              
              
              
              
              
              -Exercised
              
              
              
              
              
              -Forfeited/Expired
              
              
              4,278
              
              $
              3.15Options
                Outstanding - September 30, 2006
              
              
              186,353
              
              $
              5.28Options
                  Exercisable - September 30, 2006
              
              
              186,353
              
              $
              5.28
   The
          following table sets forth total employee and non-employee stock based
          compensation for the nine month periods ending September 30, 2006 and September
          30, 2005:
 
 Period
                      EndingSeptember
                      30,
                  
                  September
                      30,2006
                  
                  2005Stock
                      CompensationEmployee
                      Based
                  $
                      332,700
                  
                  $
                      627,361Non-Employee
                      Based
                  76,260
                  
                  43,500Total
                      Stock Based Compensation
                  $
                      408,960
                  
                  $
                      670,861
  Net
          Loss Per Share
 We
          account for earnings (loss) per share (“EPS”) in accordance with SFAS
          No. 128, “ Earnings
          per Share” (“SFAS No. 128”). Under SFAS No. 128, basic EPS is computed by dividing the
          net loss applicable to common stockholders by the weighted average common
          shares
          outstanding without including any potentially dilutive securities. Diluted
          EPS
          is computed by dividing the net loss applicable to common stockholders
          for the
          period by the weighted average common shares outstanding plus, when their
          effect
          is dilutive, common stock equivalents.
  Potentially
          dilutive securities, which have been excluded from the determination of
          diluted
          EPS because their effect would be anti-dilutive, are as follows:
  Nine
                      Months EndedSeptember
                      30,2006
                  
                  2005Warrants
                  2,127,126
                  
                  121,682Options
                  186,353
                  
                  190,631Total
                      potentially dilutive shares excluded
                  2,313,479
                  
                  312,313


*Financial
      instruments:*





Financial
      instruments at September 30, 2006 and December 31, 2005 consist of cash and
      cash
      equivalents, accounts receivable, trade payables, accrued expenses, derivative
      liabilities, notes payable and convertible debentures. As of September 30,
      2006
      and December 31, 2005, the fair values of cash and cash equivalents, accounts
      receivable, trade payables, and accrued expenses approximated their respective
      carrying values, due to their relative current maturities. Using current
      interest rates, the estimated fair value of notes payable approximated the
      carrying amount of $319,412 as of September 30, 2006, based upon the present
      value of future cash flows. The estimated fair value of convertible debentures
      approximated $3,641,198 at September 30, 2006, based upon the present value
      of
      future cash flows.





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





The
      caption Derivative Financial Instruments consists of (i) the fair values
      associated with derivative features embedded in the Convertible Debentures,
      (ii)
      the fair values of the detachable warrants issued in connection with the
      Convertible Debentures and (iii) the fair values of other warrants and
      convertible instruments where share-settlement is presumed not to be in the
      Company’s control. (See Note 8)





*Concentrations:*





Accounts
      receivable are concentrated in the Security and DC Transportation products
      segments and credit losses have been within management’s expectations. Although
      the Company serves a large and varied group of customers, two customers
      accounted for 60% (53% and 7%, respectively)
      of total revenues for the nine months ended September 30, 2006. Three customers
      accounted for 42% (14% for each customer)of the DC Transportation products
      segment revenues, and one customer accounted for 90% of the Security products
      segment revenues; for the nine months ended September 30, 2006. For the nine
      months ended September 30, 2005, three customers accounted for 66% (37%, 24%,
      and 5,%respectively) of total revenues. As of September 30, 2006, the Company
      maintained an accounts receivable balance of approximately $800,000 with a
      large
      discount retailer. This receivable is being collected by the Company over the
      period of October 23, 2006 through November 15, 2006.





F-6


POWERLINX,
          INC.
 NOTES
          TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THREE AND  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 UNAUDITED


The
      Company's product manufacturing and assembly is dependent upon the operations
      of
      one primary supplier. In turn, this supplier is dependant upon various other
      suppliers for the purchase and delivery of several of the components used in
      the
      manufacturing and assembly of the Company’s products. At September 30, 2006,
      inventory valued at $77,140 was being warehoused in Taiwan, at the offices
      of IC
      Intracom, the Company’s manufacturing partner (See “Liquidity & Capital
      Resources”). If the Company should lose this supplier, there could be a
      disruption in the operations of the Company. The Company is currently pursuing
      an additional manufacturing partner in the far east to mitigate this
      risk.




*Reclassifications:*





Certain
      reclassifications have been made to prior period balances to conform to the
      current period presentation.





**2.**
            **Liquidity
                and Management’s Plans:**





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. However, the Company has incurred losses
      from
      operations of $2,913,255 and $3,938,696 during the nine months ended September
      30, 2006 and 2005, respectively. In addition, during those periods, the Company
      has used cash of $3,688,859 and $2,244,114 respectively, in its operating
      activities and has a stockholders’deficit of $2,433,129 at September 30, 2006.
      These conditions raise substantial doubt about the Company’s ability to continue
      as a going concern.





The
      Company has devoted significant efforts in the further development and marketing
      of its existing products in its Security and DC Transportation products
      segments, but revenues cannot yet be considered as sufficient to fund operations
      for any sustained period of time. The Company has allocated significant
      resources to the development of new power line technologies and products that
      will be available for sale and/or licensing during the fourth quarter of fiscal
      year 2006. The Company’s ability to continue as a going concern will be
      dependent upon achieving profitable operations through the licensing and sales
      of these new technologies and products.





The
      Company’s ability to continue as a going concern is further dependent upon (i)
      raising additional capital to fund operations (ii) the further development
      of
      the Security and DC Transportation products segments and (iii) ultimately the
      achievement of profitable operations. During the nine months ended September
      30,
      2006, the Company secured financing of $4,473,933 in the form of convertible
      debentures which included proceeds of $3,100,000 and the conversion of
      $1,373,933 of otherwise short term existing obligations to long term debt (See
      Note 8). Further, the Company received $300,000 via a short term note in order
      to satisfy short term cash requirements of operations. While the proceeds of
      this financing will significantly mitigate the Company’s liquidity difficulties,
      the ability of the Company to sustain its operations for a reasonable period
      without further financing cannot be assured. The financial statements do not
      include any adjustments that might arise as a result of this uncertainty. Refer
      to “Liquidity & Capital Resources” in the Management Discussion &
Analysis section for additional information regarding the Company’s
      liquidity.





**3.**
            **Segment
                Information:**





The
      Company operates in three identifiable industry segments. The Marine products
      segment markets and sells underwater video cameras, lighting and accessories
      principally to retail sporting goods businesses throughout the United States.
      The Security products segment develops, markets, licenses, and sells proprietary
      power line video security devices and consumer electronic products; to
      retailers, governmental agencies, commercial businesses, and original equipment
      manufacturers, throughout the United States. The DC Transportation products
      segment develops and sells power line rear and side vision systems for all
      classes of vehicles in the transportation industry to distributors and original
      equipment manufacturers throughout the United States.





F-7


POWERLINX,
          INC.
 NOTES
          TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THREE AND  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 UNAUDITED




The
      Company had a fourth segment, the Hotel/MDU (Multi-dwelling unit) products
      segment, but its operations were discontinued in March of 2005 as part of the
      restructuring of the Company’s management and operations. The operating results
      for the discontinued segment have been reported separately as discontinued
      operations in the consolidated statements of operations for all periods
      presented (See Note 10). The Company's facilities and other assets are not
      distinguished among the identifiable segments. Other financial information
      about
      the Company’s segments is as follows:





Nine
                months ended September 30, 2006Security
              
              Marine
              
              DC
                  TransProducts
              
              Products
              
              Products
              
              TotalNet
                  revenue
              
              $
              879,001
              
              $
              132,983
              
              $
              491,996
              
              $
              1,503,980Cost
                  of sales
              
              $
              689,232
              
              $
              78,414
              
              $
              246,088
              
              $
              1,013,734Gross
                  profit
              
              $
              189,769
              
              $
              54,569
              
              $
              245,908
              
              $
              490,246Research
                  and Development
              
              $
              429,626
              
              $
              3,547
              
              $
              74,494
              
              $
              507,667


Nine
                months ended September 30, 2005Security
              
              Marine
              
              DC
                  TransProducts
              
              Products
              
              Products
              
              TotalNet
                  revenue
              
              $
              538,721
              
              $
              97,190
              
              $
              519,662
              
              $
              1,155,573Cost
                  of sales
              
              $
              439,895
              
              $
              54,720
              
              $
              309,485
              
              $
              804,100Gross
                  profit
              
              $
              98,826
              
              $
              42,470
              
              $
              210,177
              
              $
              351,473Research
                    and Development
              
              $
              421,775
              
              $
              5,726
              
              $
              70,787
              
              $
              498,288





**4.**
            **Inventories:**





Inventories
      consisted of the following at September 30, 2006 and December 31, 2005,
      respectively :




September
                  30, 2006
              
              
              December
                  31,  2005Raw
                  materials
              
              $
              337,086
              
              $
              280,360Finished
                goods
              
              
              486,606
              
              
              309,135$
              823,692
              
              $
              589,495







F-8


POWERLINX,
          INC.
 NOTES
          TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THREE AND  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 UNAUDITED


**5.**
            **Intangible
                assets:**








Intangible
      assets consisted of the following at September 30, 2006:






DCSecurity
              
              Marine
              
              Transportation
              
              TotalPatents
              
              $
              1,577,813
              
              $
              741,148
              
              $
              -
              
              $
              2,318,961Software
                  license agreement
              
              
              461,360
              
              
              -
              
              
              -
              
              
              461,360Trademark
              
              
              46,962
              
              
              -
              
              
              46,963
              
              
              93,925Acumulated
                  amortization
              
              
              (1,725,240
              )
              
              (741,148
              )
              
              -
              
              
              (2,466,388
              )$
              360,895
              
              $
              -
              
              $
              46,963
              
              $
              407,858








Intangible
      assets consisted of the following at December 31, 2005:





DCSecurity
              
              Marine
              
              Transportation
              
              TotalPatents
              
              $
              1,577,813
              
              $
              741,148
              
              $
              -
              
              $
              2,318,961Software
                  license agreement
              
              
              461,360
              
              
              -
              
              
              -
              
              
              461,360Trademark
              
              
              46,962
              
              
              -
              
              
              46,962
              
              
              93,924Acumulated
                  amortization
              
              
              (1,601,098
              )
              
              (717,736
              )
              
              -
              
              
              (2,318,834
              )$
              485,037
              
              $
              23,412
              
              $
              46,962
              
              $
              555,411





**6.**
            **Notes
                Payable:**





Notes
      payable at September 30, 2006 and December 31, 2005 consists of:










September
                  30,2006
              
              
              December
                  31,2005Notes
                payable bearing interest at 8% and secured
                by
                  inventory; principal and accrued interest paid
                  during
                    March 2006.
              
              $
              --
              
              $
              790,000Convertible
                  notes payable, non-interest bearing;
                  320,000
                    common shares were issued and $25,000 paid
                    upon maturity during February 2006
              
              
              --
              
              
              200,000
   F-9
  POWERLINX,
              INC.
 NOTES
              TO
              CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
              THREE AND  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 UNAUDITED
  Convertible
                  notes payable to related parties
                  (a
                    Company Director or family members);
                    non-interest
                      bearing through December 2005,
                      interest
                        at 10% thereafter; 300,000 common
                        shares
                          issued upon maturity during February
                          2006
              
              
              --
              
              
              75,000Convertible
                  notes payable, non-interest bearing;
                  800,000
                    common shares issued upon maturity during February
                    2006.
                  Face
                      value                              
                       $200,000
                    Less
                        unamortized discount   
                        (161,832)
              
              
              --
              
              
              38,1688%
                  unsecured note payable to a stockholder
                  in
                    three installments due late October and
                    early
                      November 2006
              
              
              300,000
              
              
              --19.2%
                  unsecured note due in 11 equal monthly
                  payments
                    with final payment during August 2007
              
              
              19,411
              
              
              --Other
                  notes re-paid
              
              
              --
              
              
              28,236319,411
              
              
              1,131,404Current
                  portion
              
              
              (319,411
              )
              
              (22,942
              )Long-term
                  portion
              
              $
              -0-
              
              $
              1,108,462





**7.**
            **Accrued
                Severance Payable:**





During
      March, 2005, the Company incurred severance expenses related to the departure
      of
      two officers of the Company. The total amount payable amounted to $551,000
      and
      is comprised of payments of both cash and common stock. Under the separation
      agreements, the Company issued a total of 50,000 shares of restricted common
      stock to the two former officers. The stock was valued at $275,000 or $5.50
      per
      share, the closing market price of the Company’s common stock on March 31, 2005;
      the date at which the liability was probable. Severance costs and related legal
      fees have been recorded as restructuring charges in the accompanying 2005
      statement of operations.





**8.**
            **Convertible
                Debentures:**





On
      March
      16, 2006, the Company entered into a Securities Purchase Agreement (the
      "Purchase Agreement"), with several accredited investors (collectively the
      "Purchasers"), under which the Company agreed to issue and sell to the
      Purchasers in a private placement up to $4,473,933 aggregate principal amount
      of
      8% Convertible Debentures, due March 22, 2008 (the "Convertible Debentures")
      and
      detachable warrants to purchase 1,841,335 shares of common stock (the
      "Warrants") for proceeds of $3,100,000 and $1,373,933 of pre-existing notes
      and
      accrued interest (the "Proceeds"). Financing costs  amounted to $82,000. On
      March 23, 2006 the Company issued $4,073,933 face value of the Convertible
      Debentures for cash of $2,700,000 and the pre-existing notes. On March 27,
      2006
      and March 29, 2006, the Company issued $250,000 and $150,000, respectively,
      of
      Convertible Debentures for cash. The March 22nd, March
      23rd, and March 29thproceed amounts equate to the total
      proceeds received of $3,100,000.




As
      of
      September 30, 2006, the Company was in default of a debt covenant in its March
      22, 2006 convertible debenture agreement. The covenant required that the Company
      generate a gross profit in excess of $200,000 per month on average during the
      period from July 1, 2006 to September 30, 2006, or in excess of $155,000 per
      month on average during the period from April 1, 2006 to September 30, 2006.
      As
      of September 29, 2006, the Company entered into a Waiver Agreement with the
      Purchasers pursuant to which a  majority of the Purchasers agreed to waive
      the covenant.





F-10


POWERLINX,
              INC.
 NOTES
              TO
              CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
              THREE AND  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 UNAUDITED






The
      Purchasers received registration rights related to the common shares underlying
      the conversion feature of the Convertible Debentures and the Warrants. The
      Registration Rights include requirements for filing, effectiveness, continued
      effectiveness and continued listing over the term of the outstanding
      instruments. The Registration Rights Agreement provides for monthly liquidating
      damages of up to 2.0% for failure to achieve or maintain effectiveness and
      listing. In addition, the Convertible Debentures provide for a mandatory
      redemption of 120% of outstanding face value for defaults under the Debenture
      and Registration Rights Agreements.





8.0%
      Convertible Debentures, Warrants and Other Derivatives :





The
      carrying value of the Company’s 8.0%, Face Value $4,473,933 Convertible
      Debentures amounted to $161,521 at September 30, 2006. Amortization of the
      debt
      discount, included in interest expense, amounted to $158,929 for the nine months
      ended September 30, 2006.





The
      Convertible Debenture Financings included registration rights and certain other
      terms and conditions related to share settlement of the embedded conversion
      features and the warrants that the Company has determined are not within its
      control. In addition, certain features associated with the financings, such
      as
      variable redemption rates afforded the Purchasers render the number of shares
      issuable to be indeterminate. In these instances, EITF 00-19 Accounting
      for Derivative Financial Instruments Indexed to, and Potentially Settled in,
      a
      Company’s Own Stock ,
      requires allocation of the proceeds between the various instruments and the
      derivative elements carried at fair values. The following tabular presentation
      reflects the allocation of the proceeds on the financings date:





**March
                23, 2006**
            
            **March
                27, 2006**
            
            **March
                29, 2006**Embedded
                derivative features
            
            $
            4,853,094
            
            $
            200,648
            
            $
            95,757Detachable
                warrants
            
            
            3,953,859
            
            
            180,105
            
            
            96,505Derivative
                loss
            
            
            (3,392,566
            )
            
            (130,753
            )
            
            (42,262
            )Debt
                extinguishment loss
            
            
            (1,340,454
            )
            
            --
            
            
            --Convertible
                debentures
            
            
            --
            
            
            --
            
            
            --Total
                proceeds
            
            $
            4,073,933
            
            $
            250,000
            
            $
            150,000





Derivative
      losses arose in connection with the allocation of proceeds to derivative
      financial instruments at their respective fair values, which amounts exceed
      amounts received by the Company in connection with the financing arrangement.
      The discount to the Convertible Debentures resulting from the aforementioned
      allocation is being amortized through periodic charges to interest expense
      using
      the effective method.





The
      following tabular presentation reflects the components of derivative financial
      instruments on the Company’s balance sheet at September 30 2006:





Liabilities:Embedded
                derivative instruments
            
            $
            1,020,188Freestanding
                derivatives (warrants)
            
            
            2,555,134Other
                derivative financial instruments (1)
            
            
            65,877$
            3,641,199





(1)
            Other
                derivative financial instruments represent the fair values of warrants
                and
                other convertible instruments that were reclassified from stockholders’
                equity when, in connection with the Convertible Debenture Financings,
                the
                Company determined that it no longer had sufficient authorized and
                unissued shares to settle all of its instruments. On March 23, 2006,
                an
                amount of $144,781 was reclassified from stockholders’ equity representing
                the fair value of these instruments. The balance in the table above
                represents the fair value at September 30,
                2006.




F-11


POWERLINX,
            INC.
 NOTES
            TO
            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THREE AND  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 UNAUDITED


The
      following tabular presentation reflects the number of common shares into which
      the aforementioned derivatives are indexed at September 30, 2006:





Common
                shares indexed:Embedded
                derivative instruments
            4,347,141Freestanding
                derivatives (warrants)
            1,883,761Other
                derivative financial instruments
            121,6826,352,584





Fair
      value considerations for derivative financial instruments :





Freestanding
      derivative instruments, consisting of the Warrants and reclassified derivative
      instruments that arose from the Convertible Debenture Financing are valued
      using
      the Black-Scholes-Merton valuation methodology because that model embodies
      all
      of the relevant assumptions that address the features underlying these
      instruments. Significant assumptions included in this model as of the financing
      date were as follows:





OtherInstrument
            Warrants
            DerivativesExercise
                prices
            $2.375
            $2.50--$25.00Term
                (years)
            5.0
            1.0--10.0Volatility
            162.9%
            104.8%--183.1%Risk-free
                rate
            3.65%
            3.65%--4.88%





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





Significant
      terms and assumptions included in this model as of the financing date are as
      follows:





Conversion
                price
            $
                1.235Actual
                term (years)
            2.0Equivalent
                term (years)
            1.6Equivalent
                volatility
            143.69%Equivalent
                risk-adjusted interest rate
            8.28%Equivalent
                risk-adjusted yield rate
            11.39%





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





F-12
 POWERLINX,
              INC.
 NOTES
              TO
              CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
              THREE AND  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 UNAUDITED


**9.**
            **Stockholders’
                Deficit:**





*2006
      Common Stock Issuances:*





During
      the nine months ended September 30, 2006, the Company issued 15,556 shares
      of
      restricted common stock in conjunction with a private equity offering exempt
      from registration under Section 4(2) of the Securities Act of 1933, and Rule
      506
      of Regulation D, thereof. The offering was priced at $1.125 per share, resulting
      in gross proceeds of $17,500 from this particular issuance. The securities
      underlying the offering include piggy-back registration rights.




During
      the nine months ended September 30, 2006, the Company issued 16,092 shares
      of
      common stock, in lieu of cash, for payment of legal services rendered for the
      three month period ended September 30, 2006. The shares were valued at $19,310
      based on the three day average closing market price of the Company’s common
      stock on the effective date of the agreement. The shares were registered on
      Form
      S-8 as filed with the Securities & Exchange Commission on  September
      29, 2006.





During
      the nine months ended September 30, 2006, the Company issued 7,400 shares of
      common stock, in lieu of cash, to a consultant for payment of marketing
      services. The shares were valued at $10,000 based on the closing market price
      of
      the Company’s common stock on the effective date of the agreement. The shares
      were registered on Form S-8 as filed with the Securities & Exchange
      Commission on  September 29, 2006.





During
      the nine months ended September 30, 2006, the Company issued 10,000 shares
      of
      common stock, in lieu of cash, to a consultant for payment of marketing
      services. The shares were valued at $12,750 based on the closing market price
      of
      the Company’s common stock on the effective date of the agreement. The shares
      were registered on Form S-8 as filed with the Securities & Exchange
      Commission on  September 29, 2006.





During
      the nine months ended September 30, 2006, the Company issued 18,000 shares
      of
      restricted common stock, in lieu of cash, for payment of financing fees
      associated the Company’s March 29, 2006 convertible debenture financing
      agreement. The shares were valued at $34,200 based on the closing share price
      calculated in conjunction with the March 29, 2006 financing transaction.





During
      the nine months ended September 30, 2006, the Company issued 28,400 shares
      of
      restricted common stock for payment of interest, in lieu of cash, relating
      to
      various notes payable that were outstanding at December 31, 2005. The shares
      were valued at $61,070, based on the closing market price of the Company’s
      common stock corresponding to the date of each note.





During
      the nine months ended September 30, 2006, the Company issued 7,582 shares of
      restricted common stock in conjunction with a litigation settlement. The shares
      were valued at $15,164, based on the closing market price of the Company’s
      common stock on the effective date of the agreement, December 12,
      2005.




During
      the nine months ended September 30, 2006, the Company issued 36,000 shares
      of
      common stock in conjunction with the 2003 settlement of a class action law
      suit.
      The shares were valued at $90,000 based on the closing market price of the
      Company's common stock when the settlement was recorded during fiscal year
      2003.




During
      the nine months ended September 30, 2006, the Company issued 53,529 shares
      of
      restricted common stock in conjunction with exercise of outstanding warrants
      from which it received proceeds in the amount of $133,824. The warrants were
      re-priced and exercisable at $2.50 per share based on the approval of the
      Company’s Board of Directors.





F-13


POWERLINX,
            INC.
 NOTES
            TO
            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THREE AND  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 UNAUDITED


During
      the nine months ended September 30, 2006, the Company issued 174,937 shares
      of
      restricted common stock in conjunction with a private equity offering exempt
      from registration under 4(2) of the Securities Act of 1933, and Rule 506 of
      Regulation D, thereof. The offering was priced at $1.125 per share, resulting
      in
      gross proceeds of $196,804 from the offering. The securities underlying the
      offering include piggy-back registration rights.





During
      the nine months ended September 30, 2006, the Company issued 17,962 shares
      of
      restricted common stock, in lieu of cash, for payment for raw materials
      inventory and for rent for the Company’s distribution warehouse in Clearwater,
      Florida. The shares were valued at $44,905, based on the closing market price
      of
      the Company’s common stock on the effective date of the agreement, November 30,
      2005.





During
      the nine months ended September 30, 2006, the Company issued 8,430 shares of
      restricted common stock for financing fees owed in conjunction with a finder’s
      fee agreement relating to the Company’s December 2005 private equity placement.
      The shares were valued at $11,855, based on the terms of the finder’s fee
      agreement.





During
      the nine months ended September 30, 2006, the Company issued 10,000 shares
      of
      restricted common stock to employees in the form of stock compensation. The
      shares were valued at $15,000, based on the closing market price of the
      Company’s common stock on date the grant was approved.





During
      the nine months ended September 30, 2006, the Company issued 51,000 shares
      of
      restricted common stock to officers in the form of stock compensation in
      accordance with their employment contracts. The shares were valued at $86,700,
      based on the closing market price of the Company’s common stock on date the
      grant was ratified by the Board of Directors.





During
      the nine months ended September 30, 2006, the Company issued 106,000 shares
      of
      restricted common stock to Directors of the Company in the form of stock
      compensation. Of the total shares issued, 14,000 shares were issued as
      compensation for the 2006 fiscal year ended December 31, 2006. The remaining
      92,000 shares were issued as compensation for services rendered by Directors
      during the Company’s 2005 restructuring plan. The shares were valued at
      $254,400, based on the closing market price of the Company’s common stock on
      date the grant was ratified by the Board of Directors.





**10.**
            ******Discontinued
                Operations:**





During
      the quarter ended March 31, 2005, the Company formalized a plan to dispose
      of
      its Hotel/MDU products segment. The plan included the termination of all
      employees associated with the segment, and the closing of the Company’s sales
      office in South Carolina. At quarter ended June 30, 2005, the plan had been
      implemented and the Company had secured an agreement with an outside party to
      sell the remaining installation and monthly service contracts.





Operating
      results for the discontinued segment have been reported separately as
      discontinued operations in the consolidated statements of income for all periods
      presented. Following are the components of the amounts disclosed:









F-14


POWERLINX,
          INC.
 NOTES
          TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THREE AND  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 UNAUDITED
 Loss
          from
          Discontinued Operations
 Nine
                    Months EndingSeptember
                    30,
                
                September
                    30,2006
                
                2005Net
                    Revenues
                
                $
                -
                
                $
                118,030Cost
                    of Goods Sold
                
                
                -
                
                
                113,614Gross
                    Profit
                
                
                -
                
                
                4,416Operating
                    Expenses
                
                
                16,588
                
                
                186,142Net
                    Loss from discontinued operations
                
                $
                (16,588
                )
                $
                (181,726
                )




Assets
                  and Liabilities of Discontinued Operation:September
                  30,
              
              December
                  31,2006
              
              2005Total
                  Assets related to discontinued operationsAccounts
                  Receivable
              
              $
              -
              
              $
              16,588Total
                  Liabilities related to discontinued operationsAccounts
                  Payable
              
              $
              88,804
              
              $
              155,128







**11.**
            **Commitments
                and Contingencies:**





*Litigation,
      claims and assessment:*




***Guestlinx,
      LLC***




On
      May
      19, 2006 the Company learned that a default judgment had been entered against
      it
      on May 3, 2006 in the Superior Court of California, Orange County, in the amount
      of $90,561, to the plaintiff Guestlinx, LLC. The judgment was granted based
      on
      an action filed by Guestlinx, LLC on November 2, 2005. The Company had no prior
      knowledge of the action and believes it was never properly served. The Company
      retained counsel in California, and on August 4, 2006 was successful in having
      the judgment set aside for improper service; contingent upon the Company
      remitting $3,000 to the Orange County Superior Court by September 4, 2006.
      The
      Company had previously recorded a liability associated with this dispute in
      the
      amount of $46,352 that is currently included in the Company’s balance sheet
      under “Liabilities from Discontinued Operations”. There is a mandatory
      remediation settlement meeting scheduled on December 8, 2006.




***Satius,
      Inc. License Agreement***






On
      June
      7, 2006, the civil action initiated against the Company (the “Action”) by
      Satius, Inc. (“Satius”), on August 17, 2005, in which Satius alleged
      various claims under a former license agreement (the “Agreement”), entered into
      on December 18, 2002, by and between Satius and the Company and subsequently
      terminated by Satius on July 10, 2004, was dismissed in the Court of Common
      Pleas of Montgomery County, Pennsylvania.  On June 9, 2006, the
      Company was notified by its counsel that Satius has appealed the dismissal.
      The
      Company cannot predict whether or not the appeal will be
      successful.




F-15


** POWERLINX,
            INC.
 NOTES
            TO
            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
            THREE AND  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 UNAUDITED
   ***SEC
          Investigation***







The
      Company has settled the previously reported investigation by the Securities
      and
      Exchange Commission (“SEC”) as described below.





On
      Tuesday, June 27, 2006, the SEC filed a civil action in the United States
      District Court for the District of Columbia against the Company, its former
      chief executive officer, George S. Bernardich III, and its former secretary
      and
      treasurer, James R. Cox. The Company consented to the entry of a judgment
      permanently enjoining it from violating Section 10(b) and Rule 10b-5 of the
      Securities Exchange Act of 1934 (“Exchange Act”), which are general antifraud
      provisions of the federal securities laws. The Company also consented to being
      enjoined from violating the periodic reporting, books and records, and internal
      controls provisions contained in Exchange Act Sections 13(b)(2)(A), 13(b)(2)(B),
      and 15(d) and Rules 15d-1, 15d-11, 15d-13, and 12b-20 thereunder.





Mr.
      Bernardich and Mr. Cox consented to the entry of judgments permanently enjoining
      them from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
      and aiding and abetting the Company’s alleged reporting violations, and barring
      them from serving as officers and directors of public companies for a period
      of
      ten years. The Company, Mr. Bernardich and Mr. Cox consented to the entry of
      the
      judgments without admitting or denying the allegations in the SEC’s Complaint.
      Mr. Bernardich was president and chief executive offer of the Company from
      February 2001 until April 2005. He was chairman of the Company’s Board of
      Directors from August 2000 until February 2005 and remained a director of the
      Company until March 2006. The Company currently has a consulting/severance
      arrangement with Mr. Bernardich. Mr. Cox was the Company’s secretary, treasurer
      and a director from the time the company went public in March 1999 until
      approximately July 2002. Mr. Cox is currently employed by the Company in a
      product development capacity.





The
      requested relief was approved by the Court on August 7, 2006.





The
      Complaint alleged that in September 2004, the Company violated the antifraud
      provisions of the federal securities laws by issuing materially misleading
      press
      releases and filing materially misleading reports with the SEC concerning a
      purported $23 million sales contract with a defense contractor known as
      Universal General Corporation (“UGC”), which, in fact, had no revenues, no
      assets, and no means to satisfy any portion of its $23 million contractual
      obligation to the Company. According to the Complaint, the Company performed
      virtually no due diligence to determine whether UGC was legitimate and could
      meet its contractual obligations. The Complaint states that Mr. Bernardich
      was
      responsible for the Company’s due diligence failures and for drafting the
      Company’s materially misleading press releases and SEC filings. The Complaint
      also alleges that during the first three quarters of fiscal year 2000, the
      Company fraudulently recognized nearly ninety percent of its reported revenues
      based on fictitious camera sales by initiating consignment arrangements with
      numerous dealers and recording the consignment order amounts as revenue before
      any cameras were manufactured, shipped to the dealers, or sold to customers.
      The
      Complaint alleges that during this same period, the Company also issued numerous
      deceptive press releases that materially misrepresented the Company’s operations
      and offered glowing, but unsubstantiated, revenue and earnings forecasts. The
      Complaint also alleges that in April 2001, following a management change, the
      Company filed with the SEC an annual report for 2000 containing a misleading
      restatement of revenues and other materially misleading disclosures and
      accounting errors. According to the Complaint, the principal architect of the
      Company’s fraudulent activities during 2000 was its now-deceased former chief
      executive officer, Richard L. McBride. According to the Complaint, among other
      things, the Company failed to disclose in violation of applicable SEC
      regulations that Mr. McBride had been convicted of fraud in 1998 and was serving
      a six-year probation term.


The
      Complaint also alleges that Mr. Cox was responsible for certain of the Company’s
      fraud and reporting violations and Mr. Bernardich, who had replaced Mr. McBride
      as chief executive officer in February 2001, aided and abetted the Company’s
      reporting violations with respect to the Company’s 2000 annual report.





F-16


POWERLINX,
          INC.
 NOTES
          TO
          CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 FOR
          THREE AND  NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
 UNAUDITED






In
      addition, the Company’s current chief financial officer, Douglas Bauer, has
      consented to the issuance of a cease-and-desist order for his role in causing
      the     Company’s   reporting violation in
      connection with its April 2002 restatement of a deferred tax asset. Mr. Bauer
      consented to the issuance of the order without admitting or denying the findings
      in the Order.




**12.**
            **Recent
                Accounting Pronouncements:**


In
            September 2006, the FASB issued FASB Statement No. 157. This Statement
            defines
            fair value, establishes a framework for measuring fair value in generally
            accepted accounting principles (GAAP) and expands disclosures about fair
            value
            measurements. This statement applies under other accounting pronouncements
            that
            require or permit fair value measurements, the Board having previously
            concluded
            in those accounting pronouncements that fair value is a relevant measurement
            attribute. Accordingly, this Statement does not require any new fair
            value
            measurements. However, for some entities, the application of this Statement
            will
            change current practices. This Statement is effective for financial statements
            for fiscal years beginning after November 15, 2007. Earlier application
            is
            permitted provided that the reporting entity has not yet issued financial
            statements for that fiscal year. Management believes this Statement will
            have no
            material impact on the financial statements of the company once
            adopted.




FASB
      Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" (FIN 48)
      clarifies the accounting for uncertainty in income taxes recognized in an
      enterprise's financial statements in accordance with FASB Statement No. 109,
      "Accounting for Income Taxes". This interpretation prescribes a recognition
      threshold and measurement attribute for the financial statement recognition
      and
      measurement of a tax position taken or expected to be taken in a tax return.
      FIN
      48 also provides guidance on derecognition, classification, interest and
      penalties, accounting in interim periods, disclosure and transition. FIN 48
      is
      effective for fiscal years beginning after December 15, 2006. The Company has
      not determined the impact of the adoption of FIN 48 on its consolidated
      financial statements.








F-17




**Item
      2. Management's Discussion and Analysis of Financial Condition and Results
      of
      Operations.**





Cautionary
      Statements





You
      should read the following discussion and analysis in conjunction with the
      Financial Statements and related Notes contained elsewhere in this Form 10-Q
      ("Report"). The information in this Report is not a complete description of
      our
      business or the risks associated with an investment in our common stock. We
      urge
      you to carefully review and consider the various disclosures made by us in
      this
      Report and in our other reports filed with the SEC, including our Annual Report
      on Form 10-K/A for the year ended December 31, 2005.





The
      section entitled "Risk Factors" set forth in our Annual Report on Form 10-K/A
      for the year ended December 31, 2005 and similar types of discussions in other
      SEC filings discuss some of the important risks that may affect our business,
      results of operations and financial condition. Some of those risks are as
      follows:





*Our
      business depends on the protection of our intellectual property and may suffer
      if we are unable to adequately protect our intellectual property.





*Our
      stock price can be extremely volatile.





You
      should carefully consider those risks, in addition to the other information
      in
      this Report and in our other filings with the SEC, before deciding to invest
      in
      our Company or to maintain or decrease your investment.





This
      Report may contain forward-looking statements within the meaning of Section
      17A
      of the Securities Exchange Act of 1933, as amended, and Section 21E of the
      Securities Exchange Act, as amended. Examples of forward-looking statements
      include, but are not limited to: (a) projections of our revenues, capital
      expenditures, growth, prospects, dividends, capital structure and other
      financial matters; (b) statements of our plans and objectives; (c) statements
      of
      our future economic performance; (d) statements of assumptions underlying other
      statements and statements about us and our business relating to the future;
      and
      (e) any statements using the words "believes," "budget," "target," "goal,"
      A
      anticipate," A expect," "plan," "outlook," "objective," A may," A project,"
      A
      intend," "estimate," or similar expressions. These statements are only
      predictions. These statements are not guarantees of future performance and
      are
      subject to certain risks, uncertainties and assumptions that are difficult
      to
      predict.





We
      believe it is important to communicate our expectations. However, there may
      be
      events in the future that we are not able to accurately predict or over which
      we
      have no control. Our actual results and the timing of certain events could
      differ materially from those anticipated in these forward-looking statements
      as
      a result of certain factors.





**OVERVIEW**




We develop,
      license, manufacture, and market products and applications developed to transmit
      voice, video, audio and data either individually or any and all combinations
      over power lines, twisted pair wires, and coax in AC and DC power environments.
      We also manufacture and market underwater video cameras, lights, and accessories
      for the marine industry. Our products are sold in both retail and commercial
      markets. Our principal products are sold in the security and transportation
      industries.





Our
      primary focus during the quarter ended September 30, 2006 was completing the
      development of our new power line products due during the 4 th quarter
      ending December 31, 2006, and identifying potential customers, licensees, and
      distributors for these new products. Consistent with our business plan, we
      intend on penetrating targeted markets utilizing both licensing and direct
      sales
      strategies; depending on market structure and targeted customers in each
      segment.




Net
      revenues of $1,004,564 for the three month period ended September 30, 2006
      increased 349% compared to net revenues of $223,945 for the same period ended
      September 30, 2005. Of this increase, $828,508 was driven by our Security
      products segment primarily from an initial order from a large discount retailer.
      Consequently, sales in our Security products segment accounted for 84% of total
      revenues for the three month period ended September 30, 2006 compared to 5%
      for
      the same period ended September 30, 2005. The $828,508 increase in Security
      products segment revenue was partially offset by a net decrease in revenue
      of
      $47,889 from our Marine and DC Transportation products segments. Revenue from
      the Marine products increased $16,711 primarily as a result of a refocus on
      internet advertising and sales. Revenue from the DC Transportation segment
      decreased $64,599 primarily as a result of a reduced shipments to a large
      customer upgrading to new rear vision system that will not be available in
      quantity until during the 4 th quarter
      ended December 31, 2006.




4


A
      reduction in manufacturing costs for our Security products segment, improved
      product sourcing and mix for our DC Transportation products segment, and an
      increase in sales at retail pricing versus wholesale pricing for our Marine
      products segment resulted in an improved gross profit margin by segment for
      the
      three month period ended September 30, 2006 versus the same period ended
      September 30, 2005. We anticipate further product cost reductions in the DC
      Transportation products segment in future periods due to a decrease in
      manufacturing costs associated with the next generation of transmitters and
      receivers for the PLC systems.





Total
      operating expenses decreased $213,839, or 21% for the three month period ended
      September 30, 2006 compared to the same three month period ended September
      30,
      2005. A reduction in legal and amortization expenses were the primary reasons
      for the overall decrease.





Also
      during the three month period ended September 30, 2006, our management met
      with
      the principals of our primary financing partners, in Europe, to discuss and
      formalize our strategy for selling and distributing our newly developed products
      in certain European markets beginning in fiscal year 2007.








**RESULTS
      OF OPERATIONS**





See
      Note
      3 to the financial statements for additional segment reporting.





**NINE
      MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005**





**NET
      REVENUE.** Net
      revenue increased $348,407 or 30% to $1,503,980 for the nine months ended
      September 30, 2006 from $1,155,573 for the nine months ended September 30,
      2005.
      Marine product segment sales were $132,983 or 9% of total revenues for the
      nine
      months ended September 30, 2006 compared to $97,190 or 8% of total revenues
      for
      the nine months ended September 30, 2005. Overall, marine product sales
      increased $35,793, or 37%. Security product segment sales were $879,001 or
      58%
      of total revenues for the nine months ended September 30, 2006 compared to
      $538,721 or 47% of total revenues for the nine months ended September 30, 2005.
      Overall, security product sales increased $340,280 or 63%. DC Transportation
      product segment sales were $491,996 or 33% of total revenues for the nine months
      ended September 30, 2006 compared to $519,662 or 45% of total revenues for
      the
      nine months ended September 30, 2005. Overall, DC Transportation product sales
      decreased $27,666 or 5%. The increase in the Marine segment sales was due to
      an
      increase in internet advertising and sales. The increase in the Security product
      segment sales was due primarily to an initial order of $794,000 during 2006
      from
      a large discount retailer. The increase in revenues for the DC transportation
      product segment was driven primarily by the addition of new customers compared
      to the same period last fiscal year.





**COST
      OF GOODS SOLD.** Cost of
      Goods sold increased $209,634 or 26% to $1,013,734 for the nine months ended
      September 30, 2006 from $804,100 for the nine months ended September 30, 2005.
      As a percentage of net revenue, cost of goods sold decreased to 67% for the
      nine
      months ended September 30, 2006 from 70% for the nine months ended September
      30,
      2005. Cost of goods sold for the Marine products segment increased $23,694
      or
      43% to $78,414 for the nine months ended September 30, 2006 from $54,720 for
      the
      nine months ended September 30, 2005. As a percentage of net revenue, cost
      of
      goods sold for the Marine products segment increased to 59% for the nine months
      ended September 30, 2006 from 56% for the nine months ended September 30, 2005.
      Cost of goods sold for the Security products segment increased $249,337 or
      57%
      to $689,232 for the nine months ended September 30, 2006 from $439,895 for
      the
      nine months ended September 30, 2005. As a percentage of net revenue, cost
      of
      goods sold for the Security products segment decreased to 78% for the nine
      months ended September 30, 2006 from 82% for the nine months ended September
      30,
      2005. Cost of goods sold for the DC Transportation products segment decreased
      $63,397 or 20% to $246,088 for the nine months ended September 30, 2006 from
      $309,485 for the nine months ended September 30, 2005. As a percentage of net
      revenue, cost of goods sold for the DC Transportation products segment decreased
      to 50% for the nine months ended September 30, 2006 from 60% for the nine months
      ended September 30, 2005.





The
      increase in the cost of goods sold as a percentage of net revenues for the
      Marine products segment was driven primarily by a one time sales promotion
      during the three months ended March 31, 2006 for the purpose of accelerating
      sales after the end of the regional boat show season. The decrease in the cost
      of goods sold as a percentage of net revenues for the Security products segment
      was driven primarily by a decrease in manufacturing costs via our new supplier
      in Asia. The decrease in the cost of goods sold as a percentage of net revenues
      for the DC Transportation products segment was due to improved product sourcing
      and product mix.





**GROSS
      PROFIT MARGIN.** Gross
      profits on sales for the nine months ended September 30, 2006 amounted to
      $490,246 or 33% of net revenues compared to $351,473 or 30% of net revenues
      for
      the nine months ended September 30, 2005. The Marine products segment
      contributed $54,569 and $42,470 of the total gross profit for the nine months
      ended September 30, 2006 and 2005, respectively. The Security products segment
      contributed $189,769 and $98,826 of the total gross profit for the nine months
      ended September 30, 2006 and 2005, respectively. The DC Transportation products
      segment contributed $245,908 and $210,177 of the total gross profit for the
      nine
      months ended September 30, 2006 and 2005, respectively. The gross profit
      percentage for the Marine products segment decreased to 41% for the nine months
      ended September 30, 2006 from 44% for the nine months ended September 30, 2005.
      The gross profit percentage for the Security products segment increased to
      22%
      for the nine months ended September 30, 2006 from 18% for the nine months ended
      September 30, 2005. The gross profit percentage for the DC Transportation
      products segment increased to 50% for the nine months ended September 30, 2006
      from 40% for the nine months ended September 30, 2005.





5


The
      decrease in the gross profit as a percentage of net revenues for the Marine
      products segment was driven primarily by a one time sales promotion during
      the
      three months ended March 31, 2006 for the purpose of accelerating sales after
      the end of the regional boat show season. The increase in the gross profit
      as a
      percentage of net revenues for the Security products segment was driven
      primarily by a decrease in manufacturing costs via our new supplier in Asia.
      The
      increase in the gross profit as a percentage of net revenues for the DC
      Transportation products segment was due to improved product sourcing and product
      mix.




**SALARIES
      AND WAGES.** Salaries
      and Wages decreased $225,114 or 18% to $1,020,978 for the nine months ended
      September 30, 2006 from $1,246,092 for the nine months ended September 30,
      2005.
      The decrease was due to the overall reduction in employees as a result of the
      Company’s restructuring plan initiated in April and May of 2005. Salary and
      Wages is comprised of employee wages and stock compensation. During the nine
      months ended September 30, 2006, $86,700 of stock-based compensation was
      recorded in conjunction with common stock issued to employees pursuant to bonus
      stock grants and employment contract obligations compared to $279,000 for the
      nine months ended September 30, 2005.





**PROFESSIONAL
      & CONSULTING FEES.** Professional and consulting fees increased $296,886 or 41% to $1,027,101 for
      the
      nine months ended September 30, 2006 from $730,215 for the nine months ended
      September 30, 2005. The increase was due to legal fees associated with the
      defense of the Satius law suit, the Securities & Exchange Commission
      investigation (See legal proceedings), and restricted common stock compensation
      for the Company’s Board of Directors. Professional and consulting fees include
      fees paid to attorneys, accountants, and business consultants. During the nine
      months ended September 30, 2006, $254,400 of stock-based compensation was
      recorded, $246,000 of which was expensed during the period, in conjunction
      with
      common stock issued to members of the Board of Directors for services rendered
      during the period and compensation for services rendered during the Company’s
      2005 restructuring. In addition, $42,060 of stock based compensation was
      recorded and expensed in conjunction with common stock issued to attorneys
      and
      consultants for legal and marketing services for the nine months ended September
      30, 2006. During the nine months ended September 30, 2005, stock-based
      compensation of $57,750 was recognized in conjunction with common stock issued
      to members of the Board of Directors for services rendered during the period.





**DEPRECIATION
      AND AMORTIZATION EXPENSE.** Depreciation and amortization decreased $286,487 or 57% to $214,454 for the
      nine
      months ended September 30, 2006 from $500,941 for the nine months ended
      September 30, 2005. The decrease was attributable to a reduction in amortization
      expense as certain intangible assets were fully amortized as of December 31,
      2005.





**RESEARCH
      & DEVELOPMENT.** Research
      and development expense increased $9,379 or 2% to $507,667 for the nine months
      ended September 30, 2006 from $498,288 for the nine months ended September
      30,
      2005. The increase was due to an increase in contract labor expenditures and
      component purchases in the Company’s efforts to finalize the development of
      several new products. Research and development costs consist of all expenditures
      related to the improvement and development of the Company's current product
      line, new product development, and engineering consulting fees associated with
      licensed technology. Currently, substantially all of our research and
      development costs and efforts are dedicated to the development of our Security
      (both analog and digital) and DC Transportation products segments. For the
      nine
      months ended September 30, 2006, of the total Research & Development
      expenditures, $429,626 or 85% was related to the Security products segment,
      $74,494 or 15% was related to the DC Transportation products segment, and $3,547
      or 1% was related to the Marine products segment.





The
      cost
      of our research and development activities is borne directly by the Company.
      No
      amounts are borne by our customers and no contracts for customer funded research
      and development is anticipated. We plan to continue funding the Security and
      DC
      Transportation products segments for the next several years.





**ADVERTISING
      AND PROMOTIONS.** Advertising and promotions decreased $43,356 or 29% to $106,558 for the nine
      months ended September 30, 2006 from $149,914 for the nine months ended
      September 30, 2005. The decrease was due directly to a reduction in print
      advertising for the DC Transportation products segment and a focus on selling
      through distribution channels rather than directly to the consumer. The amount
      also includes portions of postage, printing, and travel that are attributable
      to
      advertising and promotions.





6


**RENT
      AND UTILITIES.** Rent and
      utilities increased $1,113 or 1% to $145,263 for the nine months ended September
      30, 2006 from $144,150 for the nine months ended September 30, 2005. The
      increase is due to an end of lease holder over rent at 1 1⁄2 times the normal rate
      on the corporate office space for the two months preceding the relocation to
      new
      offices. This increase was mostly offset by rent abatement negotiated as part
      of
      the lease for the new corporate offices. Rent and utilities includes office
      rent, warehouse rent, storage, telephone, and utilities.





**TRAVEL
      & ENTERTAINMENT EXPENSE.** Travel
      & entertainment expense decreased $55,318 or 35% to $102,686 for the nine
      months ended September 30, 2006 from $158,004 for the nine months ended
      September 30, 2005. The decrease was due to a focused effort to reduce
      expenditures and an overall reduction in the number of employees traveling
      as a
      result of Company’s restructuring plan initiated in April of 2005.  Travel
& entertainment expenses include normal expenses associated with traveling
      including, but not limited to; airfare, auto rental, parking & tolls, hotels
& lodging, taxis, meals, and entertainment.





**OTHER
      EXPENSES.** Other
      expenses increased $14,518 or 5% to $278,794 for the nine months ended September
      30, 2006 from $264,276 for the nine months ended September 30, 2005. The
      increase was primarily driven by an increase in liability insurance premium
      rates and installation costs associated with the DC Transportation products
      segment. Other expenses include travel, supplies, property taxes, insurance,
      financing fees, bank charges, provision for doubtful accounts, postage &
delivery, and various other expenses that are classified as
      miscellaneous.





**NON-OPERATING
      INCOME (EXPENSE) ITEMS** .
      Non-operating income (expense) increased ($68,048) to ($88,303) for the nine
      months ended September 30, 2006 from ($20,255) for the nine months ended
      September 30, 2005. Non-operating income (expense) consists primarily of
      interest expense which increased to ($181,812) for the nine months ended
      September 30, 2006 from ($20,562) for the nine months ended September 30, 2005.
      The current period interest expense includes ($90,830) of amortization of debt
      discount on the Convertible Debentures, and ($19,291) in miscellaneous interest
      from previous financing. The Company records amortization using the effective
      interest method and, accordingly, interest expense associated with these
      debentures will increase as the carrying value increases. The expense amounts
      for the nine months ended September 30, 2006 were offset by $21,309 in interest
      income and $72,200 of income related to a litigation settlement.





**LOSS
      ON EXTINGUISHMENT OF DEBT.** Loss
      of
      extinguishment of ($1,502,286) arose in connection with our debenture financing
      where we allocated the fair value of instruments issued in connection with
      the
      financing to the proceeds and the debt relieved on a relative fair value basis.
      This calculation resulted in a loss on extinguishment associated with the
      relieved indebtedness.





**DERIVATIVE
      GAIN (LOSS).**  Derivative
      gain, which amounted to $2,317,969 for the nine months ended September 30,
      2006,
      arises from fair value adjustments to our derivative financial instruments.
      These instruments consist of freestanding warrants and embedded conversion
      features associated with the Debenture offering. We will continue to incur
      fair
      value adjustments to these instruments until such instruments are converted,
      exercised or reclassified to stockholders’ equity. Future fair value adjustments
      require the use of subjective estimates. However, the principal driver of our
      valuation model is the Company’s trading common stock. Accordingly, future
      volatility in the trading market price may result in significant changes in
      fair
      value that are required to be recorded as adjustments in income.





**LOSS
      FROM DISCONTINUED OPERATIONS** .
      Loss
      from discontinued operations decreased 91% to $16,588 for the nine months ended
      September 30, 2006 from $181,726 for the nine months ended September 30, 2005.
      (See Note 10 to the financial statements.)








**THREE
      MONTHS ENDED SEPTEMBER 30, 2006 AND SEPTEMBER 30, 2005**





**NET
      REVENUE.** Net
      revenue increased $780,619 or 349% to $1,004,564 for the three months ended
      September 30, 2006 from $223,945 for the three months ended September 30, 2005.
      Marine segment sales were $31,945 or 3% of total revenues for the three months
      ended September 30, 2006 compared to $15,234 or 7% of total revenues, for the
      three months ended September 30, 2005. Overall, Marine segment sales increased
      $16,711 or 110%. Security segment sales were $838,591 or 83% of total revenues
      for the three months ended September 30, 2006 compared to $10,083 or 5% of
      total
      revenues for the three months ended September 30, 2005. Overall, Security
      segment sales increased $828,508. DC Transportation segment sales were $134,029
      or 13% of total revenues for the three months ended September 30, 2006 compared
      to $198,628 or 89% of total revenues for the three months ended September 30,
      2005. Overall, DC Transportation segment sales decreased $64,599 or 33%. The
      increase in Marine segment sales was driven primarily by a refocusing on
      internet advertising and sales. The increase in Security segment sales was
      driven almost entirely by an initial order from a large discount retailer.
      The
      decrease in the DC Transportation segment sales was driven primarily by reduced
      shipments to a large customer upgrading to new rear vision system that will not
      be available in quantity until during the 4 th quarter
      ended December 31, 2006.








7


**COST
      OF GOODS SOLD.** Cost of
      Goods sold increased $595,159 or 436% to $731,688 for the three months ended
      September 30, 2006 from $136,529 for the three months ended September 30, 2005.
      As a percentage of net revenue, cost of goods sold increased to 73% for the
      three months ended September 30, 2006 from 61% for the three months ended
      September 30, 2005. Cost of goods sold for the Marine products segment increased
      $7,912 or 88% to $16,866 for the three months ended September 30, 2006 from
      $8,954 for the three months ended September 30, 2005. As a percentage of net
      revenue, cost of goods sold for the Marine product segment decreased to 53%
      for
      the three months ended September 30, 2006 from 59% for the three months ended
      September 30, 2005. Cost of goods sold for the Security products segment
      increased $645,830 to $654,824 for the three months ended September 30, 2006
      from $8,994 for the three months ended September 30, 2005. As a percentage
      of
      revenue, cost of goods sold for the Security products segment decreased to
      78%
      for the three months ended September 30, 2006 from 89% for three months ended
      September 30, 2005. Cost of goods sold for the DC Transportation products
      segment decreased $58,582 or 49% to $59,999 for the three months ended September
      30, 2006 from $118,581 for the three months ended September 30, 2005. As a
      percentage of net revenue, cost of goods sold for the DC Transportation products
      segment decreased to 45% for the three months ended September 30, 2006 from
      60%
      for the three months ended September 30, 2005.





The
      increase in the cost of goods sold as a percentage of net revenues for the
      Marine products segment was driven primarily by an increase in revenue resulting
      from an increase in the ratio of higher priced internet sales (retail pricing)
      versus lower priced dealer sales (wholesale pricing). The decrease in the cost
      of goods sold as a percentage of net revenues for the Security products segment
      was driven primarily by a decrease in manufacturing costs via our new supplier
      in Asia. The decrease in the cost of goods sold as a percentage of net revenues
      for the DC Transportation products segment was due to improved product sourcing
      and product mix.





**GROSS
      PROFIT MARGIN.** Gross
      profits on sales increased $185,460 or 212% to $272,876 for the three months
      ended September 30, 2006 from $87,416 for the three months ended September
      30,
      2005. As a percentage of net revenue, gross profits decreased to 27% for the
      three months ended September 30, 2006 from 39% for the three months ended
      September 30, 2005. The Marine products segment contributed $15,079 and $6,280
      of the total gross profit for the three months ended September 30, 2006 and
      2005, respectively. The Security products segment contributed $183,767 and
      $1,089 of the total gross profit for the three months ended September 30, 2006
      and 2005, respectively. The DC Transportation products segment contributed
      $74,030 and $80,047 of the total gross profit for the three months ended
      September 30, 2006 and 2005, respectively. The gross profit percentage for
      the
      Marine products segment increased to 47% for the three months ended September
      30, 2006 from 41% for the three months ended September 30, 2005. The gross
      profit percentage for the Security products segment increased to 22% for the
      three months ended September 30, 2006 from 11% for the three months ended
      September 30, 2005. The gross profit percentage for the DC Transportation
      products segment increased to 55% for the three months ended September 30,
      2006
      from 40% for the three months ended September 30, 2005.





The
      increase in gross profit as a percentage of net revenues for the Marine products
      segment was driven primarily by an increase in revenue resulting from an
      increase in the ratio of higher priced internet sales (retail pricing) versus
      lower priced dealer sales (wholesale pricing). The increase in gross profit
      as a
      percentage of net revenues for the Security products segment was driven
      primarily by a decrease in manufacturing costs via our new supplier in Asia.
      The
      increase in gross profit as a percentage of net revenues for the DC
      Transportation products segment was due to improved product sourcing and product
      mix.




**SALARIES
      AND WAGES.** Salaries
      and Wages increased $20,948 or 7% to $306,757 for the three months ended
      September 30, 2006 from $285,809 for the three months ended September 30, 2005.
      The increase was driven primarily by a rise in employee medical benefits and
      accrued officer bonuses per employment contracts. Salary and Wages is comprised
      of employee wages and stock compensation. There was no employee stock-based
      compensation expense during the three months ended September 30, 2006.





**PROFESSIONAL
      & CONSULTING FEES.** Professional and consulting fees decreased $79,263 or 39% to $121,779 for the
      three months ended September 30, 2006 from $201,042 for the three months ended
      September 30, 2005. The decrease was driven primarily by the elimination of
      legal fees associated with the dismissal of the Satius law suit and the
      settlement of the SEC investigation (See Note 11 "Commitments and
      Contingencies”). The decrease was partially offset by increase in consulting
      fees for marketing services. Professional and consulting fees include fees
      paid
      to attorneys, accountants, and business consultants. Stock-based compensation
      of
      $8,400 and $19,250 was recorded in conjunction with common stock issued to
      members of the Board of Directors for services rendered for the three months
      September 30, 2006 and the three months ended September 30, 2005, respectively.
      In addition, $42,060 of stock based compensation was recorded and expensed
      in
      conjunction with common stock issued to attorneys and consultants for legal
      and
      marketing services for the three months ended September 30, 2006





8


**DEPRECIATION
      AND AMORTIZATION EXPENSE.** Depreciation and amortization decreased $112,508 or 68% to 52,818 for the three
      months ended September 30, 2006 from $165,326 for the three months ended
      September 30, 2005. The decrease was attributable to a reduction in amortization
      expense as a 2001 patent licensing agreement becoming fully amortized as of
      December 31, 2005.





**RESEARCH
      & DEVELOPMENT.** Research
      and development expense decreased $25,197 or 14% to $152,932 for the three
      months ended September 30, 2006 from $178,129 for the three months ended
      September 30, 2005. The decrease was due to a focused effort to conserve cash.
      Research and development costs consist of all expenditures related to the
      improvement and development of the Company's current product line, new product
      development, and engineering consulting fees associated with licensed
      technology. Currently, substantially all of our research and development costs
      and efforts are dedicated to the development of our security (both analog and
      digital) and DC Transportation products segments. For the three months ended
      September 30, 2006, of the total Research & Development expenditures,
      $152,932 or 100% was related to the security & audio products segment. The
      cost of our research and development activities is borne directly by the
      Company. No amounts are borne by our customers and no contracts for customer
      funded research and development is anticipated. We plan to continue funding
      the
      security and DC transportation product segments for the foreseeable
      future..





**ADVERTISING
      AND PROMOTIONS.** Advertising and promotions decreased $8,716 or 28% to $22,158 for the three
      months ended September 30, 2006 from $30,875 for the three months ended
      September 30, 2005. The decrease was due directly to a reduction in print
      advertising for the DC transportation products segment and a focus on selling
      through distribution channels rather than directly to the consumer. The amount
      also includes portions of postage, printing, and travel that are attributable
      to
      advertising and promotions.





**RENT
      AND UTILITIES.** Rent and
      utilities decreased $7,276 or 20% to $29,689 for the three months ended
      September 30, 2006 from $36,965 for the three months ended September 30, 2005.
      The decrease is due to a rent abatement negotiated as part of the lease for
      the
      new corporate offices. Rent and utilities includes office rent, warehouse rent,
      storage, telephone, and utilities.





**TRAVEL
      & ENTERTAINMENT EXPENSE.** Travel
      & entertainment expense decreased $16,053 or 34% to $31,832 for the three
      months ended September 30, 2006 from $47,885 for the three months ended
      September 30, 2005. The decrease was due to a focused effort to reduce
      expenditures and an overall reduction in the number of employees traveling
      as a
      result of Company’s restructuring plan initiated in April of 2005. Travel &
entertainment expenses include normal expenses associated with traveling
      including, but not limited to; airfare, auto rental, parking & tolls, hotels
& lodging, taxis, meals, and entertainment.





**OTHER
      EXPENSES.** Other
      expenses increased $14,227 or 22% to $79,841 for the three months ended
      September 30, 2006 from $65,614 for the three months ended September 30, 2005.
      The increase was primarily driven by an increase in liability insurance premium
      rates and an increase in product installation costs for the DC Transportation
      products segment. Other expenses include travel, supplies, property taxes,
      insurance, financing fees, bank charges, provision for doubtful accounts,
      postage & delivery, and various other expenses that are classified as
      miscellaneous.





**NON-OPERATING
      INCOME (EXPENSE) ITEMS** .
      Non-operating income (expense) increased ($15,977) to ($22,133) for the three
      months ended September 30, 2006 from ($6,156) for the three months ended
      September 30, 2005. Non-operating income (expense) consists primarily of
      interest expense which increased to ($71,691) for the three months ended
      September 30, 2006 from ($20,562) for the three months ended September 30,
      2005.
      The current period interest expense includes ($70,691) of amortization of debt
      discount on the Convertible Debentures, and ($1,000) in accrued interest from
      current short-term notes payable. The Company records amortization using the
      effective interest method and, accordingly, interest expense associated with
      these debentures will increase as the carrying value increases. The expense
      amounts for the three months ended September 30, 2006 were offset by $2,358
      in
      interest income and $47,200 of income related to a litigation
      settlement.





**DERIVATIVE
      GAIN (LOSS).** Derivative
      (loss), which amounted to ($37,718) for the three months ended September 30,
      2006, arises from fair value adjustments to our derivative financial
      instruments. These instruments consist of freestanding warrants and embedded
      conversion features associated with the Debenture offering. We will continue
      to
      incur fair value adjustments to these instruments until such instruments are
      converted, exercised or reclassified to stockholders’ equity. Future fair value
      adjustments require the use of subjective estimates. However, the principal
      drive of our valuation model is the Company’s trading common stock. Accordingly,
      future volatility in the trading market price may result in significant changes
      in fair value that are required to be recorded as adjustments in
      income.





9





**LIQUIDITY
      & CAPITAL RESOURCES**





The
      accompanying financial statements have been prepared assuming that the Company
      will continue as a going concern. However, the Company has incurred losses
      from
      operations of $2,913,255 and $3,938,693 during the nine months ended September
      30, 2006 and 2005, respectively. In addition, during those periods, the Company
      has used cash from operating activities of $3,688,859 and $2,244,114
      respectively. Further, the Company has a stockholders’ deficit of $2,433,129 at
      September 30, 2006. These conditions raise substantial doubt about the Company’s
      ability to continue as a going concern.





The
      Company has devoted significant efforts in the further development and marketing
      of its existing products in its Security and DC Transportation Products
      Segments, which, while now showing improved revenues, cannot yet be considered
      as sufficient to fund operations for any sustained period of time. The Company
      has allocated significant resources to the development of new power line
      technologies and products expected to be available for sale and/or licensing
      during the fourth quarter of fiscal year 2006. The Company’s ability to continue
      will be dependent upon achieving profitable operations through the licensing
      and
      sales of these new technologies and products.





The
      Company’s ability to continue as a going concern is dependent upon (i) raising
      additional capital to fund operations (ii) the further development of the
      Security and DC Transportation products segments and (iii) ultimately the
      achievement of profitable operations. During the nine months ended September
      30,
      2006, the Company secured financing of $4,473,933 in the form of convertible
      debentures which included proceeds of $3,100,000 and the conversion of
      $1,373,933 of otherwise short term existing obligations to long term debt (See
      Note 8). While the proceeds of this financing will significantly mitigate the
      Company’s liquidity difficulties, the ability of the Company to sustain its
      operations for a reasonable period without further financing cannot be assured.
      The financial statements do not include any adjustments that might arise as
      a
      result of this uncertainty.





During
      the nine months ended September 30, 2006 the Company funded its losses from
      operations through the following vehicles:





·
            On
                March 16, 2006, the Company entered into a Securities Purchase Agreement
                (the "Purchase Agreement"), with several accredited investors
                (collectively the “Purchasers"), under which the Company issued and sold
                to the Purchasers in a private placement, $4,473,933 aggregate principal
                amount of convertible debentures (“Debentures”), including $1,373,933 of
                existing debt being converted into the Debentures, and warrants to
                purchase common stock (the “Warrants”) for an aggregate of up to
                $3,100,000 (the “Proceeds”). All the closing conditions of the Purchase
                Agreement were satisfied on March 23, 2006. On March 23, 2006 the
                Company
                received a portion of the Proceeds in the amount of $2,563,572 net
                of
                $136,428, which was paid from the Proceeds as payment for commissions
                and
                expenses and $87,428 as repayment of certain creditors pursuant to
                the
                Purchase Agreement. Furthermore, on March 27, 2006, the Company received
                $250,000 and on March 29, 2006 the Company received a final disbursement
                of the Proceeds in the amount of $150,000, for a total aggregate
                amount of
                the Proceeds of $3,100,000 disbursed to the Company. The Company
                intends
                to pay a portion of the Proceeds as a broker’s fee with respect to the
                sale of the Debentures and Warrants to the Purchasers, and to use
                the net
                available proceeds for general corporate and working capital purposes.
                The
                Warrants may be exercised for an aggregate of up to 94,188,063 (1,883,761
                as adjusted for the March 22, 2006 1 for 50 reverse stock split)
                shares of common stock until March 22, 2011, at price per share equal
                to
                the product of (i) 1.25 and (ii) the Applicable Initial Reference
                Price
                (the "Exercise Price"), as defined in the Warrant Agreement entered
                into
                in connection with the Purchase Agreement (“The Warrant”). The Exercise
                Price will be subject to adjustment for events and transactions as
                stated
                in the Warrant. The transaction was recorded as a derivative liability
                on
                the Company’s balance sheet (See “Note 8” to the financial
                statements). As
                of September 30, 2006, the Company was in default of a debt covenant
                in
                its March 22, 2006 convertible debenture agreement. The covenant
                required
                that the Company generate a gross profit in excess of $200,000 per
                month
                on average during the period from July 1, 2006 to September 30, 2006,
                or
                in excess of $155,000 per month on average during the period from
                April 1,
                2006 to September 30, 2006. As of September 29, 2006, the Company
                entered
                into a Waiver Agreement with the Purchasers pursuant to which a majority
                of the Purchasers agreed to waive the covenant. The Company has made
                arrangements with its financing partner to repay the short-term promissory
                note in two installments on November 16, 2006 and November 23, 2006
                with
                proceeds from accounts receivable collections.







·
            On
                September 14, 2006, the Company borrowed $300,000 from its primary
                financing partner in the form of a 45 day unsecured promissory note,
                bearing an annual interest rate of 8%, for the purpose providing
                short-term cash flow due to the approximately $1.5 million the Company
                had
                invested in inventory and accounts receivable.





10


During
      the nine months ended September 30, 2006, the Company issued purchase orders
      to
      its overseas supplier totaling $562,440 for the manufacturing of the Company’s
      Secure View product. During August and September 2006, the Company had received
      all product associated with this purchase order, and due to contractual
      arrangements with its manufacturer, had paid for the product in full as of
      September 30, 2006. In addition, the Company purchased, with cash, critical
      components during the nine months ended September 30, 2006 for both existing
      products and for new products expected to be ready for manufacturing during
      the
      fourth quarter ended December 31, 2006. At September 30, 2006, this inventory
      was being warehoused in Taiwan, at the offices of IC Intracom, the Company’s
      manufacturing partner, and was valued at approximately $77,140.





The
      financing of the overseas manufacturing of product, and the corresponding
      accounts receivable generated from the shipment of this product to customers
      had
      a significant impact on the Company’s cash position for the nine months ended
      September 30, 2006. As of September 30, 2006, the Company had approximately
      $1.8
      million in cash invested in accounts receivable and inventory balances. This
      investment created a short-term cash flow shortage which was alleviated with
      the
      short-term borrowing of $300,000 as outlined above. Approximately $800,000
      of
      the outstanding accounts receivable balance at September 30, 2006 was generated
      from a shipment to one customer on net 30 day terms. The Company is scheduled
      to
      collect this receivable over a three week period beginning approximately on
      October 25, 2006 through November 15, 2006. To date, the Company has received
      proceeds according to the schedule provided by the customer. . In addition,
      the
      Company expects to ship additional product to this customer during the fourth
      quarter ended December 31, 2006, to further liquidate inventory balances. The
      Company believes it has sufficient inventory to meet anticipated customer
      purchase orders during the fourth quarter ended December 31, 2006.




Other
      than outlined above, the Company has no other material commitments for the
      purchase of raw materials or components. The Company issues purchase orders
      for
      these items for the purposes of fulfilling customer orders and maintaining
      reasonable levels of inventory.





**Item
      3. Quantitative and Qualitative Disclosures about Market Risk**





The
      Company is exposed to changes in prevailing market interest rates affecting
      the
      return on its investments but does not consider this interest rate market risk
      exposure to be material to its financial condition or results of operations.
      The
      Company invests primarily in United States Treasury instruments with short-term
      (less than one year) maturities. The carrying amount of these investments
      approximates fair value due to the short-term maturities. Under its current
      policies, the Company does not use derivative financial instruments, derivative
      commodity instruments or other financial instruments to manage its exposure
      to
      changes in interest rates or commodity prices.





**Item
      4.** **Controls
      and Procedures**





The
      Company maintains disclosure controls and procedures that are designed to ensure
      that information required to be disclosed in the Company's Exchange Act reports
      is recorded, processed, summarized and reported within the time periods
      specified in the SEC's rules and forms, and that such information is accumulated
      and communicated to the Company's management, including its Chief Executive
      Officer and Chief Financial Officer, as appropriate, to allow timely decisions
      regarding required disclosure based closely on the definition of "disclosure
      controls and procedures" in Rule 13a-14(c). In designing and evaluating the
      disclosure controls and procedures, management recognized that any controls
      and
      procedures, no matter how well designed and operated, can provide only
      reasonable assurance of achieving the desired control objectives, and management
      necessarily was required to apply its judgment in evaluating the cost-benefit
      relationship of possible controls and procedures.





An
      evaluation was carried out under the supervision and with the participation
      of
      our management, including our Chief Executive Officer and Chief Financial
      Officer, of the effectiveness of the design and operation of our disclosure
      controls and procedures (as defined in Rule 13a-14(c) under the Securities
      Exchange Act of 1934) as of September 30, 2006. Based upon that evaluation,
      the
      Chief Executive Officer and Chief Financial Officer concluded that the design
      and operation of these disclosure controls and procedures were effective. No
      significant changes were made in our internal controls or in other factors
      that
      could significantly affect these controls subsequent to the date of their
      evaluation.





11





**PART
      II. OTHER INFORMATION**





**Item
      1. Legal Proceedings**





Litigation,
      claims and assessment:




***Guestlinx,
      LLC***




On
      May
      19, 2006 the Company learned that a default judgment had been entered against
      it
      on May 3, 2006 in the Superior Court of California, Orange County, in the amount
      of $90,561, to the plaintiff Guestlinx, LLC. The judgment was granted based
      on
      an action filed by Guestlinx, LLC on November 2, 2005. The Company had no prior
      knowledge of the action and believes it was never properly served. The Company
      retained counsel in California, and on August 4, 2006 was successful in having
      the judgment set aside for improper service; contingent upon the Company
      remitting $3,000 to the Orange County Superior Court by September 4, 2006.
      The
      Company had previously recorded a liability associated with this dispute in
      the
      amount of $46,352 that is currently included in the Company’s balance sheet
      under “Liabilities from Discontinued Operations”. There
      is
      a mandatory remediation settlement meeting scheduled on December 8,
      2006.




***Satius,
      Inc*****.
      License Agreement**






On
      June
      7, 2006, the civil action initiated against the Company (the “Action”) by
      Satius, Inc. (“Satius”), on August 17, 2005, in which Satius alleged
      various claims under a former license agreement (the “Agreement”), entered into
      on December 18, 2002, by and between Satius and the Company and subsequently
      terminated by Satius on July 10, 2004, was dismissed in the Court of Common
      Pleas of Montgomery County, Pennsylvania.  On June 9, 2006, the
      Company was notified by its counsel that Satius has appealed the dismissal.
      The
      Company cannot predict whether or not the appeal will be
      successful.






***SEC
      Investigation***







The
      Company has settled the previously reported investigation by the Securities
      and
      Exchange Commission (“SEC”) as described below.





On
      Tuesday, June 27, 2006, the SEC filed a civil action in the United States
      District Court for the District of Columbia against the Company, its former
      chief executive officer, George S. Bernardich III, and its former secretary
      and
      treasurer, James R. Cox. The Company consented to the entry of a judgment
      permanently enjoining it from violating Section 10(b) and Rule 10b-5 of the
      Securities Exchange Act of 1934 (“Exchange Act”), which are general antifraud
      provisions of the federal securities laws. The Company also consented to being
      enjoined from violating the periodic reporting, books and records, and internal
      controls provisions contained in Exchange Act Sections 13(b)(2)(A), 13(b)(2)(B),
      and 15(d) and Rules 15d-1, 15d-11, 15d-13, and 12b-20 thereunder.





Mr.
      Bernardich and Mr. Cox consented to the entry of judgments permanently enjoining
      them from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
      and aiding and abetting the Company’s alleged reporting violations, and barring
      them from serving as officers and directors of public companies for a period
      of
      ten years. The Company, Mr. Bernardich and Mr. Cox consented to the entry of
      the
      judgments without admitting or denying the allegations in the SEC’s Complaint.
      Mr. Bernardich was president and chief executive offer of the Company from
      February 2001 until April 2005. He was chairman of the Company’s Board of
      Directors from August 2000 until February 2005 and remained a director of the
      Company until March 2006.





The
      Company currently has a consulting/severance arrangement with Mr. Bernardich.
      Mr. Cox was the Company’s secretary, treasurer and director from the time the
      company went public in March 1999 until approximately July 2002. Mr. Cox is
      currently employed by the Company in a product development capacity.





The
      requested relief was approved by the Court on August 7, 2006.





The
      Complaint alleged that in September 2004, the Company violated the antifraud
      provisions of the federal securities laws by issuing materially misleading
      press
      releases and filing materially misleading reports with the SEC concerning a
      purported $23 million sales contract with a defense contractor known as
      Universal General Corporation (“UGC”), which, in fact, had no revenues, no
      assets, and no means to satisfy any portion of its $23 million contractual
      obligation to the Company. According to the Complaint, the Company performed
      virtually no due diligence to determine whether UGC was legitimate and could
      meet its contractual obligations. The Complaint states that Mr. Bernardich
      was
      responsible for the Company’s due diligence failures and for drafting the
      Company’s materially misleading press releases and SEC filings. The Complaint
      also alleges that during the first three quarters of fiscal year 2000, the
      Company fraudulently recognized nearly ninety percent of its reported revenues
      based on fictitious camera sales by initiating consignment arrangements with
      numerous dealers and recording the consignment order amounts as revenue before
      any cameras were manufactured, shipped to the dealers, or sold to customers.
      The
      Complaint alleges that during this same period, the Company also issued numerous
      deceptive press releases that materially misrepresented the company’s operations
      and offered glowing, but unsubstantiated, revenue and earnings forecasts. The
      Complaint also alleges that in April 2001, following a management change, the
      Company filed with the SEC an annual report for 2000 containing a misleading
      restatement of revenues and other materially misleading disclosures and
      accounting errors. According to the Complaint, the principal architect of the
      Company’s fraudulent activities during 2000 was its now-deceased former chief
      executive officer, Richard L. McBride. According to the Complaint, among other
      things, the Company failed to disclose in violation of applicable SEC
      regulations that Mr. McBride had been convicted of fraud in 1998 and was serving
      a six-year probation term.




12


The
      Complaint also alleged that Mr. Cox was responsible for certain of the Company’s
      fraud and reporting violations and Mr. Bernardich, who had replaced Mr. McBride
      as chief executive officer in February 2001, aided and abetted the Company’s
      reporting violations with respect to the Company’s 2000 annual report.





In
      addition, the Company’s current chief financial officer, Douglas Bauer, has
      consented to the issuance of a cease-and-desist order for his role in causing
      the Company’s reporting violation in connection with its April 2002 restatement
      of a deferred tax asset. Mr. Bauer consented to the issuance of the order
      without admitting or denying the findings in the Order.





**Item
      1A. Risk Factors**





During
      the nine months ended September 30, 2006, the following material changes
      occurred with respect to the risk factors disclosed in our Annual Report on
      Form
      10-K/A for the year ended December 31, 2005. Please read the section entitled
      "Risk Factors" set forth in our Annual Report on Form 10-K/A for the year ended
      December 31, 2005 and similar types of discussions in other SEC filings which
      discuss some of the important risks that may affect our business, results of
      operations and financial condition.





**THE
      COMPANY HAS SETTLED THE PREVIOUSLY REPORTED INVESTIGATION BY THE SECURITIES
      AND
      EXCHANGE COMMISSION**





The
      Company has settled the previously reported investigation by the Securities
      and
      Exchange Commission (“SEC”) as described below.





On
      Tuesday, June 27, 2006, the SEC filed a civil action in the United States
      District Court for the District of Columbia against the Company, its former
      chief executive officer, George S. Bernardich III, and its former secretary
      and
      treasurer, James R. Cox. The Company consented to the entry of a judgment
      permanently enjoining it from violating Section 10(b) and Rule 10b-5 of the
      Securities Exchange Act of 1934 (“Exchange Act”), which are general antifraud
      provisions of the federal securities laws. The Company also consented to being
      enjoined from violating the periodic reporting, books and records, and internal
      controls provisions contained in Exchange Act Sections 13(b)(2)(A), 13(b)(2)(B),
      and 15(d) and Rules 15d-1, 15d-11, 15d-13, and 12b-20 thereunder.





Mr.
      Bernardich and Mr. Cox consented to the entry of judgments permanently enjoining
      them from violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
      and aiding and abetting the Company’s alleged reporting violations, and barring
      them from serving as officers and directors of public companies for a period
      of
      ten years. The Company, Mr. Bernardich and Mr. Cox consented to the entry of
      the
      judgments without admitting or denying the allegations in the SEC’s Complaint.
      Mr. Bernardich was president and chief executive offer of the Company from
      February 2001 until April 2005. He was the chairman of the Company’s Board of
      Directors from August 2000 until February 2005 and remained a director of the
      Company until March 2006. The Company currently has a consulting/severance
      arrangement with Mr. Bernardich. Mr. Cox was the Company’s secretary, treasurer
      and director from the time the company went public in March 1999 until
      approximately July 2002. Mr. Cox is currently employed by the Company in a
      product development capacity. The requested relief is subject to court
      approval.





In
      addition, the Company’s current chief financial officer, Douglas Bauer, has
      consented to the issuance of a cease-and-desist order for his role in causing
      the Company’s reporting violation in connection with its April 2002 restatement
      of a deferred tax asset. Mr. Bauer consented to the issuance of the order
      without admitting or denying the findings in the Order.








**THE
      AVAILABILITY OF A LARGE NUMBER OF AUTHORIZED BUT UNISSUED SHARES OF COMMON
      STOCK
      MAY, UPON THEIR ISSUANCE, LEAD TO DILUTION OF EXISTING STOCKHOLDERS.**





Pursuant
      to the approval of the Company’s shareholders of the increase in authorized
      common stock obtained on August 8, 2006, we are authorized to issue 50,000,000
      shares of common stock, of which as of November 3, 2006, 5,050,607 shares are
      issued and outstanding. In connection with the financing arrangement that we
      entered into in March 2006, we also have outstanding secured convertible
      debentures that may be converted into an estimated 3,622,618 shares of common
      stock at $1.235 per share, and outstanding warrants to purchase 1,883,761 shares
      of common stock. Assuming conversion and exercise of these instruments, we
      will
      be left with more than 39 million authorized shares that would remain unissued.
      These shares may be issued by our Board of Directors without further stockholder
      approval.





13


The
      issuance of large numbers of shares, possibly at below market prices, is likely
      to result in substantial dilution to the interests of other stockholders. In
      addition, issuances of large numbers of shares may adversely affect the market
      price of our common stock.





**IF
      WE ARE UNABLE TO OBTAIN ADDITIONAL FUNDING OUR BUSINESS OPERATIONS WILL BE
      HARMED.**





Despite
      obtaining funding in the amount of approximately $4.5 million dollars as of
      March 22, 2006 and a financing in the form of an unsecured loan in the amount
      of
      $300,000 as of September 14, 2006, our ability to continue as a going concern
      is
      subject to our ability to generate a profit or obtain further necessary funding
      from outside sources, including obtaining additional funding from the sale
      of
      our securities, generating revenues/sales or obtaining credit lines or loans
      from various financial institutions where possible. We believe that our
      available short-term assets, investment income and recently obtained funding
      will be sufficient to meet our operating expenses and capital expenditures
      through the end of fiscal year 2006. We do not know if additional financing
      will
      be available when needed, or if it is available, if it will be available on
      acceptable terms. Insufficient funds may prevent us from implementing our
      business strategy or may require us to delay, scale back or eliminate certain
      contracts for the provision of our technology and products. If we are unable
      to
      develop our business, we may have to discontinue operations or cease to exist,
      which would be detrimental to the value of our common stock. We can make no
      assurances that our business operations will develop and provide us with
      significant cash to continue operations. A material shortage of capital will
      require us to take drastic steps such as reducing our level of operations,
      disposing of selected assets or seeking an acquisition partner. If cash is
      insufficient, we will not be able to continue operations.





To
      the
      extent we raise additional capital by issuing equity securities; our
      stockholders may experience substantial dilution. Also, any new equity
      securities may have greater rights, preferences or privileges than our existing
      common stock. To the extent we raise additional capital by issuing convertible
      instruments; our stockholders may experience substantial dilution. The number
      of
      shares that could be issued upon conversion of the repayment amounts scheduled
      under the convertible instruments may be determined by the market price of
      our
      common stock prevailing at the time of each conversion. The lower the market
      price, the greater the number of shares issuable under the agreement. Upon
      issuance of the shares, to the extent that holder of those shares will and
      may
      attempt to sell the shares into the market, these sales may further reduce
      the
      market price of our common stock. This in turn will increase the number of
      shares issuable under the agreement. This may lead to an escalation of lower
      market prices and ever greater numbers of shares to be issued. A larger number
      of shares issuable at a discount to a continuously declining stock price will
      expose our stockholders to greater dilution and a reduction of the value of
      their investment.





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





(a)  *Recent
      Sales of Unregistered Securities; Use of Proceeds from Registered
      Securities.*





*Recent
      Sales of Unregistered Securities*





On
      January 17, 2006, the Company issued 1,420,000 shares of restricted common
      stock
      for payment of interest, in lieu of cash, relating to various notes payable
      that
      were outstanding at December 31, 2005. The shares were valued at $61,070, based
      on the closing market price of the Company’s common stock corresponding to the
      date of each note.





On
      January 30, 2006, the Company issued 379,097 shares of restricted common stock
      in conjunction with a litigation settlement. The shares were valued at $15,164,
      based on the closing market price of the Company’s common stock on the effective
      date of the agreement; December 12, 2005.





On
      February 14, 2006, the Company issued 2,676,471 shares of restricted common
      stock in conjunction with exercise of outstanding warrants from which it
      received proceeds in the amount of $133,824. The warrants were re-priced and
      exercisable at $.05 per share based on the approval of the Company’s Board of
      Directors.





On
      February 22, 2006, the Company issued 20,651,411 shares of restricted common
      stock in conjunction with a private equity offering exempt from registration
      under 4(2) of the Securities Act of 1933, and Rule 506 of Regulation D, thereof.
      The offering was priced at $.0225 per share, resulting in gross proceeds of
      $464,657 from the offering. The securities underlying the offering include
      piggy-back registration rights.





On
      March
      7, 2006, the Company issued 898,100 shares of restricted common stock, in lieu
      of cash, for payment for raw materials inventory and for rent for the Company’s
      distribution warehouse in Clearwater, Florida. The shares were valued at
      $44,905, based on the closing market price of the Company’s common stock on the
      effective date of the agreement, November 30, 2005.





14


On
      March
      7, 2006, the Company issued 421,500 shares of restricted common stock for
      financing fees owed in conjunction with a finder’s fee agreement relating to the
      Company’s December 2005 private equity placement. The shares were valued at
      $11,855, based on the terms of the finder’s fee agreement.





On
      March
      7, 2006, the Company issued 500,000 shares of restricted common stock to
      employees in the form of stock compensation. The shares were valued at $15,000,
      based on the closing market price of the Company’s common stock on date the
      grant was approved.








On
      June
      28, 2006, the Company issued 51,000 shares of restricted common stock to
      officers in the form of stock compensation in accordance with their employment
      contracts. The shares were valued at $86,700, based on the closing market price
      of the Company’s common stock on date the grant was ratified by the Board of
      Directors.





On
      June
      28, 2006, the Company issued 106,000 shares of restricted common stock to
      Directors of the Company in the form of stock compensation. Of the total shares
      issued, 14,000 shares were issued as compensation for the 2006 fiscal year
      ended
      December 31, 2006. The remaining 92,000 shares were issued as compensation
      for
      services rendered by Directors during the Company’s 2005 restructuring plan. The
      shares were valued at $254,400, based on the closing market price of the
      Company’s common stock on date the grant was ratified by the Board of
      Directors.





On
      July
      7, 2006, the Company issued 15,556 shares of restricted common stock in
      conjunction with a private equity offering exempt from registration under 4(2)
      of the Securities Act of 1933, and Rule 506 of Regulation D, thereof. The
      offering was priced at $1.125 per share, resulting in gross proceeds of $17,500
      from this particular issuance. The securities underlying the offering include
      piggy-back registration rights.





On
      July
      7, 2006, the Company issued 18,000 shares of restricted common stock, in lieu
      of
      cash, for payment of financing fees associated the Company’s March 29, 2006
      convertible debenture financing agreement. The shares were valued at $34,200
      based on the closing share price calculated as the basis for pricing the March
      29, 2006 financing agreements, prior to any discounts, or $1.90 per
      share.








All
      of
      our securities issued in the foregoing transactions were issued in reliance
      on
      the exemption from registration and prospectus delivery requirements of the
      Act
      set forth in Section 3(b), and/or Section 4(2) of the Securities Act and the
      regulations promulgated thereunder. With respect to the sale of the Units
      described above, the Company claims an exemption from the registration
      requirements of the Securities Act of 1933, as amended (the “Act”), pursuant to
      Section 4(2) of the Act and/or Regulation D promulgated thereunder since, among
      other things (1) the transactions did not involve a public offering, (2) the
      investors were accredited investors and/or qualified institutional buyers,
      (3)
      the investors had access to information about the Company and their investment,
      (4) the investors took the securities for investment and not resale, (5) the
      Company took appropriate measures to restrict the transfer of the securities,
      (6) no advertising or general solicitation was employed in offering the
      securities, and (7) no commissions were paid in connection with the placement
      and/or sale of the securities.





*Use
      of Proceeds from Registered Securities*





Not
                applicable.





(b) *Purchases
      of Equity Securities by the Issuer and Affiliated Purchasers.*





None.


**Item** **3.
        Defaults Upon Senior Securities.**
 
 Not
                  applicable.


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





The
      Company has presented to its shareholders of record as of April 27, 2006 (the
      “Record Date”), the following resolutions for approval which were recommended by
      the Company’s Board of Directors:





1.
            To
                amend the Company's Articles of Incorporation to increase the authorized
                number of Common Stock from 8,000,000 shares to 50,000,000
                shares;






15





2.
            To
                authorize the Company to increase the aggregate number of shares
                of Common
                Stock covered and issuable under the 2003 Employee Stock Option Plan
                from
                250,000 shares to an amount of shares equal to 10% of the authorized
                amount of Common Stock of the Company which the Company, at any time,
                shall have authority to issue;





3.
            To
                approve the selection of Aidman, Piser & Company, P.A. as the
                Company’s Independent Public Accountant for the fiscal year ending
                December 31, 2006; and





4.
            To
                reelect Jim Williams, Martin Traber and Ted Shalek to serve as class
                II
                members of the Board of Directors of the Company and pursuant to
                the
                Company’s By-laws, for a term expiring at the annual meeting of
                shareholders held in the third (3rd)
                year following the year of their election, such election to be effective
                on and as of August 8, 2006.





The
      resolutions, as presented, were approved on August 8, 2006 by the shareholders
      representing a majority of the outstanding shares as of the Record Date. The
      Company filed a Certificate of Amendment with the Secretary
      of State of the State
      of
      Nevada on August 9, 2006, effective as of equal date, to amend the Company’s
      Articles of Incorporation per
      the
      proposals #1 and #2 .








**Item
      5. Other Information**.





None.





**Item
      6. Exhibits**




3(i)1
            
            Articles
                of Incorporation of PowerLinx, Inc. (1)3(i)(2)
            
            Certificate
                of Amendment to the Articles of Incorporation of Index Oil and Gas
                Inc.
                (the "Company"), filed with the Secretary of the State of Nevada
                on August
                9, 2006, increasing the number of authorized shares from 8,000,000
                to
                50,000,000 (2)3(i)(3)
            
            Certificate
                of Amendment to the Articles of Incorporation of the Company, filed
                with
                the Secretary of the State of Nevada on September 21, 2006, increasing
                the
                number of authorized shares from 250,000,000 to 400,000,000.
                (3)3(i)(4)
            
            Certificate
                of Amendment to the Articles of Incorporation of the Company filed
                with
                the Secretary of State of the State of Nevada on approximately November
                28, 2003, changing the name of the Company from Seaview Video Technology,
                Inc. to PowerLinx, Inc. (4)3(ii)
            
            By-laws
                of Index Oil and Gas Inc. (5)4.1
            
            Certificate
                of designation of Series A Preferred Stock. (6)31.1
            
            Certification
                of Periodic Financial Reports by Chief Financial Officer in satisfaction
                of Section 302 of the Sarbanes-Oxley Act of 2002. *31.2
            
            Certification
                of Periodic
                Financial Reports by Chief Executive Officer in satisfaction of Section
                302 of the Sarbanes-Oxley Act of 2002.
                *32.1
            
            Certification
                of Periodic Financial Reports by Chief Financial Officer in satisfaction
                of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section
                1350. *32.2
            
            Certification
                of Periodic Financial Reports by Chief Executive Officer in satisfaction
                of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section
                1350. *





*
      Filed
      Herewith


(1)
                Incorporated by reference to the Company’s Annual Report for the fiscal
                year ended December 31, 2001, filed with the SEC on Form 10KSB/A.
                on
                January 16, 2003.(2)
                Incorporated by reference to the Company’s Registration Statement filed on
                Form SB-2/A with the SEC on September 1, 2006.(3)
                Incorporated by reference to the Company’s Current Report filed on Form
                8-K with the SEC on March 22, 2006.(4)
                Incorporated by reference to the Company’s Annual Report filed on Form
                10-KSB with the SEC on March 16, 2004.(5)
                Incorporated by reference to the Company’s Annual Report filed on Form
                10-KSB with the SEC on April 15, 2005.(6)
                Incorporated by reference to the Company’s Current Report filed on Form
                8-K with the SEC on March 16, 2004.





16


**SIGNATURES**




Pursuant
      to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
      1934, the registrant has duly caused this report to be signed on its behalf
      by
      the undersigned, thereunto duly authorized.




**POWERLINX,
              INC.**Date: November
              17, 2006
            By:
            /s/ Michael
              TomlinsonMichael
              Tomlinson*Chief
              Executive Officer**and
              *Principal
              Executive Officer**




By:
            /s/ Douglas
              BauerDouglas
              Bauer*Chief
                Financial Officer, Principal Accounting and Financial
                Officer*








17