~~Power3 Medical Products, Inc.~~

Power3 Medical Products, Inc.

(A Development Stage Entity)

Balance Sheets

~~Balance Sheets~~

	March 31,
	2011			December 31,
	(Unaudited)			2010

Assets

Cash and equivalents	$	-		$	-
Other current assets		-			-

Total current assets		-			-

Property and equipment, net of accumulated depreciation of $108,577 and $108,461 at March 31, 2011 and December 31, 2010, respectively		2,012			2,128
Deposits		11,332			11,332
Other assets		100			100

Total assets	$	13,444		$	13,560

Liabilities and stockholders’ deficit

Accounts payable	$	1,288,751		$	1,643,510
Accounts payable – related party		525,701			525,701
Notes payable – related party		225,933			154,482
Notes payable – in default		501,000			501,000
Notes payable – in default – related party		80,000			80,000
Convertible debentures – in default		272,176			303,853
Derivative liabilities		629,171			1,460,472
Other current liabilities		819,871			788,225

Total current liabilities		4,342,603			5,457,243

Total liabilities		4,342,603			5,457,243

Stockholders’ deficit:

Preferred Stock – $0.001 par value: 50,000,000 shares authorized; 1,500,000 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively		1,500			1,500
Common Stock – $0.001 par value: 600,000,000 shares authorized; 513,271,617 and 472,237,565 shares issued and outstanding as of March 31, 2011 and December 31, 2010, respectively		513,272			472,237
Additional paid-in capital		73,833,040			72,994,212
Treasury stock		(16,000	)		(16,000	)
Common stock payable		135,000			135,000
Deficit accumulated during development stage		(67,114,471	)		(67,349,132	)
Deficit accumulated before entering development stage		(11,681,500	)		(11,681,500	)

Total stockholders’ deficit		(4,329,159	)		(5,443,683	)

Total liabilities and stockholders’ deficit	$	13,444		$	13,560

June 30,
2010 December 31,

(Unaudited)

2009

Assets

Cash and equivalents $ 2,541 $ -

Total current assets 2,541 -

Property and equipment, net of accumulated depreciation of $108,264 and $107,581 at June 30, 2010 and December 31, 2009, respectively - 683
Deposits 11,332 5,000
Other assets 100 100

Total assets $ 13,973 $ 5,783

Liabilities and stockholders' deficit

Accounts payable $ 1,101,580 $ 999,631
Accounts payable – related party 303,118 96,507
Notes payable – in default 451,000 451,000
Notes payable – related party 15,000 15,000
Convertible debentures – in default 351,255 351,255
Convertible debentures, net of unamortized discount of $-0- and $21,621 at June 30, 2010 and December 31, 2009, respectively 50,000 28,379
Convertible debentures – related party 30,000 30,000
Derivative liabilities 3,876,069 14,456,424
Other current liabilities 759,402 593,891

Total current liabilities 6,937,424 17,022,087

Total liabilities 6,937,424 17,022,087

Stockholders' deficit:

Preferred Stock – $0.01 par value: 50,000,000 shares authorized; 1,500,000 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively 1,500 1,500
Common Stock – $0.001 par value: 600,000,000 shares authorized; 467,797,313 and 434,167,000 shares issued and outstanding as of June 30, 2010 and December 31, 2009, respectively 467,797 434,167
Additional paid-in capital 72,744,226 71,984,083
Treasury stock (16,000 ) (16,000 )
Common stock payable 135,000 135,000
Deficit accumulated during development stage (68,574,474 ) (77,873,554 )
Deficit accumulated before entering development stage (11,681,500 ) (11,681,500 )

Total stockholders' deficit (6,923,451 ) (17,016,304 )

Total liabilities and stockholders' deficit $ 13,973 $ 5,783

The accompanying notes are an integral part of these financial statements

~~Power3 Medical Products, Inc.~~

Power3 Medical Products, Inc.

(A Development Stage Entity)

Statements of Operations

~~Statements of Operations (Unaudited)~~

							Period From
							May 18, 2004
	For the Three Months Ended						Through
	March 31,						March 31,
	2011			2010			2011

Net revenue	$	-		$	-		$	542,249

Operating expenses:
Employee compensation and benefits		31,250			34,918			31,598,092
Professional and consulting fees		382,761			245,001			18,053,409
Impairment of goodwill		-			-			13,371,776
Other selling, general and administrative expenses		61,986			177,742			2,716,134

Total operating expenses		475,997			457,661			65,739,411

Loss from operations		(475,997	)		(457,661	)		(65,197,162	)

Other income:
Derivative gain		752,811			10,703,695			7,725,815
Loss on settlement of litigation		-			-			(267,865	)
Interest income		-			-			7,867
Gain (loss) on settlement of debt		(20,263	)		-			1,562,609
Interest expense		(21,890	)		(49,198	)		(5,809,116	)
Mandatory prepayment penalty		-			-			(420,000	)
Other expense		-			-			(194,886	)

Total other income		710,658			10,654,497			2,604,424

Net income (loss)		234,661			10,196,836			(62,592,738	)

Deemed dividend		-			-			(1,140,760	)

Net income (loss) attributable to common stockholders	$	234,661		$	10,196,836		$	(63,733,498	)

Net income per share - basic	$	0.00		$	0.02

Net income per share - diluted	$	0.00		$	0.02

Weighted average number of shares outstanding - basic		486,993,960			478,823,366

Weighted average number of shares outstanding - diluted		510,842,272			500,029,456

Period From
May 18, 2004
For the Three Months Ended For the Six Months Ended Through

June 30,

June 30,
June 30,

2010

2009

2010

2009

2010

Net revenue $ - $ 35,711 $ - $ 168,477 $ 542,249
-
Operating expenses: -
Employee compensation and benefits 36,789 258,737 71,707 276,294 31,489,286
Professional and consulting fees 679,562 544,518 986,514 625,335 17,215,283
Impairment of goodwill - - - - 13,371,776
Other selling, general and administrative expenses - 47,102 162,848 150,534 2,349,169
-
Total operating expenses 716,351 850,357 1,221,069 1,052,163 64,425,514
-
Loss from operations (716,351 ) (814,646 ) (1,221,069 ) (883,686 ) (63,883,265 )

Other income (expense):
Derivative gain (loss) (123,340 ) 589,693 10,580,355 (156,651 ) 4,557,407
Gain on legal settlement - - - - 36,764
Interest income - - - - 7,867
Gain (loss) on settlement of debt - (124,295 ) - (1,008,029 ) 1,582,872
Interest expense (23,528 ) (137,739 ) (60,206 ) (314,835 ) (5,739,500 )
Mandatory prepayment penalty - - - - (420,000 )
Other income/(expense) - - - - (194,886 )

Total other income (expense) (146,868 ) 327,659 10,520,149 (1,479,515 ) (169,476 )

Net income (loss) (863,219 ) (486,987 ) 9,299,080 (2,363,201 ) (64,052,741 )

Deemed dividend - - - (34,103 ) (1,140,760 )

Net income (loss) attributable to common stockholders $ (863,219 ) $ (486,987 ) $ 9,299,080 $ (2,397,304 ) $ (65,193,501 )

Net income (loss) per share - basic $ (0.00 ) $ (0.00 ) $ 0.02 $ (0.01 )

Net income (loss) per share - diluted $ (0.00 ) $ (0.00 ) $ 0.02 $ (0.01 )

Weighted average number of shares outstanding - basic 442,685,225 335,461,585 440,432,559 267,016,937

Weighted average number of shares outstanding - diluted 442,685,225 335,461,585 459,652,702 267,016,937

The accompanying notes are an integral part of these financial statements

~~Power3 Medical Products, Inc.~~

Power3 Medical Products, Inc.

(A Development Stage Entity)

Statement of Stockholders’ Deficit

~~Statement of Stockholders' Deficit (Unaudited)~~

													Additional
	Common Stock						Preferred Stock						Paid-in			Other Equity			Accumulated
	Shares			Par Value			Shares			Par Value			Capital			Items (1)			Deficit			Total
Balances 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	)	$	2,562,751
																							-
Issued 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	)		-			4,320,000
Issued shares for acquisition of equipment		15,000,000			15,000			-			-			13,485,000			-			-			13,500,000
Stock option expense		-			-			-			-			626,100			(626,100	)		-			-
Issued shares for cash		242,167			242			-			-			314,575			-			-			314,817
Cancelled 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			-			8,311,012
Net 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	)		10,349,294

Cancelled shares returned from employee		(1,120,000	)		(1,120	)		-			-			(1,307,855	)		-			-			(1,308,975	)
Issued shares for compensation		140,000			140			-			-			41,860			-			-			42,000
Issued shares for services		850,000			850			-			-			155,150			-			-			156,000
Amortize deferred compensation expense		-			-			-			-			-			13,222,517			-			13,222,517
Net 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			-			-			314,314
Issued shares for cash		2,452,746			2,452			-			-			222,548			-			-			225,000
Issued shares for compensation		1,253,098			1,254			-			-			176,763			-			-			178,017
Adoption of FAS 123R		-			-			-			-			(475,324	)		475,324			-			-
Amortize deferred compensation expense		-			-			-			-			-			4,603,747			-			4,603,747
Net 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			-			-			284,200
Issued shares for conversion of debt		22,265,224			22,264			-			-			606,412			-			-			628,676
Issued shares for warrants exercised		5,270,832			5,272			-			-			336,396			-			-			341,668
Issued shares for cash		7,630,625			7,632			-			-			992,818			-			-			1,000,450
Placement agent fees		-			-			-			-			(58,500	)		-			-			(58,500	)
Stock received		-			-			-			-			100			-			-			100
Unreturned shares		5,000			5			-			-			4,495			-			-			4,500
Deemed 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			-			-			592,341
Common stock issued for cash		7,492,875			7,493			-			-			639,911			-			-			647,404
Common stock issued for conversion of debt		22,172,536			22,173			-			-			1,568,626			-			-			1,590,799
Common stock issued for lawsuit settlement		325,000			325			-			-			30,550			-			-			30,875
Issued shares for payables		2,133,333			2,133			-			-			186,867			-			-			189,000
Common 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			-			-			358,500
Deemed dividends		-			-			-			-			12,071			-			(12,071	)		-
Loss on related party debt conversion		-			-			-			-			(89,049	)		-			-			(89,049	)
Common stock payable		-			-			-			-			-			123,286			-			123,286
Net 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	)		-			2,222,378
Common stock payable		-			-			-			-			-			116,000			-			116,000
Common stock issed upon exercise of warrants		11,789,509			11,790			-			-			267,042			-			-			278,832
Common stock issued for services		112,201,562			112,201			-			-			4,403,503			(14,286	)		-			4,501,418
Common stock issued for cash		11,515,600			11,516			-			-			73,640			-			-			85,156
Return 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			-			24,000
Common stock rescinded for debt		(1,200,000	)		(1,200	)		-			-			-			(7,056	)		-			(8,256	)
Common stock contributed for debt payment		-			-			-			-			276,558			-			-			276,558
Options issued for services		-			-			-			-			176,927			-			-			176,927
Net 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	)

Common stock issued upon exercise of warrants		36,799,358			36,799			-			-			197,735			-			-			234,534
Common stock issued for services		13,573,456			13,573			-			-			518,671			-			-			532,244
Vesting of common stock issued for services		-			-			-			-			280,000			-			-			280,000
Common stock rescinded or canceled		(12,302,249	)		(12,302	)		-			-			12,302			-			-			-
Imputed interest on no-interest loans		-			-			-			-			1,421			-			-			1,421
Net income		-			-			-			-			-			-			10,524,422			10,524,422

Balance at December 31, 2010		472,237,565		$	472,237			1,500,000		$	1,500		$	72,994,212		$	119,000		$	(79,030,632	)	$	(5,443,683	)

Common stock issued for services		16,986,799			16,987			-			-			287,687			-			-			304,674
Common stock issued for settlement of debt and litigation		27,747,253			27,748			-			-			463,914			-			-			491,662
Common stock issued for cash		300,000			300			-			-			2,700			-			-			3,000
Common stock rescinded or canceled		(4,000,000	)		(4,000	)		-			-			4,000			-			-			-
Imputed interest on no-interest loans		-			-			-			-			2,037			-			-			2,037
Settlement of derivative liability		-			-			-			-			78,490			-			-			78,490
Net income		-			-			-			-			-			-			234,661			234,661

Balance at March 31, 2011 (unaudited)		513,271,617		$	513,272			1,500,000		$	1,500		$	73,833,040		$	119,000		$	(78,795,971	)	$	(4,329,159	)

Additional

Common Stock

Preferred Stock
Paid-in Other Equity Accumulated

Shares

Par Value

Shares

Par Value

Capital

Items (1)

Deficit

Total

Balances 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 ) 2,562,751
-
Issued 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 ) - 4,320,000
Issued shares for acquisition of equipment 15,000,000 15,000 - - 13,485,000 - - 13,500,000
Stock option expense - - - - 626,100 (626,100 ) - -
Issued shares for cash 242,167 242 - - 314,575 - - 314,817
Cancelled 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 - 8,311,012
Net 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 ) 10,349,294

Cancelled shares returned from employee (1,120,000 ) (1,120 ) - - (1,307,855 ) - - (1,308,975 )
Issued shares for compensation 140,000 140 - - 41,860 - - 42,000
Issued shares for services 850,000 850 - - 155,150 - - 156,000
Amortize deferred compensation expense - - - - - 13,222,517 - 13,222,517
Net 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 - - 314,314
Issued shares for cash 2,452,746 2,452 - - 222,548 - - 225,000
Issued shares for compensation 1,253,098 1,254 - - 176,763 - - 178,017
Adoption of FAS 123R - - - - (475,324 ) 475,324 - -
Amortize deferred compensation expense - - - - - 4,603,747 - 4,603,747
Net 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 - - 284,200
Issued shares for conversion of debt 22,265,224 22,264 - - 606,412 - - 628,676
Issued shares for warrants exercised 5,270,832 5,272 - - 336,396 - - 341,668
Issued shares for cash 7,630,625 7,632 - - 992,818 - - 1,000,450
Placement agent fees - - - - (58,500 ) - - (58,500 )
Stock received - - - - 100 - - 100
Unreturned shares 5,000 5 - - 4,495 - - 4,500
Deemed 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 - - 592,341
Common stock issued for cash 7,492,875 7,493 - - 639,911 - - 647,404
Common stock issued for conversion of debt 22,172,536 22,173 - - 1,568,626 - - 1,590,799
Common stock issued for lawsuit settlement 325,000 325 - - 30,550 - - 30,875
Issued shares for payables 2,133,333 2,133 - - 186,867 - - 189,000
Common 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 - - 358,500
Deemed dividends - - - - 12,071 - (12,071 ) -
Loss on related party debt conversion - - - - (89,049 ) - - (89,049 )
Common stock payable - - - - - 123,286 - 123,286
Net 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 ) - 2,222,378
Common stock payable - - - - - 116,000 - 116,000
Common stock issed upon exercise of warrants 11,789,509 11,790 - - 267,042 - - 278,832
Common stock issued for services 112,201,562 112,201 - - 4,403,503 (14,286 ) - 4,501,418
Common stock issued for cash 11,515,600 11,516 - - 73,640 - - 85,156
Return 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 - 24,000
Common stock rescinded for debt (1,200,000 ) (1,200 ) - - (7,056 ) - (8,256 )
Common stock contributed for debt payment - - - - 276,558 - - 276,558
Options issued for services - - - - 176,927 - - 176,927
Net 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 )

Common stock issued upon exercise of warrants 36,799,358 36,799 - - 197,735 - - 234,534
Common stock issued for services 9,133,204 9,133 - - 410,106 - - 419,239
Vesting of common stock issued for services - - - - 140,000 - - 140,000
Common stock rescinded or canceled (12,302,249 ) (12,302 ) - - 12,302 - - -
Net income - - - - - - 9,299,080 9,299,080

Balance at June 30, 2010 467,797,313 $ 467,797 $ 1,500,000 $ 1,500 $ 72,744,226 $ 119,000 $ (80,255,974 ) $ (6,923,451 )

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

The accompanying notes are an integral part of these financial statements

Power3 Medical Products, Inc.

(A Development Stage Entity)

Notes to Financial Statements (Unaudited)

~~June 30, 2010~~March 31, 2011

~~Note 7. Commitments and Contingencies (Continued)~~

Employment and Consulting Agreements

On June 1, 2009, the Company entered into an Amended and Restated Consulting Agreement with Bronco Technology, Inc. (the “Bronco Consulting Agreement”). Under the terms of the agreement, Ms. Park agreed to continue to serve as the Company’s Interim Chief Executive Officer until May 31, 2011. In consideration for Ms. Park’s services, the Company agreed to pay Bronco Technology, Inc. $8,334 per month, subject to annual review by the Company’s board of directors or compensation committee of the board of directors, if any. The Company 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 the Company from the sale of certain of its products through license agreements signed during the term of the consulting agreement.

Effective May 17, 2009, the Company entered into an Amended and Restated Employment Agreement with Dr. Ira L. Goldknopf (the “Goldknopf Employment Agreement”) to continue serving as the Company’s President and Chief Scientific Officer. The agreement is for a ~~three-year term.~~term of three years. The Company agreed to pay Dr. Goldknopf an annual base salary 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 the Company’s board of directors or compensation committee of the board of directors, if any. The Company also agreed to pay ~~Mr.~~Dr. Goldknopf a cash bonus of $1,000 for each publication authored or co-authored by ~~Dr. Goldknopf and~~him that is published in a scientific or professional journal and that provides value to the Company.

Operating Leases

In May 2010, the Company entered into a commercial lease for its corporate headquarters located in The Woodlands, Texas pursuant to which the Company leases approximately 1,500 square feet of space for a fixed monthly rent payment of $2,500. The Company will be required to make annual rent payments of $30,000 and $15,000 during 2011 and 2012, respectively. The lease expires on June 30, 2012.

In June 2010, the Company entered into a commercial lease for its laboratory facilities located in The Woodlands, Texas pursuant to which the Company leases approximately 3,000 square feet of space for an initial monthly rent payment of $5,587. The Company will be required to make annual rent payments of $68,532, $71,514, $73,008, $74,496 and $37,992 during 2011, 2012, 2013, 2014 and 2015, respectively. The lease expires on June 30, 2015.

Power3 Medical Products, Inc.

(A Development Stage Entity)

Notes to Financial Statements (Unaudited)

March 31, 2011

Note 8. Common Stock and Preferred Stock

The Company’s authorized capital consisted of 600,000,000 shares of common stock, $0.001 par value per share, at ~~June 30, 2010~~March 31, 2011 and December 31, ~~2009,~~2010, respectively, and 50,000,000 shares of preferred stock, $0.001 par value per share, at ~~June 30, 2010~~March 31, 2011 and December 31, ~~2009,~~2010, respectively. There were ~~467,797,313~~513,271,617 and ~~434,167,000~~472,237,565 shares of common stock outstanding at ~~June 30, 2010~~March 31, 2011 and December 31, ~~2009,~~2010, respectively, and 1,500,000 shares of preferred stock outstanding at ~~June 30, 2010~~March 31, 2011 and December 31, ~~2009,~~2010, respectively.

Shares Issued in Capital-Raising Transactions

A summary of the shares of common stock issued by the Company in capital-raising transactions during the three months ended March 31, 2011 is provided below.

In ~~January 2010,~~February 2011, the Company ~~issued 409,906~~sold 300,000 shares of common stock and Class A warrants exercisable into 300,000 shares of common stock to an accredited investor for aggregate gross proceeds of $3,000. The Class A warrants have an exercise price of $0.025 per share, are exercisable during the period commencing on the date of grant and ending December 31, 2011, and expire at the end of the exercise period.

Shares Issued for Services

A summary of the shares of common stock issued by the Company for services during the three months ended March 31, 2011 is provided below.

In January 2011, the Company entered into a consulting agreement with an accredited investor pursuant to which the Company agreed to issue 3,166,667 shares of common stock to the consultant ~~for consulting services.~~and to compensate the consultant $5,000 per month payable in cash or common stock in the Company’s discretion. The shares were valued at the closing price of the Company’s common stock on the date the ~~consultant agreed to receive~~issuance of shares was approved by the ~~shares~~Company’s board of directors for total consideration of ~~$65,175,~~$69,667, all of which was recognized as expense during the ~~six~~three months ended ~~June 30, 2010.~~March 31, 2011.

1316

~~POWER3 MEDICAL PRODUCTS, INC.~~

Power3 Medical Products, Inc.

(A Development Stage Entity)

Notes to Financial Statements (Unaudited)

~~June 30, 2010~~March 31, 2011

~~Note 8. Common Stock and Preferred Stock (Continued)~~

In January ~~and February 2010,~~2011, the Company ~~issued~~entered into a ~~total of 4,425,166~~consulting agreement with an accredited investor pursuant to which the Company agreed to issue 3,000,000 shares of common stock to ~~accredited investors upon~~ the ~~exercise of outstanding warrants for aggregate gross proceeds of $234,534.~~

~~In March 2010,~~consultant, to pay $8,650 to the ~~Company issued 500,000 shares of~~consultant in cash or common stock in the Company’s discretion immediately upon execution of the agreement, and to acompensate the consultant ~~for consulting services.~~$5,000 per month payable in cash or common stock in the Company’s discretion. The shares were valued at the closing price of the Company’s common stock on the date the ~~consultant agreed to receive~~issuance of shares was approved by the ~~shares~~Company’s board of directors for total consideration of ~~$23,750,~~$76,456, all of which was recognized as expense during the ~~six~~three months ended ~~June 30, 2010.~~March 31, 2011.

In January 2011, the Company and a consultant mutually agreed to terminate a consulting agreement that the parties had entered into in December 2009. Pursuant to the terms of the consulting agreement, the Company had issued a restricted stock award for 6,000,000 shares of common stock. Upon termination of the consulting agreement, the restricted stock award terminated automatically by its terms. On the date of termination, 2,000,000 shares of common stock had vested. The remaining 4,000,000 shares that had not yet vested were cancelled in their entirety.

In March ~~2010,~~2011, the Company issued ~~197,490~~3,461,539 shares of common stock to a consultant ~~for consulting services.~~in full payment of outstanding fees payable in the amount of $28,199 performed during the three months ended March 31, 2011. The shares were valued at the closing price of the Company’s common stock on the date the ~~consultant agreed to receive~~issuance of shares was approved by the ~~shares~~Company’s board of directors for total consideration of ~~$9,282,~~$48,462. The Company recorded a loss on settlement of debt in the amount of $20,263, all of which was recognized ~~as expense~~ during the ~~six~~three months ended ~~June 30, 2010.~~March 31, 2011.

In ~~April 2010,~~March 2011, the Company issued ~~400,000~~a total of 10,820,132 shares of common stock to ~~a consultant~~various consultants as payment for services performed during the three months ended March 31, 2011 in accordance with the terms of the consultants’ respective consulting ~~services.~~agreements. The shares were valued at the closing price of the Company’s common stock on the date the ~~consultant agreed to receive~~issuance of shares was approved by the ~~shares~~Company’s board of directors for total consideration of ~~$16,000,~~$158,551, all of which was recognized as expense during the three months ended ~~June 30, 2010.~~March 31, 2011.

Power3 Medical Products, Inc.

(A Development Stage Entity)

Notes to Financial Statements (Unaudited)

March 31, 2011

Shares Issued in Settlement of Litigation

In ~~May 2010,~~February 2011, the Company ~~issued~~entered into a ~~total~~settlement agreement with John Ginzler pursuant to which the Company agreed to issue 12,285,714 shares of ~~32,374,192 shares of~~its common stock to ~~accredited investors upon~~him in full payment of all amounts owed to him under the ~~exercise of outstanding warrants.~~employment agreement and for a full release from all claims filed by him against the Company. The ~~warrants were exercised in accordance with cashless exercise provisions contained~~Company recorded a contingent loss in the ~~warrants. As a result,~~amount of $161,044 in its financial statements for the ~~Company received no proceeds from the exercise of the warrants.~~

~~In May~~year ended December 31, 2010 the Company issued 7,625,808 shares of common stock to consultants for consulting services. The shares were valued at the closing price of the Company’s common stock on the date the consultants agreed to receive the shares for total consideration of $305,032, all of which was recognized as expense during the three months ended June 30, 2010.

~~During the six months ended June 30, 2010, the Company rescinded and canceled a total of 12,302,249 shares of common stock that had been issued under restricted stock awards that had terminated~~ in accordance with the ~~terms~~provisions of ASC 450.

In March 2011, the Company entered into a settlement agreement with Rockmore pursuant to which the Company agreed to issue 12 million shares of its common stock to Rockmore in full payment of the ~~awards.~~outstanding balance of the debenture and accrued interest thereon, and for a full release from all claims filed by Rockmore against the Company. The Company recorded a contingent loss in the amount of $169,818 in its financial statements for the year ended December 31, 2010 in accordance with the provisions of ASC 450.

Note 9. Stock Options and Warrants

The Company did not issue any stock options ~~or warrants~~ during the ~~three- and six- month periods~~three months ended ~~June 30, 2010,~~March 31, 2011, no stock options were exercised during the three months ended March 31, 2011, and no stock options were outstanding at ~~June 30, 2010 and December~~March 31, ~~2009.~~2011. Warrants exercisable into a total of ~~94,524,079~~59,961,090 and ~~131,323,437~~63,575,065 shares of the Company’s common stock were outstanding on ~~June 30, 2010~~March 31, 2011 and December 31, ~~2009,~~2010, respectively. The weighted average exercise price of the warrants outstanding on ~~June 30, 2010~~March 31, 2011 and December 31, ~~2009~~2010 was ~~$0.05.~~$0.133 and $0.132, 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.~~model. 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.

1418

~~POWER3 MEDICAL PRODUCTS, INC.~~

Power3 Medical Products, Inc.

(A Development Stage Entity)

Notes to Financial Statements (Unaudited)

~~June 30, 2010~~March 31, 2011

~~Note 9. Stock Options and Warrants (Continued)~~

During the six months ended June 30, 2010, the Company issued a total of 36,799,358 common stock to warrant holders upon the exercise of outstanding warrants for total cash proceeds of $234,534. The average exercise price of the warrants exercised was $0.005 per share.

~~POWER3 MEDICAL PRODUCTS, INC.~~

~~(A Development Stage Entity)~~

~~Notes to Financial Statements (Unaudited)~~

~~June 30, 2010~~

Note 10. Promissory Notes and Debentures

In March 2011, the Company entered into a settlement agreement with Rockmore pursuant to which the Company agreed to issue 12 million shares of its common stock to Rockmore in full payment of the outstanding balance of the debenture and accrued interest thereon, and for a full release from all claims filed by Rockmore against the Company. The Company recorded a contingent loss in the amount of$169,818 in its financial statements for the year ended December 31, 2010 in accordance with the provisions of ASC 450. The Company recognized a reduction in derivative liability of $78,490 which resulted in a corresponding increase in additional paid-in capital.

During the three months ended March 31, 2011, Rozetta-Cell Life Sciences, Inc., a Nevada corporation that the Company is proposing to acquire (“Rozetta-Cell”), made loans to the Company for a total of $71,451. The loans are interest free and payable on demand. The Company incurred $2,037 of imputed interest during the three months ended March 31, 2011 which resulted in an increase in additional paid-in capital since the interest is not payable.

The carrying values of the Company’s notes payable, net of unamortized discounts, amounted to ~~$466,000~~$806,933 and $735,482 at ~~June 30, 2010~~March 31, 2011 and December 31, ~~2009,~~2010, respectively, as ~~follows.~~follows:

	March 31, 2011		December 31, 2010

Notes Payable	$	-0-	$	-0-

Notes Payable – Related Party		225,933		154,482

Notes Payable – in Default		501,000		501,000
Less: Unamortized Discount		-0-		-0-
Total		501,000		501,000

Notes Payable – in Default – Related Party		80,000		80,000

Total Notes Payable, Net	$	806,933	$	735,482

June 30,
2010

December 31,
2009

Notes Payable – in Default $ 451,000 $ 451,000

Notes Payable – Related Party 15,000 15,000

Total Notes Payable, Net of Discount $ 466,000 $ 466,000

The carrying values of the Company’s convertible debentures, net of unamortized discounts, amounted to ~~$431,381~~$272,176 and ~~$409,634~~$303,843 at ~~June 30, 2010~~March 31, 2011 and December 31, ~~2009,~~2010, respectively, as ~~follows.~~follows:

	March 31, 2011		December 31, 2010

Convertible Debentures – in Default	$	272,176	$	303,853

Total Convertible Debentures, Net	$	272,176	$	303,853

June 30,
2010

December 31,
2009

Convertible Debentures $ 50,000 $ 50,000
Less: Unamortized Discount -0- (21,621 )
Total 50,000 28,379

Convertible Debentures – in Default 351,255 351,255

Convertible Debentures – Related Party 30,000 30,000

Total Convertible Debentures, Net of Unamortized Discount $ 431,255 $ 409,634

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~~POWER3 MEDICAL PRODUCTS, INC.~~

Power3 Medical Products, Inc.

(A Development Stage Entity)

Notes to Financial Statements (Unaudited)

~~June 30, 2010~~March 31, 2011

Note 11. Fair Value Measurements

The Company has issued several convertible promissory notes, convertible debentures and stock warrants that have conversion features that represent freestanding derivative instruments that meet the requirements for liability classification under ASC Topic 815, Derivatives and Hedging (“ASC 815”). As a result, the fair value of the derivative financial instruments in these securities is reflected in the Company’s balance sheet as a liability. The fair value of the derivative financial instruments in these securities was measured at the inception date of the securities and each subsequent balance sheet date. Any changes in the fair value of the derivative financial instruments were recorded as non-operating, non-cash income or expense at each balance sheet date.

The following table presents the Company’s derivative liabilities within the fair value hierarchy utilized to measure fair value on a recurring basis as of March 31, 2011 and December 31, 2010:

	Level 1		Level 2		Level 3
Derivative liabilities – March 31, 2011		-0-		-0-	$	629,171
Derivative liabilities – December 31, 2010		-0-		-0-	$	1,460,472

The following table presents a Level 3 reconciliation of the beginning and ending balances of the fair value measurements using significant unobservable inputs as of March 31, 2011 and December 31, 2010:

	Derivative Liabilities
Balance, December 31, 2009	$	14,456,424
Purchases, sales, issuances and settlements (net)		(12,995,952	)
Balance, December 31, 2010		1,460,472
Purchases, sales, issuances and settlements (net)		(831,301	)
Balance, December 31, 2010	$	629,171

The Company’s other financial instruments consist of cash and equivalents, deposits, accounts payable, notes payable and convertible debentures. The estimated fair value of the cash and equivalents, deposits and accounts payable approximates their respective carrying amounts due to the short-term nature of these instruments. The estimated fair value of the notes payable and convertible debentures also approximates their respective carrying amounts since their terms are similar to those in the lending market for comparable loans with comparable risks. None of these instruments are held for trading purposes.

Power3 Medical Products, Inc.

(A Development Stage Entity)

Notes to Financial Statements (Unaudited)

March 31, 2011

Note 12. 2011 Equity Awards Plan

In February 2011, the Company adopted the Power3 Medical Products, Inc. 2011 Equity Awards Plan (the “2011 Equity Awards Plan”). Under the plan, 25,000,000 shares of common stock may be granted to employees, officers and directors of, and consultants and advisors to, the Company 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. The plan terminates on February 28, 2021. On February 28, 2011, the Company filed a registration statement on Form S-8, File No. 333-172504, with the SEC covering the public sale of the 25,000,000 shares of common stock available for issuance under the plan.

Note 13. Acquisition of ~~StemTroniX~~Rozetta-Cell

~~In May~~On September 7, 2010, the Company ~~elected to terminate the~~entered into an Agreement and Plan of Merger (the ~~"Merger Agreement"~~“Merger Agreement”) bywith Rozetta-Cell pursuant to which Rozetta-Cell will merge with and ~~among~~into the Company, the separate corporate existence of Rozetta-Cell will cease, and the Company will continue as the surviving company.

Subject to the terms and conditions of the Merger Agreement, which has been approved by the boards of directors of both the Company and Rozetta-Cell, if the merger is completed, each outstanding share of Rozetta-Cell common stock will be converted into the right to receive 10 shares of the Company’s common stock, subject to certain adjustments as provided in the Merger Agreement.

The Merger Agreement contains customary representations and warranties by the Company and Rozetta-Cell, covenants by Rozetta-Cell to conduct its business in the ordinary course until the merger is consummated, and covenants by Rozetta-Cell to not take certain actions until the merger is consummated. Rozetta-Cell 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.

Power3 ~~Acquisition Corp.~~Medical Products, Inc.

(A Development Stage Entity)

Notes to Financial Statements (Unaudited)

March 31, 2011

Consummation of the merger is subject to certain customary conditions, including, among others, the approval of the merger by the shareholders of Rozetta-Cell, the approval of the issuance of shares of the Company’s common stock in connection with the merger by the shareholders of the Company, the approval of an amendment to the certification of incorporation of the Company by the shareholders of the Company 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 Rozetta-Cell, the receipt of any required governmental approvals and expiration of applicable waiting periods, the accuracy of the representations and warranties by the Company and Rozetta-Cell (generally subject to a material adverse effect standard), ~~a Delaware corporation~~ and ~~wholly-owned subsidiary~~material compliance by the Company and Rozetta-Cell with their respective obligations under the Merger Agreement.

The Merger Agreement contains certain termination rights of the Company and ~~StemTroniX, Inc., a Texas corporation. The Company did not incur any penalties in connection with its decision~~Rozetta-Cell, including the right to terminate the Merger ~~Agreement.~~Agreement if the merger is not completed by December 31, 2010.

On December 31, 2010, the Company and Rozetta-Cell entered into a First Amendment and Waiver to Agreement and Plan of Merger (the “Amendment”) which amends the Merger Agreement. Under the terms of the Amendment, the parties agreed to extend the outside date by which the merger must close to June 30, 2011 and require the conversion of all issued and outstanding shares of the Company’s Series B preferred stock into the Company’s common stock by the holders thereof subsequent to approval of the merger by the Company’s shareholders, but prior to completion of the merger.

Note ~~12.~~14. Subsequent Events

~~Other than~~

Subsequent to March 31, 2011, the Company issued a total of 577,112 shares of common stock to various consultants as ~~set forth below, there~~payment for services performed during the month of April 2011 in accordance with the terms of the consultants’ respective consulting agreements.

Subsequent to March 31, 2011, Rozetta-Cell made additional loans to the Company for a total of $25,500. The loans were interest free and payable on demand.

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

In July 2010, the Company filed a non-suit to dismiss the case that we filed against Transgenomic in Texas without prejudice. The Company intends to re-file the claims against Transgenomic in the United States District Court for the District of Nebraska as counterclaims accompanying its response to the claims filed by Transgenomic.

In July 2010, Kraniak and Kazanowski filed counterclaims against the Company in the United States District Court for the Southern District of Texas, Houston Division. The counterclaims contained claims for breach of contract, misrepresentation, civil conspiracy and defamation. The Company filed an answer to the counterclaims denying each of the alleged claims.

In July 2010, Able Income Fund filed a lawsuit against the Company in the Supreme Court of the State of New York. The lawsuit contained claims for breach of contract and specific performance related to two convertible debentures previously issued by the Company to Able Income Fund. The Company has engaged counsel and is currently preparing a response to the complaint.

1722

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 compete;

●

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 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations” below and “Item 1A. Risk Factors” of our Annual Report on Form 10-K for our fiscal year ended December 31, ~~2009.~~2010. 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.

1823

Item 2.

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 our Annual Report on Form 10-K for our fiscal year ended December 31, ~~2009~~2010 and elsewhere in this report. The following should be read in conjunction with our financial statements beginning on page 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 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 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 diseases.

We have developed a portfolio of products including BC-SeraPro™, 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 engaged 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 for their disease.

Strategy

We are currently developing 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.

1924

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-SeraPro™ during ~~2010.~~2011. 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 ~~United States Patent and Trademark Office.~~USPTO. By utilizing the intellectual property that we have in our possession, building on the intellectual property portfolio through additional clinical trials, and acquiring complementary intellectual property from other bio-technology companies, we will have the ability to successfully create, market and sell a diverse diagnostic product ~~offering based on our proteomic research.~~offering.

Our goal during ~~2010~~2011 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~~that 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.

Recent Developments

On September 7, 2010, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Rozetta-Cell Life Sciences, Inc., a Nevada corporation (“Rozetta-Cell”), pursuant to which Rozetta-Cell will merge with and into us, the separate corporate existence of Rozetta-Cell will cease, and we will continue as the surviving company.

Subject to the terms and conditions of the Merger Agreement, which has been approved by the boards of directors of both us and Rozetta-Cell, if the merger is completed, each outstanding share of Rozetta-Cell common stock will be converted into the right to receive 10 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 Rozetta-Cell, covenants by Rozetta-Cell to conduct its business in the ordinary course until the merger is consummated, and covenants by Rozetta-Cell to not take certain actions until the merger is consummated. Rozetta-Cell 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 Rozetta-Cell, the approval of the issuance of shares 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 Rozetta-Cell, the receipt of any required governmental approvals and expiration of applicable waiting periods, the accuracy of the representations and warranties of us and Rozetta-Cell (generally subject to a material adverse effect standard), and material compliance by us and Rozetta-Cell with their respective obligations under the Merger Agreement.

The Merger Agreement contains certain termination rights of us and Rozetta-Cell, including the right to terminate the Merger Agreement if the merger is not completed by December 31, 2010.

On December 31, 2010, we entered into a First Amendment and Waiver to Agreement and Plan of Merger with Rozetta-Cell (the “Amendment”) which amends the Merger Agreement. Under the terms of the Amendment, we and Rozetta-Cell agreed to extend the outside date by which the merger must close to June 30, 2011 and require the conversion of all issued and outstanding shares of our Series B preferred stock into shares of our common stock by the holders thereof subsequent to approval of the merger by our shareholders, but prior to completion of the merger.

Outlook

We expect sales of our BC-SeraPro™ and NuroPro® diagnostic products to increase during ~~2010~~2011 as we complete Phase II clinical studies on these products. We also ~~expect~~intend to ~~develop~~continue developing several additional diagnostic products during ~~2010.~~2011. As a result, we expect revenue to increase as we enter into ~~additional~~ collaboration and licensing agreements with ~~other~~ bio-technology 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,~~2011, will provide us with the assets and operating results necessary to grow at an exponential rate for the foreseeable future.

Critical Accounting Policies

For information regarding our critical accounting policies, please refer to the discussion provided in our Annual Report on Form 10-K for our fiscal year ended December 31, ~~2009~~2010 under the caption “Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Critical Accounting Policies” and our Notes to Financial Statements included therein.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements applicable to our business, please refer to the discussion provided in our Annual Report on Form 10-K for our fiscal year ended December 31, ~~2009~~2010 under the caption “Item 6. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Recent Accounting Pronouncements” and our Notes to Financial Statements included therein.

Comparison of the Three-Month Periods Ended ~~June 30,~~March 31, 2011 and 2010 ~~and 2009~~

Net Revenue

Net revenue ~~consists primarily~~has historically consisted of licensing fees, royalties and milestone payments that we receive from our licensing partners. We ~~generated revenue of $35,711 for the three months ended June 30, 2009. We~~ did not generate any revenue ~~for~~during the three months ended ~~June 30, 2010. The decrease in revenue resulted primarily from our decision to terminate the Collaboration~~March 31, 2011 and ~~Exclusive License Agreement with Transgenomic, Inc. in January~~ 2010. We ~~expect licensing fees, royalties and milestone payments generated from our BC-SeraPro~~™ ~~and NuroPro~~® ~~diagnostic products~~intend to ~~increase during 2010 as we complete Phase II clinical studies on these products. As a result, we expect revenue to increase as we~~ enter into ~~additional~~ collaboration and licensing agreements with ~~other~~ bio-technology companies, academic and research institutions and governmental ~~agencies.~~agencies during 2011. As a result, we expect to begin to generate revenue during the next 12 months as we begin to generate licensing fees, royalties and milestone payments under these new agreements.

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 ~~$221,948~~$3,668 to ~~$36,789~~$31,250 for the three months ended ~~June 30, 2010~~March 31, 2011 from ~~$258,737~~$34,918 for the three months ended ~~June 30, 2009.~~March 31, 2010. The decrease of ~~$221,948~~$3,668 was due ~~primarily~~ to a decrease in the amount of ~~$219,754 for~~ salary and equity-based compensation ~~expenses associated with a decrease in~~that we paid to the ~~number of~~ individuals who we employed during the three months ended ~~June 30, 2010.~~March 31, 2011. We expect employee compensation expense to increase over the next 12 months as we ~~continue~~attempt 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 ~~$135,044~~$137,760 to ~~$679,562~~$382,761 for the three months ended ~~June 30, 2010~~March 31, 2011 from ~~$544,518~~$245,001 for the three months ended ~~June 30, 2009.~~March 31, 2010. The increase of ~~$135,044~~$137,760 was due primarily to an increase of ~~$110,618~~$130,460 for ~~legal fees.~~the amount of expense recognized in connection with equity-based compensation paid to service providers and consultants for various services. 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 services and 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 ~~$47,102~~$115,756 to ~~$-0-~~$61,986 for the three months ended ~~June 30, 2010~~March 31, 2011 from ~~$47,102~~$177,742 for the three months ended ~~June 30, 2009.~~March 31, 2010. The decrease of ~~$47,102 resulted~~$115,756 was due primarily ~~from a decrease~~to decreases of ~~$28,575~~$34,991 for lab services and supplies, $39,302 for administrative and support ~~fees~~expenses, and $16,179 for insurance, as well as decreases in other miscellaneous ~~selling,~~ 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.

~~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 $114,211 to $23,528 for the three months ended June 30, 2010 from $137,739 for the three months ended June 30, 2009. The decrease of $114,211 was due primarily to the retirement during 2009 of many of the debt obligations that were outstanding during the three months ended June 30, 2009. We expect interest expense to decrease over the next 12 months as we continue to retire our remaining debt obligations.

Derivative Gain / Loss

Derivative gain / loss consists of the non-operating, non-cash income or expense ~~resulting~~that results from changes in the fair value of the derivative instruments contained in the convertible promissory notes and associated stock warrants that were outstanding at ~~June 30,~~March 31, 2011 and 2010, ~~and 2009,~~ respectively. During the three months ended June 30, 2010, we changed the method by which we valued the conversion features in ~~our~~its convertible notes and convertible debentures by switching from the binomial lattice valuation model to the Black-Scholes pricing model. As a result, the conversion features in our notes and debentures were valued under the binomial lattice valuation model at March 31, 2010, and were valued under the Black-Scholes pricing model at March 31, 2011.

We recognized a derivative ~~loss~~gain of ~~$123,340~~$752,811 for the three months ended ~~June 30, 2010~~March 31, 2011 compared to a derivative gain of ~~$589,693~~$10,703,695 for the three months ended ~~June 30, 2009.~~March 31, 2010. The ~~difference of $713,033 was~~derivative gains that we recognized during the three months ended March 31, 2011 and 2010 were due primarily to a ~~larger~~ decrease in the ~~trading~~ price of our common stock ~~between April 1, 2009~~during 2011 and ~~June 30, 2009~~2010, respectively. The decrease of $9,950,884 was due primarily to the fact that our stock price dropped a smaller percentage amount during the three months ended March 31, 2011 than it did during the ~~decrease~~three months ended March 31, 2010, and was generally at a lower level during the three months ended March 31, 2011 than it was during the three months ended March 31, 2010. While we expect our outstanding convertible promissory notes to continue to be retired or converted into shares of common stock during the next 12 months, we cannot predict what our future derivative gains or losses will be in the ~~trading price of our common stock between April 1, 2010~~future since such gains and ~~June 30, 2010. While future derivative gain / loss is~~losses are 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 the associated stock warrants are exercised or expire by their terms.stock.

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 applicable note and accrued interest thereon or the applicable invoice. We recognized a loss on the settlement of debt of ~~$124,295 for~~$20,263 during the three months ended ~~June 30, 2009.~~March 31, 2011. We did not recognize any gain or loss on the settlement of debt ~~for~~during the three months ended ~~June 30,~~March 31, 2010. The difference of ~~$124,295~~$20,263 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~~2011 by issuing shares of our common stock having an aggregate value that was greater than the outstanding ~~principal~~ amount of the ~~applicable note and accrued interest or the applicable invoice.~~invoices. While we may ~~continue to~~ incur additional gains and losses on the settlement of debt in the future asin the event we ~~continue to~~ pay off additional outstanding ~~debt~~debts and invoices with shares of our common stock, we expect any such gains or losses to decrease as the amount of our outstanding debt ~~continues~~decreases.

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 $27,308 to ~~decrease.~~$21,890 for the three months ended March 31, 2011 from $49,198 for the three months ended March 31, 2010. The decrease of $27,308 was due primarily to our decision to retire certain of our debt obligations during 2010 that were outstanding during the three months ended March 31, 2010. We expect interest expense to decrease over the next 12 months as we continue to retire our remaining debt obligations.

Net Income / Loss

We generated a net ~~loss~~income of ~~$863,219~~$234,661 for the three months ended ~~June 30, 2010~~March 31, 2011 compared to a net ~~loss~~income of ~~$486,987~~$10,196,836 for the three months ended ~~June 30, 2009.~~March 31, 2010. The ~~increase~~decrease of ~~$376,232~~$9,962,175 was due primarily to ~~a difference~~decreases of ~~$713,033~~$9,950,884 for derivative ~~loss~~gain recognized during 2011 compared to derivative gain recognized during 2010 ~~compared to 2009,~~ and ~~an increase~~increases of ~~$135,044~~$130,460 for professional fees and $20,263 for loss on settlement of debt. This was partially offset by ~~a decrease~~decreases of ~~$221,948~~$115,756 for ~~employee compensation~~other selling, general and ~~benefits, a difference of $124,295 resulting from losses from the extinguishment of debt recognized during 2009,~~administrative expenses and ~~$114,211~~$27,308 for interest expense. We expect to generate net losses during ~~the remainder of 2010~~2011 as we continue to build our business. However, we expect these losses to decrease in the future as we begin to generate ~~additional~~ revenue through collaboration and licensing ~~partners~~agreements and as we continue to retire our outstanding debt obligations.

~~Comparison of the Six-Month Periods Ended June 30, 2010 and 2009~~

~~Net Revenue~~

We generated revenue of $168,477 for the six months ended June 30, 2009. We did not generate any revenue for the six months ended June 30, 2010. The decrease in revenue resulted primarily from our decision to terminate the Collaboration and Exclusive License Agreement with Transgenomic, Inc. in January 2010.

~~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 expense decreased $204,587 to $71,707 for the six months ended June 30, 2010 from $276,294 for the six months ended June 30, 2009. The decrease of $204,587 was due primarily to a decrease of approximately $200,000 for salary and equity-based compensation expenses associated with a decrease in the number of individuals who we employed during the six months ended June 30, 2010.

~~Professional Fees~~. Professional fees increased $361,179 to $986,514 for the six months ended June 30, 2010 from $625,335 for the six months ended June 30, 2009. The increase of $361,179 was due primarily to an increase of $559,239 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 in other miscellaneous professional fees.

~~Other Selling, General and Administrative Expenses~~. Other general and administrative expenses increased $12,314 to $162,848 for the six months ended June 30, 2010 from $150,534 for the six months ended June 30, 2009. The increase of $12,314 resulted primarily from an increase of $15,351 for lab services, partially offset by a decrease in other miscellaneous selling, general and administrative expenses.

~~Interest Expense~~

Interest and amortization expense decreased $254,629 to $60,206 for the six months ended June 30, 2010 from $314,835 for the six months ended June 30, 2009. The decrease of $254,629 was due primarily to the retirement during 2009 of many of the debt obligations that were outstanding during the six months ended June 30, 2009.

~~Derivative Gain / Loss~~

We recognized a derivative gain of $10,580,355 for the six months ended June 30, 2010 compared to a derivative loss of $156,651 for the six months ended June 30, 2009. The difference of $10,737,006 was due primarily to the decrease in the trading price of our common stock between January 1, 2010 and June 30, 2010 compared to the increase in the trading price of our common stock between January 1, 2009 and June 30, 2009.

~~Gain / Loss on Settlement of Debt~~

We recognized a loss on the settlement of debt of $1,008,029 for the six months ended June 30, 2009. We did not recognize any gain or loss on the settlement of debt for the six months ended June 30, 2010. The difference of $1,008,029 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 that was greater than the outstanding principal amount of the applicable note and accrued interest or the applicable invoice.

~~Net Income / Loss~~

We generated net income of $9,299,080 for the six months ended June 30, 2010 compared to a net loss of $2,397,304 for the six months ended June 30, 2009. The difference of $11,696,384 was due primarily to a difference of $10,737,006 resulting from the derivative gain recognized during 2010 compared to the derivative loss recognized during 2009, a difference of $1,008,029 resulting from losses from the extinguishment of debt recognized during 2009, and decreases of $254,629 for interest expense and $204,587 for employee compensation and benefits. This was partially offset by a decrease of $168,477 for net revenue.

Liquidity and Capital Resources

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

Net cash used by operating activities was ~~$231,993 for~~$74,451 during the ~~six~~three months ended ~~June 30, 2010~~March 31, 2011 compared to ~~$56,185 for~~$226,404 during the ~~six~~three months ended ~~June 30, 2009.~~March 31, 2010. The ~~$175,808 increase in~~decrease of $151,953 for cash used by operating activities was due primarily to a ~~difference~~decrease of ~~$10,737,006~~$9,950,884 for ~~changes in the amount~~derivative gain and an increase of ~~our derivative liability, and decreases of $1,008,029 for loss on settlement of debt, $142,729~~$234,674 for stock issued for compensation and services, ~~and $187,357 for amortization of debt discounts and deferred finance costs. This was~~ partially offset by ~~a difference~~decreases of ~~$11,696,384 between the~~$9,962,175 for net income ~~generated in 2010~~ and ~~the net loss incurred during 2009 and an increase of $233,804 in~~$71,416 for accounts payable and other liabilities.

~~Net cash used by investing activities was $52,500 for the six months ended June 30, 2009.~~ We did not have any cash flows from investing activities during the ~~six~~three months ended ~~June 30,~~March 31, 2011 and 2010. ~~The $52,500 difference was due to purchases of property and equipment during 2009.~~

Net cash provided by financing activities was $74,451 for the three months ended March 31, 2011 compared to $234,534 for the ~~six~~three months ended ~~June 30, 2010 compared to $119,666 for the six months ended June 30, 2009.~~March 31, 2010. The ~~$114,868 increase~~$160,083 decrease in cash provided by financing activities was due ~~primarily~~ to ~~an increase~~a decrease of $234,534 for proceeds from the exercise of warrants, partially offset by ~~decreases~~increases of ~~$64,666~~$71,451 for proceeds from the issuance of ~~convertible debt, $35,000~~notes payable to related parties and $3,000 for proceeds from the sale of common ~~stock and $20,000 for proceeds from the issuance of debt.~~stock.

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

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 was due February 26, 2010. The warrant is exercisable into 1,000,000 shares of common stock and has an exercise price of $0.01 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.~~

~~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 was due March 3, 2010. The warrant is exercisable into 1,000,000 shares of common stock and has an exercise price of $0.01 that may be subject to adjustment depending upon the trading price of our common stock.

During the period beginning January 1, ~~2009~~2010 and ending ~~June 30,~~May 12, 2011, Rozetta-Cell made loans to us for a total of $251,433. The loans are interest free and payable on demand.

During the period beginning January 1, 2010 and ending May 12, 2011, we issued a total of ~~56,214,675~~36,799,358 shares of common stock to warrant holders upon the exercise of outstanding warrants at exercise prices ranging between ~~$0.001~~$0.01 and ~~$0.25~~$0.053 per share for total cash proceeds of ~~$513,366.~~$234,534.

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.

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, proceeds from the issuance of equity securities and proceeds from the exercise of outstanding warrants. 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.

Off-Balance Sheet Arrangements

As of ~~June 30, 2010,~~March 31, 2011, 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 4T. Controls and Procedures.

As of ~~June 30, 2010,~~March 31, 2011, we carried out the evaluation of the effectiveness of our disclosure controls and procedures required 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 March 31, ~~2010,~~2011, 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 Securities and Exchange Commission’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.

There has been no change in our internal control over financial reporting identified in connection with this evaluation that occurred during our fiscal quarter ended ~~June 30, 2010~~March 31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

Item 1. 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 ~~the Company’s~~our Chief Executive Officer. ~~The parties~~We agreed to arbitrate Mr. Rash’s claims for wages of $36,031 and other compensation due, breach of contracts or covenants, and ~~benefits. We agreed to arbitrate Mr. Rash’s claims for wages of $36,031~~benefits, and our claims for embezzlement, fraud and breach of contract by Mr. Rash. Arbitration ~~had~~has not been initiated by either party.

In March 2009, McLennon Law Corporation ~~(“McLennon”)~~ filed a ~~law suit~~lawsuit against us in the Superior Court of the State of California in and for the County of San Francisco for breach of contract for ~~approximately $117,000 of~~ accrued but unpaid attorney fees ~~plus interest.~~and accrued interest thereon. In July 2010, a judgment was entered against us for ~~the full amount~~a total of $148,683 for unpaid attorney fees and ~~interest and~~interest. We do not intend to appeal the ~~law suit was terminated.~~court’s ruling.

In September 2009, Marion McCormick, one of our former non-executive employees, ~~attempted to convert~~filed a lawsuit against us in the District Court of Montgomery County, Texas, 9th Judicial District, seeking damages and specific performance under a $30,000 convertible promissory note ~~plus interest~~and a warrant exercisable into 1,000,000 shares of ~~our~~ common stock. In August 2010, we filed an amended answer and counterclaims against Ms. McCormick for breach of fiduciary duty and fraud. We are disputing the amount, if any, that is due to ~~the former employee~~her under the note. As of June 30, 2010, the note had not been converted. In December 2009, the former employee filed a law suit against us in the District Court of Montgomery County, Texas, 9th Judicial District seeking damages and specific performance. We have engaged counsel and are preparing a response to the complaint.

In February 2010, Transgenomic, Inc. (“Transgenomic”) filed a lawsuit against us in the United States District Court for the District of Nebraska. The lawsuit contains claims for fraud, breach of contract, libel and slander, and seeks a declaration of rights under ~~the~~a Collaboration and Exclusive License Agreement, dated January 23, 2009, between the ~~parties.~~parties that we terminated on February 2, 2010. In April 2010, we filed a partial motion to dismiss Transgenomic’s fraud claim. In June 2010, we filed a lawsuit against Transgenomic in the District Court of Montgomery County, Texas, 359th Judicial District. The lawsuit ~~contains~~contained claims for trade secret misappropriation, breach of contract, misappropriation, conversion, unjust enrichment, quantum meruit and promissory estoppel, as well as a request for injunctive relief. In July 2010, we filed a non-suit to dismiss the case that we had filed against Transgenomic in Texas without prejudice. We intend to re-file the claims against Transgenomic in the United States District Court for the District of Nebraska as counterclaims accompanying our response to the claims filed by Transgenomic. We have agreed to enter mediation with Transgenomic in an attempt to resolve this matter.

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 ~~contains~~contained claims for breach of contract and specific performance related to a convertible debenture in the amount of $31,677 and common stock warrant that we previously issued to Rockmore. ~~We have engaged counsel~~In September 2010, Rockmore filed a motion for summary judgment and ~~are preparing~~injunction regarding its claims, and in October 2010, we filed an opposition to Rockmore’s motion. In October 2010, the court granted Rockmore’s motion for summary judgment, but denied its request for an injunction. In March 2011, we entered into a ~~response~~settlement agreement with Rockmore pursuant to ~~the complaint.~~which we agreed to issue 12 million shares of our common stock to Rockmore in return for a full release from all claims filed by Rockmore against us.

In April 2010, we filed a lawsuit against Richard Kraniak (“Kraniak”) and Roger Kazanowski (“~~Kraniak and Kaznowski”~~Kazanowski”) in the United States District Court for the Southern District of Texas, Houston Division. The lawsuit contains claims for violations of the Securities Act ~~of 1933, as amended (the “Securities Act”),~~ and the Securities and Exchange ~~Act of 1934, as amended (the “Exchange Act”).~~Act. In May 2010, Kraniak and Kazanowski filed a motion to dismiss the lawsuit. In June 2010, we filed a response to Kraniak and Kazanowski’s motion to dismiss as well as a first amended complaint against Kraniak and Kazanowski. In July 2010, Kraniak and Kazanowski filed counterclaims against ~~the Company in the United States District Court for the Southern District of Texas, Houston Division. The counterclaims contain claims~~us for breach of contract, misrepresentation, civil conspiracy and defamation. WeIn July 2010, we filed an answer to the counterclaims denying each of the alleged claims. In October 2010, we filed a second amended complaint against Kraniak and Kazanowski, which we revised and re-filed in November 2010. In December 2010, we filed motions for partial summary judgment with respect to each of the counterclaims filed by Kraniak and Kazanowski, and in March 2011, filed supplements to certain of the motions for partial summary judgment.

In April 2010, Neogenomics, Inc. (“Neogenomics”) filed a lawsuit and motion for summary judgment against us in the Supreme Court of the State of New York. The lawsuit ~~contains~~contained claims for breach of contract and specific performance related to a convertible debenture in the amount of $200,000 that we ~~previously~~ issued to ~~Neogenomics.~~Neogenomics in April 2007. In May 2010, we filed a response to Neogenomic’s motion for summary judgment. In December 2010, the court granted Neogenomic’s motion for summary judgment, awarding Neogenomics $217,457, comprised of $200,000 of principal under the debenture and $17,457 of accrued interest thereon. We intend to appeal the court’s ruling.

In April 2010, Lucas Associates, Inc. (“Lucas Associates”) filed a lawsuit against us in the District Court of Montgomery County, ~~Texas.~~Texas, 359th Judicial District. The lawsuit ~~contains~~contained claims for breach of contract, quantum meruit and fraud related to allegations that we failed to pay ~~them~~Lucas Associates a finder’s fee in connection with the hiring of John Ginzler as ~~the Company’s~~our Chief Financial Officer in 2009. In June 2010, we filed a general denial to the claims alleged in the complaint. In November 2010, we entered into a settlement with Lucas Associates pursuant to which we agreed to pay $20,000 to Lucas Associates in monthly installments of $1,250 beginning January 14, 2011.

In April 2010, John Ginzler, our former Chief Financial Officer, filed a lawsuit against us in the District Court of Montgomery County, Texas, 359th Judicial District. The lawsuit ~~contains~~contained claims for breach of contract related to an employment agreement that we had entered into ~~between him and the Company.~~with him. In June 2010, ~~the Company~~we filed a general denial to the claims alleged in the complaint. In February 2011, we entered into a settlement agreement with Mr. Ginzler pursuant to which we agreed to issue 12,285,714 shares of our common stock to him in return for a full release from all claims that he had filed against us.

In May 2010, we filed a lawsuit against Able Income Fund LLC (“Able Income Fund”) in the United States District Court for the Southern District of Texas, Houston Division. The lawsuit contains claims for violations of the Securities Act and the Exchange Act. We subsequently moved for a default judgment on our claims due to Able Income Fund’s failure to timely respond to our lawsuit. In November 2010, the court denied our motion for a default judgment. We have entered mediation with Able Income Fund in an attempt to resolve this matter.

In July 2010, Able Income Fund filed a lawsuit against us in the Supreme Court of the State of New York. The lawsuit contains claims for breach of contract and specific performance related to two convertible debentures ~~and common stock warrants~~in the aggregate amount of $450,000 that we previously issued to Able Income Fund. In September 2010, we filed a motion to dismiss Able Income Fund’s lawsuit. In November 2010, Able Income Fund filed an amended complaint alleging the existence of an outstanding convertible debenture in the amount of $72,176. We ~~have engaged counsel and are currently preparing a response~~filed an answer with affirmative defenses to ~~the complaint.~~Able Income Fund’s amended complaint in March 2011.

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

During the three months ended ~~June 30, 2010,~~March 31, 2011, we sold the following securities without registration under the Securities Act of 1933, as amended (the “Securities Act”):

In ~~January 2010, we issued 409,906~~February 2011, the Company sold 300,000 shares of common stock and Class A warrants exercisable into 300,000 shares of common stock to ~~a consultant~~an accredited investor for ~~consulting services.~~aggregate gross proceeds of $3,000. The Class A warrants have an exercise price of $0.025 per share, are exercisable during the period commencing on the date of grant and ending December 31, 2011, and expire at the end of the exercise period. 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.~~person

In ~~March 2010, we issued 500,000~~February 2011, the Company entered into a settlement agreement with John Ginzler pursuant to which the Company agreed to issue 12,285,714 shares of its common stock to ~~a consultant for consulting services. These securities were issued to an accredited investor~~him 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 withoutfull payment of ~~underwriting discounts or commissions~~all amounts owed to ~~any person.~~

~~In March 2010, we issued 197,490 shares of common stock to~~him under the employment agreement and for a ~~consultant for consulting services. These securities were issued to an accredited investor in a private placement transaction exempt~~full release from all claims filed by him against 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 April 2010, we issued 400,000 shares of common stock to a consultant for consulting services.~~Company. 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 ~~May 2010, we issued 7,625,808~~March 2011, the Company entered into a settlement agreement with Rockmore pursuant to which the Company agreed to issue 12 million shares of its common stock to ~~consultants~~Rockmore in full payment of the outstanding balance of the debenture and accrued interest thereon, and for ~~consulting services.~~a full release from all claims filed by Rockmore against the Company. These securities were issued to an accredited ~~investors~~investor in a private placement ~~transactions~~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.

~~During~~In March 2011, the ~~six months ended June 30, 2010, we~~Company issued ~~a total of 36,799,358~~3,461,539 shares of common stock to ~~warrant holders upon the exercise~~a consultant in full payment of outstanding ~~warrants for total cash proceeds~~fees payable in the amount of ~~$234,534.~~$28,199 performed during the three months ended March 31, 2011. These securities were issued to ~~a limited number of~~an accredited ~~investors~~investor in a private placement ~~transactions~~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.

2933

During the three months ended March 31, 2011, Rozetta-Cell made loans to us for a total of $71,451. The loans are interest free and payable on demand. 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. Exhibits.

The following exhibits are included herein:

Exhibit No.		Exhibit

31.1	Certification of Chief Executive Officer of the registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

31.2	Certification of Chief Financial Officer of the registrant required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

32.1	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

3034

SIGNATURES

Pursuant to the requirements 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: ~~August 17, 2010~~May 16, 2011	~~/s/~~ /s/ Helen R. Park
	Helen R. Park
	Chief Executive Officer

EXHIBIT INDEX

Exhibit		Exhibit Description

31.1	Certification of Chief Executive Officer required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

31.2	Certification of Chief Financial Officer required by Rule 13a-14(a) under the Securities Exchange Act of 1934, as amended

32.1	Certification of Chief Executive Officer and Chief Financial Officer required by Rule 13a-14(b) under the Securities Exchange Act of 1934, as amended

New York		65-0565144
(State or other jurisdiction of incorporation or organization)		(IRS Employer Identification No.)

Large accelerated filer¨ o	Accelerated filer¨ o

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

							Period From
							May 18, 2004
	For the Three Months Ended						Through
	March 31,						March 31,
	2011			2010			2011
							(unaudited)

Cash flows from operating activities

Net income (loss)	$	234,661		$	10,196,836		$	(52,068,316	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Gain on conversion of financial instruments		-			-			(1,579,670	)
Impairment of goodwill		-			-			13,371,776
Impairment of intangible assets		-			-			179,788
Loss on previously capitalized lease		-			-			34,243
Loss on settlement of litigation and debt		20,263			-			629,521
Amortization of debt discounts and deferred finance costs		-			21,747			4,027,056
Change in derivative liability, net of bifurcation		(752,811	)		(10,703,695	)		(19,567,866	)
Stock issued for compensation and services		304,674			70,000			40,094,179
Debt issued for compensation and services		-			-			1,028,927
Stock issued for settlement of litigation and debt		-			-			30,875
Depreciation expense		116			683			109,458
Release of stock held in escrow		-			-			24,000
Other non-cash items		2,037			-			(30,054	)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		-			-			186,084
Deposits and other assets		-			-			10,933
Accounts payable and other liabilities		116,609			188,025			5,398,035

Net cash used in operating activities		(74,451	)		(226,404	)		(8,121,031	)

Cash flows from investing activities

Increase in property and equipment		-			-			(147,158	)
Increase in other assets		-			-			(179,786	)

Net cash used in investing activities		-			-			(326,944	)

Cash flows from financing activities

Proceeds from sale of common stock		3,000			-			2,352,327
Borrowings on notes payable		-			-			3,838,430
Borrowings on notes payable – related party		71,451			-			475,791
Principal payments on notes payable		-			-			(122,478	)
Principal payments on notes payable – related party		-			-			(47,300	)
Proceeds from exercise of warrants		-			234,534			747,900
Stock rescinded for debt		-			-			-
Proceeds from issuance of convertible debt, warrants, and rights net of issuance cost		-			-			1,200,709

Net cash provided by financing activities		74,451			234,534			8,445,379

Net increase (decrease) in cash and equivalents		-			8,130			(2,596	)
Cash and equivalents, beginning of period		-			-			2,596

Cash and equivalents, end of period	$	-		$	8,130		$	-

Supplemental disclosure of cash flow information

Cash paid for interest		-			-			59,840
Cash paid for income taxes		-			-			-

Schedule of non-cash financing activities

Stock for conversion of debt – related party		-			-			2,227,759
Stock for subscriptions receivable		-			-			-
Warrants exercised for subscriptions receivable		-			-			-
Stock issued for common stock payable		-			-			-
Exchange of debt – related party		-			-			214,075
Exchange of convertible notes for stock		-			-			2,525,070
Stock issued for settlement of litigation and debt		471,399			98,207			1,543,333
Deemed dividend		-			-			1,140,760
Exchange of convertible preferred stock for common stock		-			-			3,380,975
Preferred stock issued for payables		-			-			358,500
Stock held in escrow		-			-			20,000
Stock contributed for debt payment		-			-			276,558
Return of stock held in escrow		-			-			16,800
Cashless exercise of warrants		-			-			32,507
Stock rescinded for debt		-			-			8,256
Stock rescinded or canceled		4,000			12,302			16,302
Settlement of derivative liability		78,490			-			78,490

							Period From
							May 18, 2004
	For the Six Months Ended						Through
	June 30,						June 30,
	2010			2009			2010
							(unaudited)

Cash flows from operating activities

Net income (loss)	$	9,299,080		$	(2,363,201	)	$	(64,052,741	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
(Gain) loss on conversion of financial instruments		-			1,008,029			(1,579,670	)
Impairment of goodwill		-			-			13,371,776
Impairment of intangible assets		-			-			179,788
Loss on previously capitalized lease		-			-			34,243
Amortization of debt discounts and deferred finance costs		21,747			209,104			4,005,561
Change in derivative liability, net of bifurcation		(10,580,355	)		156,651			(3,403,506	)
Stock issued for compensation and services		461,032			603,761			38,626,049
Debt issued for compensation and services		-			-			1,028,927
Stock issued for settlement of lawsuit		-			-			30,875
Depreciation expense		683			10,211			108,265
Release of stock held in escrow		-			-			24,000
Other non-cash items		-			-			(34,933	)
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		-			(18,939	)		186,084
Deposits and other assets		(6,332	)		(149	)		17,265
Accounts payable and other liabilities		572,152			338,348			3,952,826

Net cash used in operating activities		(231,993	)		(56,185	)		(7,505,191	)

Cash flows from investing activities

Increase in property and equipment		-			(52,500	)		(142,508	)
Increase in other assets		-			-			(179,786	)

Net cash used in investing activities		-			(52,500	)		(322,294	)

Cash flows from financing activities

Proceeds from sale of common stock		-			35,000			2,349,327
Borrowings on notes payable – related party		-			8,256			95,376
Borrowings on notes payable		-			20,000			3,838,430
Principal payments on notes payable – related party		-			-			(47,300	)
Principal payments on notes payable		-			-			(122,478	)
Proceeds from exercise of warrants		234,534			-			513,366
Stock rescinded for debt		-			(8,256	)		-
Proceeds from issuance of convertible debt, warrants, and rights net of issuance cost		-			64,666			1,200,709

Net cash provided by financing activities		234,534			119,666			7,827,430

Net increase (decrease) in cash and equivalents		2,541			10,981			(55	)
Cash and equivalents, beginning of period		-			8,331			10,927

Cash and equivalents, end of period	$	2,541		$	19,312		$	10,872

Supplemental disclosure of cash flow information

Cash paid for interest		-			-			59,840
Cash paid for income taxes		-			-			-

Schedule of non-cash financing activities

Stock for conversion of debt – related party		-			661,101			2,227,759
Stock for subscriptions receivable		-			170,000			-
Warrants exercised for subscriptions receivable		-			4,166			-
Stock issued for common stock payable		-			22,286			-
Exchange of debt – related party		-			-			214,075
Exchange of convertible notes for stock		-			-			2,525,070
Stock issued for settlement of payables		98,207			-			876,881
Deemed dividend		-			34,103			1,140,760
Exchange of convertible preferred stock for common stock		-			-			3,380,975
Preferred stock issued for payables		-			-			358,500
Stock held in escrow		-			20,000			20,000
Stock contributed for debt payment		-			244,417			276,558
Return of stock held in escrow		-			16,000			16,800
Cashless exercise of warrants		32,374			-			32,507
Stock rescinded for debt		-			-			8,256
Stock rescinded or canceled		12,302			-			12,302

Asset	June 30, 2010			December 31, 2009			March 31, 2011			December 31, 2010

Computers and Related Devices	$	15,884		$	15,884		$	18,209		$	18,209
Less: Accumulated Depreciation		(15,884	)		(15,201	)		(16,197	)		(16,081	)
Total		-0-			683			2,012			2,128

Lab Equipment		92,380			92,380			92,380			92,380
Less: Accumulated Depreciation		(92,380	)		(92,380	)		(92,380	)		(92,380	)
Total		-0-			-0-			-0-			-0-

Total Property and Equipment, Net	$	-0-		$	683		$	2,012		$	2,128

	26022 Budde Road The Woodlands, Texas 77380
	(Address of Principal Executive Offices)

	(281) 298-7944
	(~~Issuer's~~Issuer’s Telephone Number, including Area Code)


			Page
PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements		1

	Balance Sheets at ~~June 30, 2010~~March 31, 2011 (unaudited) and December 31, ~~2009~~2010		1

	Statements of Operations for the three ~~and six~~ months ended ~~June 30,~~March 31, 2011 and 2010 ~~and 2009~~ (unaudited) and the period beginning May 18, 2004 (date of entering development stage) through ~~June 30, 2010~~March 31, 2011 (unaudited)		2

	Statements of Stockholders’ Deficit for all years subsequent to May 18, 2004 (date of entering development stage) and the ~~six~~three months ended ~~June 30, 2010~~March 31, 2011 (unaudited)		3

	Statements of Stockholders’ Deficit – Other Equity Items for all years subsequent to May 18, 2004 (date of entering development stage) and the ~~six~~three months ended ~~June 30, 2010~~March 31, 2011 (unaudited)		4

	Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2011 and 2010 ~~and 2009~~ (unaudited) and the period beginning May 18, 2004 (date of entering development stage) through ~~June 30, 2010~~March 31, 2011 (unaudited)		5

	Notes to Financial Statements (unaudited)		6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19	24

Item 4T.	Controls and Procedures	27	30

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	27	31

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	29	33

Item 6.	Exhibits	30	34

	Deferred Compensation Expense			Treasury Stock			Stock Held in Escrow			Common Stock Payable			Total

Balances 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			-			-			-			8,311,012

Balance at December 31, 2004		(18,301,588	)		-			-			-			(18,301,588	)

Amortize deferred compensation expense		13,222,517			-			-			-			13,222,517

Balance at December 31, 2005		(5,079,071	)		-			-			-			(5,079,071	)

Adoption of FAS 123R		475,324			-			-			-			475,324
Amortize deferred compensation expense		4,603,747			-			-			-			4,603,747

Balance at December 31, 2006		-			-			-			-			-


Balance at December 31, 2007		-			-			-			-			-

Stock held in escrow		-			-			(20,000	)		-			(20,000	)
Common stock payable		-			-			-			123,286			123,286

Balance at December 31, 2008		-			-			(20,000	)		123,286			103,286

Common stock issued for conversion of debt		-			7,056			-			(90,000	)		(82,944	)
Common stock payable		-			-			-			116,000			116,000
Common 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			-			4,000
Common stock rescinded for debt		-			(7,056	)		-			-			(7,056	)

Balance at December 31, 2009		-			(16,000	)		-			135,000			119,000


Balance at December 31, 2010	$	-		$	(16,000	)	$	-		$	135,000		$	119,000


Balance at March 31, 2011 (unaudited)	$	-		$	(16,000	)	$	-		$	135,000		$	119,000

	Deferred Compensation Expense			Treasury Stock			Stock Held in Escrow			Common Stock Payable			Total

Balances 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			-			-			-			8,311,012

Balance at December 31, 2004		(18,301,588	)		-			-			-			(18,301,588	)

Amortize deferred compensation expense		13,222,517			-			-			-			13,222,517

Balance at December 31, 2005		(5,079,071	)		-			-			-			(5,079,071	)

Adoption of FAS 123R		475,324			-			-			-			475,324
Amortize deferred compensation expense		4,603,747			-			-			-			4,603,747

Balance at December 31, 2006		-			-			-			-			-

Balance at December 31, 2007		-			-			-			-			-

Stock held in escrow		-			-			(20,000	)		-			(20,000	)
Common stock payable		-			-			-			123,286			123,286

Balance at December 31, 2008		-			-			(20,000	)		123,286			103,286

Common stock issued for conversion of debt		-			7,056			-			(90,000	)		(82,944	)
Common stock payable		-			-			-			116,000			116,000
Common 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			-			4,000
Common stock rescinded for debt		-			(7,056	)		-			-			(7,056	)

Balance at December 31, 2009		-			(16,000	)		-			135,000			119,000

Balance at June 30, 2010	$	-		$	(16,000	)	$	-		$	135,000		$	119,000

Liability	March 31, 2011		December 31, 2010
Accrued Interest	$	384,507	$	382,759
Accrued Payroll Taxes		23,574		23,574
Accrued Compensation and Salaries		411,331		380,081
Other Accrued Expenses and Liabilities		459		1,811
Total	$	819,871	$	788,225

	June 30, 2010		December 31, 2009

Common stock warrants	$	2,355,541	$	10,267,167
Embedded conversion features – convertible promissory notes and debentures		1,520,528		4,189,257
Total	$	3,876,069	$	14,456,424

	Dividend Yield			Expected Volatility			Risk-Free Interest Rate			Remaining Contractual Life (Years)
Common Stock Warrants		0	%		111.9	%		1.09	%		2.06
Convertible Promissory Notes and Debentures		0	%		114.0	%		2.24	%		5.00

	June 30, 2010		December 31, 2009

Convertible Debentures	$	50,000	$	50,000
Less: Unamortized Discount		-0-		(21,621	)
Total		50,000		28,379

Convertible Debentures – in Default		351,255		351,255

Convertible Debentures – Related Party		30,000		30,000

Total Convertible Debentures, Net of Unamortized Discount	$	431,255	$	409,634