UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549







FORM
10-K









(Mark
One)





x           Annual
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.




For the
fiscal year ended: December 31,
2009




 ̈           Transition
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934.




For the
transition period from _________ to
__________.




Commission
File Number: 000-24921





POWER3
      MEDICAL PRODUCTS, INC.(Exact
      Name of Registrant as Specified in Its
Charter)





New York
                
                65-0565144(State
      or Other Jurisdiction
                
                (I.R.S.
      Employer Identification No.)of
      Incorporation or Organization)3400
      Research Forest Drive, Suite B2-3The Woodlands, Texas
                
                77381(Address
      of Principal Executive Offices)
                
                (Zip
      Code)





(281)
      466-1600(Registrant’s
      Telephone Number, Including Area Code)
 Securities
registered under Section 12(b) of the
Act:





Name
      of Each ExchangeTitle of Each Class
                    
                    On Which RegisteredNone
                    
                    None




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




Common
      Stock, $.001 par value per share(Title
      of Class)


Indicate by check mark if the
registrant is a well-known seasoned issuer, as defined in Rule 405 of the
Securities Act.    ̈ Yes
x
No





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or 15(d) of the Act.   ̈ Yes
x
No





Note – Checking the box above
will not relieve any registrant required to file reports pursuant to Section 13
or 15(d) of the Exchange Act from their obligations under those
Sections.





Indicate by check mark whether the
registrant: (1) has filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90
days.   Yes  x   No   ̈





Indicate by check mark whether the
registrant has submitted electronically and posted on its corporate Web site, if
any, every Interactive Data File required to be submitted and posted pursuant to
Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).   Yes  x   No   ̈





Indicate
by check mark if the disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§229.405 of this chapter) is not contained herein, and will not
be contained herein, to the best of registrant’s knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.  o





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
 See the definitions of “large accelerated filer,” “accelerated filer” and
“smaller reporting company” in Rule 12b-2 of the Exchange Act.





Large
      accelerated filer ̈
            Accelerated
      filer ̈Non-accelerated
      filer (Do not check if a smaller reporting company)  ̈
            Smaller
      reporting company x




Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act).  Yes   ̈   No  x





The aggregate market value of the
voting common equity held by non-affiliates of the registrant computed by
reference to the price at which the common equity was sold as of the last
business day of the registrant’s most recently completed second fiscal quarter,
which was June 30, 2009, was $5,927,703.





As of April 7, 2010, 427,397,313 shares
of the registrant’s common stock were outstanding.





DOCUMENTS
INCORPORATED BY REFERENCE





None.









TABLE
OF CONTENTS




PagePART
      IItem
      1.
              Business
              2Item
      1A.
              Risk
      Factors
              23Item
      2.
              Properties
              44Item
      3.
              Legal
      Proceedings
              44PART
      IIItem
      4.
              Market
      For Registrant’s Common Equity, Related Stockholder Matters and Issuer
      Purchases of Equity Securities
              45Item
      6.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
              47Item
      7.
              Financial
      Statements and Supplementary Data
              57Item
      8.
              Changes
      in and Disagreements With Accountants on Accounting and Financial
      Disclosure
              57Item
      8A(T).
              Controls
      and Procedures
              57Item
      8B.
              Other
      Information
              60PART
      IIIItem
      9.
              Directors,
      Executive Officers and Corporate Governance
              60Item
      10.
              Executive
      Compensation
              63Item
      11.
              Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
              67Item
      12.
              Certain
      Relationships and Related Transactions, and Director
      Independence
              69Item
      13.
              Principal
      Accountant Fees and Services
              70Item 14.
              Exhibits
      and Financial Statement Schedules
              71Index
      to Financial Statements
              F-1










i




DISCLOSURE
REGARDING FORWARD-LOOKING STATEMENTS





This
report contains “forward-looking statements” within the meaning of Section 27A
of the Securities Act of 1933, as amended (the “Securities Act”) and Section 21E
of the Securities Exchange Act of 1934, as amended (the “Exchange
Act”).  All statements other than statements of historical facts
included or incorporated by reference in this report, including, without
limitation, statements regarding our future financial position, business
strategy, budgets, projected revenue and costs, and plans and objectives of
management for future operations, are forward-looking statements.  In
addition, forward-looking statements generally can be identified by the use of
forward-looking terminology such as “may,” “will,” “expects,” “intends,”
“plans,” “projects,” “estimates,” “anticipates,” or “believes” or the negative
thereof or any variation thereon or similar terminology or
expressions.




These
forward-looking statements are subject to risks and uncertainties that could
cause actual results to differ materially from results proposed in such
statements.  Although we believe that the expectations reflected in
such forward-looking statements are reasonable, we can give no assurance that
such expectations will prove to have been correct.  Important factors
that could cause actual results to differ materially from our expectations
include, but are not limited to:





·
            our
      ability to fund future growth and implement our business
      strategy;




·
            our
      dependence on a limited number of business partners for substantially all
      of our revenue;




·
            projections
      of our future revenue, results of operations and financial
      condition;




·
            anticipated
      deployment, capabilities and uses of our products and our product
      development activities and product
innovations;




·
            the
      importance of proteomics as a major focus of biology
    research;




·
            competition
      and consolidation in the markets in which we
  competes;




·
            existing
      and future collaborations and
partnerships;




·
            the
      utility of biomarker discoveries;




·
            our
      belief that biomarker discoveries may have diagnostic and/or therapeutic
      utility;




·
            our
      ability to comply with applicable government
  regulations;




·
            our
      ability to expand and protect our intellectual property
      portfolio;




·
            the
      condition of the securities and capital
markets;




·
            general
      economic and business conditions, either nationally or internationally or
      in the jurisdictions in which we are doing
  business;




and
statements of assumption underlying any of the foregoing, as well as any other
factors set forth herein under “Item 1A.  Risk
Factors” and “Item
6.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations” below.  All subsequent written and oral
forward-looking statements attributable to us, or persons acting on our behalf,
are expressly qualified in their entirety by the foregoing.  Except as
required by law, we assume no duty to update or revise our forward-looking
statements.









Item
1.  Business.





Overview




We are a
leading bio-technology company focused on the development and marketing of novel
diagnostic products through the analysis of proteins. We believe that the future
of medicine lies in a shift from a treatment paradigm to a prevention paradigm.
By understanding the connections between proteins and disease, we believe
that individuals who have a greater risk of developing disease can be identified
and physicians can use this information to improve patient outcomes, patient
healthcare, and identify those individuals who would benefit from preventive
therapies. We employ a number of proprietary technologies that help us to
understand the genetic basis of human disease and the role that proteins may
play in the onset, progression and treatment of disease. We use this information
to guide the development of diagnostic products that are designed to assess an
individual’s risk for developing disease later in life (predictive medicine),
identify a patient’s likelihood of responding to drug therapy and guide a
patient’s dosing to ensure optimal treatment (personalized medicine), or assess
a patient’s risk of disease progression and disease recurrence (prognostic
medicine). Our goal is to provide physicians with this critical information that
may guide the healthcare management of their patients to prevent disease, delay
the onset of disease, or catch the disease at an earlier stage when it is more
treatable.





Our
business is focused on the development of novel diagnostic tests in the fields
of cancer, and neurodegenerative and neuromuscular diseases such as amytrophic
lateral sclerosis (commonly known as ALS or Lou Gehrig’s disease), Alzheimer’s
disease and Parkinson’s disease. We also address clinical questions related
to early disease detection, treatment response, monitoring of disease
progression, prognosis and others through collaborations with leading academic
and research institutions. We apply proprietary methodologies to discover
and identify protein biomarkers associated with diseases. We also use
advanced protein separation methods to identify and resolve variants of specific
biomarkers (known as “translational proteomics”) for developing a procedure to
measure a property or concentration of an analyte (known as an “assay”) and
commercializing novel diagnostic tests. By discovery and development of
protein-based disease biomarkers, we have developed tools for diagnosis,
prognosis, early detection and identification of new target drugs in cancer, and
neurodegenerative and neuromuscular diseases such as amytrophic lateral
sclerosis (commonly known as ALS or Lou Gehrig’s disease), Alzheimer’s disease
and Parkinson’s disease.





We have
established a scientific advisory board to assist in the research and
development of our products. The members of this scientific advisory board are
recognized leaders in their chosen fields and have strong affiliations with such
institutions as the Baylor College of Medicine and the Sun Health Research
Institute. We are working with them to find effective therapeutics and
novel predictive medicine for important human diseases. Our scientific team is
headed by our Dr. Ira L. Goldknopf, who is our President and Chief Scientific
Officer.  Dr. Goldknopf was a pioneer in the science of clinical proteomics
in the 1970s and 1980s and in so doing made a significant biochemistry discovery
— the ubiquitin conjugation of proteins. Our scientific team has leveraged these
significant insights and has made progress in the discovery of unique disease
protein footprints of biomarkers in breast cancer, neurodegenerative disease,
and drug resistance to chemotherapeutic agents.




2




We are
continuing to develop and commercialize proteomic and related biomarker tests
that will assist providers and payers in determining the most appropriate
therapeutic intervention for a particular patient. These tests are developed
based on our know-how and expertise, in partnership with thought leaders and
leading healthcare institutions, and intellectual property that we have
developed on our own, licensed from others, or acquired from other parties. Our
tests are available to patients by physician’s prescription to providers located
primarily in the United States and may be performed in our CLIA-certified
laboratory or partnered with other test providers.





Background





We were
incorporated in New York in May 1993.  Prior to 2009, we were a development
stage company with our primary business activity focused exclusively on the
development of our intellectual property assets in the area of diagnoses for
breast cancer, ALS, Alzheimer’s disease and Parkinson’s disease.  In
September 2008, Steven B. Rash, our Chief Executive Officer and Chairman of the
Board at the time, resigned from all of his positions with us.  Ira L.
Goldknopf, our sole remaining director and Chief Scientific Officer, was
appointed as President and Interim Chairman of the Board.  Helen R.
Park was appointed Interim Chief Executive Officer.  Under the
direction of our restructured management team, we implemented a new strategy
focusing on commercialization of our intellectual property assets, with less
emphasis on research and development.   We have since developed a
portfolio of products including BC-SeraProTM, a
proteomic blood serum test for the early detection of breast cancer, and
NuroPro®, a serum
test for the detection of neurodegenerative diseases including Alzheimer’s,
Parkinson’s and ALS diseases.





Proteomics




Proteomics
is the study and analysis of proteins. Proteomics compares proteins from
biological samples obtained from people with specific known characteristics or
medical conditions with samples from people without those characteristics or
medical conditions. It also compares proteins from biological samples obtained
from people who responded positively to a specific form of treatment with
samples from people who did not respond or responded negligibly to the same
treatment or who suffered toxic side effects from the treatment. Once a
proteomic difference has been identified for a specific characteristic or
disease or treatment response, the study is repeated, or replicated, in
additional samples to confirm the initial findings. The findings are then
studied using biological samples from the general population to understand how
they occur in different groups in the population and to assess their potential
utility for use in new diagnostic test procedures. Some findings from disease
association studies and studies of treatment response may have applicability in
the development of new drugs or therapeutic agents.





Through
proteomics, scientists can more accurately understand the functioning of a
healthy body and are assisted in the identification of the proteins associated
with specific diseases. Proteins that change in the course of disease are the
building blocks for new screening and diagnostic tests which we are developing
to provide earlier disease detection, enhanced treatment and monitoring
assistance.


3


Relationship Between Proteins and
Diseases




The
entire genetic content of any organism, known as its genome, is encoded in
strands of deoxyribonucleic acid (“DNA”).  Cells perform their normal
biological functions through the genetic instructions encoded in their DNA,
which results in the production of proteins.  The process of producing
proteins from DNA is known as gene expression or protein expression. Differences
in living organisms result from variability in their genomes, which can affect
the types of genes expressed and the levels of gene expression. Each cell of an
organism expresses only approximately 10% to 20% of the genome. The type of cell
determines which genes are expressed and the amount of a particular protein
produced. For example, liver cells produce different proteins from those
produced by cells found in the heart, lungs and skin.





Proteins
play a crucial role in virtually all biological processes, including
transportation and storage of energy, immune protection, generation and
transmission of nerve impulses and control of growth. Diseases may be caused by
a mutation of a gene that alters a protein directly or indirectly, or alters the
level of protein expression. These alterations interrupt the normal balance of
proteins and create disease symptoms. A protein biomarker is a protein or
protein variant that is present in a greater or lesser amount in a disease state
versus a normal condition. By studying changes in protein biomarkers,
researchers may identify diseases prior to the appearance of physical symptoms.
Historically, researchers discovered protein biomarkers as a byproduct of basic
biological disease research, which resulted in the validation by
researchers of approximately 200 protein biomarkers that are being used in
commercially available clinical diagnostic products.





Limitations of Existing Diagnostic
Approaches




The
healthcare industry continues its struggle to manage costs, as evidenced by the
projected growth of United States health expenditures to $4.4 trillion in 2018
[National Healthcare
Expenditure Data project 2008]. While the use of therapeutics continues
to grow, treatment continues, for the most part, to be delivered through a
trial-and-error approach and drugs are generally developed to treat broad
populations without regard for the difference in response by certain individuals
to specific therapeutic regimes. In fact, the cost of prescribing potentially
harmful medications in hospitals has been estimated by the Institute of
Medicine to be at least $3.5 billion a year, including 400,000 preventable
drug-related injuries occur each year in hospitals, 800,000 in long-term care
settings, and at least 500,000 in outpatient Medicare recipients [Institute of Medicine of the
National Academies, 2006].


4


The
economics of healthcare demand improved allocation of resources. Improved
allocation of resources can be derived through disease prevention, early
detection of disease leading to early intervention and diagnostic tools that can
triage patients to more appropriate therapy and intervention. If, early in drug
development, companies sought to understand more clearly the characteristics
that defined the population of patients more likely to respond favorably to a
product or more or less likely to experience certain side effects, subsequent
development efforts could be more effectively targeted. Typically referred to as
enrichment techniques, these tools have been increasingly employed throughout
the drug development process. For example, if clinical trials are conducted in
the subset of severe congestive heart failure, approval might still be gained
for the broader designation of congestive heart failure without limitation as to
severity. Similarly, proteomic and other biomarkers may be applied to identify
specific patient subpopulations that are more or less likely to respond to a
drug. This could result in faster and less expensive clinical trials, reduce the
risk of a total study failure, and accelerate the timeline to approval. In
addition, the commercialized product would be positioned to be differentiated
from other agents within its class or therapeutic area, possibly by superior
efficacy in the subpopulation but certainly by better scientific,
functional, or mechanistic data. Similarly, if pharmaceutical and biotechnology
companies could identify the patients most likely to have an unwanted side
effect based on genetic variation, they could more closely monitor these
patients or eliminate them from participating in clinical trials, improving the
risk-benefit ratio of treatment.





The in
vitro diagnostic industry manufactures and distributes products that are used to
detect thousands of individual components present in human derived specimens.
However, the vast majority of these assays are used specifically to identify
single protein biomarkers. A protein biomarker is a protein or protein variant
that is present at greater or lesser concentrations in a disease state versus a
normal condition.  The development of new diagnostic products has been
limited by the complexity of disease states, which may be caused or
characterized by several or many proteins or post-translationally modified
protein variants. Diagnostic assays that are limited to the detection of a
single protein often have limitations in clinical specificity (true negatives)
and sensitivity (true positives) due to the complex nature of many diseases and
the inherent biological diversity among populations of people. Diagnostic
products that are limited to the detection of a single protein may lack the
ability to detect more complex diseases, and thus produce results that are
unacceptable for practical use. The heterogeneity of disease and of the human
response to disease often underlies the shortcoming of single biomarkers to
diagnose and predict many diseases accurately.




Power3’s
Solution





We are
applying translational proteomics research, development tools and methods to
analyze biological information in an attempt to discover associations between
proteins, protein variants, protein-protein interaction and diseases. Our focus
on translational proteomics enables us to address the market for novel
diagnostic tests that simultaneously measure multiple protein
biomarkers.  Conventional protein tests measure a single protein
biomarker whereas most diseases are complex.  We believe that efforts
to diagnose cancer and other complex diseases have failed in large part because
the disease is heterogeneous at the causative level (i.e., most diseases can be
traced to multiple potential etiologies) and at the human response level (i.e.,
each individual afflicted with a given disease can respond to that ailment in a
specific manner). Consequently, measuring a single protein biomarker when
multiple protein biomarkers may be altered in a complex disease is unlikely to
provide meaningful information about the disease state. We believe that our
approach of monitoring and combining multiple protein biomarkers using a variety
of analytical techniques, including mass spectrometry, will allow us to create
diagnostic tests with sufficient sensitivity and specificity about the disease
state to aid the physician considering treatment options for patients with
complex diseases.


5


We have
developed diagnostic tests based on known and newly identified protein
biomarkers to help physicians predict an individual’s predisposition for a
disease in order to better characterize, monitor progression of and select
appropriate therapies for such disease. By using multiple biomarkers, we are
able to better encompass the disease and host response heterogeneity. In
addition, by examining specific biomarkers with greater resolution, for example,
post-translational modifications, we believe we can improve the specificity of
our diagnostic biomarkers because these modifications reflect both the
pathophysiology and host response.  This is accomplished using an
advanced protein separation system (integrated equipment, reagents and software)
to identify combinations of specific biomarkers leading to
commercialization of disease-specific assays.


Our goals
are to: (i) develop novel diagnostic tests that address unmet medical needs,
particularly in stratifying patients according to the risk of developing a
disease, having a disease or failing a specific therapy for a disease, (ii)
facilitate more efficient clinical trials of new therapeutics by providing
biomarkers that stratify patients according to likelihood of response, and (iii)
identify biomarkers that can form the basis of molecular imaging
targets.  We has chosen to concentrate primarily in the areas of
cancer and neurodegenerative and neuromuscular diseases such as amytrophic
lateral sclerosis (commonly known as ALS or Lou Gehrig’s disease), Alzheimer’s
disease and Parkinson’s disease because these areas generally lack quality
diagnostic tests and, therefore, we believe patient outcomes can be
significantly improved by the development of novel diagnostic
tests.





Addressing
the Heterogeneity of Disease





Our
strategy is to create a diagnostics paradigm that is based on risk
stratification, multiple-biomarker testing and information integration. This
strategy is based on the belief that any specific disease is heterogeneous and,
therefore, relying on a single disease biomarker to provide a simple “yes-no”
answer is likely to fail. We believe that efforts to diagnose cancer and other
complex diseases have failed in large part because the disease is heterogeneous
at the causative level, meaning that most diseases can be traced to multiple
potential etiologies, and at the human response level, meaning that each
individual afflicted with a given disease can respond to that ailment in a
specific manner. Consequently, diagnosis, disease monitoring and treatment
decisions can be challenging. This heterogeneity of disease and difference in
human response to disease and/or treatment underlies the shortcomings of single
biomarkers to predict and identify many diseases. A better understanding of
heterogeneity of disease and human response is necessary for improved diagnosis
and treatment of many diseases.




Validation of Biomarkers Through
Proper Study Design




Analysis
of peer-reviewed publications reveals almost daily reports of novel biomarkers
or biomarker combinations associated with specific diseases. Few of these are
used clinically. As with drug discovery, preliminary research results fail to
canvass sufficient variation in study populations or laboratory practices and,
therefore, the vast majority of candidate biomarkers fail to be
substantiated in subsequent studies. Recognizing that validation is the point at
which most biomarkers fail, our strategy is to reduce the attrition rate between
discovery and clinical implementation by building validation into the discovery
process. Biomarkers fail to validate for a number of reasons, which can be
broadly classified into pre-analytical and analytical factors. Pre-analytical
factors include study design that does not mimic actual clinical practice,
inclusion of the wrong types of control individuals and demographic bias
(usually seen in studies in which samples are collected from a single
institution). Analytical factors include poor control over laboratory protocols,
inadequate randomization of study samples and instrumentation biases (for
example, higher signal early in the experimental run compared to later in the
experimental run). Finally, the manner in which the data are analyzed can have a
profound impact on the reliability of the statistical
conclusions.


6


When
designing clinical studies, we begin with the clinical question, since this
drives the downstream clinical utility of the biomarkers.  With the
starting point of building validation into the discovery process, we design our
studies to include the appropriate cases and control groups. We further
incorporate an initial validation component even within the discovery
component.  We place an emphasis on multi-institutional studies,
inclusion of clinically relevant controls, using qualified and trained operators
to run assays and collect data.   To date, we have analyzed more
than 2,000 samples from eight medical centers in our breast cancer program,
our neurodegenerative disease program, our drug resistance program and other
programs that we have.  In analyzing the complex proteomics data, we
take a skeptical view of statistical methodologies, choosing to use a variety of
approaches and looking for concordance between approaches, taking the view that
individual and group performance of biomarkers deemed significant by multiple
statistical algorithms are more likely to reflect biological conditions than
mathematical artifacts.





Exploiting
the Power of Mass Spectrometry to Improve Assay Specificity




The
functional activity of proteins is often modulated by changes in its
structure.  Conventional approaches to assay proteins vary in their
ability to detect these changes, and may depend on the specificity of the
antibody to the original or altered forms of the
proteins.  Additionally, a conventional assay may inadvertently
measure only one form of a protein while many other forms of this protein
exist.  Our use of mass spectrometry has advantages over traditional
assay approaches due to its ability to distinguish two or more highly related
protein species based on molecular mass, or in combination with chromatographic
separation tools based on biochemical properties.  Because most
traditional assay approaches rely strictly on using antibodies to capture the
intended biomarker, protein forms with a common epitope are not readily
distinguished.  Current assays rely on unwieldy western blots or
alternately immunoblot, which are both low throughput and poorly quantitative.
Our assay measures the product of the enzymatic reaction directly, provides the
quantitation necessary to distinguish between diseases, evaluates patient
responses to therapy, and monitors patients during clinical remission to prevent
recurrences of the disease.




Creating
and Maintaining a Multi-Disease Product Pipeline





We plan
to develop potential diagnostic tests based on biomarkers discovered in its
sponsored programs with academic collaborators and through the in-license of
biomarkers and assays from academic customers.  We have obtained
access to biomarkers that may potentially lead to additional diagnostic tests.
Going forward, we will continue to identify users who may provide additional
biomarker discoveries for our diagnostics test pipeline. Additionally, we have
the opportunity to identify biomarkers discovered on other proteomic platforms
that will complement its existing product pipeline.




7




We have
entered into collaboration, research, material transfer, and license agreements
with several academic institutions, to support  large-scale
clinical studies, which include ongoing clinical studies as well as future
clinical studies.  Together with our collaborators, we are currently
conducting large-scale protein biomarker studies of cancer and neurodegenerative
diseases.  Most of these studies involve the analysis of large numbers
of samples from healthy and diseased individuals, or comparing patients with the
disease of interest to those with related diseases for which clinical
distinction is necessary. The goal of most of these studies is to identify sets
of proteins that serve as biomarkers for a specific disease.




Strategy




Our
strategy is to understand the relationship between proteins and human diseases
in order to develop the next generation of molecular diagnostic products.
Through our proprietary technologies, we believe we are positioned to identify
important disease genes, the proteins they produce, and the biological pathways
in which they are involved to better understand the underlying molecular basis
for the cause of human disease. We believe that identifying these genes,
proteins, and pathways will enable us to develop novel molecular diagnostic
products. Our business strategy includes the following key
elements:




·
            Discover important disease
      genes, understand their function and determine their role in human
      disease. We will continue to use our proprietary technologies in an
      effort to efficiently discover important genes and proteins and to
      understand their role in human
disease.




·
            Acquire promising
      biomarkers/patents from other organizations. We intend to continue
      to take advantage of in-licensing or acquisition opportunities to augment
      our in-house product development programs. We recognize that we cannot
      meet all of our research discovery needs internally and can benefit from
      the research performed by other organizations. We intend to leverage our
      product development expertise to acquire new product opportunities in
      molecular diagnostic areas of
focus.




·
            Grow our diagnostic test
      business in the U.S.  We will continue to seek to
      increase the market penetration of our existing molecular diagnostic
      products in the U.S. Additionally, we will pursue new product
      opportunities in the areas of predictive, personalized, and prognostic
      medicine.  We believe that our diagnostic products will play an
      increasingly important role in the management of a patient’s
      healthcare.




·
            Expand our molecular
      diagnostic business internationally. While we have collaborations
      in several European countries, we intend to establish operations in Europe
      in the future and market our current and future diagnostic products and
      any future products in the major market countries in Europe for which we
      believe there is an attractive commercial opportunity, subject to any
      required regulatory approvals and the license rights to our
      products.




8




In
furtherance of our strategy, we are advancing our pre-clinical pipeline of
therapeutics and related biomarkers into the clinic or to other stages that are
consistent with the program objectives, developing, acquiring and/or
in-licensing and advancing therapeutics, leveraging our know-how and
expertise in drug and biomarker development, and working with providers,
payers and others to accelerate uptake and adoption of our diagnostic tests in
clinical care with the goal of improving cost and clinical
outcomes.




Products
and Product Candidates




We have
developed a portfolio of products including BC-SeraProTM, a
proteomic blood serum test for the early detection of breast cancer, and
NuroPro®, a serum
test for the detection of neurodegenerative diseases including Alzheimer’s,
Parkinson’s and ALS diseases.  These products are designed to analyze
proteins and their mutations to assess an individual’s risk for developing
disease later in life or a patient’s likelihood of responding to a particular
drug, assess a patient’s risk of disease progression and disease recurrence, and
measure a patient’s exposure to drug therapy to ensure optimal dosing and
reduced drug toxicity. Armed with this risk response assessment information,
individuals can take action to prevent or delay the onset of disease and
physicians can ensure that patients receive the most appropriate treatment of
their disease. Future products and services are expected to originate from our
internal research and development programs, collaborative efforts and alliances
with third parties, and acquisitions of complementary technologies and
businesses.




BC-SeraProTM





Breast
cancer is the second leading cause of cancer deaths in women and results in
40,000 deaths with over $7 billion spent on breast cancer diagnosis
annually. An important factor in surviving cancer is early detection and
treatment. According to the American Cancer Society Surveillance Research, when
breast cancer is confined to the breast, the five-year survival rate for early
stages is close to 100%. Due to the limitations of the current diagnostic
techniques of mammograms and self-examination, the presence of breast cancer is
often missed or tests are inconclusive. The limitations and lack of accuracy of
the current diagnostic tests highlight the need for a test that can detect the
presence of breast cancer much earlier and more accurately.





BC-SeraProTM is a
proteomic test for the diagnosis of breast cancer.  BC-SeraProTM is
an accurate and minimally-invasive test that can detect the disease at a point
when treatment is both more effective and less expensive.  It that
avoids the discomfort, inconvenience, x-ray exposure, and emotional
stress of repeated mammogram exams and can exclude malignancy at
higher accuracy than mammography.  In a 60-patient blind test study,
BC-SeraProTMdemonstrated
a 80% sensitivity and 87% specificity for the detection of breast
cancer.  Results of the BC-SeraProTM test are
not considered a stand alone diagnosis nor a guarantee, but are intended to be
used in conjunction with other breast cancer diagnostic tools.





We
are currently in the process of developing a diagnostic test for
BC-SeraProTM that is
utilitarian, accurate, and inexpensive. We have complete Phase 1 clinical trials
and will soon be commencing Phase II clinical trials for BC-SeraProTM.  Application
of this test will have a future impact on how breast disease will be diagnosed,
monitored, and managed and is intended to be used in conjunction with
mammography, breast MRIs and other diagnostic tools used in the detection of
breast cancer.




9




How
BC-SeraProTM
Works




BC-SeraProTM measures
the quantitative expression level of 22 protein
biomarkers in the serum that differentiate between breast cancer
patients and control subjects.  Blood serum collection is a routine
procedure performed by a clinician. A small sample of blood is drawn from a
vein. This serum sample is then frozen and transported to the Power3 CLIA
certified laboratory, utilizing pre-approved carriers/delivery services, where
sample preparation and analysis begins. The concentration of the biomarkers
from a patient’s serum sample is compared to Power3’s extensive
patient database.  Statistical analysis by linear
discriminate function is used to analyze the patient’s biomarker
concentrations and assign a probability score for the diagnosis of the patient
sample.  The probability score indicates whether or not the patient may
have breast cancer. The score reflects how strongly the patient sample fits
the biostatistical model and whether the patient should be recommended for
further follow-up by the clinician.





NuroPro®





The three
neurodegenerative diseases that affect the most people in the United Sates each
year are Alzheimer’s disease, Parkinson’s disease and ALS (Amyotrophic Lateral
Sclerosis, aka Lou Gehrig’s disease). The Alzheimer’s Association reports that
Alzheimer’s disease is the most common form of dementia, affecting over
5.1 million Americans, of which 4.9 million are 65 or older. Every 72
seconds, someone in America develops Alzheimer’s disease and by mid-century
someone will develop Alzheimer’s every 33 seconds. People as young as 30 years
old can contract the disease and one in ten people age 65 and over have
Alzheimer’s disease. In addition, the American Parkinson’s Disease Association
reports that more than 1.5 million people in America have Parkinson’s
disease, affecting about 1 in 100 Americans over the age of 60, and a new case
of Parkinson’s disease is diagnosed every 9 minutes. On a smaller scale, the ALS
Association reports that an average of approximately 30,000 Americans are
afflicted with ALS, with 5,000 new cases diagnosed annually.





NuroPro®
is a blood serum protein neurodegenerative disease diagnostic screening
test.  The NuroPro® blood
test uses blood serumprotein biomarkers to
provide more accurate, quantifiable, minimally invasive tools for differential
diagnosis of the neurodegenerative diseases to help provide more effective
treatment.  It is comprised of a series of three separate and distinct
blood serum tests that have been designed to diagnose Alzheimer’s, Parkinson’s
and Lou Gehrig’s disease (ALS) in individuals. The tests monitor the
concentration of selected proteins residing in a panel of blood serum protein
biomarkers.  They determine whether a patient has a neurodegenerative
disease, such as Alzheimer’s, Parkinson’s or Lou Gehrig’s disease (ALS).
 With NuroPro®,
we have identified groups of unique markers that appear to distinguish normal
patients from those with motor neuron, cognitive, movement and other
neurological disorders.




10




We
currently use a panel of 59 protein biomarkers in the NuroPro®
blood serum-based tests for four disease diagnostics including Alzheimer’s and
Parkinson’s disease, ALS and similar disorders.   These
biomarkers were selected from the analysis of over 1,000 blood serum patient
samples.  The tests include ALS-specific tests for ALS vs. ALS-like
disorders, Alzheimer’s disease-specific tests and a Parkinson’s disease-specific
test. We are currently conducting clinical validation trials for Alzheimer’s and
Parkinson’s disease.





Diagnosis
of neurodegenerative diseases such as Alzheimer’s disease, Parkinson’s disease,
and Amyotrophic lateral sclerosis (ALS) can be difficult, especially in early
stages where there is often an insidious onset of symptoms overlapping with
different disorders. This results in delayed diagnosis and treatment
initiation.  NuroPro®
has the potential to become the first clinical diagnostic test available for the
detection of neurodegenerative diseases.





We have
completed Phase I clinical trials for NuroPro®
and are currently completing Phase II clinical trials.





How
NuroPro®Works




NuroPro®measures
the quantitative expression level of protein biomarkers in the
serum that differentiate between breast cancer patients and control
subjects.  Blood serum collection is a routine procedure performed by a
clinician. A small sample of blood is drawn from a vein. This serum sample is
then frozen and transported to the Power3 CLIA certified laboratory, utilizing
pre-approved carriers/delivery services, where sample preparation and analysis
begins. The biomarkers in the panel have been selected for their ability to
discriminate patients with these diseases from patients who do not have the
disease (normal and alternate disease controls). The concentration of the
biomarkers from a patient’s serum sample is compared to Power3’s
extensive patient database.  Our statistical model evaluates the
quantitative information of the protein biomarkers and assigns a probability
score. The probability score indicates to the physician that the patient has a
particular neurological disease or does not. The score reflects how strongly the
patient sample fits the biostatistical model and if the patient should be
recommended for further follow-up by the clinician.




Raw Materials




Our
operations require a variety of raw materials, such as biological, chemical and
biochemical materials, and other supplies, some of which are occasionally found
to be in short supply. In particular, for our research and product development
activities, we need access to human tissue and blood samples from diseased and
healthy individuals, other biological materials, and related clinical and other
information, which may be in limited supply. We may not be able to obtain or
maintain access to these materials and information on acceptable terms in the
future, or may not be able to obtain needed consents from individuals providing
tissue, blood, or other samples. In addition, government regulation in the U.S.
and foreign countries could result in restricted access to, or use of, human
tissue or blood samples or other biological materials.




In
addition, several key components of our diagnostic products and a test kit used
in our clinical laboratory testing services come from, or are manufactured for
us by, a single supplier or a limited number of suppliers.  We acquire
some of these and other key components on a purchase-order basis, meaning that
the supplier is not required to supply us with specified quantities over any set
period of time or set aside part of its inventory for our forecasted
requirements. We have not arranged for alternative supply sources for some of
these components should suppliers become unable to meet our demand or become
unwilling to do so on terms that are acceptable to us.




11




We are
required under CLIA regulations to verify that our suppliers of key components
for our diagnostic products are in compliance with all applicable FDA
regulations, including the Quality System Regulation. We believe that this
requirement increases the difficulty in arranging for alternative supply
sources, particularly for components that are from “single source” suppliers,
which means that they are currently the only viable supplier of custom-ordered
components.  If any of the components of our products or any of the
kits used for our laboratory testing services are no longer available in the
marketplace, or are not available on commercially acceptable terms, we may be
forced to further develop our products or testing services to use alternative
components or test kits or discontinue the products or testing
services.




Manufacturing




We do not
currently have manufacturing capabilities and do not have any plans to
manufacture any products in the near future. We are exploring opportunities to
produce and manufacture our diagnostic tests through collaborative agreements
and strategic alliances.  Exploitation of these opportunities will depend
on the availability of further capital, qualified personnel, sufficient
production resources and our ability to establish relationships with parties
that have existing manufacturing and distribution capabilities.





CLIA
Certification




On March
25, 2008, we received our Clinical Laboratory Improvement Amendment (CLIA)
compliance re-certification.  We earned our CLIA recertification to offer
high complexity tests after meeting standards for knowledge, training,
expertise, quality control, quality assurance and testing proficiency. With CLIA
recertification, we are able to continue offering our blood serum based tests,
BC-SeraProTM and
NuroPro®.
 Receipt of our CLIA recertification of compliance reflects our desire to
offer the highest quality diagnostic tests in our continuing mission to
commercialize our discoveries and serve the medical and scientific
communities.





Research andDevelopment




Our
research and development efforts are focused on the identification and
validation of proteins that are associated with cancer, neurodegenerative
diseases and neuromuscular diseases.  In conducting these activities,
we are using proprietary proteomics discovery platforms to develop protein-based
diagnostic products and to identify and validate novel diagnostic targets.
Through our research, we have been able to demonstrate that a particular protein
can be used as a biological point of intervention for a diagnostic product
designed to affect a particular disease or medical condition. In addition, our
proteomics research has demonstrated that a particular protein can be used as a
marker for diagnosing a disease, or for predicting disease prognosis or
responsiveness to therapeutic intervention.  These proteins may
ultimately lead to the development of therapeutic products, and also may lead to
the development of diagnostic products, whether or not they result in effective
diagnostic products.




12




Before a
protein is used as a therapeutic target or diagnostic marker, we conduct
extensive validation studies involving additional complementary testing or
analysis performed to confirm its biological relevance and potential medical
utility.  Our discovery platform uses proprietary methodologies, trade
secrets and accepted technologies that have been optimized and validated for
reproducible discovery and analysis of disease specific protein biomarkers in
clinically relevant patient samples. Following sample preparation, a
quantitative 2D gel electrophoresis system is used for the separation of
proteins. The gels are stained, digitally scanned and the digital images are
analyzed with unprecedented reproducibility and sensitivity for quantitative
differences of protein biomarkers in disease vs. control patient samples. These
differences are evaluated using advanced biostatistical analysis to generate
statistical models for the disease and control sample groups. This statistical
model is then applied to new patient samples and used to predict their
diagnosis. Biomarkers of interest can be removed from the 2D gel matrix and
analyzed by fingerprinting and amino acid sequence analysis on a liquid
chromatograph - tandem mass spectrometer. This information is then
cross-referenced on a worldwide database and the results are combined with
results from additional protein chemistry analysis to identify the specific
protein biomarkers.





In the
area of neurodegenerative diseases and breast cancer, we have completed research
and clinical validation studies involving over 2,000 patient samples.  We
use biostatistical analysis to monitor panels of biomarkers for diagnostic
sensitivity and specificity for disease, normal and disease controls. By testing
patient body fluids and tissues, including blood serum (for breast cancer and
neurodegenerative diseases), and bone marrow aspirates (for leukemia patients),
we have discovered unique protein biomarker patterns that cover a broad range of
diseases, including: (i) cancer, such as breast, bladder, stomach, and
esophageal cancer, and leukemia, and (ii) neurodegenerative diseases, such as
Alzheimer’s, Parkinson’s and Lou Gehrig’s (ALS)
diseases.





Collaborations
and Licensing Agreements




We have
been a party to several collaboration and/or licensing agreements during the
past few years and expect to enter into several more during
2010.  These types of agreements provide us with an opportunity to
work with organizations that have particular expertise or intellectual property
that complements the expertise and intellectual property that we
have.  Under these agreements, we typically grant or receive a license
to develop intellectual property rights in return for royalties received upon
the sale of diagnostic tests and products produced under the
agreement.




Our
rights and the rights of our collaborators to any diagnostic products developed
under these agreements, our obligations and the obligations of our collaborators
to further develop and commercialize these diagnostic products, and
corresponding economic arrangements vary under the different agreements.
However, we generally do not control the amount and timing of resources to be
devoted by our collaborators to activities under the agreements. These research
and development programs may never result in any diagnostic product candidates
or lead to any commercialized diagnostic products, and may not generate any
revenue for us.




13




Our
collaborators are generally required to use commercially reasonable efforts to
develop a diagnostic product, and the term of each agreement with these
collaborators continues for as long as any royalties are payable to us under the
agreement. The obligation to pay royalties generally coincides with the life of
the underlying patents. In addition, these agreements generally may be
terminated upon the mutual consent of the parties or by either party upon an
uncured material breach by the other party.




On June
28, 2004, we entered into an Exclusive License Agreement with the Baylor College
of Medicine.  Under the agreement, we received exclusive rights to the
United States Patent Application entitled “Biomarkers for Neurodegenerative
Disease.”  In return, the Baylor College of Medicine was entitled to
receive a licensing fee, royalties and a milestone payment, including all legal
costs.




On
January 23, 2009, we entered into a definitive Collaboration and Exclusive
License agreement with Transgenomic, Inc.  Under the agreement, we granted
Transgenomic exclusive rights in the United States and certain other countries
to our proprietary test kits or systems for performing neurodegenerative
diagnostic tests.  In return, we were entitled to receive an up-front
license execution fee, certain milestone fees, including fees payable in cash
and fees payable in shares of Transgenomic common stock, and royalties based
upon net sales of the Company’s tests, test kits or systems by
Transgenomic.




On
February 2, 2010, we delivered notice of termination of the agreement to
Transgenomic due in part to the failure by Transgenomic to complete the first
commercial sale of a licensed product within 12 months of the date the Agreement
was executed, and due in part to the commission of material breaches of the
agreement by Transgenomic, including a breach of the confidentiality provisions
of the agreement.  We did not incur any early termination penalties in
connection with our decision to terminate the Agreement.




Clinical
Validation Trials





We
completed a 200 patient prospective Phase I clinical validation trial of our
NuroPro®
diagnostic test for Alzheimer’s disease and Parkinson’s disease during 2009. As
with the previous studies using retrospective patient samples, we used our
existing proprietary and patent-pending technologies to analyze the samples by
monitoring existing and seeking new additional NuroPro® protein
biomarkers for the blood tests for the early detection of these
neurodegenerative diseases. We received and analyzed 36 AD, 62 PD, and 70
controls from and age and gender matched control samples that showed greater
than expected sensitivity and specificity. We obtained our blood serum samples
from patients in Greece and in Arizona utilizing rigid sample collection
protocols.  We completed the analysis in our CLIA-certified lab. The
consistency in the sample results from both the US and Greece samples indicated
how robust this test is in diverse populations. We obtained better than expected
results for our Parkinson’s disease tests and are engaged in numerous validation
studies for Alzheimer's disease and similar neurological
disorders.  We intend to bring these diagnostic tests to market
during 2010.




14




We also
completed a 300 patient Phase I and II clinical validation trial of blood serum
samples using Power3's NuroPro®
diagnostic screening test during 2009 in collaboration with the Cleo Roberts
Center of Clinical Research of the Sun Health Research Institute under the
direction of Dr. Marwan N. Sabbagh a national leader in Alzheimer’s
disease.  For Phase I, Sun Health provided us with 100 clinically
confirmed samples of Alzheimer’s disease and age and gender matched control
samples.  For Phase II, Sun Health provided us with 25 samples
clinically confirmed samples of Alzheimer’s disease, Alzheimer’s disease-like
controls, and age and gender matched control samples.  We have run
these samples in the lab and are currently engaged in image and statistical
analysis.





During
2010, we intend to begin commercializing and monetizing our research,
intellectual property and diagnostic tests.  We will also be
continuing and expanding our collaboration and clinical validation trials for
NuroPro® with
physician scientists Dr. Marwan Sabbagh of the Sun Health Research Institute and
Dr. Stanley H. Appel of the Methodist Neurological Institute.





Publications
and Presentations





We are
actively publishing and presenting the results of our proteomics research in
major scientific journals and international scientific
meetings.  These publications and presentations provide validation of
our reputation as a leader in diagnostic science.  Examples of some of the
recent publications and presentations that we have made are as
follows:





·
            Dr.
      Ira L. Goldknopf, our President and Chief Scientific Officer, published an
      invited editorial in the February 2008 issue of the peer reviewed
      scientific journal Expert Review of Proteomics.The editorial, entitled “Blood Based Proteomics for Personalized
      Medicine, Examples from Neurodegenerative Disease,” outlined how proteins
      in the blood serum can tell us what disease pathways and mechanisms are
      active in patients.




·
            We
      co-authored an article regarding the discovery of protein biomarkers for
      esophageal malignancies in the International Journal of
      Cancer in 2008.   The article, titled “Alterations in
      Barrett’s-related adenocarcinomas: A proteomic approach,” was authored by
      Dr. Wael El-Rifai, MD, PhD, Professor of Surgery, Medicine and Cancer
      Biology and Director of Surgical Oncology Research at Vanderbilt
      University Medical Center, Nashville, Tennessee. Dr. El Rifai stated that
      through the use of our leading edge proteomic discovery platform,
      twenty-three biomarkers were identified that have not been described
      before in this lethal malignancy.




·
            Dr.
      Goldknopf presented our results with Neurodegenerative diseases and drug
      resistance in leukemia at the Cambridge Healthtech Biomarker Discovery
      Summit in Philadelphia, Pennsylvania on October 1,
  2008.




·
            Dr.
      Goldknopf and co-authors Dr. Katerina Markopoulou, academic partner at the
      University of Thessaly in Greece, Dr. Bruce Chase, Dr. Stanly H. Appel and
      Dr. Marwan Sabbagh presented the overall results of NuroPro®
      blood tests, from discovery through clinical validation of blood protein
      biomarkers and tests for Parkinson’s disease, ALS, and Alzheimer’s
      disease, to the Alzheimer’s Association’s International Congress of
      Alzheimer’s Disease (ICAD) in Vienna, Austria in July
  2009.




·
            Dr.
      Goldknopf was the keynote speaker and served as a member of the
      Scientific Advisory Board of BIT Life Sciences’ 2nd
      Annual International Congress and Expo of Molecular Diagnostics
      (ICEMD-2009) in Beijing, China in November 2009.  Along with his
      keynote address, “Principles of Omic Medicine Applied to Early Detection
      and Differential Diagnosis of Breast Cancer and Neurodegenerative
      Diseases,” Dr. Goldknopf chaired the session on “Biomarkers and
      Diagnostics in Personalized
Medicine.”




15




Sales
and Marketing




We
currently have no sales or marketing employees.  However, we intend to
establish a sales force during 2010 to promote our diagnostic
tests.  This sales team will market our diagnostic tests in a variety
of ways, such as placing calls to specialists who work in the particular medical
fields that would be benefited by our diagnostic tests.  We also
intend to add resources to focus on both the provider and payer markets
specifically in managed care contracting and reimbursement.


Customers
and Reimbursement


Our
target customers consist of future commercialization partners, hospitals,
laboratories and medical clinics that perform diagnostic testing.  Our
future revenue will be highly dependent on our clinical laboratory tests being
approved for reimbursement by Medicare and third-party payors.  We
accept assignment for Medicare patients as payment in full on covered tests.
Reimbursement from third-party insurance companies varies widely, even from a
single payor in a given geographic area and population. Insurance companies
often follow the lead of Medicare in determining whether a clinical laboratory
test is covered and reimbursable. Reimbursement rates are generally higher for
non-government payors.  There can be no assurance that third-party
payors will approve for reimbursement or continue to reimburse any of our
clinical laboratory tests or the use of diagnostic products sold by us in the
future.




Some of
the greatest challenges associated with proteomic testing are the complicated
pricing and reimbursement structures of the major payers and the out-dated
Clinical Laboratory Fee Schedule codes often used by private and public payers.
Neither of these systems reflects the complexity or the value of the development
and delivery of genetic and pharmacogenetic tests. Current practice is to
“stack” applicable Current Procedural Terminology codes in an attempt to reflect
the actual laboratory procedures. New and unfamiliar tests, especially when
accompanied by code stacking, may trigger review by the payer and denials of
payment which must then be appealed on a case-by-case basis. When compounded by
the number of payers in the United States healthcare system, attaining
reasonable, value-based reimbursement for our tests remains a
challenge.


Coverage
of new diagnostic tests is further hindered by the fact that most insurers do
not have a process for evaluating new tests. Major payers such as Blue Cross and
Blue Shield have instituted or subscribe to technical review boards to evaluate
new technologies and diagnostics. While positive reviews of new tests and
technologies are valuable, they are rare and often viewed as a recommendation
only and do not necessarily constitute immediate approval of a technology by
members of that particular system.
  16


Many
health plans and employers are beginning to view biomarker testing as an
important next step in managing healthcare costs. Despite this, there is an
ongoing requirement to develop the data that support these tests and an
educational process for providers, patients, and payers required for the
adoption of these tests into clinical practice and payment plans. We are working
directly with thought leaders, leading academic institutions, physicians,
hospitals, payers, professional associations, healthcare coalitions,
information technology companies and other healthcare constituents to set the
stage for market introduction and adoption of these tests.





Strategic
Acquisitions




We
continually evaluate opportunities that may provide us with, among other things,
therapeutic assets, promising biomarkers preferably with intellectual property
protections, new technologies and key personnel or capabilities that could
augment these efforts. From time to time, we may pursue acquisitions which we
believe will meet these or other pre-clinical and clinical program
goals.





In
February 2010, we entered into a definitive merger agreement to acquire
StemTroniX, Inc., a Texas corporation.  StemTroniX is a medical
biotechnology company that is committed to improving the lives of individuals by
using autologous adult stem cell technology to repair tissue damage in
patients.  Autologous adult stem cell therapy is the process of using
an individual’s blood to purify their stem cells and re-introduce them into that
individual for the purpose of repairing and regenerating damaged
tissue.  StemTroniX provides a system to augment this
process.





Subject
to the terms and conditions of the merger agreement, which has been approved by
the boards of directors of both us and StemTroniX, if the merger is completed,
each outstanding share of StemTroniX common stock will be converted into the
right to receive fourteen and sixth-tenths (14.60) shares of our common stock,
subject to certain adjustments as provided in the merger agreement.




The
merger agreement contains customary representations and warranties by us and
StemTroniX, covenants by StemTroniX to conduct its business in the ordinary
course until the merger is completed, and covenants by StemTroniX to not
take certain actions during such period.  StemTroniX has also agreed
to not solicit proposals relating to business combination transactions with
other parties or enter into discussions concerning any proposals for business
combination transactions with other parties.




Consummation
of the merger is subject to certain customary conditions, including, among
others, the approval of the merger by the shareholders of StemTroniX, the
approval of the issuance of our common stock in connection with the merger by
our shareholders, the approval of an amendment to our certification of
incorporation by our shareholders to increase the number of shares of common
stock authorized for issuance to that number of shares necessary to ensure that
an adequate number of shares is available for issuance to the shareholders of
StemTroniX, the receipt of any required governmental approvals and expiration of
applicable waiting periods, the accuracy of the representations and warranties
by us and StemTroniX (generally subject to a material adverse effect standard),
and material compliance by us and StemTroniX with our respective obligations
under the merger agreement.




17




Intellectual
Property and Proprietary Rights





Our
ability to compete depends, in part, on our ability to protect our proprietary
discoveries and technologies through obtaining and enforcing intellectual
property rights, including patent rights, copyrights, our trade secrets and
other intellectual property rights, and operating without infringing the
intellectual property rights of others. Our diagnostic products are based on
complex, rapidly developing technologies. Some of these technologies are covered
by patents owned by others and used by us under license.  We are
protecting our proprietary rights by a combination of patent applications, trade
secret and trademark protection, and protective provisions such as
confidentiality agreements with our employees, consultants, vendors,
collaborators, advisors, customers and other third parties.





We are
currently seeking patent protection for proteins, diagnostic markers,
technologies, methods, processes and other inventions which we believe are
patentable and where we believe our interests would be best served by seeking
patent protection. We have filed 15 patent applications in the United States,
including three for breast cancer, 11 for neurodegenerative disease and one for
drug resistance.  We have also licensed rights to several issued
patents.  Through our internal research programs and collaborative
programs, we anticipate that we will further develop an increasing portfolio of
intellectual property. We may use this intellectual property in our internal
product development programs or may license this intellectual property to
collaborators, customers, or others for some combination of license fees,
milestone payments, and royalty payments.  We expect to continue
seeking patent protection for these types of inventions by pursuing patent
applications already filed and applying for patent protection for inventions
that we make in the future, in all cases subject to an ongoing case-by-case
assessment of the potential value of those inventions consistent with our
business and scientific goals.





We also
rely upon unpatented proprietary technology, and in the future may determine in
some cases that our interests would be better served by reliance on trade
secrets or confidentiality agreements rather than patents or licenses. We may
not be able to protect our rights to such unpatented proprietary technology and
others may independently develop substantially equivalent technologies. If we
are unable to obtain strong proprietary rights to our processes or products
after obtaining regulatory clearance, competitors may be able to market
competing processes and products.





We
require our employees, consultants, advisors and other contractors to enter into
agreements that prohibit their use or disclosure of our confidential information
and, where applicable, require disclosure and assignment to us of their ideas,
developments, discoveries and inventions important to our business. These
confidentiality agreements generally have a term that lasts for so long as the
collaboration is in effect, plus a specified period afterward and are generally
terminable by either party upon a breach of the agreement by the other party
and, in some cases, upon written notice. These agreements generally permit us to
seek injunctive or other relief in the event of unpermitted use or disclosure of
our confidential information.




18




Any
patent applications which we have filed or will file or to which we have
licensed or will license rights may not issue, and patents that do issue may not
contain commercially valuable claims. In addition, any patents issued to us or
our licensors may not afford meaningful protection for our technology or
products or may be subsequently circumvented, invalidated or narrowed, or found
unenforceable. We may infringe the intellectual property rights of others, and
may become involved in expensive intellectual property legal proceedings to
determine the scope and validity of our patent rights with respect to others.
Our failure to receive patent protection for our diagnostic or therapeutic
inventions could diminish the commercial value of these discoveries and could
harm our business.




Competition




The
proteomics industry is rapidly evolving and competition is becoming increasingly
intense.  The industry is subject to significant change with respect
to technology for diagnosis and treatment of disease. Competitors vary in
size and in scope and breadth of the products and services they offer.
 Existing or future biotechnology, biomedical, pharmaceutical and other
companies, government entities and universities may create diagnostic tests that
accomplish similar functions to our diagnostic tests in ways that are less
expensive, receive faster regulatory approval or receive greater market
acceptance than our potential products.




We
believe that success in the proteomics industry is dependent upon the ability of
companies to:




·
            identify
      proteomic biomarkers that will enable the clinical development program
      with the potential for clinical
utility;




·
            establish
      validated proteomic tests with adequate predictive
      characteristics;




·
            understand
      the complexity of the proteomic underpinnings of disease, and the related
      complexity of identifying and validating proteomic
    biomarkers.




·
            obtain
      patent protection for protein biomarkers and their clinical
      utility;




·
            establish
      efficacy and safety in a clinical development
  program;




·
            demonstrate
      data that supports test adoption and
  reimbursement;




·
            gain
      marketing approval under the CLIA and, later, the FDA and other regulatory
      agencies.




·
            educate
      providers and health care payers on the value of incorporating proteomic
      testing into their practice; and




·
            operate
      within an antiquated reimbursement system that does not reflect either the
      investment to develop the diagnostic test or the clinical or economic
      value of the diagnostic test.




There
are several other companies engaged in the research of proteomics and its
application to biomarker discovery capabilities, including:





·
            Celera
      Corporation, a company engaged in proteomics, bioinformatics and genomics
      that identifies and develops drug targets and discover and develop new
      therapeutics;




·
            Vermillion Inc.,
      a biomarker discovery assay development and characterization
      company;




·
            BioRad,
      a seller of biomarker discovery
equipment;




19




·
            Satoris,
      a developer of cytokines-based plasma biomarkers test for Alzheimer’s
      disease;




·
            Myriad
      Genetics, a developer of therapeutic and diagnostic products using genomic
      and proteomic technologies; and




·
            Provista
      Life Sciences, a developer of blood serum protein biomarker diagnostic
      tests for breast cancer and Alzheimer’s
disease.





Some of
our current and potential competitors have longer operating histories and
significantly greater financial, technical, marketing, administrative and other
resources than we do.  They may have significantly greater name
recognition, established marketing relationships and access to a larger
installed base of customers.  In addition, current and potential
competitors have established or may establish cooperative relationships among
themselves or with third parties to design customized products to better address
customer needs.  Accordingly, new competitors or alliances among
competitors may emerge and rapidly acquire significant market
share.  Increased competition may result in price reductions, reduced
gross margins and loss of market share, any of which could have a material
adverse affect on our business, financial condition and results of
operations.





Government
Regulation





In the
U.S. and in other countries, the development and commercialization of diagnostic
products and clinical laboratory testing services are heavily regulated by
governmental agencies. These requirements vary from country to country.
Currently, the principal markets for our diagnostic products and services are
the U.S. and the EU, and the regulatory requirements in those jurisdictions are
described below.





CLIA
and other laboratory licensure





Laboratories
that perform testing on human specimens for the purpose of providing information
for diagnosis, prevention or treatment of disease or assessment of health are
subject to the Clinical Laboratory Improvement Amendments of 1988, or CLIA. CLIA
is a federal law that regulates clinical laboratory testing performed on
specimens derived from humans for the purpose of providing information for the
diagnosis, prevention, or treatment of disease. CLIA is intended to ensure the
quality and reliability of clinical laboratory testing in the United States. Our
laboratory located in the Woodlands, Texas is a CLIA-certified
laboratory.  Our CLIA certification requires its clinical laboratory
to be inspected every other year in addition to being subject to random CLIA
inspections. Our clinical laboratory is also subject to license requirements
imposed by the State of Texas. Texas laws establish quality standards for
day-to-day operation of the clinical laboratory, including the training and
skills required of personnel and quality control. If a CLIA or state inspector
finds deficiencies, that finding could lead to the revocation or suspension of,
or limitations being placed upon, our CLIA accreditation or Texas license. Any
revocation, suspension, or limitation could prevent us from performing all or
some of its clinical laboratory testing services and could harm our operating
results and financial condition.




20




Food
and Drug Administration





In the
U.S., the FDA classifies in
vitro diagnostic products as “devices” and the FDA’s Center for Devices
and Radiological Health and Center for Biologics Evaluation and Research
regulate these products. The diagnostic products that we market do not currently
require FDA approval.  Our current diagnostic tests take advantage of
the “laboratory developed test” exception from FDA review. The FDA maintains
that it has authority to regulate the development and use of laboratory
developed tests as diagnostic medical devices under the Federal Food, Drug and
Cosmetic Act, but to date has decided not to exercise its authority with respect
to most laboratory developed tests performed by high complexity CLIA-certified
laboratories as a matter of enforcement discretion. Our diagnostic products have
not obtained FDA premarket clearance or approval. The FDA regularly considers
the application of additional regulatory controls over the use of laboratory
developed tests by laboratories such as ours. Further, the FDA has recently been
petitioned to exercise regulatory authority over certain laboratory developed
tests and to initiate enforcement action against companies that make
effectiveness claims about laboratory developed tests that are without
sufficient analytical and clinical support. As a result, it is possible that the
FDA may look at the sale and use of laboratory developed tests with heightened
scrutiny or modify their regulatory approach with respect to laboratory
developed tests. If FDA regulation of laboratory developed tests increases or if
regulation of the various medical devices used in laboratory-developed testing
ensues, it would lead to an increased regulatory burden resulting in additional
costs and delays in introducing tests, including genetic tests; this may hinder
us from developing and marketing certain products or services and could harm our
operating results and financial condition.





HIPAA
and other privacy laws




The
Health Insurance Portability and Accountability Act of 1996, or HIPAA,
established for the first time comprehensive United States protection for the
privacy and security of health information. The HIPAA standards apply to three
types of organizations, or “Covered Entities”: health plans, healthcare clearing
houses, and healthcare providers which conduct certain healthcare transactions
electronically. Covered Entities must have in place administrative, physical,
and technical standards to guard against the misuse of individually identifiable
health information.  Specifically, Title II of HIPAA, the
Administrative Simplification Act, contains four provisions that address the
privacy of health data, the security of health data, the standardization of
identifying numbers used in the healthcare system and the standardization of
data content, codes and formats used in healthcare transactions. The privacy
regulations protect medical records and other personal health information by
limiting their use and release, giving patients the right to access their
medical records and limiting most disclosures of health information to the
minimum amount necessary to accomplish an intended purpose. We are currently
subject to the HIPAA regulations and maintain an active program designed to
address regulatory compliance issues. Penalties for non-compliance with
HIPAA include both civil and criminal penalties. Violations could result in
civil penalties of up to $25,000 per type of violation in each calendar year and
criminal penalties of up to $250,000 per violation.




21




In
addition to the federal privacy regulations, there are a number of state laws
regarding the confidentiality of health information that are applicable to
clinical laboratories. The penalties for violation of state privacy laws may
vary widely and new privacy laws in this area are pending. We believe that we
have taken the steps required of us to comply with health information privacy
and confidentiality statutes and regulations in all jurisdictions, both state
and federal. However, we may not be able to maintain compliance in all
jurisdictions where we do business. Failure to maintain compliance, or changes
in state or federal laws regarding privacy, could result in civil and/or
criminal penalties and could have a material adverse effect on our
business.




Environmental
Matters


We are
subject to licensing and regulation under federal, state and local laws, such as
the Environmental Protection Act, and the Toxic Substance Control Act, relating
to the handling and disposal of medical specimens and hazardous waste as well as
to the safety and health of laboratory employees. Our laboratory facility in The
Woodlands, Texas is operated in material compliance with applicable federal and
state laws and regulations relating to disposal of all laboratory specimens.
Federal, state and local laws and regulations govern the use, manufacture,
storage, handling and disposal of these materials. We could be subject to
damages in the event of an improper or unauthorized release of, or exposure of
individuals to, hazardous materials.




The
Federal Occupational Safety and Health Administration has established extensive
requirements relating to workplace safety for healthcare employers, including
clinical laboratories, whose workers may be exposed to blood-borne pathogens
such as HIV and the hepatitis virus. These regulations, among other things,
require work practice controls, protective clothing and equipment, training,
medical follow-up, vaccinations and other measures designed to minimize exposure
to chemicals and transmission of the blood-borne and airborne
pathogens.





We
believe that we are in material compliance with these and other applicable laws
and that the costs of our ongoing compliance will not have a material adverse
effect on our business. However, statutes or regulations applicable to our
business may be adopted which impose substantial additional costs to assure
compliance or otherwise materially adversely affect our operations.





Healthcare Regulation and
Reform.





Government
regulation and reform of the healthcare industry may also affect the manner in
which we conduct our business in the future. There continues to be diverse
legislative and regulatory initiatives at both the federal and state levels to
affect aspects of the nation’s health care system.  Many states have
enacted, or are considering, various healthcare reform statutes.  These
reforms relate to, among other things, managed care practices, prompt pay
payment practices, health insurer liability and mandated benefits.  Most
states have also enacted patient confidentiality laws that prohibit the
disclosure of confidential information.  As with all areas of legislation,
the federal regulations establish minimum standards and preempt conflicting
state laws that are less restrictive but will allow state laws that are more
restrictive.  We expect this trend of increased legislation to
continue. We are unable to predict what state reforms will be enacted or how
they would affect our business.




22




Numerous
proposals to reform the current healthcare system have been introduced in the
U.S. Congress and in various state legislatures.  Recently, President
Obama and members of Congress passed significant reforms to the U.S. healthcare
system. The Obama administration has stated as a top priority its desire to
reform the U.S. health care system with the goal of providing affordable,
accessible health care for all Americans. Proposals that have been considered
include cost controls on hospitals, insurance market reforms to increase the
availability of group health insurance to small businesses, and mandatory health
insurance coverage for employees. In addition, some members of Congress have
proposed a government health insurance option to compete with private plans and
other expanded public healthcare measures. Various healthcare reform proposals
have also emerged at the state level. Both the U.S. Senate and House of
Representatives have conducted hearings about U.S. healthcare reform. We cannot
predict what the effect of any future healthcare reform legislation or
regulation will have on us.  However, an expansion of the government’s
role in the U.S. healthcare industry could have a material adverse affect on our
financial condition and results of operations.





Employees




As of
April 9, 2010, we had a total of four employees.  Of this amount, two were
full-time employees and two were part-time employees.  We utilize the
services of several full-time and part-time consultants as well as contract
research organizations and other outside specialty firms for various services
such as clinical trial support, manufacturing and regulatory approval
advice.  None of our employees are represented by a labor union, and we
have never experienced a work stoppage.  We believe that our relations
with our employees are good.





Item
1A.  Risk Factors





An
investment in our common stock involves a high degree of risk.  You
should carefully consider the following risk factors in addition to other
information in this report before purchasing our common stock.  The
risks and uncertainties described below are those that we currently deem to be
material and that we believe are specific to our company, our industry and our
stock.   In addition to these risks, our business may be subject
to risks currently unknown to us.  If any of these or other risks
actually occurs, our business may be adversely affected, the trading price of
our common stock may decline and you may lose all or part of your
investment.




Risks
Associated With Our Business




We
are an early-stage company with an unproven business model, which makes it
difficult for us to evaluate our current business and future
prospects.





While we are actively engaged in
developing diagnostic tests based on our proteomics research for the treatment
cancer and neurodegenerative and neuromuscular diseases and have already
developed two such tests, BC-SeraProTM and
NuroPro®, we have
generated only a small amount of revenue to date.  In addition, since
we have only been actively operating in the proteomics industry since 2004, we
have very limited historical data with respect to our current and proposed
business.  As a result of these factors, the revenue and income
potential of our business is unproven, and we have only a limited operating
history upon which to base an evaluation of our current business and future
prospects.  Because of our limited operating history and because the
discount medical plan industry is rapidly evolving, we have limited insight into
trends that may emerge and affect our business.  We may make errors in
predicting and reacting to relevant business trends, which could harm our
business.




23




Before purchasing our common stock, you
should consider an investment in our common stock in light of the risks,
uncertainties and difficulties frequently encountered by early-stage companies
in new and rapidly evolving markets such as ours, including those described
herein.  We may not be able to successfully address any or all of
these risks.  Failure to adequately address such risks could cause our
business, financial condition and results of operations to suffer.





We
have a history of losses and the report of our independent accountants issued in
connection with the audit of our financial statements contained a qualification
raising a substantial doubt about our ability to continue as a going
concern.





We have recognized net losses in each
fiscal quarter since our inception and as of December 31, 2009, had an
accumulated deficit of approximately $89.5 million.  We incurred net
losses to common stockholders of approximately $19.2 million for the year ended
December 31, 2009 and approximately $137,000 for the year ended December 31,
2008.  As a result of these conditions, the report of our independent
accountants issued in connection with the audit of our financial statements as
of and for our fiscal year ended December 31, 2009 contained a qualification
raising a substantial doubt about our ability to continue as a going
concern.  We can provide no assurance regarding when, if ever, we will
become profitable.  As a result, we may continue to generate losses
for the foreseeable future.





We
will need to raise additional funds in the future to cover our long-term
contractual obligations and operating expenses, which funds may not be available
or, if available, may not be available on acceptable terms.





We have significant long-term
contractual obligations that we must satisfy over the next several
years.  We are a party to an employment agreement and consulting
agreement with Ira L. Goldknopf and Helen R. Park, respectively, pursuant to
which they are currently entitled to receive annualized base salaries of
$125,000 and $100,008, respectively.  We must also make payments under
the operating lease for our office space in The Woodlands, Texas in the
aggregate amount of approximately $31,512 during 2010.  A summary of
the material terms of these employment agreements and the lease and our
financial obligations thereunder is provided herein under “Management’s Discussion and
Analysis of Financial Condition and Results of Operations – Contractual
Obligations.”  If we are unable to satisfy these obligations as
they become due, our business may be materially and adversely
affected.





We also expect to continue to incur
significant operating expenses over the next 12 months as we:





·
            the
      extent to which we enter into licensing arrangements, collaborations or
      joint ventures;




·
            our
      progress with research and
development;




·
            the
      costs and timing of obtaining new patent
rights;




24




·
            the
      extent to which we acquire or license other
  technologies;




·
            regulatory
      changes and competition and technological developments in the
      market;




·
            upgrade
      our operational and financial systems, procedures and controls;
      and




·
            comply
      with state and federal laws governing our business operations, comply with
      Securities and Exchange Commission (“SEC”) reporting requirements and
      fulfill the other responsibilities that we have as a public
      company.




We may
also experience a material decrease in liquidity due to unforeseen capital
requirements or other events and uncertainties.




We
believe that our current cash resources will not be sufficient to sustain our
current operations for the next 12 months.  As a result, we will need
to raise additional funds during the next 12 months.  We have not made
arrangements to obtain additional financing and we can provide no assurance that
additional financing will be available in an amount or on terms acceptable to
us, if at all.  If we cannot raise funds when they are needed or if
such funds cannot be obtained on acceptable terms, we may not be able to pay our
costs and expenses as they are incurred, create or sell new diagnostic products,
execute our business plan, take advantage of future opportunities or respond to
competitive pressures or unanticipated requirements.  This may
seriously harm our business, financial condition and results of
operations.





Our
continued growth could strain our personnel and infrastructure
resources.





We are experiencing rapid growth in our
operations which is placing, and will continue to place, a significant strain on
our management, administrative, operational and financial
infrastructure.  Our future success will depend in part upon the
ability of our management to manage growth effectively.  This may
require us to hire and train additional personnel to manage our expanding
operations.  In addition, we will be required to continue to improve
our operational, financial and management controls and our reporting systems and
procedures.  If we fail to successfully manage our growth, we may be
unable to execute upon our business plan.





Clinical
trials of diagnostic product candidates may not be successful.




Potential
clinical trials of product candidates may not begin on time, may not be
completed on schedule, or at all, or may not be sufficient for registration of
the products or result in products that can receive necessary clearances or
approvals. Numerous unforeseen events during, or as a result of, clinical
testing could delay or prevent commercialization of our or our collaborators’ or
licensees’ diagnostic product candidates. Diagnostic product candidates that
appear to be promising at early stages of development or early clinical trials
may later be found to be unsafe, ineffective, or to have limited medical value.
If we are unable to successfully complete clinical trials for diagnostic product
candidates, our operating results and financial condition would be
harmed.




25




Wemay not succeed in developing
diagnostic products and even ifwesucceed in developing diagnostic
products, the diagnostic products may never achieve significant commercial
market acceptance.





Our
success depends on our ability to develop and commercialize diagnostic products.
Development of existing product candidates will require significant additional
research and development efforts by us or our collaborators or licensees before
they can be marketed. For potential diagnostic products, these efforts include
extensive clinical testing to confirm the products are safe and effective and
may require lengthy regulatory review and clearance or approval by the FDA and
comparable agencies in other countries. Furthermore, even if these products are
found to be safe and effective and receive necessary regulatory clearances or
approvals, they may never be developed into commercial products due to
considerations such as inability to obtain needed licenses to intellectual
property owned by others, market and competitive conditions, and manufacturing
difficulties or cost considerations.





Our
ability to successfully commercialize diagnostic products that we may develop,
such as tests, kits and devices, will depend on several factors,
including:





·
              our
      ability to convince the medical community of the safety and clinical
      efficacy of our products and their advantages over existing diagnostic
      products;


·
              our
      ability to obtain necessary regulatory approval of our diagnostic
      products;


·
            our
      ability to further establish business relationships with other diagnostic
      companies that can assist in the commercialization of these
      products;




·
            the
      willingness of physicians and patients to utilize our products;
      and




·
            the
      extent to which Medicare and third-party payers provide full or partial
      reimbursement coverage for our
products.




These
factors present obstacles to significant commercial acceptance of our potential
diagnostic products and will require a substantial amount of time and financial
resources to overcome.  If we are unable to overcome these obstacles,
we may not generate revenue from our diagnostic products or develop a profitable
business.


If
we are unable to form and maintain the collaborative relationships that our
business strategy requires, our ability to develop products and revenue will
suffer.




Our
strategy for the discovery, development, clinical testing, manufacturing and/or
commercialization of most of our diagnostic product candidates includes entering
into collaborations and similar arrangements with other companies. Depending on
the nature of the product candidate, our potential collaborators may include
pharmaceutical companies, clinical reference laboratories, diagnostic imaging
equipment suppliers, or other companies. We have identified some potential new
collaborators, but have not yet entered into any collaboration arrangements with
them. Although we have expended, and continue to expend, time and money on
internal research and development programs, we may be unsuccessful in creating
diagnostic product candidates that would enable us to form additional
collaborations and alliances and, if applicable, receive milestone and/or
royalty payments from collaborators. Other companies may not be interested in
entering into these relationships with us, or may not be interested in doing so
on terms that we consider acceptable.




26




Collaborative
agreements generally pose the following risks:




·
            collaborators
      may not pursue further development and commercialization of products
      resulting from collaborations or may elect not to continue or renew
      research and development programs;




·
            collaborators
      may delay clinical trials, underfund a clinical trial program, stop a
      clinical trial or abandon a product, repeat or conduct new clinical trials
      or require a new formulation of a product for clinical
      testing;




·
            collaborators
      could independently develop, or develop with third parties, products that
      could compete with our future
products;




·
            the
      terms of our agreements with our current or future collaborators may not
      be favorable to us;




·
            a
      collaborator with marketing and distribution rights to one or more
      products may not commit enough resources to the marketing and distribution
      of our products, limiting our potential revenue from the commercialization
      of a product;




·
            disputes
      may arise delaying or terminating the research, development or
      commercialization of our products, or result in significant litigation or
      arbitration; and




·
            collaborations
      may be terminated and, if terminated, we would experience increased
      capital requirements if we elected to pursue further development of the
      product.




In
addition, business combinations or alliances among large pharmaceutical
companies could result in a reduced number of potential future collaborators. If
business combinations involving our collaborators were to occur, the effect
could be to diminish, terminate or cause delays in one or more of our product
development programs.





Our
future revenue will be negatively affected if third-party payors decide that our
products or services are not approved for reimbursement or if healthcare
providers do not accept our diagnostic products as clinically
useful.




Our
future revenue will be highly dependent on our clinical laboratory tests and
diagnostic products being approved for reimbursement by Medicare and other
government healthcare programs, as well as private insurance companies and
managed care organizations, commonly referred to, collectively, as “third-party
payors.” Third-party payors may determine that our diagnostic tests and products
are not medically necessary or otherwise not approved for reimbursement under
standards independently established by these third-party payors, which may take
into consideration factors such as the investigational nature of a particular
test or product, or whether less expensive alternatives are available. Each
third-party payor makes its own decision as to whether a given diagnostic test
is medically necessary and worthy of payment. If Medicare or any other
third-party payor determines that any one or more of our clinical laboratory
tests are not medically necessary or are not otherwise suitable for
reimbursement, healthcare providers could be reluctant to prescribe these tests.
Similarly, if the use of our diagnostic products is not approved for
reimbursement, purchasers of any one or more of these products could decrease or
eliminate their orders of these products. Any change by one or more third-party
payor with regard to their existing reimbursement practices could impact the
tests and products we offer, the revenue received on each of the tests and
products we sell and harm our operating results and financial
condition.




27




In
addition, the growth and success of sales of our diagnostic products depends on
market acceptance by healthcare providers and laboratories of our products as
clinically useful and cost-effective. We expect that most of our diagnostic
products will use proteomic information to predict predisposition to diseases,
disease progression or severity, or responsiveness to treatment. Market
acceptance depends on the widespread acceptance and use by healthcare providers
of proteomic testing for these purposes. The use of proteomic information by
healthcare providers for these purposes is relatively new. Healthcare providers
may not want to use our products designed for these purposes. Also, Medicare and
other third-party payors are continually looking at the clinical utility of
genetic testing and making determinations as to whether to continue
reimbursement for certain genetic tests. Either of these events could impact the
tests and products we offer, the revenue received on each of the tests and
products we sell and harm our operating results and financial
condition.




Health
care cost containment initiatives by third-party payors to reduce utilization
and reimbursement rates may decrease our revenue and profitability.




Our
ability to commercialize our products successfully will be affected by the
ongoing efforts of governmental and third-party payors to contain or reduce the
cost of health care. Third-party payors have increased their efforts to control
the cost, utilization and delivery of healthcare services. From time to time,
Congress has considered and implemented changes in the Medicare fee schedules in
conjunction with budgetary legislation. A five-year moratorium on changes to the
Medicare clinical laboratory fee schedule ended on December 31, 2008. The
Medicare clinical laboratory rates were increased approximately 4.5% as of
January 1, 2009. In the current economic environment, there is no certainty
that these rates will remain at these levels for clinical laboratory testing.
Reductions in the reimbursement rates of other third-party payors have occurred
and may occur in the future. In the past, these reimbursement rate changes have
resulted in reduced prices, added costs and decreased test utilization for the
clinical laboratory industry and future rate reductions could have a similar
impact on the industry. If the payment amount we receive for our clinical
laboratory testing services is reduced, it could harm our operating results and
financial condition. Also, if clinical laboratories that purchase our diagnostic
products receive reduced payment for their testing services, the reduced
payments may cause them to seek lower pricing for our diagnostic products, which
could, in turn, harm our operating results and financial condition.




Governmental
and other third-party payors increasingly are attempting to contain health care
costs by:




·
            challenging
      the prices charged for health care products and
  services;




·
            limiting
      both coverage and the amount of reimbursement for new therapeutic
      products;




28




·
            denying
      or limiting coverage for products that are approved by the FDA but are
      considered experimental or investigational by third-party payors;
      and




·
            refusing
      in some cases to provide coverage when an approved product is used for
      disease indications in a way that has not received FDA marketing
      approval.




In
addition, the trend toward managed health care in the United States, the growth
of organizations such as health maintenance organizations, and legislative
proposals to reform healthcare and government insurance programs could
significantly influence the purchase of healthcare services and products,
resulting in lower prices and reducing demand for our products.




Even if
we succeed in bringing any products to the market, they may not be considered
cost-effective and third-party reimbursement might not be available or
sufficient. If adequate third-party coverage is not available, we may not be
able to maintain price levels sufficient to realize an appropriate return on our
investment in research and product development. In addition, legislation and
regulations affecting the pricing of diagnostic services and testing may change
in ways adverse to us before or after any of our proposed products are approved
for marketing. While we cannot predict whether any such legislative or
regulatory changes will be adopted, the adoption of such changes could make it
difficult or impossible to sell our products.





Our
development and commercialization of diagnostic products could be harmed if
collaborators or licensees fail to perform under their agreements with us or if
they terminate those agreements.




We expect
to derive revenue from our licensees’ and partners’ product sales under our
intellectual property license agreements and other agreements that we have and
will enter into. Even if these licensees and partners perform their obligations
as required by these agreements, their ability to develop, manufacture and
commercialize products successfully is uncertain. Since the royalties payable to
us under these agreements will generally depend on our licensees’ and partners’
sales of their products, which are not within our control, their failure in
commercializing their products or maintaining or increasing the sales volumes of
their products may harm our operating results and financial condition. In
addition, certain of these intellectual property license agreements may permit
our licensees to pay us an upfront license fee over a period of time during
which they have the right to terminate the agreements. In the event that a
licensee terminates its license agreement before the upfront license fee is paid
in full, we will not be paid any remaining license fee.




Each of
our existing collaboration, license, and similar agreements with other companies
for the development and commercialization of products may be canceled under some
circumstances. These agreements generally may be terminated under circumstances
including a material breach or default of the agreement, a change in control, or
the insolvency or bankruptcy of either party. In addition, the amount and timing
of resources to be devoted to research, development, clinical trials, and
commercialization activities by our collaborators and licensees are generally
not within our control. We expect that collaboration, license, and similar
agreements entered into in the future, if any, will have similar terms and
limitations. Furthermore, even if these agreements contain commitments regarding
these activities, our collaborators or licensees may not perform their
obligations as expected. If collaborators or licensees terminate their
agreements or otherwise fail to conduct their collaborative or licensed
activities in a timely manner, or at all, the development or commercialization
of diagnostic products may be delayed or prevented. If we assume responsibility
for continuing diagnostic programs on our own after termination of a
collaboration, license, or similar agreement, we may be required to devote
additional resources to product development and commercialization or we may need
to cancel some development programs. Any reallocation of additional resources to
product development and/or commercialization or cancellation of development
programs may harm our operating results and financial condition.




29




Our
competitive position depends on maintaining our intellectual property
protection.




Our
ability to compete and to achieve and maintain profitability depends, in part,
on our ability to protect our proprietary discoveries and technologies through
obtaining and enforcing intellectual property rights, including patent rights,
copyrights, trade secrets, and trademarks, and operating without infringing the
intellectual property rights of others. Our ability to obtain patent protection
for the inventions we make, including those relating to novel methods of
diagnosing and/or treating diseases, is uncertain. The patentability of these
and other types of biotechnology inventions involves complex factual,
scientific, and legal questions. As a result, it is difficult to predict whether
patents will issue or the breadth of claims that will be allowed in
biotechnology patents. This may be particularly true with regard to the
patenting of gene sequences, gene functions, genetic variations and methods of
diagnosis of disease based on genetic variations. Future changes in policies or
laws, or interpretations of these policies or laws, relevant to the patenting of
biotechnology inventions could harm our patent position in the U.S. or other
countries. Opposition to the protection of these inventions in the U.S. or other
countries could result in stricter standards for obtaining or enforcing
biotechnology patent rights.




In some
instances, patent applications in the U.S. are maintained in secrecy until a
patent issues. In most instances, the content of U.S. and international patent
applications is made available to the public approximately eighteen months after
the initial filing from which priority is claimed. As a result, we may not be
aware that others have filed patent applications for inventions covered by our
patent applications and may incorrectly believe that our inventors were the
first to make the invention. Accordingly, our patent applications may be
preempted or we may have to participate in interference proceedings before the
U.S. Patent and Trademark Office. These proceedings determine the priority of
invention and the right to a patent for the claimed invention in the U.S. In
addition, disputes may arise in the future with regard to the ownership of
rights to any invention developed with collaborators, which could result in
delays in, or prevent, the development of related products.




We also
rely on trade secret protection for our confidential and proprietary information
and procedures, including procedures related to sequencing genes and to
searching and identifying important regions of genetic information. We protect
our trade secrets through recognized practices, including access control,
confidentiality and non-use agreements with employees, consultants,
collaborators and customers, and other security measures. These confidentiality
and non-use agreements may be breached, however, and we may not have adequate
remedies for a breach. In addition, our trade secrets may otherwise become known
or be independently developed by competitors. Accordingly, it is uncertain
whether our reliance on trade secret protection will be adequate to safeguard
our confidential and proprietary information and procedures.




30




We
may become involved in expensive intellectual property legal
proceedings.




There has
been substantial litigation and other legal proceedings regarding patents and
other intellectual property rights relevant to diagnostic and biotechnology
products and services. The intellectual property rights of biotechnology
companies, including those held by us, are generally uncertain and involve
complex factual, scientific, and legal questions. Our success in diagnostic
product development, clinical laboratory testing, and therapeutic target
discovery may depend, in part, on our ability to operate without infringing the
intellectual property rights of others and our ability to prevent others from
infringing our intellectual property rights. Also, contractual disputes related
to existing license rights to patents owned by others may affect our ability to
develop, manufacture, and sell our products and clinical laboratory testing
services.




We may
initiate proceedings at the U.S. Patent and Trademark Office to determine our
patent rights with respect to others. Also, we may initiate patent litigation to
enforce our patent rights or invalidate patents held by others. These legal
actions may similarly be initiated against us by others alleging that we are
infringing their rights. The cost to us of any patent litigation or proceedings,
even if we are successful, could be substantial, and these legal actions may
absorb significant management time. Even if we are successful on the merits in
any such proceeding, the cost of these proceedings could harm our operating
results and financial condition.




If
infringement claims against us are resolved unfavorably to us, we may be
enjoined from manufacturing or selling our products or services without a
license from a third party, and we may not be able to obtain a license on
commercially acceptable terms, or at all. Also, we could become subject to
significant liabilities to others if these claims are resolved unfavorably to
us.




If
we fail to comply with our obligations under license or technology agreements
with third parties, we could lose license rights that are critical to our
business.




We
license intellectual property that is critical to our business and in the future
we may enter into additional agreements that provide us with licenses to
valuable intellectual property or technology. These licenses impose various
royalty payments, milestones, and other obligations on us. If we fail to comply
with any of these obligations, the licensor may have the right to terminate the
license. Termination by the licensor would cause us to lose valuable rights, the
ability to distribute our current products, or inhibit our ability to
commercialize future product candidates. Our business would suffer if any
current or future licenses terminate, if the licensors fail to abide by the
terms of the license, if the licensors fail to prevent infringement by third
parties, if the licensed patents or other rights are found to be invalid or
unenforceable, or if we are unable to enter into necessary licenses on
acceptable terms.




31




We
face intense competition in the proteomics, biotechnology and pharmaceutical
industries.




The
proteomics, biotechnology and pharmaceutical industries are intensely
competitive. We have numerous competitors in the United States and elsewhere.
Our competitors include major multinational pharmaceutical, biomedical and
biotechnology companies, specialized firms and universities and other research
institutions. Many of these competitors have greater financial and other
resources, larger research and development staffs and more effective marketing
and manufacturing organizations, than we do. In addition, academic and
government institutions have become increasingly aware of the commercial value
of their research findings. These institutions are more likely to enter into
exclusive licensing agreements with commercial enterprises, including our
competitors, to market commercial products. Smaller companies may also prove to
be significant competitors, particularly through collaborative arrangements with
large pharmaceutical and established biotechnology companies. Many of these
competitors have significant products that have been approved or are in
development and operate large, well-funded research and development
programs.




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





We
conduct our clinical laboratory testing business in a heavily regulated industry
and changes in regulations or violations of regulations could, directly or
indirectly, harm our operating results and financial condition.




The
clinical laboratory testing industry is highly regulated and there can be no
assurance that the regulatory environment in which we operate will not change
significantly and adversely in the future. In particular, there is risk of
healthcare reform or other legislative activity in 2009, which may result in
changes in the regulatory or payor environment that may adversely affect our
business. Areas of the regulatory environment that may affect our ability to
conduct business include, without limitation:




·
            federal
      and state laws applicable to billing and claims
  payment;




·
            federal
      and state laboratory anti-mark-up
laws;




·
            federal
      and state anti-kickback laws;




·
            federal
      and state false claims laws;




·
            federal
      and state self-referral and financial inducement laws, including the
      federal physician anti-self-referral law, or the Stark
  Law;




·
            coverage
      and reimbursement levels by Medicare and other governmental payors and
      private insurers;




·
            federal
      and state laws governing laboratory licensing and testing, including the
      Clinical Laboratory Improvement Amendments of 1988, or
    CLIA;




32




·
            federal
      and state laws governing the development, use and distribution of
      diagnostic medical tests known as “laboratory developed
      tests”;




·
            the
      Health Insurance Portability and Accountability Act of 1996, or HIPAA, and
      analogous state laws;




·
            federal,
      state and local laws governing the handling and disposal of medical and
      hazardous waste;




·
            Occupational
      Safety and Health Administration rules and regulations;
  and




·
            changes
      to other federal, state and local laws, including tax
  laws.




These
laws and regulations are extremely complex and in many instances, there are no
significant regulatory or judicial interpretations of these laws and
regulations. Any determination that we have violated these laws or regulations,
or the public announcement that we are being investigated for possible
violations of these laws or regulations, could harm our operating results and
financial condition. In addition, a significant change in any of these laws or
regulations may require us to change our business model in order to maintain
compliance with these laws or regulations, which could harm our operating
results and financial condition.




We
need to maintain federal and state operating licenses and similar clearances to
conduct our clinical laboratory testing.




Our
clinical laboratory, located in The Woodlands, Texas, is regulated by CLIA. CLIA
is a federal law that regulates clinical laboratory testing performed on
specimens derived from humans for the purpose of providing information for the
diagnosis, prevention, or treatment of disease. CLIA is intended to ensure the
quality and reliability of clinical laboratory testing in the United States. Our
CLIA certification requires its clinical laboratory to be inspected every other
year in addition to being subject to random CLIA inspections. Our clinical
laboratory is also subject to license requirements imposed by the State of
Texas. Texas laws establish quality standards for day-to-day operation of the
clinical laboratory, including the training and skills required of personnel and
quality control. If a CLIA or state inspector finds deficiencies, that finding
could lead to the revocation or suspension of, or limitations being placed upon,
our CLIA accreditation or Texas license. Any revocation, suspension, or
limitation could prevent us from performing all or some of its clinical
laboratory testing services and could harm our operating results and financial
condition.




In
addition, our current diagnostic tests take advantage of the “laboratory
developed test” exception from FDA review. The FDA maintains that it has
authority to regulate the development and use of laboratory developed tests as
diagnostic medical devices under the Federal Food, Drug and Cosmetic Act, but to
date has decided not to exercise its authority with respect to most laboratory
developed tests performed by high complexity CLIA-certified laboratories as a
matter of enforcement discretion. Our diagnostic products have not obtained FDA
premarket clearance or approval. The FDA regularly considers the application of
additional regulatory controls over the use of laboratory developed tests by
laboratories such as ours. Further, the FDA has recently been petitioned to
exercise regulatory authority over certain laboratory developed tests and to
initiate enforcement action against companies that make effectiveness claims
about laboratory developed tests that are without sufficient analytical and
clinical support. As a result, it is possible that the FDA may look at the sale
and use of laboratory developed tests with heightened scrutiny or modify their
regulatory approach with respect to laboratory developed tests. If FDA
regulation of laboratory developed tests increases or if regulation of the
various medical devices used in laboratory-developed testing ensues, it would
lead to an increased regulatory burden resulting in additional costs and delays
in introducing tests, including genetic tests; this may hinder us from
developing and marketing certain products or services and could harm our
operating results and financial condition.




33




We are subject to environmental laws
and potential exposure to environmental
liabilities.


We are
subject to various international, federal, state and local environmental laws
and regulations that govern our operations, including the handling and disposal
of nonhazardous and hazardous wastes, the recycling and treatment of electrical
and electronic equipment, and emissions and discharges into the environment.
Failure to comply with such laws and regulations could result in costs for
corrective action, penalties or the imposition of other liabilities. We are also
subject to laws and regulations that impose liability and clean-up
responsibility for releases of hazardous substances into the environment. Under
certain of these laws and regulations, a current or previous owner or operator
of property may be liable for the costs of remediating hazardous substances
or petroleum products on or from its property, without regard to whether the
owner or operator knew of, or caused, the contamination, as well as incur
liability to third parties affected by such contamination. The presence of,
or failure to remediate properly, such substances could adversely affect the
value and the ability to transfer or encumber such property. Based on currently
available information, although there can be no assurance, we believe that such
costs and liabilities have not had and will not have a material adverse
impact on our consolidated results of operations.





Our
business is subject to technological obsolescence.




Proteomics,
biotechnology and related pharmaceutical technology have undergone and are
subject to rapid and significant change. We expect that the technologies
associated with proteomics, biotechnology research and development will continue
to develop rapidly. Our future will depend in large part on our ability to
maintain a competitive position with respect to these technologies. Any
processes, discovery platforms or products that we develop may become obsolete
before we recover any expenses incurred in connection with developing these
products.





We
currently generate almost all of our revenue through a limited number of
collaboration and licensing partners.





A limited
number of collaboration and licensing partners currently generate almost all of
our revenue for us.  Although we are attempting to expand the number
of collaboration and licensing partners that we have, we can provide no
assurance that we will be successful in doing so.  In the event we are
unable to enter into successful relationships with additional collaboration and
licensing partners, our business, financial condition and results of operations
could be materially and adversely affected.




34




Some
of our diagnostic research and product development programs require access to
human tissue and/or blood samples, other biological materials, and related
information, which may be in limited supply.




We may
not be able to obtain or maintain access to human tissue, blood and other
biological materials and information on acceptable terms, or may not be able to
obtain needed consents from individuals providing tissue, blood, or other
samples. In addition, government regulation in the U.S. and foreign countries
could result in restricted access to, or use of, human tissue or blood samples
or other biological materials. If we lose access to sufficient numbers or
sources of tissue or blood samples or other required biological materials, or if
tighter restrictions are imposed on the use of related clinical or other
information or information generated from tissue or blood samples or other
biological materials, these research and development programs and our operating
results and financial condition could be harmed.




We
rely on independent healthcare providers, laboratories, and others to collect
and process patient specimens.




We rely
primarily on healthcare providers and other clinical laboratories to collect and
send to our laboratory for testing most of our clinical laboratory
specimens.  Although we believe we pay our service providers fair
market value consideration for specimen collection and processing services and
in compliance with anti-kickback and anti-referral laws, legal restrictions
prohibit us from paying additional consideration, such as a referral fee, for
these services. Because these services are time-consuming and may not be a
business priority for the companies and individuals we rely on to provide them,
the fair market value consideration may not be sufficient incentive for them to
continue providing these services.  If we are unable to obtain or
maintain needed collection and processing services, we would be unable to obtain
patient samples for testing, which would harm our operating results and
financial condition.




We
rely on a single laboratory facility to process our diagnostic
tests.




We rely
on a single CLIA-approved laboratory facility in The Woodlands,
Texas to perform our diagnostic tests. This facility and certain pieces of
laboratory equipment would be difficult to replace and may require significant
replacement lead-time. This facility may be affected by natural disasters such
as earthquakes, floods and fires. In the event our clinical testing facility or
equipment is affected by man-made or natural disasters, we would be unable to
continue our diagnostic business and meet customer demands for a significant
period of time. Although we maintain insurance on this facility, including
business interruption insurance, it may not be adequate to protect us from all
potential losses if this facility were damaged or destroyed. In addition, any
interruption in our diagnostic business would result in a loss of goodwill,
including damage to our reputation. If our diagnostic business were interrupted,
it would seriously harm our business.




35




We
have no marketing or sales staff, and if we are unable to develop sales and
marketing capability, we may not be successful in commercializing our
products.




We
currently have no sales, marketing or distribution capability. We instead depend
on collaborations or agreements with third parties that have established
distribution systems and direct sales forces. To the extent that we enter into
co-promotion or other licensing arrangements, our revenue will depend upon the
efforts of third parties, over which we may have little or no
control.  If we are unable to reach and maintain agreement with one or
more pharmaceutical, biomedical or biotechnology companies or other potential
collaborators under acceptable terms, we may be required to market our products
directly. We may elect to establish our own specialized sales force and
marketing organization to market our products.  If we are unable to develop
a marketing and sales force with technical expertise and with supporting
distribution capability, we may not be able to successfully commercialize our
products.





We
have no commercial production capability and we may encounter production
problems or delays, which could result in lower revenue.




To date,
we have not produced any product in commercial quantities. Customers for any
potential products and regulatory agencies will require that we comply with
current good manufacturing practices that we may not be able to meet.  We
have established and are in the process of establishing agreements with contract
manufacturers to supply sufficient quantities of our products to conduct
clinical trials as well as for the manufacture, packaging, labeling and
distribution of finished products if our potential products are approved for
commercialization.  If such arrangements are terminated and if we are
unable to manufacture or contract for a sufficient supply of our potential
products on acceptable terms, our clinical testing schedule may be delayed,
resulting in the delay of submission of products for regulatory approval and
initiation of new development programs.  If we determine to manufacture
products ourselves, we may not be able to maintain acceptable quality standards
if we ramp up production. To achieve anticipated customer demand levels, we will
need to scale-up our production capability and maintain adequate levels of
inventory. We may not be able to produce sufficient quantities to meet market
demand. If we cannot achieve the required level and quality of production, we
may need to outsource production or rely on licensing and other arrangements
with third parties. This reliance could reduce our gross margins and expose us
to the risks inherent in relying on others. We may not be able to successfully
outsource our production or enter into licensing or other arrangements under
acceptable terms with these third parties, which could adversely affect our
business.





We
face potential difficulties in obtaining product liability and related
insurance.   If we are subject to product liability claims and have
not obtained adequate insurance to protect against these claims, our financial
condition would suffer.




We do not
have product liability or other professional liability insurance. In the future,
we may, in the ordinary course of business, be subject to substantial claims by,
and liability to, persons alleging injury from the use of our products.  If
we are successful in having products approved by the FDA, the sale of such
products would expose us to additional potential product liability and other
claims resulting from their use. This liability may result from claims made
directly by consumers or by others selling such products. We do not currently
have any product liability or professional liability insurance, and it is
possible that we will not be able to obtain or maintain such insurance on
acceptable terms or that any insurance obtained will provide adequate coverage
against potential liabilities. Our inability to obtain sufficient insurance
coverage at an acceptable cost or otherwise to protect against potential product
liability claims could prevent or limit the commercialization of any products we
develop. A successful product liability claim in excess of any insurance
coverage we may procure could exceed our net worth. While we desire to reduce
our risk by obtaining indemnity undertakings with respect to such claims from
licensees and distributors of our products, we may not be able to obtain such
undertakings and, even if we do, they may not be sufficient to limit our
exposure to claims.




36




We
are dependent on our management team, and the loss of any key member of this
team may prevent us from successfully implementing our business plan in a timely
manner.




Our
success depends largely upon the continued services of our executive officers
and other key management and development personnel.  While we have
entered into employment agreements with each of our executive officers, they may
each terminate their employment with us at any time without
penalty.  We do not maintain key person life insurance policies on any
of our employees.  The loss of one or more of our key employees could
seriously harm our business, financial condition or results of
operations.  In such an event we may be unable to recruit personnel to
replace these individuals in a timely manner, or at all, on acceptable
terms.




There
is a high demand for, and short supply of, key personnel needed for our clinical
laboratory testing services.




Our
existing clinical laboratory services operations need individuals who are
licensed as clinical laboratory scientists. We believe that to continue
operating and to expand our clinical laboratory testing services, we must
continue to attract and retain these licensed clinical laboratory scientists.
There is a shortage of licensed scientists in the State of Texas, and we
compete for these personnel with hospitals, other clinical laboratories, and
other healthcare providers. Licensed scientists may prefer to work for
these other organizations either because of the compensation offered, the
reputations of the organizations, or other personal considerations. If we are
unable to attract and retain a sufficient number of licensed scientists,
the current operations of our clinical laboratory testing business could be
harmed and the future growth of these services could be delayed or
prevented.




If
our current research collaborators or scientific advisors terminate their
relationships with us or develop relationships with a competitor, our ability to
discover proteins and biomarkers, and to commercialize our diagnostic products,
could be adversely affected.




We have
relationships with research collaborators at academic and other institutions who
conduct research at our request. These research collaborators are not our
employees. As a result, we have limited control over their activities and,
except as otherwise required by our collaboration agreements, can expect only
limited amounts of their time to be dedicated to our activities. Our ability to
discover genes, proteins, and biomarkers involved in human disease and
commercialize diagnostic products will depend in part on the continuation of
these collaborations. If any of these collaborations are terminated, we may not
be able to enter into other acceptable collaborations. In addition, our existing
collaborations may not be successful.




37




Our
research collaborators and scientific advisors may have relationships with other
commercial entities, some of which could compete with us. Our research
collaborators and scientific advisors sign agreements which provide for the
confidentiality of our proprietary information and the results of studies
conducted at our request. We may not, however, be able to maintain the
confidentiality of our technology and other confidential information related to
all collaborations. The dissemination of our confidential information could have
a material adverse effect on our business.




If
we acquire any companies or products in the future, such companies and products
could prove difficult to integrate, disrupt our business, dilute stockholder
value and adversely affect our operating results.





We may
acquire or make investments in complementary companies, businesses, assets,
products and services in the future.  We have not made any such
acquisitions or investments to date, and therefore, our ability to make
acquisitions or investments is unproven.  Acquisitions and investments
involve numerous risks, including:





·
            difficulties
      in integrating operations, technologies, services and
      personnel;




·
            the
      diversion of financial and management resources from existing
      operations;




·
            the
      risk of entering new markets;




·
            the
      potential loss of key employees;
and




·
            the
      inability to generate sufficient revenue to offset acquisition or
      investment costs.





In
addition, if we finance any acquisitions by issuing convertible debt or equity
securities, our existing stockholders may be diluted which could affect the
market price of our stock.  As a result, if we fail to properly
evaluate and execute any acquisitions or investments, our business and prospects
may be seriously harmed.





In
February 2010, we entered into a definitive merger agreement to acquire
StemTroniX, Inc., a Texas corporation.  Consummation of the merger is
subject to certain customary conditions, including approval by our shareholders
and the shareholders of StemTroniX.  We may not be able to obtain the
shareholder approval necessary to complete the merger. Even if we
successfully complete the acquisition, we may experience difficulties in
integrating operations, technologies, services and personnel.  Any
failure by use to successfully acquire StemTroniX and integrate its business
with our business could have a material adverse affect on our business and
results of operations.





Our
business may be harmed by any disruption to our computer hardware, software, and
Internet applications.




Our
business requires manipulating and analyzing large amounts of data,
communicating the results of the analysis to our internal research personnel and
our collaborators via the Internet and tracking and communicating the results,
via the Internet and other modalities, of the tests performed by our clinical
laboratory testing business. Also, we rely on a global enterprise software
system to operate and manage our business. Our business, therefore, depends on
the continuous, effective, reliable, and secure operation of our computer
hardware, software, networks, Internet servers, and related infrastructure. To
the extent that our hardware or software malfunctions or there is an
interruption in Internet service in a way that affects access to our data by our
accounting and billing departments, internal research personnel or collaborators
or access to our laboratory testing results by referring professionals or
patients, our operating results and financial condition could be
harmed.




38




Our
computer and communications hardware is protected through physical and software
safeguards. However, it remains vulnerable to fire, storm, flood, power loss,
earthquakes, telecommunications failures, physical or software break-ins,
software viruses, and similar events. If we fail to maintain the necessary
computer capacity and data to support our accounting and billing departments and
our collaborators’ and licensees’ discovery, research, and development
activities, including our associated computational needs, we could experience a
loss of or delay in revenues. In addition, any sustained disruption in Internet
access provided by other companies could harm our operating results and
financial condition.




Risks
Related to Our Stock




Future
sales of our common stock may cause our stock price to decline.




As of
April 7, 2010, we had 427,397,313 shares of common stock
outstanding.  Of this amount, 299,477,236 shares were freely tradable
without restriction, unless the shares are purchased by our
affiliates.  The remaining 127,920,077 shares were “restricted
securities” as that term is defined under Rule 144 of the Securities
Act.  None of our directors, executive officers or employees is
subject to lock-up agreements or market stand-off provisions that limit their
ability to sell shares of our common stock.  The sale of a large
number of shares of our common stock, or the belief that such sales may occur,
could cause a drop in the market price of our common stock.




We
have the ability to issue securities with rights that may be superior to those
of our common stock.





Our board
has the power to establish the dividend rates, preferential payments on any
liquidation, voting rights, redemption and conversion terms and privileges for
any series of our preferred stock.  We currently have outstanding 1,500,000
shares of our Series B Preferred Stock, which have voting rights that give the
holders a majority of the votes in any vote of our common stock.  The sale
or issuance of any additional shares of our preferred stock having rights
superior to those of our common stock may result in a decrease in the value or
market price of our common stock.  The issuance of preferred stock could
have the effect of delaying, deferring or preventing a change of ownership
without further vote or action by our stockholders and may adversely affect the
voting and other rights of the holders of our common stock.





We
have entered into a merger agreement with StemTroniX, Inc. that requires that we
issue a substantial number of shares of our common stock to StemTroniX
shareholders.





In
February 2010, we entered into a definitive merger agreement to acquire
StemTroniX, Inc., a Texas corporation.  Subject to the terms and
conditions of the merger agreement, which has been approved by the boards of
directors of both us and StemTroniX, if the merger is completed, each
outstanding share of StemTroniX common stock will be converted into the right to
receive fourteen and sixth-tenths (14.60) shares of our common stock, subject to
certain adjustments as provided in the merger agreement.  This will
result in us issuing approximately one billion shares to the shareholder of
StemTroniX, which will result in immediate and substantial dilution to our
incumbent shareholders.  Such dilution could have a material negative
adverse effect on the price of our common stock.


39




We
intend to raise additional funds in the future through issuances of securities
and such additional funding may be dilutive to stockholders or impose
operational restrictions.





We intend to raise additional capital
in the future to help fund our operations through sales of shares of our common
stock or securities convertible into shares of our common stock, as well as
issuances of debt.  Such additional financing may be dilutive to our
stockholders, and debt financing, if available, may involve restrictive
covenants which may limit our operating flexibility.  If additional
capital is raised through the issuances of shares of our common stock or
securities convertible into shares of our common stock, the percentage ownership
of existing stockholders will be reduced.  These stockholders may
experience additional dilution in net book value per share and any additional
equity securities may have rights, preferences and privileges senior to those of
the holders of our common stock.





The
market price of our common stock is likely to be highly volatile and subject to
wide fluctuations.





The market price of our common stock is
likely to be highly volatile and could be subject to wide fluctuations in
response to a number of factors that are beyond our control,
including:





·
            announcements
      of technological innovations or new commercial therapeutic products by us,
      our collaborative partners or our present or potential
      competitors;




·
            announcements
      by us or others of results of validation studies and clinical
      trials;





·
            developments
      or disputes concerning patent or other proprietary
  rights;





·
            adverse
      legislation, including changes in governmental regulation and the status
      of our regulatory approvals or
applications;





·
            changes
      in health care policies and practices;
and





·
            economic
      and other external factors, including general market
      conditions.




In
addition, the stock market has experienced significant price and volume
fluctuations that have particularly affected the market price of the stock of
many early-stage companies and that often have been unrelated or
disproportionate to the operating performance of these
companies.  Market fluctuations such as these may seriously harm the
market price of our common stock.  Further, securities class action
suits have been filed against companies following periods of market volatility
in the price of their securities.  If such an action is instituted
against us, we may incur substantial costs and a diversion of management
attention and resources, which would seriously harm our business, financial
condition and results of operations.




40




We
identified a material weakness in our internal control over financial reporting
during the assessment of our internal controls that we performed in connection
with the preparation of the audited consolidated financial statements included
in this report.





Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
require management to complete an annual assessment of our internal control over
financial reporting.  During the preparation of our audited
consolidated financial statements for the year ended December 31, 2009, we
identified a control deficiency that has been classified as material weaknesses
in our internal control over financial reporting.  A material weakness
is a control deficiency that results in a more than remote likelihood that a
material misstatement of the annual or interim financial statements will not be
prevented or detected on a timely basis by employees in the normal course of
their assigned functions.  Based on the material weaknesses
identified, management concluded that our internal control over financial
reporting was not effective as of December 31, 2009.





The
standards that must be met for management to assess the internal control over
financial reporting are new and complex, and require significant documentation,
testing and possible remediation to meet the detailed standards.  We
may encounter problems or delays in completing the activities necessary to make
future assessments of our internal control over financial reporting and
completing the implementation of any necessary improvements.  Future
assessments may require us to incur substantial costs and may require a
significant amount of time and attention of management, which could seriously
harm our business, financial condition and results of operations.  If
we are unable to assess our internal control over financial reporting as
effective in the future, investors may lose confidence in us and our stock may
be negatively impacted.





If
our independent registered public accounting firm is unable to provide an
unqualified attestation report on our assessment of our internal control over
financial reporting, investors may lose confidence in us and our stock may be
negatively impacted.





Rules
adopted by the SEC pursuant to Section 404 of the Sarbanes-Oxley Act of 2002
will require our independent registered public accounting firm to complete an
attestation report on our assessment of our internal control over financial
reporting.  The first attestation report of our assessment that our
independent registered public accounting firm must complete will be required in
connection with the preparation of our annual report for our fiscal year ending
December 31, 2010.  The attestation process that must be performed by
our independent registered public accounting firm is also new and
complex.  We may encounter problems or delays in receiving an
unqualified attestation of our assessment by our independent registered public
accountants.  Compliance with these new rules could require us to
incur substantial costs and may require a significant amount of time and
attention of management, which could seriously harm our business, financial
condition and results of operations.  If our independent registered
public accounting firm is unable to provide an unqualified attestation report on
our assessment, investors may lose confidence in us and our stock may be
negatively impacted.




41




We
are not subject to certain of the corporate governance provisions of the
Sarbanes-Oxley Act of 2002 and, without voluntary compliance with such
provisions, will not receive the benefits and protections they were enacted to
provide.





Since our common stock is not listed
for trading on a national securities exchange, we are not subject to certain of
the corporate governance rules established by the national securities exchanges
pursuant to the Sarbanes-Oxley Act of 2002.  These rules relate to
independent director standards, director nomination procedures, audit and
compensation committees standards, the use of an audit committee financial
expert and the adoption of a code of ethics.





Our board of directors currently
consists of Helen R. Park, who is our Interim Chief Executive Officer and
Interim Chief Financial Officer, and Ira L. Goldknopf, who is our President,
Chief Scientific Officer and Secretary.  Ms. Park and Dr. Goldknopf
are not “independent directors” as such term is defined by any of the national
securities exchanges or inter-dealer quotation systems.  Our board of
directors has not created a separately-designated standing audit committee, and
Ms. Park and Dr. Goldknopf do not qualify as an “audit committee financial
expert” as that term is defined in Item 407(d)(5)(ii) of Regulation S-K
promulgated under the Securities Act.  Unless we voluntarily elect to
fully comply with all of these rules, we will not receive the benefits and
protections they were enacted to provide.




Our
operating results may fluctuate significantly, and these fluctuations may cause
our stock price to fall.





Our operating results will likely vary
in the future primarily as the result of fluctuations in our billings, revenue
and operating expenses.  We expect to continue to incur increases in
operating expenses in the future as we continue engaging in selling and
marketing activities, develop new diagnostic tests, hire additional personnel
and comply with state and federal laws applicable to our business and SEC
reporting requirements.  If our results of operations do not meet the
expectations of our shareholders or the investment community, the price of our
common stock may decline.





Our
shares of common stock are not listed for trading on a national securities
exchange or the Nasdaq Stock Market.





Our common stock currently trades on
the OTC Bulletin Board and is not listed for trading on any national securities
exchange or the Nasdaq Stock Market.  Investments in securities
trading on the OTC Bulletin Board are generally less liquid than investments in
securities trading on a national securities exchange or the Nasdaq Stock
Market.  The failure of our shares to be approved for trading on a
national securities exchange or the Nasdaq Stock Market may have the effect of
limiting the trading activity of our common stock and reducing the liquidity of
an investment in our common stock.


42


We
have never paid any dividends on our common stock and do not intend to pay any
dividends on our common stock in the foreseeable future.




We have
never paid any dividends on our common stock and do not intend to pay any
dividends on our common stock in the foreseeable future.  We intend to
use any cash generated from our operations for reinvestment in the growth of our
business.  Any determination to pay dividends in the future will be
made by our board of directors and will depend upon our results of operations,
financial condition, contractual restrictions, restrictions imposed by
applicable law and other factors deemed relevant by our board of
directors.  Accordingly, realization of a gain on stockholders’
investments will depend on the appreciation of the price of our common
stock.  We can provide no assurance that our common stock will
appreciate in value or even maintain the price at which stockholders purchased
their shares.





If
our executive officers, directors and principal stockholders choose to act
together, they may be able to control our management and operations, which may
prevent us from taking actions that may be favorable to you.





Our
executive officers, directors and principal stockholders, and their respective
affiliates, beneficially own approximately 28% of our outstanding common
stock.  These stockholders, acting together, have the ability to exert
substantial influence over any matters requiring approval by our stockholders,
including the election and removal of directors and any proposed merger,
consolidation or sale of all or substantially all of our assets.  In
addition, they could dictate the management of our business and
affairs.  This concentration of ownership could have the effect of
delaying, deferring or preventing a change in control of us or impeding a merger
or consolidation, takeover or other business combination that could be favorable
to you.





Applicable
SEC rules governing the trading of “penny stocks” may limit the trading and
liquidity of our common stock which may affect the trading price of our common
stock.





Our
common stock is a “penny stock” as defined under Rule 3a51-1 of the Securities
Exchange Act of 1934, as amended (the “Exchange Act”) and is accordingly subject
to SEC rules and regulations that impose limitations upon the manner in which
our common stock can be publicly traded.  These regulations require
the delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the associated
risks.  Under these regulations, certain brokers who recommend such
securities to persons other than established customers or certain accredited
investors must make a special written suitability determination regarding such a
purchaser and receive such purchaser’s written agreement to a transaction prior
to sale.  These regulations may have the effect of limiting the
trading activity of our common stock and reducing the liquidity of an investment
in our common stock.


43


Item
2.  Properties.





Our
corporate headquarters and sole business office is located at 3400 Research
Forest Drive, Suite B2-3, The Woodlands, Texas 77381, where we lease
approximately 3,000 square feet of space for a monthly rent and operating
expense payment of approximately $5,252.  The lease expires on June
30, 2010.  We believe that our office space is adequate to support our
current operations and projected growth in our operations over the next 12
months.





Item
3.  Legal Proceedings.





In
September 2008, we entered into an arbitration agreement with Steven Rash, our
former Chief Executive Officer, in connection with his agreement to resign as
our Chief Executive Officer.  The parties agreed to arbitrate claims for
wages and other compensation due, breach of contracts or covenants, and
benefits.  We agreed to arbitrate Mr. Rash’s claims for wages of
$36,031 and our claims for embezzlement, fraud and breach of contract by
Mr. Rash. As of April 7, 2010, arbitration had not been initiated by either
party.





In March
2009, McLennon Law Corporation (“McLennon”) filed a lawsuit against the Company
for breach of contract for approximately $117,000 of accrued but unpaid attorney
fees.  We are currently in negotiations with McLennon to settle its claim
for unpaid attorney fees.





In
September 2009, one of our employees attempted to convert a $30,000 convertible
promissory note plus interest into shares of our common stock.  We are
disputing the amount, if any, that is due to the employee under the
note.  As of December 31, 2009, the note had not been
converted.  In December 2009, the employee filed a law suit against us
seeking damages and specific performance, and in March 2010 filed a motion for
summary judgment.  We have filed a motion in opposition to the motion
for summary judgment.  This case is currently
pending.




In
February 2010, Transgenomic, Inc. (“Transgenomic”) filed a lawsuit against us in
the United States District Court for the District of Nebraska.  The lawsuit
contained claims for fraud, breach of contract, slander, libel, and for a
declaration of rights under a Collaboration and Exclusive License Agreement,
dated January 23, 2009, between the parties.  On April 12, 2010, Power3
filed a Partial Motion to Dismiss Transgenomic’s fraud claim.  This case is
currently pending.




In March,
2010, Rockmore Investment Master Fund LTD (“Rockmore”) filed a lawsuit against
us in the Supreme Court for the State of New York.  The lawsuit
contained claims of breach of contract and specific performance.  We
have not yet responded to the complaint.  This case is currently
pending.




In April
2010, Neogenomics, Inc. (“Neogenomics”) filed a lawsuit against us in the
Supreme Court of the State of New York.  The lawsuit contained claims
for failure to repay the principal amount of, and accrued interest under, a
Convertible Debenture, dated April 17, 2009, issued by us in favor of
Neogenomics.  We have not yet responded to the
complaint.  This case is currently pending.


44


PART
II




Item 4.
              Market
      For Common Equity, Related Stockholder Matters and Issuer Purchases of
      Equity Securities.




Market
Information





Our
common stock currently trades on the OTC Bulletin Board under the symbol
“PWRM”.  The following table sets forth the range of high and low bid
prices for shares of our common stock on the OTC Bulletin Board for the periods
indicated, as reported by Nasdaq.


The
quotations represent inter-dealer prices, without retail mark-up, markdown or
commission, and may not represent actual transactions.





Fiscal Year Ended December 31, 2008
                    
                    High
                    
                    
                    LowQuarter
      ended March 31, 2008
                    
                    $
                    0.155
                    
                    
                    $
                    0.08Quarter
      ended June 30, 2008
                    
                    $
                    0.14
                    
                    
                    $
                    0.055Quarter
      ended September 30, 2008
                    
                    $
                    0.12
                    
                    
                    $
                    0.02Quarter
      ended December 31, 2008
                    
                    $
                    0.05
                    
                    
                    $
                    0.0089





Fiscal Year Ended December 31, 2009
                    
                    High
                    
                    
                    LowQuarter
      ended March 31, 2009
                    
                    $
                    0.04
                    
                    
                    $
                    0.0095Quarter
      ended June 30, 2009
                    
                    $
                    0.025
                    
                    
                    $
                    0.013Quarter
      ended September 30, 2009
                    
                    $
                    0.155
                    
                    
                    $
                    0.01Quarter
      ended December 31, 2009
                    
                    $
                    0.22
                    
                    
                    $
                    0.048




The last
reported trading price of our common stock as reported on the OTC Bulletin Board
on April 7, 2010 was $0.0395 per share.





Holders





As of
April 7, 2010, the number of stockholders of record of our common stock was
1,179.




Dividends





We have not paid any dividends on our
common stock to date, nor do we intend to pay any dividends on our common stock
in the foreseeable future.  We intend to retain future earnings, if
any, to finance the growth of our business.


45


Transfer
Agent





The
transfer agent for our common stock is Olde Monmouth Stock Transfer Company, 200
Memorial Parkway, Atlantic Highlands, New Jersey 07716.




Recent
Sales of Unregistered Securities




During our fiscal quarter ended
December 31, 2009, we sold the following securities without registration under
the Securities Act:




In
October 2009, we revised the terms of an outstanding warrant to acquire
13,318,682 shares of common stock held by the warrant holder.  The
exercise price of the warrant was increased from $0.04 per share to $0.053 per
share.  We received $200,000 and issued 3,773,585 shares of common
stock upon the partial exercise of the warrant.  These securities were
issued to an accredited investor in a private placement transaction exempt from
the registration requirements of the Securities Act pursuant to Section 4(2) of
the Securities Act directly by us without engaging in any advertising or general
solicitation of any kind and without payment of underwriting discounts or
commissions to any person.





In
October 2009, we issued 3,687,500 shares of common stock to a consultant for
consulting services.  These securities were issued to an accredited
investor in a private placement transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act directly by us without engaging in any advertising or general solicitation
of any kind and without payment of underwriting discounts or commissions to any
person.





In
October 2009, we issued 1,309,705 shares of common stock to a consultant for
consulting services.  These securities were issued to an accredited
investor in a private placement transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act directly by us without engaging in any advertising or general solicitation
of any kind and without payment of underwriting discounts or commissions to any
person.





In
October 2009, we issued 100,000 shares of common stock to a consultant for
consulting services.  These securities were issued to an accredited
investor in a private placement transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act directly by us without engaging in any advertising or general solicitation
of any kind and without payment of underwriting discounts or commissions to any
person.





In
October 2009, we issued 1,000,000 shares of common stock to a consultant for
consulting services.  These securities were issued to an accredited
investor in a private placement transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act directly by us without engaging in any advertising or general solicitation
of any kind and without payment of underwriting discounts or commissions to any
person.


46





In
December 2009, we issued 905,661 shares of common stock to a consultant for
consulting services.  These securities were issued to an accredited
investor in a private placement transaction exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) of the Securities
Act directly by us without engaging in any advertising or general solicitation
of any kind and without payment of underwriting discounts or commissions to any
person.





In
December 2009, we issued shares of our common stock to Helen R. Park, our
Interim Chief Executive Officer.  A description of these shares is set
forth under “Item
10.  Executive Compensation”of this report.  These
securities were issued to an accredited investor in a private placement
transaction exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) of the Securities Act directly by us without engaging
in any advertising or general solicitation of any kind and without payment of
underwriting discounts or commissions to any person.





Item 6.
              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations.





This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations and other parts of this report contain forward-looking statements
that involve risks and uncertainties.  All forward-looking statements
included in this report are based on information available to us on the date
hereof, and, except as required by law, we assume no obligation to update any
such forward-looking statements.  Our actual results may differ
materially from those anticipated in these forward-looking statements as a
result of a number of factors, including those set forth under “Item 1A. Risk Factors” of
this report and elsewhere in this report.  The following should be
read in conjunction with our audited consolidated financial statements beginning
on page F-1 of this report.




Overview




We are a
leading bio-technology company focused on the development and marketing of novel
diagnostic products through the analysis of proteins.  Our business is
focused on the development of novel diagnostic tests in the fields of cancer,
and neurodegenerative and neuromuscular diseases such as amytrophic lateral
sclerosis (commonly known as ALS or Lou Gehrig’s disease), Alzheimer’s disease
and Parkinson’s disease. We also address clinical questions related to
early disease detection, treatment response, monitoring of disease progression,
prognosis and others through collaborations with leading academic and research
institutions. We apply proprietary methodologies to discover and identify
protein biomarkers associated with diseases. We also use advanced protein
separation methods to identify and resolve variants of specific biomarkers
(known as “translational proteomics”) for developing a procedure to measure a
property or concentration of an assay and commercializing novel diagnostic
tests. By discovery and development of protein-based disease biomarkers, we have
developed tools for diagnosis, prognosis, early detection and identification of
new target drugs in cancer, and neurodegenerative and neuromuscular diseases
such as amytrophic lateral sclerosis, Alzheimer’s disease and Parkinson’s
disease.


47




We have
developed a portfolio of products including BC-SeraProTM, a
proteomic blood serum test for the early detection of breast cancer for which we
have completed Phase I clinical trials, and NuroPro®, a serum
test for the detection of neurodegenerative diseases including Alzheimer’s,
Parkinson’s and ALS diseases for which we are currently engage in Phase II
clinical trials.  These products are designed to analyze proteins and their
mutations to assess an individual’s risk for developing disease later in life or
a patient’s likelihood of responding to a particular drug, assess a patient’s
risk of disease progression and disease recurrence, and measure a patient’s
exposure to drug therapy to ensure optimal dosing and reduced drug toxicity.
Armed with this risk response assessment information, individuals can take
action to prevent or delay the onset of disease and physicians can ensure that
patients receive the most appropriate treatment of their disease.




Recent
Developments





In
February 2010, we entered into a definitive merger agreement to acquire
StemTroniX, Inc., a Texas corporation.  StemTroniX is a medical
biotechnology company that is committed to improving the lives of individuals by
using autologous adult stem cell technology to repair tissue damage in
patients.  Autologous adult stem cell therapy is the process of using
an individual’s blood to purify their stem cells and re-introduce them into that
individual for the purpose of repairing and regenerating damaged
tissue.  StemTroniX provides a system to augment this
process.





Subject
to the terms and conditions of the merger agreement, which has been approved by
the boards of directors of both us and StemTroniX, if the merger is completed,
each outstanding share of StemTroniX common stock will be converted into the
right to receive fourteen and sixth-tenths (14.60) shares of our common stock,
subject to certain adjustments as provided in the merger agreement.




The
merger agreement contains customary representations and warranties by us and
StemTroniX, covenants by StemTroniX to conduct its business in the ordinary
course until the merger is completed, and covenants by StemTroniX to not
take certain actions during such period.  StemTroniX has also agreed
to not solicit proposals relating to business combination transactions with
other parties or enter into discussions concerning any proposals for business
combination transactions with other parties.




Consummation
of the merger is subject to certain customary conditions, including, among
others, the approval of the merger by the shareholders of StemTroniX, the
approval of the issuance of our common stock in connection with the merger by
our shareholders, the approval of an amendment to our certification of
incorporation by our shareholders to increase the number of shares of common
stock authorized for issuance to that number of shares necessary to ensure that
an adequate number of shares is available for issuance to the shareholders of
StemTroniX, the receipt of any required governmental approvals and expiration of
applicable waiting periods, the accuracy of the representations and warranties
by us and StemTroniX (generally subject to a material adverse effect standard),
and material compliance by us and StemTroniX with our respective obligations
under the merger agreement.





We expect to complete the acquisition
of StemTroniX in May or June 2010.


48


Strategy





Currently,
we are continuing to develop and commercialize proteomic and related biomarker
tests that will assist providers and payers in determining the most appropriate
therapeutic intervention for a particular patient. These tests are developed
based on our know-how and expertise, in partnership with thought leaders and
leading healthcare institutions, and intellectual property that we have
developed on our own, licensed from others, or acquired from other parties. Our
tests are available to patients by physician’s prescription to providers located
primarily in the United States and may be performed in our CLIA-certified
laboratory or partnered with other test providers.





We intend
to complete Phase II clinical trials for NuroPro®and
begin commercialization of NuroPro® during
2010, and to complete Phase II clinical trials for BC-SeraProTM during
2010.  We also intend to develop additional diagnostic products
utilizing the proteomic research and results that we have achieved and for which
we have filed patent applications with the USPTO.  By utilizing the
intellectual property that we have in our possession, building on the
intellectual property portfolio through additional clinical trials, and
integrating the proprietary and intellectual property portfolio of StemTroniX,
we will have the ability to successfully create, market and sell a diverse
diagnostic product offering based on our proteomic research.





Our goal
during 2010 is to enter into collaboration and licensing agreements with other
leading bio-technology companies, academic and research institutions, like the
Baylor College of Medicine, who have the resources and expertise to engage in
successful commercialization campaigns of our products.  Through these
agreements, we will generate revenue through a combination of licensing fees,
royalties and milestone payments that we receive from our collaboration and
licensing partners.





2010
Outlook





We expect sales of our BC-SeraProTM and
NuroPro®
diagnostic products to increase during 2010 as we complete Phase II clinical
studies on these products.  We also expect to develop several
additional diagnostic products during 2010.  As a result, we expect
revenue to increase over the next 12 months as we enter into additional
collaboration and licensing agreements with other biotechnology companies,
academic and research institutions and governmental agencies. We intend to
reduce our liabilities by retiring our outstanding debt, which will decrease
substantially, if not eliminate, the derivative liabilities that we have been
incurring for the past few years.  The combination of increased
revenue and reduced debt, coupled with significant capital-raising initiatives
that we plan to complete during 2010, will provide us with the assets and
operating results necessary to grow at an exponential rate for the foreseeable
future.




49


Critical
Accounting Policies





Our Management’s Discussion and
Analysis of Financial Condition and Results of Operations contained herein is
based upon our consolidated financial statements and accompanying notes, which
have been prepared in accordance with United States generally accepted
accounting principles (“GAAP”).  The preparation of these financial
statements requires management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenue and expenses, and related
disclosure of contingent assets and liabilities.  When making these
estimates and assumptions, we consider our historical experience, our knowledge
of economic and market factors and various other factors that we believe to be
reasonable under the circumstances.  Actual results may differ under
different estimates and assumptions.





The
accounting estimates and assumptions discussed in this section are those that we
consider to be the most critical to an understanding of our financial statements
because they inherently involve significant judgments and
uncertainties.





Revenue
Recognition





Our
revenue consists primarily of licensing fees, royalties and milestone payments
that we receive from our licensing partners that it receives under licensing
agreements that we have with third parties.  We recognize these fees and
payments as revenue when persuasive evidence of an arrangement exists, delivery
or performance has occurred, the sales price is fixed and determinable, and
collectibility is reasonably assured in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 605
(“ASC 605”).





Stock-Based
Compensation





We
account for employee stock-based compensation in accordance with the fair value
recognition provisions of ASC Topic 718 (“ASC 718”) using the modified
prospective transition method.  Under this method, compensation
expense includes: (a) compensation expense for all share-based payments granted,
but not yet vested, as of January 1, 2006, based on the grant-date fair value,
and (b) compensation expense for all share-based payments granted subsequent to
January 1, 2006, based on the grant-date fair value.  Such amounts
have been reduced by our estimate of forfeitures of all unvested
awards.





We
account for non-employee stock-based compensation in accordance with ASC 718 and
ASC Topic 505 (“ASC 505”).  ASC 718 and ASC 505 require that we
recognize compensation expense based on the estimated fair value of stock-based
compensation granted to non-employees over the vesting period, which is
generally the period during which services are rendered by the
non-employees.





We use
the Black-Scholes pricing model to determine the fair value of the stock-based
compensation that we grant to employees and non-employees.  We are
required to make certain assumptions in connection with this determination, the
most important of which involves the calculation of volatility with respect to
the price of our common stock.  The computation of volatility is
intended to produce a volatility value that is representative of our
expectations about the future volatility of the price of our common stock over
an expected term.  We used our share price history to determine
volatility and cannot predict how the price of our shares of common stock will
react on the open market in the future since our common stock has only been
trading on the OTC Bulletin Board since March 30, 2006.  As a result,
the volatility value that we calculated may differ from the future volatility of
the price of our shares of common stock.


50


Derivative Financial
Instruments





ASC Topic
815 (“ASC 815”) requires that all derivative financial instruments be recorded
on the balance sheet at fair value. Fair values for exchange traded securities
and derivatives are based on quoted market prices. Where market prices are not
readily available, fair values are determined using market based pricing models
incorporating readily observable market data and requiring judgment and
estimates.





We have
issued several convertible promissory notes and stock warrants and has evaluated
the terms and conditions of the conversion features contained in the notes and
warrants to determine whether they represent embedded or freestanding derivative
instruments under the provisions of ASC Topic 815 (“ASC 815”).  We
determined that the conversion features contained in the notes and warrants
represent freestanding derivative instruments that meet the requirements for
liability classification under ASC 815.  As a result, the fair value
of the derivative financial instruments in the notes and warrants is reflected
in our balance sheet as a liability.  The fair value of the derivative
financial instruments of the convertible promissory notes and warrants was
measured at the inception date of the notes and warrants and each subsequent
balance sheet date.  Any changes in the fair value of the derivative
financial instruments are recorded as non-operating, non-cash income or expense
at each balance sheet date.





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





We use
the Black-Scholes pricing model to determine the fair values of its
warrants.  This model takes into consideration such factors as the
estimated term of the derivatives, the volatility of the price of our common
stock, interest rates, and the probability that the warrants will be exercised
to determine the fair value of the warrants.  The selection of these
criteria requires management's judgment and may impact our net income or
loss.


51




For a more complete discussion of our
accounting policies and procedures, see our notes to consolidated financial
statements beginning on page F-7.





Recent
Accounting Pronouncements





In
May 2009, the FASB issued guidance now codified as ASC Topic 855 (“ASC
855”) which establishes general standards of accounting for, and disclosures of,
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued.  ASC 855 requires the
disclosure of the date through which an entity has evaluated subsequent events
and the basis for selecting that date (i.e., whether that date represents the
date the financial statements were issued or were available to be issued). These
new provisions became effective for interim or fiscal periods ending after
June 15, 2009.  The adoption of these provisions did not have a
material impact on our financial condition and results of
operations.





In
June 2009, the FASB issued guidance now codified as ASC Topic 105 (“ASC
105”) as the single source of authoritative nongovernmental U.S.
GAAP.  ASC 105 does not change current U.S. GAAP, but is intended to
simplify user access to all authoritative U.S. GAAP by providing all
authoritative literature related to a particular topic in one place. All
existing accounting standard documents have been superseded and all other
accounting literature not included in the FASB ASC is considered
non-authoritative.  These new provisions became effective for
interim and annual periods ending after September 15, 2009 and,
accordingly, are effective for the Company for the current fiscal reporting
period.  The adoption of these provisions did not have a material
impact on our financial condition and results of operations.





Comparison of the Years Ended
December 31, 2009 and 2008





Net
Revenue





Net revenue consists primarily of
licensing fees, royalties and milestone payments that we receive from our
licensing partners.  Revenue increased $113,975 to $115,000 for the
year ended December 31, 2009 from $1,025 for the year ended December 31,
2008.  The increase of $113,975 resulted primarily from milestone fees
that we received under the Collaboration and Exclusive License Agreement with
Transgenomic, Inc.  We expect sales of our BC-SeraProTM and
NuroPro®
diagnostic products to increase during 2010 as we complete Phase II clinical
studies on these products.  As a result, we expect revenue to increase
over the next 12 months as we enter into additional collaboration and licensing
agreements with other biotechnology companies, academic and research
institutions and governmental agencies.


52


Operating
Expenses





Operating expenses consist primarily of
employee compensation and benefits, professional and consulting fees, and other
selling, general and administrative expenses.





Employee Compensation and
Benefits.  Employee compensation and benefits consists of all
salaries and other cash compensation, equity-based compensation, employee
benefits and the related payroll taxes.  Employee compensation expense
decreased $673,455 to $368,067 for the year ended December 31, 2009 from
$1,041,522 for the year ended December 31, 2008.  The decrease of
$673,455 was due primarily to decreases of $334,130 for salary and equity-based
compensation expenses, $102,876 for health insurance benefits and $36,982 for
payroll taxes, each associated with a decrease in the number of people who we
employed during 2009.  We expect employee compensation expense to
increase over the next 12 months as we continue to retain additional executive
management personnel, lab technicians and other employees in connection with the
growth of our business.





Professional
Fees.  Professional fees consist of fees paid to our
independent accountants, lawyers, laboratory and technology consultants and
other professionals and consultants.  Professional fees increased
$2,963,716 to $4,925,829 for the year ended December 31, 2009 from $1,962,113
for the year ended December 31, 2008.  The increase of $2,963,716 was
due primarily to an increase of $4,472,910 for the amount of expense recognized
in connection with equity-based compensation paid to service providers and
consultants for various services, partially offset by decreases of $254,230 for
legal and accounting fees, $427,951 for consulting fees and decreases in other
professional fees.  We expect professional fees to increase over the
next 12 months as we incur additional legal, accounting, laboratory and
technology fees in connection with the general expansion of our business and
operations.





Other Selling, General and
Administrative Expenses.  Other selling, general and
administrative expenses consist of selling and marketing expenses, lab supplies,
clinical validation studies, computer hardware and system costs, bank service
charges, filing fees and dues, non-employee customer service representative
expense, rent expense, financial printer costs, transfer agent costs, the costs
of investor relations campaigns and activities, postage and delivery expenses,
severance expenses, general business expenses and miscellaneous general and
administrative expenses.  Other general and administrative expenses
decreased $349,182 to $143,297 for the year ended December 31, 2009 from
$492,479 for the year ended December 31, 2008.  The decrease of
$349,182 resulted primarily from decreases of $72,532 for marketing costs,
$64,925 for rent associated with our move to a smaller office in 2009, $75,592
for travel and entertainment, $35,000 for clinical validation studies and
$18,014 for lab supplies, as well as decreases in other miscellaneous general
and administrative expenses.  We expect other general and
administrative expenses to increase over the next 12 months as we continue to
incur expenses for clinical validation studies, lab supplies, selling and
marketing expenses, rent, computer hardware and systems, and other miscellaneous
items associated with the general operation and growth of our
business.


53


Interest
Expense





Interest expense consists of the
interest and discount amortization costs that we incur on the debt obligations
that we have.  Interest and amortization expense decreased $1,124,532
to $416,886 for the year ended December 31, 2009 from $1,541,418 for the year
ended December 31, 2008.  The decrease of $1,124,532 was due primarily
do the retirement during 2009 of many of the debt obligations that were
outstanding during 2008.  We expect interest expense to continue to
decrease over the next 12 months as we retire several of our remaining debt
obligations.





Derivative Gain /
Loss





Derivative
gain / loss consists of the non-operating, non-cash income or expense resulting
from changes in the fair value of the derivative instruments contained in the
convertible promissory notes and stock warrants that were outstanding at
December 31, 2009 and 2008, respectively.  We recognized a derivative
loss of $13,045,921 for the year ended December 31, 2009, compared to a
derivative gain of $4,415,110 for the year ended December 31,
2008.  The difference of $17,461,031 was due primarily to the increase
in the trading price of our common stock between December 31, 2008 and
2009.  While future derivative gain / loss is largely dependent upon
the trading price of our common stock, we expect future derivative gains and
losses to be smaller in amount as our convertible promissory notes are retired
or converted into shares of common stock, and as stock warrants are exercised or
expire by their terms.





Gain / Loss on Settlement of
Debt





Gain / loss on settlement of debt
consists of the gains and losses that we have recognized in connection with the
retirement of outstanding debt and payment of outstanding invoices and results
when we issue shares of common stock having an aggregate value less than (in the
case of gains) or greater than (in the case of losses) the outstanding principal
amount of the note and accrued interest or the applicable invoice.  We
recognized a loss on settlement of debt of $426,574 for the year ended December
31, 2009, compared to a gain on the settlement of debt of
$464,872.  The difference of $891,446 was due primarily to our
decision to pay off a significant amount of our outstanding debt obligations and
accrued interest, and numerous outstanding invoices, during 2009 by issuing
shares of our common stock having an aggregate value greater than the
outstanding principal amount of the note and accrued interest or the applicable
invoice.  While we may continue to incur losses on the settlement of
debt in the future as we continue to pay off outstanding debt and invoices with
shares of our common stock, we expect any such losses to decrease as the amount
of outstanding debt continues to decrease.





Net Loss





Our net
loss increased $19,074,790 to $19,211,574 for the year ended December 31, 2009,
from $136,784 for the year ended December 31, 2008.  The increase of
$19,074,790 was primarily due to increases of $2,963,716 for professional fees,
$17,461,031 for derivative loss, and $891,446 for loss on the settlement of
debt.  This was partially offset by an increase of $113,975, for net
revenue, and decreases of $673,455 for employee compensation and benefits and
$349,182 for other selling, general and administrative expenses.  We
expect our net loss to decrease substantially during 2010 as we generate
additional revenue through our collaboration and licensing partners and as we
continue to retire our outstanding debt obligations.


54


Liquidity
and Capital Resources





Since our
inception, we have funded our operations primarily through private sales of
equity securities and the use of short-term debt.





Net cash
used by operating activities was $441,561 for the year ended December 31, 2009
compared to $1,447,004 for the year ended December 31, 2008.  The
$1,005,443 decrease in cash used by operating activities was due primarily to an
increase of $17,461,031 for derivative liability, $4,079,418 for stock issued
for compensation and services and $888,244 for loss on the settlement of
debt.  This was partially offset by an increase in net loss of
$19,074,790 and a decrease in accounts payable and other liabilities of
$350,954.





Net cash
used by investing activities was $758 for the year ended December 31, 2009
compared to $2,748 for the year ended December 31, 2008.  The $1,990
decrease in cash used by investing activities was due to a decrease in
expenditures on property and equipment during 2009.





Net cash
provided by financing activities was $433,988 for the year ended December 31,
2009 compared to $1,332,404 for the year ended December 31, 2008.  The
$898,416 decrease in cash provided by financing activities was due primarily to
decreases of $562,248 for proceeds from the sale of common stock and $710,000
for proceeds from the issuance of debt.  This was partially offset by
an increase of $278,832 for proceeds from the exercise of warrants and a
decrease of $120,000 for principal payments on outstanding debt.





Our
primary sources of capital over the past 12 months are set forth
below.





In June
2009, we issued 6,000,000 shares of common stock to an accredited investor for
total cash proceeds of $30,000.





In June
2009, we issued 500,000 shares of common stock to an accredited investor for
total cash proceeds of $5,000.





In August
2009, we issued 515,600 shares of common stock to two accredited investors for
total cash proceeds of $5,156.





In August
2009, we issued a convertible promissory note and a warrant to acquire shares of
common stock to an accredited investor for consideration of
$25,000.  The note is for a principal amount of $25,000, is
convertible into 2,500,000 shares of common stock, has an interest rate of 8%
and is due February 26, 2010.  The warrant is exercisable into
1,000,000 shares of common stock and has an exercise price of $0.10 that may be
subject to adjustment depending upon the trading price of our common
stock.





In
September 2009, we issued 2,500,000 shares of common stock to an accredited
investor for total cash proceeds of $25,000.


55




In
September 2009, we issued 2,000,000 shares of common stock to an accredited
investor for total cash proceeds of $20,000.





In
September 2009, we issued a convertible promissory note and a warrant to acquire
shares of common stock to an accredited investor for consideration of
$25,000.  The note is for a principal amount of $25,000, is
convertible into 2,500,000 shares of common stock, has an interest rate of 8%
and is due March 3, 2010.  The warrant is exercisable into 1,000,000
shares of common stock and has an exercise price of $0.10 that may be subject to
adjustment depending upon the trading price of our common stock.





During
the year ended December 31, 2009, we issued 11,789,509 shares of common stock to
warrant holders upon the exercise of outstanding warrants for total cash
proceeds of $278,832.





To date, our capital needs have been
met primarily through the issuance of convertible promissory notes and
debentures, sales of equity securities and proceeds received upon the exercise
of warrants held by our security holders.  We do not currently
maintain a line of credit or term loan with any commercial bank or other
financial institution.  We have used the proceeds from the exercise of
warrants and our private offerings of securities to pay virtually all of the
costs and expenses we have incurred.  These costs and expenses were
comprised of operating expenses, which consisted of the employee compensation
expenses, professional fees and other general and administrative expenses
discussed above, and the costs of sales discussed above to the extent such costs
of sales exceeded our revenue.





We
believe that our current cash resources will not be sufficient to sustain our
operations for the next 12 months.  We will need to obtain additional
cash resources within the next 12 months to enable us to pay our ongoing costs
and expenses as they are incurred and finance the growth of our
business.  We intend to obtain these funds through internally
generated cash flows from operating activities and proceeds from the issuance of
equity securities.  The issuance of additional equity would result in
dilution to our existing shareholders.  We have not made arrangements
to obtain additional financing and we can provide no assurance that additional
financing will be available in an amount or on terms acceptable to us, if at
all.  If we are unable to obtain additional funds when they are needed
or if such funds cannot be obtained on terms favorable to us, we may be unable
to execute upon our business plan or pay our costs and expenses as they are
incurred, which could have a material, adverse effect on our business, financial
condition and results of operations.





Contractual
Obligations





The
following summarizes our material long-term contractual obligations as of
December 31, 2009:





Contractual
                        Obligations
                      
                      Total
                      
                      
                      2010
                      
                      
                      2011
                      
                      
                      2012
                      
                      
                      2013
                      
                      
                      2014Executive
      Agreements (1)
                      
                      $
                      438,254
                      
                      
                      $
                      225,008
                      
                      
                      $
                      166,670
                      
                      
                      $
                      46,576
                      
                      
                      $
                      -0-
                      
                      
                      $
                      -0-Office
      Lease (2)
                      
                      
                      31,512
                      
                      
                      
                      31,512
                      
                      
                      
                      -0-
                      
                      
                      
                      -0-
                      
                      
                      
                      -0-
                      
                      
                      
                      -0-Total
                      
                      $
                      469,766
                      
                      
                      $
                      256,520
                      
                      
                      $
                      166,670
                      
                      
                      $
                      46,576
                      
                      
                      $
                      -0-
                      
                      
                      $
                      -0-




56




(1)At December 31, 2009, we
were a party to employment agreement with Ira L. Goldknopf and a consulting
agreement with Helen R. Park.  A summary of these agreements is
provided herein under “Item.
10.  Executive Compensation – Employment Contracts and
Arrangements.”




(2)At December 31, 2009, we
were a party to an operating lease for our office space in The Woodlands, Texas
that expires June 30, 2010.  A summary of this office lease is
provided herein under “Business –
Properties.”





To date,
we have made payments under these obligations with proceeds received from
issuance of convertible promissory notes and debentures, sales of our equity
securities, and proceeds received upon the exercise of outstanding warrants by
our security holders.  We intend to make future payments due under
these obligations primarily through similar means during 2010.





Off-Balance
Sheet Arrangements





As of December 31, 2009, we did not
have any relationships with unconsolidated entities or financial partners, such
as entities often referred to as structured finance or special purpose entities,
that had been established for the purpose of facilitating off-balance sheet
arrangements or other contractually narrow or limited purposes.  As
such, we are not materially exposed to any financing, liquidity, market or
credit risk that could arise if we had engaged in such
relationships.





Item 7.
              Financial
      Statements and Supplementary
Data.




Our
audited financial statements at and for each of the years ended December 31,
2009 and 2008, respectively, begin on page F-1 of this report located
immediately after the signature page hereto.





Item 8.
              Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure.




None.




Item
8A(T).  Controls and Procedures.




Evaluation
of Disclosure Controls and Procedures




We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in our Exchange Act reports is recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms and that such information is accumulated and communicated
to our management, including our Chief Executive Officer and Chief Financial
Officer, as appropriate, to allow for timely decisions regarding required
disclosure. In designing and evaluating our disclosure controls and procedures,
management recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of achieving the
desired control objectives, and management is required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and
procedures.  Our disclosure controls and procedures were designed to
provide reasonable assurance that the controls and procedures would meet
management’s objectives.


57





As of
December 31, 2009, we carried out the evaluation of the effectiveness of our
disclosure controls and procedures as defined by Rule 13a-15(e) under the
Exchange Act under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial
Officer.  Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer concluded that, as of December 31, 2009, our disclosure
controls and procedures were effective to provide reasonable assurance that
information we are required to disclose in reports that we file or submit under
the Exchange Act is: (i) recorded, processed, summarized and reported within the
time periods specified in the SEC’s rules and forms, and (ii) accumulated and
communicated to our management, including our Chief Executive Officer and Chief
Financial Officer, as appropriate to allow timely decisions regarding required
disclosure.




Management’s Report on Internal Control Over Financial
Reporting




Our
management, under the supervision of our Chief Executive Officer and Chief
Financial Officer, is responsible for establishing and maintaining adequate
internal control over financial reporting.  Internal control over
financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
GAAP.  Internal control over financial reporting includes policies and
procedures that:





(1)            pertain
to the maintenance of records that in reasonable detail accurately and fairly
reflect the transactions and dispositions of our assets;




(2)            provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with GAAP, and that our
receipts and expenditures are being made only in accordance with authorization
of our management and directors; and





(3)            provide
reasonable assurance regarding prevention or timely detection of unauthorized
acquisitions, use or disposition of our assets that could have a material effect
on our financial statements.




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


58





Our
management used the framework set forth in the report entitled, “Internal Control –Integrated Framework”published by the
Committee of Sponsoring Organizations of the Treadway Commission, known as COSO,
to evaluate the effectiveness of our internal control over financial reporting.
 Based on this assessment, our management concluded that our internal
control over financial reporting was not effective at December 31, 2009 due
to the existence of material weaknesses in our internal
controls.





A
material weakness is a control deficiency, or a combination of control
deficiencies, that results in a more than remote likelihood that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis.  Our management, in consultation with
our independent registered public accounting firm, concluded that a material
weakness existed in the following area as of December 31,
2009.





On
December 7, 2009, John P. Ginzler resigned as our Chief Financial Officer and
Helen R. Park was appointed as interim Chief Financial Officer.  As a
result, we did not have a full-time Chief Financial Officer assisting us during
the preparation of our annual report for the year ended December 31,
2009.  During the audit of our financial statements as of and for the
year ended December 31, 2009, our independent registered public accounting firm
suggested adjusting journal entries that were made by us in connection with the
preparation of our audited financial statements.  The SEC has recently
stated that the delivery of adjusting journal entries by an independent
registered public accounting firm to a company during the course of an audit
creates a presumption that a material weakness in internal controls
exists.




We are
actively seeking to remediate this material weakness.  At or about the
time Mr. Ginzler resigned as our Chief Financial Officer, we hired a consultant
to assist us on a part-time basis with the preparation of our financial
statements and annual report on Form 10-K.  We expect this consultant
to accept a full-time position with us as our new Chief Financial Officer within
the next few months.  The addition of a new Chief Financial Officer
will assist us in preparing financial statements that will not require adjusting
journal entries to be made by us at the suggestion of our independent registered
public accounting firm.





Notwithstanding
the existence of this material weakness in our internal controls, we believe
that our financial statements fairly present, in all material respects, our
balance sheets at December 31, 2009 and 2008 and our statements of
operations, stockholders’ deficit and cash flows for the years ended
December 31, 2009 and 2008 in conformity with GAAP.





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


59


Changes
in Internal Control Over Financial Reporting





There has
been no change in our internal control over financial reporting during our most
recent fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.





Item
8B.  Other Information.





None.





PART
III




Item
9.   Directors, Executive Officers and Corporate
Governance.





Directors
and Executive Officers





The following chart sets forth certain
information about each of our directors and executive officers.





Name
              
              Age
              
              Positions HeldHelen
      R. Park
              
              74
              
              Director,
      Interim Chief Executive Officer and Interim Chief Financial
      OfficerIra
      L. Goldknopf
              
              63
              
              Chairman
      of the Board, President, Chief Scientific Officer and
      Secretary





Directors




We
believe that our board of directors should be composed of individuals with
sophistication and experience in many substantive areas that impact our
business.  We believe that experience, qualifications or skills in the
following areas are most important: (i) organizational leadership and vision;
(ii) strategic, financial and operational planning; (iii) proteomics and
biotechnology industry experience; (iv) corporate restructuring and performance
enhancement; (v) corporate finance; (vi) proteomics and biotechnology industry
experience; and (vii) experience as a board member of other
corporations.  These areas are in addition to the personal
qualifications described in this section.  We believe that our current
board member possesses the professional and personal qualifications necessary
for board service, and have highlighted particularly noteworthy attributes for
this board member below.  The principal occupation and business
experience, for at least the past five years, of our current director is as
follows:




Helen R. Park has served as
the Company’s interim Chief Executive Officer since September 2008 and served as
the Company’s interim Chief Financial Officer from December 2008 to April
2009.  Ms. Park has more than 40 years of experience managing science
and bio-technology companies.  She is the founder of StemTroniX, Inc.,
a developer of adult stem cell therapies, and has served as its President, Chief
Financial Officer, Secretary and Chairman of the Board since March
2008.  She is also the founder of Bronco Technology Inc., a
contracting and consulting firm for bio-technology companies and institutions,
including Bayer Services Technology, UTMD Anderson Cancer Center, Flow Genix, UT
Health Science Center, Agennix, and Meta-Informatics, and has served as its
Chief Executive Officer, President and Secretary since 1994.   Ms.
Park was the founder of Advanced Bio/Chem, Inc. and served as its
Chief Executive Officer and Chairman of the Board from 2000 to June 2004. Ms.
Park also provides management reorganization consulting services to
bio-technology companies located in the greater Houston, Texas area. Ms. Park
received a B.S. in Chemistry from Sam Houston State University and a M.S. in
Biochemistry from the Baylor University College of Medicine.


60




Ira L. Goldknopfhas served
as our Chief Scientific Officer and as a director since May 2004.  In
September 2008, Dr. Goldknopf was appointed our President and Interim Chairman
of the Board.  From August 2000 until May 2004, Dr. Goldknopf served as the
Chief Scientific Officer of Advanced Bio/Chem, which he co-founded in
2000.  Dr. Goldknopf received a B.A. in Chemistry from Hunter College and a
Ph.D. in biochemistry from Kansas State University.  Dr. Goldknopf spent
ten years on the faculty of Baylor College of Medicine and is the author of over
70 publications and a principal inventor of our intellectual
property.





As a
result of these and other professional experiences, our board of directors
possesses particular knowledge and experience in management, operations and
finance that strengthen the board’s qualifications, skills and
experience.





Executive
Officers





Each of
our executive officers serve as members of our board of directors and are
described above.





Board
of Directors





Helen R.
Park and Ira L. Goldknopf constitute all of the members of our board of
directors.  Ms. Park and Dr. Goldknopf will serve until the next
annual meeting of shareholders or until his successor is duly elected and
qualified.  Officers are elected annually by our board of directors
and serve at the discretion of our board of directors.  We do not
currently have any committees of our board of directors.


61


Shareholder
Communications




We have
not implemented any formal procedures for shareholder communication with our
board of directors. Any matter intended for our board of directors, or for any
individual member or members of our board of directors, should be directed to
our corporate secretary at Power3 Medical Products, Inc., 3400 Research Forest
Drive, Suite B2-3, The Woodlands, Texas 77381.  In general, all
shareholder communication delivered to the corporate secretary for forwarding to
the board of directors or specified members of the board of directors will be
forwarded in accordance with the shareholder’s instructions.  However,
the corporate secretary reserves the right to not forward to members of the
board of directors any abusive, threatening or otherwise inappropriate
materials.





Audit
Committee and Audit Committee Financial Expert




Our board
of directors has not created a separately-designated standing audit committee or
a committee performing similar functions.  Accordingly, our full board
of directors acts as our audit committee.  We currently have a small
number of employees and have generated only a small amount of revenue to
date.  In light of the foregoing, our board of directors concluded
that the benefits of retaining an individual who qualifies as an “audit
committee financial expert,” as that term is defined in Item 407(d)(5)(ii) of
Regulation S-K promulgated under the Securities Act, would be outweighed by the
costs of retaining such a person.  As a result, no member of our board
of directors is an “audit committee financial expert.”




Code
of Business Conduct and Ethics




We have
adopted a Code of Business Conduct and Ethics that applies to our principal
executive officer, principal financial officer, principal accounting officer or
controller, and persons performing similar functions.  Our Code of
Business Conduct and Ethics is designed to deter wrongdoing and promote: (i)
honest and ethical conduct, including the ethical handling of actual or apparent
conflicts of interest between personal and professional relationships; (ii)
full, fair, accurate, timely and understandable disclosure in reports and
documents that we file with, or submit to, the SEC and in other public
communications that we make; (iii) compliance with applicable governmental laws,
rules and regulations; (iv) prompt internal reporting of violations of the code
to an appropriate person or persons identified in the code; and (v)
accountability for adherence to the code.




A copy of
our Code of Business Conduct and Ethics is available on our corporate website at
www.power3medicalproducts.com.





Section
16(a) Beneficial Ownership Reporting Compliance





Section 16(a) of the Exchange Act
requires that our officers and directors and persons who beneficially own more
than 10% of our common stock file initial reports of ownership and reports of
changes in beneficial ownership of our common stock with the
SEC.  They are also required to furnish us with copies of all Section
16(a) forms that they file with the SEC.  Based solely on our review
of the copies of such forms received by us, or written representations from such
persons that no reports were required for those persons, with the exception of
Helen R. Park and Ira L. Goldknopf, who failed to file one or more Form 4s to
disclose receipts and dispositions of shares of our common stock that he made
during the year, we believe that all Section 16(a) filing requirements were
satisfied in a timely fashion during our fiscal year ended December 31,
2009.


62


Item
10.  Executive Compensation.





The following table provides certain
summary information concerning compensation earned by the executive officers
named below during the fiscal year ended December 31, 2009.




Summary
Compensation Table




Name and
                              Principal Position
                            
                            Year
                            
                            Salary ($)
                            
                            
                            Bonus ($)
                            
                            
                            Stock
                              Awards
                              ($)(1)
                            
                            
                            Total ($)Helen
      R. Park (2)
                            
                            2009
                            
                            
                            113,714
                            (4)
                            
                            
                            277,500
                            (5)
                            
                            
                            -0-
                            
                            
                            
                            391,214Interim
      CEO and Interim CFO
                            
                            2008
                            
                            
                            20,426
                            
                            
                            
                            -0-
                            
                            
                            
                            -0-
                            
                            
                            
                            20,426Ira
      L. Goldknopf
                            
                            2009
                            
                            
                            215,335
                            (6)
                            
                            
                            -0-
                            
                            
                            
                            -0-
                            
                            
                            
                            215,335President,
      Chief Scientific Officer and Secretary
                            
                            2008
                            
                            
                            69,399
                            
                            
                            
                            -0-
                            
                            
                            
                            -0-
                            
                            
                            
                            69,399John
      P. Ginzler (3)
                            
                            2009
                            
                            
                            75,748
                            (7)
                            
                            
                            -0-
                            
                            
                            
                            222,000
                            
                            
                            
                            297,748Former
      Chief Financial Officer




(1)Represents the grant date
fair value of the award, calculated in accordance with Financial Accounting
Standards Board Accounting Standard Codification Topic 718.  A summary
of the assumptions made in the valuation of these awards is provided herein
under “Item
6.  Management’s Discussion and Analysis of Financial Condition and
Results of Operations – Critical Accounting Policies” and “Item 10.  Executive
Compensation – Securities Issued to Executive Officers for Compensatory
Purposes,” and in our notes to consolidated financial statements
beginning on page F-7 of this report.




(2)During
2009, Ms. Park served as our Interim Chief Financial Officer from January 1st through
April 28th and
from December 7th through
December 31st.




(3) Mr.
Ginzler served as our Chief Financial Officer from April 29, 2009 through
December 7, 2009.




(4)Includes 5,000,000 and 2,560,908
shares of common stock issued to Ms. Park in lieu of salary earned during the
years ended December 31, 2008 and 2009, respectively.  A more detailed
description of these stock issuances is provided herein under“Item
10.  Executive Compensation – Securities Issued to Executive Officers
for Compensatory Purposes.”




(5)
Comprised of 15,000,000 shares of common stock issued to Ms. Park as a
performance bonus.  A more detailed description of this stock issuance
is provided herein under “Item
10.  Executive Compensation – Securities Issued to Executive Officers
for Compensatory Purposes.”




(6)
Comprised of 7,422,558 shares of common stock issued to Dr. Goldknopf in lieu of
salary earned during the year ended December 31, 2009.  A more
detailed description of this stock issuance is provided herein under “Item 10.  Executive
Compensation – Securities Issued to Executive Officers for Compensatory
Purposes.”


63


(7)
Includes 780,640 shares of common stock issued to Mr. Ginzler in lieu of salary
earned during the year ended December 31, 2009.  A more detailed
description of these stock option issuances is provided herein under “Item 10.  Executive
Compensation – Securities Issued to Executive Officers for Compensatory
Purposes.”




Narrative
Disclosure of Executive Compensation




We are a party to an employment
agreement with Ira L. Goldknopf and a consulting agreement with Bronco
Consulting, Inc., a company of which Helen R. Park owns all of the issued and
outstanding capital stock.  Under these agreements, Dr. Goldknopf is
currently entitled to receive an annual base salary of $125,000, and Ms. Park is
currently entitled to receive a consulting fee of $8,334 per
month.  We have also issued a variety of equity securities to Messrs.
Goldknopf and Ginzler and Ms. Park over the past two years.




A summary of the material terms of
these employment agreements and the options, restricted stock awards and shares
of common stock granted to each of these individuals is provided
below.




Employment
Contracts and Consulting Agreements




Helen
R. Park




On
September 7, 2008, we entered into a Consulting Agreement with Bronco
Technology, Inc., a company of which Ms. Park owns all of the issued and
outstanding capital stock, pursuant to which Ms. Park agreed to serve as our
Interim Chief Executive Officer through June 1, 2009.  In
consideration for Ms. Park’s services, we agreed to pay Bronco Technology, Inc.
$5,000 per month and 100,000 shares or common stock per month.  Ms.
Park was also entitled to receive commission payments based upon certain
milestones of progress to be agreed upon by us and Ms. Park.





On June
1, 2009, we entered into an Amended and Restated Consulting Agreement with
Bronco Technology, Inc.  Under the terms of the agreement, Ms. Park
agreed to continue to serve as our Interim Chief Executive Officer until May 31,
2011.   In consideration for Ms. Park’s services, we agreed to
pay Bronco Technology, Inc. $8,334 per month, subject to annual review by our
board of directors or compensation committee of the board of directors, if
any.  We also agreed to pay Bronco Technology a cash commission
payment of an amount equal to one percent (1.0%), but not to exceed $5,000 per
month, of the royalties received by us from the sale of certain of our products
through license agreements signed during the term of the
agreement.





Ira
L. Goldknopf





Effective
May 17, 2009, we entered into an Amended and Restated Employment Agreement with
Dr. Ira L. Goldknopf to continue serving as our President and Chief Scientific
Officer.  The agreement is for a three-year term.  We agreed to
pay Dr. Goldknopf an annual base alary of $100,000 through May 31, 2009, and an
annual base salary of $125,000 for the remainder of the term, subject to annual
review by our board of directors or compensation committee of the board of
directors, if any.  We also agreed to pay Mr. Goldknopf a cash bonus
of $1,000 for each publication authored or co-authored by Dr. Goldknopf and
published in a scientific or professional journal that provides value to
us.


64


John
P. Ginzler





Effective
June 1, 2009, we entered into an Employment Agreement with John P. Ginzler to
continue serving as our Chief Financial Officer.  The agreement was
for an initial term ending on December 31, 2012.   We agreed to
pay him an annual base salary of $120,000 beginning May 1, 2009, subject to
annual review by our board of directors or compensation committee of the board
of directors, if any.  We also agreed to issue him a restricted stock
award with respect to 12,000,000 shares of our common stock and a warrant to
purchase 10,000,000 shares of our common stock.  The restricted stock award
vests in three equal annual installments beginning June 1, 2010.  The
warrant has an exercise price of $0.02 per share and has a term of three
years.





On
December 7, 2010, Mr. Ginzler resigned as our Chief Financial
Officer.  Upon resigning from his position, his employment agreement
and restricted stock award terminated in their entirety.





Securities
Issued to Executive Officers for Compensatory Purposes





Helen
R. Park





In
October 2008, we issued 5,000,000 shares of common stock to Ms. Park as
compensation for services rendered by Ms. Park prior to her appointment as the
Company’s Interim Chief Executive Officer.  At the time the shares were
authorized for issuance, we did not have enough shares of common stock available
to issue to Ms. Park.  In November 2008, we issued a convertible promissory
note and a warrant exercisable into shares of common stock to Ms. Park in
exchange for the 5,000,000 shares of common stock.  The convertible
promissory note had an initial principal amount of $150,000, accrued interest at
an annual rate of 12% and was due on November 18, 2009.  The warrant
is exercisable into 5,000,000 shares of common stock, has an exercise price of
$0.04, and has a term of three years.  In March 2009, we issued 9,571,429
shares of common stock to Ms. Park upon her conversion of the convertible
promissory note and accrued interest.





In June
2009, we issued 2,560,908 restricted shares of common stock to Ms. Park in full
payment of $40,000 due under her consulting agreement through May 31, 2009, plus
accrued interest, and issued 400,000 shares of common stock to Ms. Park which
was due to her under her consulting agreement through May 31, 2009.





In
December 2009, we issued 15,000,000 shares of common stock to Ms. Park as a
performance bonus in accordance with the terms of her consulting
agreement.





Ira
L. Goldknopf





In June
2009, we issued 7,422,558 shares of common stock to Mr. Goldknopf in full
payment of $92,142 of accrued but unpaid salary and accrued interest due under
his employment agreement.


65


John
P. Ginzler





In June
2009, we issued 780,640 shares of common stock to Mr. Ginzler in full payment of
$10,000 of accrued but unpaid salary due under his employment
agreement.





In June
2009, we issued a restricted stock award to Mr. Ginzler with respect to
12,000,000 shares of our common stock and a warrant to purchase 10,000,000
shares of our common stock.  The restricted stock award vests in three
equal annual installments beginning June 1, 2010.  The warrant has an
exercise price of $0.02 per share and has a term of three
years.





Director
Compensation





We do not provide any compensation to
our employee directors and have not adopted a standard compensation package for
non-employee directors serving as members of our board of
directors.  We did not have any non-employee directors on our board of
directors during 2009 and, thus, did not pay any director compensation to any
non-employee directors during 2009.  We intend to add non-employee
directors to our board of directors in the future.  In the event we do
so, we intend to provide them with remuneration that may consist of one or more
of the following: an annual retainer, a fee paid for each board meeting
attended, an annual grant of equity compensation, and reimbursement for
reasonable travel expenses incurred to attend meetings of the board of
directors.  We may provide additional remuneration to board members
participating on committees of our board of directors.





Outstanding
Equity Awards at Fiscal Year End





The following table sets forth, for
each named executive officer, information regarding unexercised warrants, stock
that had not vested, and equity incentive plan awards as of the end of our
fiscal year ended December 31, 2009.  We did not have any stock
options or restricted stock awards outstanding at December 31,
2009.





Warrant AwardsName
                                  
                                  Number of Securities
                                    Underlying
                                    Unexercised Warrants
                                    (#) Exercisable (1)
                                  
                                  
                                  Number of Securities
                                    Underlying Unexercised
                                    Warrants (#)
                                    Unexercisable
                                  
                                  
                                  Warrant
                                    Exercise Price ($)
                                  
                                  Warrant
                                    Expiration DateHelen
      R. Park
                                  
                                  
                                  5,000,000
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  0.04
                                  
                                  11/18/11Ira
      L. Goldknopf
                                  
                                  
                                  36,598,000
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  0.04
                                  
                                  11/4/111,200,000
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  0.04
                                  
                                  1/13/12John
      P. Ginzler
                                  
                                  
                                  10,000,000
                                  
                                  
                                  
                                  -0-
                                  
                                  
                                  
                                  0.02
                                  
                                  6/4/12




(1)These options vested in
full on the date of grant.


66


Item
11.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters.





The
following table sets forth, as of April 9, 2010, information with respect to the
securities holdings of all persons that we have reason to believe, pursuant to
filings with the SEC, may be deemed the beneficial owner of more than 5% of our
outstanding common stock.  The following table also sets forth, as of
such date, the beneficial ownership of our common stock by all executive
officers and directors, individually and as a group.




The
beneficial owners and amount of securities beneficially owned have been
determined in accordance with Rule 13d-3 under the Exchange Act and, in
accordance therewith, includes all shares of our common stock that may be
acquired by such beneficial owners within 60 days of April 9, 2010 upon the
exercise or conversion of any options, warrants or other convertible
securities.  Unless otherwise indicated, each person or entity named
below has sole voting and investment power with respect to all common stock
beneficially owned by that person or entity, subject to the matters set forth in
the footnotes to the table below, and has an address of 120 Gibraltar Road,
Suite 107, Horsham, Pennsylvania 19044.




Name and Address of Beneficial Owner
                
                Amount and Nature
                  of Beneficial
                  Ownership(1)
                
                
                Percentage
                  of Class(1)Helen
      R. Park
                
                
                30,532,337
                (2)
                
                
                7.1
                %Ira
      L. Goldknopf
                
                
                92,474,554
                (3)
                
                
                19.8
                %John
      P. Ginzler
                
                
                10,000,000
                (4)
                
                
                2.3
                %All
      officers and directors as a group (3 persons)
                
                
                133,006,891
                (5)
                
                
                27.6
                %







*Less
than 1%.




(1)This table has been
prepared based on 427,397,313 shares of our common stock outstanding on April 7,
2010.




(2)  Includes
5,000,000 shares issuable upon the exercise of outstanding warrants that have an
exercise price of $0.04.




(3)Includes: (i) 37,798,000
shares issuable upon the exercise of outstanding warrants that have an exercise
price of $0.04, and(ii)
1,500,000 shares issuable upon the conversion of Series B Convertible Preferred
Stock.




(4) Includes 10,000,000
shares issuable upon the exercise of warrants that have an exercise price of
$0.02 per share.




(5) Includes: (i) 42,798,000
shares issuable upon the exercise of outstanding warrants that have an exercise
price of $0.04, (ii) 10,000,000 shares issuable upon the exercise of warrants
that have an exercise price of $0.02 per share, and (iii) 1,500,000 shares
issuable upon the conversion of Series B Convertible Preferred
Stock.


67


Equity
Compensation Plan Information





The
following table sets forth information regarding the number of options,
warrants, rights and similar securities that were outstanding at December 31,
2009 under equity compensation plans that have not been approved by our security
holders.  None of our securities were outstanding at December 31, 2009
under plans that have been approved by our security holders.




Number of
                        securities to be
                        issued upon
                        exercise of
                        outstanding
                        options, warrants
                        and rights
                        (a)
                      
                      
                      Weighted-
                        average
                        exercise price
                        of outstanding
                        options,
                        warrants and
                        rights
                        (b)
                      
                      
                      Number of
                        securities
                        remaining available
                        for future issuance
                        under equity
                        compensation plans
                        (excluding
                        securities reflected
                        in column (a))
                        (c)Equity
      compensation plans approved by security holders
                      
                      
                      -0-
                      
                      
                      
                      -0-
                      
                      
                      
                      -0-Equity
      compensation plans not approved by security holders:2008
      Compensation Plan
                      
                      
                      -0-
                      
                      
                      
                      -0-
                      
                      
                      
                      -0-2009
      Stock Incentive Plan
                      
                      
                      -0-
                      
                      
                      
                      -0-
                      
                      
                      
                      -0-Warrants
      issued to directors, officers and employees
                      
                      
                      52,798,000
                      
                      
                      $
                      0.036
                      
                      
                      
                      -0-Total
                      
                      
                      52,798,000
                      
                      
                      $
                      0.036
                      
                      
                      
                      -0-





Warrants
Issued to Employees




A description of the warrants issued to
our directors and employees that were outstanding at December 31, 2009 is set
forth above under “Item
10.  Executive Compensationand in Note 10 to our audited
consolidated financial statements beginning on page F-1 of this
report.




Stock
Compensation Plans





We have
adopted two additional equity compensation plans that have not been approved by
security holders.  These consist of the Power3 Medical Products, Inc.
2008 Compensation Plan and the Power3 Medical Products, Inc. 2009 Stock
Incentive Plan.




68


Power3
Medical Products, Inc. 2008 Compensation Plan





The
Power3 Medical Products, Inc. 2008 Compensation Plan was adopted on April 16,
2008.  Under the plan, up to 5,000,000 shares of common stock could be
granted to non-executive employees of, and consultants and advisors to, us under
awards that may be made in the form of stock options, restricted stock and
unrestricted stock.  As of April 7, 2010, awards have been granted under
each of the plans with respect to all shares of our common stock available for
issuance under the respective plans and there were no securities issuable upon
the exercise of outstanding options, warrants or rights under the
plan.  On June 6, 2008, we filed a registration statement on
Form S-8, File No. 333-151466, with the SEC covering the public sale
of all 5,000,000 shares of common stock available for issuance under the
plan.





Power3
Medical Products, Inc. 2009 Stock Incentive Plan





In 2009,
we adopted the Power3 Medical Products, Inc. 2009 Stock Incentive
Plan.  Under the plan, 40,000,000 shares of common stock may be
granted to employees, officers and directors of, and consultants and advisors
to, us under awards that may be made in the form of stock options, warrants,
stock appreciation rights, restricted stock, restricted units, unrestricted
stock and other equity-based or equity-related awards.  As of April 7,
2010, all shares of common stock had been issued under the plan.  The plan
terminates in 2019.  On April 22, 2009, we filed a registration
statement on Form S-8, File No. 333-158685, with the SEC covering the
public sale of all 40,000,000 shares of common stock available for issuance
under the plan.





Item
12.  Certain Relationships and Related Transactions, and Director
Independence.





Certain
Relationships and Related Transactions





In
November 2008, we issued a convertible promissory note and a warrant to acquire
shares of our common stock to Dr. Goldknopf to retire all of his outstanding
convertible promissory notes and accrued interest thereon in the aggregate
amount of $1,100,386.  The convertible promissory note is for a
principal amount of $1,097,940, has a term of three years, is convertible into
36,598,000 shares of common stock and accrues interest at an annual rate of
12%.  The warrant is exercisable into 36,598,000 shares of common
stock, has an exercise price of $0.04 per share and has a term of three
years.





In
November 2008, we issued a promissory note to Dr. Goldknopf in exchange for the
transfer by Mr. Goldknopf of shares of common stock to a third party for payment
of debt owed by us to the third party.  The note was for a principal
amount of $18,927, had an annual interest rate of 6% and was due May 20,
2009.





In
January 2009, we issued a convertible promissory note and a warrant to acquire
shares of our common stock to Mr. Goldknopf in consideration for the return of
1,200,000 shares of common stock held by Mr. Goldknopf.  The
promissory note was for a principal amount of $8,256, had a term of one year,
was convertible into 1,200,000 shares of common stock, and accrued interest at
an annual rate of 12%.  The warrant is exercisable into 1,200,000
shares of common stock and has an exercise price of $0.04 per
share.





In March
2009, we issued 46,910,896 shares of common stock to Dr. Goldknopf to retire the
convertible promissory note with an outstanding principal balance of $1,097,940
plus accrued interest and the convertible promissory note with an outstanding
balance of $27,185 plus accrued interest.


69


We have
entered into employment agreements and consulting agreements with Helen R. Park,
Ira L. Goldknopf and John P. Ginzler and have issued warrants, restricted stock
awards and shares of common stock.  A description of the agreements,
warrants, restricted stock awards and common stock grants is set forth under
“Item 10.  Executive
Compensation” of this report.





Director
Independence





Helen R.
Park, our Interim Chief Executive Officer and Interim Chief Financial Officer,
and Ira L. Goldknopf, our President, Chief Scientific Officer and Secretary,
constitute all members of our board of directors.  They will each
serve until the next annual meeting of shareholders or until his successor is
duly elected and qualified.  Pursuant to Item 407(a)(1)(ii) of
Regulation S-K promulgated under the Securities Act, we have adopted the
definition of “independent director” as set forth in Rules 5000(a)(19) and
5605(a)(2) of the rules of the Nasdaq Stock Market.  Ms. Park and Dr.
Goldknopf do not qualify as “independent directors” pursuant to such
rules.  Our board of directors has not created separately-designated
standing committees and Ms. Park and Dr. Goldknopf are not “independent” for
purposes of Rule 5605(c)(2) of the rules of the Nasdaq Stock
Market.  Officers are elected annually by our board of directors and
serve at the discretion of our board of directors.




Item
13.  Principal Accountant Fees and Services.





The
following table presents fees for professional audit services performed by
M&K CPAS, PLLC for the audit of our annual financial statements for our
fiscal years ended December 31, 2009 and 2008, and fees billed for other
services rendered by M&K CPAS, PLLC during such years.




2009
                    
                    
                    2008Audit
      Fees:
                    
                    $
                    56,000
                    
                    
                    $
                    52,811Audit-Related
      Fees:
                    
                    
                    —
                    
                    
                    
                    —Tax
      Fees:
                    
                    
                    —
                    
                    
                    
                    2,850All
      Other Fees:
                    
                    
                    —
                    
                    
                    
                    —Total:
                    
                    $
                    56,000
                    
                    
                    $
                    55,661





Audit Fees consist of fees
billed for professional services rendered by our principal accountant for the
audit of our annual financial statements and review of our interim financial
statements included in our quarterly reports and services that are normally
provided by our principal accountant in connection with statutory and regulatory
filings or engagements.




70




Audit-Related Fees consist of
fees billed for assurance and related services rendered by our principal
accountant that are reasonably related to the performance of the audit or review
of our consolidated financial statements and are not reported under “Audit
Fees.”
  Tax Fees consists of fees
billed for professional services rendered by our principal accountant for tax
compliance, tax advice and tax planning.  These services include
assistance regarding federal and state tax compliance and filings.
  All Other Fees consist of
fees billed for products and services provided by our principal accountant,
other than those services described above.




Our board of directors serves as our
audit committee.  It approves the engagement of our independent
auditors, and meets with our independent auditors to approve the annual scope of
accounting services to be performed and the related fee estimates.  It
also meets with our independent auditors prior to the completion of our annual
audit and reviews the results of their audit and review of our annual and
interim consolidated financial statements, respectively.  During the
course of the year, our chairman has the authority to pre-approve requests for
services that were not approved in the annual pre-approval
process.  The chairman reports any interim pre-approvals at the
following quarterly meeting.  At each of the meetings, management and
our independent auditors update our board of directors regarding material
changes to any service engagement and related fee estimates as compared to
amounts previously approved.  During 2009 and 2008, all audit and
non-audit services performed by our independent accountants were pre-approved by
our board of directors in accordance with the foregoing procedures.





Item
14.  Exhibits




The
following exhibits are filed as part of this report:





Exhibit No.
              
              Exhibit3.1
              
              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 to 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)


71





3.6
              
              Certificate
      of Amendment to the Certificate of Incorporation (incorporated by
      reference to Exhibit 3.1 to the Company’s Form 10-KSB filed on November
      14, 2007)3.7
              
              Certificate
      of Amendment to the Certificate of Incorporation dated February 4,
      20093.8
              
              Bylaws
      (incorporated by reference to Exhibit 2.10 to the Company’s Form 10-SB
      filed on September 28, 1998)10.1
              
              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).10.2
              
              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).10.3
              
              Exclusive
      License Agreement, dated June 28, 2004, by and between Baylor College of
      Medicine and the Company (incorporated by reference to Exhibit 10.1 to the
      Company’s Form 10-QSB/A for the quarter ended September 30,
      2004).10.4
              
              Promissory
      Note, dated April 5, 2005, executed by the Company in favor of Cordillera
      Fund LP in the amount of $251,000, (incorporated by reference to Exhibit
      10.1 to the Company’s Form 10-QSB filed August 22,
  2005).10.5
              
              Promissory
      Note, dated September 5, 2005, executed by the Company in favor of
      Cordillera Fund LP in the amount of $200,000 (incorporated by reference to
      Exhibit 10.3 to the Company’s Form 8-K filed on September 9,
      2005).10.6
              
              Form
      of Convertible Debenture, dated June 30, 2008 by and between Able Income
      Fund LLC and the Company (incorporated by reference to Exhibit 10.1 to the
      Company’s Form 8-K dated June 30, 2008).10.7
              
              Form
      of Warrant, dated June 30, 2008, by and between Able Income Fund LLC and
      the Company (incorporated by reference to Exhibit 10.4 to the Company’s
      Form 8-K dated June 30, 2008).10.8
              
              Form
      of Convertible Debenture, dated July 29, 2008, by and between Able Income
      Fund LLC and the Company (incorporated by reference to Exhibit 10.1 to the
      Company’s Form 8-K dated July 29, 2008).10.9
              
              Form
      of Warrant, dated July 29, 2008, by and between Able Income Fund LLC and
      the Company (incorporated by reference to Exhibit 10.4 to the Company’s
      Form 8-K dated July 29, 2008).10.10
              
              Form
      of Convertible Promissory Note, dated November 4, 2008 by, and between the
      Company and certain investors, including Ira Goldknopf (incorporated by
      reference to Exhibit 10.1 to the Company’s Form 8-K dated November 4,
      2008).


72





10.11
              
              Form
      of Warrant, dated November 4, 2008 by and between the Company and certain
      investors, including Ira Goldknopf (incorporated by reference to Exhibit
      10.2 to the Company’s Form 8-K dated November 4, 2008).10.12
              
              Employment
      Agreement, dated April 29, 2009, by and between the Company and John P.
      Ginzler (incorporated by reference to Exhibit 10.2 to the Company’s Form
      10-Q filed August 12, 2009).10.13
              
              Amended
      and Restated Employment Agreement, dated May 17, 2009, by and between the
      Company and Ira L. Goldknopf (incorporated by reference to Exhibit 10.3 to
      the Company’s Form 10-Q filed August 12, 2009).10.14
              
              Amended
      and Restated Consulting Agreement, dated June 1, 2009, by and between the
      Company and Bronco Technologies, Inc. (incorporated by reference to
      Exhibit 10.4 to the Company’s Form 10-Q filed August 12,
      2009).10.15
              
              Second
      Modification and Ratification of Lease Agreement, dated October 1, 2009,
      by and between Vista Woodlands Partners, Ltd. and the
    Company23.1
              
              Consent
      of M&K CPAS, PLLC31.1
              
              Certification
      of Chief Executive Officer of the registrant required by
      Rule 13a-14(a) under the Securities Exchange Act of 1934, as
      amended31.2
              
              Certification
      of Chief Financial Officer of the registrant required by
      Rule 13a-14(a) under the Securities Exchange Act of 1934, as
      amended32.1
              
              Certification
      of Chief Executive Officer and Chief Financial Officer of the registrant
      required by Rule 13a-14(b) under the Securities Exchange Act of
      1934, as amended




73


SIGNATURES





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





POWER3
      MEDICAL PRODUCTS, INC.Date:  April
      15, 2010
              By:
              /s/  Helen R.
  ParkHelen
      R. ParkInterim
      Chief Executive Officer





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





Signature
              
              Title
              
              Date/s/  Helen R.
Park
              
              Interim
      CEO, Interim CFO and
              
              April
      15, 2010Helen
      R. Park
              
              Member
      of the Board (Principal
                Executive
      Officer and Principal
                Financial
      and Accounting Officer)/s/  Ira L.
    Goldknopf
              
              President,
      Chief Scientific Officer,
              
              April
      15, 2010Ira
      L. Goldknopf
              
              Secretary
      and Chairman of the Board




74




POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Enterprise)


FINANCIAL
STATEMENTS





Table of
Contents





Report
      of Independent Registered Public Accounting Firm
              F-2Balance
      Sheets at December 31, 2009 and 2008
              F-3Statements
      of Operations for the Years Ended December 31, 2009 and 2008 and the
      period beginning May 18, 2004 (inception) through December 31,
      2009
              F-4Statements
      of Stockholders’ Deficit for all Years Subsequent to May 18, 2004
      (inception)
              F-5Statements
      of Stockholders’ Deficit – Other Equity Items for all Years Subsequent to
      May 18, 2004 (inception)
              F-6Statements
      of Cash Flows for the Years Ended December 31, 2009 and 2008 and the
      period beginning May 18, 2004 (inception) through December 31,
      2009
              F-7Notes
      to Financial Statements
              F-8




F-1





REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM





To the
Board of Directors


Power3
Medical Products, Inc.


(A
Development Stage Entity)


The
Woodlands, Texas




We have
audited the accompanying balance sheets of Power3 Medical Products, Inc. (A
Development Stage Entity) (the “Company”) as of December 31, 2009 and 2008 and
the related statements of operations, stockholders' deficit and cash flows for
the years then ended.  These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.




We
conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.





In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Power3 Medical Products,
Inc. as of December 31, 2009 and 2008 and the results of its operations and cash
flows for the period described above in conformity with accounting principles
generally accepted in the United States of America.





The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern.  The Company has suffered recurring
losses from operations and maintains a working capital deficit. These matters
raise substantial doubt about the Company’s ability to continue as a going
concern.  These financial statements do not include any adjustments
relating to the recoverability and classification of asset carrying amounts or
the amount and classification of liabilities that may result should the Company
be unable to continue as a going concern. See note 3 to the financial statements
for further information regarding this uncertainty.





/s/M&K
CPAS, PLLC





www.mkacpas.com


Houston,
Texas


April 13,
2010


F-2





Power3
Medical Products, Inc.


(A
Development Stage Entity)


Balance
Sheets





December 31,2009
                      
                      
                      2008AssetsCash
      and equivalents
                      
                      $
                      -
                      
                      
                      $
                      8,331Other
      current assets
                      
                      
                      -
                      
                      
                      
                      6,645Total
      current assets
                      
                      
                      -
                      
                      
                      
                      14,976Property
      and equipment, net of accumulated depreciation of $107,581 and $101,253 at
      December 31, 2009 and 2008, respectively
                      
                      
                      683
                      
                      
                      
                      6,253Deposits
                      
                      
                      5,000
                      
                      
                      
                      5,450Other
      assets
                      
                      
                      100
                      
                      
                      
                      -Total
      assets
                      
                      $
                      5,783
                      
                      
                      $
                      26,679Liabilities
      and stockholder's deficitAccounts
      payable
                      
                      $
                      999,631
                      
                      
                      $
                      1,043,682Accounts
      payable — related party
                      
                      
                      96,507Notes
      payable – in default
                      
                      
                      451,000
                      
                      
                      
                      451,000Notes
      payable – net of unamortized discount of $-0- and $45,825 at December 31,
      2009 and 2008, respectively
                      
                      
                      -
                      
                      
                      
                      64,174Notes
      payable – related parties
                      
                      
                      15,000
                      
                      
                      
                      68,927Convertible
      debentures – in default, net of unamortized discount of $-0- and $97,036
      at December 31, 2009 and 2008, respectively
                      
                      
                      351,255
                      
                      
                      
                      767,974Convertible
      debentures, net of unamortized discount of $21,621 and $577,668 at
      December 31, 2009 and 2008, respectively
                      
                      
                      28,379
                      
                      
                      
                      442,332Convertible
      debentures – related party, net of unamortized discount of $-0- and
      $672,836 at December 31, 2009 and 2008, respectively
                      
                      
                      30,000
                      
                      
                      
                      696,599Derivative
      liabilities
                      
                      
                      14,456,424
                      
                      
                      
                      1,352,247Other
      current liabilities
                      
                      
                      593,891
                      
                      
                      
                      617,486Total
      current liabilities
                      
                      
                      17,022,087
                      
                      
                      
                      5,504,421Total
      liabilities
                      
                      
                      17,022,087
                      
                      
                      
                      5,504,421Stockholders'
      deficit:Preferred
      Stock – $0.01 par value: 50,000,000 shares authorized; 1,500,000 shares
      issued and outstanding as of December 31, 2009 and 2008,
      respectively
                      
                      
                      1,500
                      
                      
                      
                      1,500Common
      Stock – $0.001 par value: 600,000,000 shares authorized; 434,167,000 and
      149,959,290 shares issued and outstanding as of December 31, 2009 and
      2008, respectively
                      
                      
                      434,167
                      
                      
                      
                      149,960Additional
      paid-in capital
                      
                      
                      71,984,083
                      
                      
                      
                      63,499,938Treasury
      stock
                      
                      
                      (16,000
                      )
                      
                      
                      -Stock
      held in escrow
                      
                      
                      -
                      
                      
                      
                      (20,000
                      )Common
      stock payable
                      
                      
                      135,000
                      
                      
                      
                      123,286Deficit
      accumulated during development stage
                      
                      
                      (77,873,554
                      )
                      
                      
                      (57,550,926
                      )Deficit
      accumulated before entering development stage
                      
                      
                      (11,681,500
                      )
                      
                      
                      (11,681,500
                      )Total
      stockholders' deficit
                      
                      
                      (17,016,304
                      )
                      
                      
                      (5,477,742
                      )Total
      liabilities and stockholders' deficit
                      
                      $
                      5,783
                      
                      
                      $
                      26,679





The
accompanying notes are an integral part of these financial
statements


F-3





Power3
Medical Products, Inc.


(A
Development Stage Entity)


Statements
of Operations





Period FromMay 18, 2004For the Twelve Months Ended
                                
                                
                                ThroughDecember 31,
                                
                                
                                December 31,2009
                                
                                
                                2008
                                
                                
                                2009(unaudited)Net
      revenue
                                
                                $
                                115,000
                                
                                
                                $
                                1,025
                                
                                
                                $
                                542,249Operating
      expenses:Employee
      compensation and benefits
                                
                                
                                368,067
                                
                                
                                
                                1,041,522
                                
                                
                                
                                31,417,579Professional
      and consulting fees
                                
                                
                                4,925,829
                                
                                
                                
                                1,962,113
                                
                                
                                
                                16,228,769Impairment
      of goodwill
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                13,371,776Other
      selling, general and administrative expenses
                                
                                
                                143,297
                                
                                
                                
                                492,479
                                
                                
                                
                                2,186,321Total
      operating expenses
                                
                                
                                5,437,193
                                
                                
                                
                                3,496,114
                                
                                
                                
                                63,204,445Loss
      from operations
                                
                                
                                (5,322,193
                                )
                                
                                
                                (3,495,089
                                )
                                
                                
                                (62,662,196
                                )Other
      income (expense):Derivative
      gain (loss)
                                
                                
                                (13,045,921
                                )
                                
                                
                                4,415,110
                                
                                
                                
                                (6,022,948
                                )Gain
      on legal settlement
                                
                                
                                -
                                
                                
                                
                                17,875
                                
                                
                                
                                36,764Interest
      income
                                
                                
                                -
                                
                                
                                
                                576
                                
                                
                                
                                7,867Gain
      (loss) on settlement of debt
                                
                                
                                (426,574
                                )
                                
                                
                                464,872
                                
                                
                                
                                1,582,872Interest
      expense
                                
                                
                                (416,886
                                )
                                
                                
                                (1,541,418
                                )
                                
                                
                                (5,679,294
                                )Mandatory
      prepayment penalty
                                
                                
                                -
                                
                                
                                
                                -
                                
                                
                                
                                (420,000
                                )Other
      income/(expense)
                                
                                
                                -
                                
                                
                                
                                1,290
                                
                                
                                
                                (194,886
                                )Total
      other income/(expense)
                                
                                
                                (13,889,381
                                )
                                
                                
                                3,358,305
                                
                                
                                
                                (10,689,625
                                )Net
      loss
                                
                                
                                (19,211,574
                                )
                                
                                
                                (136,784
                                )
                                
                                
                                (73,351,821
                                )Deemed
      dividend
                                
                                
                                (1,111,054
                                )
                                
                                
                                (12,071
                                )
                                
                                
                                (1,140,760
                                )Net
      loss attributable to common stockholders
                                
                                $
                                (20,322,628
                                )
                                
                                $
                                (148,855
                                )
                                
                                $
                                (74,492,581
                                )Net
      loss per share - basic and diluted
                                
                                $
                                (0.06
                                )
                                
                                $
                                (0.00
                                )Weighted
      average number of sharesoutstanding -
      basic and diluted
                                
                                
                                331,737,780
                                
                                
                                
                                135,096,000





The
accompanying notes are an integral part of these financial
statements


F-4





Power3
Medical Products, Inc.


(A
Development Stage Entity)


Statement
of Stockholders' Deficit





AdditionalCommon Stock
                                                        
                                                        
                                                        Preferred Stock
                                                        
                                                        
                                                        Paid-in
                                                        
                                                        
                                                        Other Equity
                                                        
                                                        
                                                        AccumulatedShares
                                                        
                                                        
                                                        Par Value
                                                        
                                                        
                                                        Shares
                                                        
                                                        
                                                        Par Value
                                                        
                                                        
                                                        Capital
                                                        
                                                        
                                                        Items (1)
                                                        
                                                        
                                                        Deficit
                                                        
                                                        
                                                        TotalBalances
      as of Beginning of Development Stage — May 18, 2004
                                                        
                                                        
                                                        14,407,630
                                                        
                                                        
                                                        
                                                        14,407
                                                        
                                                        
                                                        
                                                        3,870,000
                                                        
                                                        
                                                        
                                                        3,870
                                                        
                                                        
                                                        
                                                        14,225,974
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (11,681,500
                                                        )
                                                        
                                                        
                                                        2,562,751Issued
      shares for compensation
                                                        
                                                        
                                                        27,945,000
                                                        
                                                        
                                                        
                                                        27,945
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        25,423,555
                                                        
                                                        
                                                        
                                                        (25,451,500
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Issued
      shares for services
                                                        
                                                        
                                                        4,910,000
                                                        
                                                        
                                                        
                                                        4,910
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        4,850,090
                                                        
                                                        
                                                        
                                                        (535,000
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        4,320,000Issued
      shares for acquisition of equipment
                                                        
                                                        
                                                        15,000,000
                                                        
                                                        
                                                        
                                                        15,000
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        13,485,000
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        13,500,000Stock
      option expense
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        626,100
                                                        
                                                        
                                                        
                                                        (626,100
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Issued
      shares for cash
                                                        
                                                        
                                                        242,167
                                                        
                                                        
                                                        
                                                        242
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        314,575
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        314,817Cancelled
      shares per cancellation agreement
                                                        
                                                        
                                                        (160,000
                                                        )
                                                        
                                                        
                                                        (160
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (71,840
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (72,000
                                                        )Issued
      shares to convert Series A perferred shares to common
    shares
                                                        
                                                        
                                                        3,000,324
                                                        
                                                        
                                                        
                                                        3,001
                                                        
                                                        
                                                        
                                                        (3,870,000
                                                        )
                                                        
                                                        
                                                        (3,870
                                                        )
                                                        
                                                        
                                                        3,377,974
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (3,380,975
                                                        )
                                                        
                                                        
                                                        (3,870
                                                        )Stock
      based compensation
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        8,311,012
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        8,311,012Net
      reclassification of derivative liabilities
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (3,347,077
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (3,347,077
                                                        )Net
      loss (from May 18, 2004 to December 31, 2004)
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (15,236,339
                                                        )
                                                        
                                                        
                                                        (15,236,339
                                                        )Balance
      at December 31, 2004
                                                        
                                                        
                                                        65,345,121
                                                        
                                                        
                                                        
                                                        65,345
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        58,884,351
                                                        
                                                        
                                                        
                                                        (18,301,588
                                                        )
                                                        
                                                        
                                                        (30,298,814
                                                        )
                                                        
                                                        
                                                        10,349,294Cancelled
      shares returned from employee
                                                        
                                                        
                                                        (1,120,000
                                                        )
                                                        
                                                        
                                                        (1,120
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (1,307,855
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (1,308,975
                                                        )Issued
      shares for compensation
                                                        
                                                        
                                                        140,000
                                                        
                                                        
                                                        
                                                        140
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        41,860
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        42,000Issued
      shares for services
                                                        
                                                        
                                                        850,000
                                                        
                                                        
                                                        
                                                        850
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        155,150
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        156,000Amortize
      deferred compensation expense
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        13,222,517
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        13,222,517Net
      loss
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (27,134,865
                                                        )
                                                        
                                                        
                                                        (27,134,865
                                                        )Balance
      at December 31, 2005
                                                        
                                                        
                                                        65,215,121
                                                        
                                                        
                                                        
                                                        65,215
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        57,773,506
                                                        
                                                        
                                                        
                                                        (5,079,071
                                                        )
                                                        
                                                        
                                                        (57,433,679
                                                        )
                                                        
                                                        
                                                        (4,674,029
                                                        )Issued
      shares for services
                                                        
                                                        
                                                        2,449,990
                                                        
                                                        
                                                        
                                                        2,449
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        311,865
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        314,314Issued
      shares for cash
                                                        
                                                        
                                                        2,452,746
                                                        
                                                        
                                                        
                                                        2,452
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        222,548
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        225,000Issued
      shares for compensation
                                                        
                                                        
                                                        1,253,098
                                                        
                                                        
                                                        
                                                        1,254
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        176,763
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        178,017Adoption
      of FAS 123R
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (475,324
                                                        )
                                                        
                                                        
                                                        475,324
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Amortize
      deferred compensation expense
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        4,603,747
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        4,603,747Net
      loss
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (6,415,969
                                                        )
                                                        
                                                        
                                                        (6,415,969
                                                        )Balance
      at December 31, 2006
                                                        
                                                        
                                                        71,370,955
                                                        
                                                        
                                                        
                                                        71,370
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        58,009,358
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (63,849,648
                                                        )
                                                        
                                                        
                                                        (5,768,920
                                                        )Issued
      shares for services
                                                        
                                                        
                                                        1,810,000
                                                        
                                                        
                                                        
                                                        1,810
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        282,390
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        284,200Issued
      shares for conversion of debt
                                                        
                                                        
                                                        22,265,224
                                                        
                                                        
                                                        
                                                        22,264
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        606,412
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        628,676Issued
      shares for warrants exercised
                                                        
                                                        
                                                        5,270,832
                                                        
                                                        
                                                        
                                                        5,272
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        336,396
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        341,668Issued
      shares for cash
                                                        
                                                        
                                                        7,630,625
                                                        
                                                        
                                                        
                                                        7,632
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        992,818
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,000,450Placement
      agent fees
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (58,500
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (58,500
                                                        )Stock
      received
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        100
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        100Unreturned
      shares
                                                        
                                                        
                                                        5,000
                                                        
                                                        
                                                        
                                                        5
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        4,495
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        4,500Deemed
      dividend
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        17,635
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (17,635
                                                        )
                                                        
                                                        
                                                        -Net
      loss
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (5,216,288
                                                        )
                                                        
                                                        
                                                        (5,216,288
                                                        )Balance
      at December 31, 2007
                                                        
                                                        
                                                        108,352,636
                                                        
                                                        
                                                        
                                                        108,353
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        60,191,104
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (69,083,571
                                                        )
                                                        
                                                        
                                                        (8,784,114
                                                        )Common
      stock issued for services
                                                        
                                                        
                                                        7,482,910
                                                        
                                                        
                                                        
                                                        7,483
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        584,858
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        592,341Common
      stock issued for cash
                                                        
                                                        
                                                        7,492,875
                                                        
                                                        
                                                        
                                                        7,493
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        639,911
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        647,404Common
      stock issued for conversion of debt
                                                        
                                                        
                                                        22,172,536
                                                        
                                                        
                                                        
                                                        22,173
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,568,626
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,590,799Common
      stock issued for lawsuit settlement
                                                        
                                                        
                                                        325,000
                                                        
                                                        
                                                        
                                                        325
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        30,550
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        30,875Issued
      shares for payables
                                                        
                                                        
                                                        2,133,333
                                                        
                                                        
                                                        
                                                        2,133
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        186,867
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        189,000Common
      stock held in escrow
                                                        
                                                        
                                                        2,000,000
                                                        
                                                        
                                                        
                                                        2,000
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        18,000
                                                        
                                                        
                                                        
                                                        (20,000
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Preferred
      stock issued for services
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,500,000
                                                        
                                                        
                                                        
                                                        1,500
                                                        
                                                        
                                                        
                                                        357,000
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        358,500Deemed
      dividends
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        12,071
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (12,071
                                                        )
                                                        
                                                        
                                                        -Loss
      on related party debt conversion
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (89,049
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (89,049
                                                        )Common
      stock payable
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        123,286
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        123,286Net
      loss
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (136,784
                                                        )
                                                        
                                                        
                                                        (136,784
                                                        )Balance
      at December 31, 2008
                                                        
                                                        
                                                        149,959,290
                                                        
                                                        
                                                        
                                                        149,960
                                                        
                                                        
                                                        
                                                        1,500,000
                                                        
                                                        
                                                        
                                                        1,500
                                                        
                                                        
                                                        
                                                        63,499,938
                                                        
                                                        
                                                        
                                                        103,286
                                                        
                                                        
                                                        
                                                        (69,232,426
                                                        )
                                                        
                                                        
                                                        (5,477,742
                                                        )Common
      stock issued for conversion of debt
                                                        
                                                        
                                                        150,701,039
                                                        
                                                        
                                                        
                                                        150,701
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,154,621
                                                        
                                                        
                                                        
                                                        (82,944
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        2,222,378Common
      stock payable
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        116,000
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        116,000Common
      stock issed upon exercise of warrants
                                                        
                                                        
                                                        11,789,509
                                                        
                                                        
                                                        
                                                        11,790
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        267,042
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        278,832Common
      stock issued for services
                                                        
                                                        
                                                        112,201,562
                                                        
                                                        
                                                        
                                                        112,201
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        4,403,503
                                                        
                                                        
                                                        
                                                        (14,286
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        4,501,418Common
      stock issued for cash
                                                        
                                                        
                                                        11,515,600
                                                        
                                                        
                                                        
                                                        11,516
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        73,640
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        85,156Return
      of common stock held in escrow
                                                        
                                                        
                                                        (800,000
                                                        )
                                                        
                                                        
                                                        (800
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        800
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -Deemed
      dividends
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        1,111,054
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (1,111,054
                                                        )
                                                        
                                                        
                                                        -Release
      of common stock held in escrow
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        20,000
                                                        
                                                        
                                                        
                                                        4,000
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        24,000Common
      stock rescinded for debt
                                                        
                                                        
                                                        (1,200,000
                                                        )
                                                        
                                                        
                                                        (1,200
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (7,056
                                                        )
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (8,256
                                                        )Common
      stock contributed for debt payment
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        276,558
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        276,558Options
      issued for services
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        176,927
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        176,927Net
      loss
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        -
                                                        
                                                        
                                                        
                                                        (19,211,574
                                                        )
                                                        
                                                        
                                                        (19,211,574
                                                        )Balance
      at December 31, 2009
                                                        
                                                        
                                                        434,167,000
                                                        
                                                        
                                                        $
                                                        434,167
                                                        
                                                        
                                                        $
                                                        1,500,000
                                                        
                                                        
                                                        $
                                                        1,500
                                                        
                                                        
                                                        $
                                                        71,984,083
                                                        
                                                        
                                                        $
                                                        119,000
                                                        
                                                        
                                                        $
                                                        (89,555,054
                                                        )
                                                        
                                                        $
                                                        (17,016,304
                                                        )





(1) A
more detailed description of the items comprising "Other Equity Items" is set
forth herein following this Statement of Stockholders' Deficit.





The
accompanying notes are an integral part of these financial
statements


F-5





Power3
Medical Products, Inc.


(A
Development Stage Entity)


Statements
of Stockholders Deficit — Other Equity Items





Deferred
                                              Compensation
                                              Expense
                                            
                                            
                                            Treasury
                                              Stock
                                            
                                            
                                            StockHeld
                                              inEscrow
                                            
                                            
                                            Common
                                              Stock
                                              Payable
                                            
                                            
                                            TotalBalances
      as of beginning of development stage May 18, 2004
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Issued
      shares for compensation
                                            
                                            
                                            (25,451,500
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (25,451,500
                                            )Issued
      shares for services
                                            
                                            
                                            (535,000
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (535,000
                                            )Stock
      option expense
                                            
                                            
                                            (626,100
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (626,100
                                            )Stock
      based compensation
                                            
                                            
                                            8,311,012
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            8,311,012Balance
      at December 31, 2004
                                            
                                            
                                            (18,301,588
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (18,301,588
                                            )Amortize
      deferred compensation expense
                                            
                                            
                                            13,222,517
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            13,222,517Balance
      at December 31, 2005
                                            
                                            
                                            (5,079,071
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (5,079,071
                                            )Adoption
      of FAS 123R
                                            
                                            
                                            475,324
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            475,324Amortize
      deferred compensation expense
                                            
                                            
                                            4,603,747
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            4,603,747Balance
      at December 31, 2006
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Balance
      at December 31, 2007
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Stock
      held in escrow
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (20,000
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (20,000
                                            )Common
      stock payable
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            123,286
                                            
                                            
                                            
                                            123,286Balance
      at December 31, 2008
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (20,000
                                            )
                                            
                                            
                                            123,286
                                            
                                            
                                            
                                            103,286Common
      stock issued for conversion of debt
                                            
                                            
                                            -
                                            
                                            
                                            
                                            7,056
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (90,000
                                            )
                                            
                                            
                                            (82,944
                                            )Common
      stock payable
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            116,000
                                            
                                            
                                            
                                            116,000Common
      stock issued for services
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (14,286
                                            )
                                            
                                            
                                            (14,286
                                            )Return
      of common stock held in escrow
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (16,000
                                            )
                                            
                                            
                                            16,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -Release
      of common stock held in escrow
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            4,000
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            4,000Common
      stock rescinded for debt
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (7,056
                                            )
                                            
                                            
                                            -
                                            
                                            
                                            
                                            -
                                            
                                            
                                            
                                            (7,056
                                            )Balance
      at December 31, 2009
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            (16,000
                                            )
                                            
                                            $
                                            -
                                            
                                            
                                            $
                                            135,000
                                            
                                            
                                            $
                                            119,000





The
accompanying notes are an integral part of these financial
statements


F-6





Power3
Medical Products, Inc.


(A
Development Stage Entity)


Statements
of Cash Flows





Period FromMay 18, 2004For the Twelve Months Ended
                  
                  
                  ThroughDecember 31,
                  
                  
                  December 31,2009
                  
                  
                  2008
                  
                  
                  2009(unaudited)Cash
      flows from operating activitiesNet
      loss
                  
                  $
                  (19,211,574
                  )
                  
                  $
                  (136,784
                  )
                  
                  $
                  (73,351,821
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:(Gain)
      loss on conversion of financial instruments
                  
                  
                  426,574
                  
                  
                  
                  (461,670
                  )
                  
                  
                  (1,579,670
                  )Impairment
      of goodwill
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  13,371,776Impairment
      of intangible assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  179,788Loss
      on previously capitalized lease
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  34,243Amortization
      of debt discounts and deferred finance costs
                  
                  
                  258,384
                  
                  
                  
                  1,198,688
                  
                  
                  
                  3,983,814Change
      in derivative liability, net of bifurcation
                  
                  
                  13,045,921
                  
                  
                  
                  (4,415,110
                  )
                  
                  
                  7,176,849Stock
      issued for compensation and services
                  
                  
                  4,794,345
                  
                  
                  
                  714,627
                  
                  
                  
                  38,165,017Debt
      issued for compensation and services
                  
                  
                  -
                  
                  
                  
                  1,028,927
                  
                  
                  
                  1,028,927Stock
      issued for settlement of lawsuit
                  
                  
                  -
                  
                  
                  
                  30,875
                  
                  
                  
                  30,875Depreciation
      expense
                  
                  
                  6,328
                  
                  
                  
                  2,294
                  
                  
                  
                  107,582Release
      of stock held in escrow
                  
                  
                  24,000
                  
                  
                  
                  -
                  
                  
                  
                  24,000Other
      non-cash items
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (34,933
                  )Changes
      in operating assets and liabilities:Prepaid
      expenses and other current assets
                  
                  
                  -
                  
                  
                  
                  16,147
                  
                  
                  
                  186,084Inventory
      and other assets
                  
                  
                  6,995
                  
                  
                  
                  16,602
                  
                  
                  
                  23,597Accounts
      payable and other liabilities
                  
                  
                  207,466
                  
                  
                  
                  558,400
                  
                  
                  
                  3,380,674Net
      cash used in operating activities
                  
                  
                  (441,561
                  )
                  
                  
                  (1,447,004
                  )
                  
                  
                  (7,273,198
                  )Cash
      flows from investing activitiesIncrease
      in property and equipment
                  
                  
                  (758
                  )
                  
                  
                  (2,748
                  )
                  
                  
                  (142,508
                  )Increase
      in other assets
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  (179,786
                  )Net
      cash used in investing activities
                  
                  
                  (758
                  )
                  
                  
                  (2,748
                  )
                  
                  
                  (322,294
                  )Cash
      flows from financing activitiesProceeds
      from sale of common stock
                  
                  
                  85,156
                  
                  
                  
                  647,404
                  
                  
                  
                  2,349,327Borrowings
      on notes payable – related party
                  
                  
                  20,000
                  
                  
                  
                  45,000
                  
                  
                  
                  95,376Borrowings
      on notes payable
                  
                  
                  50,000
                  
                  
                  
                  760,000
                  
                  
                  
                  3,838,430Principal
      payments on notes payable – related party
                  
                  
                  -
                  
                  
                  
                  (30,000
                  )
                  
                  
                  (47,300
                  )Principal
      payments on notes payable
                  
                  
                  -
                  
                  
                  
                  (90,000
                  )
                  
                  
                  (122,478
                  )Proceeds
      from exercise of warrants
                  
                  
                  278,832
                  
                  
                  
                  -
                  
                  
                  
                  278,832Proceeds
      from CD, warrants and rights net of issuance cost
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  1,200,709Net
      cash provided by financing activities
                  
                  
                  433,988
                  
                  
                  
                  1,332,404
                  
                  
                  
                  7,592,896Net
      increase (decrease) in cash and equivalents
                  
                  
                  (8,331
                  )
                  
                  
                  (117,348
                  )
                  
                  
                  (2,596
                  )Cash
      and equivalents, beginning of period
                  
                  
                  8,331
                  
                  
                  
                  125,679
                  
                  
                  
                  10,927Cash
      and equivalents, end of period
                  
                  $
                  -
                  
                  
                  $
                  8,331
                  
                  
                  $
                  8,331Supplemental
      disclosure of cash flow informationCash
      paid for interest
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  59,840Cash
      paid for income taxes
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  -Schedule
      of non-cash financing activitiesStock
      for conversion of debt – related party
                  
                  
                  1,212,826
                  
                  
                  
                  1,014,933
                  
                  
                  
                  2,227,759Exchange
      of debt – related party
                  
                  
                  -
                  
                  
                  
                  214,075
                  
                  
                  
                  214,075Exchange
      of convertible notes for stock
                  
                  
                  -
                  
                  
                  
                  965,266
                  
                  
                  
                  2,525,070Stock
      issued for settlement of payables
                  
                  
                  582,977
                  
                  
                  
                  189,000
                  
                  
                  
                  778,674Deemed
      dividend
                  
                  
                  1,111,054
                  
                  
                  
                  12,071
                  
                  
                  
                  1,140,760Exchange
      of convertible preferred stock for common stock
                  
                  
                  -
                  
                  
                  
                  -
                  
                  
                  
                  3,380,975Preferred
      stock issued for payables
                  
                  
                  -
                  
                  
                  
                  358,500
                  
                  
                  
                  358,500Stock
      held in escrow
                  
                  
                  -
                  
                  
                  
                  20,000
                  
                  
                  
                  20,000Stock
      contributed for debt payment
                  
                  
                  276,558
                  
                  
                  
                  -
                  
                  
                  
                  276,558Return
      of stock held in escrow
                  
                  
                  16,800
                  
                  
                  
                  -
                  
                  
                  
                  16,800Cashless
      exercise of warrants
                  
                  
                  133
                  
                  
                  
                  -
                  
                  
                  
                  133Stock
      rescinded for debt
                  
                  
                  8,256
                  
                  
                  
                  -
                  
                  
                  
                  8,256





The
accompanying notes are an integral part of these  financial
statements


F-7





POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





Note
1.  Description of Business





Power3
Medical Products, Inc. (“we”, “us”, “our”, “Power3”, or the “Company”) was
incorporated in the State of Florida on May 15, 1992 and merged into a New York
Corporation in 1994, under the name Sheffield Acres, Inc. On September 12, 2003,
Surgical Safety Products, Inc. amended its Certificate of Incorporation to
change its name to Power3 Medical Products, Inc. The Company transitioned to
being a development stage company on May 18, 2004, when it completed the
acquisition of certain intellectual property assets from Advanced Bio/Chem, Inc.
and began focusing on research and development relating to those
assets.  The Company currently focuses on the development of its
intellectual properties by focusing on disease diagnosis, protein and biomarker
identification and early detection indicators in the areas of cancers,
neurodegenerative and neuromuscular diseases, as well as other scientific areas
of interest associated with protein biomarkers.





The
Company has developed a portfolio of products including BC-SeraProTM, a
proteomic blood serum test for the early detection of breast cancer, and
NuroPro®, a serum
test for the detection of neurodegenerative diseases including Alzheimer’s,
Parkinson’s and ALS diseases.  These products are designed to analyze
proteins and their mutations to assess an individual’s risk for developing
disease later in life or a patient’s likelihood of responding to a particular
drug, assess a patient’s risk of disease progression and disease recurrence, and
measure a patient’s exposure to drug therapy to ensure optimal dosing and
reduced drug toxicity. Future products and services are expected to originate
from the Company’s internal research and development programs, collaborative
efforts and alliances with third parties, and acquisitions of complementary
technologies and businesses.  The Company intends to continue entering
into collaboration and licensing agreements with other biotechnology companies,
academic and research institutions, and other organizations that have the
ability to market and sell the Company’s products in return for licensing fees,
royalties and milestone payments.




Note
2.  Significant Accounting Policies





This
summary of significant accounting policies is provided to assist the reader in
understanding the Company’s financial statements.  The financial
statements and notes thereto are representations of the Company’s
management.  The Company’s management is responsible for their
integrity and objectivity.  These accounting policies conform to
accounting principles generally accepted in the United States of America and
have been consistently applied in the preparation of the financial
statements.


F-8


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008




Going
Concern





The
Company’s financial statements have been prepared using accounting principles
generally accepted in the United States of America applicable to a going concern
which contemplates the realization of assets and liquidation of liabilities in
the normal course of business.  The Company has historically incurred
significant losses, which raises substantial doubt about the Company’s ability
to continue as a going concern.  The accompanying financial statements
do not include any adjustments relating to the recoverability and classification
of asset carrying amounts or the amount and classification of liabilities that
might result from the outcome of this uncertainty.





Reclassifications





Certain
amounts in the 2008 financial statements have been reclassified to conform to
the 2009 presentation.  These reclassifications did not result in any
change to the previously reported total assets, net loss or stockholders’
deficit.





Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes.  Actual results could differ from
those estimates.





Revenue
Recognition and Concentration





The
Company’s revenue consists of licensing fees and sample fees that it receives
under licensing agreements that the Company has with third parties.  The
Company recognizes the fees as revenue when persuasive evidence of an
arrangement exists, delivery or performance has occurred, the sales price is
fixed and determinable, and collectibility is reasonably assured in accordance
with Financial Accounting Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) Topic 605 (“ASC 605”).





During
the year ended December 31, 2009, the Company generated revenue of
$115,000.  All of this revenue was generated through the Collaboration
and Exclusive License Agreement between the Company and
Transgenomic.





Financial
Instruments





The company accounts for its financial
instruments in accordance with ASC Topic 825, whichrequires the disclosure
of fair value information about financial instruments when it is practicable to
estimate that value. The carrying amounts of the Company’s cash and cash
equivalents, accounts payable, accrued liabilities and other short-term
liabilities in the consolidated balance sheet approximate their fair value due
to the short-tem maturity of these instruments and obligations. The fair value
of related party transactions is not determinable due to their related party
nature.


F-9


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008




Fair
Value Measurements




In
accordance with the authoritative guidance on fair value measurements and
disclosure under GAAP, the Company determines fair value using a fair value
hierarchy that distinguishes between market participant assumptions developed
based on market data obtained from sources independent of the reporting entity,
and the reporting entity’s own assumptions about market participant assumptions
developed based on the best information available in the circumstances and
expands disclosure about fair value measurements.


Fair
value is the price that would be received to sell an asset or paid to transfer a
liability in our principal or most advantageous market for the asset or
liability in an orderly transaction between market participants at the
measurement date, essentially the exit price.


The
levels of fair value hierarchy are:


Level 1:  Quoted
prices in active markets for identical assets and liabilities at the measurement
date.


Level 2:  Observable
inputs other than quoted prices included in Level 1, such as quoted prices
for similar assets and liabilities in active markets; quoted prices for
identical or similar assets and liabilities in markets that are not active; or
other inputs that are observable or can be corroborated by observable market
data.


Level 3:  Unobservable
inputs for which there is little or no market data available. These inputs
reflect management’s assumptions of what market participants would use in
pricing the asset or liability.


Level 1
investments are valued based on quoted market prices in active markets and
include the Company’s cash equivalent investments. Level 2 investments,
which include investments that are valued based on quoted prices in markets that
are not active, broker or dealer quotations, or alternative pricing sources with
reasonable levels of price transparency, include the Company’s certificates of
deposit, corporate bonds and notes, municipal bonds and notes and
U.S. government securities.


A
financial instrument’s level within the fair value hierarchy is based upon the
lowest level of any input that is significant to the fair value measurement.
However, the determination of what constitutes “observable” requires significant
judgment by the Company. The Company considers observable data to be market data
which is readily available, regularly distributed or updated, reliable and
verifiable, not proprietary, and provided by independent sources that are
actively involved in the relevant market.


F-10


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





Property
and Equipment





Property and equipment are stated at
cost, less accumulated depreciation and amortization. Depreciation and
amortization are calculated using the straight-line basis over the estimated
useful lives of the related assets.  The cost of major improvements to
the Company’s property and equipment are capitalized. The cost of maintenance
and repairs that do not improve or extend the life of the applicable assets are
expensed as incurred.  When assets are retired or otherwise disposed
of, the cost and accumulated depreciation and amortization are removed from the
accounts and any resulting gain or loss is reported in the period
realized.





The Company reviews property and
equipment for impairment whenever events or changes in circumstances indicate
that the carrying amount of assets may not be
recoverable.  Recoverability is measured by comparison of the carrying
amount of the assets to the future undiscounted net cash flows that the assets
are expected to generate.  If the assets are considered to be
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of these assets exceeds the fair value of the
assets.





Debt
Discounts and Deferred Finance Costs





Debt
discounts and deferred finance costs are amortized through periodic charges to
interest expense over the maximum term of the related financial instrument using
the effective interest method. Total amortization of debt discounts and deferred
financing costs amounted to $258,384 and $1,198,688 during the years ended
December 31, 2009 and 2008, respectively.





Long-Lived
Assets





The
Company reviews long-lived assets for impairment at least annually or whenever
events or changes in circumstances indicate that the carrying amount of assets
may not be recoverable in accordance with ASC Topic
360.  Recoverability is measured by comparison of the carrying amount
of the assets to the future undiscounted net cash flows that the assets are
expected to generate.  If the assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the carrying
amount of these assets exceeds the fair value of the assets.


F-11


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





Derivative
Financial Instruments





ASC Topic
815 (“ASC 815”) requires that all derivative financial instruments be recorded
on the balance sheet at fair value. Fair values for exchange traded securities
and derivatives are based on quoted market prices. Where market prices are not
readily available, fair values are determined using market based pricing models
incorporating readily observable market data and requiring judgment and
estimates.





The
Company has issued several convertible promissory notes and stock warrants and
has evaluated the terms and conditions of the conversion features contained in
the notes and warrants to determine whether they represent embedded or
freestanding derivative instruments under the provisions of ASC Topic 815 (“ASC
815”).  The Company determined that the conversion features contained
in the notes and warrants represent freestanding derivative instruments that
meet the requirements for liability classification under ASC 815.  As
a result, the fair value of the derivative financial instruments in the notes
and warrants is reflected in the Company’s balance sheet as a
liability.  The fair value of the derivative financial instruments of
the convertible promissory notes and warrants was measured at the inception date
of the notes and warrants and each subsequent balance sheet date.  Any
changes in the fair value of the derivative financial instruments are recorded
as non-operating, non-cash income or expense at each balance sheet
date.





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


F-12


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008




The
Company uses the Black-Scholes pricing model to determine the fair value of its
warrants. This model takes into consideration such factors as the estimated term
of the warrants, the volatility of the price of the Company’s common stock,
interest rates, and the probability that the warrants will be exercised to
determine the fair value of the warrants.  The selection of these
criteria requires management's judgment and may impact the Company’s net income
or loss.





Net
Loss Per Share





Basic
loss per share is based on the weighted average number of shares of the
Company’s common stock outstanding during the applicable year, and is calculated
by dividing the reported net loss for the applicable year by the weighted
average number of shares of common stock outstanding during the applicable
year.   The Company calculates diluted loss per share by dividing
the reported net loss for the applicable year by the weighted average number of
shares of common stock outstanding during the applicable year as adjusted to
give effect to the exercise of all potentially dilutive options and warrants
outstanding at the end of the year.  A total of 117,037,446 and
119,646,610 shares of common stock underlying options and warrants that were
outstanding on December 31, 2009 and 2008, respectively, have been excluded from
the computation of diluted earnings per share because they are
anti-dilutive.  As a result, basic loss per share was equal to diluted
loss per share for each year.





Stock-Based
Compensation





The
Company accounts for employee stock-based compensation in accordance with the
fair value recognition provisions of ASC Topic 718 (“ASC 718”) using the
modified prospective transition method.  Under this method,
compensation expense includes: (a) compensation expense for all stock-based
payments granted, but not yet vested, as of January 1, 2006 based on the
grant-date fair value, and (b) compensation expense for all stock-based payments
granted subsequent to January 1, 2006, based on the grant-date fair
value.  Such amounts have been reduced by the Company’s estimate of
forfeitures of all unvested awards.





The
Company accounts for non-employee stock-based compensation in accordance with
ASC 718 and ASC Topic 505 (“ASC 505”).  ASC 718 and ASC 505 require
that the Company recognize compensation expense based on the estimated fair
value of stock-based compensation granted to non-employees over the vesting
period, which is generally the period during which services are rendered by the
non-employees.





The
Company uses the Black-Scholes pricing model to determine the fair value of the
stock-based compensation that it grants to employees and
non-employees.  The Company is required to make certain assumptions in
connection with this determination, the most important of which involves the
calculation of volatility with respect to the price of its common
stock.  The computation of volatility is intended to produce a
volatility value that is representative of the Company’s expectations about the
future volatility of the price of its common stock over an expected
term.


F-13


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008




The
Company used its share price history to determine volatility and cannot predict
how the price of its shares of common stock will react on the open market in the
future since its common stock has only been trading on the OTC Bulletin Board
since March 30, 2006.  As a result, the volatility value that the
Company calculated may differ from the future volatility of the price of its
shares of common stock.





Income
Taxes





The
Company uses the liability method of accounting for income taxes under which
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards.  Deferred tax
assets and liabilities are measured using enacted tax rates in effect for the
year in which those temporary differences are expected to be recovered or
settled.  The effect on deferred tax assets and liabilities of a
change in tax rates is recognized as part of the provision for income taxes in
the period that includes the enactment date.  Valuation allowances are
established when necessary to reduce deferred tax assets to the amount expected
to be realized in the future.





Net
deferred tax assets consisted of the following components at December 31, 2009
and 2008, respectively:





December 31,2009
                      
                      
                      2008Deferred
      tax assets:Net
      operating loss carryforwards
                      
                      $
                      7,423,678
                      
                      
                      $
                      6,745,328Deferred
      tax liabilities
                      
                      
                      -0-
                      
                      
                      
                      -0-Valuation
      allowance
                      
                      
                      (7,423,678
                      )
                      
                      
                      (6,745,328
                      )Net
      deferred tax asset
                      
                      $
                      —
                      
                      
                      $
                      —





The
Company had net operating loss carry-forwards of approximately $21,210,509 and
$19,839,201 at December 31, 2009 and 2008, respectively, that may be offset
against future taxable income from the years 2019 through 2029.  No
tax benefit has been reported in the December 31, 2009 financial statements
since the potential tax benefit is offset by a valuation allowance of the same
amount.  The Company had no uncertain tax positions at December 31,
2009 or 2008.


F-14


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008




Utilization
of net operating loss carryforwards may be subject to a substantial annual
limitation due to ownership change limitations provided by the Internal Revenue
Code of 1986, as well as similar state and foreign provisions.  These
ownership changes may limit the amount of net operating loss carryforwards that
can be utilized annually to offset future taxable income and tax,
respectively.  Subsequent ownership changes could further affect the
limitation in future years.  These annual limitation provisions may
result in the expiration of certain net operating losses and credits before
utilization.





Cash
Equivalents





The
Company considers all highly liquid investments with an original maturity of 90
days or less on the date of purchase to be cash equivalents.  There
were no cash equivalents as of December 31, 2009 or 2008.




Recently
Accounting Pronouncements





In
May 2009, the Financial Accounting Standards Board (“FASB”) issued guidance
now codified as ASC Topic 855 (“ASC 855”) which establishes general standards of
accounting for, and disclosures of, events that occur after the balance sheet
date but before financial statements are issued or are available to be
issued.  ASC 855 requires the disclosure of the date through which an
entity has evaluated subsequent events and the basis for selecting that date
(i.e., whether that date represents the date the financial statements were
issued or were available to be issued). These new provisions are effective for
interim or fiscal periods ending after June 15, 2009.  The
adoption of these provisions did not have a material impact on the Company’s
financial condition and results of operations.





In
June 2009, the FASB issued guidance now codified as ASC Topic 105 (“ASC
105”) as the single source of authoritative nongovernmental U.S.
GAAP.  ASC 105 does not change current U.S. GAAP, but is intended to
simplify user access to all authoritative U.S. GAAP by providing all
authoritative literature related to a particular topic in one place. All
existing accounting standard documents have been superseded and all other
accounting literature not included in the FASB ASC is considered
non-authoritative.  These new provisions are effective for interim and
annual periods ending after September 15, 2009 and, accordingly, are
effective for the Company for the current fiscal reporting
period.  The adoption of these provisions did not have an impact on
the Company’s financial condition and results of operations.


F-15


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





Note
3.  Property and Equipment





Property
and equipment consisted of the following at December 31, 2009 and
2008:





Asset
                  
                  2009
                  
                  
                  2008Computers
      and Related Devices
                  
                  $
                  15,884
                  
                  
                  $
                  15,126Less:
      Accumulated Depreciation
                  
                  
                  (15,201
                  )
                  
                  
                  (10,545
                  )Total
                  
                  
                  683
                  
                  
                  
                  4,581Lab
      Equipment
                  
                  
                  92,380
                  
                  
                  
                  92,380Less:  Accumulated
      Depreciation
                  
                  
                  (92,380
                  )
                  
                  
                  (90,708
                  )Total
                  
                  
                  -0-
                  
                  
                  
                  1,672Total
      Property and Equipment, Net
                  
                  $
                  683
                  
                  
                  $
                  6,253




Note
4.  Other Current Liabilities





Other
current liabilities consisted of the following at December 31, 2009 and
2008:





Liability
                  
                  2009
                  
                  
                  2008Accrued
      rent
                  
                  $
                  -0-
                  
                  
                  $
                  28,566Accrued
      interest and interest payable
                  
                  
                  312,252
                  
                  
                  
                  335,033Prepayment
      penalty
                  
                  
                  -0-
                  
                  
                  
                  25,000Accrued
      payroll taxes
                  
                  
                  21,464
                  
                  
                  
                  44,347Accrued
      compensation and salaries payable
                  
                  
                  258,364
                  
                  
                  
                  150,965Other
      accrued expenses and liabilities
                  
                  
                  1,811
                  
                  
                  
                  33,575Total
                  
                  $
                  593,891
                  
                  
                  $
                  617,486





Note
5.  Derivative Liabilities





Our
derivative liabilities were $14,456,424 and $1,352,247 at December 31, 2009 and
2008, respectively, resulting in a loss of $13,045,921 for derivative
liabilities.  The increase in the amount of derivative loss recognized
was due primarily to the increase in our stock price during 2009 and our
decision to change the exercise price of many of our outstanding warrants to
$0.053 per share during October 2009.


F-16


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





We have
issued warrants that contain a reset provision that is triggered when we issue
other warrants at an exercise price that is below the exercise price of the
warrants containing the reset provision.  During March 2009, the reset
provision of these warrants was triggered when we issued warrants at $0.01 per
share, which exercise price was less than the exercise price of the warrants
containing the reset provision.  As a result, we recognized an
increase in liabilities of $13,104,177 during the year ended December 31,
2009.





The
components of derivative financial instruments on the Company’s balance sheet at
December 31, 2009 and 2008 is as follows:





December
      31,2009
                  
                  
                  2008Common
      stock warrants
                  
                  $
                  10,267,167
                  
                  
                  $
                  554,637Embedded
      conversion features – convertible promissory notes and
      debentures
                  
                  
                  4,189,257
                  
                  
                  
                  778,178Other
      derivative instruments
                  
                  
                  —
                  
                  
                  
                  19,432Total
                  
                  $
                  14,456,424
                  
                  
                  $
                  1,352,247





Note
6.  Commitments and Contingencies





In
September 2008, the Company entered into an Arbitration Agreement with Steven
Rash, our former Chief Executive Officer, in connection with his agreement to
resign as our Chief Executive Officer.  The parties agreed to arbitrate
claims for wages and other compensation due, breach of contracts or covenants,
and benefits.  The Company agreed to arbitrate Mr. Rash’s claims for
wages of $36,031 and its claims for embezzlement, fraud and breach of contract
by Mr. Rash.  As of December 31, 2009, arbitration had not been initiated
by either party.





In March
2009, McLennon Law Corporation filed a law suit against the Company for breach
of contract for approximately $117,000 of accrued but unpaid attorney fees.
 As of December 31, 2009, the Company was in negotiations with McLennon to
settle its claim for unpaid attorney fees.





In
September 2009, one of our employees attempted to convert a $30,000 convertible
promissory note plus interest into shares of our common stock.  We are
disputing the amount, if any, that is due to the employee under the
note.  As of December 31, 2009, the note had not been
converted.  In December 2009, the employee filed a law suit against us
seeking damages and specific performance.  As of December 31, 2009,
the Company had engaged counsel and was preparing a response to the
complaint.


F-17


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





Note
7.  Common Stock and Preferred Stock





The
Company’s authorized capital consisted of 600,000,000 and 150,000,000 shares of
common stock, $0.001 par value per share, at December 31, 2009 and 2008,
respectively, and 50,000,000 shares of preferred stock, $0.001 par value per
share, at December 31, 2009 and 2008, respectively.  There were
434,167,000 and 149,959,290 shares of common stock outstanding at December 31,
2009 and 2008, respectively, and 1,500,000 shares of preferred stock outstanding
at December 31, 2009 and 2008, respectively.





Capital-Raising
Transactions





During
the year ended December 31, 2008, we issued 7,492,875 shares of common stock to
accredited investors for total cash proceeds of $647,404.





In June
2009, we issued 6,000,000 shares of common stock to an accredited investor for
total cash proceeds of $30,000.





In June
2009, we issued 500,000 shares of common stock to an accredited investor for
total cash proceeds of $5,000.





In August
2009, we issued 515,600 shares of common stock to two accredited investors for
total cash proceeds of $5,156.





In
September 2009, we issued 2,500,000 shares of common stock to an accredited
investor for total cash proceeds of $25,000.





In
September 2009, we issued 2,000,000 shares of common stock to an accredited
investor for total cash proceeds of $20,000.





Non-Capital Raising
Transactions





In April
2008, we issued 1,500,000 shares of Series B Preferred Stock to each of Steven
Rash, our former Chief Executive Officer, and Ira L. Goldknopf, our President
and Chief Scientific Officer, in accordance with the terms of the Rash
Employment Agreement and the Goldknopf Employment Agreement,
respectively.  In September 2008, Mr. Rash resigned from all of his
positions with us.  Upon the resignation of Mr. Rash, all 1,500,000
shares of Series B Preferred Stock held by Mr. Rash automatically converted into
1,500,000 shares of common stock.  The shares of common stock were
valued at the closing price of our common stock on the date of the conversion
for total consideration of $90,000.


F-18


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





During
the year ended December 31, 2008, we issued 2,133,333 shares of common stock to
vendors in full payment of invoices that had an outstanding balance of
$203,730.  The shares were valued at the closing price of our common
stock on the date the vendors agreed to receive the shares for total
consideration of $189,000.  We recognized a loss of $14,730 in
connection with the payments.





During
the year ended December 31, 2008, we issued 7,482,910 shares of common stock to
employees and consultants for employment and consulting services.  The
shares were valued at the closing price of our common stock on the date the
employee or consultant agreed to receive the shares for total consideration of
$592,341.





In March
2009, we issued 2,761,878 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $55,238.





In March
2009, we issued 900,000 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $18,000.





In March
2009, we issued 2,857,143 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $42,857, which included a reduction of a stock payable in the
amount of $14,286.





In April
2009, we issued 3,000,000 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $60,000.





In April
2009, we issued 4,333,333 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $86,667.


F-19


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





In April
2009, we issued 500,000 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $10,000.





In April
2009, we issued 12,500,000 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $250,000.





In April
2009, we issued 1,500,000 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $30,000.





In May
2009, we issued 460,970 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $9,216.





In May
2009, we issued 772,752 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $15,455.





In May
2009, we issued 2,469,136 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $49,383.





In May
2009, we issued 1,029,688 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $20,594.





In May
2009, we issued 568,182 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $11,364.


F-20


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





In May
2009, we issued 848,990 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $16,980.





In May
2009, we issued 500,000 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $10,000.





In June
2009, we issued 1,500,000 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $30,000.





In June
2009, we issued 396,700 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $7,934.





In June
2009, we issued 488,293 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $9,766.





In June
2009, we issued 7,422,558 shares of common stock to Ira L. Goldknopf, our
President and Chief Scientific Officer, in full payment of $92,142 of accrued
but unpaid salary and accrued interest due under the Amended and Restated
Employment Agreement, dated May 17, 2009, between Mr. Goldknopf and the Company
(the “Goldknopf Employment Agreement”).  The shares were valued at the
closing price of our common stock on the date Mr. Goldknopf agreed to receive
the shares for total consideration of $148,451.  We recognized
additional expense of $52,849 in connection with the payment.





In June
2009, we issued 780,640 shares of common stock to John P. Ginzler, our Chief
Financial Officer, in full payment of $10,000 of accrued but unpaid salary due
under the Employment Agreement, dated June 1, 2009, between Mr. Ginzler and the
Company (the “Ginzler Employment Agreement”).  The shares were valued
at the closing price of our common stock on the date Mr. Ginzler agreed to
receive the shares for total consideration of $15,613.  We recognized
additional expense of $5,613 in connection with the payment.


F-21


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





In June
2009, we issued 2,960,908 shares of common stock to Helen R. Park, our Interim
Chief Executive Officer, in full payment of $40,000 of accrued but unpaid fees
due under the Consulting Agreement, dated June 1, 2009, between Bronco
Technology, Inc. and the Company (the “Bronco Consulting
Agreement”).  The shares were valued at the closing price of our
common stock on the date Ms. Park agreed to receive the shares for total
consideration of $59,218.  We recognized additional expense of $19,218
in connection with the payment.





In June
2009, we issued a restricted stock award for 12,000,000 shares of common stock
and a warrant to acquire 10,000,000 shares of common stock to John P. Ginzler,
our Chief Financial Officer, in accordance with the terms of the Ginzler
Employment Agreement.  The restricted stock award and warrant vest in
three equal annual installments commencing June 2, 2010.  The shares
were valued at the closing price of our common stock on the date the Ginzler
Employment Agreement was approved by our Board of Directors. On December 7, 2009, Mr.
Ginzler resigned from all positions with us.  As a result, on that
date, the restricted stock award terminated in its entirety.  We
recognized expense of $416,927 in connection with the issuance of the
award.  As of December 31, 2009, the shares represented by the
restricted stock award had not been returned to the transfer agent for
cancellation.





In July
2009, we issued 833,330 shares of common stock to a consultant pursuant to a
consulting agreement.  The shares were valued at the closing price of
our common stock on the date the issuance of shares was approved by our board of
directors for total consideration of $16,667.





In July
2009, we issued 528,446 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $10,569.





In July
2009, we issued 5,000,000 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $100,000.





In July
2009, we issued 500,000 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $5,000.





In August
2009, we issued 1,000,000 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $10,000.


F-22


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





In August
2009, we issued 500,000 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $10,000.





In August
2009, we issued 1,000,000 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $20,000.





In August
2009, we issued 500,000 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $15,000.





In August
2009, we issued 1,000,000 shares of common stock to a consultant for consulting
services.  The shares were valued at the closing price of our common
stock on the date the consultant agreed to receive the shares for total
consideration of $10,000.





In
September 2009, we issued 500,000 shares of common stock to a consultant for
consulting services.  The shares were valued at the closing price of
our common stock on the date the consultant agreed to receive the shares for
total consideration of $40,000.





In
September 2009, we issued 1,800,000 shares of common stock to a consultant
pursuant to a consulting agreement.  The shares were valued at the
closing price of our common stock on the date the issuance of shares was
approved by our board of directors for total consideration of
$108,000.





In
October 2009, we issued 3,687,500 shares of common stock to a consultant for
consulting services.  The shares were valued at the closing price of
our common stock on the date the consultant agreed to receive the shares for
total consideration of $368,750.





In
October 2009, we issued 1,309,705 shares of common stock to a consultant for
consulting services.  The shares were valued at the closing price of
our common stock on the date the consultant agreed to receive the shares for
total consideration of $144,068.





In
October 2009, we issued 100,000 shares of common stock to a consultant for
consulting services.  The shares were valued at the closing price of
our common stock on the date the consultant agreed to receive the shares for
total consideration of $10,000.





In
October 2009, we issued 5,000,000 shares of common stock to a consultant for
consulting services.  The shares were valued at the closing price of
our common stock on the date the consultant agreed to receive the shares for
total consideration of $450,000.


F-23


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





In
October 2009, we issued 500,000 shares of common stock to a consultant for
consulting services.  The shares were valued at the closing price of
our common stock on the date the consultant agreed to receive the shares for
total consideration of $45,000.





In
October 2009, we issued 1,000,000 shares of common stock to a consultant for
consulting services.  The shares were valued at the closing price of
our common stock on the date the consultant agreed to receive the shares for
total consideration of $90,000.





In
October 2009, we issued 100,000 shares of common stock to a consultant for
consulting services.  The shares were valued at the closing price of
our common stock on the date the consultant agreed to receive the shares for
total consideration of $11,000.





In
December 2009, we issued 1,000,000 shares of common stock and a restricted stock
award with respect to 6,000,000 shares of common stock to a consultant pursuant
to a consulting agreement.  The restricted stock award vests in 12
equal quarterly installments of 500,000 shares.  The 1,000,000 shares
of common stock were valued at the closing price of our common stock on the date
the issuance of shares was approved by our board of directors for total
consideration of $140,000.  The 6,000,000 shares underlying the
restricted stock award were also valued at the closing price of our common stock
on the date the issuance of shares was approved by our board of
directors.  We recognized $23,333 of consulting expense in connection
with the restricted stock award during the 12 months ended December 31,
2009.





In
December 2009, we issued 905,661 shares of common stock to a consultant for
consulting services.  The shares were valued at the closing price of
our common stock on the date the consultant agreed to receive the shares for
total consideration of $99,623.





In
December 2009, we issued 15,000,000 shares of common stock to Helen R. Park, our
Interim Chief Executive Officer, as a performance bonus in accordance with the
terms of the Bronco Consulting Agreement.  The shares were valued at
the closing price of our common stock on the date the issuance of shares was
approved by our board of directors for total consideration of
$1,500,000.





In
December 2009, we received 800,000 shares of common stock from a consultant that
had been held in escrow and returned to us due to non-performance by the
consultant.  Upon receipt, these shares were placed in
treasury.


F-24


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





Note
8.  Stock Options and Warrants





The Company did not issue any stock
options during the years ended December 31, 2009 and 2008, and no stock options
were outstanding at December 31, 2009 and 2008.  Warrants exercisable
into a total of 117,037,446 and 119,646,610 shares of the Company’s common stock
were outstanding on December 31, 2009 and 2008, respectively.  The
weighted average exercise price of the warrants outstanding on December 31, 2009
and 2008 was $0.05, respectively.  The Company estimates the fair
value of its warrants on the date of grant by using the Black-Scholes pricing
model in accordance with the provisions of ASC 718.  Under the
Black-Scholes pricing model, the Company used the following weighted-average
assumptions to determine the fair value of the warrants issued: a dividend yield
of zero percent, an expected volatility of 241%, a risk-free interest rate of
1.14% and a remaining contractual life of 3.5 years.





During the year ended December 31,
2009, we issued a total of 11,789,509 shares of common stock to warrant holders
upon the exercise of outstanding warrants.  Of this number, 11,656,917
shares were issued for total cash proceeds of $278,832.  The remaining
132,592 shares of common stock were issued to warrant holders in accordance with
cashless exercise provisions contained in their warrants.  The
exercise prices of the warrants exercised for cash ranged between $0.01 and
$0.053 per share.





We
revised the exercise price of several outstanding warrants during the years
ended December 31, 2008 and 2009.  We accounted for the revisions to
the exercise price in accordance with ASC 718.  Pursuant to the
provisions of ASC 718, we revalued the warrants by comparing the terms of the
original warrants with the terms of the revised warrants and recorded the
difference in value between the two warrants as a deemed dividend in accordance
with ASC Topic 470.  We used the Black-Scholes pricing model to
calculate the amount of the dividend to be recorded.  Variables that
were used in the calculation of the amount of the dividend were the price of our
common stock on the measurement date, the exercise price of the options, the
term of the options, the discount rate and the computed volatility.





In March
2009, we revised the terms of an outstanding warrant to acquire 300,000 shares
of common stock held by the warrant holder.  The exercise price of the
warrant was reduced from $0.98 per share to $0.01 per share upon the condition
that the holder immediately exercise the warrant at the reduced exercise
price.  We received $3,000 upon the exercise of the warrant and
recorded the reduction of the exercise price of the warrant as a dividend in the
amount of $3,895.


F-25


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





In March
2009, we revised the terms of an outstanding warrant to acquire 833,333 shares
of common stock held by the warrant holder.  The exercise price of the
warrant was reduced from $0.09 per share to $0.01 per share upon the condition
that the holder immediately exercise the warrant at the reduced exercise
price.  We received $8,333 upon the exercise of the warrant and
recorded the reduction of the exercise price of the warrant as a dividend in the
amount of $4,053.





In March
2009, we revised the terms of an outstanding warrant to acquire 416,666 shares
of common stock held by the warrant holder.  The exercise price of the
warrant was reduced from $0.08 per share to $0.01 per share upon the condition
that the holder immediately exercise the warrant at the reduced exercise
price.  We received $4,167 upon the exercise of the warrant and
recorded the reduction of the exercise price of the warrant as a dividend in the
amount of $2,702.





In March
2009, we revised the terms of an outstanding warrant to acquire 2,000,000 shares
of common stock held by the warrant holder.  The exercise price of the
warrant was reduced from $0.10 per share to $0.01 per share upon the condition
that the holder immediately exercise the warrant at the reduced exercise
price.  We received $20,000 upon the exercise of the warrant and
recorded the reduction of the exercise price of the warrant as a dividend in the
amount of $10,315.





In
September 2009, we revised the terms of an outstanding warrant to acquire
1,000,000 shares of common stock held by the warrant holder.  The
exercise price of the warrant was reduced from $0.08 per share to $0.01 per
share upon the condition that the holder immediately exercise the warrant at the
reduced exercise price.  We received $10,000 upon the exercise of the
warrant and recorded the reduction of the exercise price of the warrant as a
dividend in the amount of $13,012.





In
October 2009, we revised the terms of an outstanding warrant to acquire
13,318,682 shares of common stock held by the warrant holder.  The
exercise price of the warrant was increased from $0.04 per share to $0.053 per
share.  We received $200,000 and issued 3,773,585 shares of common
stock upon the partial exercise of the warrant.  We recorded a deemed
dividend in the amount of $577,712 in connection with the revision of the terms
of the warrant.





In
October 2009, we terminated outstanding warrants to acquire 6,541,582 shares of
common stock held by warrant holders and issued to them Class A warrants that
had an exercise price of $0.053.  These Class A warrants carried with
them the right to receive Class B warrants and Class C warrants with an exercise
price of $0.50 and $1.00, respectively, in the future.  We recorded a
deemed dividend in the amount of $482,174 in connection with the termination of
the old warrants and subsequent issuance of the Class A
warrants.


F-26


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





A summary
of the warrants issued during the years ended December 31, 2009 and 2008 is set
forth below.





Weighted-AverageExerciseShares
                        
                        
                        PriceOutstanding,
      December 31, 2007
                        
                        
                        28,893,119
                        
                        
                        $
                        0.04Granted
                        
                        
                        91,420,157
                        
                        
                        
                        0.05Exercised
                        
                        
                        (666,666
                        )
                        
                        
                        0.08Expired/Canceled
                        
                        
                        -0-
                        
                        
                        
                        -0-Outstanding,
      December 31, 2008
                        
                        
                        119,646,610
                        
                        
                        $
                        0.05Granted
                        
                        
                        15,200,000
                        
                        
                        $
                        0.19Exercised
                        
                        
                        (11,789,509
                        )
                        
                        $
                        0.02Expired/Canceled
                        
                        
                        (6,019,655
                        )
                        
                        0.039Outstanding,
      December 31, 2009
                        
                        
                        117,037,446
                        
                        
                        $
                        0.05Exercisable,
      December 31, 2008
                        
                        
                        119,646,610
                        
                        
                        $
                        0.05Exercisable,
      December 31, 2009
                        
                        
                        117,037,446
                        
                        
                        $
                        0.05




Year Ended
                      December 31,
                    
                    Range of
                      ExercisePrices
                    
                    
                    Number
                      Outstanding
                    
                    
                    Weighted-
                      Average
                      Remaining
                      Contractual
                      Life (In Years)
                    
                    
                    Weighted-
                      Average
                      Exercise
                      Price2008
                    
                    $
                    0.03
      – $3.00
                    
                    
                    
                    119,646,610
                    
                    
                    
                    2.0
                    
                    
                    $
                    0.052009
                    
                    $
                    0.01
      – $0.25
                    
                    
                    
                    117,037,446
                    
                    
                    
                    3.5
                    
                    
                    $
                    0.05


F-27


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





Note
9.  Promissory Notes and Debentures





Issuances of Promissory
Notes and Debentures





In
October 2004, we issued convertible debentures and warrants to accredited
investors for aggregate gross proceeds of $1,400,000.  The convertible
debentures were for an initial principal amount of $1,400,000, were convertible
into shares of common stock at an initial conversion price of $0.90 that varies
in relation to the trading price of the common stock and had a term of three
years.  The warrants were exercisable at an initial exercise price of
$0.04 that varied in relation to the trading price of the common
stock.  Concurrently, we entered into a registration rights agreement
with the investors that required the company to file a registration statement
with the SEC registering the resale of the shares of common stock issuable upon
the conversion of the debentures and the exercise of the
warrants.  The balance of the outstanding convertible debentures was
$31,667 and $115,010 at December 31, 2009 and 2008, respectively.





In May
2008, we issued a promissory note to Steven Rash, our former Chief Executive
Officer, for consideration of $30,000.  The note was for a principal
amount of $30,000, had an annual interest rate of 6% and was due June 22,
2008.  We repaid the full amount of the note to Mr. Rash in August
2008.





In June
2008, we issued a promissory note to Steven Rash, our former Chief Executive
Officer, for consideration of $15,000.  The note was for a principal
amount of $15,000, had an annual interest rate of 6% and was due July 19,
2008.





In June
2008, we issued a convertible debenture and a warrant to acquire shares of
common stock to an accredited investor for consideration of
$200,000.  The debenture was for a principal amount of $200,000, was
convertible into 5,000,000 shares of common stock, had an interest rate of 15%
and was due December 30, 2008.  The warrant is exercisable into
3,500,000 shares of common stock, has an exercise price of $0.06 and has a term
of five years.





In
July 2008, we issued a convertible debenture and a warrant to acquire shares of
common stock to an accredited investor for consideration of
$250,000.  The debenture was for a principal amount of $250,000, was
convertible into 6,250,000 shares of common stock, had an interest rate of 15%
and was due October 15, 2008.  The warrant is exercisable into
4,500,000 shares of common stock, has an exercise price of $0.06 and has a term
of five years.





In
September 2008, we issued convertible promissory notes and warrants to two
accredited investors for aggregate consideration of $60,000.  The
notes were each for an initial principal amount of $30,000, were convertible
into 750,000 shares of common stock, had an interest rate of 12% and were due
September 8, 2009.  The warrants were each exercisable into 600,000
shares of common stock at an exercise price of $0.06 per share.


F-28


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





In
October 2008, we authorized the issuance of 5,000,000 shares of common stock to
Helen R. Park, our Interim Chief Executive Officer, as compensation for services
rendered by Ms. Park prior to her appointment as the Company’s Interim Chief
Executive Officer.  At the time the shares were authorized for issuance, we
did not have enough shares of common stock available to issue to Ms. Park.
 In November 2008, we issued a convertible promissory note and a warrant
exercisable into shares of common stock to Ms. Park in exchange for the
5,000,000 shares of common stock.  The convertible promissory note had an
initial principal amount of $150,000, accrued interest at an annual rate of 12%
and was due on November 18, 2009.  The warrant is exercisable into
5,000,000 shares of common stock, has an exercise price of $0.04, and has a term
of three years.





In
November 2008, we issued a convertible promissory note and a warrant exercisable
into shares of common stock to an employee.  The convertible promissory
note had an initial principal amount of $30,000, accrued interest at an annual
rate of 12% and was due on November 18, 2009.  The warrant is
exercisable into 1,000,000 shares of common stock, has an exercise price of
$0.04, and has a term of three years.





In
November 2008, we issued a convertible promissory note and a warrant to acquire
shares of our common stock to Ira L. Goldknopf, our President and Chief
Scientific Officer, to retire all of his outstanding convertible promissory
notes and accrued interest thereon in the aggregate amount of
$1,100,386.  The convertible promissory note is for a principal amount
of $1,189,435, has a term of three years, is convertible into 36,679,533 shares
of common stock and accrues interest at an annual rate of 12%.  The
warrant is exercisable into 36,598,000 shares of common stock, has an exercise
price of $0.04 per share and has a term of three years.  We recorded a
loss of $89,049 upon the retirement of the notes.





In
November 2008, we issued a promissory note to Ira L. Goldknopf, our President
and Chief Scientific Officer, in exchange for the transfer by Mr. Goldknopf of
shares of common stock to a third party for payment of debt owed by us to the
third party.  The note was for a principal amount of $18,927, had an
annual interest rate of 6% and was due May 20, 2009.





In
January 2009, we issued a convertible promissory note and a warrant to acquire
shares of our common stock to Ira L. Goldknopf, our President and Chief
Scientific Officer, in consideration for the return of 1,200,000 shares of
common stock held by Mr. Goldknopf.  The promissory note was for a
principal amount of $8,256, had a term of one year, was convertible into
1,200,000 shares of common stock, and accrued interest at an annual rate of
12%.  The warrant is exercisable into 1,200,000 shares of common stock
and has an exercise price of $0.04 per share.


F-29


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





In March
2009, we issued convertible promissory notes to two accredited investors for
aggregate consideration of $20,000.  The notes were each for an
initial principal amount of $10,000, were convertible into 250,000 shares of
common stock, had an interest rate of 12% and were due September 8,
2009.





In August
2009, we issued a convertible promissory note and a warrant to acquire shares of
common stock to an accredited investor for consideration of
$25,000.  The note is for a principal amount of $25,000, is
convertible into 2,500,000 shares of common stock, has an interest rate of 8%
and is due February 26, 2010.  The warrant is exercisable into
1,000,000 shares of common stock and has an exercise price of $0.10 that may be
subject to adjustment depending upon the trading price of our common
stock.





In
September 2009, we issued a convertible promissory note and a warrant to acquire
shares of common stock to an accredited investor for consideration of
$25,000.  The note is for a principal amount of $25,000, is
convertible into 2,500,000 shares of common stock, has an interest rate of 8%
and is due March 3, 2010.  The warrant is exercisable into 1,000,000
shares of common stock and has an exercise price of $0.10 that may be subject to
adjustment depending upon the trading price of our common stock.





Conversions and Retirements
of Promissory Notes and Debentures





In May
2008, we issued 11,225,869 shares of common stock to Steven Rash, our former
Chief Executive Officer, to retire all of his outstanding convertible promissory
notes and accrued interest thereon in the aggregate amount of
$1,014,933.  We recorded a loss of $107,654 upon the retirement of the
notes.





In July
2008, Steven B. Rash, our former Chief Executive Officer, pledged 14,048,369
shares of common stock and 1,500,000 shares of preferred stock as collateral for
various convertible promissory notes that we issued.  In September
2008, upon the resignation of Mr. Rash from all positions that he held with us,
the 1,500,000 shares of preferred stock automatically converted into 1,500,000
shares of common stock.  During the year ended December 31, 2009, the
holders of the notes sold shares of the pledged common stock for aggregate net
proceeds of $244,417 and sold the 1,500,000 shares of common stock received upon
the conversion of the preferred stock for aggregate net proceeds of $32,141, all
of which was applied as a payment towards the notes and accrued interest
thereon.


F-30


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





During
the year ended December 31, 2008, we issued 22,172,536 shares of common stock to
various debt holders upon the settlement of convertible promissory notes with an
outstanding principal balance and accrued interest in the aggregate amount of
$1,644,456.  We recorded a gain of $419,825 upon the retirement of the
notes.





In
January 2009, we issued 1,200,000 shares of our common stock to an accredited
investor upon the partial conversion of $8,256 of the outstanding principal
balance of the convertible promissory note that it held.  We recorded
a loss of $3,744 upon conversion of the note.





In
February 2009, we issued 14,117,270 shares of our common stock to an accredited
investor upon the partial conversion of $130,000 of the outstanding principal
balance of the convertible promissory note that it held.  We recorded
a loss of $22,345 upon conversion of the note.





In March
2009, we issued 24,109,529 shares of common stock to an accredited investor to
retire a convertible promissory note with an original principal balance of
$325,000 and accrued interest of $22,438.  In accordance with the
terms of the note, the outstanding principal balance of the note was converted
into 9,166,667 shares of common stock.  The remaining 3,514,285 shares
of common stock were issued to retire additional promissory notes with an
aggregate original principal balance of $90,000 and accrued
interest.  We recorded a loss of $357,774 upon the retirement of the
notes, which was recorded in additional paid-in capital due to the related party
nature of the transaction.





In March
2009, we issued 24,109,529 shares of common stock to an accredited investor to
retire a convertible promissory note with an outstanding principal balance of
$325,000 and accrued interest of $13,356.  In accordance with the
terms of the note, the note was converted into 9,166,667 shares of common
stock.  The remaining 2,085,714 shares of common stock were issued to
retire additional promissory notes with an aggregate original principal balance
of $10,000 and accrued interest.  We recorded a loss of $402,606 upon
the retirement of the note, which was recorded in additional paid-in capital due
to the related party nature of the transaction.




In March
2009, we issued 13,390,340 shares of common stock to an accredited investor to
retire a convertible promissory note with an outstanding principal balance of
$340,000 and accrued interest of $13,973.  In accordance with the
terms of the note, the note was converted into 11,333,333 shares of common
stock.  The remaining 2,057,143 shares of common stock were issued to
retire the accrued interest.  We recorded a loss of $224,682 upon the
retirement of the note.


F-31


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008




In March
2009, we issued 43,027,287 shares of common stock to Dr. Goldknopf to retire the
convertible promissory note with an outstanding principal balance of $1,189,435
and accrued interest of $22,019, and the convertible promissory note with an
outstanding balance of $27,183 and accrued interest.   In
accordance with the terms of the note, the note was converted into 36,598,000
shares of common stock.  The remaining 10,312,896 shares of common
stock were issued to retire the accrued interest.  We recorded a loss
of $559,378 upon the retirement of the note, which was recorded in additional
paid-in capital due to the related party nature of the transaction.




In March
2009, we issued 9,571,429 shares of common stock to Helen R. Park, our Interim
Chief Executive Officer, to retire a convertible promissory note with an
outstanding balance of $150,000 and accrued interest of $5,819.  In
accordance with the terms of the note, the note was converted into 5,000,000
shares of common stock.  The remaining 4,571,429 shares of common
stock were issued to retire the accrued interest.  We recorded a loss
of $168,127 upon the retirement of the note, which was recorded in additional
paid-in capital due to the related party nature of the transaction.




In March
2009, we issued 10,000,000 shares of common stock to an accredited investor to
retire a convertible promissory note with an outstanding principal balance of
$100,000 and accrued interest of $14,345.  In accordance with the
terms of the note, the note was converted into 1,111,111 shares of common
stock.  The remaining 8,888,889 shares of common stock were issued to
retire the accrued interest on the note.  We recorded a loss of
$174,590 upon the retirement of the note.





In May
2009, we issued 342,366 shares of common stock to an accredited investor to
retire a convertible promissory note with an outstanding principal balance of
$5,000 and accrued interest of $1,618.  We recorded a loss of $229
upon the retirement of the note.





In July
2009, we issued 8,333,300 common shares to an accredited investor to retire a
convertible promissory note with an outstanding principal balance of $83,333 and
accrued interest of $21,469.  We recorded a loss of $1,930 upon the
retirement of the note.





In August
2009, we issued 1,000,000 shares of common stock to an accredited investor to
retire a convertible promissory note with an outstanding principal balance of
$30,000 and accrued interest of $2,841.  We recorded a gain of $947
upon the retirement of the note.


F-32


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





The
carrying values of our notes payable, net of unamortized discounts, amounted to
$446,000 and $584,102 at December 31, 2009 and 2008, respectively, as follows.




December
      31,2009
                  
                  
                  2008Notes
      Payable
                  
                  $
                  -0-
                  
                  
                  $
                  110,000Less:
      Discount on Notes Payable
                  
                  
                  -0-
                  
                  
                  
                  (45,825
                  )Total
                  
                  
                  -0-
                  
                  
                  
                  64,175Notes
      Payable – in Default
                  
                  
                  451,000
                  
                  
                  
                  451,000Notes
      Payable – Related Party
                  
                  
                  15,000
                  
                  
                  
                  68,927Total
      Notes Payable, Net of Discount
                  
                  $
                  466,000
                  
                  
                  $
                  584,102





The
carrying values of our convertible debentures, net of unamortized discounts,
amounted to $409,634 and $1,906,905 at December 31, 2009 and 2008, respectively,
as follows.





December
      31,2009
                  
                  
                  2008Convertible
      Debentures
                  
                  $
                  50,000
                  
                  
                  $
                  1,020,000Less:
      Unamortized Discount
                  
                  
                  (21,621
                  )
                  
                  
                  (577,668
                  )Total
                  
                  
                  28,379
                  
                  
                  
                  442,332Convertible
      Debentures – in Default
                  
                  
                  351,255
                  
                  
                  
                  865,010Less:
      Unamortized Discount
                  
                  
                  -0-
                  
                  
                  
                  (97,036
                  )Total
                  
                  
                  351,255
                  
                  
                  
                  767,974Convertible
      Debentures – Related Party
                  
                  
                  30,000
                  
                  
                  
                  1,369,435Less:
      Unamortized Discount
                  
                  
                  -0-
                  
                  
                  
                  (672,836
                  )Total
                  
                  
                  30,000
                  
                  
                  
                  696,599Total
      Convertible Debentures, Net of Unamortized Discount
                  
                  $
                  409,634
                  
                  
                  $
                  1,906,905


F-33


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





Note
10.  Related Party Transactions





In May
2008, we issued 11,225,869 shares of common stock to Steven Rash, our former
Chief Executive Officer, to retire all of his outstanding convertible promissory
notes and accrued interest thereon in the aggregate amount of
$1,014,933.





In May
2008, we issued a promissory note to Steven Rash, our former Chief Executive
Officer, for consideration of $30,000.  The note was for a principal
amount of $30,000, had an annual interest rate of 6% and was due June 22,
2008.  We repaid the full amount of the note to Mr. Rash in August
2008.





In June
2008, we issued a promissory note to Steven Rash, our former Chief Executive
Officer, for consideration of $15,000.  The note was for a principal
amount of $15,000, had an annual interest rate of 6% and was due July 19,
2008.





In July
2008, Steven B. Rash, our former Chief Executive Officer, pledged 14,048,369
shares of common stock and 1,500,000 shares of preferred stock as collateral for
various convertible promissory notes that we issued.  In September
2008, upon the resignation of Mr. Rash from all positions that he held with us,
the 1,500,000 shares of preferred stock automatically converted into 1,500,000
shares of common stock.  During the year ended December 31, 2009, the
holders of the notes sold shares of the pledged common stock for aggregate net
proceeds of $244,417 and sold the 1,500,000 shares of common stock received upon
the conversion of the preferred stock for aggregate net proceeds of $32,141, all
of which was applied as a payment towards the notes and accrued interest
thereon.





In
October 2008, we authorized the issuance of 5,000,000 shares of common stock to
Helen R. Park, our Interim Chief Executive Officer, as compensation for services
rendered by Ms. Park prior to her appointment as the Company’s Interim Chief
Executive Officer.  At the time the shares were authorized for issuance, we
did not have enough shares of common stock available to issue to Ms. Park.
 In November 2008, we issued a convertible promissory note and a warrant
exercisable into shares of common stock to Ms. Park in exchange for the
5,000,000 shares of common stock.  The convertible promissory note had an
initial principal amount of $150,000, accrued interest at an annual rate of 12%
and was due on November 18, 2009.  The warrant is exercisable into
5,000,000 shares of common stock, has an exercise price of $0.04, and has a term
of three years.





In
November 2008, we issued a convertible promissory note and a warrant to acquire
shares of our common stock to Ira L. Goldknopf, our President and Chief
Scientific Officer, to retire all of his outstanding convertible promissory
notes and accrued interest thereon in the aggregate amount of
$1,100,386.  The convertible promissory note is for a principal amount
of $1,189,435, has a term of three years, is convertible into 36,679,533 shares
of common stock and accrues interest at an annual rate of 12%.  The
warrant is exercisable into 36,598,000 shares of common stock, has an exercise
price of $0.04 per share and has a term of three years.


F-34


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





In
November 2008, we issued a promissory note to Ira L. Goldknopf, our President
and Chief Scientific Officer, in exchange for the transfer by Mr. Goldknopf of
shares of common stock to a third party for payment of debt owed by us to the
third party.  The note was for a principal amount of $18,927, had an
annual interest rate of 6% and was due May 20, 2009.





In
January 2009, we issued a convertible promissory note and a warrant to acquire
shares of our common stock to Ira L. Goldknopf, our President, Chief Scientific
Officer in consideration for the return of 1,200,000 shares of common stock held
by Mr. Goldknopf.  The promissory note was for a principal amount of
$8,256, had a term of one year, was convertible into 1,200,000 shares of common
stock, and accrued interest at an annual rate of 12%.  The warrant is
exercisable into 1,200,000 shares of common stock and has an exercise price of
$0.04 per share.





In March
2009, we issued 46,910,896 shares of common stock to Dr. Goldknopf to retire the
convertible promissory note with an outstanding principal balance of $1,097,940
plus accrued interest and the convertible promissory note with an outstanding
balance of $27,185 plus accrued interest.




In March
2009, we issued 9,571,429 shares of common stock to Helen R. Park, our Interim
Chief Executive Officer, to retire a convertible promissory note with an
outstanding balance of $150,000 and accrued interest of $5,819.  In
accordance with the terms of the note, the note was converted into 5,000,000
shares of common stock.  The remaining 4,571,429 shares of common
stock were issued to retire the accrued interest on the note.





In June
2009, we issued 7,422,558 shares of common stock to Ira L. Goldknopf, our
President and Chief Scientific Officer, in full payment of $92,142 of accrued
but unpaid salary and accrued interest due under the Goldknopf Employment
Agreement.





In June
2009, we issued 2,960,908 shares of common stock to Helen R. Park, our Interim
Chief Executive Officer, in full payment of $40,000 of accrued but unpaid fees
due under the Bronco Consulting Agreement.





In June
2009, we issued 780,640 shares of common stock to John P. Ginzler, our Chief
Financial Officer, in full payment of $10,000 of accrued but unpaid salary due
under the Ginzler Employment Agreement.


F-35


POWER3
MEDICAL PRODUCTS, INC.


(A
Development Stage Entity)


Notes to
Financial Statements


December
31, 2009 and 2008





In June
2009, we issued a restricted stock award for 12,000,000 shares of common stock
and a warrant to acquire 10,000,000 shares of common stock to John P. Ginzler,
our Chief Financial Officer, in accordance with the terms of the Ginzler
Employment Agreement.  The restricted stock award vests in three equal
annual installments commencing June 2, 2010. On December 7, 2009, Mr. Ginzler
resigned from all positions with us.  As a result, on that date, the
restricted stock award terminated in its entirety.





In
December 2009, we issued 15,000,000 shares of common stock to Helen R. Park, our
Interim Chief Executive Officer, as a performance bonus in accordance with the
terms of the Bronco Consulting Agreement.





Note
11.  Subsequent Events





In
February 2010, Transgenomic, Inc. (“Transgenomic”) filed a lawsuit against us in
the United States District Court for the District of Nebraska.  The lawsuit
contained claims for fraud, breach of contract, slander, libel, and for a
declaration of rights under a Collaboration and Exclusive License Agreement,
dated January 23, 2009, between the parties.  On April 12, 2010, Power3
filed a Partial Motion to Dismiss Transgenomic’s fraud claim.  This case is
currently pending.




In March
2010, we issued 500,000 shares of common stock to a consultant for consulting
services.




In March,
2010, Rockmore Investment Master Fund LTD (“Rockmore”) filed a lawsuit against
us in the Supreme Court for the State of New York.  The lawsuit
contained claims of breach of contract and specific performance.  We
have not yet responded to the complaint.  This case is currently
pending.




In April
2010, we issued 597,490 shares of common stock to a consultant in full payment
of outstanding invoices for services rendered.




In April
2010, Neogenomics, Inc. (“Neogenomics”) filed a lawsuit against us in the
Supreme Court of the State of New York.  The lawsuit contained claims
for failure to repay the principal amount of, and accrued interest under, a
Convertible Debenture, dated April 17, 2009, issued by us in favor of
Neogenomics.  We have not yet responded to the
complaint.  This case is currently pending.




There have been no additional
significant subsequent events through the date these financial statements were
issued.




F-36


EXHIBIT
INDEX
  Exhibit
                            
                            Exhibit Description10.15
                            
                            Second
      Modification and Ratification of Lease Agreement, dated October 1, 2009,
      by and between Vista Woodlands Partners, Ltd. and the
    Company23.1
                            
                            Consent
      of M&K CPAS, PLLC31.1
                            
                            Certification
      of Chief Executive Officer required by Rule 13a-14(a) under the Securities
      Exchange Act of 1934, as amended31.2
                            
                            Certification
      of Chief Financial Officer required by Rule 13a-14(a) under the Securities
      Exchange Act of 1934, as amended32.1
                            
                            Certification
      of Chief Executive Officer and Chief Financial Officer required by Rule
      13a-14(b) under the Securities Exchange Act of 1934, as
      amended