** **

**U.S. SECURITIES ANDEXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

** **

**FORM 10-KSB**

** **

| **ý**                                            | **ANNUAL REPORT PURSUANT  TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|-------------------------------------------------------|-----------------------------------------------------------------------------------------------------|
| ** **                                            | ** **                                                                                          |
| **For  the fiscal year ended December 31, 2004** |
| ** **                                            | ** **                                                                                          |
| **o**                                                 | **TRANSITION REPORT UNDER  SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**   |

 

**Forthe transition period from                to                 **

** **

**COMMISSION FILE NO. 0-24921**

** **

**POWER 3 MEDICAL PRODUCTS,INC.**

(Nameof small business issuer in its charter)

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

** **

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

** **

**Securities registered under Section 12(b) ofthe Exchange Act: **None

** **

**Securities registered under Section 12(g) ofthe Exchange Act:**

 

**Common Stock, $.001par value**

(Titleof class)

 

Check whether the issuer: (1) filed all reportsrequired to be filed by Section 13 or 15(d) of the Exchange Actduring the past 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2)has been subject to such filingrequirements for the past 90 days. Yes ýNo o

 

Check if there is no disclosure of delinquent filersin response to Item 405 of Regulation S-B contained in this form, and nodisclosure will be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part IIIof this Form 10-KSB or any amendment to this Form 10-KSB. o

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No ý

 

Revenues for the issuer’s fiscal year ended December 31,2004 were $ 15,491.  The aggregate marketvalue of the voting and non-voting common equity held by non-affiliates of theregistrant, computed by reference to the closing price of such stock on theOver-the-Counter Bulletin Board (“OTCBB”) administered by the NationalAssociation of Securities Dealers (“Nasdaq”) onAugust 15, 2005 was $15,682,829 million. For purposes of this calculation, affiliates include directors andexecutive officers.

 

The number of shares outstanding of the registrant’scommon stock, par value .001 per share, as of August 15, 2005 was65,345,121 shares.

 

**Documentsincorporated by reference**: None.

 

 

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**TABLEOF CONTENTS**

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| **PART I**                                                                                                                |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                                      |   |
| Item 1. Description of Business                                                                                           |   |
| Item 2. Description of Property                                                                                           |   |
| Item 3. Legal Proceedings                                                                                                 |   |
| Item 4. Submission of Matters to a Vote of  Security Holders                                                              |   |
|                                                                                                                      |   |
| **PART II**                                                                                                               |   |
|                                                                                                                      |   |
| Item 5. Market for Common Equity and  Related Stockholder Matters                                                         |   |
| Item 6. Management’s Discussion and  Analysis or Plan of Operation                                                   |   |
| Item 7. Financial Statements                                                                                              |   |
| Item  8. Changes In and Disagreements with Accountants on Accounting and Financial  Disclosure                            |   |
| Item 8a. Controls and Procedures                                                                                          |   |
| Item 8b. Other Information                                                                                                |   |
|                                                                                                                      |   |
| **PART III**                                                                                                              |   |
|                                                                                                                      |   |
| Item 9. Directors, Executive Officers,  Promoters and Control Persons; Compliance with Section 16(a) of the Exchange  Act |   |
| Item 10. Executive Compensation                                                                                           |   |
| Item 11. Security Ownership of Certain  Beneficial Owners and Management and Related Stockholder Matters                  |   |
| Item 12. Certain Relationships and Related  Transactions                                                                  |   |
| Item 13. Exhibits                                                                                                         |   |
| Item 14. Principal Accountant Fees and  Services                                                                          |   |
|                                                                                                                      |   |
| **SIGNATURES**                                                                                                            |   |

 

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**FORWARD-LOOKINGSTATEMENT**

** **

This Report contains certain forward-lookingstatements of the intentions, hopes, beliefs, expectations, strategies, andpredictions of Power 3 Medical Products, Inc. (“Power 3” or the “Company”)or its management with respect to future activities or other future events orconditions within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. These statements are usually identified by the use of words such as“believes,” “will,” “anticipates,” “estimates,” “expects,” “projects,” “plans,”“intends,” “should,” “could,” or similar expressions.  These statements are based on certainassumptions and analyses made by the Company’s management in light of itsexperience and its perception of historical trends, current conditions,expected future developments and other factors believed appropriate.  Readers are cautioned that theseforward-looking statements are only predictions and that the Company’s businessis subject to significant risks and uncertainties, including, withoutlimitation:

 

•                  The Company’s history of operatinglosses;

 

•                  The Company’s need and ability toraise significant capital and obtain adequate financing for its developmentefforts;

 

•                  The Company’s ability tosuccessfully develop and complete validation studies for its products;

 

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

 

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

 

•                  Development by competitors of new orcompetitive products or services;

 

•                  The Company’s ability to retainmanagement, implement its business strategy, assimilate and integrate anyacquisitions;

 

•                  The Company’s lack of operatingexperience and present commercial production capabilities; and

 

•                  The increasing emphasis oncontrolling healthcare costs and potential legislation or regulation ofhealthcare pricing.

 

Although the Company believes that the assumptionsunderlying the forward-looking statements contained in this report arereasonable, any of the assumptions could be inaccurate, and, therefore, therecan be no assurance that the forward-looking statements included in this reportwill prove to be accurate. In light of the significant uncertainties inherentin the forward-looking statements included in this report, the inclusion ofsuch information should not be regarded as a representation by the Company orany other person that the objectives and plans of the Company will be achieved.Except for its ongoing obligation to disclose material information as requiredby the federal securities laws, the Company undertakes no obligation to releasepublicly any revisions to any forward-looking statements to reflect events orcircumstances after the date of this report or to reflect the occurrence ofunanticipated events. Accordingly, the reader should not rely onforward-looking statements, because they are subject to known and unknownrisks, uncertainties, and other factors that may cause actual results to differmaterially from those contemplated by the forward-looking statements.

 

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**PART I**

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*Except forhistorical information, the matters set forth in this report includeforward-looking statements that are subject to risks and uncertainties thatcould cause actual results to differ materially from those set forthherein.  Power 3 Medical Products, Inc.refers you to cautionary information and risk factors contained elsewhereherein and in other documents filed with the Securities and Exchange Commission(“SEC”) from time to time.*

* *

**Item1. Description of Business.**

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**Generaland Corporate History**

** **

Power 3 Medical Products, Inc. (the “Company”or “Power 3”) was incorporated in the State of Florida on May 15, 1992 andmerged into a New York Corporation in 1994, under the name Sheffield Acres, Inc.Power3 and its wholly owned subsidiaries, C5 Health, Inc. (C5), which wasofficially dissolved in the State of Delaware and the State of Floridaeffective December 31, 2003 and Power3 Medical, Inc., a NevadaCorporation, were engaged in sales, distribution and services for thehealthcare industry. On September 12, 2003 Surgical Safety Products, Inc. amended its Certificate ofIncorporation to (a) declare a 1:50 reverse split of its common stock; (b) increaseits authorized capital to 150,000,000 shares of common stock and 50,000,000shares of preferred stock; and (c) change its name to Power3 MedicalProducts, Inc.

 

At December 31, 2004, the Company had one directsubsidiary, Tenthgate, Inc. (“Tenthgate”), a Nevada corporation formerlyknown as Power 3 Medical, Inc. Tenthgate is not active in Power3’s current line of businessactivity.  Prior to the acquisition ofsubstantially all the assets and certain liabilities from Advanced BioChem, itwas contemplated that Power3 would distribute shares of its subsidiary to itsshareholders of record, however the shares of Tenthgate were transferred to atrustee for distribution to the shareholders of Power3 on May 17, 2004,before the Advanced BioChem transaction. Previous management of Power3 and Tenthgate have been independentlyoperating Tenthgate since the Advanced BioChem transaction.  As a result, Power3 does not now control theoperations or activities of Tenthgate. As a result, Tenthgate’s activities are no longer controlled by, nor aretheir activities associated with Power3 in any manner whatsoever.  To the extent that additional actions areneeded, Power3 intends to divest itself of its subsidiary due to thedifferences in business activity between Tenthgate and Power3 operating underits current business model.  Some of theprincipal reasons for the divestiture of Tenthgate and its subsidiary are thatthe disposition of Tenthgate will allow the Company’s management to focusexclusively on its business objectives and permit management of Tenthgate moreflexibility in its operations and the disposition will allow the market toseparately identify and evaluate each business. The Company is continuing its efforts to complete the disposition ofTenthgate; however current management of Tenthgate has advised the Company thatTenthgate has issued a significant number of shares of its common stockpurportedly reducing the Company’s ownership interest to less than 1%.  The Company believes this stock issuance tobe invalid, however the Company does not have access to the records ofTenthgate and is considering its alternatives with respect to theseactions.  The Company still desires tocomplete a divestiture of Tenthgate, but believes the operations areinconsistent with and not material to the current activities of the Company.  As a result, the operations and assets ofTenthgate are not consolidated or otherwise presented herein.

 

The Company’s common stock is quoted on the OTCBulletin Board under the symbol “PWRM”. The Company’s principal executiveoffices are located at 3400 Research Forest Drive, Suite B2-3, TheWoodlands, Texas 77381.  The Company’stelephone number is (281) 466-1600 and its facsimile number is (281) 466-1681.  During 2005, the Company’s failure to timelyfile its Form 10-KSB caused the OTCBB to append the symbol “E” to theCompany’s trading symbol.  On June 14,2005, the Company was notified of the OTCBB’s action to not allow the Company’ssecurities to be quoted on the OTCBB, as of June 16, 2005, pending thefiling of the Company’s Form 10-KSB for 2004.  At the present time, the Company’s securitiesare no longer eligible for quotation on the OTCBB and all quotations of theCompany’s securities are deleted from the OTCBB.  It is the Company’s intention to apply forreinstatement on the OTCBB immediately upon filing this Form 10-KSB for2004.

 

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**The Company transitioned to thedevelopment stage, from previously being an operating company, as of the assetpurchase transaction with Advanced BioChem on May 18, 2004, as referencedbelow.  It is primarily engaged incommercializing its intellectual properties in the area of diagnosis andtreatment of breast cancer, ALS, Alzheimer’s disease and Parkinson’sdisease.  Shares of common stock issuedfor other than cash have been assigned amounts equivalent to the market valueof the service or assets received in the exchange, with an effective date asthe date of the agreement, per SEC requirement**.

** **

**Purchaseof a Set of Assets and Assumption of a Set of Liabilities from AdvancedBio/Chem, Inc.**

** **

On May 18, 2004, Power 3 purchased substantiallyall the assets of Advanced Bio/Chem, doing business as ProteEx.  Since the May 18, 2004 transaction,Advanced Bio/Chem has changed its name to Industrial Enterprises of America, Inc.  In this transaction, Power 3 purchasedsubstantially all the assets and intellectual properties of Advanced Bio/Chemand assumed certain liabilities in exchange for the issuance of 15,000,000shares of its common stock pursuant to an Asset Purchase Agreement of even datetherewith. For financial statement purposes, the transaction has been accountedfor as a purchase transaction.  Unlessotherwise stated in this report, all financial information presented in this reportis for Power3 Medical Products, Inc., in accordance with Regulation S-B for reporting the purchase of a set ofassets and liabilities not constituting a change in control of Advanced BioChemor a merger or acquisition of Advanced BioChem into Power 3 Medical Products,Inc .

 

This accounting treatment represents a change in theaccounting treatment previously used to report the Advanced BioChem transactionas a recapitalization of Power3 as in a reverse acquisition, as previouslyshown in the Form 10-QSB issued by Power3 for the 2nd Quarter,2004.  Power3 is amending its previouslyissued 10-QSB’s for the quarterly periods ending June 30, 2004, September 30,2004 and March 31, 2005.   TheCompany, and its auditors, are in complete agreement as to the accountingtreatment of purchase accounting as an appropriate treatment to account for itsacquisition of the assets and a certain set of liabilities of Advanced BioChemon May 18, 2004.

 

**Businessof Issuer**

** **

Subsequent to the Company’s acquisition of assets fromAdvanced Bio/Chem on May 18, 2004, the Company’s overall business strategywas changed.  The Company’s currentbusiness directive is to engage in the early detection, monitoring, andtargeting of diseases through the analysis of proteins. Power 3’s developmentstage business objective is to commercialize its intellectual properties byfocusing on disease diagnosis, protein and biomarkers identification, and drugresistance in the areas of cancers, neurodegenerative and neuromusculardiseases. The Company has established a Scientific Advisory Board to assist inthe research and development of its products. The members of this ScientificAdvisory Board are recognized leaders in their chosen fields and the Company isworking with them to find effective therapeutics and novel predictive medicinefor important human diseases.

 

The Company’s business strategy, which is dependentupon obtaining sufficient additional financing, is to enhance thecommercialization of its existing diagnostic products and to aggressively lookfor appropriate product and company strategic partnerships.

 

As a result of the acquisition of assets and certainliabilities of Advanced Bio/Chem, Power 3 has transitioned into an advancedproteomics company that applies existing proprietary methodologies to discoverand identify protein biomarkers associated with diseases. By discovery anddevelopment of protein-based disease biomarkers, the Company has begun thedevelopment of tools for diagnosis, prognosis, early detection andidentification of new targets for drugs in cancer, and neurodegenerative andneuromuscular diseases such as amyotrophic lateral sclerosis (commonly known asALS or Lou Gehrig’s disease), Alzheimer’s disease, and Parkinson’s disease.

 

Power 3’s scientific team is headed by its ChiefScientific Officer, Dr. Ira L. Goldknopf. Dr. Goldknopf was a pioneer in the science of clinical proteomicsin the 1970s and 1980s and in so doing made a significant biochemistrydiscovery – the ubiquitin conjugation of proteins.  This discovery was cited in the announcement

 

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of the 2004 Nobel Prizefor chemistry.  The team has leveragedthese significant insights and has made progress in the discovery of uniquedisease protein footprints of biomarkers in breast cancer, neurodegenerativedisease, and drug resistance to chemotherapeutic agents.

 

Proteomics is the study and analysis of proteins.Through proteomics, scientists can more accurately understand the functioningof a healthy body and are assisted in the identification of the proteinsassociated with specific diseases. Proteins that change in the course ofdisease are the building blocks for new screening and diagnostic tests whichthe Company is developing to provide earlier disease detection, enhancedtreatment and monitoring assistance.

 

**ProductCandidates**

** **

Subsequent to the acquisition of assets from AdvancedBio/Chem, the Company changed its management team and is now focused onbringing the acquired technology to the forefront of the scientific/medicalcommunity. The strategy will concentrate on efforts to attain a leadingposition in the protein-based diagnostic and drug targeting markets utilizingthe Company’s portfolio of proprietary biomarker disease footprints.  In the area of neurodegenerative disease, theCompany has completed clinical validation studies involving 600 patient samplesand is utilizing biostatistics to monitor appropriate biomarkers for diagnosticsensitivity, specificity, positive predictive value, and negative predictivevalue.  By testing patient body fluidsand tissues, such as serum, nipple aspirate fluid, and bone marrow, the Companyhas discovered unique snapshots of protein patterns in diseases including:

 

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

 

•                  neurodegenerative diseases such asAlzheimer’s, ALS, and Parkinson’s disease.

 

The Company’s discovery platform uses both proprietarymethodologies owned by or licensed to the Company and accepted technologies todiscover biomarkers in clinical samples. Following sample preparation, a 2D Gelsystem is used for the separation of protein. The gels are stained, imaged andanalyzed with unprecedented sensitivity for differences in the diseased vs.normal samples. The significance of these differences is evaluated relative tothe status of the health of the individual. The proteins of interest areremoved from the gel matrix and analyzed on a mass spectrometer. Thisinformation is then cross-referenced on a worldwide database to identify theprotein of origin. This process requires a great deal of proteomics experienceand expertise to make the end-data interpretable. In addition, all of theprocedures are scaleable.  The Company’sbiomarker discovery platform delivers significant discoveries that are capableof detecting up to 20 times as many proteins in nipple aspirate fluids as MudPit or SELDI TOF (competing technologies); exhibiting reproducible and reliableidentification; and displaying broad dynamic range and linearity of diseaseprotein footprints.

 

The Company has successfully identified more than 300proteins, protein fragments and isoforms that are differentially expressed inresponse to disease by employing proprietary technologies gained from over 50years of combined experience in protein biochemistry.

 

Power 3 is transitioning from a company focused onlyon research and development to one also demonstrating “proof of concept” of itstechnology in route to the commercialization of its technology, products andservices.  The Company is engaged in theprocess of developing a portfolio of products including the NAFTestTM and bloodserum tests (for early detection of breast cancer), NuroProTM tests and bloodserum tests (for neurodegenerative diseases including Alzheimer’s, Parkinson’sand ALS diseases) and tests for drug resistance screening in chemotherapeutics.

 

**Licenseand Sponsored Research**

** **

Advanced Bio/Chem entered into a license agreementwith the Board of Regents of The University of Texas System, an agency of theState of Texas, on behalf of The University of Texas M.D. Anderson CancerCenter in September 2003, which the Company acquired in its transactionwith Advanced Bio/Chem.  The

 

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license agreement givesthe Company an exclusive, worldwide, royalty-bearing license to certain patentrights and technology rights for proteomic methods of diagnosis and monitoringof breast cancer using nipple aspirate fluids. The license agreement also gives the Company a non-exclusive, worldwide,royalty-bearing license to certain patent rights and technology rights formethods of identifying specific nipple aspirate fluid proteins for diagnosisand monitoring of breast cancer.  TheCompany is permitted to grant sublicenses under the license agreement exceptfor the identification of biological markers. The Company is obligated to pay to M.D. Anderson an initial license fee,and a subsequent license fee, both of which have been paid.   The Company is also obligated to pay annuallicense maintenance fees, royalties and additional milestone payments upon theoccurrence of certain designated events. The license agreement imposes upon the Company an obligation toindemnify the Board of Regents, The University of Texas System, M.D. Anderson,the regents, officers, employees, students, and agents against claims arisingon account of any injury or death, or damage to property caused by the exerciseof the rights granted under the license agreement to the Company, its officersand affiliates.  The term of the licenseagreement is based on the date of expiration of the last patent rights toexpire or, in the case of licensed technology rights, for a term of fifteen(15) years.  However, in addition tocustomary termination provisions, M.D. Anderson has the right to terminate the licensein any country if the Company fails, within ninety (90) days after receivingwritten notification from M.D. Anderson, to provide satisfactory evidence thatit has commercialized or is attempting to commercialize the licensed inventionin such country.

 

Effective June 28, 2004, Power 3 entered into anexclusive license agreement with the Baylor College of Medicine which grants tothe Company an exclusive, worldwide, sublicensable license for serum proteomicsmethods under certain patent rights for all biomarkers for both diagnostic andtherapeutic use in neurodegenerative disease. Under the terms of the agreement,Power 3 paid Baylor an initial license fee and it has the obligation to payfuture royalties and additional licensing fees upon the achievement of certainmilestones.  The Company is obligatedunder the license agreement to indemnify Baylor, its faculty members,scientists, researchers, employees, officers, trustees and agents againstclaims arising from the design, process, manufacture or use of any of thepatent rights or licensed products that are developed through the use of thelicense from Baylor.  Subject tocustomary termination provisions, the term of the agreement is established on acountry-by-country basis and expires on the date of expiration of the lastpatent rights to expire in that country or the tenth anniversary of the firstcommercial sale of licensed products in countries where no patents exist insuch country. After such expiration the Company will have a perpetual paid infull license in such country.

 

On August 1, 2004, Power 3 entered into anexclusive license agreement with M.D. Anderson which grants the Company anexclusive, worldwide, sublicensable license to patents and technologies forearly detection screening tests, identified protein biomarkers and drug targetsfor cancer patient’s resistance to drug therapy. The licensed technology wasdeveloped through joint collaboration between the Company’s scientific team andM.D. Anderson. Under the terms of the agreement, the Company paid M.D. Andersonan initial license fee and the Company has the obligation to pay furtherroyalties and additional licensing fees upon the achievement of certainmilestones.  The license agreement imposesupon the Company an obligation to indemnify the Board of Regents, TheUniversity of Texas System, M.D. Anderson, the regents, officers, employees,students, and agents against claims arising on account of any injury or deathor damage to property caused by the exercise of the rights granted under thelicense agreement to the Company, its officers and affiliates.  The term of the license agreement is based onthe date of expiration of the last patent rights to expire or, in the case oflicensed technology rights, for a term of fifteen (15) years.  However, in addition to customary terminationprovisions, M.D. Anderson has the right to terminate the license in any countryif the Company fails, within ninety (90) days after receiving writtennotification from M.D. Anderson, to provide satisfactory evidence that it hascommercialized or is attempting to commercialize the licensed invention in suchcountry.

 

On August 31, 2004 the Company entered into aresearch agreement with Baylor College of Medicine for the purpose ofdiscovering biomarkers in serum and plasma that are of particular utility inthe diagnosis and drug targeting for metabolic syndrome and associateddisorders including diabetes, cardiovascular disease, hypertension andstroke.  Under the terms of theagreement, Baylor College of Medicine will provide the Company sample materialsfor use in diagnosis in drug targeting metabolic syndrome and associateddiseases including diabetes, cardiovascular disease, hypertension andstroke.  With respect to any inventionsdeveloped pursuant to the agreement, the party who develops such invention willretain sole and exclusive rights to such invention.  The other party will have the right to anexclusive license for the invention, which has been

 

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developed.  Inventions developed jointly by the partieswill be jointly owned.  Power 3 does nothave any obligations for the payment of fees or royalties pursuant to thisagreement.  The agreement has a termending June 30, 2007 and may be renewed for successive one-year periods.

 

The Company has entered into a collaborative researchagreement with New Horizons Diagnostic effective March 21, 2005 for thedevelopment of antibody based diagnostic tests for neurodegenerative diseaseutilizing the Company’s identified biomarkers. The research agreement is based on groups of biomarkers whose profilesare relatively sensitive and specific in distinguishing patients with ALS,Alzheimer’s disease and Parkinson’s disease from each other, as well as fromnormal patients and patients with other neuromuscular and neurologicaldisorders. The purpose of the agreement is to tailor monoclonal and polyclonalantibodies to the biomarkers, which will be incorporated intoimmunoassays.  Once the assays areavailable, they will be developed to validate diagnostic tests specificallydesigned to detect and discriminate among the neurodegenerative diseases.  The research agreement provides that theparties will develop an agreed upon schedule and budget for the workcontemplated thereunder within sixty (60) days of the effective date.  The agreement provides that in the event theparties are able to achieve specified goals relating to the development of adiagnostic kit as contemplated by the research agreement, New Horizons would becompensated in any one of the following manners with respect to such diagnostickit:  (i) a contract to manufactureat least one key component of such diagnostic kit; (ii) royalties on thesale of such diagnostic kit; (iii) the opportunity to form a joint venturewith the Company for the commercialization of such diagnostic kit; or (iv) areasonable percentage of any cash consideration that the Company receives froma third party for such diagnostic kit. Although the form and amounts of any consideration to be paid have notbeen agreed upon, the parties have agreed to be reasonable in negotiating suchconsideration.

 

On May 24, 2005, the Company entered into aCollaboration Agreement with BioSite Incorporated . The Agreement provides thatthe Company and Biosite will engage in a collaborative research program inwhich Biosite will attempt to develop antibodies and diagnostic assays forselected target biomolecules proposed by the Company. The Company and Biositewill then assess the diagnostic and therapeutic potential of these antibodiesand diagnostic assays for breast cancer and neurological diseases. If theantibodies and diagnostic assays are found to have diagnostic and/ortherapeutic potential, Biosite will develop and commercialize Biosite Productsfor the detection and/or treatment of breast cancer and/or neurologicaldiseases. Biosite will make milestone payments to the Company, as well as payroyalties on the sale of any Biosite Products containing antibodies to anyselected target biomolecule claimed in a patent application or an issuedpatent.

 

More specifically, the Agreement provides that theCompany shall propose target biomolecules for the collaborative researchprogram; Biosite and the Company shall mutually select certain targetbiomolecules for immunization (“Program Target”); and Biosite shall usecommercially reasonable efforts to develop monoclonal and omniclonal antibodiesto the selected target biomolecules that meet the specification set out by theparties (“Program Antibodies”). Upon Biosite’s written request subsequent tothe delivery of Program Antibodies to the Company, the Company will provideBiosite with blood-based clinical samples useful in the assessment of theProgram Antibodies.

 

Biosite will use commercially reasonable efforts togenerate an ELISA-based assay for each Program Target for which Biosite hasgenerated Program Antibodies. If Biosite successfully develops an ELISA-basedassay for any such Program Target, Biosite shall analyze each of the clinicalsamples provided by Power3 with such assay and shall provide the resulting datato Power3.

 

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

 

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Under the terms of the Agreement, Power3 grants toBiosite a non-exclusive, worldwide, royalty-bearing license under the Power3patent rights for the target biomolecules and Power3 know-how rights todevelop, make, have made, use, offer for sale, sell and import Biosite Productsfor use in the detection, prognosis, diagnosis or monitoring of anyneurological-related disease. This license includes the right for Biosite togrant one sublicense for each Program Target, provided that the grant of suchsublicense will replace Biosite’s own rights under the license.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

**BreastCancer Screening Test**

** **

An important factor in surviving cancer is earlydetection and treatment. According to the American Cancer Society SurveillanceResearch, when breast cancer is confined to the breast, the five-year survivalrate is close to 100%.  Breast cancer isthe second leading cause of cancer deaths in women, with over $7 billion spenton breast cancer diagnosis annually.  Dueto the limitations of the current diagnostic techniques of mammograms andself-examination, diagnosis of cancer is often missed or inconclusive.  The Company’s proteomic discovery platformcovered by pending patent applications and trade secrets for identifyingproteins which signal pre-mammography stages of breast cancer has led to whatthe Company believes to be one of the first tests of its type that may detectbreast cancer earlier than current technology allows. These discoveriesestablish the basis of a very sensitive, non-invasive, early detection breastcancer-screening test.

 

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

 

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Power 3 has completed the initial proof-of conceptstage and the Company is currently moving forward with clinical validationstudies. In the third quarter of 2004, the Company entered the clinicalvalidation phase for the NAFTestTM.  In2004, the Company received approval from the Women’s Hospital of Texas, MercyWomen’s Center of Oklahoma City, and the New York University Medical Center tobegin clinical validation studies for the NAFTestTM for the early detection ofbreast cancer. ** **These three sites will provide theprojected four hundred patient samples needed to establish clinical validationof the NAFTestTM. This test will be used to monitor groups of breast cancerrelated protein biomarkers found in nipple aspirates fluids to provide earlydiagnosis of breast cancer.

 

Recently the Company also discovered a group of bloodserum biomarkers for breast cancer and is moving forward to develop ablood-based cancer diagnostic test.

 

**NeurodegenerativeScreening Test**

** **

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

 

The members of the Company’s scientific team havedeveloped a method for the differential diagnosis of neurodegenerative diseasesutilizing blood serum, which was co-developed with neurologist, Dr. StanAppel, Chairman of Neurology and his team at Baylor College of Medicine inHouston. With this test, which involves monitoring the concentration ofdifferentially expressed proteins, the Company has identified groups of uniquemarkers that appear to distinguish normal patients from those with motorneuron, cognitive, and other neurological disorders.

 

The Company is continuing its ongoing clinicalvalidation program in collaboration with Baylor College of Medicine.  The initial phase was completed in July 2004and the latest phase was completed in December 2004.  During this time period, the Company’sdatabase has increased from 183 to over 600 unique samples classified either asnormal or being clinically diagnosed with ALS, Alzheimer’s, Parkinson’s, andother related neurological disorders. During this time, the number of differentially expressed proteins usedin the discriminant analysis has increased from 9 to 34.  The ability to differentiate normal fromdisease has improved using biostatistical analysis on the larger database andan expanded set of biomarkers. Currently, select panels of biomarkers are being employed fordevelopment of blood serum-based tests for four disease diagnostics includingneurological diseases of motor control such as Parkinson’s disease, ALS andtheir like disorders; ALS specific tests for ALS vs. ALS-like disorders;Alzheimer’s disease specific test; and a Parkinson’s disease-specifictest.  Pre-IDE applications for the firsttwo have been filed with the U.S. Food and Drug Administration.

 

**DrugResistance to Chemotherapeutic Agents**

** **

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

 

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**StrategicPartners Initiative**

** **

The Company continues to seek synergistic strategicpartners to license and develop its growing portfolio of protein biomarkerdisease footprints.  The Company’sbusiness plan includes the development of these strategic partnerships which itanticipates will assist in the Company’s evolution over the next several yearsincluding the commercialization of its proprietary technologies.

 

The Company recognizes that the licensing of itsproprietary technologies to industry leaders is one of the most expedientapproaches to develop the Company’s technology into important diagnostic toolsfor the detection of diseases.  TheCompany believes this focused positioning of its products and services willenable the Company to capture clinical and public awareness of its proprietarytechnologies, and apply a major portion of that technology to the earlydetection and screening markets.

 

**Competition**

** **

The industry in which the Company operates isintensely competitive, and subject to significant change with respect totechnology for diagnosis and treatment of disease.  Existing or future biotechnology, biomedical,pharmaceutical and other companies, government entities and universities maycreate developments that accomplish similar functions to the Company’stechnologies in ways that are less expensive, receive faster regulatoryapproval or receive greater market acceptance than the Company’s potentialproducts.  The Company expects thatcompetition in the biomarker discovery field will be based primarily on eachproduct’s efficacy, stability, timing of entry of the product into the market,cost, and acceptance by health care providers and health care payers.

 

The Company’s competitors have, in general, been inexistence for considerably longer than the Company has, and may have greatercapital resources and access to capital; greater internal resources foractivities in research and development, clinical testing and trials, productionand distribution; and existing collaborative relationships with third parties.

 

The existing market for biomarker discovery platformsand processes for Alzheimer’s disease alone has been estimated to be in excessof $4 billion in the U.S. based on a study prepared by Frost &Sullivan.  There are several othercompanies engaged in the research of proteomics and its application tobiomarker discovery capabilities.  Someof these companies include:

 

•                  Celera Genomics, which is engaged inproteomics, bioinformatics and geonomics to identify and develop drug targetsand discover and develop new therapeutics;

 

•                  Ciphergen Biosystems, which isactive in biomarker discovery assay development and characterization;

 

•                  Europroteome, which appliesproteomics to human epithelial cancers to identify cancer specific proteinexpression patterns for clinical applications;

 

•                  Matritech, which is a developer ofproteomics-based diagnostic products for the early detection of cancer;

 

•                  Myriad Genetics, which is focused onthe development of therapeutic and diagnostic products using genomic andproteomic technologies; and

 

•                  WITA Proteomics, which focuses onthe potential role of proteins from specific cellular sources under particularconditions and analysis of the presence of modified proteins and the strategicuse of this information for drug development and diagnostic use.

 

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**Sourcesand Availability of Raw Materials and Names of Principal Suppliers**

 

The Company is, as previously discussed in this section, inthe developmental stage and has not commenced commercial production of productsfor sale.   Therefore the Company doesnot acquire, purchase, nor use any significant quantities of raw materials whatsoeverand consequently has no principal suppliers.

 

**Dependenceon One or on a Few Major Customers**

 

The Company is, as discussed in this section, in thedevelopmental stage and has not commenced producing or marketing any productsto customers at this stage and has no dependence on one customer or on a fewmajor customers.  The Company does have alimited set of institutions and laboratories that it is currently involved withdoing testing and development work, however these associations could change andthe Company is not limited to which institutions, hospitals or laboratories itworks with in the future.

 

**Researchand Development**

** **

The Company believes that research and development isan important factor in its future growth and operates a state of the artproteomics laboratory.  The Company hasrestricted the initiation of new research activities during the latter half of2004 because of funding limitations and has focused its efforts oncommercializing its current inventory of test products.

 

**Patents,Copyrights and Trademarks**

** **

The Company is continuing to pursue patent protectionfor its proprietary technologies with the U.S. Patent and Trademark Office andin foreign jurisdictions.   The Companyplans to prosecute, assert and defend its patent rights wheneverappropriate.  However, securing patentprotection does not necessarily assure the Company of competitive success.

 

With respect to the Company’s biomarker discoveryprocess, antibody detection system and breast cancer biomarkers, the Companyhas three(3) provisional patents pending and three(3) utility patentspending.  The Company’s work in breastcancer and drug resistance depends on certain technologies that it has licensedfrom M.D. Anderson Cancer Center.  Aslicensor of the technology, M.D. Anderson Cancer Center has filed three(3) utilitypatent applications on the technology, one of which has issued, and isgenerally responsible for the prosecution and maintenance of theseapplications.  Foreign patentapplications are anticipated in 2005.

 

In cooperation with Baylor College of Medicine, theCompany has discovered a number of biomarkers for neurodegenerative diseasessuch as ALS, Alzheimer’s disease, and Parkinson’s disease.  The Company has received a license for therights in this technology and is responsible for the filing, prosecution andmaintenance of all patent applications covering this licensed technology.  To date, the Company has filed ten(10) provisionalpatent applications for the neurodegenerative biomarkers and assays using thesebiomarkers and has converted four(4) of those provisional patents intoutility applications.

 

The Company also attempts to protect its proprietaryproducts, processes and other information by relying on trade secret laws andnondisclosure and confidentiality agreements with its employees, consultantsand certain other persons who have access to such products, processes andinformation.  The agreements affirm thatall inventions conceived by employees are the exclusive property of thecompany.  Nevertheless, there can be noassurance that these agreements will afford significant protection against oradequate compensation for misappropriation or unauthorized disclosure of theCompany’s trade secrets.

 

**GovernmentalRegulation**

** **

The Food and Drug Administration sets out guidelinesfor clinical trials which are conducted in order to obtain FDA approval.  Clinical trials are required to findeffective treatments to improve health. All clinical trials are based on a protocol which is a study plan thatdescribes the type of people who may participate in the trial, the schedule oftests and procedures, and the length of the study.

 

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Most clinical trials in the United States must beapproved and monitored by an Institutional Review Board (IRB) to make sure therisks of the trial are as low as possible and are worth any potentialbenefits.  All institutions that conductor support biomedical research are required by federal regulation to have anIRB that initially approves and periodically reviews the research.

 

Upon successful completion of a clinical trialvalidation study, an application based on the results of the clinical trial issubmitted for FDA approval.  Upon receiptof FDA approval, the diagnostic screening test would be ready forcommercialization.

 

In the United States, clearance or approval tocommercially distribute new medical devices or products is received from theFDA through clearance of a 510(k) premarket notification, or 510(k), approvalof a premarket approval application, or PMA. It may take from three to nine months from submission to obtain 510(k)clearance, but may take longer or clearance may not be obtained at all.  The FDA may determine that additionalinformation is needed before approval to distribute the product is given.

 

For any products that are cleared through the 510(k)premarket notification process, modifications or enhancements that couldsignificantly affect safety or constitute a major change in the intended use ofthe product will require new 510(k) submissions.

 

A PMA application must be filed if a proposed productis not substantially equivalent to a medical product first marketed prior to May 1976,or if otherwise required by the FDA.  ThePMA approval process can be expensive, uncertain and lengthy, and a number of productsfor which other companies have sought FDA approval of a PMA application havenever been approved for marketing.  Itgenerally takes from six to eighteen months from submission to obtain PMAapproval, but it may take longer or the submission may not be approved at all.

 

On May 5, 2005 the Company submitted a pre-IDEapplication to the FDA in order to obtain the Agency’s guidance regarding: theappropriate regulatory pathway to pursue; the proper approach to refine and/ordefine its data and statistical analyses; and the study design for the Company’spending neurodegenerative disease diagnostic blood tests. A submission madeunder the pre-IDE process is not an official IDE application as described in 21CFR Part 812. The Pre-IDE process is designed to help companies obtainearly, informal input on aspects of a future IDE application and offersassistance in establishing the parameters for official IDE applications whenunique diagnostic tests involving innovative technologies are being pursued.The Company met with the Food and Drug Administration on June 1, 2005regarding its Pre-IDE submission for the first in a series of its NuroProTMBlood Tests for the early detection and differentiation of neuromusculardiseases, such as ALS and Parkinson’s disease.

 

In the meeting with the FDA, guidance was offeredregarding requirements for study design, patient risk assessment and intendeduse.  In addition, the FDA concurred withhow the Company had approached the biostatistics analysis utilized to interpretthe test results.

 

Based on the FDA’s advice in preliminarydiscussions, Power3 presented optimized results with an increase in specificityto more than 92% and an increase in Positive Predicted Value to more than96%.  Now, the Company is proceeding tomake preparations for FDA applicable multiple site clinical studies for theNuroProTM suite of blood serum tests.

 

The Company is also subject to the regulatory approvaland compliance requirements for each foreign country to which it exportsproducts.  In the European Union, asingle regulatory approval process has been created, and approval isrepresented by the CE Mark.

 

Both before and after a product is commercialized, theCompany has ongoing responsibilities under the regulations of the FDA and otheragencies.  The Company’s manufacturingfacilities and those of its contract manufacturers are, or can be, subject toperiodic regulatory inspections by the FDA and other federal and stateregulatory agencies, as well as civil penalties, recall or seizure of products,total or partial suspension of

 

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production, failure ofthe government to grant premarket clearance approval for products, withdrawalof marketing clearances or approvals, and criminal prosecution.  The FDA has the authority to request recall,repair, replacement or refund of the cost of any product, which the Companymanufactures or distributes.  The FDAalso administers certain controls over the export of medical devices from theUnited States.  The Company is alsosubject to routine inspection and must file periodic reports after the productis approved by the FDA for compliance with quality system requirements, or QSR,and medical device reporting requirements in the United States and other applicableregulations worldwide.  Changes inexisting requirements or adoption of new laws or requirements could have amaterial adverse effect on the Company’s business, financial condition andresults of operation.  The Company willincur significant costs to comply with laws and regulations.

 

The Company is also subject to numerous federal, stateand local laws relating to such matters as safe working conditions,manufacturing practices, environmental protection, fire hazard control anddisposal of hazardous or potentially hazardous substances.  The Company may incur significant costs tocomply with laws and regulations, or such laws or regulations in the future mayhave a material adverse effect upon its business, financial condition andresults of operations.

 

**Salesand Marketing**

** **

The Company currently has no sales or marketingemployees, and no immediate plans to hire any personnel devoted to thisarea.   The Company will make decisionsabout sales and marketing at a later date, when its products are further alongin the development stage.

 

**Manufacturing**

** **

The Company does not currently have manufacturingcapabilities, but it is exploring opportunities to produce and manufacture theCompany’s diagnostic tests through collaborative agreements and strategic alliances.  Exploitation of these opportunities willdepend on the availability of further capital, qualified personnel, sufficientproduction resources and the Company’s ability to establish these relationshipswith other parties who have existing manufacturing and distributioncapabilities.  The Company does notcurrently have plans to manufacture any products in the near future.  The Company will make decisions aboutmanufacturing at a later date, when its product portfolio is further along inthe development stage.

 

**Costs and Effects of Compliancewith Environmental Laws (Federal, State or Local)**

 

The Company, as discussed earlier in this section,does not manufacture any products, nor does it purchase, store or ship anyproducts.  Consequently the Company doesnot have any compliance issues with regard to environmental laws as they relateto commercial operations.

 

The Company does store and handle certain organicwastes and human tissue samples in its laboratory operations.  The cost of complying with environmental lawswhich govern our research and development laboratory operations, during 2004,was $ 7,856.

 

**Employeesand Consultants**

** **

At December 31, 2004, the Company had fifteen(15) full-time employees.  None of theCompany’s employees are represented by collective bargaining agreements, andthe Company considers its employee relations to be good.  The Company utilizes part-time consultants aswell as contract research organizations and other outside specialty firms forvarious services such as clinical trial support, manufacturing and regulatoryapproval advice.

 

**Divestitureof Subsidiaries**

** **

At December 31, 2004, the Company had one directsubsidiary, Tenthgate, Inc. (“Tenthgate”), a Nevada corporation formerlyknown as Power 3 Medical, Inc. Tenthgate is not active in Power3’s current line of businessactivity.  Prior to the acquisition ofsubstantially all the assets and certain liabilities from Advanced

 

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BioChem, it wascontemplated that Power3 would distribute shares of its subsidiary to itsshareholders of record, however the shares of Tenthgate were transferred to atrustee for distribution to the shareholders of Power3 on May 17, 2004,before the Advanced BioChem transaction. Previous management of Power3 and Tenthgate have been independentlyoperating Tenthgate since the Advanced BioChem transaction.  As a result, Power3 does not now control theoperations or activities of Tenthgate. As a result, Tenthgate’s activities are no longer controlled by, nor aretheir activities associated with Power3 in any manner whatsoever.  Power3 intends to divest itself of itssubsidiary due to the differences in business activity between Tenthgate andPower3 operating under its current business model.  Some of the principal reasons for thedivestiture of Tenthgate and its subsidiary are that the disposition ofTenthgate will allow the Company’s management to focus exclusively on itsbusiness objectives and permit management of Tenthgate more flexibility in itsoperations and the disposition will allow the market to separately identify andevaluate each business.  The Company iscontinuing its efforts to complete the disposition of Tenthgate; howevercurrent management of Tenthgate has advised the Company that Tenthgate hasissued a significant number of shares of its common stock purportedly reducingthe Company’s ownership interest to less than 1%.  The Company believes this stock issuance tobe invalid, however the Company does not have access to the records of Tenthgateand is considering its alternatives with respect to these actions.  The Company still desires to complete adivestiture of Tenthgate, and believes the operations are inconsistent with andnot material to the current activities of the Company.  As a result, the operations and assets ofTenthgate are not consolidated or otherwise presented herein.

 

**RiskFactors**

** **

*In addition to the other information contained inthis report, the following risks may affect us. If any of these risks occurs, our business, financial condition oroperating results could be adversely affected.*

* *

**We have ahistory of operating losses, and we may not achieve or maintain profitabilityin the future.**

** **

We have experienced a net loss of ($19,081,344) forcalendar year, 2004. We expect these losses to continue and it is uncertainwhen, if ever, we will become profitable. These losses have resulted primarilyfrom non-cash, stock-based compensation costs incurred in consulting contracts,stock issued for compensation, research and development activities and fromgeneral and administrative costs associated with operations. Stock issued forcompensation and for consulting fees has been valued at market price on theeffective date of the agreement, per SEC requirement.  We expect to incur increasing operatinglosses in the future as a result of expenses associated with research andproduct development as well as general and administrative costs and we haveestimated that we will require approximately $3,500,000 to carry out ourbusiness plan through the period ending March 31, 2006.  Even if we do achieve profitability, we maynot be able to sustain or increase profitability on a quarterly or annualbasis.

 

**We will needsignificant additional capital in the future and, if additional capital is notavailable, we may have to curtail or cease operations.**

** **

We have an immediate need for capital to continue ouroperations, and we will need to raise significant additional funds to implementour business plan.  Our current plansindicate we will need significant additional capital for research anddevelopment before we have any anticipated revenue generating products. Theactual amount of funds that we will need will be determined by many factors,some of which are beyond our control, and we may need funds sooner thancurrently anticipated. These factors include:

 

•                  the extent to which we enter intolicensing arrangements, collaborations or joint ventures;

 

•                  our progress with research andproduct development;

 

•                  the costs and timing of obtainingnew patent rights;

 

•                  the extent to which we acquire orlicense other technologies; and

 

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•                  regulatory changes and competitionand technological developments in the market.

 

Our continued operations will therefore depend uponour ability to raise additional funds through additional equity or debtfinancing.  We may seek additionalfunding through private sales of our securities, public sales of oursecurities, strategic alliances or by licensing all or a portion of ourtechnology.  Any such funding maysignificantly dilute existing shareholders or may limit our rights to ourtechnology.  Moreover, the increase inthe number of shares available in the public marketplace may reduce the marketprice for our common stock and, consequently, the price investors may receiveat the time of sale.  When we requireadditional funds, general market conditions or the then-current market price ofour common stock may not support capital raising transactions such asadditional public or private offerings of our common stock.  If we are unable to obtain additional fundson a timely basis or on terms favorable to the Company, we may be required toscale back our development of new products, sell or license some or all of ourtechnology or assets, or curtail or cease operations.

 

**We may not besuccessful in developing or commercializing our products, which would harm theCompany and force the Company to curtail or cease operations.**

** **

We have only recently commenced our business operationsand our technologies are still in the early stages of development. The productswe are currently developing may not be successfully developed or commercializedon a timely basis, or at all. If we are unable, for technological or otherreasons, to complete the development, introduction or scale up of manufacturingof these products or other potential products, or if our products do notachieve a significant level of market acceptance, we would be forced to curtailor cease operations. Even if we develop our products for commercial use andobtain all necessary regulatory approvals, we may not be able to developproducts that:

 

•                  are accepted by, and marketedsuccessfully to, the marketplace;

 

•                  are safe and effective;

 

•                  are protected from competition by others;

 

•                  do not infringe the intellectualproperty rights of others;

 

•                  are developed prior to thesuccessful marketing of similar products by competitors; or

 

•                  can be manufactured in sufficientquantities or at a reasonable cost.

 

**Many of ourresearch and development programs rely on technology licensed from thirdparties, and termination of any of those licenses would result in loss ofsignificant rights to develop and market our products, which would impair ourbusiness.**

** **

We have rights to technology through licenseagreements with third parties.  We relyupon an exclusive license agreement from Baylor College of Medicine foridentification and use of biomarkers for neurodegenerative diseases.  We have two license agreements from TheUniversity of Texas M.D. Anderson Cancer Center.  One license agreement from M.D. Andersongrants the Company an exclusive license for identifying specific proteinsassociated with sensitivity or resistance to kinase inhibitor.  The second license agreement from M.D.Anderson grants the Company an exclusive license to employ proteomic methodsfor diagnosis and monitoring of breast cancer using nipple aspirate fluid and anon-exclusive license for methods of identifying specific nipple aspirate fluidproteins for diagnosis and monitoring of breast cancer.  Our licenses generally may be terminated bythe other party if we fail to perform our obligations, including milestoneobligations to conduct a research and development program and develop thelicensed products for commercialization. If terminated, we would lose the rightto develop the licensed products, which would significantly harm our business.The license agreements include payments contingent upon achieving specifiedmilestones toward commercialization of the licensed products. If disputes ariseover the definition of these requirements or whether we have satisfied therequirements in a timely manner, or if any other obligations in the

 

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license agreement aredisputed by the other party, the other party could terminate the agreement andwe could lose our rights to develop the licensed technology.

 

**If we areunable to form and maintain the collaborative relationships that our businessstrategy requires, our ability to develop products and revenue will suffer.**

** **

We must form research collaborations and licensingarrangements with several partners to operate our business successfully. Tosucceed, we will have to further develop our existing relationships andestablish additional collaborations. We cannot be sure that we will be able toestablish any additional research collaborations or licensing arrangementsnecessary to develop and commercialize products using our technology or that wecan do so on terms favorable to the Company. If our collaborations are notsuccessful or we are not able to manage multiple collaborations successfully,our programs may suffer.

 

Collaborative agreements generally pose the followingrisks:

 

•                  collaboratorsmay not pursue further development and commercialization of products resultingfrom collaborations or may elect not to continue or renew research anddevelopment programs;

 

•                  collaboratorsmay delay clinical trials, under fund a clinical trial program, stop a clinicaltrial or abandon a product, repeat or conduct new clinical trials or require anew formulation of a product for clinical testing;

 

•                  collaboratorscould independently develop, or develop with third parties, products that couldcompete with our future products;

 

•                  theterms of our agreements with our current or future collaborators may not befavorable to the Company;

 

•                  acollaborator with marketing and distribution rights to one or more products maynot commit enough resources to the marketing and distribution of our products,limiting our potential revenues from the commercialization of a product;

 

•                  disputesmay arise delaying or terminating the research, development orcommercialization of our products, or result in significant litigation orarbitration; and

 

•                  collaborationsmay be terminated and, if terminated, we would experience increased capitalrequirements if we elected to pursue further development of the product.

 

In addition, business combinations or alliances amonglarge pharmaceutical companies could result in a reduced number of potentialfuture collaborators. If business combinations involving our collaborators wereto occur, the effect could be to diminish, terminate or cause delays in one ormore of our product development programs.

 

**Our productsare subject to United States, European Union and international medicalregulations and controls, which impose substantial financial costs on theCompany and which can prevent or delay the introduction of new products.  As a result, we may not obtain requiredapprovals for the commercialization of our products.**

** **

Our ability to sell our products is subject to variousfederal, state and international rules and regulations.  In the United States, we are subject toinspection and market surveillance by the Food and Drug Administration, or FDA,to determine compliance with regulatory requirements.  The regulatory process is costly, lengthy anduncertain.

 

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Our future performance depends on, among othermatters, estimates as to when and at what cost we will receive regulatoryapproval for our new products. Regulatory approval can be a lengthy, expensive and uncertain process,making the timing and cost of obtaining approvals difficult to predict.

 

In the United States, clearance or approval tocommercially distribute new medical devices or products is received from theFDA through clearance of a 510(k) premarket notification, or 510(k), approvalof a premarket approval application or PMA. The process to obtain 510(k) clearance is lengthy and there is noassurance clearance will be obtained.

 

For any products that are cleared through the 510(k)premarket notification process, modifications or enhancements that couldsignificantly affect safety or constitute a major change in the intended use ofthe product, will require new 510(k) submissions.

 

A PMA application must be filed if proposed productsare not substantially equivalent to a medical product first marketed prior to May 1976,or if otherwise required by the FDA.  ThePMA approval process can be expensive, uncertain and lengthy, and a number ofproducts for which other companies have sought FDA approval of a PMAapplication have never been approved for marketing.

 

We are also subject to the regulatory approval andcompliance requirements for each foreign country to which we export ourproducts.  In the European Union, asingle regulatory approval process has been created, and approval isrepresented by the CE Mark.

 

Both before and after products are commercialized, wehave ongoing responsibilities under the regulations of the FDA and otheragencies.  Our manufacturing facilitiesand those of our contract manufacturers are, or can be, subject to periodicregulatory inspections by the FDA and other federal and state regulatoryagencies.  The FDA has the authority torequest recall, repair, replace or refund of the cost of any productmanufactured or distributed by the Company. The FDA also administers certain controls over the export of medicaldevices from the United States.  We are alsosubject to routine inspection and must file periodic reports after the productis approved by the FDA for compliance with quality system requirements, or QSR,and medical device reporting requirements in the United States and otherapplicable regulations worldwide. Changes in existing requirements or adoption of new laws or requirementscould have a material adverse effect on our business, financial condition andresults of operation.  We will incursignificant costs to comply with laws and regulations.

 

Regulatory agencies have made, and continue to make,changes in their approval and compliance requirements and process.  We cannot predict what, how or when thesechanges will occur or what effect the changes will have on the regulation ofour products.  Any new legislation mayimpose additional costs or lengthen review times of our products.  We may not be able to obtain necessaryworldwide regulatory approvals or clearances for our products on a timelybasis, if at all.  Delays in receipts ofor failure to receive such approvals or clearances, the loss of previouslyreceived approvals or clearances, or failure to comply with existing or futureregulatory requirements would have a material adverse effect on our business,financial condition and results of operations.

 

**Because manyof our competitors have substantially greater capital resources and moreexperience in research and development, manufacturing and marketing than we do,we may not succeed in developing our proposed products and bringing them tomarket in a cost-effective, timely manner.**

** **

We expect to compete with a broad range oforganizations that are engaged in the development and production of products,services and strategies relating to the diagnosis, prognosis, early detectionand development of new drugs in cancer, neurodegenerative and neuromusculardiseases.  They include:

 

•                  biotechnology,biomedical, pharmaceutical and other companies;

 

•                  academicand scientific institutions;

 

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•                  governmentalagencies; and

 

•                  publicand private research organizations.

 

We are an early stage development company engagedprimarily in new product development. Early in its existence, Power3 was a development stage company, strivingto develop products for sale to the surgical industry.  After this stage, Power3 entered theoperating company stage selling the products they had developed to hospitalsand medical care providers, up until May 17, 2004.  At the time of the May 18, 2004 assetpurchase transaction, Power3 changed its business model and entered back intothe development stage to commercialize its intellectual properties acquired inthe transaction. We have not yet completed the development of our first productand have no revenue from operations. Since the change of our focus, we may havedifficulty competing with larger, established biomedical and pharmaceuticalcompanies and organizations. These companies and organizations have muchgreater financial, technical, research, marketing, sales, distribution, serviceand other resources than the Company. Moreover, they may offer broader productlines, services and have greater name recognition than we do, and may offerdiscounts as a competitive tactic.

 

In addition, several early stage companies are currentlydeveloping products that may compete with our potential products.  We anticipate strong competition from severalcompanies that include:

 

•                  Medarex,which is a biopharmaceutical company focused on the development ofantibody-based therapeutics to treat life threatening and debilitating diseasesincluding cancer and infectious diseases;

 

•                  Matritech,which is a developer of proteomics-based diagnostic products for the earlydetection of cancer;

 

•                  CiphergenBiosystems, which is active in biomarker discovery assay development andcharacterization;

 

•                  LexiconGenetics, which is using gene knockout technology for a number of therapeuticareas which include neurological disorders and cancer; and

 

•                  Cyberonics,which designs, develops, manufactures and markets medical devices for thetreatment of Alzheimer’s disease and other chronic disorders.

 

**Ourcompetitive position depends on protection of our intellectual property.**

** **

Our success will depend on our ability to obtain andprotect patents on our technology and to protect our trade secrets. The patentswe currently license, and any future patents we may obtain or license, may notafford meaningful protection for our technology and products. Others maychallenge our patents and, as a result, our patents could be narrowed,invalidated or unenforceable.  Inaddition, our current and future patent applications may not result in theissuance of patents in the United States or foreign countries. Competitors maydevelop products similar to ours that conflict with our patent applications andany patents we ultimately receive. In order to protect or enforce our patentrights, we may initiate interference proceedings, oppositions, or patentlitigation against third parties, such as infringement suits. These lawsuitscould be expensive, take significant time and divert management’s attentionfrom other business concerns. The patent position of biotechnology firmsgenerally is highly uncertain, involves complex legal and factual questions,and has recently been the subject of much litigation. No consistent policy hasemerged from the U.S. Patent and Trademark Office or the courts regarding thebreadth of claims allowed or the degree of protection afforded underbiotechnology patents. In addition, there is a substantial backlog ofbiotechnology patent applications at the U.S. Patent and Trademark Office, andthe approval or rejection of patent applications may take several years.

 

We also rely upon trade secrets, proprietary know-howand continuing technological innovation to remain competitive. Third partiesmay independently develop such know-how or otherwise obtain access to ourtechnology. While our employees, consultants and corporate partners with accessto proprietary information

 

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generally will berequired to enter into confidentiality agreements, we cannot guarantee thatthese agreements will provide the Company with adequate protection againstimproper use or disclosure of confidential information. In addition, in some situations,these agreements may conflict with, or be subject to, the rights of thirdparties with whom our employees, consultants or advisors have prior employmentor consulting relationships. Further, others may gain access to our tradesecrets or independently develop substantially equivalent proprietaryinformation and techniques.

 

**Our productscould infringe on the intellectual property rights of others.**

** **

Third parties may challenge the patents that have beenissued or licensed to the Company. We may have to pay substantial damages,possibly including treble damages, for past infringement if it is ultimatelydetermined that our products infringe a third party’s patents. Further, we maybe prohibited from selling our products before we obtain a license, which, ifavailable at all, may require the Company to pay substantial royalties. Even ifinfringement claims against the Company are without merit, defending a lawsuittakes significant time, may be expensive and may divert management attentionfrom other business concerns.

 

**We depend onour key scientific and management personnel to develop our products and pursuecollaborations.**

** **

Our performance is substantially dependent on theperformance of our current senior management, board of directors and key scientificand technical personnel and advisers. The loss of the services of any member ofour senior management, board of directors, scientific or technical staff orscientific advisory board may significantly delay or prevent the achievement ofproduct development and other business objectives and could have a materialadverse effect on our business, operating results and financial condition.

 

Recruiting and retaining qualified scientificpersonnel to perform research and development work are critical to our success.There is intense competition for qualified scientists and managerial personnelfrom numerous pharmaceutical, biomedical and biotechnology companies, as wellas from academic and government organizations, research institutions and otherentities. In addition, we may face particular difficulties because there is alimited number of scientists specializing in proteomics and its use for thediscovery of diseases, the principal focus of our company. We expect to rely onconsultants and advisors, including our scientific and clinical advisors, toassist the Company in formulating our research and development strategy. Any ofthose consultants or advisors could be employed by other employers, or beself-employed, and might have commitments to, or consulting or advisorycontracts with, other entities that may limit their availability to theCompany. Such other employment, consulting or advisory relationships couldplace our trade secrets at risk, even if we require non-disclosure agreements.

 

**Our lack ofoperating experience may cause the Company difficulty in managing our growth.**

** **

We have no experience in manufacturing or procuringproducts in commercial quantities, conducting other later-stage phases of theregulatory approval process or selling our products, and we have only limitedexperience in negotiating, establishing and maintaining strategicrelationships. We have no experience with respect to the launch of a commercialproduct. Our ability to manage our growth, if any, will require the Company to improveand expand our management and our operational and financial systems andcontrols. If our management is unable to manage growth effectively, ourbusiness and financial condition would be materially harmed. In addition, ifrapid growth occurs, it may strain our operational, managerial and financialresources.

 

**We have nocommercial production capability and we may encounter production problems ordelays, which could result in lower revenue.**

** **

To date, we have not produced any product incommercial quantities. Customers for any potential products and regulatoryagencies will require that we comply with current good manufacturing practicesprescribed by the FDA that we may not be able to meet.  We have established and are in the process ofestablishing agreements with contract manufacturers to supply sufficientquantities of our products to conduct clinical trials as well as for themanufacture, packaging, labeling and distribution of finished products if our

 

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potential products areapproved for commercialization.  If sucharrangements are terminated and if we are unable to manufacture or contract fora sufficient supply of our potential products on acceptable terms, our clinicaltesting schedule may be delayed, resulting in the delay of submission ofproducts for regulatory approval and initiation of new developmentprograms.  If we determine to manufactureproducts ourselves, we may not be able to maintain acceptable quality standardsif we ramp up production. To achieve anticipated customer demand levels, wewill need to scale-up our production capability and maintain adequate levels ofinventory. We may not be able to produce sufficient quantities to meet marketdemand. If we cannot achieve the required level and quality of production, wemay need to outsource production or rely on licensing and other arrangementswith third parties. This reliance could reduce our gross margins and expose theCompany to the risks inherent in relying on others. We may not be able tosuccessfully outsource our production or enter into licensing or otherarrangements under acceptable terms with these third parties, which couldadversely affect our business.

 

**We have nomarketing or sales staff, and if we are unable to develop sales and marketingcapability, we may not be successful in commercializing our products.**

** **

We currently have no sales, marketing or distributioncapability. As a result, we will depend on collaborations or agreements withthird parties that have established distribution systems and direct salesforces. To the extent that we enter into co-promotion or other licensingarrangements, our revenues will depend upon the efforts of third parties, overwhich we may have little or no control.

 

If we are unable to reach and maintain agreement withone or more pharmaceutical, biomedical or biotechnology companies or otherpotential collaborators under acceptable terms, we may be required to marketour products directly. We may elect to establish our own specialized salesforce and marketing organization to market our products.  If we are unable to develop a marketing andsales force with technical expertise and with supporting distributioncapability, we may not be able to successfully commercialize our products.

 

**Our businessis subject to technological obsolescence.**

** **

Proteomics, biotechnology and related pharmaceuticaltechnology have undergone and are subject to rapid and significant change. Weexpect that the technologies associated with proteomics, biotechnology researchand development will continue to develop rapidly. Our future will depend inlarge part on our ability to maintain a competitive position with respect tothese technologies. Any processes, discovery platforms or products that wedevelop may become obsolete before we recover any expenses incurred inconnection with developing these products.

 

**We faceintense competition in the proteomics, biotechnology and pharmaceuticalindustries.**

** **

The proteomics, biotechnology and pharmaceuticalindustries are intensely competitive. We have numerous competitors in theUnited States and elsewhere. Our competitors include major multinationalpharmaceutical, biomedical and biotechnology companies, specialized firms anduniversities and other research institutions. Many of these competitors havegreater financial and other resources, larger research and development staffsand more effective marketing and manufacturing organizations, than we do. Inaddition, academic and government institutions have become increasingly aware ofthe commercial value of their research findings. These institutions are nowmore likely to enter into exclusive licensing agreements with commercialenterprises, including our competitors, to market commercial products. Smallercompanies may also prove to be significant competitors, particularly throughcollaborative arrangements with large pharmaceutical and establishedbiotechnology companies. Many of these competitors have significant productsthat have been approved or are in development and operate large, well-fundedresearch and development programs.

 

Our competitors may succeed in developing or licensingtechnologies and products that are more effective or less costly than any weare developing. Our competitors may succeed in obtaining FDA or otherregulatory approvals for product candidates before we do.  Products resulting from our research anddevelopment efforts, if approved for sale, may not compete successfully withour competitors’ existing products or products under development.

 

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**We facepotential difficulties in obtaining product liability and relatedinsurance.  If we are subject to productliability claims and have not obtained adequate insurance to protect againstthese claims, our financial condition would suffer.**

** **

We do not have product liability or other professionalliability insurance. In the future, we may, in the ordinary course of business,be subject to substantial claims by, and liability to, persons alleging injuryfrom the use of our products.  If we aresuccessful in having products approved by the FDA, the sale of such productswould expose the Company to additional potential product liability and otherclaims resulting from their use. This liability may result from claims madedirectly by consumers or by others selling such products. We do not currentlyhave any product liability or professional liability insurance, and it ispossible that we will not be able to obtain or maintain such insurance onacceptable terms or that any insurance obtained will provide adequate coverageagainst potential liabilities. Our inability to obtain sufficient insurancecoverage at an acceptable cost or otherwise to protect against potentialproduct liability claims could prevent or limit the commercialization of anyproducts we develop. A successful product liability claim in excess of anyinsurance coverage we may procure could exceed our net worth. While we desireto reduce our risk by obtaining indemnity undertakings with respect to such claimsfrom licensees and distributors of our products, we may not be able to obtainsuch undertakings and, even if we do, they may not be sufficient to limit ourexposure to claims.

 

**If we aresubject to claims relating to improper handling, storage or disposal of thehazardous materials we use in our business, our financial condition wouldsuffer.**

** **

Our research and development processes involve thecontrolled storage, use and disposal of hazardous materials includingbiological hazardous materials. We are subject to federal, state and localregulations governing the use, manufacture, storage, handling and disposal ofmaterials and waste products. Although we believe that our safety proceduresfor handling and disposing of these hazardous materials comply with thestandards prescribed by law and regulation, the risk of accidentalcontamination or injury from hazardous materials cannot be completelyeliminated. In the event of an accident, we could be held liable for anydamages that result. We currently do not have insurance which covers any suchaccident and may not be able to maintain insurance on acceptable terms, or atall. We could be required to incur significant costs to comply with current orfuture environmental laws and regulations.

 

**Health carecost containment initiatives may limit our returns.**

** **

Our ability to commercialize our products successfullywill be affected by the ongoing efforts of governmental and third-party payersto contain or reduce the cost of health care. Governmental and other third-partypayers increasingly are attempting to contain health care costs by:

 

•                  challengingthe prices charged for health care products and services;

 

•                  limitingboth coverage and the amount of reimbursement for new therapeutic products;

 

•                  denyingor limiting coverage for products that are approved by the FDA but areconsidered experimental or investigational by third-party payors; and

 

•                  refusingin some cases to provide coverage when an approved product is used for diseaseindications in a way that has not received FDA marketing approval.

 

In addition, the trend toward managed health care inthe United States, the growth of organizations such as health maintenanceorganizations, and legislative proposals to reform healthcare and governmentinsurance programs could significantly influence the purchase of healthcareservices and products, resulting in lower prices and reducing demand for ourproducts.

 

Even if we succeed in bringing any products to themarket, they may not be considered cost-effective and third-party reimbursementmight not be available or sufficient. If adequate third-party coverage is notavailable, we may not be able to maintain price levels sufficient to realize anappropriate return on our

 

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investment in researchand product development. In addition, legislation and regulations affecting thepricing of diagnostic services and testing may change in ways adverse to theCompany before or after any of our proposed products are approved for marketing.While we cannot predict whether any such legislative or regulatory changes willbe adopted, the adoption of such changes could make it difficult or impossibleto sell our products.

 

**Stock pricesfor biomedical and biotechnology companies are volatile.**

** **

The market price for securities of biomedical andbiotechnology companies historically has been highly volatile, and the marketfrom time to time has experienced significant price and volume fluctuationsthat are unrelated to the operating performance of such companies. Fluctuationsin the trading price or liquidity of our common stock may adversely affect ourability to raise capital through future equity financings.

 

Factors that may have a significant impact on themarket price and marketability of our common stock include:

 

•                  announcementsof technological innovations or new commercial therapeutic products by theCompany, our collaborative partners or our present or potential competitors;

 

•                  announcementsby the Company or others of results of validation studies and clinical trials;

 

•                  developmentsor disputes concerning patent or other proprietary rights;

 

•                  adverselegislation, including changes in governmental regulation and the status of ourregulatory approvals or applications;

 

•                  changesin health care policies and practices; and

 

•                  economicand other external factors, including general market conditions.

 

In the past, following periods of volatility in themarket price of a company’s securities, securities class action litigation hasoften been instituted. If a securities class action suit is filed against theCompany, we would incur substantial legal fees and our management’s attentionand resources would be diverted from operating our business in order to respondto the litigation.

 

**The resale inthe open market of the shares we have issued, or shares issuable uponconversion or exercise of securities we have issued, in exempt transactionsmight adversely affect our stock price.**

** **

As of August 15, 2005, 65,345,121 shares of ourcommon stock were outstanding.  We alsointend to register, pursuant to a Registration Statement on Form SB-2 tobe filed after we file this 10-KSB, approximately 13,600,000 shares issuableupon outstanding convertible debentures and warrants.  In addition to the shares included in theregistration statement, the investors have additional investment rights topurchase additional convertible debentures in the aggregate principal amount of$2,500,000.  These additional convertibledebentures are convertible into 2,314,815 shares of common stock, subject toadjustment.  The investors will bepermitted to sell the shares covered by the registration statement in the openmarket from time to time without advance notice to the Company or to the marketand without limitations on volume.  Thesale of a substantial number of shares of our common stock by the investors, orthe anticipation of such sales, could make it more difficult for the Company tosell equity or equity-related securities in the future at a time and at a pricethat we might otherwise wish to effect sales. In addition to the shares listed in this prospectus, approximately15,000,000 shares of common stock issued to Advanced Bio/Chem in ouracquisition of substantially all of its assets may become available forresale.  Sales of shares pursuant toother exercisable options and warrants we have issued could also lead tosubsequent sales of the shares in the public market. These sales could depressthe market price of our stock by creating an excess in supply of shares for sale.Availability of these shares for sale in the public market could also impairour ability to raise capital by selling equity securities.

 

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**Our stock isthinly traded, which could lead to price volatility and difficulty liquidatingyour investment.**

** **

The trading volume of our stock has been low, whichcan cause the trading price of our stock to change substantially in response torelatively small orders. During the quarter ended December 31, 2004, theaverage daily trading volume of our stock was approximately 215,000 shares andthe shares traded as low as $0.67 and as high as $2.23 per share. Both volumeand price could also be subject to wide fluctuations in response to variousfactors, many of which are beyond our control, including:

 

•                  actualor anticipated variations in quarterly and annual operating results;

 

•                  announcementsof technological innovations by the Company or our competitors;

 

•                  developmentsor disputes concerning patent or proprietary rights; and

 

•                  generalmarket perception of biotechnology and pharmaceutical companies.

 

**Because ourstock currently trades below $5.00 per share, and is traded on the PinkSheets,  our stock is considered by theSEC a “penny stock,” which can adversely affect its liquidity.**

** **

Our common stock does not currently qualify forlisting on the Nasdaq Stock Market or the OTCBB.. If the trading price of ourcommon stock remains less than $5.00 per share, our common stock is considereda “penny stock,” and trading in our common stock is subject to the requirementsof Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule,brokers or dealers who recommend low-priced securities to persons other thanestablished customers and accredited investors must satisfy special salespractice requirements. The broker or dealer must make an individualized writtensuitability determination for the purchaser and receive the purchaser’s writtenconsent prior to the transaction.

 

SEC regulations also require additional disclosure inconnection with any trades involving a penny stock, including the delivery,prior to any penny stock transaction, of a disclosure schedule explainingthe penny stock market and its associated risks. These requirements couldseverely limit the liquidity of such securities in the secondary market becausefew brokers or dealers are likely to undertake these compliance activities. Inaddition to the applicability of the penny stock rules, another risk associatedwith trading in penny stocks may be high price fluctuations. Purchasers ofstock may be subject to substantial dilution.

 

As stated in “Market Information”, during 2005, uponthe Company’s failure to timely file its Form 10-KSB, the OTCBB appendedthe symbol “E” to the Company’s trading symbol and notified the Company of itsjeopardy of having its securities no longer quoted on the OTCBB, pending theCompany’s filing of its Form 10-KSB for 2004.  On June 14, 2005, the Company wasnotified of the OTCBB’s action to not allow the Company’s securities to bequoted on the OTCBB, as of June 16, 2005, pending the filing of theCompany’s Form 10-KSB for 2004. Accordingly, at time of this filing, all quotations of the Company’ssecurities are deleted from the OTCBB.

 

**If theownership of our common stock continues to be highly concentrated, it mayprevent you from influencing significant corporate decisions and may result inconflicts of interest that could cause our stock price to decline.**

** **

As of March 24, 2005, our executive officers,directors and their affiliates beneficially own or control approximately 41% ofthe outstanding shares of our common stock (after giving effect to the exerciseof all options and warrants held by them which are exercisable within sixtydays of such date).  Additionally, basedupon our stock records, Advanced Bio/Chem is the record owner of approximately23% of the outstanding shares of our common stock as of****March 24, 2005.  Accordingly, our current executive officers,directors and their affiliates, as well as Advanced Bio/Chem, will havesubstantial control over the outcome of corporate actions requiring shareholderapproval, including the election of directors, any merger, consolidation orsale of all or substantially all of our assets or any other significantcorporate transactions.  Theseshareholders may also

 

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delay or prevent a changeof control of the Company, even if such a change of control would benefit ourother shareholders. The significant concentration of stock ownership mayadversely affect the trading price of our common stock due to investors’perception that conflicts of interest may exist or arise.

 

**The terms ofour convertible debentures have materially modified the rights of commonshareholders, and the holders of preferred stock may be able to delay orprevent a change of control of the company.**

** **

We are authorized to issue up to 50,000,000 shares ofpreferred stock in one or more series. Our board of directors will be able to determine the terms of preferredstock without further action by our shareholders. If we issue preferred stock,it could affect your rights or reduce the value of your common stock. Inparticular, specific rights granted to future holders of preferred stock couldbe used to restrict our ability to merge with or sell our assets to a thirdparty. These terms may include voting rights, preferences as to dividends andliquidation, conversion and redemption rights, and sinking fund provisions.

 

Under the terms of our convertible debentures, we areprohibited from taking certain actions without the approval of the holders of atwo-thirds majority of the then-outstanding principal amount of thedebentures.  Specifically, we have agreednot to, and not to permit our subsidiary to, so long as any portion of thedebentures are outstanding, (1) amend its certificate of incorporation,bylaws or other charter documents so as to adversely affect any rights of theholders of the debentures (with exception for the Series B preferred stockto be issued by the Company), or (2) repurchase more than a de minimisnumber of shares of its common stock or other equity securities other than asto the shares of common stock issuable upon conversion of the debenturesdescribed above.

 

**We arecontractually obligated to issue shares of a Series B preferred stock toour two directors and principal officers. The Series B preferred stock will have special voting rights suchthat the holders of the Series B preferred stock will hold a majority ofthe voting rights of the company.**

** **

We previously entered into employment agreements withour two directors and executive officers in which we agreed to issue 1,500,000shares of Series B preferred stock to each officer.  The shares were intended to be issuedfollowing the Advanced Bio/Chem transaction; however, we did not file thecertificate of amendment necessary to designate powers and relative rights ofthe Series B preferred stock.  As aresult of certain restrictions agreed to by the Company in connection with thesale of our convertible debentures, we are not permitted to issue common sharesor common share equivalents such as the Series B preferred stock until 90days after the effective date of the registration statement.  After such restrictions lapse, we intend todesignate and issue the Series B preferred stock.  It is contemplated that the Series Bpreferred stock will have special voting rights such that the holders of the Series Bpreferred stock will hold a majority of the voting rights of the company.  Upon issuance of the Series B preferredstock, our current executive officers and directors may restrict our ability tomerge with, or sell our assets to, a third party.

 

**We do notanticipate paying dividends on our common stock.**

** **

We do not plan to pay dividends on our common stockfor the foreseeable future. We currently intend to retain future earnings, ifany, to finance operations, capital expenditures and the expansion of ourbusiness.

 

**Item2. Description of Property**

** **

The Company does not own any real estate.  The Company conducts its operations fromleased premises of approximately 7,200 square feet in The Woodlands, Texas.

 

At this facility the Company maintains its executiveoffices and conducts development and product prototyping activities.   The Company expects this space will beadequate for its needs for the remainder of the lease term.

 

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**Item3. Legal Proceedings**

** **

In November 2004, Chapman Spira &Carson, LLC (“Chapman Spira”), an investment banking firm, filed a lawsuit inthe Supreme Court of the State of New York for the County of New York againstAdvanced BioChem (the Predecessor), Power3 and Steven Rash.  The suit alleges that Advanced BioChem andPower3 are liable to Chapman Spira for damages allegedly resulting from thebreach of a letter agreement between Chapman Spira and Advanced BioChem relatingto the performance of strategic and investment banking services.  The suit further alleges that Mr. Rashmade false statements regarding the performance of services by ChapmanSpira.  Chapman Spira is seeking damagesin the amount of $1,522,000 plus interest. The Company has filed an answer in the lawsuit.  The Company believes that Chapman Spira’sclaims are without merit; however, the Company cannot be assured it willprevail or if the outcome of the action will adversely affect the Company’sbusiness, financial position or results of operations.  Inquiries to resolve this matter have beenundertaken by the attorneys representing each party in this matter, but noresolution has been achieved thus far.

 

An equipment vendor filed a complaint, regardingequipment which the Company acquired in its May 18, 2004 transaction withAdvanced BioChem, against Advanced BioChem in April of 2002 in aCalifornia court alleging breach of contract and seeking damages.  Advanced BioChem reached a settlementagreement in April of 2003 under which Advanced BioChem would pay thevendor $40,000 in installments through August, 2003.  At December 31, 2003, Advanced BioChemhad a balance remaining of $20,000.   InApril, 2005, the equipment vendor filed a lawsuit against Advanced BioChem,certain former officers of Advanced BioChem and against Power3 in order toenforce its claim for the remaining balance which is past due and may beassumed by the Company as part of the settlement of the dispute with AdvancedBioChem.

 

On May 17, 2005, the Law Offices of Jerry Schefffiled suit against the Company seeking recovery of fees billed to Power3 forlegal fees invoiced in November, 2004. The Company believes that it is not liable for the specific dollaramounts claimed in the lawsuit, however the dollar amounts are included in theaccounts payable section of the Company’s balance sheet.  The Company cannot be assured it will prevailor if the outcome of this action will adversely affect the Company’s financialposition or results of operations.

 

In June, 2005, Charles Caudle et al filed a lawsuit inHarris County, Texas, against Advanced BioChem, Power3 and the officers anddirectors of both companies.  The suitalleges that Advanced BioChem, Power3 and the officers and directors of Power3,are liable to Charles Caudle et al for damages resulting from funds loaned toAdvanced BioChem and which were subsequently converted into common stock ofAdvanced BioChem.  It is unclear as tothe specific dollar amount of the claim. The Company, and its officers and directors, has filed an answer denyingall claims in the lawsuit.  The Companybelieves that Charles Caudle et al’s claims are without merit, however theCompany cannot be assured it will prevail or if the outcome of the action willadversely affect the Company’s financial position or results of operations.

 

On June 27, 2005, the Company received a subpoenafor documents regarding the SEC’s Division of Enforcement investigation In TheMatter of Maui General Store, Inc. It is the Company’s understanding that the Maui General Store matterrelates to a promotional scheme by certain individuals to promote the stock andstock price of certain companies, during 2004. The Company provided all documents in its possession pursuant to thesubpoena and complied fully with the subpoena on July 11, 2005.  The Company has received no furthercorrespondence from the Enforcement Division of the SEC.  The Company has not been notified that it isa subject of this investigation.

 

**On August 8, 2005, AdvancedBioChem filed suit against Power3, Steven B. Rash and Ira Goldknopf claimingdamages of at least $3,000,000 including the costs of litigation and ofaddressing the claims of the creditors of Advanced BioChem that remainunpaid.  Advanced BioChem has, in itspublic reports, announced their assertion that the parties to the law suit areresponsible for all of the liabilities of Advanced BioChem, at the date of theasset purchase transaction on May 18, 2004.   The terms of the Asset Purchase Agreementare not clear and are subject to different interpretations.  While the Company believes that it hasproperly interpreted the provisions of the Agreement, fulfilled its obligationsthereunder and reflected the terms of the transaction in its financialstatements and previous filings, the Company had previously had discussions andnegotiations with Advanced BioChem in an effort to resolve this disagreementand the alleged liabilities.  Recently asa result of**

 

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**Advanced BioChem’s refusal tofurther negotiate to settle the question, management has reviewed theliabilities in question and has determined that Power3 is not liable for any ofthe aforementioned liabilities and these liabilities have not been included inthe financial statements of the Company because the fair value of thesecontingent liabilities cannot be reasonably estimated at this time.  Power3 intends to file an answer denying allclaims in the lawsuit.  Power3 believesthat Advanced BioChem’s claims are without merit, however the Company cannot beassured it will prevail or if the outcome of the action will adversely affectthe Company’s financial position or results of operations.**

** **

**Item4. Submission of Matters to a Vote of Security Holders**

** **

There were no matters submitted to the vote of thesecurity holders during the fourth quarter 2004.

 

**PART II**

** **

**Item5. Market for Common Equity and Related Stockholder Matters**

** **

**MarketInformation**

** **

During 2004, the Company’s common stock was traded onthe OTC Bulletin Board under the symbol “PWRM.” The high and low bid information for each quarter for the years ending December 31,2003 and 2004, as reported by National Quotation Bureau, Inc., are asfollows:

 
| **Quarter**         | ** ** | **Pre  or Post Split  Price(1)** | ** ** | **High  Bid** | ** ** | **Low  Bid** | ** ** |
|---------------------|------------|----------------------------------|------------|---------------|------------|--------------|------------|
|                |       |                             |       |          |       |         |       |
| First Quarter 2004  |       | Post-Split                       |       | $             | 0.87       |         | $          | 0.15 |   |
| Second Quarter 2004 |       | Post-Split                       |       | $             | 2.87       |         | $          | 0.28 |   |
| Third Quarter 2004  |       | Post-Split                       |       | $             | 7.79       |         | $          | 1.70 |   |
| Fourth Quarter 2004 |       | Post-Split                       |       | $             | 2.23       |         | $          | 0.67 |   |
|                |       |                             |       |          |       |         |       |
| First Quarter 2003  |       | Pre-Split                        |       | $             | 0.02       |         | $          | 0.01 |   |
| Second Quarter 2003 |       | Pre-Split                        |       | $             | 0.01       |         | $          | 0.005 |   |
| Third Quarter 2003  |       | Pre-Split                        |       | $             | 0.01       |         | $          | 0.005 |   |
| Fourth Quarter 2003 |       | Pre-Split                        |       | $             | 0.75       |         | $          | 0.05 |   |

 

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(1)         On September 24, 2003,the Company effected a 1-for-50 reverse stock split of its common stock.

 

The quotations above reflect inter-dealer prices,without adjustment for retail mark-up, markdown or commissions and may notreflect actual transactions.

 

During 2005, upon the Company’s failure to timely fileits Form 10-KSB, the OTCBB appended the symbol “E” to the Company’strading symbol and notified the Company of its jeopardy of having itssecurities no longer quoted on the OTCBB, pending the Company’s filing of its Form 10-KSBfor 2004.

 

On June 14, the Company was notified of the OTCBB’saction to not allow the Company’s securities to be quoted on the OTCBB, as of June 16,2005, pending the filing of the Company’s Form 10-KSB for 2004.  Accordingly, the Company’s securities are nolonger eligible for quotation on the OTCBB, as of June 16, 2005, and allquotations of the Company’s securities are deleted from the OTCBB.

 

**Holders**

** **

As of March 24, 2005, there were 1,117shareholders of record of the Company’s common stock.  The transfer agent for the Company’s commonstock was Cottonwood Stock Transfer, through June 30, 2005.  In early July, 2005, the management and Boardof Directors of Power3 terminated its relationship with

 

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Cottonwood Stock Transferand contractually agreed to employ Integrity Stock Transfer as its new stocktransfer agent.

 

**Dividends**

** **

The Company has not paid or declared any dividends onits common stock for the last two fiscal years and does not anticipate payingcash dividends in the foreseeable future. There are no limitations on theability of the Company to declare dividends; except those set forth in § 510of the****New York Business Corporation Lawswhich prohibits dividends if the Company is insolvent or would be madeinsolvent by the declaration of a dividend and all dividends must be made outof surplus only.

 

**RecentSales of Unregistered Securities**

** **

The following summarizes information relating to theCompany’s sale of equity securities that were not registered under theSecurities Act of 1933 during the period covered by this annual report andwhich have not been previously disclosed by the Company in a Quarterly Reporton Form 10-QSB or a Current Report on Form 8-K.

 

During the second quarter of 2004, the Company wasinformed that certain liabilities of the Company were settled for an aggregateof $70,000. An affiliate of former executive officers of the Company providedinformation to the Company that the previous management of the Company hadagreed to issue shares of its common stock for such debt settlement.  However, after numerous requests for documentationof such agreement, the Company has not been provided with documentation.  Because the entity that provided the fundshas not produced any documentation relative to this transaction and theliabilities themselves are in dispute, the liability for this allegedobligation has been removed from the balance sheet of the Company.  The outcome of this matter cannot bedetermined at this time, but is not considered by the Company to have amaterial effect on the financial statements. If stock is issued at a later date, the shares will be issued inreliance on Section 4(2) of the Securities Act of 1933 as atransaction not involving a public offering on the basis of the limited numberof persons that participated in the transaction, the lack of general solicitationand advertising, the sophistication of the investor, the information availableto such investor and the restriction of the shares to be issued, from resale,by the investor.

 

On October 17, 2004, the Company reachedagreement with Alan B. Hollingsworth, M. D. by which Dr. Hollingsworthwould join the Company’s Scientific Advisory Board. Under the terms of theagreement, Dr. Hollingsworth will receive 10,000 shares of common stockfor each year served, fees for attendance at each Scientific Advisory BoardMeeting and warrants to purchase 50,000 shares of common stock of theCompany.   Dr. Hollingsworth wasissued 10,000 shares of common stock and a warrant to purchase 50,000 shares ofthe Company’s common stock in October 2004 in reliance on Section 4(2) ofthe Securities Act of 1933 as a transaction not involving a public offering onthe basis of the limited number of persons that participated in thetransaction, the lack of general solicitation and advertising, thesophistication of the investor, the information available to such investor andthe restriction of the shares to be issued from resale by the investor.

 

On November 17, 2004, the Company issued anaggregate of 3,000,324 shares of common stock upon conversion of 3,870,000outstanding shares of the Company’s Series A preferred stock.  These shares of common stock were issued inreliance upon exemptions from registration pursuant to Section 4(2) ofthe Securities Act of 1933 as a transaction not involving a public offering onthe basis of the limited number of persons that participated in the transactionand the existing relationship between the Company and the holders of the Series Apreferred stock.

 

**Item6. Management’s Discussion and Analysis or Plan of Operation**

** **

**Overview**

** **

The Company is an early stage development companyengaged in the early detection, monitoring, and targeting of diseases throughthe analysis of proteins.  As previouslystated, prior to the date of the asset

 

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purchase transaction on May 18,2004, the Company was an operating company. After the acquisition, the Company significantly changed its businessactivity from being an operating company to a development stage company andreturned to being a development stage company with its focus on commercializingthe intellectual properties it acquired in the asset purchase transaction.  The Company’s business objective is to focuson disease diagnosis, protein and biomarkers identification, and drugresistance in the areas of cancers, neurodegenerative and neuromusculardiseases.  The Company has established ascientific advisory board to assist in the research and development of itsproducts. The members of the scientific advisory board are recognized leadersin their chosen fields, and the Company is working with them in the developmentof effective early diagnosis and drug targets for early treatment of cancers,neurodegenerative and neuromuscular diseases.

 

Prior to the Company’s acquisition of substantiallyall the assets of Advanced Bio/Chem on May 18, 2004, the Company wasprimarily engaged in the production and distribution of surgical safety devicesthrough the operations of its subsidiary, Power 3 Medical, Inc.  On May 18, 2004, the Company completedits acquisition of a set of assets from Advanced Bio/Chem.  The Company acquired substantially all theassets and intellectual properties of Advanced Bio/Chem and assumed certainliabilities in exchange for the issuance of 15,000,000 shares of the Company’scommon stock. After May 18, 2004 the Company established the new businessdirection described in the “Business of Issuer” section of this document.

 

After the May 18, 2004, transaction , the Companycompletely changed its business activity and became an advanced proteomics companyapplying existing certain proprietary methodologies to discover and identifyprotein biomarkers associated with diseases. The Company currently has no products or services for sale and isprincipally focused on research and development activities and, to a certainextent, initiating the “proof of concept” of its technologies.

 

The Company has had significant losses during2004.   The Company anticipates that itwill continue to incur substantial operating losses in future years as itprogresses in its research and development activities as well as thecommercializing of its technologies.  TheCompany does not expect to produce revenues from operations in the near termand expects that its revenues will be limited to research grants, collaborationagreements, and other strategic alliances which the Company is able toobtain.  The Company has an immediateneed for capital to continue its current operations.  Assuming the Company successfully closes thefinal stage of its private placement, the Company anticipates that it will needto raise additional capital prior to October 2005 to meet its operatingcosts.  At December 31, 2004, theCompany had an accumulated deficit of approximately $45,280,000. The followingdiscussion should be read in conjunction with the Company’s audited financialstatements as of December 31, 2004 and for the years ended December 31,2004 and 2003, including the notes to those financial statements.  The following discussion containsforward-looking statements that reflect the Company’s plans, estimates andbeliefs.  Actual results could differmaterially from those discussed in the forward-looking statements.  See “Item 1. Description of Business – RiskFactors” for additional discussion of these factors and risks.

 

**Resultsof Operations**

** **

*Year Ended December 31,2004 as Compared to Year Ended December 31, 2003*

* *

Revenues from operations for the year ended December 31,2004 were $15,491 compared to $45,874 for the prior year, resulting in adecrease of $30,383.

 

Cost of Goods Sold for the year ended December 31,2004 were $5,174, compared to $21,273 for the prior year, resulting in adecrease of $16,099.

 

Operating expenses were $19,674,890 for 2004 ascompared to $2,253,657 for 2003, an increase of $17,421,233. The increase inoperating expenses was primarily attributable to the increase in stock basedcompensation expense due to the issuance of shares of common stock andpreferred stock rights to management and other employees as well as consultantsand advisors.  Professional and consultingfees were $9,650,302 in 2004.    Thesefees increased substantially primarily due to the issuance of common shares,valued at market price on the effective date of the agreement, to consultingcompanies and individuals.   The totalamount of non-cash,

 

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stock-based compensationissued during 2004, to both consultants and employees, is approximately$35,600,000, of which approximately $17,486,982 was amortized during 2004.

 

Employee compensation and benefits were $938,195primarily due to employee compensation increases and costs associated withhiring additional employees to handle SEC compliance measures.

 

Occupancy and equipment expenses were $49,895 in2004.  This resulted primarily from theCompany’s office lease and utilities during 2004.

 

The above matters result in net loss increasing from$1,845,496 in 2003 to $**19,081,344** in2004.

 

**Liquidityand Capital Resources**

** **

The Company has financed its operations primarilythrough the net proceeds generated from the sale of common stock and the recentsale of convertible debentures.  From thedate of the Advanced Bio/Chem transaction to December 31, 2004, theCompany raised approximately $1,000,000. Then in January, 2005, the Company raised an additional $400,000 from alimited set of the original convertible debenture holders.  As described in “Recent Financing” below, theCompany intends to sell an additional $1,600,000 in aggregate principal amountof convertible debentures following the effectiveness of the RegistrationStatement on Form SB-2 filed by the Company for the resale of certainshares of the Company’s stock by the purchasers of the Company’s convertibledebentures.  The Company expects to use aportion of the proceeds from the sale and issuance of the remaining $1,600,000aggregate principal amount of debentures to pay the $251,000 principal balanceowing under the promissory note dated April 5, 2005 which is payable onthe sooner of August 15, 2005 or one business day following the sale and issuanceof such debentures.   This note is pastdue.

 

The Company’s liquidity and capital needs relateprimarily to working capital, development and other general corporaterequirements.  The Company has notreceived any cash from operations.  Underthe terms of the license agreement with M.D. Anderson which the Companyacquired from Advanced Bio/Chem, the Company is required to pay a nonrefundablelicense documentation fee of $40,000, payable in two installments.  The first $20,000 installment was previouslypaid following the execution of the license agreement and the secondinstallment was paid in February 2005. A similar license documentation fee is payable under the terms of thelicense agreement the Company entered into with M.D. Anderson and the Companywill be obligated to pay the second installment of $20,000 in August of2005.  The Company anticipates its saleand issuance of the remaining $1,600,000 in aggregate principal amount ofconvertible debentures, after repayment of the bridge note of $251,000immediately following the sale and issuance of such debentures, will provideadequate cash to satisfy this obligation to M.D. Anderson and to allow theCompany to meet its funding requirements through the third quarter of 2005.  In the event the sale and issuance of suchdebentures occurs and the investors exercise their warrants and additionalinvestment rights, the Company anticipates it will have adequate cash to meetits funding requirements through the first quarter of 2007.

 

Net cash used in operating activities approximated($946,293) for the year ended December 31, 2004, compared to ($170,499)for the year ended December 31, 2003. The increase in net cash used in operating activities during 2004 wasprimarily due to increased payroll and laboratory costs during 2004.

 

Net cash used in investing activities during 2004 was($331,061) as compared to $-0- in 2003. Net cash provided by financing activities approximated $1,435,588 forthe year ended December 31, 2004, as compared to $171,000 for the yearended December 31, 2003.  Theincrease in net cash provided by financing activities is primarily due to netproceeds received from the initial closing of the Company’s October 2004private offering described below and the issuance of certain notes payableduring 2004. In addition, cash proceeds from the sales of stock increased from$100,000 for the year ended December 31, 2003 to $449,807 for the yearended December 31, 2004.

 

As of December 31, 2004, the Company’s principalsource of liquidity was approximately $158,782 in cash.  As of the date of filing this report, theCompany only has funds on hand to pay operating expenses for the next threemonths.  We also have no confirmed sourceof funds for the next twelve months, although we expect

 

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that after filing thisreport and our SB-2 registration statement, additional debt and equity capitalwill become available to the Company.

 

In addition, pursuant to the recent financingdescribed below, it is anticipated that the Company will receive an additional$1,600,000 upon the sale and issuance of $1,600,000 in aggregate principalamount of debentures at the final closing of the private placement, which is tooccur on or before the fifth trading day after the effective date of theregistration statement filed by the Company for the resale of securities by theinvestors.  In addition, the Company hasreceived several bridge loans and officer advances during 2005.  It is expected that a portion of the proceedsreceived by the Company from the issuance and sale of the $1,600,000 aggregateprincipal amount of debentures will be used to repay certain bridge loansreceived after December 31, 2004, which are payable the sooner of August 15,2005 or one business day after the sale and issuance of such debentures.  The Company has thus far, been unable tocomplete the funding of the convertible debentures, described below in “RecentFinancing” due to its failure to timely file this 10-KSB for 2004.

 

***Recent Financing***

*** ***

The Company entered into a securities purchaseagreement, dated as of October 28, 2004, with certain investors.  Pursuant to the securities purchaseagreement, the investors agreed to purchase from the Company convertibledebentures due three (3) years from the date of issuance in the aggregateprincipal amount of $3,000,000. Effective January 19, 2005, the Company entered into an amendmentto the securities purchase agreement with each of the investors.  The securities purchase agreement, asamended, also provides for the issuance to the investors of warrants topurchase shares of the Company’s common stock and additional investment rightsto purchase additional convertible debentures. In connection with thesecurities purchase agreement, the Company entered into a registration rightsagreement which requires the Company to file a registration statementregistering on behalf of the investors the resale of the shares of common stockissuable upon conversion of the debentures and the exercise of the warrants.  The Company will also file a registrationstatement registering on behalf of the investors the resale of shares of commonstock issuable upon conversion of the debentures issued upon exercise of theadditional investment rights previously issued by the Company.

 

Effective October 28, 2004, the Company issuedand sold to the investors the first $1,000,000 in aggregate principal amount ofsuch debentures at the initial closing under the securities purchaseagreement.  Pursuant to the securitiespurchase agreement, as amended, effective January 26, 2005 the Companyissued and sold to certain investors $400,000 aggregate principal amount ofconvertible debentures.  Subject to theCompany’s satisfaction of the conditions set forth in the securities purchaseagreement (which includes the effectiveness of the registration statement) theinvestors are required to purchase the remaining $1,600,000 in aggregateprincipal amount of such debentures at the final closing, which is to occur onor before the fifth trading day after the effective date of the registrationstatement.

 

The $1,000,000 aggregate principal amount ofdebentures issued on October 28, 2004 and the $400,000 aggregate principalamount of debentures issued January 26, 2005 are due and payable in fullthree (3) years after issuance and do not bear interest. The $1,600,000aggregate principal amount of debentures issuable at the final closing will bedue and payable in full three (3) years after the date of their issuance,and will not bear interest. The aggregate cash purchase price for thedebentures will be $3,000,000, which is equal to the full face amount of thedebentures. At any time from the closing date until the maturity date of thedebentures, the purchasers have the right to convert the debentures, in wholeor in part, into common stock at the then effective conversion price. Theconversion price for the previously issued $1,400,000 aggregate principalamount of debentures is $0.90 but is subject to adjustment if either (1) 75%of the average of the daily volume weighted average price of the Company’scommon stock for the five (5) consecutive trading days preceding the datethat the registration statement is declared effective by the SEC or (2) thedaily volume weighted average price of the common stock on such date is lessthan $0.90 per share. In such event, the conversion price will be adjusted downto equal the lower of (1) the 75% average of the daily volume weightedaverage price of the common stock for the five (5) consecutive dayspreceding the effective date of the registration statement or (2) thedaily volume weighted average price of the common stock on the effective dateof the registration statement. The $1,600,000 aggregate principal amount ofdebentures issuable at the final closing will have a conversion price equal tothe lesser of (1) $0.90, (2) the 75% average of the daily volumeweighted average price of the common

 

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stock for the five (5) consecutivedays preceding the effective date of the registration statement of which thisprospectus forms a part, or (3) the daily volume weighted average price ofthe common stock on the effective date of the registration statement. Theconversion price shall be subject to adjustment under circumstances set forthin the debentures.

 

The debentures contain covenants that will limit theCompany’s ability to, among other things: incur or guarantee additionalindebtedness; incur or create liens; amend the Company’s certificate ofincorporation, bylaws or other charter documents so as to adversely affect anyrights of the holders of the debentures; and repay or repurchase more than a deminimis number of shares of common stock other than as permitted in thedebentures and other documents executed with the purchasers.

 

The debentures include customary default provisionsand an event of default includes, among other things, a change of control ofthe Company, the sale of all or substantially all of the Company’s assets, thefailure to have the registration statement declared effective on or before the180th day after the initial closing date, and the lapse of the effectiveness ofthe registration statement for more than 30 consecutive trading days during any12-month period (with certain exceptions), the Company’s failure to timelydeliver certificates to holders upon conversion and a default by the Company inany obligations under any indebtedness of at least $150,000 which results insuch indebtedness being accelerated. Upon the occurrence of an event ofdefault, each debenture may become immediately due and payable, eitherautomatically or by declaration of the holder of such debenture. The aggregateamount payable upon an acceleration by reason of an event of default shall beequal to the greater of 130% of the principal amount of the debentures to beprepaid or the principal amount of the debentures to be prepaid, divided by theconversion price on the date specified in the debenture, multiplied by theclosing price on the date set forth in the debenture.

 

Concurrent with the issuance of the initial $1,000,000aggregate principal amount of debentures dated October 28, 2004, thepurchasers also received warrants to purchase an aggregate of up to 2,500,000shares of common stock and additional investment rights to purchase up to anadditional $2,500,000 principal amount of convertible debentures.  Pursuant to the terms of the amendment to thesecurities purchase agreement, concurrent with the issuance of the $400,000aggregate principal amount of convertible debentures, the Company issuedadditional warrants to purchase an aggregate of up to 333,333 shares of itscommon stock.  The warrants areexercisable at a price of $1.44 per share (subject to adjustment), for a periodof five (5) years from October 28, 2004. The additional investmentrights are exercisable at a price equal to the principal amount of thedebentures to be purchased, for (1) a period of nine months following theeffective date of the registration statement, or (2) April 28, 2006.The debentures to be purchased upon the exercise of the additional investmentrights will have the same terms as the debentures described above, except thatthe conversion price will be equal to $1.08 (subject to adjustment).

 

Each selling shareholder has contractually agreed torestrict its ability to convert the debentures, exercise the warrants andadditional investment rights and receive shares of the Company’s common stocksuch that the number of shares of common stock held by them and theiraffiliates after such conversion or exercise does not exceed 4.99% of thenumber of shares of the Company’s common stock outstanding immediately aftergiving effect to such conversion or exercise.

 

In accordance with the provisions of Emerging IssuesTask Force Issue 98-5 (“EITF 98-5”), a discount for the entire face amount ofthe convertible debentures was recorded on the date of the first closing toallocate value to the embedded beneficial conversion feature and the 2,500,000warrants.  Since there is no assurancethat the Company will receive the funds due at the time of the final closingand/or through the exercise of additional investment rights, no effect has beengiven to any value that may result from the issuance of additional convertibledebentures, either through the remaining $1,600,000 or from exercise ofadditional investment rights associated with the original or subsequentconvertible debenture purchases.

 

On April 5, 2005, the Company received a bridgeloan in the amount of $251,000.  Thisbridge loan is due and payable on the sooner of August 15, 2005 or onebusiness day following the closing of the Company’s sale and issuance of the$1,600,000 aggregate principal amount of debentures.  The Company expects to use proceeds from thesale and issuance of such debentures to repay such bridge loan.  The bridge loan bears interest

 

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at a rate of 10% perannum which, at the holder’s option, may be paid in (a) cash, or (b) thatnumber of shares of the Company’s common stock determined by dividing $251,000by the common stock price on date of payment and multiplying the quotient soobtained by 20%.  The payee of this NotePayable has agreed to allow the Company an extension of time to repay suchbridge loan.

 

**On May 31, 2005, the Company received anOfficer Advance in the amount of $ 55,000.  This advance is in the form of a short-term Note Payable, to theOfficer, Mr. Steven Rash, President and CEO, by the Company.  The Note Payable was originally due on June 30,2005, and bears interest at 6 % per annum until paid.  The Company expects to use the proceeds fromthis note as working capital.  TheCompany expects to use the proceeds from later permanent financing obtainedfrom issuing additional debentures to repay this Officer Advance.  The Officer has agreed to allow the Companyan extension of time to repay this Note Payable.**

** **

On June 3, 2005, the Company received anOfficer Advance in the amount of $ 50,000. This advance is in the form of a short-term Note Payable, to theOfficer, Dr. Ira Goldknopf, Chief Scientific Officer, by the Company.  The Note Payable is due on June 30,2005, and bears interest at 6% per annum until paid.  The Company used the proceeds from this noteas working capital.  The Company expectsto use the proceeds from later permanent financing obtained from issuingadditional debentures to repay this Officer Advance.   The Officer has agreed to allow the Companyan extension of time to repay this Note Payable.

 

**On June 13, 2005, the Company received a bridgeloan in the amount of $ 396,500.   Thisbridge loan is due and payable on the sooner of August 11, 2005 or thefifth day following the effective date of the Company’s registration statementon Form SB-2.  The Company expectsto use the proceeds from the sale and issuance of the remaining $1,600,000 ofconvertible debentures to repay the loan. The note is secured by a Stock Pledge Agreement, entered into on June 17,2005, by Steven B. Rash, Chairman and CEO of Power3, wherein Mr. Rashpledged 6,000,000 shares of common stock as security for the performance of theCompany under the note.  The payee ofthis Note Payable has agreed to allow the Company an extension of time to repaysuch bridge loan.**

** **

**Planof Operations and Cash Requirements**

** **

The Company currently does not have operating revenuesfrom product sales or the performance of services and it continues toexperience net operating losses.  TheCompany is actively pursuing third party licensing agreements, collaborationagreements and similar business arrangements in order to establish a revenuebase utilizing its capabilities in disease diagnosis based on protein andbiomarker identification, and drug resistance in the areas of cancers,neurodegenerative and neuromuscular diseases. The Company has undertaken clinical validation studies to demonstratethe diagnostic capabilities of its technologies. However, there can be noassurances that revenue generating agreements will be in place in the nexttwelve months.

 

Absent a source of revenues, the Company will requirefunding in order to carry out its business plan until such time as it is ableto generate sustained revenues.  TheCompany’s current cash requirements are approximately $250,000 per month andthe Company anticipates that it will require approximately $3,500,000 for thetwelve months ended March 31, 2006 to continue its development activities,undertake and perform clinical validation studies, continue its marketingefforts and maintain its administrative infrastructure, broken down as follows:

 

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**EstimatedExpenditures RequiredDuring Next Twelve Months**

 
| General and Administrative                |   | $      | 2,550,000 |   |
|-------------------------------------------|--------|--------|-----------|--------|
|                                      |   |   |      |
| Capital  Expenditures                     |   | $      | 400,000   |   |
|                                      |   |   |      |
| Patent  filings and intellectual property |   | $      | 200,000   |   |
|                                      |   |   |      |
| NAF clinical  validation studies          |   | $      | 350,000   |   |
|                                      |   |   |      |
| Total                                     |   | $      | 3,500,000 |   |

 

The Company has no significant capital expenditurerequirements and does not plan to increase its monthly expenditure rate absentan increase in revenues or additional funding.

 

As noted in “Liquidity and Capital Resources” above,the Company entered into a securities purchase agreement and an amendment tothe securities purchase agreement pursuant to which certain investors agreed topurchase convertible debentures in the aggregate principal amount of$3,000,000. The securities purchase agreement, as amended, also provides forthe issuance of warrants to purchase shares of the Company’s common stock andadditional investment rights to purchase additional convertible debentures. Onthe initial closing under the securities purchase agreement, which occurredeffective as of October 28, 2004, the investors purchased the first$1,000,000 in aggregate principal amount of the convertible debentures of whichthe Company received approximately $860,000 after payment of fees andexpenses.  Pursuant to the securitiespurchase agreement, as amended, certain investors have purchased an additional$400,000 aggregate principal amount of convertible debentures on January 26,2005.  Subject to the Company’ssatisfaction of the conditions set forth in the securities purchase agreement(which includes the effectiveness of the registration statement), the investorsare required to purchase the remaining $1,600,000 in aggregate principal amountof such convertible debentures on or before the fifth trading day after theeffective date of the registration statement. Assuming the completion of the remaining closing and sale and issuanceof the remaining $1,600,000 in aggregate principal amount of the convertibledebentures, the Company estimates that, after repayment of the bridge note of$396,500 and the bridge note of $251,500, immediately following the sale andissuance of such debentures, the Company will have adequate cash to allow it tomeet its funding requirements through the third quarter of 2005.  In the event the sale and issuance of suchdebentures occurs and the investors exercise their warrants and additionalinvestment rights, the Company anticipates it will have adequate cash to meetits funding requirements through the first quarter of 2007.

 

In addition to the convertible debentures, the Companyalso issued warrants to purchase up to 2,500,000 shares of common stock, withan exercise price equal to $1.44.  TheCompany issued additional warrants to purchase up to 333,333 shares of commonstock concurrent with its issuance of the $400,000 aggregate principal amountof debentures.  Full exercise of thewarrants would generate funds in excess of $4,000,000.  The Company also issued additional investmentrights, which give the investors the right to purchase up to an aggregate of$2,500,000 of convertible debentures with a conversion price of $1.08. However,the exercise of these warrants and additional investment rights is at thediscretion of the purchasers and there are no assurances that the purchaserswill exercise their rights under such securities.

 

The Company will continue to require additional debtor equity financing for its operations which may not be readily available.  The Company’s ability to continue as a goingconcern is subject to its ability to generate a profit or obtain necessaryfunding from outside sources.  Managementbelieves that even though the Company currently has limited cash resources andliquidity, assuming exercise of the warrants and additional investment rights,the net funds available from the final closing under the Securities PurchaseAgreement financing, after repayment of the bridge loans,****will allow the Company to continueoperations through October 2005.  Inthe event the final closing and sale of $1,600,000 in aggregate principalamount of debentures occurs

 

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but the warrants andadditional investment rights are not exercised, the Company anticipates that itwill need to raise additional capital prior to October 2005 to meet itsoperating costs.  The Company’s actualresults may differ materially from these estimates, and no assurance can begiven that additional funding will not be required sooner than anticipated orthat such additional funding will be available when needed or on termsacceptable to the Company.  Insufficientfunding will require the Company to curtail or terminate operations.

 

**Off-BalanceSheet Arrangements**

** **

At December 31, 2004, with the exception of thelease for its operating facility, and employment agreements entered with itsthree principal officers, the Company did not have any significant off balancesheet commitments.

 

**CriticalAccounting Policies**

** **

**Stock-BasedCompensation**

** **

The Company accounts for equity instruments issued toemployees that are fully vested and non-forfeitable based on the market valueof the stock issued as of the effective date of the agreement, per SECrequirement.  Equity instruments issuedto non-employees for services are also measured at market value on theeffective date of the agreement.

 

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

 

In December 2004, the Financial AccountingStandards Board issued Statement Number 123 (“FAS 123 (R)”), Share-BasedPayments.  FAS 123 (R) requires allentities to recognize compensation expense in an amount equal to the fair valueof share-based payments such as stock options granted to employees.  The Company will be required to apply FAS 123(R) on a modified prospective method. Under this method, the Company will be required to record compensationexpense (as previous awards continue to vest) for the unvested portion ofpreviously granted awards that remain outstanding at the date of adoption.  In addition, the Company may elect to adoptFAS 123 (R) by restating previously issued financial statements, basing theamounts on the expense previously calculated and reported in the pro formadisclosures that had been required by FAS 123, effective for the firstreporting period during which the Company has such compensation.  The Company has not yet determined the impactthat FAS 123 (R) will have on its financial statements; however, it does notbelieve the impact of adopting this Statement is material to this report asthere are no unvested options and warrants at December 31, 2004.

 

**Accountingfor Convertible Securities**

 

The Company accounts for the embedded beneficialconversion feature of the convertible debentures and the 2,500,000 warrants inaccordance with the provisions of EITF 98-5. In accordance with EITF 98-5, a discount for the appropriate portion ofthe face amount of the convertible debentures was recorded on the date of thefirst closing to allocate value to the embedded beneficial conversion featureand the 2,500,000 warrants.  Since thereis no assurance that the Company will receive the funds due at the time of thefinal closing and/or through the exercise of additional investment rights, noeffect has been given to any value that may result from the issuance ofsecurities in the accompanying financial statements.

 

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**Item7.  Financial Statements**

** **

**POWER3 MEDICAL PRODUCTS, INC.**

 

**FINANCIAL STATEMENTS**

**AS OF DECEMBER 31, 2004 AND**

**FOR THE YEARS ENDED DECEMBER 31,2004 AND 2003**

 
| Report of  Independent Registered Public Accounting Firm                                      |   |
|-----------------------------------------------------------------------------------------------|--------|
|                                                                                          |   |
| Independent Auditors’ Report                                                             |   |
|                                                                                          |   |
| Balance Sheet as of December 31, 2004                                                    |   |
|                                                                                          |   |
| Statements of Operation for the years ended  December 31, 2004 and 2003                  |   |
|                                                                                          |   |
| Statements of  Stockholders’ Deficit for the years ended December 31, 2004 and 2003 |   |
|                                                                                          |   |
| Statements of Cash Flows for the years  ended December 31, 2004 and 2003                 |   |
|                                                                                          |   |
| Notes to Financial Statements                                                                 |   |

 

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** **

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

**REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

 

TO THE SHAREHOLDERS ANDBOARD OF DIRECTORS OF POWER 3 MEDICAL PRODUCTS, INC.:

 

We have audited the accompanying balance sheetof Power 3 Medical Products, Inc.. (a New York corporation in the developmentstage) (“the Company”) as of December 31, 2004, and the related statementsof operations, changes in stockholders’ equity and cash flows for the yearended December 31, 2004, and for the period from May 18, 2004 (dateof entry into development stage) to December 31, 2004.  Thesefinancial statements are the responsibility of the Company’s management. Ourresponsibility is to express an opinion on these financial statements based onour audit. The financial statements of Power 3 Medical Products, Inc. as December 31,2003 were audited by other auditors whose report dated April 13, 2004expressed a modification based on the uncertainty that the company wouldcontinue as a going concern.

 

Weconducted our audits in accordance with the standards of the Public CompanyAccounting Oversight Board (United States). Those standards require that weplan and perform an audit to obtain reasonable assurance whether the financialstatements are free of material misstatement. The Company is not required tohave, nor were we engaged to perform, an audit of its internal control overfinancial reporting. Our audit included consideration of internal control overfinancial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion.  An audit includes examining, on a test basis,evidence supporting the amounts and disclosures in the financial statements. Anaudit also includes assessing the accounting principles used and significantestimates made by management, as well as evaluating the overall financialstatement presentation. We believe that our audits provide a reasonable basisfor our opinion. 

 

Inour opinion, the financial statements referred to above present fairly, in allmaterial respects, the financial position of Power 3 MedicalProducts, Inc.at December 31,2004, and the related results of their operations and cash flows for the yearended December 31, 2004 and for the period from May 18,2004 (date of entry into development stage) to December 31, 2004 in conformity with accounting principlesgenerally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that theCompany will continue as a going concern. As discussed in Note 2 to the financial statements, the Company is in the development stage and is primarilyinvolved in research and development and capital raising activities.  There isno assurance that researchactivities that the Company is involved in will generate sufficient funds that willbe available for operations. The Company’s limited revenue history, itsdependence on a narrow customerbase and limited funding raise substantial doubt about the Company’s ability tocontinue as a going concern. Management’s plans in regard to these matters arealso described in Note 2. Theaccompanying financial statements do not include any adjustments that might resultfrom the outcome of this uncertainty.

 

Asdiscussed in note 7 to the financial statements, the Company is the defendantin certain lawsuits and is involved in a dispute with AdvancedBiochem.   The Company believes these claims are without merit and intendsto resolve them in the best interest of the Company.   Accordingly noprovision for any liabilities related to the matters has beenaccrued.   However, due to the uncertainties with these legal issues,it is at least reasonably possible that adverse results will occur, althoughany such amount cannot be estimated.

 

John A. Braden & Company, PC

 

Houston, Texas

September 2, 2005

 

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**INDEPENDENT AUDITORS’ REPORT**

 

**Letterhead of Kingery, Crouse &Hohl, P.A.**

 

**(now known as Kingery & Crouse,P.A.)**

 

To the Shareholders and Board of Directors of Power 3 Medical Products, Inc.and subsidiaries:

 

We have audited the accompanying consolidated statements of operations,stockholders’ deficit and cash flows of Power 3 Medical Products, Inc. andsubsidiaries (the “Company”) for the year ended December 31, 2003.  These consolidated financial statements arethe responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financialstatements based on our audit.

 

We conducted our audit in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the consolidated financial statements arefree of material misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the consolidated financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe that our audit provides areasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to abovepresent fairly, in all material respects, the results of operations and cashflows of the Company for the year ended December 31, 2003 in conformitywith accounting principles generally accepted in the United States of America.

 

The consolidated financial statements referred to above were preparedassuming that the Company would continue as a going concern.  As discussed in Note 2 to such consolidatedfinancial statements, the Company has suffered recurring losses fromoperations, has working capital and stockholders’

 

36

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deficits at December 31, 2003 and will require a significantamount of capital and/or debt financing to proceed with its business plan.These factors, among others, raised substantial doubt about the Company’sability to continue as a going concern. Management’s plans in regard to thesematters were also discussed in Note 2. The consolidated financial statementsdid not include any adjustments that might have resulted from the outcome ofthis uncertainty.

 
|                | /s/ Kingery, Crouse & Hohl, P.A. (now known as  Kingery & Crouse, P.A.) |   |
|---------------------|-------------------------------------------------------------------------------------------|--------|
|                |
| April 13, 2004 |
|                |
| Tampa, FL           |

 

37

----

 

BALANCESHEET

 

**POWER3MEDICAL PRODUCTS, INC.**

**(ADevelopment Stage Enterprise)**

**BALANCESHEET**

**AS OF DECEMBER 31,2004**

 
| ** **                                                                                              | ** ** | **2004**    | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------|------------|
| **ASSETS**                                                                                              |       |        |       |
| **CURRENT  ASSETS**                                                                                     |       |        |       |
| Cash and  cash equivalents                                                                              |       | 158,782     |       |
| Accounts  Receivable                                                                                    |       | 2,350       |       |
| Prepaid  expenses and other current assets                                                              |       | 4,352       |       |
| Total  Current Assets                                                                                   |       | 165,484     |       |
|                                                                                                    |       |        |       |
| **FIXED  ASSETS**                                                                                       |       |        |       |
| Furniture,  Fixtures and Equipment                                                                      |       | 85,025      |       |
| (Net of  accumulated depreciation of $45,024)                                                           |       |        |       |
| Fixed Intangible Assets (patents and  agreements)                                                       |       | 146,799     |       |
| Total Fixed  Assets                                                                                     |       | 231,824     |       |
|                                                                                                    |       |        |       |
| **OTHER  ASSETS**                                                                                       |       |        |       |
| Debt  Issuance Cost (net of amortization of $8,888)                                                     |       | 131,102     |       |
| Deposits                                                                                                |       | 25,900      |       |
| Total Other  Assets                                                                                     |       | 157,002     |       |
| TOTAL ASSETS                                                                                            |       | 554,310     |       |
|                                                                                                    |       |        |       |
| **LIABILITIES  AND STOCKHOLDER’S DEFICIT**                                                         |       |        |       |
| **CURRENT  LIABILITIES**                                                                                |       |        |       |
| Accounts  Payable and accrued liabilities                                                               |       | 631,560     |       |
| Note Payable                                                                                            |       | 20,000      |       |
| Other  Current Liabilities                                                                              |       | 132,481     |       |
| Total  Current Liabilities                                                                              |       | 784,041     |       |
|                                                                                                    |       |        |       |
| **LONG  TERM LIABILITIES**                                                                              |       |        |       |
| Convertible  Debentures                                                                                 |       | 1,000,000   |       |
| Accrued  Interest on Issued Debentures                                                                  |       | (944,444    | )          |
| TOTAL LIABILITIES                                                                                       |       | 839,597     |       |
|                                                                                                    |       |        |       |
| **STOCKHOLDER’S  DEFICIT**                                                                         |       |        |       |
| Common Stock-$0.001  par value:150,000,000 shares authorized;  65,345,121 shares issued and outstanding |       | 65,345      |       |
| Additional  Paid-In Capital                                                                             |       | 63,231,428  |       |
| Deferred  Compensation                                                                                  |       | (18,301,588 | )          |
| Deficit  accumulated before entering development stage                                                  |       | (11,681,500 | )          |
| Deficit  accumulated during the development stage                                                       |       | (33,598,972 | )          |
| Total  Stockholder’s Deficit                                                                       |       | (285,287    | )          |
| **TOTAL  LIABILITIES AND STOCKHOLDERS DEFICIT**                                                         |       | 554,310     |       |

 

**SEE NOTES TO THE FINANCIAL STATEMENTS.**

 

38

----

 

STATEMENT OF OPERATIONS

 

**POWER3 MEDICAL PRODUCTS, INC.**

**(ADevelopment Stage Enterprise)**

**STATEMENTOF OPERATIONS**

**JANUARY 1,2004 TO DECEMBER 31, 2004**

 
| ** **                                          | ** ** | **2004**    | ** ** | **2003**   | ** ** | **Development Stage  Results  May 18, 2004 -  December 31, 2004** | ** ** |
|-----------------------------------------------------|------------|-------------|------------|------------|------------|-----------------------------------------------------------------------------|------------|
|                                                |       |        |       |       |       |                                                                        |       |
| **REVENUES:**                                       | ** ** | ** **  | ** ** | ** ** | ** ** | ** **                                                                  | ** ** |
| Sales                                               |       | 11,491      |       | 45,874     |       | 4,000                                                                       |       |
| Other  Revenue                                      |       | 4,000       |       |       |       |                                                                        |       |
| Total  Revenue                                      |       | 15,491      |       | 45,874     |       | 4,000                                                                       |       |
|                                                |       |        |       |       |       |                                                                        |       |
| **COST OF  GOODS SOLD:**                            | ** ** | ** **  | ** ** | ** ** | ** ** | ** **                                                                  | ** ** |
| Production costs                                    |       | 5,174       |       | 21,273     |       |                                                                        |       |
| Total  Production costs                             |       | 5,174       |       | 21,273     |       |                                                                        |       |
|                                                |       |        |       |       |       |                                                                        |       |
| **GROSS  PROFIT**                                   |       | 10,317      |       | 24,601     |       | 4,000                                                                       |       |
|                                                |       |        |       |       |       |                                                                        |       |
| **OPERATING  EXPENSES:**                            |       |        |       |       |       |                                                                        |       |
| Stock based  compensation- common stock             |       | 8,215,241   |       |       |       | 8,215,241                                                                   |       |
| Stock based  compensation-preferred stock           |       |        |       | 1,695,000  |       |                                                                        |       |
| Employee  compensation and benefits                 |       | 938,195     |       |       |       | 831,915                                                                     |       |
| Professional  and consulting fees                   |       | 9,650,302   |       |       |       | 7,485,436                                                                   |       |
| Occupancy  and equipment                            |       | 49,895      |       |       |       | 44,895                                                                      |       |
| Travel and  entertainment                           |       | 72,375      |       |       |       | 66,623                                                                      |       |
| Other  selling, general and administrative expenses |       | 748,882     |       | 558,657    |       | 150,238                                                                     |       |
| Total  Operating Expenses                           |       | 19,674,890  |       | 2,253,657  |       | 16,794,348                                                                  |       |
|                                                |       |        |       |       |       |                                                                        |       |
| **LOSS  FROM OPERATIONS**                           |       | (19,664,573 | )          | (2,229,056 | )          | (16,790,348                                                                 | )          |
|                                                |       |        |       |       |       |                                                                        |       |
| **OTHER  INCOME AND EXPENSE:**                      |       |        |       |       |       |                                                                        |       |
| Interest  Income                                    |       | 1,215       |       |       |       | 1,215                                                                       |       |
| Other Income                                        |       | 641,854     |       | 402,709    |       |                                                                        |       |
| Interest  Expense                                   |       | (59,840     | )          | (19,149    | )          | (57,088                                                                     | )          |
| Total Other  Income(Expense)                        |       | 583,229     |       | 383,560    |       | (55,873                                                                     | )          |
|                                                |       |        |       |       |       |                                                                        |       |
| **NET LOSS**                                        |       | (19,081,344 | )          | (1,845,496 | )          | (16,846,221                                                                 | )          |
|                                                |       |        |       |       |       |                                                                        |       |
| **NET LOSS  PER SHARE**                             |       | (0.45       | )          | (1.81      | )          | (0.27                                                                       | )          |
|                                                |       |        |       |       |       |                                                                        |       |
| Weighted  average number of shares outstanding      |       | 42,034,796  |       | 1,017,000  |       | 62,724,534                                                                  |       |

 

**SEE NOTES TO THE FINANCIAL STATEMENTS.**

 

39

----

 

**STATEMENT OF STOCKHOLDER’S DEFICIT**

 

**POWER3MEDICAL PRODUCTS, INC.**

**A DevelopmentStage Enterprise**

**STATEMENT OFSTOCKHOLDERS’ DEFICIT**

**For YearEnded December 31, 2004**

 
| ** **                                                                                | ** ** | ** **       | ** ** | ** **          | ** ** | ** **      | ** ** | ** **       | ** ** | **Additional** | ** ** | **Deferred** | ** ** | **Common**     | ** ** | ** **       | ** ** | ** **  | ** ** |
|-------------------------------------------------------------------------------------------|------------|------------------|------------|---------------------|------------|-----------------|------------|------------------|------------|----------------|------------|--------------|------------|----------------|------------|------------------|------------|-------------|------------|
| ** **                                                                                | ** ** | **Common Stock** | ** ** | **Preferred Stock** | ** ** | **Paid In**     | ** ** | **Compensation** | ** ** | **Stock**      | ** ** | **Deemed**   | ** ** | ** **     | ** ** |
| ** **                                                                                | ** ** | **# of Shares**  | ** ** | **Par Value**       | ** ** | **# of Shares** | ** ** | **Par Value**    | ** ** | **Capital**    | ** ** | **Expense**  | ** ** | **Subscribed** | ** ** | **Distribution** | ** ** | **Deficit** | ** ** |
| BALANCES, DECEMBER 31, 2002                                                          |       | 997,830          |       | 997                 |       |            |       |             |       | 6,315,951      |       |         |       |           |       |             |       | (7,600,881  | )          |
|                                                                                      |       |             |       |                |       |            |       |             |       |           |       |         |       |           |       |             |       |        |       |
| Issuance of preferred stock for cash and conversion  of accred payroll                    |       |             |       |                |       | 3,990,000       |       | 3,990            |       | 1,991,010      |       |         |       |           |       |             |       |        |       |
| Issuance of common stock for services rendered                                            |       | 100,000          |       | 100                 |       |            |       |             |       | 37,400         |       |         |       |           |       |             |       |        |       |
| Conversion of convertible notes payable to common  stock                                  |       | 95,000           |       | 95                  |       |            |       |             |       | 27,405         |       |         |       |           |       |             |       |        |       |
| Conversion of other note payable to common stock                                          |       | 50,000           |       | 50                  |       |            |       |             |       | 12,450         |       |         |       |           |       |             |       |        |       |
| Common stock subscriptions                                                                |       |             |       |                |       |            |       |             |       | 89,700         |       |         |       | 300            |       |             |       |        |       |
| Conversion of preferred stock                                                             |       | 1,200,000        |       | 1,200               |       | (120,000        | )          | (120             | )          | (1,080         | )          |         |       |           |       |             |       |        |       |
| Net Loss for the year                                                                     |       |             |       |                |       |            |       |             |       |           |       |         |       |           |       |             |       | (1,845,496  | )          |
|                                                                                      |       |             |       |                |       |            |       |             |       |           |       |         |       |           |       |             |       |        |       |
| **BALANCES, DECEMBER 31, 2003**                                                      |       | 2,442,830        |       | 2,442               |       | 3,870,000       |       | 3,870            |       | 8,472,836      |       |         |       | 300            |       |             |       | (9,446,377  | )          |
|                                                                                      |       |             |       |                |       |            |       |             |       |           |       |         |       |           |       |             |       |        |       |
| Correct beginning balance per transfer agent                                              |       | 433              |       | 1                   |       |            |       |             |       |           |       |         |       |           |       |             |       |        |       |
| Issued effective January 23, 2004, services                                          |       | 6,000,000        |       | 6,000               |       |            |       |             |       | 3,055,327      |       |         |       |           |       |             |       |        |       |
| Issued effective April 1, 2004 for cash                                              |       | 583,334          |       | 583                 |       |            |       |             |       | 134,417        |       |         |       |           |       |             |       |        |       |
| Issued effective April 27,2004 for services                                          |       | 440,000          |       | 440                 |       |            |       |             |       | 197,560        |       |         |       |           |       |             |       |        |       |
| Issued effective May 10, 2004 to retire debt                                         |       | 300,000          |       | 300                 |       |            |       |             |       | 194,700        |       |         |       | (300           | )          |             |       |        |       |
| Issued effective May 11, 2004 for services                                           |       | 4,500,000        |       | 4,500               |       |            |       |             |       | 2,065,500      |       |         |       |           |       |             |       |        |       |
| Issued effective May 17, 2004 for services                                           |       | 141,033          |       | 141                 |       |            |       |             |       | 105,634        |       |         |       |           |       |             |       |        |       |
| Issued effective May 18, 2004 compensation                                           |       | 27,805,000       |       | 27,805              |       |            |       |             |       | 24,996,695     |       | (25,024,500  | )          |           |       |             |       |        |       |
| Issued effective May 18, 2004 for services                                           |       | 4,550,000        |       | 4,550               |       |            |       |             |       | 4,090,450      |       |         |       |           |       |             |       |        |       |
| Issued effective May 18, 2004 for acquisition                                        |       | 15,000,000       |       | 15,000              |       |            |       |             |       | 13,485,000     |       |         |       |           |       | (13,371,776      | )          |        |       |
| Issued effective June 1, 2004 for services                                           |       | 125,000          |       | 125                 |       |            |       |             |       | 249,875        |       | (250,000     | )          |           |       |             |       |        |       |
| Issued effective June 11, 2004 for services                                          |       | 100,000          |       | 100                 |       |            |       |             |       | 211,900        |       |         |       |           |       |             |       |        |       |
| Record stock option expense                                                               |       |             |       |                |       |            |       |             |       | 626,100        |       | (626,100     | )          |           |       |             |       |        |       |
| Issued effective July 1, 2004 compensation                                           |       | 140,000          |       | 140                 |       |            |       |             |       | 426,860        |       | (427,000     | )          |           |       |             |       |        |       |
| Issued effective July 23, 2004 for services                                          |       | 125,000          |       | 125                 |       |            |       |             |       | 284,875        |       | (285,000     | )          |           |       |             |       |        |       |
| Issued November 10, 2004 for cash                                                    |       | 242,167          |       | 242                 |       |            |       |             |       | 314,575        |       |         |       |           |       |             |       |        |       |
| Issued November 10, 2004 for services                                                |       | 10,000           |       | 10                  |       |            |       |             |       | 12,990         |       |         |       |           |       |             |       |        |       |
| Cancelled November 15, 2004 (agreement)                                              |       | (160,000         | )          | (160                | )          |            |       |             |       | (71,840        | )          |         |       |           |       |             |       |        |       |
| Issued November 17, 2004 to convert Series A  Preferred Shares to Common Shares |       | 1,031,316        |       | 1,031               |       | (1,331,280      | )          | (1,330           | )          | 1,391,246      |       |         |       |           |       | (1,392,277       | )          |        |       |
| Issued November 23, 2004 to convert Series A  Preferred Shares to common shares |       | 1,969,008        |       | 1,970               |       | (2,538,720      | )          | (2,540           | )          | 1,986,728      |       |         |       |           |       | (1,988,698       | )          |        |       |
| Record discount on convertible debentures                                                 |       |             |       |                |       |            |       |             |       | 1,000,000      |       |         |       |           |       |             |       |        |       |
| Net Loss for the year                                                                     |       |             |       |                |       |            |       |             |       |           |       |         |       |           |       |             |       | (19,081,344 | )          |
| Stock based compensation expensed during the year                                         |       |             |       |                |       |            |       |             |       |           |       | 8,311,012    |       |           |       |             |       |        |       |
| ** **                                                                                |       |             |       |                |       |            |       |             |       |           |       |         |       |           |       |             |       |        |       |
| **BALANCES, DECEMBER 31,2004**                                                       |       | 65,345,121       |       | 65,345              |       | 0               |       | 0                |       | 63,231,428     |       | (18,301,588  | )          | 0              |       | (16,752,751      | )          | (28,527,721 | )          |

 

**Additional Information:**

 
| Deficit accumulated during  development stage       |   | (16,846,221 | )      | (16,846,221 | )      |
|-----------------------------------------------------|--------|-------------|--------|-------------|--------|
|                                                |   |        |   |        |   |
| Deficit accumulated prior  to the development stage |   |        |   | (11,681,500 | )      |
|                                                |   |        |   |        |   |
| Deemed Distribution                                 |   | (16,752,751 | )      |        |   |
|                                                |   |        |   |        |   |
| Totals                                              |   | (33,598,972 | )      | (28,527,721 | )      |

 

SEE NOTES TO THE FINANCIAL STATEMENTS.

 

40

----

 

STATEMENT OF CASH FLOWS

 

**POWER3 MEDICAL PRODUCTS, INC.**

**(ADevelopment Stage Enterprise)**

**STATEMENTOF CASH FLOWS**

**JANUARY 1,2004 TO DECEMBER 31, 2004**

 
| ** **                                                                  | ** ** | **Year ended December 31,** | ** **  |
|-----------------------------------------------------------------------------|------------|----------------------------------|-------------|
| ** **                                                                  | ** ** | **2004**                         | ** **  | **2003** | ** ** | **Cumulative  during  Development  Stage (May 18,  2004 to  December 31,  2004** | ** ** |
|                                                                        |       |                             |        |   |   |   |   |
| Operating  Activities:                                                      |       |                             |        |   |   |   |   |
| Net loss                                                                    |       | $                                | (19,081,344 | ) | $ | (1,845,496 | ) | $ | (16,846,221 | ) |
|                                                                        |       |                             |        |   |   |   |   |
| Adjustments  to reconcile net loss to net cash used in operating activities |       |                             |        |   |   |   |   |
| Stock based  services and compensation                                      |       | 17,932,787                       |        | 1,722,500 |   | 15,155,488 |   |
| Stock issued  to retire preferred stock and debt                            |       | 4,236                            |        |   |   | 4,236 |   |
| Gain on  reversal of liabilities                                            |       |                             |        | (413,218 | ) |   |   |
| Depreciation  and amortization                                              |       | 227,461                          |        |   |   | 227,461 |   |
| Decrease  (increase) in receivables                                         |       | 9,006                            |        | (11,356 | ) | (2,350 | ) |
| Decrease  (increase) in deposits                                            |       | (25,900                          | )           |   |   | (25,900 | ) |
| Decrease  (increase) in prepaids                                            |       | (4,352                           | )           |   |   | (4,352 | ) |
| Increase  (decrease) in interest payable                                    |       |                             |        |   |   |   |   |
| Increase  (decrease) in accounts payable and accrued liabilities            |       | (8,187                           | )           | 377,071 |   | 543,297 |   |
|                                                                        |       |                             |        |   |   |   |   |
| Net cash  used in operating activities                                      |       | (946,293                         | )           | (170,499 | ) | (948,341 | ) |
|                                                                        |       |                             |        |   |   |   |   |
| Investing  Activities:                                                      |       |                             |        |   |   |   |   |
| Capital  expenditures, net                                                  |       | (331,061                         | )           |   |   | (331,061 | ) |
| Increase in  other assets                                                   |       | —                           |        |   |   |   |   |
| Net cash  used in investing activities                                      |       | (331,061                         | )           |   |   | (331,061 | ) |
|                                                                        |       |                             |        |   |   |   |   |
| Financing  Activities:                                                      |       |                             |        |   |   |   |   |
| Proceeds  from sale of common stock, net                                    |       | 449,807                          |        |   |   | 449,807 |   |
| Proceeds  from issuance of preferred stock                                  |       |                             |        | 100,000 |   |   |   |
| Proceeds  from borrowings under notes payable                               |       |                             |        | 30,000 |   |   |   |
| Repayment of  related party notes payable                                   |       |                             |        | (39,000 | ) |   |   |
| Payments on  other notes payable                                            |       |                             |        | (10,000 | ) |   |   |
| Proceeds  from stock subscriptions                                          |       |                             |        | 90,000 |   |   |   |
| Proceeds  from long term debt, net of issuance costs                        |       | 985,781                          |        | — |   | 985,781 |   |
|                                                                        |       |                             |        |   |   |   |   |
| Net cash  provided by financing activities                                  |       | 1,435,588                        |        | 171,000 |   | 1,435,588 |   |
|                                                                        |       |                             |        |   |   |   |   |
| Net increase  in cash and cash equivalents                                  |       | 158,234                          |        | 501 |   | 156,186 |   |
| ** **                                                                  |       |                             |        |   |   |   |   |
| Cash and  cash equivalents, beginning of period                             |       | 548                              |        | 47 |   | 2,596 |   |
|                                                                        |       |                             |        |   |   |   |   |
| Cash and  cash equivalents, end of period                                   |       | $                                | 158,782     |   | $ | 548 |   | $ | 158,782 |   |

 

41

----

 
| ** **                                                                    | ** ** | **Year ended December 31,** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | **2004**                         | ** ** | **2003** | ** ** | **Cumulative  during  Development  Stage (May 18,  2004 to  December 31,  2004** | ** ** |
|                                                                          |       |                             |       |   |   |   |   |
| Cash paid  for:                                                               |       |                             |       |   |   |   |   |
| Interest                                                                      |       | $                                | 59,840     |   | $ | 6,400 |   | $ | 59,840 |   |
| Income taxes                                                                  |       | —                           |       | — |   | — |   |
|                                                                          |       |                             |       |   |   |   |   |
| Non-cash  transactions:                                                       |       |                             |       |   |   |   |   |
| Conversion  of convertible notes payable and accrued interest to common stock |       | $                                |       |   | $ | 27,500 |   | $ |   |   |
| Conversion  of accrued payroll to preferred stock                             |       |                             |       | 200,000 |   |   |   |
| Conversion  of stockholder advances to notes payable                          |       |                             |       | 34,500 |   |   |   |
| Conversion  of notes payable to equity                                        |       |                             |       | 12,500 |   | — |   |
| Conversion  of preferred stock to common stock                                |       | —                           |       | 9,000 |   |   |   |
|                                                                          |       |                             |       |   |   |   |   |
| Conversion  of other liabilities to stockholder advances                      |       |                             |       | 5,000 |   |   |   |
| Exchange of  convertible preferred stock for common stock 3,000,324 shares    |       | 3,380,975                        |       |   |   | 3,380,975 |   |
| Common stock  issued for services (At market, date of effective agreement):   |       | —                           |       |   |   |   |   |
| For  consulting contracts 15,831,466 shares                                   |       | 10,156,775                       |       |   |   | 10,156,775 |   |
| For asset  acquisition 15,000,000 shares                                      |       | 13,500,000                       |       |   |   | 13,500,000 |   |
| For  compensation contracts 27,945,000 shares                                 |       | 25,451,500                       |       |   |   | 25,451,500 |   |
| Issuance of  warrants in connection with services                             |       | —                           |       |   |   |   |   |
| Issuance of  warrants in connection with convertible debentures               |       |                             |       | — |   |   |   |
| Asset  retirement obligation                                                  |       | —                           |       |   |   |   |   |
| Retirement  of common stock                                                   |       | —                           |       | — |   |   |   |
|                                                                               |            |                                  |            |  |  |  |  |  |  |  |  |  |

 

SEE NOTES TO THE FINANCIAL STATEMENTS

 

42

----

 

**POWER3 MEDICAL PRODUCTS, INC**

**(A Development Stage Enterprise)**

 

**NOTESTO FINANCIAL STATEMENTS**

 

***Item 1. ORGANIZATION, PRINCIPALACTIVITIES AND BASIS OF PRESENTATION***

 

Power 3 Medical Products, Inc.(the “Company” or “Power 3”) was incorporated in the State of Florida on May 15,1992 and merged into a New York Corporation in 1994, under the name SheffieldAcres, Inc..  Power3 and its whollyowned subsidiaries, C5 Health, Inc. (C5), which was officially dissolvedin the State of Delaware and the State of Florida effective December 31,2003 and Power3 Medical, Inc., a Nevada Corporation, now known asTenthgate, Inc., were engaged in product development, sales, distributionand services for the healthcare industry.  On September 12, 2003, Surgical Safety Products, Inc. amendedits Certificate of Incorporation to (a) declare a 1:50 reverse split ofits common stock; (b) increase its authorized capital to 150,000,000shares of common stock and 50,000,000 shares of preferred stock; and (c) changeits name to Power3 Medical Products, Inc. All references to the number of shares in the accompanying financialstatements and notes thereto have been adjusted to reflect the stock split asif it occurred on January 1, 2004.

 

At December 31,2004, the Company had one former direct subsidiary, Tenthgate, Inc. (“Tenthgate”).  Tenthgate is not active in Power3’s currentline of business activity.  Prior to theacquisition of substantially all the assets and certain liabilities fromAdvanced BioChem, it was contemplated that Power3 would distribute shares ofits subsidiary to its shareholders of record, however the shares of Tenthgatewere transferred to a trustee for distribution to the shareholders of Power3 onMay 17, 2004, before the Advanced BioChem transaction.  Previous management of Power3 and Tenthgatehave been independently operating Tenthgate since the Advanced BioChemtransaction.  As a result, Power3 doesnot now control the operations or activities of Tenthgate and Tenthgateactivities are no longer controlled by, nor are their activities associatedwith Power3 in any manner whatsoever. Power3 intends to divest itself of its subsidiary due to the differencesin business activity between Tenthgate and Power3 operating under its currentbusiness model.  Some of the principalreasons for the divestiture of Tenthgate and its subsidiary are that thedisposition of Tenthgate will allow the Company’s management to focusexclusively on its business objectives and permit management of Tenthgate moreflexibility in its operations and the disposition will allow the market toseparately identify and evaluate each business. The Company is continuing its efforts to complete the disposition ofTenthgate; however current management of Tenthgate has advised the Company thatTenthgate has issued a significant number of shares of its common stockpurportedly reducing the Company’s ownership interest to less than 1%.  The Company believes this stock issuance tobe invalid, however the Company does not have access to the records ofTenthgate and is considering its alternatives with respect to theseactions.  The Company still desires tocomplete a divestiture of Tenthgate, and believes the operations areinconsistent with and not material to the current activities of theCompany.  As a result, the operations andassets of Tenthgate are not consolidated or otherwise presented herein.

 

In2003, the Company was an operating company, marketing devices to aid surgicalprocedures. Prior to May 18, 2004, the products had received only minormarket acceptance and sales had slowed to the point that Power3 was searchingfor other products and markets to increase its presence in the healthcare industry.  In early 2004, Power3 became aware of abiotech company that appeared to have a set of assets and intellectualproperties that it required to more effectively pursue its business model.  That company, named Advanced BioChem, doingbusiness as ProteEx, provided contract-for-fee lab services analyzing proteinbiomarkers. At the conclusion of negotiations with Advanced BioChem, Power3entered into an Asset Purchase Agreement dated May 18, 2004, whereby itpurchased substantially all the assets and intellectual properties of AdvancedBioChem, and assumed certain liabilities, as scheduled in the agreement, fromAdvanced BioChem.   After thetransaction, certain employees from Advanced BioChem became employees of Power3and were later issued Employment

 

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Agreementsby Power3.  As consideration in the AssetPurchase Agreement, Power3 issued 15,000,000 shares of common stock to AdvancedBioChem.

 

Power3Medical Products, Inc. did not continue the business activity of AdvancedBioChem and never conducted any contract-for-fee lab service workwhatsoever.  Subsequent to the assetpurchase, the business model of Power3 was significantly changed, the Companyentered into the development stage and began to commercialize the intellectualproperty it acquired in the transaction, with its focus in the early detection,monitoring and targeting of diseases through the analysis of proteins.  Power3’s new developmental stage objective,and activity, is to develop its intellectual properties by focusing on diseasediagnosis, protein and biomarker identification and early detection indicatorsin the areas of cancers, neurodegenerative and neuromuscular diseases, as wellas other scientific areas of interest associated with protein biomarkers.

 

Afterthe asset purchase transaction on May 18, 2004, the previous management ofPower3 resigned and left the employ of the Company.  Subsequent to these resignations, twoemployees of Advanced BioChem were granted employment agreements byPower3.  These two employees were StevenB. Rash as President and CEO and Dr. Ira Goldknopf as Chief ScientificOfficer.

 

**2.RESTATEMENT OF UNAUDITED FINANCIAL INFORMATION**

 

OnMay 18, 2004, Power3 executed the Asset Purchase Agreement (“the Agreement”)referred to above, to purchase substantially all the assets of Advanced BioChemand assume certain liabilities in exchange for the issuance of 15,000,000shares of common stock of Power3.  Forfinancial statement purposes, the transaction was treated, at the time, as arecapitalization of the equity structure of Power3 and therefore, theaccumulated deficit of Power3 was eliminated, no stock-based expenses wererecorded as a result of this transaction, and the assets and liabilities ofPower3 and Advanced BioChem were combined, based on the accounting treatment asrecapitalization, in a reverse acquisition.  Subsequent to the filing of Form 10-QSB for the quarter ended March 31,2005, during its interim revue, Power3 determined that the purchase of assetsand the acquisition of certain liabilities of Advanced BioChem, which occurredon May 18, 2004, is properly accounted for as a purchase transaction, in arelated party transaction.  In addition,management determined that, due to the specific nature of the transaction andbecause Power3 did not continue the business activity of Advanced BioChemwhatsoever, Advanced BioChem cannot be considered a predecessor.  In addition, because the asset acquisition byPower3 was a purchase of equipment and intellectual property from an entitythat continued its existence and its previous business activity after thepurchase transaction, rather than being merged into Power 3, and because thecombination did not contain other elements of an equity merger of the twocompanies, the Company determined that the facts of the transaction had beenmisapplied and that purchase accounting is the more appropriate accountingtreatment and Advanced BioChem would not be presented as a predecessor.  This accounting treatment represents a restatementof the transaction referenced above, which was previously characterized as arecapitalization of Power3, as in a reverse acquisition.  The Balance Sheet, Statement of Operationsand the Statement of Cash Flow shown in Part I, Item 1, display the financialstatements of the Company consistent with the restatement of the assetacquisition as purchase accounting.

 

Theeffect of the restatement on the balance sheet of Power3 Medical Products, Inc.,besides eliminating the financial condition of Advanced BioChem as thepredecessor for the period of January 1, 2004 through May 17, 2004,is to restore Power3’s previously existing deficit in Retained Earnings,recognize the stock-based compensation expenses associated with the transactionand reclassify certain items within the Stockholder’s Deficit section ofthe Company’s balance sheet.

 

Theeffect of the restatement on the statement of operations of Power3 is primarilyto increase the stock-based compensation expenses associated with the May 18,2004 transaction and recognize the difference in the historical cost of theassets acquired and the liabilities assumed in the transaction.

 

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OnAugust 10, 2005, the Company issued an 8-K reporting non-reliance onpreviously issued financial statements for the quarter ended June 30,2004, September 30, 2004 and March 30, 2005, which had beenpreviously presented under the previous accounting treatment.

 

SincePower3’s planned principal operations have not yet commenced, it was and isconsidered to be in the developmental stage, as of May 18, 2004, asdefined in Financial Accounting Standards Board Statement No. 7.  Accordingly, some of the Company’s accountingpolicies and procedures have not yet been established.  The Company has been in its currentdevelopmental stage since its acquisition of its set of intellectual propertieson May 18, 2004.

 

**(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

 

Principles of Consolidation and Investments

 

Theaccompanying 2003 financial statements include the accounts of Power3 and itssubsidiaries.  As described in Item 1,the Company’s former subsidiary, now known as Tenthgate, Inc., is notconsolidated in 2004, since the Company has distributed the stock to a trusteefor distribution to the shareholders, and the Company does not controlTenthgate, Inc.  As such, in 2003,the Company accounted for its interest in Tenthgate using the cost method.

 

*Deemed Distribution*

 

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

 

Duringthe 4th Quarter of 2004, the Company converted Series APreferred Stock owned by former management of the Company to common shares, perthe terms of the Series A Preferred Stock held by these individuals(Novak, Gray and Leonard.)  As part ofthat transaction the Company recorded a deemed distribution of $3,380,975, themarket value of the common shares issued at the date of issue of the commonshares.  Since both of these deemeddistributions occurred after May 18, 2004, the date the Company enteredthe development stage, the total of these two deemed distributions($16,752,751) is included in the deficit accumulated during the developmentstage in the Balance Sheet of the Company as presented for December 31,2004.  The total presented in the BalanceSheet for deficit accumulated during development stage of ($33,598,972) is thecombined deemed distributions of ($16,752,751) and the net loss duringdevelopment stage of ($16,846,221).

 

Use of Estimates

 

The preparation of financial statementsin conformity with accounting principles generally accepted in the UnitedStates of America requires management to make certain estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the date of the financial statements. Thereported amounts of revenues and expenses during the reporting period may beaffected by the estimates and assumptions management is required to make.  Estimates that are critical to theaccompanying financial statements include assessing the impact of contingenciesand the amortization periods for the debt issuance costs and debt discount onthe convertible debentures (see Note 8) as well as estimating

 

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depreciation and amortization periods oftangible and intangible assets, and long-lived impairments, among others.  The markets for the Company’s products arecharacterized by intense competition, evolving standards and price competition,all of which could impact the future realizability of the Company’sassets.  Estimates and assumptions arereviewed periodically and the effects of revisions are reflected in thefinancial statements in the period they are determined to be necessary.

 

Financial Instruments and Concentrations of Credit Risk 

 

Management believes the book value of the Company’s cash and cashequivalents, accounts payable and accrued liabilities approximates their fairvalues due to their short-term nature. Management has used certain valuation techniques to estimate the fairvalue of the convertible debentures and other notes payable because of the lackof similar type arrangements in the marketplace.

 

Financial instruments, which potentially subject the Company tosignificant concentrations of credit risk, consist primarily of cash and cashequivalents.  The Company occasionallymaintains cash and cash equivalents balances in excess of federally insuredlimits.  The Company has not experiencedany losses in such accounts.

 

Furniture, Fixtures and Lab Equipment

 

Furniture,fixtures and lab equipment are stated at cost. Major additions are capitalized, while minor additions and maintenanceand repairs, which do not extend the useful life of an asset, are expensed asincurred. Depreciation and amortization are provided using the straight-linemethod over the assets’ estimated useful lives. At December 31, 2004, certain lab equipment having a net book valueof approximately $37,500 serves as security for certain liabilities.

 

Debt Acquisition Costs 

 

Debt acquisition costs are being amortized over themaximum term of the convertible debentures of three years using the straightline method.

 

Unamortized Discount

 

Unamortized discount resulting from the allocation ofvalue to warrants and the beneficial conversion feature embedded in theconvertible debentures is being amortized to interest expense over thecontractual lives of the debentures using the interest method.

 

Other Intangibles 

 

Other intangibles consist primarily ofpatents which are recorded at cost and arise from legal and filing fees.  Patents and other intangibles are beingamortized over ten years on a straight-line basis.

 

Long-Lived Assets 

 

Statement of Financial AccountingStandards (SFAS) 144, “Accounting for the Impairment or Disposal of Long-LivedAssets” requires that long-lived assets, including certain identifiableintangibles, be reviewed for impairment whenever events or changes incircumstances indicate that the carrying value of the assets in question maynot be recoverable. The Company evaluated its long-lived assets at December 31,2004 and determined that certain impairment losses were necessary. As a result,operations were charged for $45,024 during the year ended December 31,2004.  Management believes that theremaining balances of the Company’s long-lived assets are recoverable at December 31,2004.

 

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Net Loss Per Share 

 

Net loss per share is computed inaccordance with SFAS No. 128 “Earnings per Share” (“SFAS No. 128”)and SEC Staff Accounting Bulletin No. 98 (“SAB 98”).  Under the provisions of SFAS No. 128 andSAB 98, basic net loss per share is computed by dividing the net loss availableto common stockholders for the period by the weighted average number of commonshares outstanding during the period. Diluted net loss per share is computed by dividing the net loss for theperiod by the number of common and common equivalent shares outstanding duringthe period.  In periods in which theywould be anti-dilutive, common equivalent shares are ignored in the loss pershare calculations.  As a result, basicand diluted net loss per share is identical for each of the periods in theaccompanying financial statements.

 

Stock – Based Compensation 

 

TheCompany accounts for equity instruments issued to employees for services basedon the intrinsic value of the equity instruments issued and accounts for equityinstruments issued to those other than employees based on the fair value of theconsideration received or the fair value of the equity instruments, whicheveris more reliably measurable.  Fair valueis measured herein as the closing market price of the common stock on theeffective date of the agreement or Board resolution, rather than imputed valueof the agreement or imputed services.

 

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

 

Income Taxes 

 

TheCompany computes income taxes in accordance with Financial Accounting StandardsStatement No. 109 “Accounting for Income Taxes” (“SFAS 109”). The Companyalso prepares its income taxes in accordance with this standard. Under SFAS109, deferred taxes are recognized for the tax consequences of temporarydifferences by applying enacted statutory rates applicable to future years todifferences between the financial statement carrying amounts and the tax basisof existing assets and liabilities. Also, the effect on deferred taxes of achange in tax rates is recognized in income in the period that included theenactment date. There were no significant temporary differences at June 30,2005.

 

Research and Development 

 

Research and development costs, whichapproximated $411,174 for the year ended December 31, 2004 are expensed asincurred.

 

Cash Equivalents

 

Forpurposes of the statements of cash flows, the Company considers all highlyliquid debt instruments purchased with a maturity of three months or less to becash equivalents.

 

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Revenue Recognition

 

In2003, the Company shipped its product directly from the outsource manufacturerto the customer without taking ownership or possession of its products.  All shipments were FOB destination withfreight allowed and payment terms were net 30 days after shipment.

 

TheCompany’s revenue recognition policy is consistent with the criteria set forthin Staff Accounting Bulletin 101-Revenue Recognition in Financial Statements(SAB 101) for determining when revenue is realized or realizable andearned.  In accordance with therequirements of SAB 101 the Company recognizes revenue when (1) Persuasiveevidence of an arrangement exists; (2) Delivery has occurred; (3) theSeller’s price is fixed or determinable; and (4) collectibility isreasonably assured.

 

Sales Returns, Discounts and Other Reductions in Revenue

 

TheCompany does not allow returns for credit or discounts on purchases of surgicalsafety devices.  Based on historicalexperience, the Company does not recognize any allowance for warranty ordefects and the costs of warranty or defects were expensed as incurred.

 

Advertising Costs

 

Advertisingexpenses, which were $-0- for the years ended December 31, 2004 and December 31,2003, are expensed as incurred.

 

Investments 

 

Theaccompanying financial statements for the year ended December 31, 2003include the accounts of Power3 and its subsidiaries.  The Company accounted for its interest inTenthgate, during 2003, using the cost method.

 

Inthe financial statements for the year ended December 31, 2004, theaccounts of the Company’s former subsidiary, Tenthgate, are not consolidatedsince the Company has distributed the stock it held in Tenthgate to a trusteefor distribution and the Company does not control Tenthgate, as of the yearended December 31, 2004.

 

Other Income

 

Duringthe year ended December 31, 2003, various unsecured liabilities having acarrying value of approximately $413,200 were extinguished.  The transactions resulted because the age ofthe payables led management to conclude that the possibility of payment of suchliabilities is remote.  Because none ofthe liabilities were to related parties, the extinguishments were included inother income in the accompanying 2003 consolidated statement of operations.

 

**(2) GOING CONCERN**

 

TheCompany’s financial statements are presented on a going concern basis, whichcontemplates the realization of assets and satisfaction of liabilities in thenormal course of business. The Company is in the development stage and hasprimarily been involved in research and development and capital raisingactivities; as such the Company has incurred significant losses from operationsand has a significant stockholders’ deficit at December 31, 2004.

 

Asa result, the Company has an immediate need for capital to continue itsoperations, and it will need to raise significant additional funds to implementits business plan.  This cash will haveto come from equity sales 

 

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and/orborrowings as management has projected that the Company will need significantadditional capital for development and other ongoing operational activitiesbefore it will have any anticipated revenue generating products. The actualamount of funds that the Company will need will be determined by many factors,some of which are beyond the Company’s control. These factors include:

 

•                  Theextent to which the Company enters into licensing arrangements, collaborationsor joint ventures;

•                  Theprogress and results of research and product development;

•                  Thecosts and timing of obtaining new patent rights;

•                  Theextent to which the Company requires or licenses other technologies; and

•                  Regulatorychanges and competition and technological developments in the market.

 

Acurrent possibility available to the Company is to raise the remaining funds of$1,600,000 potentially available to them pursuant to the Securities PurchaseAgreement dated October 28, 2004 (the “Agreement”). These funds will beimmediately reduced by the payment of certain delinquent payables ofapproximately $251,000 of certain bridge financing received in April 2005,the $396,500 of bridge loan financing and the two Officer Advances that are tobe repaid upon the receipt of the $1,600,000. The Company is in immediate needfor capital to continue its operations and as such its ability to continue as agoing concern is subject to its ability to generate a profit or obtainnecessary funding from outside sources. . Management believes that even thoughthe Company currently has limited cash resources and liquidity, assumingexercise of the warrants and additional investment rights specified in theAgreement, that the net funds available from the final closing under suchAgreement will allow the Company to continue operations through December 2005.  In the event the final closing and sale of$1,600,000 in aggregate principal amount of debentures occurs, but the warrantsand additional investment rights are not exercised, the Company anticipatesthat it will need to raise additional capital prior to December 2005 tomeet its operating costs. However, the Company is currently in default underthe conditions set forth in the Agreement as well as the debentures andregistration rights agreement and consequently, there is no assurance that theCompany will be successful in completing the sale and issuance of the remaining$1,600,000 aggregate principal amount of debentures and/or the additionalinvestments rights pursuant to the Agreement. If the Company is unsuccessful in the closing of the sale and issuanceof the $1,600,000 aggregate principal amount of debentures at the finalclosing, the Company will be required to obtain alternative financing, sell orlicense some of its technology, and/or to curtail or cease its operations. Anysuch funding may significantly further dilute existing shareholders or maylimit the Company’s rights to its technology. Moreover, the increase in the number of shares available in the publicmarketplace may reduce the market price for the Company’s common stock, andconsequently, the price investors may receive at the time of sale.  The financial statements do not include anyadjustments to reflect the possible future effects on the recoverability andclassification of assets or the amounts and classification of liabilities thatmay result from the possible inability of the Company to continue as a goingconcern.

 

**(3)  Loss Per Share**

 

AtDecember 31, 2003, common stock options and preferred stock were excludedfrom the fully diluted loss per share calculations because the effects would beanti-dillutive.  At December 31,2004, the following common equivalent shares were excluded from suchcalculations for the same reason:

 

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

 

•                  333,333warrants which were issued to certain accredited investors on January 26,2005 under the Agreement. In addition, pursuant to the Agreement, the investorspurchased certain convertible debentures that if exercised, will result in theissuance of an indeterminate number of shares of 

 

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common stock

 

•                  580,000shares of warrants which were issued to members of the Company’s ScientificAdvisory Board and various other consultants in 2004 (including 100,000 to theagent that placed the convertible debentures discussed above).  The warrants, which expire three to fiveyears from the dates of the respective grants and were issued at no cost to suchpersonnel, may be converted to a like number of shares of the Company’s commonstock at any time prior to their expiration(s). As a result, during the period May 18, 2004 (date of acquisition)to December 31, 2004, the Company recorded $626,100 of stock basedcompensation as a result of the issuance of these warrants, which amountsrepresent the fair value of the warrants on the dates they were granted.

 

**(4)  Income Taxes**

 

TheCompany recognized losses for both financial and tax reporting purposes duringeach of the periods in the accompanying statements of operations.  Accordingly, no provisions for income taxesand/or deferred income taxes payable have been provided for in the accompanyingfinancial statements.

 

AtDecember 31, 2004 the Company had net operating loss carryforwards forincome tax purposes of approximately $9,551,000 arising primarily from stockbased expenses that are considered to be permanent differences.  These net operating loss carryforwards expireat various times through the period ended December 31, 2022 however becausethe Company has experienced changes in control and has incurred significantoperating losses, utilization of the income tax loss carryforwards are notassured. As a result, the non-current deferred income tax asset arising fromthese net operating loss carryforwards is not recorded in the accompanyingbalance sheet because the Company established a valuation allowance to fullyreserve such assets as their realization did not meet the required assetrecognition standard established by SFAS 109.

 

**(5) Related Party Transactions**

 

Inconnection with the related party notes which existed at December 31,2003, the Company incurred interest expense of approximately $10,600 during theyear ended December 31, 2003.

 

OnJuly 1, 2003, the Company entered into a consulting arrangement with oneof the holders of Series A Preferred Stock to provide strategic andcorporate development services on behalf of the Company.  This arrangement was on a month to monthbasis and was for $10,000 per month.  On December 31,2003, $60,000 was unpaid and due to this party. This amount was included in accounts payable and accrued liabilities at December 31,2003.

 

AtDecember 31, 2003, Notes Payable-Related Party consisted of threeunsecured promissory notes due to a former officer ($9,500), a former officer’sspouse ($25,000) and a preferred stockholder($20,000) totaling $54,500.  These notes, which were in default as of December 31,2003, bear interest at fixed rates between 10% and 12% per annum.  Total interest incurred under these notesapproximated $5,500 for the year ended December 31, 2003.

 

Duringthe three months ended March 31, 2005 the chief financial officer advanced$35,000 to the Company.  The advance,which is due on demand and unsecured, bears interest at 6% per annum.  At June 30, 2005, the balance of theadvance is included in accounts payable and accrued and other liabilities inthe accompanying condensed balance sheet.

 

OnMay 31, 2005, the Company received an Officer Advance in the amount of $55,000.  This advance is in the form of ashort-term Note Payable to the Officer, is payable on June 30, 2005, andbears interest at a rate of 6 % per annum until paid.  The Officer has agreed to allow the Companyan extension of time to repay this Note.

 

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OnJune 3, 2005, the Company received an Officer Advance in the amount of $50,000.  This advance is in the form of ashort-term Note Payable to the Officer, is payable on June 30, 2005, andbears interest at a rate of 6 % per annum until paid.  The Officer has agreed to allow the Companyan extension of time to repay this Note.

 

**(6) Notes Payable**

 

At December 31, 2002, the Company hadconvertible promissory notes payable aggregating $57,500.  During the year ended December 31, 2003,the following conversions occurred:

 

•                  $37,500 of thesenotes were converted to 95,000 shares of the Company’s common stock.  The difference between the $37,500 reductionin these notes, and the $27,500 increase in common stock and additional paid-incapital resulted because the market value of the shares issued was less thanthe carrying amount of the notes.

 

•                  $20,000 of theconvertible notes were converted to other notes payable.  These notes were unsecured, bore interest ata rate of 6 % per annum and were initially due on December 31, 2004.  However they were extended and remainoutstanding as of such date.

 

In addition to the above, other notes payable at December 31,2003, include $10,000 owed to the Company’s former landlord.  This note and 50,000 shares of the Company’scommon stock were provided to the landlord as full consideration for a notepayable of $33,009 owed to such landlord at December 31, 2002.  The $10,000 note was paid.

 

**(7) OtherCommitments and Contingencies**

 

Operating Lease for Office and Laboratory Space

 

InAugust 2004, the Company entered into a new lease which expires on August 31,2009, has an initial term of sixty-three months, and requires base monthlyminimum lease payments ranging from approximately $6,000 to $9,600 (plusutilities and operating expenses) over the lease term.  The lease contains a provision which allowsthe Company to extend the lease for two additional terms of sixty months.  Rent expense (for the office lease)approximated $28,952 during the year ended December 31, 2004.

 

Other Leases

 

InJune, 2004, the Company entererd into a new lease for a telephone system whichexpires in June, 2009, has an initial term of 60 months and requires basemonthly minimum lease payments in the amount of $184.51 per month over thelease term.  The Company paid $1,107 onthis lease during the year ended December 31, 2004.

 

InOctober, 2004, the Company entered into a new lease for computers which expiresin September, 2006, has an initial term of 24 months and requires base monthlyminimum lease payments in the amount of $344 per month over the leaseterm.  The Company paid $344 on thislease during the year ended December 31, 2004.

 

Futureother lease commitments are as follows:

 

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| 2005 |   | $     | 6,072  |   |
|------|--------|-------|--------|--------|
| 2006 |   | 5,109 |   |
| 2007 |   | 2,220 |   |
| 2008 |   | 2,220 |   |
| 2009 |   | 1,110 |   |

 

Employment Agreements 

 

TheCompany is obligated under amended and restated employment agreements with itsChief Executive Officer, Chief Scientific Officer and Chief FinancialOfficer.   The significant terms of theagreements are as follows:

 

ChiefExecutive Officer – The amended and restated employment agreement is effectiveas of May 18, 2004 and has an initial term of five years, subject to eachparty’s termination rights.  Theagreement provides for a base salary of $250,000 per year and the opportunityto receive cash bonuses based on performance upon the discretion of the boardof directors.  The agreement alsoincludes participation in employee benefit plans offered to employees, as wellas a grant of 13,250,000 shares of restricted common stock and 1,500,000 sharesof restricted Series B preferred stock (the Series B preferred shareshave not yet been issued).  Either partymay terminate the Chief Executive Officer’s employment under the contract,either with or without cause upon giving the other party at least thirty daysnotice.  If the Company terminates thechief executive officer’s employment at any time during the initial termwithout cause, he will be entitled to receive compensation provided under theagreement for the remaining initial term of employment.  In addition, in the event of a change incontrol as defined in the agreement, the Company may waive, in whole or inpart, any and all remaining restrictions on the restricted shares of commonstock and Series B preferred stock granted to him.

 

ChiefScientific Officer – The amended and restated employment agreement is effectiveas of May 18, 2004 and has an initial term of five years, subject to eachparty’s termination rights.  Theagreement provides for a current base salary of $125,000 through December 18,2004 and $100,000 thereafter and the opportunity to receive cash bonuses basedon performance upon the discretion of the board of directors.   The agreement also includes participation inemployee benefit plans offered to employees, as well as a grant of 13,250,000shares of restricted common stock and 1,500,000 shares of restricted Series Bpreferred stock (the Series B preferred shares have not yet beenissued).  Either party may terminate thechief scientific officer’s employment under the contract, either with orwithout cause upon giving the other party at least thirty days notice.  If the Company terminates the ChiefScientific Officer’s employment at any time during the initial term withoutcause, he will be entitled to receive compensation provided under the agreementfor the remaining initial term of employment. In addition, in the event of a change in control as defined in theagreement, the Company may waive, in whole or in part, any and all remainingrestrictions on the restricted shares of common stock and Series Bpreferred stock granted to him.

 

Chief Financial Officer – The amended and restated employment agreementis effective as of July 2, 2004 and has an initial term of three years,subject to each party’s termination rights. The agreement provides for a base salary of $120,000 per year and theopportunity to receive cash bonuses based on performance upon the discretion ofour board of directors.  The agreementalso includes participation in employee benefit plans offered by us to ouremployees, as well as a grant of 140,000 shares of restricted commonstock.  Either party may terminate theChief Financial Officer’s employment under the contract, either with or withoutcause upon giving the other party at least thirty days notice.  If the Company terminates the chief financialofficer’s employment at any time during the initial term without cause, he willbe entitled to receive compensation provided under the agreement for theremaining initial term of employment.  Inaddition, in the event of a change in control as defined in the agreement, theCompany may waive, in whole or in part, any and all remaining restrictions onthe restricted shares of common stock granted to him.

 

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On June 3, 2005, Mr. Michael Rosinski, Chief FinancialOfficer of Power3, resigned and terminated his employment at the Company as ofthat date.   In accordance with hisresignation, the employment agreement with Mr. Rosinski has terminated on June 5,2005, and the stock grant of 140,000 shares of Restricted Stock to Mr. Rosinskiis terminated.  The stock shares coveredin this agreement have been returned to the Company.

 

OnJune 3, 2005, the Company named John P. Burton as Chief Accounting Officerand Controller.  Previously Mr. Burtonwas Chief Financial Officer of Affiniscape, Inc. and served as ChiefFinancial Officer and Controller for Bob Johnson & Associates, Inc.from 1999 to 2003.

 

Other Common Stock Grants

 

Inaddition to the above common stock grants, the Company granted 1,305,000 sharesof its common stock to various other employees. Because all of the shares were granted at no cost to the employees, andbecause the shares generally vest over a period of two years, the Companyrecorded $26,612,600 of deferred compensation upon the date of the grant (whichamount was determined based on the total number of shares granted times thetrading values of the shares on the dates the stock grants were made).  This amount is being amortized to stock basedcompensation expense over the vesting period.

 

Asmentioned above, the Company has agreed to issue a total of 3,000,000 shares ofSeries B Preferred Stock to two of its officers.  However, for various reasons, includingcertain restrictions required by the indebtedness (which preclude the sharesfrom being issued for at least 90 days after the effective date of theregistration statement that has been filed to cover the resale of the shares ofcommon stock that will be issued upon the conversion or exercise of thesecurities issued by the Company for such indebtedness), the shares have notyet been issued.  The Company intends toissue such shares of the Series B Preferred Stock at such time as it ispermitted.

 

Futurerequired payments for base compensation under all of the employment agreementsdiscussed above are approximately as follows:

 

| **Periods Ending  December 31,** | ** ** | **Amounts** | ** ** |
|---------------------------------------|------------|-------------|------------|
|                                  |       |        |       |
| 2005                                  |       | $           | 470,000    |   |
| 2006                                  |       | 470,000     |       |
| 2007                                  |       | 410,000     |       |
| 2008                                  |       | 350,000     |       |
| 2009                                  |       | 131,250     |       |
|                                  |       |        |       |
| Total                                 |       | $           | 1,831,250  |   |

 

Contingencies

 

Inthe normal course of business, the Company is involved in certain litigation,including one matter in which the plaintiff is seeking $1,522,000 indamages.   Management believes the claimis without merit, and intends to vigorously contest such claim.  This matter is currently in the discoverystage and accordingly its ultimate resolution cannot presently be determined.  As such, no effect has been given to any lossthat might result from the outcome of this litigation in the accompanyingfinancial statements.

 

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Inaddition, an equipment vendor filed a complaint against Advanced BioChem (whichrelated to equipment acquired by Power3 in the May 18, 2004 transaction)in April of 2002 in a California court alleging breach of contract andseeking damages. Advanced BioChem reached a settlement agreement in April of2003 under which Advanced BioChem agreed to pay the vendor $40,000 ininstallments through August of 2003. At December 31, 2003, Advanced BioChem had a balance remaining of$20,000. In April 2005 the equipment vendor filed a lawsuit againstAdvanced BioChem and certain former officers of Advanced BioChem, and againstPower3, in order to enforce its claim for the remaining balance which is pastdue and may be assumed by the Company as part of the settlement of the disputewith Advanced BioChem as to liabilities assumed in the May 18, 2004transaction.

 

*Dispute with Advanced BioChem*

 

Advanced BioChem recently advised the Company, and publicly announced,that it was reviewing the terms of the Company’s acquisition of substantiallyall of the assets and assumption of certain liabilities of Advanced BioChempursuant to the Asset Purchase Agreement. Advanced BioChem has asserted thatthe Company did not assume all of the liabilities for which it was obligatedunder the terms of the purchase agreement.   On August 8, 2005, Advanced BioChem filed suit against Power3 andSteven B.Rash and Ira Goldknopf claiming damages of at least $3,000,000including the costs of litigation and of addressing the claims of the creditorsof Advanced BioChem that remain unpaid. The terms of the Asset Purchase Agreement are not clear and are subjectto different interpretations. While the Company believes that it has properlyinterpreted the provisions of the agreement, fulfilled its obligationsthereunder and reflected the terms of the transaction in its financialstatements and previous filings, the Company cannot be assured it willprevail.  Power3 has previously haddiscussions and negotiations with Advanced BioChem in an effort to resolve thisdisagreement. Notwithstandingthis, because the Company had previously offered to assume certainadditional liabilities of approximately $425,000 in connection with theirefforts to resolve the dispute, the Company had previously recorded $425,000 incontingent liabilities on its balance sheet. In accordance with Financial Accounting Standards Board Statement Number5, “Accounting for Contingencies”, the Company was prepared to increase thepurchase price by $425,000 (which amount represents the minimum amount of therange of additional liabilities that may ultimately be assumed upon theresolution of this matter).   Recently,as a result of Advanced BioChem’s refusal to further negotiate to settle thequestion, management has reviewed the liabilities in question and hasdetermined that Power3 is not liable for any of the aforementioned liabilitiesand these contingent liabilities have been removed from the Company’s balancesheet.  However, the Company remainscontingently liable for the claimed liabilities of $2,575,000. The purchaseprice and related financial statements have not been adjusted for theseliabilities as the fair value of this contingency cannot be reasonablyestimated at this time.

 

*Subpoena from the SEC, Division of Enforcement*

 

OnJune 27, 2005, the Company received a subpoena for documents regarding theSEC’s Division of Enforcement investigation In The Matter of Maui General Store, Inc.  It is the Company’s understanding that theMaui General Store matter relates to a promotional scheme by certainindividuals to promote the stock and stock price of certain entities during2004.  The Company provided all documentsin its possession pursuant to the subpoena and complied fully with the subpoenaon July 11, 2005.  The Company hasreceived no further correspondence from the Enforcement Division of theSEC.  The Company has not been notifiedthat it is a subject of this investigation.

 

*Settlement Agreement*

 

AtDecember 31, 2003, accrued and other liabilities included $10,000 to aformer supplier of support services for the Company’s Oasis systems, whichamount arose from the settlement of certain litigation.  Pursuant to the terms of the settlement, theCompany had agreed to pay the plaintiff $20,000 on or before May 31, 2002,

 

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howeversuch payment was not made and therefore the Company became liable to theplaintiff for $100,000 plus interest from June 1, 2002.  The liability was settled for $20,000 in 2004and the $100,000 liability was removed from accrued liabilities at such time.

 

Leases in 2003

 

InMay, 2002, the Company entered a lease expiring on March 31, 2006.  This lease was terminated on October 29,2002 and all future obligations were released in exchange for a promissory notetotaling $33,009, which included termination and related fees.  This note and all accrued interest were dueon October 29, 2003.  On December 29,2003, this note was renegotiated and at December 31, 2003, only $10,000remained outstanding.  The note was paidin 2004.

 

Subsequentto termination of such lease, the Company operated out of its President’s andChief Financial Officer’s homes. Effective October 15, 2003, the Board of Directors resolved that astipend be provided to the two officers for use of their home offices andrelated equipment in the service of the Company’s goals until such time that permanentoffice space is secured.  This stipend of$500 per month for each of the officers was retroactive to September 2002at the time when the previous office space was vacated.  As a result, $15,000 of rent expense has beenincluded in selling, general and administrative expenses in the accompanying2003 consolidated statement of operations.

 

Other

 

OnJanuary 30, 1998, the Company entered into an agreement with SarasotaMemorial Hospital (the “Provider”) in which the Provider was to performclinical testing of ten surgical or medical products submitted by theCompany.  The agreement, which waspersonally guaranteed by Dr. Michael Swor, the Company’s predecessor CEO,expired on January 30, 2003 and required the Company to pay the Provider afixed amount of $25,000 for each of the ten studies.  The agreement further provided that theCompany was obligated to pay the $250,000 even if the Company elected to foregohaving the Provider perform the clinical testing.  The Company did not submit any products for clinicaltesting during the term of the agreement and/or pay any amounts due under thisarrangement.  For various reasons, theProvider agreed to waive their rights under the agreement provided that theCompany either (1) entered into a new profit participation agreement withthe Provider under which the Provider would receive no less than $250,000within a four year period commencing on the date of such agreement or (2) madean immediate payment of $50,000 to the Provider.  As a result thereof, the Company recorded a$50,000 liability as of December 31, 2002, which amount represented theprobable amount of the liability existing at such time, as well as at December 31,2003.  The liability was paid in 2004.

 

**(8) SecuritiesPurchase Agreement**

 

Convertible Debentures 

 

TheCompany entered into a Securities Purchase Agreement, dated October 28,2004 (the “Agreement”) with certain accredited investors, and an Amendment tosuch Securities Purchase agreement on January 19, 2005 in which fourinvestors accelerated the purchase of debentures in exchange for additionalwarrants.   Pursuant to the Agreement,the purchasers agreed to purchase from the Company convertible debentures duethree (3) years from the date of issuance in the aggregate principalamount of $3,000,000. The Agreement also provides for the issuance to thepurchasers, at no additional cost to the purchasers, warrants to purchaseshares of the Company’s common stock and additional investment rights topurchase additional convertible debentures. In connection with the Agreement, the Company also entered into aregistration rights agreement with the purchasers, which requires that theCompany file a registration statement with the SEC registering on behalf of thepurchasers the resale of the shares of common stock issuable upon conversion ofthe debentures and the exercise of the warrants. The Company will also file anadditional registration statement for the resale of the shares issuable 

 

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uponconversion of the debentures issuable upon exercise of the additionalinvestment rights previously issued by the Company.

 

EffectiveOctober 28, 2004, the Company issued and sold to the purchasers the first$1,000,000 in aggregate principal amount of such debentures at the initialclosing under the Agreement. Effective January 26, 2005, the Companyissued and sold to certain investors $400,000 aggregate principal amount ofdebentures.  Subject to the conditionsset forth in the Agreement, as amended, the purchasers are required to purchasethe remaining $1,600,000 in aggregate principal amount of such debentures atthe final closing, which is to occur on or before the fifth trading day afterthe effective date of the registration statement. The Company is currently indefault under the Agreement and the previously issued debentures and relatedregistration rights agreement, and therefore the conditions of the Agreementwill not be satisfied or otherwise met on a timely basis. Consequently, thereare no assurances that the investors will purchase all or any portion of theremaining $1,600,000 aggregate principal amount of debentures. The $1,000,000aggregate principal amount of debentures issued in the initial closing and the$400,000 aggregate principal amount of debentures issued on January 26,2005 are due and payable in accordance with their original terms in full threeyears after the date of issuance and will not bear interest. The debentureswhich may be issued at the final closing will be due and payable in full three (3) yearsafter the date of their issuance, and will not bear interest. The aggregatecash purchase price for the debentures will be $3,000,000, which is equal tothe full face amount of the debentures. At any time from the closing date untilthe maturity date of the debentures, the purchasers have the right to convertthe debentures, in whole or in part, into common stock of the Company at thethen effective conversion price. The conversion price for the previously issued$1,400,000 aggregate principal amount of debentures and the 1,600,000 aggregateprincipal amount of debentures issuable at the final closing is equal to thelesser of (1) $0.90, (2) the 75% average of the daily volume weightedaverage price of the common stock for the five (5) consecutive dayspreceding the effective date of the registration statement or (3) thedaily volume weighted average price of the common stock on the effective dateof the registration statement. The conversion price shall be subject toadjustment under circumstances set forth in the debentures.

 

Under the Agreement, thePurchasers also received at the first closing warrants to purchase an aggregateof up to 2,500,000 shares of common stock and additional investment rights topurchase up to an additional $2,500,000 principal amount of convertibledebentures.  Pursuant to the Amendment tothe agreement, concurrent with the Company’s issuance of the $400,000 aggregateprincipal amount of debentures on January 26, 2005, the Company issuedadditional warrants to purchase an aggregate of up to 333,333 shares of commonstock.  The warrants are exercisable at aprice of $1.44 per share (subject to adjustment), for a period of five (5) yearsfrom October 28, 2004.

 

Theadditional investment rights are exercisable at a price equal to the principalamount of the debentures to be purchased, for (1) a period of nine monthsfollowing the effective date of the registration statement to be filed pursuantto the registration rights agreement, or (2) a period of 18 months fromthe date of issuance of the additional investment rights, whichever is shorter.The debentures to be purchased upon the exercise of the additional investmentrights will have the same terms as the debentures described above, except thatthe conversion price will be equal to $1.08 (subject to adjustment).

 

Thedebentures contain covenants that will limit the Company’s ability to, amongother things: incur or guarantee additional indebtedness; incur or createliens; amend the Company’s certificate of incorporation, bylaws or othercharter documents so as to adversely affect any rights of the holders of thedebentures; and repay or repurchase more than a de minimus number of shares ofcommon stock other than as permitted in the debentures and other documents executedwith the purchasers.

 

Thedebentures include customary default provisions and an event of defaultincludes, among other things, a change of control of the Company, the sale ofall or substantially all of the Company’s assets, the failure to have the registrationstatement declared effective on or before the 180th day after the initialclosing date, and the 

 

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lapseof the effectiveness of the registration statement for more than 30 consecutivetrading days during any 12-month period (with certain exceptions), the Company’sfailure to timely deliver certificates to holders upon conversion and a defaultby the Company in any obligations under any indebtedness of at least $150,000which results in such indebtedness being accelerated.

 

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

 

As mentioned above, theCompany is in default under the provisions of the Agreement, registrationrights agreement and previously issued debentures.  The events of default now principally relatesto the Company’s inability to have its registration statement declaredeffective within the time period required by the agreements.  Although the Company intends to seek waiversor forbearance agreements from the holders of its debentures, there is noassurance that the Company will receive such concessions.  As such, the indebtedness has been classifiedas a current liability in the accompanying balance sheet.  If the Company is unable to obtain suchconcessions, the aggregate amount payable under the outstanding debentures dueto the acceleration thereof by reason of the default is equal to the “MandatoryPrepayment Amount” as specified in the debentures.  The Mandatory Prepayment Amount equals thesum of (i) the greater of:  (a) 130%of the principal amount of the debentures to be prepaid, or (b) theprincipal amount of the debentures to be prepaid, divided by the conversion priceon (x) the date the payment is demanded or otherwise due, or (y) thedate the payment is paid in full, whichever is less, multiplied by the closingprice of the Company’s common stock on (x) the date the payment isdemanded or otherwise due, or (y) the date the payment is paid in full,whichever is greater, and (ii) all other amounts, costs, expenses andliquidated damages due in respect of the debentures.  In addition to the foregoing, pursuant to theterms of the registration rights agreement, the Company is required to pay eachholder of the debentures liquidated damages since the registration statementwas not declared effective on or before February 25, 2005.  The amount of liquidated damages shall equaltwo percent (2%) of the aggregate purchase price paid by the holders for thedebentures and shall be payable on each monthly anniversary of such date untilthe registration statement is declared effective.  As of June 30, 2005, the Company hasrecorded $188,000 of expense and accrued liabilities as a result of thisprovision.

 

The Company has receivednotice from one of the purchasers of the debentures informing the Company thatit is in default under the debentures and demanding payment of the MandatoryPrepayment Amount, together with the liquidated damages, to which it isentitled pursuant to the agreement.

 

Upon filing its Form 10-KSBfor 2004, the Company intends to file an amendment to its previously filedregistration statement and will endeavor to have it declared effective as soonas practicable.  The Company is indiscussion with its debenture holders regarding a resolution of this matter.

 

Inconnection with such financing, the Company became obligated to issue to itsplacement agent, Westor Online and Kogan and Associates, a warrant to purchase100,000 shares of common stock at an exercise price of $3.00. If any investorexercises their additional investment rights and purchases additionaldebentures, the placement agent will be entitled to receive additional warrantsto purchase up to a number of shares of common stock equal to ten percent (10%)of the exercise price paid upon exercise of the additional investment rightsdivided by ninety percent (90%) of the market price as of the initial closing.

 

Inaccordance with the provisions of Emerging Issues Task Force Issue 98-5 (“EITF98-5”), discounts have been recorded for the entire face amount of theconvertible debentures on the dates the debentures were sold (i.e. October 28,2004 and January 25, 2005) of the first closing to allocate value to theembedded beneficial conversion feature and the 2,500,000 warrants.

 

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Similarly,a discount for the entire face amount of the convertible debentures wasrecorded on the date of the first closing to allocate value to the embeddedbeneficial conversion feature and the 2,500,000 warrants.

 

Sincethere is no assurance that the Company will receive the remaining funds due atthe time of the final closing and/or through the exercise of additionalinvestment rights, no effect has been given to any value that may result fromthe issuance of securities in the accompanying financial statements.

 

**(9) OtherSignificant Equity Transactions**

 

Duringthe year ended December 31, 2003, a stockholder contributed $90,000 inexchange for the right to receive a total of 300,000 shares of the Company’scommon stock.  These shares were notissued as of December 31, 2003, and accordingly the par value of suchshares is reflected as common stock subscribed.

 

OnDecember 31, 2003, an independent consultant was issued 100,000 shares ofrestricted common stock for assisting the Company in certain developmentactivities.  Stock based compensation of$37,500 was recorded as a result of this transaction based on the fair value ofthe shares at the date of issuance.

 

AtDecember 31, 2003, the Company had 9,500 warrants outstanding, whichentitled the holders to purchase one share of the Company’s restricted commonstock for $50 per share.  The warrantsexpired in 2004.

 

*Series APreferred Stock*

 

OnMarch 31, 2003, the Company’s Board of Directors authorized 4,000,000shares of Series A Preferred Stock. Simultaneously, the Company issued 2,660,000 shares of Series APreferred Stock in consideration of accrued and unpaid salary totaling $200,000to two officers of the Company and 1,330,000 shares of Series A PreferredStock in consideration of $100,000 cash by an individual investor.  The Company recorded $1,695,000 of non-cashcompensation expense as a result of this transaction during 2003.  The transaction was recorded in the fourth quarterof 2003 based on the value of the Company’s stock immediately subsequent to thestock split discussed previously.  On December 31,2003 the two officers mentioned above converted a total of 120,000 shares oftheir Series A Preferred Stock into 1,200,000 common shares.   In November, 2004, the Series APreferred stockholders converted their remaining preferred shares into3,000,324 shares of common stock.

 

**(10) Stock Option Plans**

 

The Company has various stock option andwarrant plans outstanding.   Optionsgranted under the 1998 stock option plans are exercisable only after therespective vesting period, which is determined by the Company’s stock optioncommittee. Options expire seven years from the date of grant. Under the 1999stock option plan, options granted to employees vest ratably over three years;vesting is determined by the Company’s stock option committee for optionsgranted to officers, directors, and consultants. Options expire ten years fromthe date of grant.

 

On March 31, 2003, the Companyapproved the 2003 Stock Compensation Plan, which provides for the granting ofcommon stock, options and/or warrants to officers, directors and employees ofthe Company, as well as consultants and attorneys who provide services to theCompany.  Under this plan the Company isauthorized to issue up to 8,000,000 shares of common stock, options orwarrants. The options and warrants shall expire according to terms asdetermined by a committee on the date of grant, which will not exceed ten yearsfrom the date of grant, or five years in cases of a grantee who owns more than10% of the total combined voting power of all classes of stock (10%Stockholder). The exercise period of any options or warrants granted will alsobe determined by this committee at the date of grant. The exercise price shallbe determined by the committee at the time of grant except that in the case ofincentive stock options, the exercise price shall not be less than 100% 

 

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of the fair market value of the shares onthe date of grant, and in cases of a 10% Stockholder, for which the exerciseprice shall not be less than 110% of fair market value on the date of grant.

 

In addition to the above, in January 2004,the Company’s Board of Directors approved the 2004 Directors, Officers andConsultants Stock Option, Stock Warrant, and Stock Award Plan (the 2004Plan).  Pursuant to the 2004 Plan,initially 10,000,000 shares of common stock, warrants, options, preferred stockor any combination thereof may be optioned. After the grant of any option, warrant or share of preferred stock, thenumber of shares that may be optioned under the 2004 Plan will beincreased.  The number of shares of suchincrease shall be an amount such that immediately following such increase, thetotal number of shares issuable under this plan and reserved for issuance uponexercise of options, warrants, or conversion of shares of preferred stock willequal 15% of the total number of issued and outstanding shares of the Company’scommon stock.  At December 31, 2004no warrants or options are outstanding under this plan.

 

Pro forma information regarding net income andearnings per share is required by SFAS 123, and has been determined as if theCompany had accounted for all of its options and warrants (the “Warrants”)  under the fair value method of thatStatement. The fair value for the Warrants was estimated at the date of grantusing a Black-Scholes option pricing model with the following assumptions forWarrants granted in 2000: risk-free interest rate of 6.03%; dividend yield of0%; volatility factor of the expected market price of the Company’s common stockof .34; and a weighted-average expected life of the options of 2.7 years. Thefollowing assumptions were used for Warrants granted in 2004: risk-freeinterest rate of 5.0%; dividend yield of 0%; volatility factor of the expectedmarket price of the Company’s common stock of 1.86 and a weighted-averageexpected life of the options of -0- years (as all were immediately vested). TheBlack-Scholes option valuation model was developed for use in estimating thefair value of traded Warrants that have no vesting restrictions and are fullytransferable. In addition, option valuation models require the input of highlysubjective assumptions including the expected stock price volatility. Becausethe Company’s Warrants have characteristics significantly different from thoseof traded Warrants, and because changes in the subjective input assumptions canmaterially affect the fair value estimate, in management’s opinion, theexisting models do not necessarily provide a reliable single measure of thefair value of its stock options.  .

 

Allof the Company’s warrants were recorded at their fair values; accordingly stockbased compensation actually recorded and stock based compensation that would berecorded using a fair value based method are identical.  For purposes of pro forma disclosures, theestimated fair value of the options is charged to expense over the options’vesting period.  For the fiscal yearended December 31, 2003, the Company would have recorded compensationexpense of approximately $11,750 as a result of outstanding options.

 

TheCompany’s pro forma information for the years ended December 31, 2004 and2003 is as follows:

 
| ** **                                             | ** ** | **2004** | ** **  | **2003** | ** ** |
|--------------------------------------------------------|------------|----------|-------------|----------|------------|
| Net Loss:                                              |       |     |        |     |       |
| As reported                                            |       | $        | (19,081,344 | )        | $          | (1,845,496 | ) |
| Stock based employee compensation expense              |       |     |        |     |       |
| Determined under fair value based methods,  net of tax |       |     |        | $        | (11,750    | ) |
| Option Expense                                         |       | $        | (626,100    | )        |       |   |
|                                                   |       |     |        |     |       |
| Pro forma net loss                                     |       | $        | (19,707,444 | )        | $          | (1,857,246 | ) |
|                                                   |       |     |        |     |       |
| Loss per  share, basic and diluted:                    |       |     |        |     |       |
| As reported                                            |       | $        | (0.45       | )        | $          | (1.81 | ) |
| Pro forma                                              |       | $        | (0.47       | )        | $          | (1.83 | ) |

 

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Asummary of the Company’s warrant activity and related information for the yearsended December 31, 2004 and 2003 is as follows:

 
| ** **                          | ** ** | **2004**     | ** ** | **2003**     | ** ** |
|-------------------------------------|------------|--------------|------------|--------------|------------|
| ** **                          | ** ** | ** **   | ** ** | **Weighted** | ** ** | ** ** | ** ** | **Weighted** | ** ** |
| ** **                          | ** ** | ** **   | ** ** | **Average**  | ** ** | ** ** | ** ** | **Average** | ** ** |
| ** **                          | ** ** | ** **   | ** ** | **Exercise** | ** ** | ** ** | ** ** | **Exercise** | ** ** |
| ** **                          | ** ** | **Warrants** | ** ** | **Price**    | ** ** | **Warrants** | ** ** | **Price** | ** ** |
|                                |       |         |       |         |       |   |   |   |   |
| Outstanding  at beginning of year   |       | 6,360        |       | 12.50        |       | 6,360 |   | 12.50 |   |
|                                |       |         |       |         |       |   |   |   |   |
| Cancelled                           |       | —       |       | —       |       | — |   | — |   |
|                                |       |         |       |         |       |   |   |   |   |
| Granted                             |       | 3,080,000    |       | 1.44         |       |   |   |   |   |
|                                |       |         |       |         |       |   |   |   |   |
| Exercised                           |       | —       |       | —       |       | — |   | — |   |
|                                |       |         |       |         |       |   |   |   |   |
| Outstanding  at end of year         |       | 3,086,360    |       | 1.46         |       | 6,360 |   | 12.50 |   |
|                                |       |         |       |         |       |   |   |   |   |
| Exercisable  at the end of the year |       | 3,086,360    |       | 1.46         |       | 6,360 |   | 12.50 |   |

 

 

Thefollowing table summarizes information about the Company’s Warrants outstandingat December 31, 2004:

 

| **Exercise  Price** | ** ** | **Number  Outstanding** | ** ** | **Weighted Average  Remaining Contractual  Life (in years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** |
|---------------------|------------|-------------------------|------------|--------------------------------------------------------------|------------|----------------------------------------|------------|
| $                   | .98        |                    | 300,000    |                                                         | 2.4        |                                   | $          | .98 |   |
| $                   | 1.00       |                    | 100,000    |                                                         | 2.4        |                                   | $          | 1.00 |   |
| $                   | 1.43       |                    | 50,000     |                                                         | 2.8        |                                   | $          | 1.43 |   |
| $                   | 1.44       |                    | 2,500,000  |                                                         | 4.8        |                                   | $          | 1.44 |   |
| $                   | 2.77       |                    | 30,000     |                                                         | 2.6        |                                   | $          | 2.77 |   |
| $                   | 3.00       |                    | 100,000    |                                                         | 4.8        |                                   | $          | 3.00 |   |
| $                   | 6.50       |                    | 5,460      |                                                         | 6.0        |                                   | $          | 6.50 |   |
| $                   | 50.00      |                    | 900        |                                                         | 3.0        |                                   | $          | 50.00 |   |
|                |       |                    |       |                                                         |       |                                   |       |
|                |       | 3,086,360               |       |                                                         |       | $                                      | 1.46       |   |

 

Inaddition to the Warrants discussed above, during the six months ended June 30,2005, the Company issued 333,333 warrants to certain holders of the convertibledebentures (see Note 8).

 

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**(11) Recent Pronouncements**

 

*FIN 46– Consolidation of Variable Interest Entities*

 

InJanuary 2003, the FASB issued FIN 46, (revised in December 2003 asFIN46R) “Consolidation of Variable Interest Entities,” which clarifies theapplication of Accounting Research Bulletin (“ARB”) 51, Consolidated FinancialStatements, to certain entities (called variable interest entities) in whichequity investors do not have the characteristics of a controlling financialinterest or do not have sufficient equity at risk for the entity to finance itsactivities without additional subordinated financial support from otherparties. The disclosure requirements of this Interpretation are effective forall financial statements issued after January 31, 2003. The consolidationrequirements apply to all variable interest entities created after January 31,2003. In addition, public companies must apply the consolidation requirementsto variable interest entities that existed prior to February 1, 2003 andremain in existence as of the beginning of annual or interim periods beginningafter June 15, 2003. The adoption of FIN 46R had no impact on the financialstatements of the Company as the Company has no variable interests in variableinterest entities.

 

*SFAS150 - Accounting for Certain ‘Financial Instruments with Characteristics ofBoth Liabilities and Equity*

 

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

 

*SFAS132 - Employers’ Disclosures about Pensions and Other Postretirement Benefits*

 

In December 2003, FASBStatement No. 132 (revised) was issued which prescribes the requiredemployers’ disclosures about pension plans and other postretirement benefitplans; but it does not change the measurement or recognition of thoseplans.  The Statement retains and revisesthe disclosure requirements contained in the original Statement 132.  It also requires additional disclosures aboutthe assets, obligations, cash flows, and net periodic benefit cost of definedbenefit pension plans and other postretirement benefit plans.  The Statement generally is effective forfiscal years ending after December 15, 2003.  Since the Company does not have any types ofpension plans or other postretirement benefits, the adoption of this Statementdid not have an effect on the Company’s financial statements.

 

*SFAS 123(R)‘Share-Based Payments’*

 

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

 

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

 

In December 2004, FASBStatement No. 153 was issued amending APB Opinion No. 29 to eliminatethe exception allowing non-monetary exchanges of similar productive assets tobe measured based on the carrying value of the assets exchanged as opposed toat their fair values.  This exception wasreplaced with a general exception for exchanges of non-monetary assets that donot have commercial substance.  Anon-monetary exchange has commercial substance if the future cash flows of theentity are expected to change significantly as a result of the exchange.  The provisions of this statement areeffective for non-monetary asset exchanges occurring in fiscal periodsbeginning after the June 15, 2005. The adoption of this statement did not have a material impact on theCompany’s financial statements.

 

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

 

InNovember 2002, the FASB issued FASB Interpretation (“FIN”) 45 “Guarantor’sAccounting and Disclosure Requirements for Guarantees, Including IndirectGuarantees of Indebtedness of Others,” which elaborates on the disclosures tobe made by a guarantor in its interim and annual financial statements about itsobligations under certain guarantees that it has issued. It also clarifies thata guarantor is required to recognize, at the inception of the guarantee, aliability for the fair value of the obligation undertaken in issuing theguarantee. The initial recognition and initial measurement provisions of thisInterpretation are applied prospectively to guarantees issued or modified afterDecember 31, 2002. The adoption of these recognition provisions willresult in recording liabilities associated with certain guarantees provided byus. The disclosure requirements of this Interpretation are effective forfinancial statements of interim or annual periods ending after December 15,2002. FIN 45 has no impact on the Company’s financial statements

 

**(12) Subsequent Events**

 

OnApril 5, 2005, the Company received a bridge loan in the amount of $251,000.  This bridge loan is due andpayable on the sooner of August 15, 2005 or one business day following theclosing of the Company’s sale and issuance of the $1,600,000 aggregateprincipal amount of debentures which come due on August 15, 2005.  This bridge loan bears interest at a rate of10% per annum which, at the holder’s option may be paid in (a) cash or (b) thatnumber of shares of the Company’s common stock determined by dividing $ 251,000by the common stock price on the date of payment and multiplying the quotientso obtained by 20%.  The holder of thisNote has agreed to allow the Company an extension of time to repay this Note.

 

OnJune 17, 2005, the Company received a bridge loan in the amount of $396,500.  This bridge loan is in the formof a promissory note, payable on the sooner of August 15, 2005, or thefifth day following the effective date of the Company’s registration statementon Form SB-2.  The note is securedby a Stock Pledge Agreement, entered into on June 17, 2005, by the CEO ofPower3, wherein the Pledger agreed to pledge 6,000,000 shares of common stockas security for the performance of the Company under the note.   The note bears no interest, other than incase of default, in which case the note shall bear interest at the rate of 18%per annum from the date such interest would be due.  The holder of this Note has agreed to allowthe Company an extension of time to repay this Note.

 

On June 3, 2005, Mr. Rosinski,Chief Financial Officer of the Company, resigned and terminated his employmentat the Company as of that date.  Inaccordance with his resignation, the employment agreement with Mr. Rosinskiterminated, on June 3, 2005, and the stock grant of 140,000 shares ofRestricted Stock to Mr. Rosinski is terminated.  Mr. Rosinski has returned his stockshares in accordance with this forfeiture.

 

OnJuly 28, 2005, the management of Power3 decided upon a change in itsindependent public accounting firm and decided to no longer engage Kingery &Crouse, P.A. as its independent public accounting firm.  On that same date, the Company engaged theservices of John A. Braden & Company, P.C. as its independent publicaccounting firm.

 

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OnAugust 12, 2005, Power3 issued an 8-K indicating that it was restating itsfinancial statements previously presented for the three month periods ending June 30,2004, September 30, 2004 and March 31, 2005.  In addition, the Company will amend its 8-Kfiled to report the asset purchase transaction with Advanced BioChem on May 18,2004.

 

OnAugust 15, 2005, Power3 issued a 12b-25 indicating that it would be filingits 10-QSB for June 30, 2005 late, within the 5 day grace period for latefiling.

 

OnAugust 29, 2005, Power3 issued an 8-K/A restating its previously reportedfinancial statements for the three month period ended March 31, 2004.

 

**Item 8. Changes InAccountants on Accounting and Financial Disclosure**

** **

On July 28, 2005, the management of Power3Medical Products, Inc. (“the Company”) decided upon a change in itsindependent public accounting firm and confirmed that the Company would nolonger engage Kingery & Crouse, P.A. as its independent publicaccounting firm.  On that same date, theCompany engaged the services of John A. Braden & Company, PC, as itsindependent public accounting firm for its fiscal year ending December 31,2004.  The Company’s Board of Directorsauthorized the engagement of John A. Braden & Company, PC as theCompany’s independent public accounting firm.

 

The audit report of Kingery & Crouse on theCompany’s financial statements as of and for the fiscal year ended December 31,2003 did not contain any adverse opinion or disclaimer of opinion, nor was itqualified or modified as to uncertainty, audit scope or accounting principles,but did contain modifications as to the Registrant’s ability to continue as agoing concern.  From the date of Kingery &Crouse’s appointment through the date of their dismissal on July 28, 2005,there were no disagreements between the Company and Kingery & Crouse,P.A. on any matter listed under Item 304, Section (a) (1) (iv) Ato E of Regulation S-B, including accounting principles or practices, financialstatement disclosure or auditing scope or procedure which, if not resolved tothe satisfaction of Kingery & Crouse, P.A. would have caused them tomake reference to the matter in its reports on the Company’s financialstatements.

 

In deciding to select John A. Braden &Company, the Board of Directors of Power3 reviewed auditor independence issuesand existing commercial relationships with John A. Braden & Companyand concluded that John A. Braden & Company has no commercialrelationship with the Company that would impair its independence.

 

During the two most recent fiscal years ended December 31,2003 and December 31, 2004, and the subsequent interim period through July 28,2005, the Company did not consult with John A. Braden & Company, PC,regarding any of the matters or events set forth in Item 304(a)(2)(i) and (ii) ofRegulation S-K.

 

**Item8a. Controls and Procedures**

** **

*DisclosureControls and Procedures*

* *

Under the supervision and with the participation ofthe Company’s management, including its Chief Executive Officer and ChiefFinancial Officer, the Company conducted an evaluation of its disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) ofthe Exchange Act).  Based on thisevaluation and for the reasons set forth below, the Chief Executive Officer andChief Financial Officer concluded that the Company’s disclosure controls andprocedures were ineffective as of December 31, 2004, the end of the periodcovered by this annual report.

 

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As reported in the Company’s Quarterly Reports on Form 10-QSBfor the quarterly periods ended September 30, 2004 and March 31,2005, the Company identified certain deficiencies which caused management toconclude that the Company’s disclosure controls were ineffective as of September 30,2004.  The Company has undertaken stepsand implemented actions as disclosed in its previous Form 10-QSB’s in aneffort to resolve these deficiencies. While the actions identified in the previously filed Form 10-QSB’sand the actions identified below have addressed many of these deficiencies, theCompany continued to have deficiencies with respect to its disclosure controlsand procedures at December 31, 2004 including the following:

 

Deficiencieshave arisen from a lack of supporting documentation and records relating toperiods prior to the Advanced Bio/Chem transaction and a lack of communicationbetween the Company, its auditors and the management of Advanced Bio/Chem.  The Company had encountered delays inobtaining necessary supporting documentation and records for the audit ofAdvanced BioChem previously during 2004 prior to the date of the AdvancedBio/Chem transaction.  The delay inobtaining this supporting documentation resulted in a delay in the completionof the Company’s financial statements and the filing of this Annual Report on Form 10-KSB.  Under the purchase accounting treatment ofthe Advanced BioChem transaction discussed previously, this is no longer anissue because the financial statements of Advanced BioChem are no longerrequired for this report.

 

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

 

TheCompany continues to face disputed issues relating to the integration of theAdvanced Bio/Chem transaction and with previous management of the Company, andsuch issues have caused the Company’s accounting personnel to devotesignificant and unanticipated time and attention to these matters.

 

The Company continues to believe that the deficienciesare attributable to many factors including issues relating to the quality ofthe Company’s disclosure controls and procedures at the time of the AdvancedBio/Chem transaction and the transition following the transaction.  Management is committed to a sound disclosurecontrol and internal control environment and is continuing its efforts toimprove the Company’s infrastructure, personnel, processes and controls to helpensure that the Company is able to produce accurate financial statements on atimely basis.

 

*Changes inInternal Control Over Financial Reporting*

* *

As previously disclosed in the Company’s QuarterlyReport on Form 10-QSB for the quarterly period ending September 30,2004, the Company implemented several actions during the third quarter of 2004in an effort to improve its internal control over financial reporting.  During the fourth quarter of 2004, theCompany continued the implementation of more rigorous policies with respect toits disclosure and financial reporting review process including improvements ofits infrastructure and processes to improve its internal control over financialreporting.  The Company also iscontinuing its implementation of procedures to improve its review and processingof non-accounting documentation and contracts. Other than the changes described above, there were no changes in theCompany’s internal control over financial reporting that occurred during theCompany’s fiscal quarter ended December 31, 2004 that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrols over financial reporting.

 

**Item8b.  Other Information**

** **

None.

 

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**PART III**

** **

**Item9. Directors, Executive Officers, Promoters and Control Persons; Compliancewith Section 16(a) of the Exchange Act**

** **

**Directors,Executive Officers, Promoters and Control Persons**

** **

Set forth below is certain information concerning eachof the Company’s directors, executive officers and significant employees.  All directors of the Company hold officeuntil the next annual meeting of shareholders or until their successors havebeen elected and qualified.  The officersof the Company are appointed by the board of directors and hold office untiltheir death, resignation or removal from office.  The Company’s directors, executive officers,significant employees, and their ages, positions held and duration as such areas follows:

 
| **Name**             | ** ** | **Position Held  with the Company**    | ** ** | **Age** | ** ** | **Date First Elected  or Appointed** |
|----------------------|------------|----------------------------------------|------------|---------|------------|--------------------------------------|
|                 |       |                                   |       |    |       |                                 |
| Steven B.  Rash      |       | Chief  Executive Officer and Director  |       | 57      |       |                                 | May 18,  2004 |
| Ira L.  Goldknopf    |       | Chief  Scientific Officer and Director |       | 59      |       |                                 | May 18,  2004 |
| Michael J.  Rosinski |       | Chief  Financial Officer               |       | 60      |       |                                 | July 2,  2004 |
| Brian R.  Folsom     |       | Director of  Laboratory Operations     |       | 48      |       |                                 | July 12,  2004 |
| John P.  Burton      |       | Chief  Accounting Officer              |       | 59      |       |                                 | June 3,  2005 |

 

Certain additional information concerning theindividuals named above is set forth below. This information is based on information furnished by each director,executive officer and significant employee.

 

Steven B. Rash joined the Company in May 2004 asChairman of the Board of Directors and Chief Executive Officer.  Mr. Rash was Chairman of the Board ofDirectors and Chief Executive Officer of Advanced Bio/Chem, Inc. from September 2003to May 2004.  Prior to that time hewas an independent consultant from February 2003 until September 2003.  In April 2001, Mr. Rash wasemployed as a consultant to Global Water Technologies, Inc. and was hiredas President and interim CFO of the company in January 2002 and retainedthat position until February 2003. From April 2000 until April 2001, he was an independentconsultant.  From June 1995 until March 2000,Mr. Rash was employed as President and CEO of American Biomed, Inc.,a publicly traded medical device company. Mr. Rash has a B.S. in Business Administration from the Universityof Delaware and an M.B.A. from Southern Illinois University.

 

Ira L. Goldknopf, Ph.D. joined the Company in May 2004as Chief Scientific Officer and Director. From August 2000 until May 2004, Dr. Goldknopf was ChiefScientific Officer of Advanced Bio/Chem, which he co-founded in 2000.  From August 1997 until August 2000,Dr. Goldknopf was a biotechnology consultant.  Dr. Goldknopf has a B.A. in Chemistryfrom Hunter College and a Ph.D. in Biochemistry from Kansas StateUniversity.  Dr. Goldknopf spent tenyears on the faculty of Baylor College of Medicine and is the author of over 70publications and a principal inventor of the Company’s intellectualproperty.  Dr. Goldknopf also serveson the Company’s Scientific Advisory Board.

 

Michael J. Rosinski joined the Company on July 2,2004 as Chief Financial Officer.  From January 1997until June 2004, he was Senior Vice President and Chief Operating Officerfor Municipal Energy Resource Corporation. From August 1992 to December 1996, he was employed at Santa FeEnergy Resources, Inc., where he served as Chief Financial Officer from1992 to 1994 and Senior Vice President from 1994 to 1996.  Mr. Rosinski has a B.S. in MechanicalEngineering from Georgia Tech and an M.B.A. from Tulane University.  On June 3, 2005, Michael Rosinski, ChiefFinancial Officer of the Company, resigned and thereby terminated 

 

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his employment at theCompany as of June 3, 2005.  Mr. Rosinskiresigned to pursue personal interests and is available for communication withthe Company as to questions and matters of import to the Company.

 

On June 6, 2005, John P. Burton was named ChiefAccounting Officer and Controller of the Company.   Prior to joining the Company, Mr. Burtonwas employed at Affiniscape, Inc. where he served as Chief FinancialOfficer from December, 2003 until August, 2004.   From December, 1999 to March, 2003, he wasemployed at Bob Johnson & Associates, Inc. as Controller.  Mr. Burton has a BBA and MBA from TheUniversity of Texas at Austin.

 

Brian R. Folsom, Ph.D. joined the Company on July 12,2004 as Director of Laboratory Operations.  From January 2001 to July 2003, he was a Staff Engineer atDiosynth-RTP.  From July 2003 until July 2004he was an independent consultant.  From March 1995until January 2001, he was the Manager, Process Development for EnchiraBiotechnology Corporation.  In his priorpositions, Dr. Folsom has been responsible for the management oflaboratories involved in the development of biotechnological intellectualproperty over the past ten years.  Dr. Folsomhas a B.A. in Chemistry from MacAlester College and a Ph.D. in Biochemistryfrom Washington State University.  Dr. Folsomis the author of 15 scientific publications and holds two patents.

 

There are no family relationships among any of thedirectors or executive officers of the Company. Except as disclosed below with respect to the amended and restatedemployment agreements of Messrs. Rash, Goldknopf and Rosinski, noarrangement or understanding exists between any director or executive officerand any other person pursuant to which any director or executive officer waselected to serve.

 

Mr. Rash has many years of experience incorporate reorganizations, finance and new business development.  Mr. Rash was hired by American Biomed, Inc.in June 1995 to assist in the reorganization and turnaround of the company.  Mr. Rash remained with American Biomeduntil March 2000 as president and CEO during which time the company wasrestructured.  In July 2000,approximately four (4) months after Mr. Rash’s departure, AmericanBiomed filed for Chapter 7 bankruptcy proceedings.  Mr. Rash was initially retained as aconsultant in April 2001 to assist Global Water Technologies, Inc.and its Chairman/CEO in formulating a turnaround strategy for the company.  Mr. Rash was subsequently employed aspresident and interim CFO in January 2002. Global Water was declared in default of its bank loan in January 2003and sold its operating division in February 2003.  Mr. Rash resigned in February 2003and, in May 2003, Global Water filed for Chapter 11 bankruptcyproceedings.

 

Except as described above with respect to Mr. Rash,none of the Company’s directors, executive officers, promoters or controlpersons have been involved in any of the following events during the past fiveyears:

 

•                  anybankruptcy petition filed by or against any business of which such person was ageneral partner or executive officer either at the time of the bankruptcy orwithin two years prior to that time;

 

•                  anyconviction in a criminal proceeding or being subject to a pending criminalproceeding (excluding traffic violations and other minor offenses);

 

•                  beingsubject to any order, judgment or decree, not subsequently reversed, suspendedor vacated, of any court of competent jurisdiction, permanently or temporarilyenjoining, barring, suspending or otherwise limiting his involvement in anytype of business, securities or banking activities; or

 

•                  beingfound by a court of competent jurisdiction (in a civil action), the SEC or theCommodity Futures Trading Commission to have violated a federal or statesecurities or commodities law, and the judgment has not been reversed,suspended or vacated.

 

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The board of directors has not established an auditcommittee or any committee performing similar functions.  Consequently, the Company does not have anaudit committee financial expert as defined in Item 401(3) of Regulation S-B.  Management believes that in light of theCompany’s current size and its status as a company with no operations, theestablishment of an audit committee and the retention of an audit committeefinancial expert is not necessary at this time and is cost-prohibitive.  The Company also does not have a standingnominating committee of its board of directors or any committee performing asimilar function.

 

**ScientificAdvisory Board**

** **

The Company’s Scientific Advisory Board providesassistance in the research and development of the Company’s products.  Unlike members of the Company’s Board ofDirectors, members of the Scientific Advisory Board, other than Dr. Goldknopf,are not involved in the management or operations of the Company.  The members of the Scientific Advisory Boardare as follows:

 

Dr. Stanley H. Appel, M. D. is Professor andChair of Neurology at the Methodist Hospital Neurological Institute,  Professor of Neurology at Baylor College ofMedicine, Director of the Vicki Appel MDA/ALS Clinic, and past-Director of theAlzheimer’s Disease Research Center at Baylor College of Medicine in Houston,Texas. He also serves as the Director of the Jerry Lewis Neuromuscular ResearchCenter.  Dr. Appel is a leadingauthority on degenerative neurological diseases, such as Parkinson’s, Alzheimer’sand ALS.  Specifically, Dr. Appelfocuses on the importance of neurotrophic factors and immune mechanisms, includingthe role of inflammatory cytokines in these diseases. He has served as anAdvisory Board member of the Alzheimer’s Disease and Related DisordersAssociation and as a Council member of the American Society of Neurochemistry.

 

Dr. Zouhair Atassi, Ph. D. is the current RobertA. Welch Chair of Chemistry and the Professor of Biochemistry and MolecularBiology at Baylor College of Medicine, Houston, Texas. After completing hisPh.D. in Chemistry, University of Birmingham, England, Dr. Atassi startedhis career in 1960 as Postdoctoral Research Fellow in Chemistry at theUniversity of Birmingham.  Dr. Atassiwas the 2003 President of the Institute of Immunobiology and he is the currentEditor-in-Chief for The Protein Journal, Protein Reviews and Critical Reviewsin Immunology. Dr. Atassi has published 14 books and several volumes inImmunochemistry of Proteins and Immunobiology of Proteins and Peptides. He hasgiven more than 150 lectures in national and international conferences and morethan 180 invited seminars in U.S. and foreign universities and researchinstitutions. In addition Dr. Atassi has more than several hundredscientific publications and has been awarded five United States patents between1996 and 2000.

 

Dr. Ira L. Goldknopf, Ph. D. began his scientificcareer over 30 years ago, pioneering the field that is now known as Proteomics.More than a decade before the start of the Human Genome Project, Dr. Goldknopfmade the earliest proteomic discovery at Baylor College of Medicine with HarrisBusch, the isolation, identification, and sequencing of a new protein from atwo-dimensional gel, Protein A24. During the course of these investigations, hediscovered that protein A24 was the first known conjugate of two very importantproteins, Histone H2A, a part of the subunit structure that packages DNA in thecell nucleus, and Ubiquitin. Through the work of Dr. Goldknopf and manyothers (over 9,000 publications in the ensuing years) – including Drs. AvramHershko, Aaron Ciechanover, and Alex Varshavsky, who shared the 2000 LaskerAward for their achievements – the Ubiquitin Conjugation System is now known toplay a major role in the management of the inventories of proteins in the cell,cell proliferation, programmed cell death, and most if not all major regulatoryfunctions in health and disease at the cellular level.

 

Dr. Thomas E. Watts, M. D. received his M.D. in1975 from Baylor College of Medicine. Dr. Watts is board certified, fromAmerican Board of Family Practice since 1972 and practiced medicine at Blue EarthMedical Center in Minnesota from 1975 to 1996 and is now practicing at theKelsey-Seybold Clinic, The 

 

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Woodlands, Texas.  As a physicianwith more than 30 years of practice experience, Dr. Watts provides theCompany with insights from the perspective of the end user of the Company’sproducts.

 

Dr. Alan B. Hollingsworth, M. D. received hisM.D. with Distinction from the University of Oklahoma College of Medicine in1975 where he served as First Vice-President of Alpha Omega Alpha Honor MedicalSociety.  In addition to his generalsurgery residency at the University of Oklahoma, he completed a one-yearfellowship in surgical pathology at U.C.L.A. In the 1980s, he joined the first wave of surgeons who chose to limittheir practices to breast cancer.  He wasthe Founding Medical Director of the University of Oklahoma Institute forBreast Health in 1993 where he held the G. Rainey Williams Chair of SurgicalBreast Oncology.  Currently, he serves asMedical Director of Mercy Women’s Center (Mercy Health Center, Oklahoma City)and Medical Director, Breast MRI of Oklahoma. His interest in breast cancer risk assessment led to the publication ofthe first lay book on the subject, The Truth About Breast Cancer RiskAssessment, and he served as lead author for the multi-institutional consensuspaper published in the American Journal of Surgery by the national breastcancer risk assessment working group.

 

**Section 16(a) BeneficialOwnership Reporting Compliance**

** **

Section 16(a) of the Exchange Act requiresthe Company’s directors, executive officers, and the persons who beneficiallyown more than ten percent (10%) of the Company’s common stock to file reportsof ownership and changes in ownership with the SEC.  Copies of all filed reports are required tobe furnished to the Company.  Basedsolely on the reports received by the Company and on representations of thereporting persons, the Company determined that there were a number oftransactions that were not timely reported. With respect to its current directors, executive officers, and personsbeneficially owning more than ten percent (10%) of the Company’s common stock,the Company undertook to file forms throughout the year.  The Company has implemented new procedures toensure improved compliance with the reporting requirements on an on-goingbasis.  To the Company’s knowledge, basedsolely on its review of the reports received and on representations of thereporting persons, the Company believes that these persons have complied withall applicable filing requirements during the fiscal year ended December 31,2004, except:  (i) Mr. Rash didnot timely file a Form 3 which was subsequently filed with the SEC; (ii) Dr. Goldknopfdid not timely file a Form 3 which was subsequently filed with the SEC; (iii) Mr. Rosinskidid not timely file a Form 3 and Form 4, each of which wassubsequently filed with the SEC; (iv) Advanced Bio/Chem, Inc. did nottimely file a Form 3 which was subsequently filed with the SEC; (v) Mr. Behzadi,a former executive officer of the Company, did not timely file a Form 3which was subsequently filed with the SEC; and (vi) Mr. Novak, aformer executive officer and director of the Company, reported severaltransactions on five Form 5s rather than on Form 4 after he was nolonger an executive officer or director of the Company and has not correctedsuch filings.

 

**Codeof Ethics**

** **

The Company has adopted a code of ethics applicable toits principal executive officer and principal financial officer, a copy ofwhich is filed with this Annual Report.

 

**Item10. Executive Compensation**

** **

The following table sets forth the compensation paidby the Company for services performed on the Company’s behalf for the threefiscal years ended December 31, 2004, with respect to those persons whoserved as the Company’s Chief Executive Officer during the year ended December 31,2004 and those executive officers who received more than $100,000 incompensation for fiscal year 2004 from either the Company or Advanced Bio/Chem.

 

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**Summary Compensation Table**

 
| ** **                                                                             | ** ** | ** **       | ** ** | **Annual  Compensation(1)** | ** ** | **Long Term  Compensation Awards** | ** ** | ** **                         | ** ** |
|----------------------------------------------------------------------------------------|------------|------------------|------------|-----------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| **Name and Principal Position**                                                        | ** ** | **Year**         | ** ** | **Salary**                  | ** ** | **Bonus**                          | ** ** | **Restricted  Stock  Award(s)(2)** | ** ** | **Securities  Underlying  Options/SARs** | ** ** | **All Other  Compensation** | ** ** |
| ** **                                                                             | ** ** | ** **       | ** ** | **($)**                     | ** ** | **($)**                            | ** ** | **($)**                            | ** ** | **(#)** | ** ** | ** ** | ** ** |
| Steven B. Rash, Chairman of the Board and  Chief Executive Officer(3)                  |       | 2004             |       | 190,623                     |       | 0

0                               |       | 11,925,000                         | (4) (5)    | 0 | (5) | 0

0 |   |
|                                                                                   |       |             |       |                        |       |                               |       |                               |       |   |   |   |   |
| Ira L. Goldknopf, Chief Scientific Officer(6)                                          |       | 2004             |       | 96,214                      |       | 0                                  |       | 11,925,000                         | (7)        | 0 |   | 0 |   |
|                                                                                   |       |             |       |                        |       |                               |       |                               |       |   |   |   |   |
| Michael J. Rosinski, Chief Financial  Officer(8)                                       |       | 2004             |       | 60,000                      |       | 0                                  |       | 483,000

(483,000                  | (8))(9)    | 0 |   | 0 |   |
|                                                                                   |       |             |       |                        |       |                               |       |                               |       |   |   |   |   |
| Timothy S. Novak, Former Chairman of the  Board and Chief Executive Officer  (10) |       | 2004  2003  2002 |       | 13,706

157,500

139,000    | (11)  | 0

0

0                            |       | 0

0

0                            |       | 0

0

0 |   | 0

0

0 |   |
|                                                                                   |       |             |       |                        |       |                               |       |                               |       |   |   |   |   |
| R. Paul Gray, Former Chief Financial  Officer, Secretary and Treasurer(10)             |       | 2004  2003  2002 |       | 4,960

157,500

87,500      | (11)  | 0

0

0                            |       | 0

0

0                            |       | 0

0

0 |   | 0

0

0 |   |

 

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(1)          Other annual compensationprovided to the named executive officers did not exceed the applicabledisclosure requirements.

(2)          At December 31, 2004 theaggregate number and value of all restricted shares held by each of the namedexecutive officers was as follows:  Rash –13,250,000 restricted shares, $12,190,000 value; Goldknopf – 13,250,000restricted shares, $12,190,000 value; and Rosinski – 140,000 restricted shares,$128,800 value.  The values are based onthe closing price of $0.90 of the Company’s common stock on May 18,2004.  Although the Company does notexpect to pay dividends on its common stock, any dividends which may be paid onits common stock will not be paid on the restricted stock unless and until suchtime as the restricted stock becomes nonforfeitable.

(3)          Mr. Rash joined theCompany in May 2004 with the completion of the acquisition of assets fromAdvanced Bio/Chem.  Mr. Rash was theChairman of the Board and Chief Executive Officer of Advanced Bio/Chem.    Mr. Rash has entered into anemployment agreement with the Company which is described below.

(4)          Pursuant to Mr. Rash’semployment agreement, he was awarded 13,250,000 shares of restricted commonstock.  The value is based upon a closingprice of $0.90 of the Company’s common stock on May 18, 2004.  All of the shares are restricted stock andshall vest on May 18, 2006 if Mr. Rash continues to be employed bythe Company on such date.  In addition, Mr. Rashis entitled to receive 1,500,000 shares of restricted Series B preferred stockto be designated by the Company.

(5)          In 2003, Mr. Rash wasgranted by Advanced Bio/Chem pursuant to his employment agreement 825,000shares of Advanced Bio/Chem’s common stock and the option to purchase 200,000shares of common stock at $0.80 per share. At the time the 825,000 shares were granted, the fair market value ofsuch stock was $0.80 per share for a total of $660,000.  Mr. Rash continues to hold such sharesand the value of such restricted stock holdings at December 31, 2004 was$206,250.  Advanced Bio/Chem was to enterinto an option agreement with Mr. Rash; however, no such option agreementhas been executed nor is it expected since Mr. Rash is no longer anofficer of Advanced Bio/Chem.

(6)          Dr. Goldknopf joined theCompany in May 2004 with the completion of the acquisition of the assetsof Advanced Bio/Chem.  Dr. Goldknopfwas the Chief Scientific Officer of Advanced Bio/Chem.   Dr. Goldknopf has entered into anemployment agreement with the Company described below.

(7)          Pursuant to Dr. Goldknopf’semployment agreement, he was awarded 13,250,000 shares of restricted commonstock.  The value is based upon a closingprice of $0.90 of the Company’s common stock on May 18, 2004.  All of the shares are restricted stock andshall vest on May 18, 2006 if Dr. Goldknopf continues to be employedby the Company on such date.  Inaddition,

 

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Dr. Goldknopfis entitled to receive 1,500,000 shares of restricted Series B preferredstock to be designated by the Company.

(8)          Mr. Rosinski joined theCompany on a full-time basis in July 2004.

(9)          Pursuant to Mr. Rosinski’semployment agreement, he was awarded 140,000 shares of restricted commonstock.  The value is based upon a closingprice of $3.45 of the Company’s common stock on July 2, 2004.  On June 3, 2005, Mr. Rosinskiresigned and terminated his employment with the Company.  Therefore, according to his EmploymentAgreement, his shares were returned to the Company.

(10)    Timothy S. Novak and R. PaulGray each resigned from their respective positions with Power 3 Medical at thetime of the Company’s acquisition of the assets of Advanced Bio/Chem in May 2004.  Messrs. Novak and Gray continue to bethe president, and secretary/treasurer, respectively, of Tenthgate.

(11)    On March 31, 2003, eachof Messrs. Novak and Gray were issued 1,330,000 shares of Series APreferred Stock in consideration of accrued and unpaid salary.  At the time of such issuance, the Series APreferred Stock issued to each had a value of $100,000 which is reflected inthe salary figure for 2003.

 

**DirectorCompensation**

** **

Mr. Rash and Dr. Goldknopf are the Company’ssole directors at this time.  Except forthe compensation to which each is entitled pursuant to the terms of theirrespective employment agreements, neither Mr. Rash nor Dr. Goldknopfreceive any further compensation for service as directors.  The Company has no formal plan forcompensating outside directors at this time. However, at such time as the Company has outside directors, the Companyexpects to compensate its outside directors and to reimburse them forreasonable travel and other out-of-pocket expenses incurred in connection withthe attendance at meetings.

 

**OptionGrants in Last Fiscal Year**

** **

No options were granted to the above named officers in2004.

 

**EmploymentAgreements**

** **

The Company has entered into an amended and restatedemployment agreement with Mr. Rash. The employment agreement is effective as of May 18, 2004 and has aninitial term of five years, subject to each party’s termination rights.  The agreement provides for a base salary of$250,000 per year and the opportunity to receive cash bonuses based onperformance upon the discretion of the Company’s board of directors.  The agreement also includes participation inemployee benefit plans offered by the Company to its employees, as well as agrant of 13,250,000 shares of restricted common stock and 1,500,000 shares ofrestricted Series B preferred stock. The agreement contains a covenant not to compete with the Company duringthe period of employment and for a period of two years following thetermination or expiration of his employment. The employment agreement also contains a non-disclosure and non-use ofproprietary information clause and a non-interference clause covering theperiod of employment and for a period of five (5) years thereafter.  Either party may terminate Mr. Rash’semployment under the contract, either with or without cause upon giving theother party at least thirty days notice. If the Company terminates Mr. Rash’s employment at any time duringthe initial term without cause, Mr. Rash will be entitled to receivecompensation provided under the agreement for the remaining initial term ofemployment.  In addition, in the event ofa change in control as defined in the agreement, the Company may waive, inwhole or in part, any and all remaining restrictions on the restricted sharesof common stock and Series B preferred stock granted to Mr. Rash.

 

The Company has entered into an amended and restatedemployment agreement with Dr. Goldknopf. The employment agreement is effective as of May 18, 2004 and has aninitial term of five years, subject to each party’s termination rights.  The agreement provides for a base salary of$125,000 per year through December 18, 2004 and $100,000 per yearthereafter, with an opportunity to receive cash bonuses based on performanceupon 

 

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the discretion of the Company’s board of directors.  The agreement also includes participation inemployee benefit plans offered by the Company to its employees, as well as agrant of 13,250,000 shares of restricted common stock and 1,500,000 shares ofrestricted Series B preferred stock. The agreement contains a covenant not to compete with the Company duringthe period of employment and for a period of two years following thetermination or expiration of his employment. The employment agreement also contains a non-disclosure and non-use ofproprietary information clause and a non-interference clause covering theperiod of employment and for a period of five (5) years thereafter.  Either party may terminate Dr. Goldknopf’semployment under the contract, either with or without cause upon giving theother party at least thirty days notice. If the Company terminates Dr. Goldknopf’s employment at any timeduring the initial term without cause, Dr. Goldknopf will be entitled toreceive compensation provided under the agreement for the remaining initialterm of employment.  In addition, in theevent of a change in control as defined in the agreement, the Company maywaive, in whole or in part, any and all remaining restrictions on therestricted shares of common stock and Series B preferred stock granted to Dr. Goldknopf.

 

The Company entered into an amended and restatedemployment agreement with Mr. Rosinski. The employment agreement is effective as of July 2, 2004 and has aninitial term of three years, subject to each party’s termination rights.  The agreement provides for a base salary of$120,000 per year and the opportunity to receive cash bonuses based onperformance upon the discretion of the Company’s board of directors.  The agreement also includes participation inemployee benefit plans offered by the Company to its employees, as well as agrant of 140,000 shares of restricted common stock.  The agreement contains a covenant not tocompete with the Company during the period of employment and for a period oftwo (2) years following the termination or expiration of hisemployment.  The employment agreementalso contains a non-disclosure and non-use of proprietary information clauseand a non-interference clause covering the period of employment and for aperiod of five (5) years thereafter. Either party may terminate Mr. Rosinski’s employment under thecontract, either with or without cause upon giving the other party at leastthirty days notice.  If the Companyterminates Mr. Rosinski’s employment at any time during the initial termwithout cause, Mr. Rosinski will be entitled to receive compensationprovided under the agreement for the remaining initial term of employment.  In addition, in the event of a change incontrol as defined in the agreement, the Company may waive, in whole or inpart, any and all remaining restrictions on the restricted shares of commonstock granted to Mr. Rosinski.

 

On June 3, 2005, Mr. Rosinski, ChiefFinancial Officer of the Company, resigned and terminated his employment at theCompany as of that date.  In accordancewith his resignation, the employment agreement with Mr. Rosinskiterminated, on June 3, 2005, and the stock grant of 140,000 shares ofRestricted Stock to Mr. Rosinski is terminated.  Mr. Rosinski has returned his stockshares in accordance with this forfeiture.

 

**Item11. Security Ownership of Certain Beneficial Owners and Management and RelatedStockholder’s Matters**

** **

**SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT**

 

The following table sets forth information as of March 24,2005, the most recent practicable date, regarding beneficial ownership of theCompany’s common stock by the following persons:  (i) each person who is known to theCompany to beneficially own more than 5% of the outstanding shares of commonstock; (ii) each of the Company’s directors; (iii) each of theCompany’s executive officers named in the executive compensation table; and (iv) allof the Company’s directors and executive officers as a group.  There has been no change to any of theamounts reported in the table below, as of the date of filing this report.

 

Unless otherwise indicated below, to the Company’sknowledge, all persons listed below have sole voting and investment power withrespect to their shares of common stock, except to the extent authority isshared by spouses under applicable law. Beneficial ownership is determined in accordance with the rules ofthe 

 

71

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SEC based on factors including voting and investment power with respectto shares, subject to applicable community property laws. Shares of commonstock subject to options or warrants exercisable within 60 days of March 24,2005, are deemed outstanding for the purpose of computing the percentageownership of the person holding such options or warrants, but are not deemedoutstanding for computing the percentage ownership of any other person.

 
| **Name of Beneficial Owner**                                                                                                                                   | ** ** | **Number of Shares of  Common Stock** | ** ** | **Percent of Class** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|----------------------|------------|
| Industrial  Enterprises of America, Inc.  (formerly known as Advanced Bio/Chem, Inc.)  770 South Post Oak Lane, Suite 330  Houston, Texas 77056 |       | 15,000,000                            |       | 22.96                | %          |
| Steven B.  Rash  3400 Research Forest Dr., Suite B2-3  The Woodlands, Texas 77381                                                                         |       | 13, 250,000                           |       | 20.28                | %          |
| Ira L.  Goldknopf  3400 Research Forest Dr., Suite B2-3  The Woodlands, Texas 77381                                                                       |       | 13, 250,000                           |       | 20.28                | %          |
| Michael J.  Rosinski  3400 Research Forest Dr., Suite B2-3  The Woodlands, Texas 77381                                                                    |       | 140,000  (140,000                     | )          |                 | *          |
| Timothy S.  Novak  44050 Ashburn Plaza, Suite 195  Ashburn, Virginia 20147                                                                                |       | 984,504                               |       | 1.5                  | %          |
| R. Paul Gray  44050 Ashburn Plaza, Suite 195  Ashburn, Virginia 20147                                                                                     |       | 984,504                               |       | 1.5                  | %          |
| All current  directors and executive officers as a group (3 persons)                                                                                           |       | 26,500,000                            |       | 40.55                | %          |

 

----

*Indicates less than one percent.

 

At December 31, 2004, the Company held 100% ofthe outstanding common stock of its subsidiary, Tenthgate, Inc. (“Tenthgate”),formerly known as Power 3 Medical, Inc. Tenthgate owned 100% of the outstanding common stock of Ice Therapies, Inc.Tenthgate is not active in Power3’s current line of business activity.  Prior to the acquisition of substantially allthe assets and certain liabilities from Advanced BioChem, it was contemplatedthat Power3 would distribute shares of its subsidiary to its shareholders ofrecord, however the shares of Tenthgate were transferred to a trustee fordistribution to the shareholders of Power3 on May 17, 2004, before theAdvanced BioChem transaction.  Previousmanagement of Power3 and Tenthgate have been independently operating Tenthgatesince the Advanced BioChem transaction. As a result, Power3 does not now control the operations or activities ofTenthgate.  As a result, Tenthgate’sactivities are no longer controlled by, nor are their activities associatedwith Power3 in any manner whatsoever. Power3 intends to divest itself of its subsidiary due to the differencesin business activity between Tenthgate and Power3 operating under its currentbusiness model.  Some of the principalreasons for the divestiture of Tenthgate and its subsidiary are that thedisposition of Tenthgate will allow the Company’s management to focusexclusively on its business objectives and permit management of Tenthgate moreflexibility in its operations and the disposition will allow the market toseparately identify and evaluate each business. The Company is continuing its efforts to complete the disposition of Tenthgate;however current management of Tenthgate has advised the Company that Tenthgatehas issued a significant number of shares of its common stock purportedlyreducing the Company’s ownership interest to less than 1%.  The Company believes this stock issuance tobe invalid, however the Company does not have access to the records ofTenthgate and is considering its alternatives with respect to theseactions.  The 

 

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Company still desires to complete a divestiture of Tenthgate, andbelieves the operations are inconsistent with and not material to the currentactivities of the Company.  As a result,the operations and assets of Tenthgate are not consolidated or otherwisepresented herein.

 

**Changesof Control**

** **

In addition to the shares of the Company’s commonstock beneficially owned by Mr. Rash and Dr. Goldknopf describedabove, the Company has entered into amended and restated employment agreementswith Mr. Rash and Dr. Goldknopf which require the Company to issue1,500,000 shares of restricted Series B preferred stock to each of Mr. Rashand Dr. Goldknopf. The Company has not filed the certificate of amendmentdesignating the Series B preferred stock and its powers, designations andrelative rights and has not issued the shares of the Series B preferredstock.  As a result of certainrestrictions agreed upon with the investors in connection with the Company’srecent financing, the Company may not issue the Series B preferred stockuntil 90 days after the effective date of the registration statement filed bythe Company on behalf of the investors. After such restrictions lapse, the Company intends to file thecertificate of amendment and issue the Series B preferred stock.

 

The terms of the Series B preferred stock agreedupon by the Company provide that while the shares of Series B preferredstock are held by Mr. Rash and Dr. Goldknopf, they will have theright to vote that number of votes equal to the number of outstanding shares ofthe Company’s common stock plus one additional vote such that they will hold amajority of the voting rights of the Company. In the event of the death or termination of employment of either Mr. Rashor Dr. Goldknopf, the remaining holder of the Series B preferredstock will continue to hold such voting rights. The issuance of such shares of Series B preferred stock will resultin a change of control of the Company.

 

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**EmployeeStock Option Plans**

** **

**SecuritiesAuthorized for Issuance Under Equity Compensation Plans**

** **
| ** **                                                                                                                                                                         | ** ** | **Number of securities  to be issued upon  exercise of outstanding  options, warrants and  rights** | ** ** | **Weighted-average  exercise price of  outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available  for future issuance  under equity  compensation plans  (excluding securities  reflected in column  (a))** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                                                                         | ** ** | **(a)**                                                                                             | ** ** | **(b)**                                                                            | ** ** | **(c)**                                                                                                                                                | ** ** |
|                                                                                                                                                                               |       |                                                                                                |       |                                                                               |       |                                                                                                                                                   |       |
| Equity compensation plans approved by  security holders                                                                                                                            |       | 0                                                                                                   |       | 0                                                                                  |       | 0                                                                                                                                                      |       |
|                                                                                                                                                                               |       |                                                                                                |       |                                                                               |       |                                                                                                                                                   |       |
| Equity compensation plans enacted by  management and approved by the Board of Directors, but not submitted for a  vote or approved by all holders of the Company’s securities |       | 580,000                                                                                             |       | $                                                                                  | 1.44       |                                                                                                                                                   | 17,801,768 |   |
|                                                                                                                                                                               |       |                                                                                                |       |                                                                               |       |                                                                                                                                                   |       |
| Total                                                                                                                                                                              |       | 580,000                                                                                             |       | $                                                                                  | 1.44       |                                                                                                                                                   | 17,801,768 |   |

 

The 17,801,768 securities that remain available for futureissuance under equity compensation plans arise from the Company’s 2003 StockCompensation Plan (“2003 Plan”) (8,000,000 of the total) and the Company’s 2004Directors, Officers and Consultants Stock Option, Stock Warrant, and StockAward Plan (“2004 Plan”) (9,801,768 of the total).  No options have been issued under the 2003Plan.  The Company has issued 6,000,000shares of common stock under the 2004 Plan. The 2004 Plan initially authorized the issuance of 10,000,000 shares ofthe Company’s common stock pursuant to the Plan; however, the number of sharesavailable under the 2004 Plan shall increase so that immediately following anygrant of securities under the 2004 Plan, the total number of shares issuableunder the 2004 Plan and reserved for issuance upon exercise of options,warrants, or conversion of shares of preferred stock will equal 15% of thetotal number of the Company’s issued and outstanding shares of common stock.

 

In March 2003, the Company’s board of directorsapproved the 2003 Plan, which provides for the granting of common stock,options and/or warrants to officers, directors and employees as well asconsultants and attorneys who provide services to the Company.  Under this plan the Company is authorized toissue up to 8,000,000 shares of common stock, options or warrants.  The options and warrants shall expireaccording to the terms as determined by a committee on the date of grant, whichshall not exceed ten years from the date of grant, or five years in cases of agrantee who owns more than 10% of the total combined voting power of allclasses of the Company’s stock.  Theexercise period of incentive stock options granted will also be determined bythis committee at the date of grant.  Theexercise price shall not be less than 100% of the fair market value of theincentive stock options on the date of grant, except in cases of a 10%shareholder, in which case the exercise price shall not be less than 110% ofthe fair market value on the date of grant.

 

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In January 2004, the Company’s board of directorsapproved the 2004 Plan.  Under this plan,initially 10,000,000 shares of common stock are reserved for issuance and6,000,000 shares were issued under the Plan. After the grant of any option, warrant or share of preferred stock, thenumber of shares that may be granted under this plan will be increased.  The number of shares available under the 2004Plan shall increase so that immediately following any grant of securities underthe 2004 Plan, the total number of shares issuable under this plan and reservedfor issuance upon exercise of options, warrants or conversion of shares ofpreferred stock under the plan will equal 15% of the total number of theCompany’s issued and outstanding shares of common stock.

 

On June 3, 2005, the Company’s Chief FinancialOfficer, Mr. Rosinski resigned and terminated his employment at theCompany as of that date.  On June 3,2005, in accordance with the resignation of Mr. Rosinski, the stock grantof 140,000 shares of Restricted Stock to Mr. Rosinski is terminated.   Mr. Rosinski has returned his stockshares in accordance with this forfeiture.

 

On June 3, 2005 the Company named a new ChiefAccounting Officer and Controller, Mr. John Burton.  At the present time, Mr. Burton isemployed at the Company without an Employment Contract.

 

**Item12.  Certain Relationships and RelatedTransactions**

** **

On May 18, 2004, the Company acquired a set ofassets from Advanced Bio/Chem and assumed certain of its liabilities in exchangefor the issuance of 15,000,000 shares of the Company’s common stock to AdvancedBio/Chem.  At the time of theacquisition, Mr. Rash owned approximately 3.92% of the common stock ofAdvanced Bio/Chem, thus resulting in indirect beneficial ownership at the timeof the transaction of approximately 588,000 shares of the Company’s commonstock through Advanced Bio/Chem. Additionally, Dr. Goldknopf held approximately 8.23% of the commonstock of Advanced Bio/Chem at the time of the transactions, thus resulting inhis indirect beneficial ownership at the time of the transaction ofapproximately 1,234,500 shares of the Company’s common stock through AdvancedBio/Chem.

 

In October 2004, Mr. Rosinski loaned theCompany $75,000.  The loan was repaid to Mr. Rosinski,without interest, in November 2004 with proceeds from the Company’sfinancing on October 28, 2004.

 

In March, 2005, Mr. Rosinski loaned the Company $35,000.  The loan, due to be repaid on orbefore April 30, 2005, is to be repaid with proceeds from later issue ofpermanent financing and is payable, with interest at rate of 6% per annum,  The loan remains outstanding and is carriedon the Balance Sheet of the Company in Notes Payable.

 

On May 31, 2005, the Company received anOfficer Advance in the amount of $55,000. This advance is in the form of a short-term Note Payable, to theOfficer, and is payable on June 30, 2005, and bears interest at a rate of6 % per annum until paid.

 

On June 3, 2005, the Company received anOfficer Advance in the amount of $50,000. This advance is in the form of a short-term Note Payable, to theOfficer, and is payable on June 30, 2005, and bears interest at a rate of6 % per annum until paid.

 

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**Item13. Exhibits**

** **

(a)          Exhibits

 
| **Exhibit No.** | ** ** | **INDEX**                                                                                                                                                                                                                                                                                                                                                                                                    |
|----------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 2.1                  |       | Asset Purchase Agreement dated as of May 11, 2004 by  and among Power 3 Medical Products, Inc., Advanced Bio/Chem, Inc. d/b/a  ProteEx, Steven B. Rash and Ira Goldknopf (incorporated by reference to  Exhibit 2.1 to the Company’s Registration State on Form SB-2 (File No.  333-122227)).                                                                                                           |
| 3.1                  |       | Certificate of Incorporation (incorporated by  reference to Exhibit 2.5 to the Company’s Form 10-SB filed on  September 28, 1998).                                                                                                                                                                                                                                                       |
| 3.2                  |       | Certificate of Merger (incorporated by reference to  Exhibit 2.7 to the Company’s Form 10-SB filed on September 28,  1998).                                                                                                                                                                                                                                                              |
| 3.3                  |       | Certificate of Amendment of the Certificate of  Incorporation (incorporated by reference to Exhibit 2.9 to the Company’s  Form 10-SB filed on September 28, 1998).                                                                                                                                                                                                                       |
| 3.4                  |       | Certificate of Amendment of the Certificate of  Incorporation (incorporated by reference to Exhibit 3.(I).10 to the  Company’s Form S-3 filed on March 2, 2000).                                                                                                                                                                                                                         |
| 3.5                  |       | Certificate of Amendment to the Certificate of  Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s  Form 8-K filed on November 5, 2004).                                                                                                                                                                                                                           |
| 3.6                  |       | Bylaws (incorporated by reference to  Exhibit 2.10 to the Company’s Form 10-SB filed on  September 28, 1998).                                                                                                                                                                                                                                                                            |
| 4.1                  |       | Form of Convertible Debenture Due  October 28, 2007 (incorporated by reference to Exhibit 4.1 to the  Company’s Form 8-K filed on November 3, 2004).                                                                                                                                                                                                                           |
| 4.2                  |       | Form of Common Stock Purchase Warrant  (incorporated by reference to Exhibit 4.2 to the Company’s Form 8-K  filed on November 3, 2004).                                                                                                                                                                                                                                             |
| 4.3                  |       | Form of Additional Investment Right  (incorporated by reference to Exhibit 4.3 to the Company’s Form 8-K  filed on November 3, 2004).                                                                                                                                                                                                                                               |
| 10.1(3)              |       | Amended and Restated Employment Agreement** **for Steven B. Rash (incorporated by  reference to Exhibit 10.1 to the Company’s Form 8-K filed  January 5, 2005).                                                                                                                                                                                                                     |
| 10.2(3)              |       | Amended and Restated Employment Agreement for Ira L.  Goldknopf, Ph.D. (incorporated by reference to Exhibit 10.2 to the  Company’s Form 8-K filed January 5, 2005).                                                                                                                                                                                                                     |
| 10.3(3)              |       | Amended and Restated Employment Agreement** **for Michael J. Rosinski (incorporated by  reference to Exhibit 10.3 to the Company’s Form 8-K filed  January 5, 2005).                                                                                                                                                                                                                |
| 10.4(4)              |       | Exclusive License Agreement dated effective as of  June 28, 2004 by and between Baylor College of Medicine and Power 3  Medical Products, Inc. (incorporated by reference to Exhibit 10.1  to the Company’s Form 10-QSB/A for the quarter ended September 30,  2004).                                                                                                          |
| 10.5(4)              |       | Patent and Technology License Agreement dated  August 1, 2004 by and between The Board of Regents of The University of  Texas System, on behalf of The University of Texas M.D. Anderson Cancer  Center, and Power 3 Medical Products, Inc. (incorporated by reference to  Exhibit 10.2 to the Company’s Form 10-QSB/A for the quarter ended  September 30, 2004).             |
| 10.6(4)              |       | Patent and Technology License Agreement dated  September 1, 2003 by and between The Board of Regents of The University  of Texas System, on behalf of The University of Texas M.D. Anderson Cancer  Center, and Advanced Bio/Chem, Inc. (d/b/a ProteEx) (incorporated by  reference to Exhibit 10.3 to the Company’s Form 10-QSB/A for the  quarter ended September 30, 2004). |
| 10.7                 |       | Securities Purchase Agreement dated as of  October 28, 2004, among the Company and each purchaser identified  therein (incorporated by reference to Exhibit 10.1 to the Company’s  Form 8-K filed on November 3, 2004).                                                                                                                                                             |
| 10.8                 |       | Amendment to Securities Purchase Agreement dated  January 19, 2005 among the Company and each purchaser identified therein  (incorporated by reference to Exhibit 10.8 of the Company’s Registration  Statement on Form SB-2 (File No.333-122227)).                                                                                                                                      |
| 10.9                 |       | Registration Rights Agreement dated as of  October 28, 2004, among the Company and each purchaser identified  therein (incorporated by reference to Exhibit 10.2 to the Company’s  Form 8-K filed on November 3, 2004).                                                                                                                                                             |
| 10.10(3)             |       | 2003 Stock Compensation Plan (incorporated by  reference to Exhibit 4.1 of the Company’s Registration                                                                                                                                                                                                                                                                                              |

 

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| **Exhibit No.** | ** ** | **INDEX**                                                                                                                                                                                                                               |
|----------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |       | Statement on Form S-8 filed April 18,  2003).                                                                                                                                                                                 |
| 10.11(3)             |       | 2004 Directors, Officers and Consultants Stock  Option, Stock Warrant and Stock Award Plan (incorporated by reference to  Exhibit 4.1 of the Company’s Registration Statement on Form S-8  filed January 20, 2004). |
| 10.12(3)             |       | Collaborative Research Agreement, dated  March 21, 2005, by and between New Horizons Diagnostics and Power3                                                                                                                        |
| 10.13(3)             |       | Collaborative Research and Licensing Agreement,  dated May 17, 2005, by and between BioSite Incorporated and Power3 for  collaborative research and worldwide licensing to BioSite Incorporated                                    |
| 14.1(1)              |       | Code of Ethics for Chief Executive Officer, Chief  Financial Officer and Principal Accounting Officer.                                                                                                                                  |
| 16.1                 |       | Letter re: change in certifying accountant                                                                                                                                                                                              |
| 21.1(1)              |       | List of subsidiaries.                                                                                                                                                                                                                   |
| 31.1(1)              |       | Certification of Power 3 Medical Products, Inc.  Chief Executive Officer, Steven B. Rash, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                         |
| 31.2(1)              |       | Certification of Power 3 Medical Products, Inc.  Chief Accounting Officer, John P. Burton, pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                        |
| 32.1(2)              |       | Certification of Power 3 Medical Products, Inc.  Chief Executive Officer, Steven B. Rash, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                         |
| 32.2(2)              |       | Certification of Power 3 Medical Products, Inc.  Chief Accounting Officer, John P. Burton, pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002.                                                                        |

 

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(1)   Filed herewith.

 

(2)   Furnishedherewith.

 

(3)   Managementcontract or compensatory plan or arrangement.

 

(4)   Confidentialtreatment has been requested with respect to certain portions of thisexhibit.  Omitted portions have beenfiled separately with the Securities and Exchange Commission.

 

 

**Item14. Principal Accountant Fees and Services**

** **

The following table sets forth the aggregate amount offees billed by the Company’s independent accountants for the year ended December 31,2004 and the year ended December 31, 2003:

 
| ** **           | ** ** | **2003** | ** ** | **2004** | ** ** |
|----------------------|------------|----------|------------|----------|------------|
| Audit Fees:          |       | $        | 10,000     |     | $          | 55,747 |   |
| Audit  Related Fees: |       | —   |       | —   |       |
| Tax Fees:            |       | —   |       | —   |       |
| All Other  Fees:     |       | —   |       | —   |       |
|                 |       |     |       |     |       |
| **Total  Fees:**     | ** ** | $        | 10,000     |     | $          | 55,747 |   |

 

The Company does not have an Audit Committee of theBoard of Directors. All activities of the Company’s independent accountants arereviewed and approved prior to the engagement by the Board of Directors, whoconsider whether such activities could affect the independence of such accountants.

 

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**SIGNATURES**

** **

In accordance with Section 13 and 15(d) ofthe Exchange Act, the Registrant caused this report to be signed on its behalfby the undersigned, thereunto duly authorized.

 
|                         | **Power 3 Medical Products, Inc.** |
|------------------------------|-----------------------------------------|
|                         | ** **                              |
|                         | ** **                              |
|                         | By:                                     | /s/ Steven B. Rash | ** ** |
|                         | Name:                                   | Steven B. Rash |
|                         | Title:                                  | Chairman and Chief Executive Officer |
|                         |                                    |   |
| Date: September 9, 2005 |                                    | (Principal Executive Officer) |

 

Pursuant to the requirements of the Exchange Act, thisreport has been signed by the following persons in the capacities and on thedates indicated.

 
| **Signature**            | ** ** | **Title**                                                                             | ** ** | **Date**                |
|--------------------------|------------|---------------------------------------------------------------------------------------|------------|-------------------------|
|                     |       |                                                                                  |       |                    |
| /s/ Steven B.  Rash      |       | Chairman and  Chief Executive Officer (Principal Executive Officer)                   |       | September 9,  2005 |
| Steven B. Rash           |       |
|                     |       |                                                                                  |       |                    |
|                     |       |                                                                                  |       |                    |
| /s/ Ira L.  Goldknopf    |       | Chief Scientific  Officer and Director                                                |       | September 9,  2005 |
| Ira L.  Goldknopf, Ph.D. |       |                                                                                  |       |                    |
|                     |       |                                                                                  |       |                    |
|                     |       |                                                                                  |       |                    |
| /s/ John P.  Burton      |       | Chief Accounting  Officer and Controller (Principal Financial and Accounting Officer) |       | September 9,  2005 |
| John P. Burton           |       |                                                                                  |       |

 

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