~~POWER3 MEDICAL PRODUCTS, INC.~~Power3 Medical Products, Inc.

(A Development Stage ~~Entity)~~Company)

Notes to Financial Statements (Unaudited)

~~September~~June 30, ~~2010~~2011

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.

Note 11. 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 12. Potential Acquisition of Rozetta-Cell

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

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

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

(A Development Stage Company)

Notes to Financial Statements (Unaudited)

June 30, 2011

Consummation of the ~~Merger~~merger is subject to certain customary conditions, including, among others, the approval of the ~~Merger~~merger by the shareholders of Rozetta-Cell, the approval of the issuance of ~~Company~~shares of the Company’s common stock in connection with the ~~Merger~~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 ofby the Company and Rozetta-Cell (generally subject to a material adverse effect standard), and material compliance by the Company and Rozetta-Cell with their respective obligations under the ~~Rozetta-Cell~~ Merger Agreement.

~~The Rozetta-Cell Merger Agreement contains certain termination rights of~~On December 31, 2010, the Company and Rozetta-Cell ~~including the right~~entered into a First Amendment and Waiver to ~~terminate the Rozetta-Cell~~Agreement and Plan of Merger ~~Agreement if~~(the “Amendment”) which amends the Merger ~~is not completed~~Agreement. Under the terms of the Amendment, the parties agreed to extend the outside date by ~~December 31, 2010.~~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. The parties are currently finalizing a second amendment to extend the time requirement to complete the merger.

~~POWER3 MEDICAL PRODUCTS, INC.~~

~~(A Development Stage Entity)~~

~~Notes to Financial Statements (Unaudited)~~

~~September 30, 2010~~

Note 13. Subsequent Events

~~Other than~~

Subsequent to June 30, 2011, the Company issued a total of 30,132,000 shares of common stock to consultants as ~~set forth below,~~payment for services performed in accordance with the terms of the consultants’ respective consulting agreements.

In February 2010, Transgenomic, Inc. (“Transgenomic”) filed a lawsuit against the Company in the United States District Court for the District of Nebraska. The lawsuit contains claims for fraud, breach of contract, libel and slander, and sought a declaration of rights under a Collaboration and Exclusive License Agreement, dated January 23, 2009, between the parties that the Company had terminated on February 2, 2010. In April 2010, the Company filed a partial motion to dismiss Transgenomic’s fraud claim. In June 2010, the Company filed a lawsuit against Transgenomic in the District Court of Montgomery County, Texas, 359th Judicial District. The lawsuit 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, the Company filed a non-suit to dismiss the case that the Company 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 and has agreed to enter mediation with Transgenomic in an attempt to resolve this matter. Mediation occurred in July 2011 between the parties and is currently awaiting the courts final approval. Based on the July 22, 2011 mediation outcome with Transgenomic, the Company recorded a loss of $55,556 during the three month period ended June 30, 2011 and recorded a stock payable of $55,556 which represented 5,555,556 shares. As of August 22, 2011 these shares have not yet been issued.

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

~~In October 2010, the court granted Rockmore’s motion for summary judgment, but denied its request for an injunction.~~

~~In October 2010, the Company filed a second amended complaint against Kraniak and Kazanowski.~~

~~In October 2010, the Company issued 1,000,000 shares of common stock to a consultant for consulting services.~~

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 and subsequent Form 10-Q filings. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the foregoing. Except as required by law, we assume no duty to update or revise our forward-looking statements.

Item 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.~~report and subsequent Form 10-Q filings. 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 laboratory or partnered with other test providers.

We intend to complete Phase II clinical trials for NuroPro® and ~~begin commercialization of NuroPro~~® ~~during 2011, and to complete Phase II clinical trials for~~ BC-SeraPro™ during 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 ~~the remainder of 2010 and~~ 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 (the “Merger”).

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 ten shares of our common stock, subject to certain adjustments as provided in the Merger Agreement.

The Merger Agreement contains customary representations and warranties of us and Rozetta-Cell, covenants of Rozetta-Cell to conduct its business in the ordinary course until the Merger is consummated, and covenants of 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 Power3 common stock in connection with the Merger by the shareholders of Power3, the approval of an amendment to the certification of incorporation of Power3 by the shareholders of Power3 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 Power3 and Rozetta-Cell (generally subject to a material adverse effect standard), and material compliance by Power3 and Rozetta-Cell with their respective obligations under the Merger Agreement.

~~The Merger Agreement contains certain termination rights of Power3 and Rozetta-Cell, including the right to terminate the Merger Agreement if the Merger is not completed by December 31, 2010.~~

Outlook

We expect sales of our ~~BC-SeraPro~~™BC-SeraPro™ and ~~NuroPro~~®NuroPro® diagnostic products to increase during 2011 as we complete Phase II clinical studies on these products. We also ~~expect~~intend to ~~develop~~continue developing several additional diagnostic products during 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 ~~the remainder of 2010 and~~ 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 ~~September~~June 30, ~~2010~~2011 and ~~2009~~2010

Net Revenue

Net revenue ~~consists primarily~~has historically consisted of licensing fees, royalties and milestone payments that we ~~receive~~received from our licensing partners. ~~We generated revenue of $41,337 for the three months ended September 30, 2009.~~ We did not generate any revenue ~~for~~during the three months ended ~~September~~June 30, ~~2010. The decrease in revenue resulted primarily from our decision to terminate the Collaboration~~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, if such licenses are completed, from either licensing fees, royalties or milestone payments.

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 ~~$84,282~~$5,539 to ~~$33,147~~$31,250 for the three months ended ~~September~~June 30, ~~2010~~2011 from ~~$117,429~~$36,789 for the three months ended ~~September~~June 30, ~~2009.~~2010. The decrease of ~~$84,282~~$5,539 was due ~~primarily~~ to a decrease in the amount of ~~$65,172 for~~ salary and equity-based compensation ~~expenses associated with a decrease in~~that we paid to the ~~number of individuals who~~individual we employed during the three months ended ~~September~~June 30, ~~2010. We~~2011. Assuming the completion of our merger with Rozetta-Cell and adequate funding, we expect employee compensation expense to increase ~~over~~in the ~~next 12 months~~future 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 $272,387~~decreased $626,045 to ~~$654,920~~$53,517 for the three months ended ~~September~~June 30, ~~2010~~2011 from ~~$382,533~~$679,562 for the three months ended ~~September~~June 30, ~~2009.~~2010. The ~~increase~~decrease of ~~$272,387~~$626,045 was due primarily to ~~increases~~a decrease in legal, accounting and other professional fees associated with various legal matters and litigation activities that the Company was involved in during 2010 as compared to a significant reduction in these activities during the quarter ended June 30, 2011. Assuming the completion of ~~$120,274 for legal fees~~our merger with Rozetta-Cell and ~~$149,794 for the amount of expense recognized in connection with equity-based compensation paid to service providers and consultants for various services. We~~adequate funding, we expect professional fees to increase ~~over~~in the ~~next 12 months~~future 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 increased ~~$29,275~~$24,094 to ~~$95,028~~$24,094 for the three months ended ~~September~~June 30, ~~2010~~2011 from ~~$65,753~~$-0- for the three months ended ~~September~~June 30, ~~2009.~~2010. The increase of ~~$29,275 resulted~~$24,094 was due primarily ~~from an increase~~to a reclassification of ~~$14,993~~expenses to provide enhanced reporting information for ~~relocation expenses~~the three month period ended June 30, 2011 as compared to the same period in the prior year. Assuming the completion of our merger with Rozetta-Cell and ~~increases in other miscellaneous selling, general and administrative expenses. We~~adequate funding, we expect other general and administrative expenses to increase ~~over~~in the future 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.

Comparison of the Six-Month Periods Ended June 30, 2011 and 2010

Net Revenue

Net revenue has historically consisted of licensing fees, royalties and milestone payments that we received from our licensing partners. We did not generate any revenue during the six months ended June 30, 2011 and 2010. We intend to enter into collaboration and licensing agreements with bio-technology companies, academic and research institutions and governmental 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 $9,207 to $62,500 for the six months ended June 30, 2011 from $71,707 for the six months ended June 30, 2010. The decrease of $9,207 was due to a decrease in the amount of salary and equity-based compensation that we paid to the individual we employed during the six months ended June 30, 2011. Assuming the completion of our merger with Rozetta-Cell and adequate funding, we expect employee compensation expense to increase in the future we 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 decreased $550,236 to $436,278 for the six months ended June 30, 2011 from $986,514 for the six months ended June 30, 2010. The decrease of $550,236 was due primarily to a decrease in legal, accounting and other professional fees associated with various legal matters and litigation activities that the Company was involved in during 2010 as compared to a significant reduction in these activities during the six month period ended June 30, 2011. Assuming the completion of our merger with Rozetta-Cell and adequate funding, we expect professional fees to increase in the future 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 $76,768 to $86,080 for the six month period ended June 30, 2011 from $162,848 for the same period in the prior year. The decrease of $76,768 was due primarily to a decrease in general corporate activities while the company focuses on the merger with Rozetta-Cell and due to limited resources. Assuming the completion of our merger with Rozetta-Cell and adequate funding, we expect other general and administrative expenses to increase in the future 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 $29,880 to $23,782 for the three months ended September 30, 2010 from $53,662 for the three months ended September 30, 2009. The decrease of $29,880 was due primarily to the retirement during 2009 of many of the debt obligations that were outstanding during the three months ended September 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 ~~September~~June 30, ~~2010~~2011 and ~~2009,~~2010, 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.

We recognized a derivative gain of ~~$1,418,710~~$197,757 for the three months ended ~~September~~June 30, ~~2010~~2011 compared to a derivative loss of ~~$9,211,930~~$123,340 for the three months ended ~~September~~June 30, ~~2009.~~2010. The ~~difference~~derivative gains that we recognized during the three months ended June 30, 2011 and 2010 were due primarily to a decrease in the price of ~~$10,630,640~~our common stock during 2011 and 2010, respectively. The decrease of $321,097 was due primarily to the fact that our stock price dropped a smaller percentage amount during the three months ended June 30, 2011 than it did during the three months ended June 30, 2010, and was generally at a lower level during the three months ended June 30, 2011 than it was during the three months ended June 30, 2010.

We recognized a derivative gain of $950,568 for the six months ended June 30, 2011 compared to a derivative gain of $10,580,355 for the six months ended June 30, 2010. The derivative gains that we recognized during the six months ended June 30, 2011 and 2010 were due primarily to a decrease in the ~~trading~~ price of our common stock during 2011 and 2010, respectively. The decrease of $9,629,787 was due primarily to the fact that ~~we experienced between July 1,~~our stock price dropped a smaller percentage amount during the six months ended June 30, 2011 than it did during the six months ended June 30, 2010, and ~~September~~was generally at a lower level during the six months ended June 30, ~~2010 compared~~2011 than it was during the six months ended June 30, 2010.

While we expect our outstanding convertible promissory notes to continue to be retired or converted into shares of common stock during the ~~large increase~~next 12 months, we cannot predict what our future derivative gains or losses will be in the ~~trading price of our common stock that we experienced between July 1, 2009~~future since such gains and ~~September 30, 2009. 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 ~~$82,599 for~~$60,381 during the three months ended ~~September~~June 30, ~~2009.~~2011. We did not recognize any gain or loss on the settlement of debt ~~for~~during the three months ended ~~September~~June 30, 2010. The difference of ~~$82,599~~$60,381 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 to decrease.~~decreases.

Gain / loss on settlement of debt consists of the gains and losses that we 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 $80,644 during the six months ended June 30, 2011. We did not recognize any gain or loss on the settlement of debt during the six months ended June 30, 2010. The difference of $80,644 was due primarily to our decision to pay off outstanding invoices during 2011 by issuing shares of our common stock having an aggregate value that was greater than the outstanding amount of the invoices. While we may incur additional gains and losses on the settlement of debt in the future in the event we pay off additional outstanding 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 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 $1,622 to $21,906 for the three months ended June 30, 2011 from $23,528 for the three months ended June 30, 2010. The decrease of $1,622 was due primarily to our decision to retire certain of our debt obligations during 2010 that were outstanding during the three months ended June 30, 2010. We expect interest expense to decrease over the next 12 months as we continue to retire our remaining debt obligations.

Interest and amortization expense decreased $16,410 to $43,796 for the six months ended June 30, 2011 from $60,206 for the six months ended June 30, 2010. The decrease of $16,410 was due primarily to our decision to retire certain of our debt obligations during 2010 that were outstanding during the six months ended June 30, 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 net income of ~~$611,833~~$6,609 for the three months ended ~~September~~June 30, ~~2010~~2011 compared to a net loss of ~~$9,885,581~~$863,219 for the three months ended ~~September~~June 30, ~~2009.~~2010. The ~~difference~~increase in net income of ~~$10,497,414 was~~$869,828 for the three month period ended June 30, 2011 as compared to the same period in the prior year. This increase in net income is primarily due ~~primarily~~ to a ~~difference~~significant decrease in operating expenses of ~~$10,630,640~~$607,490 for ~~derivative gain recognized during 2010~~the three month period ended June 30, 2011 as compared to ~~derivative loss recognized during 2009,~~the same period in the prior year. This decrease was primarily due to a ~~difference of $82,599 resulting from losses from the extinguishment of debt recognized during 2009,~~reduction in legal and ~~decreases of $29,880 for interest expense and $84,282 for employee compensation and benefits. This was partially offset by an increase of $272,387 for professional fees.~~litigation activities in 2011 as compared to 2010. 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 asif we can begin to generate ~~additional~~ revenue through collaboration and licensing ~~partners~~agreements and as we continue to retire our outstanding debt obligations.

~~Comparison of the Nine-Month Periods Ended September 30, 2010 and 2009~~

~~Net Revenue~~

We generated ~~revenue~~net income of ~~$209,814~~$241,270 for the ~~nine~~six months ended ~~September~~June 30, ~~2009. We did not generate any revenue~~2011 compared to net income of $9,299,080 for the ~~nine~~six months ended ~~September~~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~~net income of ~~employee compensation and benefits, professional and consulting fees, and other selling, general and administrative expenses.~~

~~Employee Compensation and Benefits. Employee compensation expense decreased $279,938 to $113,785 for the nine months ended September 30, 2010 from $393,723 for the nine months ended September 30, 2009. The decrease of $279,938~~$9,057,810 was due primarily to ~~a decrease~~decreases of ~~approximately $202,065~~$9,629,787 for ~~salary and equity-based compensation expenses associated with a decrease in the number of individuals who we employed during the nine months ended September 30, 2010.~~

~~Professional Fees~~. Professional fees increased $145,551 to $1,153,419 for the nine months ended September 30, 2010 from $1,007,868 for the nine months ended September 30, 2009. The increase of $145,551 was due primarily to an increase of $188,530 for legal and accounting fees, partially offset by a decrease of $28,439 for the amount of expense recognized in connection with equity-based compensation paid to service providers and consultants for various services.

~~Other Selling, General and Administrative Expenses~~. Other general and administrative expenses increased $178,397 to $394,684 for the nine months ended September 30, 2010 from $216,287 for the nine months ended September 30, 2009. The increase of $178,397 resulted primarily from increases of $35,026 for administrative fees, $57,000 for general office expenses, $13,366 for lease payments and $16,168 for relocation expenses, and increases in other miscellaneous selling, general and administrative expenses.

~~Interest Expense~~

Interest and amortization expense decreased $284,509 to $83,988 for the nine months ended September 30, 2010 from $368,497 for the nine months ended September 30, 2009. The decrease of $284,509 was due primarily to the retirement during 2009 of many of the debt obligations that were outstanding during the nine months ended September 30, 2009.

~~Derivative Gain / Loss~~

We recognized a derivative gain of $11,999,065 for the nine months ended September 30, 2010 compared to a derivative loss of $9,368,581 for the nine months ended September 30, 2009. The difference of $21,367,646 was due primarily to the decrease in the trading price of our common stock that we experienced between January 1, 2010 and September 30, 2010 compared to the large increase in the trading price of our common stock that we experienced between January 1, 2009 and September 30, 2009.

~~Gain / Loss on Settlement of Debt~~

We recognized a loss on the settlement of debt of $1,090,628 for the nine months ended September 30, 2009. We did not recognize any gain or loss on the settlement of debt for the nine months ended September 30, 2010. The difference of $1,090,628 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 $10,253,189 for the nine months ended September 30, 2010 compared to a net loss of $12,282,885 for the nine months ended September 30, 2009. The difference of $22,536,074 was due primarily to a difference of $21,367,646 resulting from the derivative gain recognized during ~~2010~~2011 compared to derivative gain recognized during 2010. In addition we had a significant decrease in operating expenses of $639,211 for the six month period ended June 30, 2011 as compared to the ~~derivative loss recognized~~same period in the prior year. This decrease was primarily due to a reduction in legal and litigation activities in 2011 as compared to 2010. We expect to generate net losses during ~~2009, a difference of $1,090,628 resulting from~~2011 as we continue to build our business. However, we expect these losses ~~from~~to decrease in the ~~extinguishment of~~future if we can begin to generate revenue through collaboration and licensing agreements and as we continue to retire our outstanding debt ~~recognized during 2009, and decreases of $284,509 for interest expense and $279,938 for employee compensation and benefits. This was partially offset by a decrease of $209,814 for net revenue.~~obligations.

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 ~~$294,690 for~~$74,451 during the ~~nine~~six months ended ~~September~~June 30, ~~2010~~2011 compared to ~~$147,282 for~~$231,993 during the ~~nine~~six months ended ~~September~~June 30, ~~2009.~~2010. The ~~$147,408 increase in~~decrease of $151,953 for cash used by operating activities was due primarily to a ~~difference~~decrease of ~~$21,367,647~~$9,950,884 for ~~changes in the amount~~derivative gain and an increase of ~~our derivative liability, and decreases of $1,090,628 for loss on settlement of debt, $718,245~~$234,674 for stock issued for compensation and services, ~~and $212,400 for amortization of debt discounts and deferred finance costs. This was~~ partially offset by ~~a difference~~decreases of ~~$22,488,959 between the~~$9,962,175 for net income ~~generated in 2010~~ and ~~the net loss incurred during 2009.~~$71,416 for accounts payable and other liabilities.

~~Net~~We did not have any cash ~~used by~~flows from investing activities ~~was $2,325 for~~during the ~~nine months~~six month periods ended ~~September~~June 30, ~~2010 compared to $52,500 for the nine months ended September 30, 2009. The difference of $50,175 was due to a decrease in the amount of property~~2011 and ~~equipment purchased during~~ 2010.

Net cash provided by financing activities was ~~$303,334~~$74,451 for the ~~nine~~six months ended ~~September~~June 30, ~~2010~~2011 compared to ~~$229,822~~$234,534 for the ~~nine~~six months ended ~~September~~June 30, ~~2009.~~2010. The ~~$73,512 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 ~~$85,156~~$71,451 for proceeds from the issuance of notes payable to related parties and $3,000 for proceeds from the sale of common ~~stock and $74,666 for proceeds from the issuance of convertible debt and warrants.~~

stock.

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

~~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 ~~three months ended September 30,~~period beginning January 1, 2010 and ending May 12, 2011, Rozetta-Cell made loans to us for a total of ~~$68,800.~~$251,433. The loans are interest free and payable on demand.

During the period beginning January 1, ~~2009~~2010 and ending ~~September 30, 2010,~~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 ~~September~~June 30, ~~2010,~~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 ~~September~~June 30, ~~2010,~~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 ~~September~~June 30, ~~2010,~~2011, our disclosure controls and procedures were not 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 ~~September~~June 30, ~~2010~~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 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 September 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. In August 2010, we filed an amended answer and counterclaims against the former employee for breach of fiduciary duty and fraud.

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, which was denied by the court in October 2010.~~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~~We have agreed to ~~dismiss the case without prejudice. We intend to re-file the claims against~~enter mediation with Transgenomic in an attempt to resolve this matter. Mediation occurred in July 2011 between the ~~United States District Court for~~parties and is currently awaiting the ~~District~~courts’ final approval. Based on the July 22, 2011 mediation outcome with Transgenomic, the Company recorded a loss of ~~Nebraska as counterclaims accompanying our response to~~$55,556 during the ~~claims filed by Transgenomic.~~three month period ended June 30, 2011 and recorded a stock payable of $55,556 which represented 5,555,556 shares. As of August 22, 2011 these shares have not yet been issued.

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. In September 2010, Rockmore filed a motion for summary judgment and injunction regarding its claims, and in October 2010, we filed an opposition to ~~their~~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 settlement agreement with Rockmore pursuant to 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~~ 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 us for breach of contract, misrepresentation, civil conspiracy and indefamation. In 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.~~Kazanowski, which we revised and re-filed in November 2010. In ~~July~~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 counterclaims against the Company in the United States District Court for the Southern District of Texas, Houston Division. The counterclaims contain claims for violations of securities laws, breach of contract, misrepresentation, civil conspiracy and defamation. We filed an answersupplements to ~~the counterclaims denying each~~certain of the ~~alleged claims.~~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 filed an answer with affirmative defenses to Able Income Fund’s amended complaint in March 2011.

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

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

In ~~August 2010, we issued 1,000,000~~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.

In ~~August 2010, we issued 440,252~~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 him in full payment of all amounts owed to him under the employment agreement and for a ~~consultant for consulting services.~~full release from all claims filed by him against the 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 ~~September 2010, we issued 2,000,000~~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 ~~consultant for consulting services.~~full release from all claims filed by Rockmore against the 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.

~~During~~In March 2011, the Company issued 3,461,539 shares of common stock to a consultant in full payment of outstanding fees payable in the amount of $28,199 performed during the three months ended ~~September~~March 31, 2011. 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.

During the three month period ended June 30, ~~2010,~~2011, the Company issued a total of 9,577,113 shares of common stock to various consultants as payment for services performed during that period in accordance with the terms of the consultants’ respective consulting agreements. The shares were valued at the closing price of the Company’s common stock on the date the issuance of shares was approved by the Company’s board of directors for total consideration of $91,594, all of which was recognized as expense during the three months ended June 30, 2011. The Company also issued 1,930,000 shares of common stock to a consultant in full payment of outstanding fees payable of $19,300 for services provided in a prior period. The shares were valued at the closing price of the Company’s common stock on the date the issuance of shares was approved by the Company’s board of directors for total consideration of $24,125. The Company recorded a loss on settlement of debt in the amount of $4,825, all of which was recognized during the three months ended June 30, 2011.

During the six months ended June 30, 2011, Rozetta-Cell made loans to us for a total of ~~$68,800.~~$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.

During the nine months ended September 30, 2010, we issued a total of 36,799,358 shares of common stock to warrant holders upon the exercise of outstanding warrants for total cash proceeds of $234,534. These securities were issued to a limited number of accredited investors in private placement transactions 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

3233

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: ~~November 10, 2010~~	August 23, 2011	/s/ Helen R. Park
		Helen R. Park
		Chief Executive Officer

EXHIBIT INDEX

Exhibit		Exhibit Description
~~31.1~~
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 ¨	Accelerated filer ¨

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

	September 30,
	2010			December 31,
	(Unaudited)			2009

Assets

Cash and equivalents	$	6,319		$	-

Total current assets		6,319			-

Property and equipment, net of accumulated depreciation of
$108,345 and $107,581 at September 30, 2010 and
December 31, 2009, respectively		2,244			683
Deposits		11,332			5,000
Other assets		100			100

Total assets	$	19,995		$	5,783

Liabilities and stockholders' deficit

Accounts payable	$	1,213,217		$	999,631
Accounts payable – related party		433,406			96,507
Notes payable		68,800			-
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 September 30, 2010 and December 31, 2009,
respectively		50,000			28,379
Convertible debentures – related party		30,000			30,000
Derivative liabilities		2,457,358			14,456,424
Other current liabilities		760,296			593,891

Total current liabilities		5,830,332			17,022,087

Total liabilities		5,830,332			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 September 30,
2010 and December 31, 2009, respectively		1,500			1,500
Common Stock – $0.001 par value: 600,000,000 shares authorized;
471,237,565 and 434,167,000 shares issued and outstanding as
of September 30, 2010 and December 31, 2009, respectively		471,237			434,167
Additional paid-in capital		72,899,791			71,984,083
Treasury stock		(16,000	)		(16,000	)
Common stock payable		135,000			135,000
Deficit accumulated during development stage		(67,620,365	)		(77,873,554	)
Deficit accumulated before entering development stage		(11,681,500	)		(11,681,500	)

Total stockholders' deficit		(5,810,337	)		(17,016,304	)

Total liabilities and stockholders' deficit	$	19,995		$	5,783

	June 30,			December 31,
	2011			2010
	(Unaudited)
ASSETS

Property and equipment , net of accumulated depreciation of $108,693 and $108,461 at June 30, 2011 and December 31, 2010, respectively		1,896			2,128
Deposits		11,332			11,332
Other assets		100			100

Total assets	$	13,328		$	13,560

LIABILITIES AND STOCKHOLDERS’ DEFICIT

Current liabilities
Accounts payable	$	1,460,290		$	1,643,510
Accounts payable – related parties		263,271			525,701
Notes payable – related parties		225,933			154,482
Notes payable- in default		501,000			501,000
Notes payable- in default- related parties		80,000			80,000
Convertible debentures- in default		272,176			303,853
Derivative liabilities		431,414			1,460,472
Other current liabilities		1,041,857			788,225
Total current liabilities		4,275,941			5,457,243

Total liabilities		4,275,941			5,457,243

Stockholders’ deficit
Preferred shares, par value $0.001; 50,000,000 authorized; 1,500,000 issued and outstanding as of June 30, 2011 and December 31, 2010		1,500			1,500
Common stock, par value $0.001; 600,000,000 shares authorized; 524,778,730 and 472,237,565 shares issued and outstanding as of June 30, 2011 and December 31, 2010		524,779			472,237
Additional paid in capital		73,825,914			72,994,212
Treasury stock		(16,000	)		(16,000	)
Common stock payable		190,556			135,000
Deficit accumulated during development stage		(67,107,862	)		(67,349,132	)
Deficit accumulated before entering development stage		(11,681,500	)		(11,681,500	)

Total stockholders’ deficit		(4,262,561	)		(5,443,683	)

Total liabilities and stockholders’ deficit	$	13,328		$	13,560

													Period From
													May 18, 2004
	For the Three Months Ended						For the Nine Months Ended						Through
	September 30,						September 30,						September 30,
	2010			2009			2010			2009			2010

Net revenue	$	-		$	41,337		$	-		$	209,814		$	542,249
														-
Operating expenses:														-
Employee compensation and benefits		33,147			117,429			113,785			393,723			31,531,364
Professional and consulting fees		654,920			382,533			1,153,419			1,007,868			17,382,188
Impairment of goodwill		-			-			-			-			13,371,776
Other selling, general and administrative expenses		95,028			65,753			394,684			216,287			2,581,005

Total operating expenses		783,095			565,715			1,661,888			1,617,878			64,866,333

Loss from operations		(783,095	)		(524,378	)		(1,661,888	)		(1,408,064	)		(64,324,084	)

Other income (expense):
Derivative gain (loss)		1,418,710			(9,211,930	)		11,999,065			(9,368,581	)		5,976,117
Gain on legal settlement		-			-			-			-			36,764
Interest income		-			-			-			-			7,867
Gain (loss) on settlement of debt		-			(82,599	)		-			(1,090,628	)		1,582,872
Interest expense		(23,782	)		(53,662	)		(83,988	)		(368,497	)		(5,763,282	)
Mandatory prepayment penalty		-			-			-			-			(420,000	)
Other income/(expense)		-			-			-			-			(194,886	)

Total other income/(expense)		1,394,928			(9,348,191	)		11,915,077			(10,827,706	)		1,225,452

Net income (loss)		611,833			(9,872,569	)		10,253,189			(12,235,770	)		(63,098,632	)

Deemed dividend		-			(13,012	)		-			(47,115	)		(1,140,760	)

Net income (loss) attributable to common stockholders	$	611,833		$	(9,885,581	)	$	10,253,189		$	(12,282,885	)	$	(64,239,392	)

Net income (loss) per share - basic	$	0.00		$	(0.03	)	$	0.02		$	(0.05	)

Net income (loss) per share - diluted	$	0.00		$	(0.03	)	$	0.02		$	(0.05	)

Weighted average number of shares
outstanding - basic		468,521,746			385,487,654			449,898,509			267,016,937

Weighted average number of shares
outstanding - diluted		469,832,091			385,487,654			459,768,500			267,016,937

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


				Page
PART I – FINANCIAL INFORMATION

Item 1.		Financial Statements		1

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

		Statements of Operations for the three and ~~nine months~~six month periods ended ~~September~~June 30, ~~2010~~2011 and~~2009 (unaudited) and the period beginning May 18, 2004 (date of entering developmentstage) through September 30,~~ 2010 (unaudited)		2

		~~Statements of Stockholders’ Deficit for all years subsequent to May 18, 2004 (date of~~ ~~entering development stage) and the nine months ended September 30, 2010 (unaudited)~~		3

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

		~~Statements of Cash Flows for the nine months ended September 30, 2010 and 2009 (unaudited)~~ and the period beginning May 18, 2004 (date of entering development stage) through ~~September~~June 30, 2011 (unaudited)		2

	Statements of Cash Flows for the six month periods ended June 30, 2011 and 2010 (unaudited) and the period beginning May 18, 2004 (date of entering development stage) through June 30, 2011 (unaudited)		3

	Notes to Financial Statements (unaudited)		5

		~~Notes to Financial Statements (unaudited)~~		6

Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		21

Item 4T.		Controls and Procedures		2928

PART II – OTHER INFORMATION


Item 1.		Legal Proceedings		2930

Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		3132

Item 6.		Exhibits		3233

													Period
													From
													May 18,
	Three Months						Six Months						2004 to
	Ended June 30,						Ended June 30,						June 30,
	2011			2010			2011			2010			2011

Net revenue	$	—		$	—		$	—		$	—		$	542,249

Operating expenses:
Employee compensation and benefits		31,250			36,789			62,500			71,707			31,629,342
Professional and consulting fees		53,517			679,562			436,278			986,514			18,106,926
Impairment loss		—			—			—			—			13,371,776
Other selling general and administrative		24,094			—			86,080			162,848			2,740,228
Total operating expenses		108,861			716,351			584,858			1,221,069			65,848,272
Loss from operations		(108,861	)		(716,351	)		(584,858	)		(1,221,069	)		(65,306,023	)


Other income (expense):
Derivative gain(loss)		197,757			(123,340	)		950,568			10,580,355			7,923,572
Loss on litigation settlement		—			—			—			-			(267,865	)
Interest income		—			—			—			-			7,867
Gain (loss) on debt settlement		(60,381	)		—			(80,644	)		-			1,502,228
Interest expense		(21,906	)		(23,528	)		(43,796	)		(60,206	)		(5,831,022	)
Mandatory prepayment penalty		—			—			—			—			(420,000	)
Other expense		—			—			—			—			(194,886	)
Total other income (expense)		115,470			(146,868	)		826,128			10,520,149			2,719,894

Net income (loss)		6,609			(863,219	)		241,270			9,299,080			(62,586,129	)
Deemed dividend		—			—			—			—			(1,140,760	)
Net income (loss) attributable to common stockholders	$	6,609		$	(863,219	)	$	241,270		$	9,229,080		$	(63,726,889	)

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

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

Weighted average shares outstanding
Basic		517,476,361			442,685,225			502,080,160			440,432,559

Diluted		517,476,361			442,685,225			504,517,715			459,652,702

													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		12,573,456			12,573			-			-			495,671			-			-			508,244
Vesting of common stock issued for services		-			-			-			-			210,000			-			-			210,000
Common stock rescinded or canceled		(12,302,249	)		(12,302	)		-			-			12,302			-			-			-
Net income		-			-			-			-			-			-			10,253,189			10,253,189

Balance at September 30, 2010		471,237,565		$	471,237		$	1,500,000		$	1,500		$	72,899,791		$	119,000		$	(79,301,865	)	$	(5,810,337	)

	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 September 30, 2010	$	-		$	(16,000	)	$	-		$	135,000		$	119,000

Supplemental disclosure of cash flow information

Cash paid for interest	-	-	59,840

Cash paid for income tax	-	-	-

Non-cash activities

Stock for conversion of debt – related party	-	-	2,227,759
Stock issued for common stock payable	-	98,207	-
Exchange of debt – related party	-	-	214,075
Exchange of convertible notes for stock	-	-	2,525,070
Stock issued for settlement of litigation and debt	336,571	-	1,115,245
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	-	32,374	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

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

Computers and Related Devices	$	18,209		$	15,884		$	18,209		$	18,209
Less: Accumulated Depreciation		(15,964	)		(15,201	)		(16,313	)		(16,081	)
Total		2,244			683			1,896			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	$	2,244		$	683		$	1,896		$	2,128

Liability	September 30, 2010		December 31, 2009
Accrued interest and interest payable	$	386,471	$	312,252
Accrued payroll taxes		23,183		21,464
Accrued compensation and salaries payable		348,831		258,364
Other accrued expenses and liabilities		1,811		1,811
Total	$	760,296	$	593,891

	September 30, 2010		December 31, 2009

Common stock warrants	$	1,484,232	$	10,267,167
Embedded conversion features – convertible promissory notes and debentures		973,126		4,189,257
Total	$	2,457,358	$	14,456,424

	Dividend Yield			Expected Volatility			Risk-Free Interest Rate			Remaining Contractual Life (Years)
Common Stock Warrants		0	%		114.6	%		0.03	%		1.81
Convertible Promissory Notes and Debentures		0	%		122.4	%		0.19	%		4.75

	September 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

	June 31, 2011		December 31, 2010

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

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

	Level 1		Level 2		Level 3
Derivative liabilities – June 30, 2011		-0-		-0-	$	431,414
Derivative liabilities – December 31, 2010		-0-		-0-	$	1,460,472

	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)		(1,029,058	)
Balance, December 31, 2010	$	431,414