Filed Pursuant to Rule 424(b)(3)
                                                  Commission File No. 333-130915

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING OFFERS TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.


                                   PROSPECTUS

                              AETHLON MEDICAL, INC.


                     Up to 11,500,000 Shares of Common Stock


         This prospectus relates to the sale of up to 11,500,000 shares of our
common stock. Up to 11,500,000 shares of our common stock are being offered
hereby by the Ellen R. Weiner Family Revocable Trust, Allan S. Bird, Christian
J. Hoffmann III and Claypoole Capital, LLC, an Arizona limited liability company
that is an Affiliate of Mr. Hoffmann ("Holders"), selling shareholders under
this prospectus. There are no other shares of our common stock that are being
offered by other selling shareholders. The prices at which the selling
shareholders may sell the shares will be determined by the prevailing market
price for the shares or in negotiated transactions. We will not receive proceeds
from the sale of our shares by the selling shareholders.

         Our common stock is quoted on the NASDAQ Over-the-Counter Bulletin
Board under the symbol "AEMD." On December 15, 2005, the last reported sale
price for our common stock as reported on the NASDAQ Over-the-Counter Bulletin
Board was $0.36 per share.

         INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 3 FOR A DISCUSSION OF THESE RISKS.

                              --------------------

         NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

                The date of this Prospectus is January 25, 2006.





                                TABLE OF CONTENTS
                                                                         PAGE
                                                                         ----

PROSPECTUS SUMMARY                                                          1
RISK FACTORS                                                                3
USE OF PROCEEDS                                                            16
THE PRIVATE PLACEMENT TRANSACTION                                          16
DESCRIPTION OF BUSINESS                                                    17
DESCRIPTION OF PROPERTIES                                                  29
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS               29
MANAGEMENT                                                                 29
EXECUTIVE COMPENSATION                                                     34
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                  36
LEGAL PROCEEDINGS                                                          44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT             44
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                             46
DESCRIPTION OF SECURITIES                                                  47
EQUITY COMPENSATION PLANS                                                  47
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS                   49
SELLING SHAREHOLDERS                                                       49
PLAN OF DISTRIBUTION                                                       50
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
    AND FINANCIAL DISCLOSURE                                               51
TRANSFER AGENT                                                             51
LEGAL MATTERS                                                              51
EXPERTS                                                                    51
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION
    FOR SECURITIES ACT LIABILITIES                                         52
REPORTS TO SECURITY HOLDERS                                                52
WHERE YOU CAN FIND MORE INFORMATION                                        52


                                       i




                               PROSPECTUS SUMMARY

         This summary highlights important information about our company and
business. Because it is a summary, it may not contain all of the information
that is important to you. To understand this offering fully, you should read
this entire prospectus and the financial statements and related notes included
in this prospectus carefully, including the "Risk Factors" section. Unless the
context requires otherwise, "WE," "US," "OUR", " and the "COMPANY" and similar
terms collectively refer to Aethlon Medical, Inc. and our subsidiaries.

THE COMPANY

         We are a development stage medical device company focused on expanding
the applications of our Hemopurifier (TM) platform technology, which is designed
to rapidly reduce the presence of infectious viruses and other toxins from human
blood. In this regard, our core focus is the development of therapeutic devices
that treat HIV/AIDS, Hepatitis-C, and pathogens targeted as potential biological
warfare agents. The Hemopurifier(TM) combines the established scientific
principals of affinity chromatography and hemodialysis as a means to mimic the
immune system's response of clearing viruses and toxins from the blood before
cell and organ infection can occur. The Hemopurifier(TM) cannot cure HIV and
Hepatitis-C but prevents virus and toxins from infecting unaffected tissues and
cells. We have completed pre-clinical blood testing of Hemopurifiers(TM) to
treat HIV and Hepatitis-C, and have commenced human safety trials for
Hepatitis-C in India, but have yet to receive regulatory approval to initiate
human trials in the United States. The commercialization of each
Hemopurifier(TM) application involves significant hurdles which include the
completion of human efficacy clinical trials. The approval of any application of
the Hemopurifier(TM) in the United States will require the approval of the FDA
to initiate human studies. Such studies could take years to demonstrate safety
and effectiveness in humans, and there is no assurance that the Hemopurifier(TM)
will be cleared by the FDA as a device we can market to the medical community.
We also anticipate that similar regulatory challenges will be expected from
foreign regulatory agencies, should we attempt to commercialize and market the
Hemopurifier(TM) outside of the United States. As a result, we have not
generated revenues from the sale of any Hemopurifier(TM) application.
Additionally, there have been no independent validation studies of our
Hemopurifiers(TM) to treat infectious disease. We manufacture our products on a
small scale for testing purposes but have yet to manufacture our products on a
large scale for commercial purposes. All of our pre-clinical human blood studies
have been conducted in our laboratories under the direction of Dr. Richard
Tullis, our Chief Science Officer.

         As of December 15, 2005 we had issued and outstanding 19,901,016 common
shares, and common share purchase options and warrants entitling the holders to
purchase up to 17,555,820 common shares including 5,000,000 underlying warrant
shares required to be issued upon conversion of the Notes by Holders. We are a
Nevada corporation. Our principal executive offices are located at 3030 Bunker
Hill Street, Suite 4000, San Diego, California 92109. Our telephone number is
(858) 459-7800. The address of our website is www.aethlonmedical.com.
Information on our website is not a part of this prospectus.

THE OFFERING

         This prospectus relates to the offer and sale by some of our
shareholders during the period in which the registration statement containing
this prospectus is effective of up to 11,500,000 common shares, including up to
5,000,000 shares issuable under common share purchase warrants and shares
issuable for accrued and anticipated future interest payable on the Notes. There
are no shares of our common stock that are being offered by other selling
shareholders. As of December 15, 2005, there were 19,909,016 common shares
outstanding. If the shares offered by this prospectus were outstanding as of
December 15, 2005, such shares would represent approximately 36.61% of the total
common stock outstanding on that date.

         From July 11, 2005 through December 15, 2005 the Company received a
series of cash investments totaling $760,000 from the Ellen R. Weiner Family
Revocable Trust, an accredited investor, as a part of the funding of the $1.0
million 10% Series A Convertible Notes ("Promissory Notes"). The Promissory
Notes accrue interest at the rate of ten percent (10%) per annum and mature on
January 2, 2007. The Promissory Notes are convertible into shares of restricted
common stock at any time at the election of the holder at a conversion price
equal to $0.20 per share for any conversion occurring on or prior to the
maturity date. In addition, upon conversion, the Company is obligated to issue
three-year Warrants (the "Weiner Warrants") to purchase a number of shares equal
to the number of shares into which the Notes were converted at an exercise price
of $0.20.

                                       1




         From August 2, 2005 through December 15, 2005 the Company received cash
investments totaling $225,000 from Allan S. Bird, an accredited investor, as a
part of the funding of the $1.0 million 10% Series A Convertible Notes
("Promissory Notes"). The Promissory Notes accrue interest at the rate of ten
percent (10%) per annum and mature on January 2, 2007. The Promissory Notes are
convertible into shares of restricted common stock at any time at the election
of the holder at a conversion price equal to $0.20 per share for any conversion
occurring on or prior to the maturity date. In addition, upon conversion, the
Company is obligated to issue three-year Warrants (the "Bird Warrants") to
purchase a number of shares equal to the number of shares into which the Notes
were converted at an exercise price of $0.20.

         On December 15, 2005 the Company received cash investments totaling
$10,000 from Christian J. Hoffmann III and $5,000 from Claypoole Capital LLC (an
affiliate of Mr. Hoffmann), accredited investors, as a part of the funding of
the $1.0 million 10% Series A Convertible Notes ("Promissory Notes"). The
Promissory Notes accrue interest at the rate of ten percent (10%) per annum and
mature on January 2, 2007. The Promissory Notes are convertible into shares of
restricted common stock at any time at the election of the holder at a
conversion price equal to $0.20 per share for any conversion occurring on or
prior to the maturity date. In addition, upon conversion, the Company is
obligated to issue three-year Warrants (the "Hoffmann/Claypoole Warrants") to
purchase a number of shares equal to the number of shares into which the Note
was converted at an exercise price of $0.20. Mr. Hoffmann is legal counsel to
the Ellen R. Weiner Family Revocable Trust.

         An additional 1,500,000 shares are included in this registration to
accommodate conversions related to accrued and anticipated future interest on
the Notes and other costs.

         The common shares offered under this prospectus, including the shares
of common stock underlying the Promissory Notes, the Weiner Warrants, the Bird
Warrants and the Hoffmann/Claypoole Warrants may be sold by the selling
shareholders on the public market, in negotiated transactions with a
broker-dealer or market maker as principal or agent, or in privately negotiated
transactions not involving a broker or dealer. Information regarding the selling
shareholders, the common shares they are offering to sell under this prospectus,
and the times and manner in which they may offer and sell those shares is
provided in the sections of this prospectus captioned "SELLING SHAREHOLDERS" and
"Plan of Distribution". We will not receive any of the proceeds from those
sales. Should the selling shareholders in their discretion exercise any of the
common share purchase warrants underlying the common shares offered under this
prospectus, we would, however, receive the exercise price for those warrants.
The registration of common shares pursuant to this prospectus does not
necessarily mean that any of those shares will ultimately be offered or sold by
the selling shareholders.

SUMMARY FINANCIAL DATA

         The following tables summarize the consolidated statements of
operations and balance sheet data for our company.


CONSOLIDATED STATEMENTS OF OPERATIONS DATA:                            SIX MONTHS ENDED                  YEARS ENDED
                                                                  SEPTEMBER 30, (UNAUDITED)               MARCH 31,
                                                                ------------------------------------------------------------------
                                                                      2005             2004              2005             2004
- ----------------------------------------------------------------------------------------------------------------------------------
                                                                                                         
         Revenue                                                  $          0     $          0     $          0     $          0
         Gross profit                                             $          0     $          0     $          0     $          0
         Net loss                                                   (1,475,323)    $   (829,945)    $ (2,096,951)    $ (1,518,798)
         Preferred stock dividends                                         N/A              N/A              N/A              N/A
         Net loss attributed to common shareholders               $ (1,475,323)    $   (829,945)    $ (2,096,951)    $ (1,518,798)
         Loss per common share, basic and diluted                 $      (0.08)    $      (0.06)    $      (0.15)    $      (0.19)
         Weighted average common shares outstanding, basic and
           diluted                                                  18,373,416       12,906,408       14,037,341        8,181,612

CONSOLIDATED BALANCE SHEET DATA:                                   SEPTEMBER 30,                     MARCH 31,
                                                                      2005                             2005
                                                                   (UNAUDITED)
- ----------------------------------------------------------------------------------------------------------------------------------
         Current assets                                           $    85,508                       $    18,813
         Total assets                                             $   347,731                       $   300,352
         Total current liabilities                                $ 3,624,606                       $ 3,367,323
         Total stockholders' deficit                              $(3,276,875)                      $(3,066,971)
         Total liabilities and stockholders' deficit              $   347,731                       $   300,352


                                                                              2





                                  RISK FACTORS

         An investment in our common shares involves a high degree of risk and
is subject to many uncertainties. These risks and uncertainties may adversely
affect our business, operating results and financial condition. In such an
event, the trading price for our common shares could decline substantially, and
you could lose all or part of your investment. In order to attain an
appreciation for these risks and uncertainties, you should read this prospectus
in its entirety and consider all of the information and advisements contained in
this prospectus, including the following risk factors and uncertainties.

RISKS RELATING TO OUR BUSINESS

         WE HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT
LOSSES TO CONTINUE FOR THE FORESEEABLE FUTURE.

         We have yet to establish any history of profitable operations. We have
not had any revenues for the past three years. We have incurred annual operating
losses of $2,183,377, $995,549 and $1,971,385, respectively, during the past
three fiscal years of operation and an operating loss of $1,289,455 in the six
months ended September 30, 2005. As a result, at March 31, 2005, we had an
accumulated deficit of $19,142,264. We have incurred net losses from continuing
operations of $2,096,951 and $1,518,798 for the fiscal years ending March 31,
2005 and 2004 and $1,475,323 and $829,945 for the six months ended September 30,
2005 and 2004. As a result, at September 30, 2005, we had an accumulated deficit
of $20,617,587. Our revenues have not been sufficient to sustain our operations.
We expect that our revenues will not be sufficient to sustain our operations for
the foreseeable future. Our profitability will require the successful
commercialization of our Hemopurifier(TM) technology. No assurances can be given
when or if this will occur or that we will ever be profitable.

         WE HAVE RECEIVED AN OPINION FROM OUR AUDITORS REGARDING OUR ABILITY TO
CONTINUE AS A GOING CONCERN

         Our independent auditors noted in their report accompanying our
financial statements for our fiscal year ended March 31, 2005 that we had a
significant deficit accumulated during the development stage, had a working
capital deficit and that a significant amount of additional capital,
approximately $5,000,000 as estimated by management, will be necessary to
advance the development of our products to the point at which we may become
commercially viable and stated that those conditions raised substantial doubt
about our ability to continue as a going concern. Note 1 to our financial
statements addressed management's plans to address these matters. We cannot
assure you that our business plans will be successful in addressing these
issues. This opinion about our ability to continue as a going concern could
affect our ability to obtain additional financing at favorable terms, if at all,
as such an opinion may cause investors to lose faith in our long term prospects.
If we cannot successfully continue as a going concern, our shareholders may lose
their entire investment in our common shares.

         WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND
WITHOUT IT WE WILL NOT BE ABLE TO CONTINUE OPERATIONS.

         At March 31, 2005 and September 30, 2005, we had a working capital
deficit of approximately $3,348,510 and $3,539,098, respectively. The
independent auditors' report for the year ended March 31, 2005, includes an
explanatory paragraph stating that our recurring losses from operations and
working capital deficiency raise substantial doubt about our ability to continue
as a going concern. We had a net operating cash flow deficit of $745,950 for the
six months ended September 30, 2005, a net operating cash flow deficit of
$1,559,366 for the year ended March 31, 2005, a net operating cash flow deficit
of $542,056 for the year ended March 31, 2004 and for the year ended March 31,
2003, a net operating cash flow deficit of $514,503. We do not currently have
sufficient financial resources to fund our operations or those of our
subsidiaries. Therefore, we need additional funds to continue these operations.

         We have the right to receive $10,000 per trading day under an
agreement with Fusion Capital Fund II, LLC unless our stock price equals or
exceeds $1.00, in which case the daily amount may be increased under certain
conditions as the price of our common stock increases.

                                       3




         The extent we rely on Fusion Capital as a source of funding will depend
on a number of factors including, the prevailing market price of our common
stock and the extent to which we are able to secure working capital from other
sources, such as through the commercialization or licensing of our
Hemopurifier(TM) technology. If obtaining sufficient financing from Fusion
Capital were to prove prohibitively expensive and if we are unable to
commercialize and sell our Hemopurifier(TM) technology, we will need to secure
another source of funding in order to satisfy our working capital needs. Should
the financing we require to sustain our working capital needs be unavailable or
prohibitively expensive when we require it, the consequences would be a material
adverse effect on our business, operating results, financial condition and
prospects.

         WE MAY FAIL TO OBTAIN GOVERNMENT CONTRACTS TO DEVELOP OUR
HEMOPURIFIER(TM) TECHNOLOGY FOR BIODEFENSE APPLICATIONS.

         The U.S. Government has undertaken commitments to help secure improved
countermeasures against bioterrorism. To date, we have submitted two Small
Business Innovative Research ("SBIR") grant proposals, one in 2002 and the other
in April 2004, with the National Institutes of Health that relate to the use of
our Hemopurifier(TM) as a treatment countermeasure against certain biological
weapon candidates and we anticipate that we will submit additional proposals to
obtain U.S. Government grants. The first proposal in 2002 was reviewed but not
scored. We expanded the proposal, submitted the proposal in 2004 and it was
again reviewed but not scored as the term countermeasures in SBIR and other
related Request for Proposal ("RFP") grants includes drugs and vaccines, but not
medical devices such as the Hemopurifier(TM). As a result, future attempts to
obtain grant income from the Federal Government will be sought through direct
communication to government health and military agencies, and may include
unsolicited proposals to provide the Hemopurifier(TM) as a treatment
countermeasure.

         At present, the Hemopurifier(TM) has not been approved for use by any
government agency, nor have we received any contracts to purchase the
Hemopurifier(TM). Since inception, we have not generated revenues from the sale
of any product based on our Hemopurifier(TM) technology platform. The process of
obtaining government contracts is lengthy with the uncertainty that we will be
successful in obtaining announced grants or contracts for therapeutics as a
medical device technology. Accordingly, we cannot be certain that we will be
awarded any future government grants or contracts utilizing our Hemopurifier(TM)
platform technology.

         IF THE U.S. GOVERNMENT FAILS TO PURCHASE SUFFICIENT QUANTITIES OF ANY
FUTURE BIODEFENSE CANDIDATE UTILIZING OUR HEMOPURIFIER(TM) PLATFORM TECHNOLOGY,
WE MAY BE UNABLE TO GENERATE SUFFICIENT REVENUES TO CONTINUE OPERATIONS.

         We cannot be certain of the timing or availability of any future
funding from the U.S. Government, and substantial delays or cancellations of
funding could result from protests or challenges from third parties once such
funding is obtained. If we develop products utilizing our Hemopurifier(TM)
platform technology that are approved by the U.S. Food and Drug Administration
(the "FDA"), but the U.S. Government does not place sufficient orders for these
products, our future business will be harmed.

         U.S. GOVERNMENT AGENCIES HAVE SPECIAL CONTRACTING REQUIREMENTS, WHICH
CREATE ADDITIONAL RISKS.

         Our business plan to provide biodefense product candidates and
HIV-Hemopurifier(TM) candidates may involve contracts with the U.S. Government.
U.S. Government contracts typically contain unfavorable termination provisions
and are subject to audit and modification by the government at its sole
discretion, which subjects us to additional risks. These risks include the
ability of the U.S. Government to unilaterally:

         o        suspend or prevent us for a period of time from receiving new
                  contracts or extending existing contracts based on violations
                  or suspected violations of laws or regulations;

         o        audit and object to our contract-related costs and fees,
                  including allocated indirect costs;

         o        control and potentially prohibit the export of our products;
                  and

         o        change certain terms and conditions in our contracts.

                                       4




         If we were to become a U.S. Government contractor, we would be required
to comply with applicable laws, regulations and standards relating to our
accounting practices and would be subject to periodic audits and reviews. As
part of any such audit or review, the U.S. Government may review the adequacy
of, and our compliance with, our internal control systems and policies,
including those relating to our purchasing, property, estimating, compensation
and management information systems. Based on the results of its audits, the U.S.
Government may adjust our contract-related costs and fees, including allocated
indirect costs. In addition, if an audit or review uncovers any improper or
illegal activity, we would possibly be subject to civil and criminal penalties
and administrative sanctions, including termination of our contracts, forfeiture
of profits, suspension of payments, fines and suspension or prohibition from
doing business with the U.S. Government. We could also suffer serious harm to
our reputation if allegations of impropriety were made against us. Although
adjustments arising from government audits and reviews have not seriously harmed
our business in the past, future audits and reviews could cause adverse effects.
In addition, under U.S. Government purchasing regulations, some of our costs,
including most financing costs, amortization of intangible assets, portions of
our research and development costs, and some marketing expenses, would possibly
not be reimbursable or allowed under such contracts. Further, as a U.S.
Government contractor, we would be subject to an increased risk of
investigations, criminal prosecution, civil fraud, whistleblower lawsuits and
other legal actions and liabilities to which purely private sector companies are
not.

         WE WILL FACE INTENSE COMPETITION FROM COMPANIES THAT HAVE GREATER
FINANCIAL, PERSONNEL AND RESEARCH AND DEVELOPMENT RESOURCES THAN OURS. THESE
COMPETITIVE FORCES MAY IMPACT OUR PROJECTED GROWTH AND ABILITY TO GENERATE
REVENUES AND PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE
VALUE OF YOUR INVESTMENT.

         Our competitors are developing vaccine candidates, which could compete
with the Hemopurifier(TM) medical device candidates we are developing. Our
commercial opportunities will be reduced or eliminated if our competitors
develop and market products for any of the diseases we target that:

         o        are more effective;

         o        have fewer or less severe adverse side effects;

         o        are better tolerated;

         o        are more adaptable to various modes of dosing;

         o        are easier to administer; or

         o        are less expensive than the products or product candidates we
                  are developing.

         Even if we are successful in developing effective Hemopurifier(TM)
products, and obtain FDA and other regulatory approvals necessary for
commercializing them, our products may not compete effectively with other
successful products. Researchers are continually learning more about diseases,
which may lead to new technologies for treatment. Our competitors may succeed in
developing and marketing products that are either more effective than those that
we may develop, alone or with our collaborators, or that are marketed before any
products we develop are marketed.

         The Congress' recent passage of the Project BioShield Bill, a
comprehensive effort to develop and make available modern, effective drugs and
vaccines to protect against attack by biological and chemical weapons or other
dangerous pathogens, may encourage competitors to develop their own product
candidates. We cannot predict the decisions that will be made in the future by
the various government agencies as a result of such legislation.

         Our competitors include fully integrated pharmaceutical companies and
biotechnology companies as well as universities and public and private research
institutions. Many of the organizations competing with us, have substantially
greater capital resources, larger research and development staffs and
facilities, greater experience in product development and in obtaining
regulatory approvals, and greater marketing capabilities than we do.


                                       5




         The market for medical devices is intensely competitive. Many of our
potential competitors have longer operating histories, greater name recognition,
more employees, and significantly greater financial, technical, marketing,
public relations, and distribution resources than we have. This intense
competitive environment may require us to make changes in our products, pricing,
licensing, services or marketing to develop, maintain and extend our current
technology. Price concessions or the emergence of other pricing or distribution
strategies of competitors may diminish our revenues (if any), adversely impact
our margins or lead to a reduction in our market share (if any), any of which
may harm our business.

         WE HAVE LIMITED MANUFACTURING EXPERIENCE.

         To achieve the levels of production necessary to commercialize our
Hemopurifier(TM) products, we will need secure manufacturing agreements with
manufacturers which comply with good manufacturing practices standards and other
standards prescribed by various federal, state and local regulatory agencies in
the U.S. and any other country of use.

         We have limited experience manufacturing products for testing purposes
and no experience manufacturing products for large scale commercial purposes. We
will likely outsource the manufacture of our Hemopurifier(TM) products to third
parties operating FDA-certified facilities. To date, we have manufactured
devices on a small scale for testing purposes. There can be no assurance that
manufacturing and control problems will not arise as we attempt to commercialize
our products or that such manufacturing can be completed in a timely manner or
at a commercially reasonable cost. Any failure to surmount such problems could
delay or prevent commercialization of our products and would have a material
adverse effect on us.

         OUR HEMOPURIFER(TM) TECHNOLOGY MAY BECOME OBSOLETE.

         Our Hemopurifier(TM) products may be made unmarketable by new
scientific or technological developments where new treatment modalities are
introduced that are more efficacious and/or more economical than our
Hemopurifier(TM) products. The Homeland Security industry is growing rapidly
with many competitors trying to develop products or vaccines to protect against
infectious disease. Any one of our competitors could develop a more effective
product which would render our technology obsolete.

         OUR USE OF HAZARDOUS MATERIALS, CHEMICALS AND VIRUSES REQUIRE US TO
COMPLY WITH REGULATORY REQUIREMENTS AND EXPOSES US TO POTENTIAL LIABILITIES.

         Our research and development involves the controlled use of hazardous
materials, chemicals and viruses. The primary hazardous materials include
chemicals needed to construct the Hemopurifier(TM) cartridges and HIV and
Hepatitis C infected plasma samples used in preclinical testing of the
Hemopurifier(TM). All other chemicals are fully inventoried and reported to the
appropriate authorities, such as the fire department, who inspect the facility
on a regular basis. We are subject to federal, state, local and foreign laws
governing the use, manufacture, storage, handling and disposal of such
materials. Although we believe that our safety procedures for the use,
manufacture, storage, handling and disposal of such materials comply with the
standards prescribed by federal, state, local and foreign regulations, we cannot
completely eliminate the risk of accidental contamination or injury from these
materials. We have had no incidents or problems involving hazardous chemicals or
biological samples. In the event of such an accident, we could be held liable
for significant damages or fines. We currently carry a limited amount of
insurance to protect us from these damages. In addition, we may be required to
incur significant costs to comply with regulatory requirements in the future.

         WE ARE DEPENDENT FOR OUR SUCCESS ON A FEW KEY EXECUTIVE OFFICERS. OUR
INABILITY TO RETAIN THOSE OFFICERS WOULD IMPEDE OUR BUSINESS PLAN AND GROWTH
STRATEGIES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF
YOUR INVESTMENT.

         Our success depends to a critical extent on the continued services of
our Chief Executive Officer, James A. Joyce and our Chief Science Officer,
Richard H. Tullis. Were we to lose one or more of these key executive officers,
we would be forced to expend significant time and money in the pursuit of a
replacement, which would result in both a delay in the implementation of our
business plan and the diversion of limited working capital. The loss of Dr.
Tullis would harm the clinical development of our products due to his unique
experience with the Hemopurifier(TM) technology. The loss of Dr. Tullis and/or
Mr. Joyce would be detrimental to our growth as they possess unique knowledge of

                                       6




our business model and infectious disease which would be difficult to replace
within the biotechnology field. We can give you no assurance that we can find
satisfactory replacements for these key executive officers at all, or on terms
that are not unduly expensive or burdensome to our company. Although Mr. Joyce
and Mr. Tullis have signed employment agreements providing for their continued
service to our company, these agreements will not preclude them from leaving our
company. We do not currently carry key man life insurance policies on any of our
key executive officers which would assist us in recouping our costs in the event
of the loss of those officers.

         OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD IMPEDE
OUR ABILITY TO GENERATE REVENUES AND PROFITS AND TO OTHERWISE IMPLEMENT OUR
BUSINESS PLAN AND GROWTH STRATEGIES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR
BUSINESS AND COULD ADVERSELY AFFECT THE VALUE OF YOUR INVESTMENT.

         We currently have an extremely small staff comprised of five full time
employees consisting of our Chief Executive Officer, our Chief Science Officer,
our Chief Financial Officer, a research scientist, a research associate, as well
as other personnel employed on a contract basis. Although we believe that these
employees, together with the consultants currently engaged by our company, will
be able to handle most of our additional administrative, research and
development and business development in the near term, we will nevertheless be
required over the longer-term to hire highly skilled managerial, scientific and
administrative personnel to fully implement our business plan and growth
strategies. Due to the specialized scientific nature of our business, we are
highly dependent upon our ability to attract and retain qualified scientific,
technical and managerial personal. Competition for these individuals, especially
in San Diego where many bio-technology companies are located, is intense and we
may not be able to attract, assimilate or retain additional highly qualified
personnel in the future. We cannot assure you that we will be able to engage the
services of such qualified personnel at competitive prices or at all,
particularly given the risks of employment attributable to our limited financial
resources and lack of an established track record.

         WE PLAN TO GROW VERY RAPIDLY, WHICH WILL PLACE STRAINS ON OUR
MANAGEMENT TEAM AND OTHER COMPANY RESOURCES TO BOTH IMPLEMENT MORE SOPHISTICATED
MANAGERIAL, OPERATIONAL AND FINANCIAL SYSTEMS, PROCEDURES AND CONTROLS AND TO
TRAIN AND MANAGE THE PERSONNEL NECESSARY TO IMPLEMENT THOSE FUNCTIONS. OUR
INABILITY TO MANAGE OUR GROWTH COULD IMPEDE OUR ABILITY TO GENERATE REVENUES AND
PROFITS AND TO OTHERWISE IMPLEMENT OUR BUSINESS PLAN AND GROWTH STRATEGIES,
WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR
INVESTMENT.

         We will need to significantly expand our operations to implement our
longer-term business plan and growth strategies. We will also be required to
manage multiple relationships with various strategic partners, technology
licensors, customers, manufacturers and suppliers, consultants and other third
parties. This expansion and these expanded relationships will require us to
significantly improve or replace our existing managerial, operational and
financial systems, procedures and controls; to improve the coordination between
our various corporate functions; and to manage, train, motivate and maintain a
growing employee base. The time and costs to effectuate these steps may place a
significant strain on our management personnel, systems and resources,
particularly given the limited amount of financial resources and skilled
employees that may be available at the time. We cannot assure you that we will
institute, in a timely manner or at all, the improvements to our managerial,
operational and financial systems, procedures and controls necessary to support
our anticipated increased levels of operations and to coordinate our various
corporate functions, or that we will be able to properly manage, train, motivate
and retain our anticipated increased employee base.

         WE MAY HAVE DIFFICULTY IN ATTRACTING AND RETAINING MANAGEMENT AND
OUTSIDE INDEPENDENT MEMBERS TO OUR BOARD OF DIRECTORS AS A RESULT OF THEIR
CONCERNS RELATING TO THEIR INCREASED PERSONAL EXPOSURE TO LAWSUITS AND
SHAREHOLDER CLAIMS BY VIRTUE OF HOLDING THESE POSITIONS IN A PUBLICLY-HELD
COMPANY

         The directors and management of publicly traded corporations are
increasingly concerned with the extent of their personal exposure to lawsuits
and shareholder claims, as well as governmental and creditor claims which may be
made against them, particularly in view of recent changes in securities laws
imposing additional duties, obligations and liabilities on management and
directors. Due to these perceived risks, directors and management are also
becoming increasingly concerned with the availability of directors and officers
liability insurance to pay on a timely basis the costs incurred in defending

                                       7




such claims. We currently do carry limited directors and officers liability
insurance. Directors and officers liability insurance has recently become much
more expensive and difficult to obtain. If we are unable to continue or provide
directors and officers liability insurance at affordable rates or at all, it may
become increasingly more difficult to attract and retain qualified outside
directors to serve on our board of directors. We may lose potential independent
board members and management candidates to other companies in the biotechnology
field that have greater directors and officers liability insurance to insure
them from liability or to biotechnology companies that have revenues or have
received greater funding to date which can offer greater compensation packages.
The fees of directors are also rising in response to their increased duties,
obligations and liabilities as well as increased exposure to such risks. As a
company with a limited operating history and limited resources, we will have a
more difficult time attracting and retaining management and outside independent
directors than a more established company due to these enhanced duties,
obligations and liabilities.

         IF WE FAIL TO COMPLY WITH EXTENSIVE REGULATIONS OF DOMESTIC AND FOREIGN
REGULATORY AUTHORITIES, THE COMMERCIALIZATION OF OUR PRODUCT CANDIDATES COULD BE
PREVENTED OR DELAYED.

         Our pathogen filtration devices, or Hemopurifier(TM) products, are
subject to extensive government regulations related to development, testing,
manufacturing and commercialization in the United States and other countries.
The determination of when and whether a product is ready for large scale
purchase and potential use will be made by the government through consultation
with a number of governmental agencies, including the FDA, the National
Institutes of Health, the Centers for Disease Control and Prevention and the
Department of Homeland Security. Our product candidates are in the pre-clinical
and clinical stages of development and have not received required regulatory
approval from the FDA to be commercially marketed and sold. The process of
obtaining and complying with FDA and other governmental regulatory approvals and
regulations is costly, time consuming, uncertain and subject to unanticipated
delays. Such regulatory approval (if any) and product development requires
several years. Despite the time and expense exerted, regulatory approval is
never guaranteed. We also are subject to the following risks and obligations,
among others.

         o        The FDA may refuse to approve an application if they believe
                  that applicable regulatory criteria are not satisfied.

         o        The FDA may require additional testing for safety and
                  effectiveness.

         o        The FDA may interpret data from pre-clinical testing and
                  clinical trials in different ways than we interpret them.

         o        If regulatory approval of a product is granted, the approval
                  may be limited to specific indications or limited with respect
                  to its distribution.

         o        The FDA may change their approval policies and/or adopt new
                  regulations.

         Failure to comply with these or other regulatory requirements of the
FDA may subject us to administrative or judicially imposed sanctions, including:

         o        warning letters;

         o        civil penalties;

         o        criminal penalties;

         o        injunctions;

         o        product seizure or detention;

         o        product recalls; and

         o        total or partial suspension of productions.

         DELAYS IN SUCCESSFULLY COMPLETING OUR CLINICAL TRIALS COULD JEOPARDIZE
OUR ABILITY TO OBTAIN REGULATORY APPROVAL OR MARKET OUR HEMOPURIFIER(TM) PRODUCT
CANDIDATES ON A TIMELY BASIS.

                                       8




         Our business prospects will depend on our ability to complete clinical
trials, obtain satisfactory results, obtain required regulatory approvals and
successfully commercialize our Hemopurifier(TM) product candidates. Completion
of our clinical trials, announcement of results of the trials and our ability to
obtain regulatory approvals could be delayed for a variety of reasons,
including:

         o        serious adverse events related to our medical device
                  candidates;

         o        unsatisfactory results of any clinical trial;

         o        the failure of our principal third-party investigators to
                  perform our clinical trials on our anticipated schedules;
                  and/or

         o        different interpretations of our pre-clinical and clinical
                  data, which could initially lead to inconclusive results.

         Our development costs will increase if we have material delays in any
clinical trial or if we need to perform more or larger clinical trials than
planned. If the delays are significant, or if any of our Hemopurifier(TM)
product candidates do not prove to be safe or effective or do not receive
required regulatory approvals, our financial results and the commercial
prospects for our product candidates will be harmed. Furthermore, our inability
to complete our clinical trials in a timely manner could jeopardize our ability
to obtain regulatory approval.

         THE INDEPENDENT CLINICAL INVESTIGATORS THAT WE RELY UPON TO CONDUCT OUR
CLINICAL TRIALS MAY NOT BE DILIGENT, CAREFUL OR TIMELY, AND MAY MAKE MISTAKES,
IN THE CONDUCT OF OUR CLINICAL TRIALS.

         We depend on independent clinical investigators to conduct our clinical
trials. The investigators are not our employees, and we cannot control the
amount or timing of resources that they devote to our product development
programs. If independent investigators fail to devote sufficient time and
resources to our product development programs, or if their performance is
substandard, it may delay FDA approval of our medical device candidates. These
independent investigators may also have relationships with other commercial
entities, some of which may compete with us. If these independent investigators
assist our competitors at our expense, it could harm our competitive position.

         THE APPROVAL REQUIREMENTS FOR MEDICAL PRODUCTS USED TO FIGHT
BIOTERRORISM ARE STILL EVOLVING, AND WE CANNOT BE CERTAIN THAT ANY PRODUCTS WE
DEVELOP, IF EFFECTIVE, WOULD MEET THESE REQUIREMENTS.

         We are developing product candidates based upon current governmental
policies regulating these medical countermeasure treatments. For instance, we
intend to pursue FDA approval of our proprietary pathogen filtration devices to
treat infectious agents under requirements published by the FDA that allow the
FDA to approve certain medical devices used to reduce or prevent the toxicity of
chemical, biological, radiological or nuclear substances based on human clinical
data to demonstrate safety and immune response, and evidence of effectiveness
derived from appropriate animal studies and any additional supporting data. Our
business is subject to substantial risk because these policies may change
suddenly and unpredictably and in ways that could impair our ability to obtain
regulatory approval of these products, and we cannot guarantee that the FDA will
approve our proprietary pathogen filtration devices.

         OUR PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE
TO RESULTS OF STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR
MARKET ACCEPTANCE, PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES.

         Our success depends on our ability to successfully develop and obtain
regulatory approval to market new filtration devices. We expect that a
significant portion of the research that we will conduct will involve new and
unproven technologies. Development of a product requires substantial technical,
financial and human resources even if the product is not successfully completed.

         Our previously planned products have not become marketable products due
in part to our transition in 2001 from a focus on utilizing our Hemopurifier(TM)
technology on treating harmful metals to treating infectious diseases prior to
our having completed the FDA approval process. Our transition was made in order
to focus on larger markets with an urgent need for new treatment and to take
advantage of the sense of greater sense of urgency surrounding acute and chronic
infectious diseases. Prior to initiating the development of infectious disease
Hemopurifiers(TM), we successfully completed an FDA approved Phase I human

                                       9




safety trial of a Hemopurifier(TM) to treat aluminum and iron intoxication.
Since changing the focus to infectious disease research, we have not initiated
an FDA approved human clinical trial as the development of the technology is
still continuing and will require both significant capital and scientific
resources. Our pending products face similar challenges of obtaining successful
clinical trials in route to gaining FDA approval prior to commercialization.
Additionally, our limited financial resources hinder the speed of our product
development due to personal constraints.

         Our potential products may appear to be promising at various stages of
development yet fail to reach the market for a number of reasons, including the:

         o        lack of adequate quality or sufficient prevention benefit, or
                  unacceptable safety during pre-clinical studies or clinical
                  trials;

         o        failure to receive necessary regulatory approvals;

         o        existence of proprietary rights of third parties; and/or

         o        inability to develop manufacturing methods that are efficient,
                  cost-effective and capable of meeting stringent regulatory
                  standards.

         POLITICAL OR SOCIAL FACTORS MAY DELAY OR IMPAIR OUR ABILITY TO MARKET
OUR PRODUCTS.

         Products developed to treat diseases caused by or to combat the threat
of bioterrorism will be subject to changing political and social environments.
The political and social responses to bioterrorism have been highly charged and
unpredictable. Political or social pressures may delay or cause resistance to
bringing our products to market or limit pricing of our products, which would
harm our business. Bioterrorism has become the focus of political debates
especially with the upcoming presidential elections, both in terms of how to
approach bioterrorism and the amount funding the government should provide for
any programs involving homeland protection. Government funding for products on
bioterrorism could be reduced which would hinder our ability to obtain
governmental grants.

         OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD
NEGATIVELY IMPACT OUR PROJECTED GROWTH AND ABILITY TO GENERATE REVENUES AND
PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF
YOUR INVESTMENT.

         We rely on a combination of patents, patents pending, copyrights,
trademark and trade secret laws, proprietary rights agreements and
non-disclosure agreements to protect our intellectual properties. We cannot give
you any assurance that these measures will prove to be effective in protecting
our intellectual properties.

         In the case of patents, we cannot give you any assurance that our
existing patents will not be invalidated, that any patents that we currently or
prospectively apply for will be granted, or that any of these patents will
ultimately provide significant commercial benefits. Further, competing companies
may circumvent any patents that we may hold by developing products which closely
emulate but do not infringe our patents. While we intend to seek patent
protection for our products in selected foreign countries, those patents may not
receive the same degree of protection as they would in the United States. We can
give you no assurance that we will be able to successfully defend our patents
and proprietary rights in any action we may file for patent infringement.
Similarly, we cannot give you any assurance that we will not be required to
defend against litigation involving the patents or proprietary rights of others,
or that we will be able to obtain licenses for these rights. Legal and
accounting costs relating to prosecuting or defending patent infringement
litigation may be substantial. Since many of our patents were issued in the
1980's, they may expire before FDA approval, if any, is obtained. However, we
believe that certain patent applications filed and/or other patents issued more
recently will help to protect the proprietary nature of the Hemopurifier(TM)
treatment technology.

         The Hemopurifier(TM) is protected by four issued patents, in the United
States, Europe and Japan, three of which we own and one in which we own an
exclusive license. Three additional patent applications deal with treatments for
virus infection and manufacturing methods, two of which we own and one of which
we own an exclusive license.

                                       10




         We also rely on proprietary designs, technologies, processes and
know-how not eligible for patent protection. We cannot give you any assurance
that our competitors will not independently develop the same or superior
designs, technologies, processes and know-how.

         While we have and will continue to enter into proprietary rights
agreements with our employees and third parties giving us proprietary rights to
certain technology developed by those employees or parties while engaged by our
company, we can give you no assurance that courts of competent jurisdiction will
enforce those agreements.

         THE PATENTS WE OWN COMPRISE A MAJORITY OF OUR ASSETS WHICH COULD LIMIT
OUR FINANCIAL VIABILITY.

         The Hemopurifier(TM) is protected by four issued patents, in the United
States, Europe and Japan, three of which we own and one which we own the
exclusive license. These patents comprise a majority of our assets. At September
30, 2005, our patents comprised 80.06% of our non-current assets, and 60.37% of
all assets. If our existing patents are invalidated or if they fail to provide
significant commercial benefits, it will severely hurt our financial condition
as a majority of our assets would lose their value. Further, since our patents
are written down over the course of their term until they expire, our assets
comprised of patents will continually be written down until they lose value
altogether.

         LEGISLATIVE ACTIONS AND POTENTIAL NEW ACCOUNTING PRONOUNCEMENTS ARE
LIKELY TO IMPACT OUR FUTURE FINANCIAL POSITION AND RESULTS OF OPERATIONS.

         There have been regulatory changes, including the Sarbanes-Oxley Act of
2002, and there may potentially be new accounting pronouncements or additional
regulatory rulings which will have an impact on our future financial position
and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes
as well as proposed legislative initiatives following the Enron bankruptcy have
increased our general and administrative costs as we have incurred increased
legal and accounting fees to comply with such rule changes. Further, proposed
initiatives are expected to result in changes in certain accounting rules,
including legislative and other proposals to account for employee stock options
as a compensation expense. These and other potential changes could materially
increase the expenses we report under accounting principles generally accepted
in the United States of America, and adversely affect our operating results.

         OUR PRODUCTS MAY BE SUBJECT TO RECALL OR PRODUCT LIABILITY CLAIMS.

         Our Hemopurifier(TM) products may be used in connection with medical
procedures in which it is important that those products function with precision
and accuracy. If our products do not function as designed, or are designed
improperly, we may be forced by regulatory agencies to withdraw such products
from the market. In addition, if medical personnel or their patients suffer
injury as a result of any failure of our products to function as designed, or
our products are designed inappropriately, we may be subject to lawsuits seeking
significant compensatory and punitive damages. The risk of product liability
claims, product recalls and associated adverse publicity is inherent in the
testing, manufacturing, marketing and sale of medical products. We do not have
general clinical trial liability insurance coverage. There can be no assurance
that future insurance coverage will to be adequate or available. We may not be
able to secure product liability insurance coverage on acceptable terms or at
reasonable costs when needed. Any product recall or lawsuit seeking significant
monetary damages may have a material affect on our business and financial
condition. Any liability for mandatory damages could exceed the amount of our
coverage. Moreover, a product recall could generate substantial negative
publicity about our products and business and inhibit or prevent
commercialization of other future product candidates.

RISKS RELATING TO AN INVESTMENT IN OUR SECURITIES

         TO DATE, WE HAVE NOT PAID ANY CASH DIVIDENDS AND NO CASH DIVIDENDS WILL
BE PAID IN THE FORESEEABLE FUTURE.

         We do not anticipate paying cash dividends on our common shares in the
foreseeable future, and we cannot assure an investor that funds will be legally
available to pay dividends, or that even if the funds are legally available,
that the dividends will be paid.

         THE APPLICATION OF THE "PENNY STOCK" RULES COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON SHARES AND INCREASE YOUR TRANSACTION COSTS TO SELL
THOSE SHARES.

                                       11




         As long as the trading price of our common shares is below $5 per
share, the open-market trading of our common shares will be subject to the
"penny stock" rules. The "penny stock" rules impose additional sales practice
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities and
have received the purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in decreased
liquidity for our common shares and increased transaction costs for sales and
purchases of our common shares as compared to other securities.

         OUR COMMON SHARES ARE THINLY TRADED, SO YOU MAY BE UNABLE TO SELL AT OR
NEAR ASK PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO RAISE MONEY OR
OTHERWISE DESIRE TO LIQUIDATE YOUR SHARES.

         Our common shares have historically been sporadically or
"thinly-traded" on the OTCBB, meaning that the number of persons interested in
purchasing our common shares at or near ask prices at any given time may be
relatively small or non-existent. As of December 15, 2005, our average trading
volume per day for the past three months was approximately 102,095 shares a day
with a high of 915,100 shares traded and a low of 500 shares traded. This
situation is attributable to a number of factors, including the fact that we are
a small company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. We cannot give you any assurance
that a broader or more active public trading market for our common shares will
develop or be sustained, or that current trading levels will be sustained.

         In May of 2004, we entered into a common stock purchase agreement with
Fusion Capital II, LLC ("Fusion"). Under the common stock purchase agreement,
Fusion agreed to Purchase, on each trading day during the term of the agreement,
$10,000 of our common stock. As of December 15, 2005, Fusion can purchase an
aggregate of $5,299,999 of common stock over a 30 month period from inception.

         Fusion Capital's purchase of $10,000 of our common stock each trading
day could cause our common stock price to decline due to the additional shares
available in the market, particularly in light of the relatively thin trading
volume of our common stock. Using the closing price on December 15, 2005 of
$0.36 as an example, Fusion Capital would be issued approximately 27,778 shares
each trading day if we elected to have them purchase the daily purchase amount,
whereas our average trading volume for the prior three months is 96,222 per day.
The market price of our common stock could decline given our minimal average
trading volume compared to the number of shares potentially issuable to Fusion
Capital and the voting power and value of your investment would be subject to
continual dilution if Fusion Capital purchases the shares and resells those
shares into the market, although there is no obligation for Fusion Capital to
sell such shares. Any adverse affect on the market price of our common stock
would increase the number of shares issuable to Fusion Capital each trading day
which would increase the dilution of your investment. Although we have the right
to reduce or suspend Fusion Capital purchases at any time, our financial
condition at the time may require us to waive our right to suspend purchases
even if there is a decline in the market price.

         Contractual 9.9% beneficial ownership limitations prohibit Fusion
Capital, together with its affiliates, from beneficially owning more than 9.9%
of our outstanding common stock. This 9.9% limitation does not prevent Fusion
Capital from purchasing shares of our common stock and then reselling those
shares in stages over time where Fusion Capital and its affiliates do not, at
any given time, beneficially own shares in excess of the 9.9% limitation.
Consequently, these limitations will not necessarily prevent substantial
dilution of the voting power and value of your investment.

                                       12




THE MARKET PRICE FOR OUR COMMON SHARES IS PARTICULARLY VOLATILE GIVEN OUR STATUS
AS A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY-TRADED PUBLIC FLOAT,
LIMITED OPERATING HISTORY AND LACK OF REVENUES WHICH COULD LEAD TO WIDE
FLUCTUATIONS IN OUR SHARE PRICE. THE PRICE AT WHICH YOU PURCHASE OUR COMMON
SHARES MAY NOT BE INDICATIVE OF THE PRICE THAT WILL PREVAIL IN THE TRADING
MARKET. YOU MAY BE UNABLE TO SELL YOUR COMMON SHARES AT OR ABOVE YOUR PURCHASE
PRICE, WHICH MAY RESULT IN SUBSTANTIAL LOSSES TO YOU.

         The market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the indefinite
future. In fact, during the 52-week period ended December 15, 2005, the high and
low sale prices of a share of our common stock were $0.77 and $0.18,
respectively. The volatility in our share price is attributable to a number of
factors. First, as noted above, our common shares are sporadically and/or thinly
traded. As a consequence of this lack of liquidity, the trading of relatively
small quantities of shares by our shareholders may disproportionately influence
the price of those shares in either direction. The price for our shares could,
for example, decline precipitously in the event that a large number of our
common shares are sold on the market without commensurate demand, as compared to
a seasoned issuer which could better absorb those sales without adverse impact
on its share price. Secondly, we are a speculative or "risky" investment due to
our limited operating history and lack of revenues or profits to date, and
uncertainty of future market acceptance for our potential products. As a
consequence of this enhanced risk, more risk-adverse investors may, under the
fear of losing all or most of their investment in the event of negative news or
lack of progress, be more inclined to sell their shares on the market more
quickly and at greater discounts than would be the case with the stock of a
seasoned issuer. The following factors may add to the volatility in the price of
our common shares: actual or anticipated variations in our quarterly or annual
operating results; acceptance of our proprietary technology as viable method of
augmenting the immune response of clearing viruses and toxins from human blood;
government regulations, announcements of significant acquisitions, strategic
partnerships or joint ventures; our capital commitments; and additions or
departures of our key personnel. Many of these factors are beyond our control
and may decrease the market price of our common shares, regardless of our
operating performance. We cannot make any predictions or projections as to what
the prevailing market price for our common shares will be at any time, including
as to whether our common shares will sustain their current market prices, or as
to what effect that the sale of shares or the availability of common shares for
sale at any time will have on the prevailing market price.

         Shareholders should be aware that, according to SEC Release No.
34-29093, the market for penny stocks has suffered in recent years from patterns
of fraud and abuse. Such patterns include (1) control of the market for the
security by one or a few broker-dealers that are often related to the promoter
or issuer; (2) manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (3) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated to
a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. Our management is aware of the abuses that
have occurred historically in the penny stock market. Although we do not expect
to be in a position to dictate the behavior of the market or of broker-dealers
who participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.

         VOLATILITY IN OUR COMMON SHARE PRICE MAY SUBJECT US TO SECURITIES
LITIGATION.

         The market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the indefinite
future. In the past, plaintiffs have often initiated securities class action
litigation against a company following periods of volatility in the market price
of its securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.

                                       13




         OUR OFFICERS AND DIRECTORS BENEFICIALLY OWN OR CONTROL APPROXIMATELY
42% OF OUR OUTSTANDING COMMON SHARES AS OF DECEMBER 15, 2005, WHICH MAY LIMIT
THE ABILITY OF YOURSELF OR OTHER SHAREHOLDERS, WHETHER ACTING INDIVIDUALLY OR
TOGETHER, TO PROPOSE OR DIRECT THE MANAGEMENT OR OVERALL DIRECTION OF OUR
COMPANY. ADDITIONALLY, THIS CONCENTRATION OF OWNERSHIP COULD DISCOURAGE OR
PREVENT A POTENTIAL TAKEOVER OF OUR COMPANY THAT MIGHT OTHERWISE RESULT IN YOU
RECEIVING A PREMIUM OVER THE MARKET PRICE FOR YOUR COMMON SHARES.

         As of December 15, 2005, our officers and directors beneficially own or
control approximately 41.64% of our outstanding common shares. These persons
will have the ability to control substantially all matters submitted to our
shareholders for approval and to control our management and affairs, including
extraordinary transactions such as mergers and other changes of corporate
control, and going private transactions.

         A LARGE NUMBER OF COMMON SHARES ARE ISSUABLE UPON EXERCISE OF
OUTSTANDING COMMON SHARE PURCHASE OPTIONS, WARRANTS AND CONVERTIBLE PROMISSORY
NOTES. THE EXERCISE OR CONVERSION OF THESE SECURITIES COULD RESULT IN THE
SUBSTANTIAL DILUTION OF YOUR INVESTMENT IN TERMS OF YOUR PERCENTAGE OWNERSHIP IN
THE COMPANY AS WELL AS THE BOOK VALUE OF YOUR COMMON SHARES. THE SALE OF A LARGE
AMOUNT OF COMMON SHARES RECEIVED UPON EXERCISE OF THESE OPTIONS OR WARRANTS ON
THE PUBLIC MARKET TO FINANCE THE EXERCISE PRICE OR TO PAY ASSOCIATED INCOME
TAXES, OR THE PERCEPTION THAT SUCH SALES COULD OCCUR, COULD SUBSTANTIALLY
DEPRESS THE PREVAILING MARKET PRICES FOR OUR SHARES.

         As of December 15, 2005, there are outstanding non-variable priced
purchase options and warrants entitling the holders to purchase 17,555,820
common shares at a weighted average exercise price of $0.42 per share. There are
5,150,000 shares underlying promissory notes convertible into common stock at a
weighted average exercise price of $ 0.20. The exercise price for all of the
aforesaid warrants, may be less than your cost to acquire our common shares. In
the event of the exercise of these securities, you could suffer substantial
dilution of your investment in terms of your percentage ownership in the company
as well as the book value of your common shares. In addition, the holders of the
common share purchase options or warrants may sell common shares in tandem with
their exercise of those options or warrants to finance that exercise, or may
resell the shares purchased in order to cover any income tax liabilities that
may arise from their exercise of the options or warrants.

         OUR ISSUANCE OF ADDITIONAL COMMON SHARES, OR OPTIONS OR WARRANTS TO
PURCHASE THOSE SHARES, WOULD DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING
RIGHTS.

         We are entitled under our certificate of incorporation to issue up to
50,000,000 shares of common stock. After taking into consideration our
outstanding common stock at December 15, 2005, our convertible notes,
outstanding options and outstanding warrants we will be entitled to issue up to
7,390,164 additional common shares. Our board may generally issue shares of
common stock, or options or warrants to purchase those shares, without further
approval by our shareholders based upon such factors as our board of directors
may deem relevant at that time. It is likely that we will be required to issue a
large amount of additional securities to raise capital to further our
development. It is also likely that we will be required to issue a large amount
of additional securities to directors, officers, employees and consultants as
compensatory grants in connection with their services, both in the form of
stand-alone grants or under our stock plans. We cannot give you any assurance
that we will not issue additional shares of common stock, or options or warrants
to purchase those shares, under circumstances we may deem appropriate at the
time.

         OUR ISSUANCE OF ADDITIONAL COMMON SHARES IN EXCHANGE FOR SERVICES OR TO
REPAY DEBT, WOULD DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING RIGHTS AND
COULD HAVE A NEGATIVE IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK.

         Our board may generally issue shares of common stock to pay for debt or
services, without further approval by our shareholders based upon such factors
as our board of directors may deem relevant at that time. For the past three
years and for the six months ended September 30, 2005, we issued a total of
2,306,103 shares for debt to reduce our obligations. The average price discount
of common stock issued for debt in this period, weighted by the number of shares
issued for debt in such period was 32%, 47.4% and 53.4% for the years ended
2003, 2004, 2005 and we issued no common stock for debt reduction for the six
month period ended September 30, 2005. For the past three years and for the six
months ended September 30, 2005, we issued a total of 3,645,101 shares in
payment for services. The average price discount of common stock issued for

                                       14




services for services in this period, weighted by the number of shares issued
for services in such period was 43.9%, 55.4%, 46.3% and 12.20% for the years
ended 2003, 2004, 2005 and the six months ended September 30, 2005,
respectively. It is likely that we will issue additional securities to pay for
services and reduce debt in the future. We cannot give you any assurance that we
will not issue additional shares of common stock under circumstances we may deem
appropriate at the time.

         THE SALE OF OUR COMMON STOCK UNDERLYING THE PROMISSORY NOTES AND
WARRANTS OWNED BY THE SELLING SHAREHOLDERS MAY CAUSE DILUTION AND THE SALE OF
THE SHARES OF COMMON STOCK ACQUIRED BY SELLING SHAREHOLDERS COULD CAUSE THE
PRICE OF OUR COMMON STOCK TO DECLINE.

         Depending upon market liquidity at the time, a sale of shares under
this offering at any given time could cause the trading price of our common
stock to decline. The sale of a substantial number of shares of our common stock
under this offering, or anticipation of such sales, could make it more difficult
for us to sell equity or equity-related securities in the future at a time and
at a price that we might otherwise wish to effect sales.

         THE ELIMINATION OF MONETARY LIABILITY AGAINST OUR DIRECTORS, OFFICERS
AND EMPLOYEES UNDER OUR CERTIFICATE OF INCORPORATION AND THE EXISTENCE OF
INDEMNIFICATION RIGHTS TO OUR DIRECTORS, OFFICERS AND EMPLOYEES MAY RESULT IN
SUBSTANTIAL EXPENDITURES BY OUR COMPANY AND MAY DISCOURAGE LAWSUITS AGAINST OUR
DIRECTORS, OFFICERS AND EMPLOYEES.

         Our certificate of incorporation contains provisions which eliminate
the liability of our directors for monetary damages to our company and
shareholders. Our bylaws also require us to indemnify our officers and
directors. We may also have contractual indemnification obligations under our
agreements with our directors, officers and employees. The foregoing
indemnification obligations could result in our company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors,
officers and employees, which we may be unable to recoup. These provisions and
resultant costs may also discourage our company from bringing a lawsuit against
directors, officers and employees for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our shareholders
against our directors, officers and employees even though such actions, if
successful, might otherwise benefit our company and shareholders.

         ANTI-TAKEOVER PROVISIONS MAY IMPEDE THE ACQUISITION OF OUR COMPANY.

         Certain provisions of the Nevada General Corporation Law have
anti-takeover effects and may inhibit a non-negotiated merger or other business
combination. These provisions are intended to encourage any person interested in
acquiring us to negotiate with, and to obtain the approval of, our Board of
Directors in connection with such a transaction. However, certain of these
provisions may discourage a future acquisition of us, including an acquisition
in which the shareholders might otherwise receive a premium for their shares. As
a result, shareholders who might desire to participate in such a transaction may
not have the opportunity to do so.

         SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

         In this prospectus we make a number of statements, referred to as
"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 (the "Exchange Act"), which are intended to
convey our expectations or predictions regarding the occurrence of possible
future events or the existence of trends and factors that may impact our future
plans and operating results. The safe harbor for forward-looking statements
provided by the Private Securities Litigation Reform Act of 1995 does not apply
to us. We note, however, that these forward-looking statements are derived, in
part, from various assumptions and analyses we have made in the context of our
current business plan and information currently available to us and in light of
our experience and perceptions of historical trends, current conditions and
expected future developments and other factors we believe to be appropriate in
the circumstances. You can generally identify forward-looking statements through
words and phrases such as "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT",
"INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY
RESULT", and similar expressions. When reading any forward looking statement you
should remain mindful that all forward-looking statements are inherently
uncertain as they are based on current expectations and assumptions concerning
future events or future performance of our company, and that actual results or
developments may vary substantially from those expected as expressed in or
implied by that statement for a number of reasons or factors, including those
relating to:

                                       15




         o        whether or not markets for our products develop and, if they
                  do develop, the pace at which they develop;

         o        our ability to attract and retain the qualified personnel to
                  implement our growth strategies,

         o        our ability to obtain approval from the Food and Drug
                  Administration for our products;

         o        our ability to protect the patents on our proprietary
                  technology;

         o        our ability to fund our short-term and long-term financing
                  needs;

         o        changes in our business plan and corporate strategies; and

         o        other risks and uncertainties discussed in greater detail in
                  the sections of this prospectus, including those captioned
                  "RISK FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                  FINANCIAL CONDITION AND RESULTS OF OPERATIONS".

         Each forward-looking statement should be read in context with, and with
an understanding of, the various other disclosures concerning our company and
our business made elsewhere in this prospectus as well as other pubic reports
filed with the United States Securities and Exchange Commission (the "SEC"). You
should not place undue reliance on any forward-looking statement as a prediction
of actual results or developments. We are not obligated to update or revise any
forward-looking statement contained in this prospectus to reflect new events or
circumstances unless and to the extent required by applicable law.


                                 USE OF PROCEEDS

         This prospectus relates to shares of our common stock that may be
offered and sold from time to time by selling shareholders. We will receive no
proceeds from the sale of shares of common stock in this offering. Should any
selling shareholder acquire the shares to be sold by exercising common share
purchase warrants, we would receive the proceeds from the exercise price. In
such an event we anticipate we would use the proceeds of such exercise for
working capital and general corporate purposes. If the shares underlying the
warrants included in this registration statement were exercised, the Company
would receive approximately $1,000,000.


                         PRIVATE PLACEMENT TRANSACTION

         From July 11, 2005 through December 15, 2005 the Company received a
series of cash investments totaling $760,000 from the Ellen R. Weiner Family
Revocable Trust, an accredited investor, as a part of the funding of the $1.0
million 10% Series A Convertible Notes ("Promissory Notes"). The Promissory
Notes accrue interest at the rate of ten percent (10%) per annum and mature on
January 2, 2007. The Promissory Notes are convertible into shares of restricted
common stock at any time at the election of the holder at a conversion price
equal to $0.20 per share for any conversion occurring on or prior to the
maturity date. In addition, upon conversion, the Company is obligated to issue a
three-year Warrant (the "Weiner Warrant") to purchase a number of shares equal
to the number of shares into which the Note was converted at an exercise price
of $0.20.

         From August 2, 2005 through December 15, 2005 the Company received cash
investments totaling $225,000 from Allan S. Bird, an accredited investor, as a
part of the funding of the $1.0 million 10% Series A Convertible Notes
("Promissory Notes"). The Promissory Notes accrue interest at the rate of ten
percent (10%) per annum and mature on January 2, 2007. The Promissory Notes are
convertible into shares of restricted common stock at any time at the election
of the holder at a conversion price equal to $0.20 per share for any conversion
occurring on or prior to the maturity date. In addition, upon conversion, the
Company is obligated to issue a three-year Warrant (the "Bird Warrant") to
purchase a number of shares equal to the number of shares into which the Note
was converted at an exercise price of $0.20.

                                       16




          On December 15, 2005 the Company received cash investments totaling
$10,000 from Christian J. Hoffmann III and $5,000 from Claypoole Capital LLC (an
affiliate of Mr. Hoffmann), accredited investors, as a part of the funding of
the $1.0 million 10% Series A Convertible Notes ("Promissory Notes"). The
Promissory Notes accrue interest at the rate of ten percent (10%) per annum and
mature on January 2, 2007. The Promissory Notes are convertible into shares of
restricted common stock at any time at the election of the holder at a
conversion price equal to $0.20 per share for any conversion occurring on or
prior to the maturity date. In addition, upon conversion, the Company is
obligated to issue a three-year Warrant (the "Hoffmann/Claypoole Warrant") to
purchase a number of shares equal to the number of shares into which the Note
was converted at an exercise price of $0.20. Mr. Hoffmann is legal counsel to
the Ellen R. Weiner Family Revocable Trust.

         An additional 1,500,000 shares are included in this registration
statement to accommodate conversions related to accrued interest and other
costs.


                             DESCRIPTION OF BUSINESS

         GENERAL

         Aethlon Medical, Inc. ("Aethlon Medical", "We" or the "Company"),
formerly Bishop Equities, Inc. ("Bishop"), was incorporated in Nevada in April
1991 to provide a public vehicle for participation in a business transaction
through a merger with or acquisition of a private company. In March 1993, we
successfully offered our common stock at $6.00 per share through an initial
public offering. In March 1999, Bishop began doing business as "Aethlon Medical,
Inc." In March 2000, the Company's Articles of Incorporation were amended to
formally change the name of the Company from "Bishop Equities, Inc." to "Aethlon
Medical, Inc."

         BUSINESS DEVELOPMENT/ACQUISITIONS

         On March 10, 1999, (1) Aethlon, Inc., a California corporation
("Aethlon"), (2) Hemex, Inc., a Delaware corporation ("Hemex"), the accounting
predecessor to the Company, and (3) Bishop, a publicly traded "shell" company,
completed an Agreement and Plan of Reorganization (the "Plan") structured to
result in Bishop's acquisition of all of the outstanding common shares of
Aethlon and Hemex (the "Reorganization"). The Reorganization was intended to
qualify as a tax-free transaction under Section 368 (a)(1)(B) of the 1986
Internal Revenue Code, as amended. Under the Plan's terms, Bishop issued 733,500
and 1,350,000 shares of its common stock to the common stock shareholders of
Aethlon and Hemex, respectively, such that Bishop then owned 100% of each
company.

         Effective January 1, 2000, we entered into an agreement with Dr. Julian
Ambrus, the son of Dr. Clara Ambrus who was the original founder of Hemex, Inc.
Under this agreement, an invention and related patent rights for a method of
removing HIV and other viruses from the blood were assigned to us. This
invention further expands the established blood filtration patents already owned
by us. In addition to certain royalty payments equal to 8.75% of net sales of
the patented product, the consideration for the acquired rights included the
additional issuance of shares of our common stock to the inventors upon the
issuance of the patent. The term of the agreement expires on the expiration date
of the patents or any patent applications filed in connection with the
invention. There have been no sales of the patented product as of December 15,
2005. We initially issued 12,500 shares of restricted common stock to the
inventors upon the execution of the agreement. On March 4, 2003, the related
patent was issued and we issued 196,078 shares of restricted common stock to the
inventors.

         On January 10, 2000, we acquired all the outstanding common stock of
Syngen Research, Inc. ("Syngen") in exchange for 65,000 shares of our restricted
common stock in order to establish research facilities in San Diego, California,
as well as employ Dr. Richard Tullis, the founder of Syngen. Dr. Tullis is a
recognized research scientist in the area of DNA synthesis and antisense. Syngen
had no significant assets, liabilities, or operations, and primarily served as
the entity through which Dr. Tullis performed research consulting services. As
such, the acquisition has been accounted for as an acquisition of assets in the
form of an employment contract with Dr. Tullis and not as a business
combination. Dr. Tullis was appointed to the Board of Directors of Aethlon
Medical and was elected its Vice President for Business Development. Effective
June 1, 2001, Dr. Tullis was appointed Chief Science Officer of Aethlon Medical,
replacing Dr. Clara Ambrus, who retired from the Company.

                                       17




         On April 6, 2000, we completed the acquisition of Cell Activation, Inc.
("Cell"). In accordance with the purchase agreement, we issued 99,152 shares of
restricted common stock and issued 50,148 options to purchase common stock in
exchange for all of the outstanding common shares and options to purchase common
stock of Cell. After the transaction, Cell became our wholly-owned subsidiary.
The acquisition was accounted for as a purchase. At March 31, 2001, management
determined that goodwill recognized in the purchase of Cell was impaired due to
the permanent suspension of operations by Cell, and, accordingly, treated the
related goodwill as fully impaired.

         BUSINESS OF ISSUER

         We are a development stage therapeutic device company focused on
expanding the applications of our Hemopurifier (TM) platform technology, which
is designed to rapidly reduce the presence of infectious viruses and other
toxins from human blood. In this regard, our core focus is the development of
therapeutic devices that treat HIV/AIDS, Hepatitis-C, and pathogens targeted as
potential biological warfare agents. To date, the Company has conducted and
published studies that measured the ability of the Hemopurifier(TM) to capture
HIV, Hepatitis-C, and gp120, which is a HIV surface protein that destroys immune
cells. The studies have been published in the following journals: American
Clinical Laboratories (November 2001), Journal of Theoretical Medicine (2002),
Therapeutic Apheresis (2001) and Blood Purification (2003 and 2004). All of the
studies were conducted in Aethlon Medical laboratory facilities under the
supervision of Dr. Richard Tullis, the Company's Chief Science Officer. The cost
of materials required to perform each study did not exceed $100,000. Each of the
studies encompassed the filling of hollow-fiber dialysis cartridges with
antibodies that have been coupled to agarose beads and then sealed within the
cartridge. As a result, the coupled antibodies surround the hollow-fibers, which
have pores between 200-500 nanometers in size. Infected human blood was then
circulated through the cartridge and data was obtained to measure the amount of
the targeted pathogen that diffused through the fiber pores and was captured by
the immobilized antibodies. In pre-clinical testing, we have published that our
HIV-Hemopurifier(TM) removed 55% of HIV from human blood in three hours and in
excess of 85% of HIV in twelve hours. Additionally, the HIV-Hemopurifier(TM)
captured 90% of gp120, a toxic protein that depletes human immune cells, during
a one-hour pre-clinical blood study. The Hemopurifier(TM) cannot cure HIV and
Hepatitis-C but augments the immune response of clearing viruses and toxins from
the blood before cell and organ infection can occur. We are currently conducting
but have not published studies related to the capture of other pathogens with
the Hemopurifier(TM) including the capture of pathogens with the
Hemopurifier(TM) relating biological weapons which we are currently seeking to
commercialize. Our potential customers may not accept our interpretation of
results from our test sites until our customers repeat the tests and
independently verify the tests. Since inception, our only source of revenue has
been grants from certain agencies of the Federal Government, subcontract revenue
and sale of research and development. From the date of our inception through
1999, we received a total of $1,424,012 in grant income. No grant revenues have
been received after 1999. Since then, from time to time, we have applied for,
but have not been awarded, any such grants. Since our current focus is to
develop, test and obtain approval of our products, we do not expect to obtain
subcontract revenue, nor do we expect to sell our research and development
expertise. Any future income derived from grant submissions is likely to be the
primary source of revenues until such time that our Hemopurifier(TM) has been
approved for sale in the marketplace.

         The Hemopurifier(TM)

         The Hemopurifier(TM) is an expansive platform technology that converges
the established scientific principles of affinity chromatography (method of
selective capture of proteins, sugars, fats and organic compounds) and
hemodialysis (artificial kidneys) as a means to augment the natural immune
response of clearing infectious viruses and toxins from the blood before cells
and organs can be infected. The therapeutic goal of each Hemopurifier(TM)
application is to improve patient survival rates by reducing viral load and
preserving the immune function. We feel that the Hemopurifier(TM) will enhance
and prolong the benefit of current infectious disease drug therapies, and fill
the void for patients who inevitably become resistant to drug therapies. The
Hemopurifier(TM) is also being positioned to treat patients that might become
infected by a biological agent with no established drug or vaccine treatment.

         Traditionally, hemodialysis has been used to remove urea and other
small metabolic toxins that build up in the blood of patients with acute or
chronic kidney failure. Acute renal failure is generally handled in the
intensive care unit using continuous renal replacement therapy ("CRRT") while
chronic renal failure is generally treated using thrice-weekly, intermittent
hemodialysis ("IHD") in a stand-alone dialysis clinic.

                                       18




         While there are several variations of technique, a catheter is most
often the primary method utilized to gain access to the blood, which is then
pumped through a hollow-fiber hemodialysis cartridge. Within the cartridge,
toxic salts, urea and excess water pass through small pores in the walls of the
hollow-fibers and are removed. Proteins and blood cells that are too large to
pass through the membrane are retained. The purified blood is then returned back
into circulation.

         There are two issues in kidney dialysis as it is practiced today that
limit its application to a wide array of toxins and pathogens. Both issues are
related to the separation membranes. First, hemodialysis cartridges
non-selectively remove substances of a particular size from the blood. Thus in
addition to removing toxins, the dialyzer may also remove important substances
that the body would prefer to retain. Second, many important toxins are too
large pass through the dialysis membrane and are therefore not removed even when
it would be desirable.

         We have solved these problems by designing a Hemopurifier(TM) cartridge
which has pores large enough to let tHE largest toxins pass through (i.e.
particles as large as whole viruses), yet selective enough to remove only the
targeted toxins. We employ the established principles of hollow-fiber dialysis
cartridges, but with pores large enough to allow for circulating infectious
virus and toxins to separate from the blood and diffuse through the fibers so
that it may be captured by binding agents or antibodies that surround the
fibers. Since the blood serves as a transport mechanism for viruses to infect
cells and organs, the Hemopurifier(TM) disrupts the viral infection cycle.
Materials such as antibodies, which bind only to their corresponding antigen,
provide selectivity, while the use of a sealed cartridge allows the process to
use large pore sizes that are normally incompatible with kidney dialysis.

         The Hemopurifier(TM) platform technology is based on the immobilization
of antibodies or binding agents against infectious disease within hemodialysis
cartridges that traditionally have been used in treating kidney failure. The
typical cartridge is a clear plastic cylinder, approximately twelve inches long
and one and one-half inch in diameter. Sealed within the cartridge are up to
10,000 hollow micro-fibers through which the blood flows during treatment. The
walls of each fiber are porous so that pathogens can diffuse out of the blood to
be captured by the antibodies or binding agents that surround each of the
fibers. The size of the fiber pores allows for the diffusion and capture of
pathogens up to 500 nanometers in size.

         The binding antibodies or other selective agents are chemically bound
to the surface of glass or plastic beads located on the outside of the
hollow-fibers. This effectively prevents the active materials from entering the
bloodstream. Viruses and toxins in the blood diffuse or are transported through
the pores in the hollow-fibers and become trapped by the immobilized antibody.

         In this way, materials of very large sizes are allowed enter the
cartridge while non-toxic materials of similar size readily leave and re-enter
the bloodstream. Blood cells and platelets, which are too large to enter the
membrane, remain in the hollow-fiber and are returned to the patient.
Importantly, the Hemopurifier(TM) cartridge does not require the development of
any new equipment. The cartridge fits directly onto the global infrastructure of
dialysis machines already located in hospitals and clinics.

         Each Hemopurifier(TM) application is designed to be useful in clearing
infectious viruses and toxins from the entire blood stream before cells and
organs become infected. Science terminology defines this technique as a method
to inhibit pathogens from entering cells and organs, which is more commonly
known as "Entry Inhibitor" treatment. Traditionally, a vast majority of
infectious disease treatments have been drug-based therapies whose action has
been to inhibit or slow down the replication of viruses in cells that have
already been infected.

         Infectious Disease

         The current treatment for viral illnesses include vaccines and
antiviral drugs. Vaccines have been the most successful in curing viral diseases
(e.g. polio and smallpox). Unfortunately, newly emerging pathogens (e.g. SARS),
highly mutable RNA viruses (e.g., HIV and Hepatitis C virus) and exotic viruses
that might be used in terrorist attacks often do not have vaccine treatments.
Similarly, antiviral drugs are often useful in controlling viral infections.
However, there do not seem to be any general, broad-spectrum antiviral agents
similar to penicillin for bacteria and viruses capable of rapidly developing
drug resistant mutations. In addition, it generally takes years and millions of
dollars to develop vaccine and drug candidates that may or may not be approved
by the FDA.

                                       19




         Our Hemopurifier(TM) technology represents a new approach to treating
viral diseases. The treatment is designed to work with current treatments to
remove infectious virus, toxic viral proteins and injurious immunological
mediators directly from the blood of the patient. By removing circulating virus
and toxins from the blood that are captured by the Hemopurifier(TM), the
Hemopurifier(TM) cartridge prevents virus and toxins from infecting unaffected
tissues and cells. The Hemopurifier(TM) cannot cure HIV and Hepatitis-C but
augments the immune response of clearing viruses and toxins from the blood
before cell and organ infection can occur. Scientifically, this action is known
as a "Fusion Inhibitor" since the ability for the virus to enter or fuse with
host cells or organs is inhibited.

         The Hemopurifier(TM) is positioned as a therapeutic medical device that
can be rapidly developed to treat genetically engineered and drug and vaccine
resistant biowarfare agents. We recently demonstrated the ability to rapidly
build and test new antibody cartridges upon the receipt on an antibody against
HIV which was previously untested for its utility as an agent to be immobilized
within the Hemopurifier(TM) treatment cartridge. The process included the
attachment of the antibody to agarose beads to create an affinity or binding
solution that was immobilized within the hollow-fiber treatment cartridge as
means to capture HIV as it diffused through the fibers. Human blood infected
with HIV was then circulated through the cartridge to measure the ability of the
Hemopurifier(TM) to capture HIV over a range of time periods. Human blood
infected with HIV was also circulated through a control cartridge without
immobilized antibodies as a means to document an improved ability to capture
infectious virus when the immobilized antibody was utilized in the treatment
cartridge. Upon completion of the circulation of infected blood, diagnostic
studies were implemented to verify the viral capture rate of the
Hemopurifier(TM) with and without the immobilized antibody. The data was then
provided in a confidential report to the antibody manufacturer within ten days
of the original receipt of the antibody in our labs.

         We have submitted proposals to the NIH regarding the use of the
Hemopurifier(TM) as a potential treatment for patients infected with HIV and
Hepatitis-C. We also plan to submit other proposals to the NIH related to the
use of the Hemopurifier(TM) as a countermeasure against biological weapons. We
will make these submissions upon the completion of animal studies that suggest a
potential relevance of the Hemopurifier(TM) as a treatment for pathogens
considered to be the greatest threat as biological weapons. Additionally, we
will seek beneficial relationships with other agencies and organizations upon
the publication of animal studies related to the potential use of the
Hemopurifier(TM) against biological weapon candidates. In this regard, we are
developing a standard Hemopurifier(TM) to be utilized within the established
infrastructure of dialysis machines, as well as Hemopurifiers(TM) that are
designed to be wearable treatment cartridges. The initial application of the
wearable cartridge relies on the blood pressure of the infected patient to drive
the circulation of blood into the cartridge without the need for a pumping
device such as a dialysis machine. Future generations of the Hemopurifier(TM)
may involve the convergence of miniature cartridges with portable wearable pumps
as a means to increase virus and toxin clearance through continuous blood
circulation over extended periods time.

         Biological Weapons

         We are developing treatments to combat infectious agents that may be
used in biological warfare and terrorism. This expands our intent to treat
infectious diseases beyond HIV/AIDS and Hepatitis-C. We are working to design
Hemopurifiers(TM) that can be rapidly deployed by armed forces as wearable
post-exposure treatments on the battlefield, as well as dialysis-based
treatments for civilian populations. We are focusing our bio-defense strategy on
treating "Category A" agents, which are considered by the Centers for Disease
Control ("CDC") to be the worst bioterrorism threats. These agents include the
viruses that cause Smallpox, hemorrhagic fevers such as Ebola and Marburg, the
Anthrax bacteria, and Botulinum toxin which is a gangrene toxin. Each treatment
device will be based on the same proprietary Hemopurifier(TM) filtration
technology that is utilized in advancing our HIV/AIDS, and Hepatitis-C
treatments. We have not yet published any data related to the treatment of any
"Category A" agent. We are currently conducting but have not published studies
related to the capture of pathogens relating to biological weapons which we are
currently seeking to commercialize.

         Viral and bacterial illnesses have always been with us and have
sometimes been used as weapons. In recent times, some nations have refined and
weaponized several pathogens for use in warfare. Although there are specific
differences between bioweapons grade organisms in the way they are transmitted
or how they are designed to kill, nearly all result in sepsis.

                                       20




         Sepsis is essentially a dysregulation of the immune system, often
described as a septic shock. Microbial invasion sets off an immunological chain
reaction mediated by proteins produced by cells and tissues. Over expression of
these protein immunological mediators "confuses" the immune system, ultimately
resulting in major organ failure and death. Hemodialysis has been used for many
years as a treatment in septic shock, which is generally acknowledged to be
beneficial. Unfortunately, the technique is limited in the size of the toxins it
can remove and is inherently non-selective, making it less than completely
effective.

         Perhaps just as important is the speed with which new treatment options
can be developed. Each new bioweapon comes without a corresponding treatment.
Typical biowarfare pathogens have been genetically engineered to contain genes
that make them resistant to available drugs and vaccines. This presents a
substantial problem since the development of new drugs or vaccines usually takes
several years. However, our Hemopurifier(TM), when targeted to the new pathogen
can often be constructed within a matter of a few months. All that is required
is the existence of an antibody or binding protein that selectively adheres to
the surface of the target pathogen or toxin. In this regard, our
Hemopurifier(TM) is positioned as a rapid response countermeasure against
untreatable pathogens that are released as biowarfare agents.

         Manufacturing

         We plan to manufacture a small number of cartridges sufficient to
complete clinical trials in our current facilities. Ultimately we will outsource
cartridge manufacturing to a GMP/ISO9001 compliant contract manufacturer.
Hemopurifiers(TM) to treat pathogens that are bioweapons candidates will be sold
directly to the U.S. military and the federal government. Sale of
Hemopurifiers(TM) to treat HIV and Hepatitis C will be directed through
organizations with established distribution channels.

         Treatment Classification

         Our treatments for infectious diseases are classified as
"Immunotherapies" that augment or mimic the immune system's response of clearing
infectious viruses, and as "Entry Inhibitors" that curb the re-infection process
by physically removing infectious viruses before healthy cells are infected.

         Immunotherapy - The "Immunotherapy" classification is a result of our
ability to mimic the immune system's natural response of generating antibodies
to fight foreign invaders such as viruses. Antibodies are specifically created
by the immune system to attach themselves to the antigens (chemical compounds
which cause antibodies to be produced e.g. proteins and other component parts of
viruses), forming an antigen-antibody complex which neutralizes the invader. The
neutralized antigens are then physically removed from the bloodstream by organs
such as the liver.

         Our treatment technology uses a hemodialysis cartridge (e.g. artificial
kidney or plasmapheresis cartridge) modified to contain immobilized antibodies
targeted against specific viruses. Plasmapheresis cartridges are utilized to
separate blood plasma from blood cells in treating various diseases. Viruses in
the blood are captured inside the cartridge through the formation of an
antigen-antibody complex, physically removing the virus from circulation. As a
result, the physical elimination of infectious virus occurs without the
side-effects common in drug therapy.

         Entry Inhibitor - Our treatment technology is also classified as an
"Entry Inhibitor" since the re-infection process is interrupted when viruses are
removed from circulation before cells can be infected. As a result, the
replication cycle is inhibited as infectious virus is denied entry into the
cells that it seeks to kill. From a therapeutic standpoint, entry inhibitors
represent a departure from the traditional drug action of inhibiting viral
replication within the cells that have already been infected. The novel
therapeutic mechanism offered by "Entry Inhibitors", combined with the high
level of treatment resistance to currently approved drugs, positions "Entry
Inhibitors" as an important new treatment strategy to assist HIV/AIDS and
Hepatitis-C infected individuals in managing their disease.

         Research and Development

         In fiscal year 2001, we realigned our research and development
activities from developing Hemopurifiers(TM) to treat harmful metals to
developing Hemopurifiers(TM) for the treatment of HIV/AIDS and Hepatitis-C.As a
result of this strategic realignment, we initiated the consolidation of all
scientific and administrative functions into our San Diego facilities during the
fourth quarter of fiscal year 2001. This consolidation was completed during the
first quarter of fiscal year 2002 and our facilities in Buffalo, N.Y. were
closed. In 2004, we expanded our research effort to include the development of
Hemopurifiers(TM) as countermeasures against biological weapons.

                                       21




         The cost of research and development, all of which has been charged to
operations, amounted to approximately $793,727 over the last two fiscal years.

         Patents

         Effective January 1, 2000, we entered into an agreement with a related
party under which an invention and related patent rights for a method of
removing HIV and other viruses from the blood using the Hemopurifier(TM) were
assigned to us by the inventors in exchange for a royalty to be paid on future
sales of the patented product or process and shares of our common stock. On
March 4, 2003, the related patent was issued and we issued 196,078 shares of
restricted common stock. The Hemopurifier(TM) is protected by four issued
patents in the United States, Europe and Japan. Three additional patent
applications deal with treatments for virus infection and manufacturing methods.
The following is a list of patents and patent applications we currently hold.
Patent Issuance #4 below, and application #6 are exclusively licensed to us.

         ISSUED PATENTS:

         1.       Ambrus CA and Horvath C (1986) Removing heavy metal ions from
                  blood. Japan No: 110,047/82 (Issued June 7, 1994).
         2.       Ambrus CA and Horvath C (1988) Blood purification. US Patent
                  No. 4,787,974 (Issued November 29, 1988).
         3.       Ambrus C A and Stadler A (2000) Process for immobilizing a
                  chelator on silica device containing immobilized chelator and
                  use thereof. US Patent 6,071,412 (June 6, 2000).
         4.       Ambrus JL and Scamurra D (2003) Method for removing HIV and
                  other viruses from blood. US Patent 6,528,057 (issued March 4,
                  2003).

         PATENT APPLICATIONS:

         5.       Ambrus CA and Stadler A (2000) Process for immobilizing a
                  chelator on silica device containing immobilized chelator and
                  use thereof. International Application PCT/US99/17125.
         6.       Ambrus JL and Scamurra D (2003) Method for removing HIV and
                  other viruses from blood. International Application
                  PCT/US99/19448 (filed August 30, 1999). On November 11, 2005,
                  the Company was notified that the European Patent Office
                  intends to grant a patent on the application.
         7.       Tullis, R.H. (2003) Lectin affinity hemodialysis method for
                  removal of HIV other viruses from blood. US Patent
                  Application, filed January 3, 2003.

         The issued patents cover a range of applications of the
Hemopurifier(TM) and variations thereof. The initial applications (Ambrus and
Horvath, 1986 and related issues) refer to methods and constructions for
removing heavy metals from blood. The U.S. patent will expire on September 16,
2006 and the Japanese patent will expire on June 7, 2011. Ambrus and Horvath
1988 refer to methods and constructions for using modified hollow-fiber dialysis
devices for removing antigenically reactive substances from blood (e.g.
antibodies, antigens, toxins and pathogens such as bacteria or viruses).

         Ambrus and Stadler (2000) refers to improved methods for attaching
chelators to glass beads (silica) in order to more efficiently remove heavy
metals (e.g. iron, lead and aluminum). This patent will expire on July 27, 2018.
Ambrus and Scammura (2003) is a patent that speaks to the removal of viruses and
viral fragments from the blood of infected patients using a modified
hollow-fiber dialysis device. This patent will expire in March 5, 2019. The
European application is ongoing.

         Tullis R.H. (2003) is a patent application that covers the use of
lectins as an improved means of removing HIV and other viruses from blood.
Lectins are naturally occurring proteins that bind sugars and complex
carbohydrates to form stable complexes. Lectins derived from plants, also known
as plant antibodies, are immobilized within the Hemopurifier(TM) because of
their known ability to selectively bind to HIV and other envelope viruses with
sugar-based surfaces. This patent is not yet issued however on November 11,
2005, the Company was notified that the European Patent Office intends to grant
a patent on the application.

         Any resulting medical device or process will require approval by the
FDA, and we have not yet begun efforts to obtain FDA approval on any infectious
disease related Hemopurifier(TM). Since many of our patents were issued in the
1980's, they may expire before FDA approval, if any, is obtained. However, we do
not believe that the near term expiration of certain patents will have an
adverse material effect on our operations as we believe that certain patents
applications filed and/or other patents issued more recently will help to
protect the proprietary nature of the Hemopurifier(TM) treatment technology.
Additionally, we intend to file new patents as improvements, modifications, or
applications of our Hemopurifier(TM) technology occur.

                                       22




         INDUSTRY

         The industry for treating infectious disease is extremely competitive,
and companies developing new treatment procedures are faced with severe
regulatory challenges. In this regard, only a very small percentage of companies
that are developing new treatments will actually obtain approval from the FDA to
market their treatments in the United States. Currently, the market for treating
HIV/AIDS & Hepatitis-C (HCV) is comprised of drugs designed to reduce viral load
by inhibiting viral replication or by inhibiting viruses from infecting healthy
cells. Unfortunately, these drugs are toxic, they are expensive to develop, and
inevitably, infected patients will develop viral strains that become resistant
to drug treatment. As a result, patients are left without treatment options.

         COMPETITION

         We are advancing our Hemopurifier(TM) technology as a treatment to
enhance and prolong current drug therapies by removing the viral strains that
cause drug resistance. The Hemopurifier(TM) is also designed to prolong life for
infected patients who have become drug resistant and have no other treatment
options. Therefore, we do not believe that the Hemopurifier(TM) competes with
the current drug therapy treatment standard. However, if the industry considered
the Hemopurifier(TM) to be a potential replacement for drug therapy, then the
marketplace for the Hemopurifier(TM) would be extremely competitive. We are also
pursuing the development of Hemopurifiers(TM) to be utilized as treatment
countermeasures against biological weapons. In this regard, we are targeting the
treatment of pathogens, which are microbial organisms that cause disease, in
which current treatments are either limited or do not exist. We believe that we
are the sole developer of viral filtration systems (Hemopurifiers(TM)) to treat
HIV-AIDS, Hepatitis-C, and Biological weapons. However, we face competition from
the producers of the following alternative treatment options for the biodefense
industry.

         Antibiotics and Anti-Viral Drugs

         Antibiotics are the most immediately available first line of therapy
for bacterial infections. Unfortunately, bacteria, previously controlled through
the application of antibiotics, are developing widespread resistance to
available treatments. Several bacteria have become completely resistant to many
existing antibiotics and developing new antibiotics is a long, time consuming
process. In addition, treatment with antibiotics poses problems such as being
available in sufficient quantities, uncertainty of which antibiotics are
appropriate to use, efficacy against the particular organism, adverse reactions,
and, timely initiation of therapy and completion of treatment regimens.

         For viral infections, specific drugs can be effective, but there are no
drugs that are effective against the broad-spectrum of known pathogenic viruses.
At present, only a few antiviral drugs are available to treat the multitude of
viruses that may be used as biological weapons. For example, Ribavirin is the
treatment of choice for certain hemorrhagic fever viral infections, but has no
current application to Ebola and Marburg infections. Some newer antiviral drugs
have shown significant promise in animal models, and limited case reports in
humans are encouraging. The lack of broad-spectrum antivirals takes on added
significance in light of the ability of many viruses to rapidly develop
resistance.

         Current efforts to define the genetic details of normal and pathogenic
agents on a molecular level promise the hope of new points of attack. Genomic
analysis of the viral pathogen and the animal model response to infection
provide valuable information enabling the development of novel treatment and
prevention strategies. However, even the rapid elucidation of the genetic
structure of a specific pathogen does not provide sufficient information to
design an effective cure. For example, while SARS has been known of for more
than a year and several strains have had their complete genetic sequence
determined, no effective treatment has yet emerged.

         One promising approach in drug development has been the advent of
combinatorial chemistry, which provides the ability to rapidly synthesize huge
libraries of related compounds, many of which have never been seen before.
However, the real roadblock to progress is the need to laboriously screen each
new compound for efficacy in fighting a particular disease. In that sense,
combinatorial drugs confront the same problem as the traditional method of
screening of plant and animal extracts for active compounds that block viral or
bacterial replication.

                                       23




         Thus while science can radically increase the number of drug
candidates, the slow step will always be showing that they are both effective
and safe. Even effective new drugs represent an irresistible selective pressure
on natural and un-natural pathogens to develop resistance, something at which
they are clearly very efficient.

         Vaccines

         Historically, the most effective tool in controlling infections has
been vaccines. Polio, measles, mumps and many other viral illnesses are now
controllable and smallpox has been eradicated from nature. Licensed vaccines for
hemorrhagic fever viruses are limited to yellow fever (though others are in the
trial phase of approval). Promising vaccines are being tested for some of the
other diseases, but research is hampered by the need to conduct the studies in
secure laboratories.

         There are other problems with relying on vaccines as our primary
protection against a biological weapons attack. While vaccination may be an
effective prophylaxis in a military setting, it would not work for civilian
populations for several reasons:

         o        The agent used would have to be known prior to its deployment.
                  With the exception of the smallpox vaccine, vaccination is of
                  no use after exposure to a pathogen.

         o        Even if everyone in the United States could be vaccinated, it
                  would be impossible to vaccinate people against every agent
                  for which a vaccine is available.

         o        If a vaccine is available, it would only be useful if the
                  agent involved has not mutated or been genetically altered so
                  that it is drug or vaccine resistant.

         Vaccines that are both efficacious and safe are difficult to develop.
History has shown that developing vaccines can be a slow process and may not
even be possible for highly mutable pathogens like HIV and Hepatitis C.
Moreover, current vaccine strategies often carry significant risk for
complications. For example, smallpox vaccine, which uses attenuated strains of a
live virus, can occasionally cause illness or death by infection from the very
organism that usually provides protection.

         In terms of a bioterrorist attack, anthrax vaccine can serve as an
example of our capability in treating a well recognized threat. Only one anthrax
vaccine, licensed in 1970, is available. This vaccine, produced by the Bioport
Corporation, consists of a membrane-sterilized culture filtrate of an avirulent,
non-encapsulated strain of anthrax. The data in support of the license consisted
of a single field study. The vaccine efficacy was 92.5% effective in this small
trial. In December 1985, 15 years after the vaccine was licensed, the FDA's
advisory panel reviewed the efficacy of the anthrax vaccine but did not respond
to the effectiveness of the current vaccine to anthrax exposure through
inhalation.

         The shortcomings of the current vaccine have spurred studies of new
anthrax vaccine products. The new vaccines include protective antigen-based
vaccines, e.g., purified protein from B. Anthracis culture or live-attenuated
spore vaccine. One of the immune correlates of protection of anthrax vaccines is
likely to be the antibody response to protective antigen. However, the
quantitative relation of anti-protective antigen antibody to protection has not
been established in humans. The relationship between neutralization of
protective antigen and the lethal effects of anthrax is currently being
investigated by the Department of Defense.

         Because of the difficulties associated with classic vaccine
development, new methods for generating vaccines are being researched.
Recombinant DNA technology combined with combinatorial biochemistry is now being
employed in an attempt to rapidly identify and develop vaccine candidates and
passive immunotherapies. In the phage display system, cloned viral or bacterial
proteins, or even cloned antibodies, are individually displayed on the surface
of bacterial viruses. Phage proteins can be rapidly screened to find out which
ones are the most immunologically reactive. Directed evolution can then be used
to make even more effective antigenic materials. Even better, the best of these
are already in a form that can be used to produce enough of the material to test
in animals.

                                       24




         The principal drawback to the system is the need to use fermentation
techniques to produce sufficient quantities of purified material, uncontaminated
by the organisms used to produce them. The amount of material required to
inoculate a sizeable population requires large fermentation systems, which are
expensive to set up and already in short supply. The restriction on medical
fermentation capacity is already so severe that many companies have had to delay
offering approved products to the public.

         GOVERNMENT REGULATION

         The Hemopurifier(TM) is a medical device subject to extensive and
rigorous regulation by FDA, as well as other federal and state regulatory bodies
in the United States and comparable authorities in other countries. Therefore,
we cannot assure that our Hemopurifier(TM) technology will successfully complete
any regulatory clinical trial for any of our proposed applications.

         One of the main problems facing the FDA is the need to ensure public
safety while at the same time preventing unsafe treatments from reaching the
public. The balance between these competing pressures has resulted in a long and
deliberate process for approving new treatments, which is not responsive to the
urgent need for new treatments presented in the era of bioterrorism. For most
drugs, the principal research and development phases take one to three years
before a drug is even submitted to FDA for testing. A clinical research program
takes two to 10 years, depending on the agent and clinical indication. The
marketing application review period requires an average of one year. Once a
product is approved for market, long-term post-marketing surveillance,
inspections, and product testing must be performed to ensure the quality,
safety, and efficacy of the product, as well as appropriate product labeling.

         FDA'S PREMARKET CLEARANCE AND APPROVAL REQUIREMENTS. Unless an
exemption applies, each medical device we wish to commercialize in the United
States will require either prior 510(k) clearance or a PMA from FDA. Medical
devices are classified into one of three classes--Class I, Class II, or Class
III--depending on the degree or risk associated with each medical device and the
extent of control needed to ensure safety and effectiveness. Devices deemed to
pose lower risks are placed in either Class I or II, which requires the
manufacturer to submit to FDA a premarket notification requesting permission to
commercially distribute the device. This process is generally known as 510(k)
clearance. Some low risk devices are exempted from this requirement. Devices
deemed by FDA to pose the greatest risk, such as life-sustaining,
life-supporting or implantable devices, or devices deemed not substantially
equivalent to a previously cleared 510(k) device, are placed in Class III,
requiring premarket approval. If any application of the Hemopurifier(TM) is not
cleared as a 510(k), then it is likely that such applications will be classified
as Class III medical device.

         510(K) CLEARANCE PATHWAY. When a 510(k) clearance is required, we must
submit a premarket notification to FDA demonstrating that our proposed device is
substantially equivalent to a previously cleared and legally marketed 510(k)
device or a device that was in commercial distribution before May 28, 1976 for
which FDA has not yet called for the submission of a PMA application. By
regulation, FDA is required to clear or deny a 510(k) premarket notification
within 90 days of submission of the application. As a practical matter,
clearance often takes significantly longer. FDA may require further information,
including clinical data, to make a determination regarding substantial
equivalence. If FDA determines that the device, or its intended use, is not
substantially equivalent to a previously-cleared device or use, FDA will place
the device, or the particular use, into Class III.

         PREMARKET APPROVAL PATHWAY. A PMA application must be submitted to FDA
if the device cannot be cleared through the 510(k) process. The PMA application
process is much more demanding than the 510(k) premarket notification process. A
PMA application must be supported by extensive data, including but not limited
to technical, preclinical, clinical trials, manufacturing and labeling to
demonstrate to FDA's satisfaction the safety and effectiveness of the device.

         After a PMA application is submitted and FDA determines that the
application is sufficiently complete to permit a substantive review, FDA will
accept the application for review. FDA has 180 days to review an "accepted" PMA
application, although the review of an application generally occurs over a
significantly longer period of time and can take up to several years. During
this review period, FDA may request additional information or clarification of
the information already provided. Also, an advisory panel of experts from
outside FDA may be convened to review and evaluate the application and provide
recommendations to FDA as to the approvability of the device. In addition, FDA
will conduct a preapproval inspection of the manufacturing facility to ensure

                                       25




compliance with quality system regulations. New PMA applications or PMA
application supplements are required for significant modification to the
manufacturing process, labeling and design of a device that is approved through
the premarket approval process. Premarket approval supplements often require
submission of the same type of information as a premarket approval application,
except that the supplement is limited to information needed to support any
changes from the device covered by the original premarket approval application
and may not require as extensive clinical data or the convening of an advisory
panel.

         CLINICAL TRIALS. Clinical trials are almost always required to support
an FDA premarket application and are sometimes required for 510(k) clearance. In
the United States, these trials generally require submission of an application
for an Investigational Device Exemption, or IDE, to FDA. The IDE application
must be supported by appropriate data, such as animal and laboratory testing
results, showing that it is safe to test the device in humans and that the
testing protocol is scientifically sound. The IDE must be approved in advance by
FDA for a specific number of patients unless the product is deemed a
non-significant risk device eligible for more abbreviated IDE requirements.
Clinical trials for significant risk devices may not begin until the IDE
application is approved by FDA and the appropriate institutional review boards,
or IRBs, at the clinical trial sites. Our clinical trials must be conducted
under the oversight of an IRB at the relevant clinical trial sites and in
accordance with FDA regulations, including but not limited to those relating to
good clinical practices. We are also required to obtain patients' informed
consent that complies with both FDA requirements and state and federal privacy
regulations. We, FDA or the IRB at each site at which a clinical trial is being
performed may suspend a clinical trial at any time for various reasons,
including a belief that the risks to study subjects outweigh the benefits. Even
if a trial is completed, the results of clinical testing may not demonstrate the
safety and efficacy of the device, may not be equivocal or may otherwise not be
sufficient to obtain approval of the product. Similarly, in Europe the clinical
study must be approved by the local ethics committee and in some cases,
including studies with high-risk devices, by the Ministry of Health in the
applicable country.

         PERVASIVE AND CONTINUING REGULATION. After a device is placed on the
market, numerous regulatory requirements continue to apply. These include:

         o FDA's Quality System Regulation, or QSR, which requires
           manufacturers, including third-party manufacturers, to follow
           stringent design, testing, control, documentation and other quality
           assurance procedures during all aspects of the manufacturing process;

         o labeling regulations and FDA prohibitions against the promotion of
           products for uncleared, unapproved or off-label uses;

         o clearance or approval of product modifications that could
           significantly affect safety or efficacy or that would constitute a
           major change in intended use;

         o medical device reporting, or MDR, regulations, which require that
           manufacturers report to FDA if their device may have caused or
           contributed to a death or serious injury or malfunctioned in a way
           that would likely cause or contribute to a death or serious injury if
           the malfunction were to recur; and

         o post-market surveillance regulations, which apply when necessary to
           protect the public health or to provide additional safety and
           effectiveness data for the device.

         After a device receives 510(k) clearance or a PMA, any modification
that could significantly affect its safety or effectiveness, or that would
constitute a major change in its intended use, will require a new clearance or
approval. FDA requires each manufacturer to make this determination initially,
but FDA can review any such decision and can disagree with a manufacturer's
determination.

         The MDR regulations also require that we report to FDA any incident in
which our product may have caused or contributed to a death or serious injury or
in which our product malfunctioned and, if the malfunction were to recur, would
likely cause or contribute to death or serious injury.

                                       26




         FRAUD AND ABUSE. We may also directly or indirectly be subject to
various federal and state laws pertaining to healthcare fraud and abuse,
including anti-kickback laws. In particular, the federal healthcare program
Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in
exchange for or to induce either the referral of an individual, or the
furnishing, arranging for or recommending a good or service, for which payment
may be made in whole or part under federal healthcare programs, such as the
Medicare and Medicaid programs. Penalties for violations include criminal
penalties and civil sanctions such as fines, imprisonment and possible exclusion
from Medicare, Medicaid and other federal healthcare programs. The Anti-Kickback
Statute is broad and prohibits many arrangements and practices that are lawful
in businesses outside of the healthcare industry. In implementing the statute,
the Office of Inspector General, or OIG, has issued a series of regulations,
known as the "safe harbors." These safe harbors set forth provisions that, if
all their applicable requirements are met, will assure healthcare providers and
other parties that they will not be prosecuted under the Anti-Kickback Statute.
The failure of a transaction or arrangement to fit precisely within one or more
safe harbors does not necessarily mean that it is illegal or that prosecution
will be pursued. However, conduct and business arrangements that do not fully
satisfy each applicable element of a safe harbor may result in increased
scrutiny by government enforcement authorities, such as the OIG.

        INTERNATIONAL. International sales of medical devices are subject to
foreign governmental regulations, which vary substantially from country to
country. The time required to obtain clearance or approval by a foreign country
may be longer +or shorter than that required for FDA clearance or approval, and
the requirements may be different.

         The primary regulatory environment in Europe is that of the European
Union, which has adopted numerous directives and has promulgated voluntary
standards regulating the design, manufacture, clinical trials, labeling and
adverse event reporting for medical devices. Devices that comply with the
requirements of a relevant directive will be entitled to bear CE conformity
marking, indicating that the device conforms with the essential requirements of
the applicable directives and, accordingly, can be commercially distributed
throughout the member states of the European Union, and other countries that
comply with or mirror these directives. The method of assessing conformity
varies depending on the type and class of the product, but normally involves a
combination of self-assessment by the manufacturer and a third-party assessment
by a notified body, an independent and neutral institution appointed by a
country to conduct the conformity assessment. This third-party assessment may
consist of an audit of the manufacturer's quality system and specific testing of
the manufacturer's device. Such an assessment is required in order for a
manufacturer to commercially distribute the product throughout these countries.
ISO 9001 and ISO 13845 certifications are voluntary harmonized standards.
Compliance establishes the presumption of conformity with the essential
requirements for a CE Marking.

         We have completed preclinical studies that demonstrate the removal of
HIV and Hepatitis C virus from infected human blood. We have also completed
initial animal safety studies and are presently engaged in human safety trials
as outlined in the "Timelines" table below. Subsequent to the completion of our
initial efficacy trials in India we will develop our manufacturing protocols and
begin the process of obtaining regulatory approval from the FDA to initiate
clinical trials in the United States.

         The outline and table below describe suggested timelines for the
generation and testing of our current targets. The timelines presuppose the
development of a working relationship with government or private agencies
capable of handling biowarfare agents.

         US CLINICAL TRIALS - CHRONIC DISEASES:

         o        FDA Investigative Device Exemption ("IDE") submission and
                  approval to initiate HIV/HCV Human Safety Study - Q3 2006

         o        HIV/HCV Human Safety Study - completion target - Q2 2007

         o        HIV/HCV Human Efficacy Study - completion target - Q1 2008

         o        FDA market clearance for one or both indications (HIV and/or
                  HCV) - Q4 2008

                                       27




         BIODEFENSE APPLICATIONS:

         o        IDE submission and FDA approval to initiate Human Safety Study
                  - Q1 2006

         o        Human Safety Study - completion target - Q4 2006

         o        FDA Market Clearance for first label indication - Q1 2007

         Note that the Hemopurifier(TM) technology is applicable to a range of
"Class A" Bio-weapons candidates and that the safety studies noted above begin
the process of determining those which have the largest market potential or
strategic importance. We have estimated the direct costs for performing the
proposed submissions and clinical tests on the above timetable will require at
least $5.0 million through the end of calendar 2007.


 
                             ------------------------------------------------------------------------------------------------
                              2006                            2007                            2008
- -----------------------------------------------------------------------------------------------------------------------------
                               Q1      Q2      Q3      Q4      Q1      Q2      Q3      Q4      Q1      Q2      Q3      Q4
- -----------------------------------------------------------------------------------------------------------------------------
US CLINICAL TRIALS - CHRONIC DISEASES

IDE Submission and Approval            Submission
Human Safety Study                                HIV/HCV Human Safety
Human Efficacy Study                                                     HIV/HCV Human Efficacy
FDA Market Clearance                                                                                                 HIV/HCV

BIODEFENSE APPLICATIONS

IDE Submission and Approval  Submission
Human Safety Study                      Biodefense Safety
FDA Market Clearance                                               Class A Bio-weapons
- -----------------------------------------------------------------------------------------------------------------------------


                                    

         Because we may market our products abroad we will be subject to varying
foreign regulatory requirements. Although international efforts are being made
to harmonize these requirements, applications must currently be made in each
individual country. The data necessary and the review time varies significantly
from one country to another. Approval by the FDA does not ensure approval by the
regulatory bodies of other countries. Any future collaborators will also be
subject to all of the above-described regulations in connection with the
commercialization of products utilizing our technology.

         PRODUCT LIABILITY

         The risk of product liability claims, product recalls and associated
adverse publicity is inherent in the testing, manufacturing, marketing and sale
of medical products. We have limited clinical trial liability insurance
coverage. There can be no assurance that future insurance coverage will be
adequate or available. We may not be able to secure product liability insurance
coverage on acceptable terms or at reasonable costs when needed. Any liability
for mandatory damages could exceed the amount of our coverage. A successful
product liability claim against us could require us to pay a substantial
monetary award. Moreover, a product recall could generate substantial negative
publicity about our products and business and inhibit or prevent
commercialization of other future product candidates.

         SUBSIDIARIES

         We have four dormant wholly-owned subsidiaries, Aethlon, Inc., Cell
Activation, Inc., Syngen Research, Inc., and Hemex, Inc.

         EMPLOYEES

         At December 15, 2005, we had five full-time employees, comprised of our
Chief Executive Officer, our Chief Science Officer, our Chief Financial Officer,
and two research scientists. We utilize, whenever appropriate, contract and part
time professionals in order to conserve cash and resources. We believe our
employee relations are good. None of our employees is represented by a
collective bargaining unit.

                                       28




                            DESCRIPTION OF PROPERTIES

         We currently rent approximately 3,200 square feet of executive office
space and laboratory space at 3030 Bunker Hill Street, Suite 4000, San Diego,
California 92109 at the rate of $7,520 per month rent, plus approximately $5,000
per month in maintenance and other fees on a lease that expires on July 12,
2006. We anticipate that we will be able to continue our current lease or find
equivalent space with no material difficulty.

          DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

         The names, ages and positions of our directors and executive officers
as of December 15, 2005 are listed below:

         NAMES                        TITLE OR POSITION                      AGE
         -----------------------------------------------------------------------
         James A. Joyce (1)           Chairman, President, Chief Executive   44
            Officer and Secretary

         Richard H. Tullis, PhD (2)   Vice President, Chief Science Officer  60
            and Director

         James W. Dorst (3)           Chief Financial Officer                51

         Franklyn S. Barry, Jr.       Director                               66

         Edward G. Broenniman         Director                               69

         Calvin M. Leung (4)          Director                               68


         (1) Effective June 1, 2001, Mr. Joyce was appointed our President and
Chief Executive Officer, replacing Mr. Barry, who continues as a member of the
board of directors. Mr. Barry also served as a consultant to us on strategic
business issues from June 1, 2001 to May 31, 2003.

         (2) Effective June 1, 2001, Dr. Tullis was appointed as our Chief
Science Officer, replacing Dr. Clara M. Ambrus, who retired.

         (3) Effective August 1, 2005, Mr. Dorst was appointed Chief Financial
Officer.

         (4) Effective June 30, 2003, Mr. Leung was elected to our board of
directors.


                                   MANAGEMENT


         James A. Joyce, Chairman, President and CEO

         Mr. Joyce is the founder of Aethlon Medical, and has been the Chairman
of the Board and Secretary since March 1999. On June 1, 2001, our Board of
Directors appointed Mr. Joyce with the additional roles of President and CEO. In
1992, Mr. Joyce founded and was the sole shareholder in James Joyce &
Associates, an organization that provided management consulting and corporate
finance advisory services to CEOs and CFOs of publicly traded companies.
Previously, from 1989 to 1991, Mr. Joyce was Chairman and Chief Executive
Officer of Mission Labs, Inc. Prior to that Mr. Joyce was a principal in charge
of U.S. operations for London Zurich Securities, Inc. Mr. Joyce is a graduate
from the University of Maryland.

         James W. Dorst, Chief Financial Officer

         Mr. Dorst brings more than 20 years of senior management experience in
finance, operations, planning and business transactions to the Company. Prior to
joining Aethlon, Mr. Dorst was Vice President of Finance and Operations for
VerdiSoft Corporation, a developmental-stage mobile-software developer recently
acquired by Yahoo, Inc. (NASDAQ:YHOO). Previously, Mr. Dorst held executive
positions as SVP of Finance and Administration at SeeCommerce; COO/CFO of Omnis
Technology Corp. (now NASDAQ Small Cap: RDTA); CFO and SVP of Information
Technology at Savoir Technology Group, Inc. (acquired by NYSE:AVT). Mr. Dorst
practiced as a Certified Public Accountant with Coopers & Lybrand
(PricewaterhouseCoopers) and holds an MS in Accounting and BS in finance from
the University of Oregon.

                                       29




         Richard H. Tullis, Ph.D., Vice President, Chief Science Officer

         Dr. Tullis has been Vice President and a director of the Company since
January 2000 and Chief Science Officer since June 2001. Dr. Tullis has extensive
biotechnology management and research experience, and is the founder of Syngen
Research, a wholly-owned subsidiary of Aethlon Medical, Inc. Previously, Dr.
Tullis co-founded Molecular Biosystems, Inc., a former NYSE company. At
Molecular Biosystems, Dr. Tullis was Director of Oligonucleotide Hybridization,
Senior Research Scientist and Member of the Board of Directors. In research, Dr.
Tullis developed and patented the first application of oligonucleotides to
antisense antibiotics and developed new methods for the chemical synthesis of
DNA via methoxy-hosphorochloridites. Dr. Tullis also co-developed the first
applications of covalently coupled DNA-enzyme conjugates using synthetic
oligonucleotides during his tenure at Molecular Biosystems. In 1985, Dr. Tullis
founded, and served as President and CEO of Synthetic Genetics, Inc., a pioneer
in custom DNA synthesis, which was sold to Molecular Biology Resources in 1991.
Dr. Tullis also served as interim-CEO of Genetic Vectors, Inc., which completed
its IPO under his management, and was co-founder of DNA Sciences, Inc., a
company that was eventually acquired by Genetic Vectors. Dr. Tullis received his
Ph.D. in Biochemistry and Cell Biology from the University of California at San
Diego, and has done extensive post-doctoral work at UCSD, USC, and the
University of Hawaii.

         Franklyn S. Barry, Jr.

         Mr. Barry has over 25 years of experience in managing and building
companies. He was President and Chief Executive Officer of Hemex from April 1997
through May 31, 2001 and our President and CEO from March 10, 1999 to May 31,
2001. He became a director of Aethlon Medical on March 10, 1999. From 1994 to
April 1997, Mr. Barry was a private consultant. Included among his prior
experiences are tenures as President of Fisher-Price and as co-founder and CEO
of Software Distribution Services, which today operates as Ingram Micro-D, an
international distributor of personal computer products. Mr. Barry serves on the
Board of Directors of Merchants Mutual Insurance Company.

         Edward G. Broenniman

         Mr. Broenniman became a director of Aethlon Medical on March 10, 1999.
Mr. Broenniman has 30 years of management and executive experience with
high-tech, privately-held growth firms where he has served as a CEO, COO, or
corporate advisor, using his expertise to focus management on increasing
profitability and stockholder value. He is the Managing Director of The Piedmont
Group, LLC, a venture advisory firm. Mr. Broenniman recently served on the Board
of Directors of publicly-traded QuesTech (acquired by CACI International), and
currently serves on the Boards of four privately-held firms. His nonprofit
Boards are the Dingman Center for Entrepreneurship's Board of Advisors at the
University of Maryland, the National Association of Corporate Directors,
National Capital Chapter and the Board of the Association for Corporate Growth,
National Capital Chapter.

         Calvin M. Leung

         Mr. Leung became a director of Aethlon Medical on June 30, 2003. He is
the President of Mandarin Investment Corporation, specializing in investment,
development and management of mobile home and recreational vehicle parks in
California, Arizona and the midwest since 1975. He has syndicated a number of
land and housing developments in the western United States. Mr. Leung, born in
Hong Kong, received his advanced education in the United States where he was
awarded a doctorate degree in psychology specializing in experimental research.
He taught at the university level for several years.

         Our Board of Directors has the responsibility for establishing broad
corporate policies and for overseeing our overall performance. Members of the
Board are kept informed of our business activities through discussions with the
President and other officers, by reviewing analyses and reports sent to them,
and by participating in Board and committee meetings. Our bylaws provide that
each of the directors serves for a term that extends to the next Annual Meeting
of Shareholders of the Company. Our Board of Directors presently has an Audit
Committee and a Compensation Committee on each of which Messrs. Barry,
Broenniman and Leung serve. Mr. Barry is Chairman of the Audit Committee, and
Mr. Broenniman is Chairman of the Compensation Committee.

                                       30




         Upon the recommendation of our Compensation Committee, in February
2005, we adopted our 2005 Directors Compensation Program (the "Directors
Compensation Program") which advances our interest by helping us to obtain and
retain the services of outside directors services upon whose judgment,
initiative, efforts and/or services we are substantially dependent, by offering
to or providing those persons with incentives or inducements affording such
persons an opportunity to become owners of our capital stock. Under the
Directors Compensation Program, a newly elected director will receive a one time
grant of a non-qualified stock option of 1.5% of the common stock outstanding at
the time of election. The options will vest one-third at the time of election to
the board and the remaining two-thirds will vest equally at year end over three
years. Additionally, each director will also receive an annual $25,000
non-qualified stock option retainer, $15,000 of which is to be paid at the first
of the year to all directors who are on the Board prior to the first meeting of
the year and a $10,000 retainer will be paid if a director attends 75% of the
meetings either in person, via conference call or other electronic means. The
exercise price for the options under the Directors Compensation Program will
equal the average closing of the last ten (10) trading days prior to the date
earned. At September 30, 2005 under the 2005 Directors Compensation Program, we
had issued 1,337,825 options to outside directors and 3,965,450 options to
employee-directors for a total of 5,303,275 options.

         FAMILY RELATIONSHIPS

         There are no family relationships between or among the directors,
executive officers or persons nominated or charged by us to become directors or
executive officers.

         There are no arrangements or understandings between any two or more of
our directors or executive officers. There is no arrangement or understanding
between any of our directors or executive officers and any other person pursuant
to which any director or officer was or is to be selected as a director or
officer, and there is no arrangement, plan or understanding as to whether
non-management shareholders will exercise their voting rights to continue to
elect the current board of directors. There are also no arrangements, agreements
or understanding between non-management shareholders that may directly or
indirectly participate in or influence the management of our affairs.

         SCIENCE ADVISORY BOARD

         Each person listed below is a current member of our Science Advisory
Board. The role of the Science Advisory Board is to provide scientific guidance
related to the development of our Hemopurifier(TM) technology. Unlike the
members of our board of directors, the Science Advisory Board members are not
involved in the management or operations of our company. Members of the Science
Advisory Board are paid $500 per day for services rendered either on-site or at
a mutually agreeable location.

         Jean-Claude Chermann, Ph.D.

         Dr. Chermann is a pioneer in the study of retroviruses, and was the
principal investigator of the research team that collaborated in the first
isolation and characterization of HIV at the Pasteur Institute in 1983. Dr.
Chermann was also the Director of Research of INSERM (French National Institute
of Health and Medical Research) and also held the position of Director of
Research of Unit INSERM U322 on "Retrovirus and Associated Diseases" from 1989
until June 2001 when he accepted his current role as Chief Scientific Director
of Urrma Biopharma based in Montreal, Canada, and Research & Development
Director of URRMA R&D, based in Aubagne, France.

         We entered into a consulting agreement with Dr. Chermann on October 1,
2002 with services to be provided on a month-to-month basis at a rate of $3,500
per month. As per the agreement, Dr. Chermann provides us with up to 20 hours of
scientific advisory services that are specifically related to the development of
our HIV-Hemopurifier(TM). Either party may terminate the agreement with thirty
days advance notice.

         Larry Cowgill, D.V.M., Ph.D.

         Dr. Cowgill is a Professor in the Department of Medicine and
Epidemiology at the School of Veterinary Medicine, University of
California--Davis and has nearly 30 years of experience as a clinical instructor
in small animal internal medicine, nephrology and hemodialysis. He currently
Heads the Companion Animal Hemodialysis Units at the Veterinary Medical Teaching
Hospital at UC Davis and the UC Veterinary Medical Center-San Diego. Dr. Cowgill
is also Associate Dean for Southern California Clinical Programs and is
Co-Director of the University of California Veterinary Medical Center-San Diego.

                                       31




Prior to his appointment at the University of California, he was a National
Institutes of Health (NIH) Special Research Fellow at the University of
Pennsylvania School of Veterinary Medicine and at the Renal Electrolyte Section
at the University of Pennsylvania School of Medicine, where he conducted
research in basic renal physiology and clinical nephrology. Dr. Cowgill received
his D.V.M. from the University of California--Davis School of Veterinary
Medicine and his Ph.D. in Comparative Medical Sciences from the University of
Pennsylvania, where he also completed his internship and Residency training in
Small Animal Internal Medicine. He became a Diplomat of the American College of
Veterinary Internal Medicine in 1977. Dr. Cowgill has published extensively in
the area of veterinary nephrology and has established a Clinical Fellowship in
Renal Medicine and Hemodialysis, which is the first of its kind in veterinary
Medicine.

         Pedro Cuatrecasas, M.D.

         Dr. Cuatrecasas was President of the Pharmaceutical Research Division
of Parke-Davis Co., and Corporate Vice President for Warner Lambert Company from
1989 until his retirement in 1997. From 1986 to 1989, he served as SVP and
Director of Glaxo Inc. For the prior ten years, he was VP/R&D and Director, of
the Burroughs Wellcome Company. During his career in pharmaceutical research, he
was involved in the discovery, development and marketing registration of more
than 40 novel medicines. Dr. Cuatrecasas is widely recognized for the invention
and development of affinity chromatography which is a method for the selective
capture of proteins, sugars, fats and inorganic compounds. He is a member of the
National Academy of Sciences, The Institute of Medicine, and the American
Academy of Arts & Sciences, and he has authored more than 400 original
publications.

         Nathan W. Levin, M.D.

         Dr. Levin is recognized as a leading authority within the hemodialysis
industry. He is the Medical and Research Director of the Renal Research
Institute, LLC, a joint venture between Fresenius Medical Care - North America
and Beth Israel Medical Center, New York. Dr. Levin also serves as Professor of
Clinical Medicine at the Albert Einstein College of Medicine.

         Raveendran (Ravi) Pottathil, Ph.D.

         Dr. Pottathil was the Section Manager for Retroviruses (focus on HIV
and HCV) and Tumor markers and PCR diagnostics at Hoffman La Roche from 1985 to
1992. He then co-founded Specialty Biosystems, Inc, a venture of Specialty Labs,
one of the largest independent reference laboratories in California. Dr.
Pottathil has also advised the World Health Organization's Sexually Transmitted
Diseases and Global Vaccination Program. Dr. Pottathil has worked with Dr.
Robert Huebner of the NIH in immunology and virology at The Jackson Laboratory,
and with Drs. David Lang and Wolfgang Joklik at Duke University on interferons,
anti-tumor RNAs and antigenic suppression of tumorigenic retroviruses. Academic
positions include: Assistant Professor at the University of Maryland School of
Medicine; Associate Professor at the City of Hope Medical Center in Duarte,
California where he published extensively with Dr. Pedro Cuatrecasas (one of
developers of affinity chromatography); and Adjunct Professor in Cellular and
Molecular Biology at Down State Medical Center and Rutgers University. As a
virologist and molecular biologist, Dr. Pottathil has over 40 refereed
publications to his credit and has been a Director of OncQuest, Inc., GeneQuest,
Inc., Specialty Laboratories Asia in Singapore and Specialty Ranbaxy in India.
Currently, Dr. Pottathil is the President of AccuDx, Inc. a pharmaceutical
diagnostics company he founded in 1996.

         Claudio Ronco, M.D.

         Dr. Ronco is the Director of the Dialysis and Renal Transplantation
Programs of St. Bartolo Hospital in Vicenza, Italy. He has published 17 books on
nephrology and dialysis and has written or co-authored over 350 scientific
articles. Dr. Ronco also serves on the editorial board of 12 scientific
journals, is a director of three international scientific societies, and is
recognized as being instrumental in the introduction of continuous
hemofiltration and high flux dialysis in Europe.


         Ken Alibek, M.D., Ph.D., D.Sc.

         Dr. Alibek is the Executive Director of Education at the National
Center for Biodefense at George Mason University (GMU), and is a Distinguished
Professor at GMU as well. Dr. Alibek specializes in medical and scientific
research dedicated to developing new forms of protection against biological
weapons and other infectious diseases.

                                       32




         Formerly, Dr. Alibek was a Soviet Army Colonel, and served as First
Deputy Chief of the civilian branch of the Soviet Union's biological weapons
program until he defected to the United States in 1992 and subsequently served
as a consultant to numerous U.S. government agencies in the areas of medical
microbiology, biological weapons defense, and biological weapons
nonproliferation. Dr. Alibek has worked with the National Institutes of Health,
testified extensively before the U.S. Congress on nonproliferation of biological
weapons and is the author of Biohazard: The Chilling True Story of the Largest
Covert Biological Weapons Program in the World--Told from Inside by the Man Who
Ran It, published by Random House Books. He holds numerous patents, is widely
published in science journals, and has provided over 300 lectures and
presentations to military and civilian universities, as well as foreign
governments. The December 2003 issue of the Acumen Journal of Life Sciences
named Dr. Alibek as one of top five biological warfare experts in the nation.

         We entered into a consulting agreement with Dr. Alibek on October 27,
2004 with services to be provided for a one year term. As per the agreement, Dr.
Alibek provides us with up to 24 hours per month of scientific advisory services
in connection with advancing the development of the Hemopurifier(TM) technology
as a potential countermeasure against pathogens targeted as biological weapons.
As consideration for the services to be provided, we shall compensate Dr. Alibek
with a four year option to purchase up to 80,000 shares of our common stock at
an exercise price of $0.53 per share.

         Charles Bailey, Ph.D.

         Dr. Bailey is the former commander of the U.S. Army Medical Research
Institute of Infectious Diseases (USAMRIID). Dr. Bailey has 25 years U.S. Army
experience in R&D and management in infectious diseases and biological warfare
defense. As an officer of the Defense Intelligence Agency, Dr. Bailey wrote
extensively on foreign biological warfare capabilities. Dr. Bailey is currently
the Executive Director for Research & International Relations at the National
Center for Biodefense at George Mason University (GMU), and is a Distinguished
Professor of Biology at GMU as well. The Acumen Journal of Life Sciences named
Dr. Bailey as one of the top five biological warfare experts in the nation.

         We entered into a consulting agreement with Dr. Bailey on October 27,
2004 with services to be provided for a one year term. As per the agreement, Dr.
Bailey provides us with up to 24 hours per month of scientific advisory services
in connection with advancing the development of the Hemopurifier(TM) technology
as a potential countermeasure against pathogens targeted as biological weapons.

         INVOLVEMENT IN LEGAL PROCEEDINGS.

         To the best of our knowledge, during the past five years, none of the
following occurred with respect to a present or former director or executive
officer of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the SEC or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.

         CODE OF ETHICS.

         On February 23, 2005, the Board of Directors approved a "Code of
Business Conduct and Ethics."


                                       33




                             EXECUTIVE COMPENSATION

            The following table sets forth compensation received for the fiscal
years ended March 31, 2003 through 2005 by our Chief Executive Officer and all
other executive officers.


                                                                                   LONG TERM COMPENSATION
                                                                             ----------------------------------
                                             ANNUAL COMPENSATION                      AWARDS           PAYOUTS
                                     ------------------------------------    ----------------------   ---------
                                                                                         SECURITIES      LONG      ALL
NAMED EXECUTIVE OFFICER AND                                                              UNDERLYING      TERM     OTHER
PRINCIPAL POSITION                                                           RESTRICTED    OPTIONS    INCENTIVE   COMP-
                             YEAR      SALARY(1)          BONUS    OTHER        STOCK       & SARS        PLAN   ENSATION
                             --------------------------------------------------------------------------------------------
                                                                                            
James A. Joyce               2005  $        187,291    $  20,000  $    --    $       --   2,231,100          --  $     --
PRESIDENT AND CHIEF          2004           180,000           --       --            --          --          --        --
EXECUTIVE OFFICER            2003           180,000           --                                 --          --        --

Richard H. Tullis, Ph.D      2005           154,375    $  15,000  $    --    $       --   1,734,350   $      --  $     --
VICE PRESIDENT AND CHIEF     2004           150,000           --                     --          --          --        --
SCIENCE OFFICER              2003           150,000           --                     --     250,000          --        --

James W. Dorst (2)           2005  $             --    $      --                         $       --   $      --  $     --
CHIEF FINANCIAL OFFICER      2004               N/A           --                     --          --          --        --
                             2003               N/A           --       --            --          --          --        --

(1)The remuneration described in the above table does not include our cost of
benefits furnished to the named executive officers, including premiums for
health insurance and other personal benefits provided to such individuals that
are extended to all of our employees in connection with their employment.
Perquisites and other personal benefits, securities, or property received by an
executive officer are either the lesser of $50,000 or 10% of the total salary
and bonus reported for each named executive officer, except as otherwise
disclosed.

(2) James W. Dorst was appointed Chief financial Officer August 1, 2005. Mr.
Dorst receives an annual salary of $150,000 and was granted nonqualified stock
options to purchase 500,000 shares of common stock at an exercise price equal to
the fair market value of the stock on the date of grant.

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS GRANT TABLE

         The following table provides certain information with respect to
individual grants during the last fiscal year to each of our named executive
officers of common share purchase options or stock appreciation rights ("SARs")
relating to our common shares:

                                   COMMON SHARES        AS PERCENTAGE OF
                                UNDERLYING GRANT OF       GRANTS TO ALL        EXERCISE OR
NAMED EXECUTIVE OFFICER           OPTIONS OR SARS           EMPLOYEES          BASE PRICE      EXPIRATION DATE(S)
- ------------------------------------------------------------------------------------------------------------------
James A. Joyce,
CHAIRMAN, PRESIDENT AND CEO          2,231,100                  56%              $0.38         02/23/10; 12/31/10;
                                                                                                          12/31/11
Richard H. Tullis, Ph.D,             1,734,350                  44%              $0.38         02/23/10; 12/31/10;
VICE PRESIDENT, CHIEF                                                                                     12/31/11
SCIENCE OFFICER
James W. Dorst                             N/A                  N/A              N/A                           N/A
Chief Financial Officer



                                       34




STOCK OPTIONS AND STOCK APPRECIATION RIGHTS EXERCISE AND VALUATION TABLE

         The following table sets forth the number of common stock options, both
exercisable and unexercisable, held by each of our Named Executive Officers and
the value of any in-the-money options at December 15, 2005, utilizing a value of
$0.36 per share, the closing price of the Company's common stock on the OTCBB on
December 15, 2005:



                                                                       ----------------------------------------------
                                           SHARES                       NUMBER OF SECURITIES     VALUE OF UNEXERCISED
                                          ACQUIRED         VALUE       UNDERLYING UNEXERCISED        IN-THE-MONEY
       NAMED EXECUTIVE OFFICER           ON EXERCISE      REALIZED          OPTIONS/SARS             OPTIONS/SARS
                                                                            (EXERCISABLE/           (EXERCISABLE/
                                                                            UNEXERCISABLE)          UNEXERCISABLE)
- ---------------------------------------------------------------------------------------------------------------------
                                                                                                    
James A. Joyce                               --              --       3,972,693 / 1,115,550          $428,571 / $0

Richard H. Tullis                            --              --       1,147,175 / 867,175                  $0 / $0

James W. Dorst
                                             --              --               0 / 500,000             $0 / $75,000


         EMPLOYMENT AGREEMENTS

         We entered into an employment agreement with Mr. Joyce effective April
1, 1999. Effective June 1, 2001, Mr. Joyce was appointed President and Chief
Executive Officer and his base annual salary was increased from $120,000 to
$180,000. Effective January 1, 2005, Mr. Joyce's salary was increased from
$180,000 to $205,000 per year. Under the terms of the agreement, his employment
continues at a salary of $205,000 per year for successive one year periods,
unless given notice of termination 60 days prior to the anniversary of his
employment agreement.

         We entered into an employment agreement with Dr. Tullis effective
January 10, 2000. Effective June 1, 2001, Dr. Tullis was appointed our Chief
Science Officer of the Company. His compensation under the agreement was
modified in June 2001 from $80,000 to $150,000 per year. Effective January 1,
2005, Dr. Tullis' salary was increased from $150,000 to $165,000 per year Under
the terms of the agreement, his employment continues at a salary of $165,000 per
year for successive one-year periods, unless given notice of termination 60 days
prior to the anniversary of his employment agreement.

         Both Mr. Joyce's and Dr. Tullis' agreements provide for health
insurance and disability benefits, one year of severance pay if their employment
is terminated by us without cause or due to change in our control before the
expiration of their agreements, and allow for bonus compensation and stock
option grants as determined by our Board of Directors. Both agreements also
contain restrictive covenants preventing competition with us and the use of
confidential business information, except in connection with the performance of
their duties for the Company, for a period of two years following the
termination of their employment with us.

         Effective August 1, 2005, Mr. Dorst was elected our Chief Financial
Officer. In addition to his annual salary of $150,000, Mr. Dorst receives health
insurance benefits from us. He was also granted five-year options to purchase
500,000 shares of common stock at $0.23 per share, vesting over three years.

         STOCK OPTION GRANTS

         Our 2000 Stock Option Plan (the "Plan"), adopted by us in August 2000,
provides for the grant of incentive stock options ("ISOs") to full-time
employees (who may also be Directors) and nonstatutory stock options ("NSOs") to
non-employee Directors, consultants, customers, vendors or providers of
significant services. The exercise price of any ISO may not be less than the
fair market value of our Common Stock on the date of grant or, in the case of an
optionee who owns more than 10% of the total combined voting power of all
classes of our outstanding stock, not be less than 110% of the fair market value
on the date of grant. The exercise price, in the case of any NSO, must not be
less than 75% of the fair market value of our Common Stock on the date of grant.
The amount available under the Plan is 500,000 shares issuable under options.

                                       35




         At December 15, 2005, we had granted and there are currently
outstanding 32,500 options under the Plan, with 467,500 available for future
issuance. We issued the remaining 10,646,433 options (of which 600,000 have been
exercised and 773,300 have expired) outside the Plan.

         At December 15, 2005, we had outstanding options to purchase 9,212,785
shares of Common Stock. See "Security Ownership of Certain Beneficial Owners and
Management."

         OUTSTANDING STOCK PURCHASE WARRANTS

         Common Stock purchase warrants

         At December 15, 2005, we had outstanding warrants to purchase a total
of 8,343,035 shares of common stock, exercisable at prices between $0.18 and
$4.00 per share and with expiration dates from November 2005 through May 2010.

See "Security Ownership of Certain Beneficial Owners and Management."


                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                              OR PLAN OF OPERATION

         The following discussion of our consolidated financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and their explanatory notes appearing elsewhere in this
prospectus.

         Certain statements contained herein that are not related to historical
results, including, without limitation, statements regarding the Company's
business strategy and objectives, future financial position, expectations about
pending litigation and estimated cost savings, are forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Securities Exchange Act") and
involve risks and uncertainties. Although we believe that the assumptions on
which these forward-looking statements are based are reasonable, there can be no
assurance that such assumptions will prove to be accurate and actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, regulatory policies, competition from other similar businesses, and
market and general economic factors. All forward-looking statements contained in
this prospectus are qualified in their entirety by this statement.

         PLAN OF OPERATION

         The Company's current plan of operation is to fund our anticipated
increased research and development activities and operations for the near future
through the common stock purchase agreement in place with Fusion Capital,
whereby Fusion Capital has committed to buy up to an additional $6,000,000 of
our common stock over a 30-month period, that commenced, at our election, after
the SEC declared effective a registration statement under Form SB-2 on December
7, 2004 covering such shares. Through September 30, 2005 the Company had
received $700,001 from this agreement. However, no assurance can be given that
we will receive any additional funds under our agreement with Fusion Capital.
Based on our projections of additional employees and equipment for operations
and to complete research, development and testing associated with our
Hemopurifier(TM) products, we anticipate that these funds will satisfy our cash
requirements, including this anticipated increase in operations, in excess of
the next twelve months. In addition, on November 2, 2005 the Company formalized
an agreement with accredited investors who had been providing funding since July
2005, to issue up to $1,000,000 in 10% Series A Convertible Promissory Notes and
has issued $1,000,000 in principal amount of the notes under this arrangement.
The Company plans to utilize the proceeds for ongoing general working capital
requirements. However, due to market conditions and to assure availability of
funding for operations in the long term, we plan to arrange for additional
funding, subject to acceptable terms, during the next twelve months.

         The Company is a development stage medical device company that has not
yet engaged in significant commercial activities. The primary focus of our
resources is the advancement of our proprietary Hemopurifier(TM) platform
treatment technology, which is designed to rapidly reduce the presence of
infectious viruses and toxins in human blood. Our main focus is to prepare our
Hemopurifier(TM) to treat HIV/AIDS, Hepatitis-C and Flu Viruses in human
clinical trials. The Company is also working to advance pathogen filtration
devices to treat infectious agents that may be used in biological warfare and
terrorism.

                                       36




         The Company plans to continue our research and development activities
related to our Hemopurifier(TM) platform technology, with particular emphasis on
the advancement of our lead product candidates for the treatment of HIV/AIDS,
HCV and Flu Viruses. The Company also plans to implement a regulatory strategy
for the use of our Hemopurifier(TM) for biodefense treatments in fiscal year
2006 pursuant to a recent rule implemented by the FDA for medical
countermeasures to weapons of mass destruction. Under this rule, in situations
where it is deemed unethical to conduct efficacy studies in humans, a treatment
can be reviewed for approval on the basis of efficacy in the most relevant
animal species and safety data in humans.

         The Company expects to add additional employees in the next twelve
months, as required to support our increased research and development effort
that will include expanding our goal beyond treating infectious diseases
HIV/AIDS and Hepatitis-C and new applications to combat infectious agents that
may be used in biological warfare and terrorism. This will involve designing
Hemopurifier(TM) products that can be rapidly deployed by armed forces as
wearable post-exposure treatments on the battlefield, as well as dialysis-based
treatments for civilian populations. This will entail developing the new
treatment device based on the same proprietary Hemopurifier(TM) filtration
technology that is utilized in advancing our HIV/AIDS, and Hepatitis-C
treatments. Accordingly, due to this increase in activity during the next twelve
months, Management anticipates continuing to increase spending on research and
development during this period. Additionally, associated with the Company's
anticipated increase in research and development expenditures, we anticipate
purchasing additional amounts of equipment during this period to support our
laboratory and testing operations. Operations to date have consumed substantial
capital without generating revenues, and will continue to require substantial
and increasing capital funds to conduct necessary research and development and
pre-clinical and clinical testing of our Hemopurifier(TM) products, as well as
market any of those products that receive regulatory approval. The Company does
not expect to generate revenue from operations for the foreseeable future, and
our ability to meet our cash obligations as they become due and payable is
expected to depend for at least the next several years on our ability to sell
securities, borrow funds or a combination thereof. Future capital requirements
will depend upon many factors, including progress with pre-clinical testing and
clinical trials, the number and breadth of our clinical programs, the time and
costs involved in preparing, filing, prosecuting, maintaining and enforcing
patent claims and other proprietary rights, the time and costs involved in
obtaining regulatory approvals, competing technological and market developments,
as well as Management's ability to establish collaborative arrangements,
effective commercialization, marketing activities and other arrangements. The
Company expects to continue to incur increasing negative cash flows and net
losses for the foreseeable future.

         RESULTS OF OPERATIONS

         THREE MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2004

         Operating Expenses

         Consolidated operating expenses for the three months ended September
30, 2005 were $554,386, almost unchanged in comparison with $561,947 for the
comparable quarter one year ago. The reduction of $7,561 was comprised of
increases in Professional Fees and General and Administrative expenses of
$16,915 and $8,305, respectively, offset by a decrease in overall Payroll and
Related expenses of $32,781.

         Net Loss

         The Company recorded a consolidated net loss of $673,321 and $348,605
for the quarters ended September 30, 2005 and 2004, respectively. The increased
net loss was primarily attributable to a $328,527 increase in recorded interest
expense. This increase is a result of a large credit ($244,500) to correct for
over-accrued interest expense taken in the prior quarter one year ago offset by
an increase in interest expense attributable to amortization of warrant value
and BCF recorded in association with convertible notes payable incurred in the
first and second quarters of the Company's fiscal year.

         Basic and diluted loss per common share were ($0.04) for the three
month period ended September 30, 2005 compared to ($0.03) for the same period
ended September 30, 2004. This reduction in loss per share was primarily a
result of the greater number of common shares outstanding during the three month
period ended September 30, 2005, as compared to the three month period ended
September 30, 2004, offset by the increased net loss for the three month period
ended September 30, 2005, as compared to the three month period ended September
30, 2004.

                                       37




         SIX MONTHS ENDED SEPTEMBER 30, 2005 COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 2004

         Operating Expenses

         Consolidated operating expenses were $1,289,455 for the six months
ended September 30, 2005, versus $1,020,319 for the comparable period ended
September 30, 2004. This increase of $269,136 results from a $188,064 increase
in Professional Fees and a $118,306 increase in General and Administrative
expenses offset by a $37,234 reduction in Payroll and Related expenses. The
increase in Professional Fees is a result of additional work required to prepare
for and initiate human safety trials on HCV infected patients, while the
increase in General and Administrative expense included increases in Lab
Supplies of $80,714, insurance expense of $23,964, rent expense of $37,980
offset by decreases in other General and Administrative expenses.

         Net Loss

         We recorded a consolidated net loss of $1,475,321 and $829,945 for the
six-month periods ended September 30, 2005 and 2004, respectively. The increase
in net loss was primarily attributable to increased operating expenses, offset
partially by a reversal of approximately $244,500 in over-accrued interest
expense in the quarter ended September 30, 2004 and an additional non-cash
expense of $3,750 related to the revaluation of warrants issued with convertible
debt combined with actual increases in interest expense attributable to the
amortization of warrant value and BCF recorded in association with convertible
notes payable incurred during the six month period ending September 30, 2005.

         Basic and diluted loss per common share were ($0.08) for the six month
period ended September 30, 2005 compared to ($0.06) for the same period ended
September 30, 2004. This reduction in loss per share was attributable to both
the greater number of common shares outstanding during the six month period
ended September 30, 2005, as compared to the six month period ended September
30, 2004, partially offset by the increased net loss for the six month period
ended September 30, 2005, as compared to the equivalent period one year ago.

         LIQUIDITY AND CAPITAL RESOURCES

         To date, the Company has funded its capital requirements for the
current operations from net funds received from the public and private sale of
debt and equity securities, as well as from the issuance of common stock in
exchange for services. The Company's cash position at September 30, 2005 was
$75,275 compared to $8,625, at March 31, 2005, representing an increase of
$66,650. During the six months ended September 30, 2005, operating activities
used net cash of $745,950. The Company received $177,600 from the issuance of
common stock, $535,000 from proceeds for the issuance of convertible notes
payable and $100,000 from the issuance of notes payable.

         During the six month period ended September 30, 2005, net cash used in
operating activities primarily consisted of net loss of $1,475,323. Net loss was
offset principally by depreciation and amortization of $15,341 plus the fair
market value of common stock of $296,241 in payment for services and $121,095 in
amortization of discount associated with note issuances and an increases in
accounts payable and other current balance sheet accounts of $262,946.

         An decrease in working capital during the six months in the amount of
$190,588 increased the Company's negative working capital position to
($3,539,098) at September 30, 2005 as compared to a negative working capital of
($3,348,510) at March 31, 2005. The Company's current deficit in working capital
required us to obtain funds in the short-term to be able to continue in
business, and in the longer term to fund research and development on products
not yet ready for market.

         The Company's operations to date have consumed substantial capital
without generating revenues, and will continue to require substantial and
increasing capital funds to conduct necessary research and development and
pre-clinical and clinical testing of Hemopurifier(TM) products, and to market
any of those products that receive regulatory approval. The Company does not
expect to generate revenue from operations for the foreseeable future, and its
ability to meet its cash obligations as they become due and payable is expected
to depend for at least the next several years on its ability to sell securities,
borrow funds or a combination thereof. The Company's future capital requirements
will depend upon many factors, including progress with pre-clinical testing and
clinical trials, the number and breadth of our programs, the time and costs
involved in preparing, filing, prosecuting, maintaining and enforcing patent
claims and other proprietary rights, the time and costs involved in obtaining
regulatory approvals, competing technological and market developments, and
Management's ability to establish collaborative arrangements, effect successful
commercialization strategies, marketing activities and other arrangements. The
Company expects to continue to incur increasing negative cash flows and net
losses for the foreseeable future.

                                       38




         Management does not believe that inflation has had or is likely to have
any material impact on the Company's limited operations.

         At the date of this filing, we do not have plans to purchase
significant amounts of equipment or hire significant numbers of employees prior
to successfully raising additional capital.


         FISCAL YEAR ENDED MARCH 31, 2005 COMPARED TO THE FISCAL YEAR ENDED
MARCH 31, 2004

         We recorded consolidated net losses of ($2,096,951) or ($0.15) per
common share and ($1,518,798) or ($0.19) per common share for the fiscal years
ended March 31, 2005 and 2004, respectively. Our consolidated operating expenses
for fiscal 2005 were $2,183,377 versus $995,549 for fiscal year 2004. This
increase in operating expenses amounting to $1,187,828 or 119.31% is largely
attributable to a increase in our professional fees by $409,050 or 120.4%, to
$748,837, principally due to higher legal, accounting, technical and other
professional services; an increase in payroll and related expenses by $582,838,
or 139.6%, to $1,000,324, principally due to an increase in the salary of our
CEO, CSO and the addition of full-time administrative and laboratory personnel
since mid-year; and an increase in general and administrative expenses in the
amount of $195,940, or 82.2% to $434,216, due to increased insurance, warrant
expense and rent costs. Our capital equipment expenditures were approximately
$30,000 in fiscal year 2005 and $5,000 in 2004.

         Notes and Convertible Notes

         At March 31, 2005 there were no convertible notes outstanding. At March
31, 2004, there were two convertible notes outstanding. One in the amount of
$125,000, plus accrued interest, was converted to stock in September 2004. The
second convertible note outstanding at March 31, 2004 in the amount of $50,000
was converted to stock in 2004.

         At March 31, 2005, there were $537,500 in principal amount of notes
outstanding with 16 note holders. Our 12% one year notes in the principal amount
of $272,500, due between August 2000 and September 2001 have no acceleration
provisions. We increased the interest to 15% in FY 2002. One 12% note in the
amount of $12,500 and a 10% note in the amount of $10,000 were repaid in June
and July 2004, respectively. Our remaining 10% note, in the principal amount of
$5,000, was due May 2002. The 10% notes have no acceleration provisions. One
two-month note in the amount of $150,000, due June 25, 2003, currently bears
interest at 18%. The note's conversion rights have expired and it has no
acceleration provisions. In October 2004, three 10% notes in the total amount of
$130,000 were issued with warrants attached. In November and December 2004,
principal amounts of $15,000 and $5,000, respectively, of a 10% note issued in
October 2004 were used to pay for the exercise of warrants, resulting in a
reduction in the principal amount of the note. In December 2004, the Company
repaid two $25,000 12% promissory notes, including accrued interest, through the
issuance of restricted common shares.

         On May 16, 2005, the Company issued Fusion Capital a $30,000
Convertible Promissory Note (the "Convertible Note") with an interest rate of
fifteen percent (15%) per annum that matured on August 15, 2005 (the "Maturity
Date").The Convertible Note is convertible into shares of restricted common
stock at any time at the election of Fusion at a conversion price equal to $0.20
per share for any conversion occurring on or prior to the Maturity Date, or at a
price equal to the lesser of (i) 75% of the average of the three (3) lowest
closing sale prices of the common shares during the twelve (12) trading days
prior to the submission of a conversion notice or (ii) $0.20 per share, for any
conversion occurring after the Maturity Date. In addition, the Company issued
Fusion a five-year warrant to purchase 300,000 shares of the Company's common
stock at an exercise price of $0.25 per share (the "Warrant"). The warrant has
been valued using a Black-Scholes option pricing model and an associated
discount of $19,655, which will accrete to interest expense over the term of the
Convertible Note, has been recorded. The convertible feature of the Convertible
Note provides for a rate of conversion that is below market value. Pursuant to
EITF 98-5 and EITF 00-27, the Company has estimated the fair value of such
Beneficial Conversion Feature ("BCF") to be $10,345 and records such amount as a
debt discount. Such discount is being accreted to interest expense over the term
of the Convertible Note. Total interest expense on the Convertible Note for
amortization of the above debt discount and BCF totaled $30,000 for the six
months ended September 30, 2005.

                                       39




         On May 27, 2005, the Company issued a promissory note (the "Note") to
an accredited investor in an amount of $100,000 with 12% interest maturing on
December 1, 2005. In conjunction with the issuance of the Note, the Company also
issued a 12-month warrant to acquire 400,000 shares of Common Stock at $0.25 per
share. Accordingly, this warrant has been valued using a Black Scholes option
pricing model and an associated discount of $41,860, which will accrete to
interest expense over the term of the Note, has been recorded. Such interest
expense totaled $31,466 for the six months ended September 30, 2005.

         From July 11, 2005 through September 30, 2005 the Company received cash
investments of $455,000 from an accredited investor (Ellen R. Weiner Family
Revocable Trust) based on agreed-upon terms reached on the cash receipt dates.
Such investments were documented on November 2, 2005 in a 10% Series A
Convertible Note ("Note"). The Note accrues interest at a rate of ten percent
(10%) per annum and matures on January 2, 2007. The Note is convertible into
shares of restricted common stock at any time at the election of the holder at a
conversion price equal to $0.20 per share for any conversion occurring on or
prior to the maturity date. In addition, upon conversion, the Company is
obligated to issue a three-year Warrant (the "Warrant") to purchase a number of
shares equal to the number of shares into which the Note was converted at an
exercise price of $0.20. The Warrant has been valued using a Binomial Lattice
option pricing model and an associated discount of $253,875, measured at the
commitment dates, will be expensed as future conversions occur. The convertible
feature of the Convertible Note provides for a rate of conversion that is below
market value. Pursuant to EITF 98-5 and EITF 00-27, the Company has estimated
the fair value of such Beneficial Conversion Feature ("BCF") to be $201,125 and
records such amount as a debt discount. Such discount is being accreted to
interest expense over the term of the Convertible Note. Total interest expense
on the Convertible Note for amortization of the above debt discount and BCF
totaled $31,297 for the three months ended September 30, 2005.

         From August 8, 2005 through September 30, 2005 the Company received
cash investments of $50,000, from an accredited investor (Allan S. Bird) based
on agreed upon terms on the cash receipt dates. Such investments were documented
on November 2, 2005 in a 10% Series A Convertible Note ("Note"). The Note
accrues interest at a rate of ten percent (10%) per annum and matures on January
2, 2007. The Note is convertible into shares of restricted common stock at any
time at the election of the holder at a conversion price equal to $0.20 per
share for any conversion occurring on or prior to the maturity date. In
addition, upon conversion, the Company is obligated to issue a three-year
Warrant (the "Warrant") to purchase a number of shares equal to the number of
shares into which the Note was converted at an exercise price of $0.20. The
Warrant has been valued using a Binomial Lattice option pricing model and an
associated discount of $28,750, measured at the commitment dates, will be
expensed as future conversions occur. The convertible feature of the Convertible
Note provides for a rate of conversion that is below market value. Pursuant to
EITF 98-5 and EITF 00-27, the Company has estimated the fair value of such
Beneficial Conversion Feature ("BCF") to be $21,250 and records such amount as a
debt discount. Such discount is being accreted to interest expense over the term
of the Convertible Note. Total interest expense on the Convertible Note for
amortization of the above debt discount and BCF totaled $3,639 for the three
months ended September 30, 2005.

         The Company is currently in default on approximately $457,500 of
amounts owed under various notes payable and accrued liabilities and is
currently seeking other financing arrangements to retire all past due notes. At
September 30, 2005 the Company had accrued interest in the amount of $210,155
associated with these notes and accrued liabilities payable.

Securities Issued for Services

         We have issued securities in payment of services to reduce our
obligations and to avoid using our cash resources. In the six-month period ended
September 30, 2005 we issued 1,489,500 common shares and 418,365 warrants for
services. We issued 836,730 common shares and a warrant to purchase 418,365
shares for $309,591 in legal expense, 628,770 shares for $147,995 in development
expense related to our clinical trials and 24,000 shares for $6,000 for general
expenses. All of the shares were registered for sale.

         In the fiscal year ended March 31, 2005, we issued 1,412,625 common
shares for services, 854,978 of the shares issued were unregistered. We issued
468,604 restricted common shares for commitment and financing fees associated
with the $6 million commitment from Fusion Capital; 225,000 restricted common
shares for payment of legal services associated with the related private
placement and Form SB-2 registration statement, 10,715 restricted common shares
for employment placement fees; 143,809 restricted common shares were issued for
investor relations and 6,850 restricted common shares were issued for technical
consulting. In addition, 557,647 shares, registered under a Form S-8

                                       40




registration statement, were issued as follows: for corporate and SEC legal
advice, 356,547 shares; for regulatory and technical consulting, 132,236 shares;
for employment placement fee, 46,364 shares and for achievement of employee
goals and objectives, 22,500 shares. The value of services purchased with
registered and restricted shares was approximately $337,000. The average price
discount of common stock issued for these services, weighted by the number of
shares issued for services in this period, was approximately 36%.

         In fiscal year 2004, we issued 335,714 restricted common shares
consisting of 200,185 restricted common shares in payment of investor relations,
consulting and services for investor research report on the Company and investor
relations programs and investor meetings; 73,529 restricted common shares in
payment of corporate legal services related to SEC filings, issuance of
securities and general corporate matters; and 62,000 restricted common shares
for consulting for biodefense marketing, and technical analytical services, all
totaling approximately $138,000. The average price discount of common stock
issued for services in this period, weighted by the number of shares issued for
services in this period, was approximately 46% In 2003, we issued 726,378 shares
of restricted common shares consisting of 400,000 restricted common shares in
payment of business development consulting services; 196,078 restricted common
shares for a patent royalty payment on the Hemopurifier(TM); 69,231 restricted
common shares for strategic planning and financial modeling consulting services;
41,869 restricted common shares for technical consulting associated with the
Hemex Hemopurifier(TM); and 18,200 restricted common shares for technical
laboratory, and financial valuation consulting services, all totaling
approximately $421,000. The average price premium of common stock issued for
services in this period, weighted by the number of shares issued for services in
this period was 54%.

         We plan to continue this practice in the future. The amount of our
outstanding liabilities that we are able to convert to stock will depend on our
ability to negotiate reasonable settlements with the respective service
providers, our stock price and market conditions. The following is a summary of
the securities issued for services and the types of services provided.

         The following table provides the number of shares issued for services
provided over the periods indicated with the average discount for each period
shown. The expenses include legal fees, financing fees, employment placement
fees, investor relations, marketing, technical services and miscellaneous.

                                       Dollar      Securities   Weighted Average
                                       Amount      issued for       Discount
                                                    Services      from Market
- --------------------------------------------------------------------------------
Six months ended September 30, 2005   $ 463,586    1,907,865         0.48%
Fiscal year ended March 31, 2005      $ 337,000    1,412,625        36.00%
Fiscal year ended March 31, 2004      $ 154,000      335,714        46.30%
Fiscal year ended March 31, 2003      $ 421,000      726,378        54.00%
- --------------------------------------------------------------------------------

         Securities Issued for Debt

         We have also issued securities for debt to reduce our obligations to
avoid using our cash resources. For the six months ending September 30, 2005, we
did not retire any obligations through the issuance of stock. For the fiscal
year ended March 31, 2005, we issued 847,755 common shares for repayment in full
of notes, including accrued interest. The price discount of common stock issued
for debt in this period, weighted by number of shares issued for conversion of
debt in this period, was approximately 41%, partially due to a substantial
discount in the conversion of the $125,000 convertible note in accordance with
its original terms in 2001. In fiscal year 2004, we issued 813,365 shares of
stock for debt. The average price discount of common stock issued for debt in
this period, weighted by number of shares issued for conversion of debt in this
period, was approximately 47%. The percentage excludes shares issued in one
transaction determined by formula from a preexisting agreement.

            In fiscal year 2003, we issued 509,055 shares of stock for debt. The
average price premium of common stock issued for debt in this period, weighted
by number of shares issued for conversion of debt in this period, was 32%.

         Prospects for Debt Conversion

         We seek, where possible, to convert our debt and accounts payable to
stock and/or warrants in order to reduce our cash liabilities. Our success at
accomplishing this depends on several factors including market conditions,
investor acceptance and other factors, including our business prospects.

                                       41




         Going Concern

         Our independent registered public accounting firm has stated in their
audit report on our March 31, 2005 consolidated financial statements, that we
have a working capital deficiency and a significant deficiency accumulated
during the development stage. These conditions, among others, raise substantial
doubt about our ability to continue as a going concern.

         Critical Accounting Policies

         The preparation of condensed consolidated financial statements in
conformity with accounting principles generally accepted in the United States of
America requires us to make a number of estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements. Such estimates
and assumptions affect the reported amounts of expenses during the reporting
period. On an ongoing basis, the Company evaluates estimates and assumptions
based upon historical experience and various other factors and circumstances.
Management believes the Company's estimates and assumptions are reasonable in
the circumstances; however, actual results may differ from these estimates under
different future conditions.

         The Company believes that the estimates and assumptions that are most
important to the portrayal of the Company's financial condition and results of
operations, in that they require the most difficult, subjective or complex
judgments, form the basis for the accounting policies deemed to be most critical
to us. These critical accounting policies relate to stock purchase warrants
issued with notes payable, beneficial conversion feature of convertible notes
payable, impairment of intangible assets and long lived assets, stock
compensation, contingencies and litigation. We believe estimates and assumptions
related to these critical accounting policies are appropriate under the
circumstances; however, should future events or occurrences result in
unanticipated consequences, there could be a material impact on the Company's
future financial conditions or results of operations.

         Long Lived Assets

         SFAS No.144 ("SFAS 144"), "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
SFAS 144 requires that long-lived assets be reviewed for impairment whenever
events or changes in circumstances indicate that their carrying amounts may not
be recoverable. If the cost basis of a long-lived asset is greater than the
projected future undiscounted net cash flows from such asset (excluding
interest), an impairment loss is recognized. Impairment losses are calculated as
the difference between the cost basis of an asset and its estimated fair value.
SFAS 144 also requires companies to separately report discontinued operations
and extends that reporting requirement to a component of an entity that either
has been disposed of (by sale, abandonment or in a distribution to owners) or is
classified as held for sale. Assets to be disposed of are reported at the lower
of the carrying amount or the estimated fair value less costs to sell.
Management believes that no impairment existed at or during the six months ended
September 30, 2005.

         Stock Purchase Warrants Issued with Notes Payable

         The Company granted warrants in connection with the issuance of certain
notes payable. Under Accounting Principles Board Opinion No. 14, "ACCOUNTING FOR
CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE WARRANTS," the relative
estimated fair value of such warrants represents a discount from the face amount
of the notes payable. Such discounts are amortized to interest expense over the
term of the notes.

         Derivatives

         The Company has an obligation to register for resale the shares
underlying warrants in connection with the issuance of its 10% Series A
Convertible Promissory Notes. In accordance with Emerging Issues Task Force
("EITF") No. 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO,
AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK," the value of the warrants is
recorded as a liability until such registration is effective. The Company will
be required to re-measure the fair value of these warrants at the end of each
quarter until a registration statement for the common shares underlying the
warrants is declared effective. The Company will be required to re-measure the
fair value of these warrants at the end of each quarter until a registration
statement for the common shares underlying the warrants is declared effective,
at which time the fair value of the warrant is adjusted and any remaining
associated liability is then reclassified to equity.

                                       42




         Beneficial Conversion Feature of Notes Payable

         The convertible feature of certain notes payable provides for a rate of
conversion that is below market value. Such feature is normally characterized as
a "Beneficial Conversion Feature" ("BCF"). Pursuant to EITF Issue No. 98-5,
"ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR
CONTINGENTLY ADJUSTABLE CONVERSION RATIO" and EITF No. 00-27, "APPLICATION OF
EITF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS," the estimated fair
value of the BCF is recorded in the consolidated financial statements as a
discount from the face amount of the notes. Such discounts are amortized to
interest expense over the term of the notes.

         Accounting for Transactions involving Stock Compensation

         Financial Accounting Standards Board ("FASB") Interpretation No. 44
("FIN 44"), "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION,
AN INTERPRETATION OF APB 25" clarifies the application of APB 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence for various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. Under APB 25 compensation expense
is the excess, if any, of the estimated fair value of the stock at the grant
date or other measurement date over the amount an employee must pay to acquire
the stock. Compensation expense, if any, is recognized over the applicable
service period, which is usually the vesting period.

         SFAS 123, if fully adopted, changes the method of accounting for
employee stock-based compensation plans to the fair value based method. For
stock options and warrants, fair value is estimated using an option pricing
model that takes into account the stock price at the grant date, the exercise
price, the expected life of the option or warrant, stock volatility and the
annual rate of quarterly dividends. Compensation expense, if any, is recognized
over the applicable service period, which is usually the vesting period. The
adoption of the accounting methodology of SFAS 123 is optional and we have
elected to continue accounting for stock-based compensation issued to employees
using APB 25; however, pro forma disclosures, as we adopted the cost recognition
requirement under SFAS 123, are required to be presented.

         SFAS 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123," provides alternative
methods of transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, this Statement
amends the disclosure requirements of SFAS 123 to require prominent disclosures
in both annual and interim financial statements about the method of accounting
for stock-based employee compensation and the effect of the method used on
reported results.

         In December 2004, the FASB issued SFAS No. 123-R, "Share-Based
Payment," which requires that the compensation cost relating to share-based
payment transactions (including the cost of all employee stock options) be
recognized in the financial statements. That cost will be measured based on the
estimated fair value of the equity or liability instruments issued. SFAS No.
123-R covers a wide range of share-based compensation arrangements including
share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans. SFAS No.123-R replaces
SFAS No. 123 and supersedes APB 25. As originally issued, SFAS No. 123
established as preferable a fair-value-based method of accounting for
share-based payment transactions with employees. However, that pronouncement
permitted entities to continue applying the intrinsic-value model of APB 25,
provided that the financial statements disclosed the pro forma net income or
loss based on the preferable fair-value method.

         Small Business Issuers are required to apply SFAS No. 123-R in the
first interim or annual reporting period of the registrant's first fiscal year
that begins after December 15, 2005. Thus, the Company's consolidated financial
statements will reflect an expense for (a) all share-based compensation
arrangements granted on or after January 1, 2006 and for any such arrangements
that are modified, cancelled, or repurchased on or after that date, and (b) the
portion of previous share-based awards for which the requisite service has not
been rendered as of that date, based on the grant-date estimated fair value.
Management has not yet determined the future effect of FAS 123-R on its
consolidated financial statements.

         Off-Balance Sheet Arrangements

         We have not entered into any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources and would be
considered material to investors.

                                       43




                                LEGAL PROCEEDINGS

         We may be involved from time to time in various claims, lawsuits,
disputes with third parties or breach of contract actions incidental to the
normal course of business operations. We are not aware of any material pending
legal proceedings involving our Company.


         SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

         The following table sets forth selected information, computed as of
December 15, 2005, about the amount of shares of common stock beneficially owned
by: each of our "EXECUTIVE OFFICERS" (defined as our President, Secretary, Chief
Financial Officer or Treasurer, any vice-president in charge of a principal
business function, such as sales, administration or finance, or any other person
who performs similar policy making functions for our company); each of our
directors; each person known to us to own beneficially more than 5% of any class
of our securities; and the group comprised of our current directors and
executive officers.

         Except as otherwise noted in the footnotes below, the entity,
individual Director or Executive Officer has sole voting and investment power
over such securities.

                                       
                                                                                                            COMMON
                                                                                                          (VOTING)
NAME AND ADDRESS OF BENEFICIAL OWNERS (1) (2)                      AMOUNT                                     %(3)
James A. Joyce (5)(6)(7)(8)                                     5,688,243                                   22.76%


Calvin M. Leung (6)(10)                                         2,535,368                                   12.42%
P.O. Box 2366
Costa Mesa, CA 92628

Richard H. Tullis (5)(6)(7)(9)                                  2,072,350                                    9.45%


Ellen R. Weiner Family Revocable Trust (4)(7)(11)
10645 N. Tatum Blvd. Suite 200-166                              7,878,070                                    9.90%(11)
Phoenix, Arizona  85028

Allan S. Bird (4)(7)(11)                                        2,250,000                                    9.90%(11)
PO Box 371179
Las Vegas, Nevada 89137

Rod Tompkins (7)                                                1,860,000                                    9.34%
420 Douglas
Wayne, NE 68787

Fusion Capital Fund II, LLC  (7) (12)                           1,562,495                                    7.45%
222 Merchandise Mart Plaza, Suite 9-112
Chicago, IL 60654

Edward G. Broenniman (6)(13)                                      775,924                                    3.80%


Franklyn S. Barry, Jr. (6)(14)                                    521,010                                    2.55%


James W. Dorst (5)(15)                                            500,000                                    2.45%


Directors and executive officers, as a group (6                12,090,895                                   41.64%
  members)


                                                                

- ----------------------------------

                                       44




(1)      Beneficial ownership is determined in accordance with Rule 13d-3 under
         the Securities Exchange Act and is generally determined by voting power
         and/or investment power with respect to securities. Except as indicated
         by footnote and subject to community property laws where applicable,
         the Company believes the persons named in the table above have sole
         voting and investment power with respect to all shares of Common Stock
         shown as beneficially owned by them. Unless otherwise indicated, the
         address of each shareholder is 3030 Bunker Hill Street, Suite 4000, San
         Diego, CA 92109.
(2)      A person is deemed to be the beneficial owners of securities that can
         be acquired by such person within 60 days from December 15, 2005 upon
         the exercise of warrants or options. Each beneficial owner's percentage
         ownership is determined by assuming that options and warrants that are
         held by such person (but not those held by any other person) and that
         are exercisable within 60 days from December 15, 2005 have been
         exercised.
(3)      Assumes 19,909,016 shares of Common Stock outstanding at December 15,
         2005.
(4)      Includes shares issuable upon conversion of $985,000 of convertible
         notes and associated warrants which would be issued in the event and at
         such time as such notes are converted into restricted shares of common
         stock. Includes convertible notes held by both the Ellen R. Weiner
         Family Revocable Trust and Allan S. Bird. Mr. Bird is Ms. Weiner's
         father-in-law. Neither the Trust nor Mr. Bird is entitled to convert
         Convertible Promissory Notes or associated Warrants to the extent that
         such conversion or exercise would cause the aggregate number of shares
         of common stock beneficially owned by either of them to exceed 9.9% of
         the outstanding shares of the common stock following such exercise. The
         Ellen R. Weiner Family Trust disclaims any beneficial ownership of Mr.
         Bird's notes, associated warrants and underlying common stock. Mr. Bird
         disclaims any beneficial ownership of such Trust's notes and associated
         warrants.
(5)      Executive officer.
(6)      Director.
(7)      More-than-5% shareholder.
(8)      Includes options to purchase 2,231,100 restricted common shares at
         $0.38 and options to purchase 2,857,143 restricted common shares at
         $0.21.
(9)      Includes 250,000 stock options exercisable at $1.90 per share , 30,000
         stock options exercisable at $2.56 per share and 1,734,350 stock
         options with an exercise price of $0.38 per share.
(10)     Includes all shares owned by members of Mr. Leung's family and related
         entities plus 10,000 warrants with an exercise price of $3.00, expiring
         on January 11, 2006 and 180,000 warrants at an exercise price of $0.25,
         expiring on July 14, 2006 and 308,725 options with an exercise price of
         $0.38 per share.
(11)     Holders have a contractual 9.9% limitation on the conversion of their
         convertible notes and warrants. The Ellen R. Weiner Family Revocable
         Trust holds notes convertible into 3,800,000 common shares at a $0.20
         conversion price and, upon conversion will receive a warrant to
         purchase 3,800,000 common shares at a $0.20 exercise price. Allan S.
         Bird holds notes convertible into 1,125,000 common shares at a $0.20
         conversion price and, upon conversion, will receive a warrant to
         purchase 1,125,000 common shares at a $0.20 exercise price.
         Accordingly, the shares shown in the table for the Trust and Mr. Bird
         represent the maximum number of shares that could be issued to such
         parties without taking into account the 9.9% limitation. See footnote
         (4) above.
(12)     Includes 568,181 warrants to purchase common stock at an exercise price
         of $0.76 per share, 300,000 warrants with an exercise price of $0.25
         per share associated with a convertible note entered into on May 16,
         2005 and 209,402 conversion shares assuming conversion of such
         convertible note at September 30, 2005,
(13)     Includes 53,885 common shares owned by Mr. Broenniman's wife and
         options to purchase 2,500 shares at an exercise price of $3.00, 3,000
         shares at an exercise price of $1.78 and 514,550 shares at an exercise
         price of $0.38.
(14)     Includes 1,867 stock options with an exercise price of $1.84 and
         514,550 stock options with an exercise price of $0.38.
(15)     Includes 500,000 stock options with an exercise price of $0.23.


                                       45




                            CERTAIN RELATIONSHIPS AND
                              RELATED TRANSACTIONS

         Franklyn S. Barry, Jr., a director and shareholder of Aethlon Medical,
was engaged as a consultant to Aethlon Medical on strategic and business issues
from June 1, 2001 to May 31, 2003 and was paid $60,000 per year providing
advisory services to management on strategic and business issues. Mr. Barry had
been our original President and Chief Executive Officer and served in such
capacities until 2001. When Mr. Barry stepped down as our President and Chief
Executive Officer was owed severance equal to one year salary. The consulting
agreement was in lieu of immediate payment to spread the payment of the course
of the agreement and to ensure that Mr. Barry provided transition consultation
to Mr. Joyce on company practices and maintained and managed relationships with
certain employees and vendors. See "Directors, Executive Officers, Promoters and
Control Persons"" and "Security Ownership of Certain Beneficial Owners and
Management."

         Calvin M. Leung, a director and shareholder of Aethlon Medical, was
previously engaged as a consultant to the Company providing as needed business
advisory services to management, including business development services and
introductions to potential investors and merger candidates, and he and his
affiliates have invested a total of approximately $939,500 in the Company to
date, through equity and convertible debt securities. $448,000 was invested via
convertible promissory notes from November 2001 through May 2002. The notes
accrued interest at rates ranging from 6.75% to 12% per annum. Mr. Leung
invested $300,000 via the exercise of stock options received while our
consultant for which he received 600,000 shares of restricted common stock. Mr.
Leung and his affiliates also invested during 2003 a total of $146,500 in cash
for 586,000 shares of our restricted common stock. Finally, Mr. Leung and his
affiliates invested approximately $45,000 from September 2003 to February 2004
via the exercise of warrants that resulted in the issuance of 180,000 shares of
our restricted common stock. Mr. Leung worked as our consultant from January 7,
2001 to January 7, 2003. We do not expect Mr. Leung to provide consulting
services now that he is a member of our board of directors. He currently owns
2,036,643 common shares, 190,000 warrants to purchase common stock at prices
between $0.25 to $3.00 per share and stock options to purchase 308,725 shares of
common stock at an exercise price of $0.38. (See "Security Ownership of Certain
Beneficial Owners and Management.")

         Certain of our officers and other related parties have advanced us
funds, agreed to defer compensation or paid expenses on our behalf to cover
short-term working capital deficiencies in the aggregate amount of approximately
$1,330,000. Of this amount, we owe Mr. Barry a total of approximately $300,800,
for deferred salary and consulting fees from pre-merger in 1999 through May 2003
and approximately $15,000 from accrued medical benefits. We owe approximately
$69,000 to James Joyce and Associates, a company founded by our current Chief
Executive Officer, for deferred consulting fees on services provided prior to
our merger in 1999. We previously repaid Mr. Barry a total of $25,000 in cash.
Additionally, we owe John Murray, our former Chief Financial Officer, a total of
approximately $25,000 for deferred salary and medical benefits for services
rendered from September 2000 through May 2001. We owe Robert S. Stefanovich, a
former Chief Financial Officer, a total of approximately $91,000 for deferred
salary, vacation and medical benefits for services rendered from July 2001 until
July 2002. Additionally, we owe Dr. Clara Ambrus, the founder of Hemex, Inc.,
approximately $190,500 for services rendered from pre-merger in 1999 through
March 2002. We owe Edward Broenniman, a board member, and Linda Broenniman, his
wife, an aggregate of approximately $119,000 for services rendered prior to our
merger in 1999 and approximately $60,000 for unpaid expenses and advances to
Hemex, Inc. prior to the merger with Aethlon Media. Mr. Broenniman was repaid a
total of $15,000 against this debt. We owe approximately $34,500 to directors
for deferred directors' fees. The remaining approximately $425,327 is accrued
payroll for employees. On September 9, 2005, as previously disclosed on Form
8-K, we issued a stock option to acquire 2,857,143 stock option to our CEO and
Chairman, James A. Joyce, in satisfaction of $300,000 in previously accrued
payroll expense. These non interest-bearing liabilities have been included as
due to related parties in the accompanying financial statements.

         Effective January 1, 2000, we entered into an agreement with Dr. Julian
Ambrus, the son of Dr. Clara Ambrus who was the original founder of Hemex, Inc.
Under this agreement, an invention and related patent rights for a method of
removing HIV and other viruses from the blood using the Hemopurifier(TM) were
assigned to us by the inventors in exchange for (a) a royalty to be paid on
future sales of the patented product or process equal to 8.75% of net sales, as
defined and (b) 12,500 shares of our restricted common stock. Upon the issuance
of the first United States patent relating to the invention, we were obligated
to issue an additional 12,500 shares of common stock to the inventors. If the
market price of our restricted common stock on the date the patent was issued
was below $8 per share, the number of shares to be issued was that amount which

                                       46




equates to $100,000 of market value. On March 4, 2003, the related patent was
issued and as a result, we issued 196,078 shares of our restricted common stock.
Such shares were recorded at par value since the original patent acquisition
purchase transaction had been measured at $100,000 and recorded as "patents" in
the March 2000 consolidated balance sheet. The 196,078 shares merely satisfied a
contingent obligation under the original purchase agreement.

         We believe that the related party transactions above, due to their
related party nature, are not necessarily on terms that would have been obtained
from unaffiliated third parties.


                            DESCRIPTION OF SECURITIES

GENERAL

         Our authorized capital consists of 50,000,000 shares of common stock,
par value $.001 per share (these shares are referred to in this prospectus as
"COMMON SHARES"). As of December 15, 2005, there were issued and outstanding
19,909,016 common shares.

COMMON SHARES

         Our common shareholders are entitled to one vote per share on all
matters to be voted upon by those shareholders. Upon the liquidation,
dissolution, or winding up of our Company, our common shareholders will be
entitled to share ratably in all of the assets which are legally available for
distribution, after payment of all debts and other liabilities. Our common
shareholders have no preemptive, subscription, redemption or conversion rights.
All of our currently outstanding common shares are, and all of our common shares
offered for sale under this prospectus will be, validly issued, fully paid and
non-assessable.

OPTIONS AND WARRANTS CONVERTIBLE INTO COMMON SHARES

         As of December 15, 2005, there were outstanding common share purchase
options entitling the holders to purchase 9,212,785 common shares at a weighted
average exercise price of $0.44 per share and warrants entitling the holders to
purchase up to 8,343,035 common shares at a weighted average exercise price of
$0.40 per share.


                            EQUITY COMPENSATION PLANS

SUMMARY EQUITY COMPENSATION PLAN DATA

         The following table sets forth information compiled on an aggregate
basis as of December 15, 2005 with respect to the various equity compensation
plans, including stand-alone compensation arrangements, under which we have
granted or are authorized to issue equity securities to employees or
non-employees in exchange for consideration in the form of goods or services:


                                                        NUMBER OF                           NUMBER OF SECURITIES
                                                      SECURITIES        WEIGHTED-       REMAINING AVAILABLE FOR
                                                        TO BE            AVERAGE         FUTURE ISSUANCE UNDER
                                                     ISSUED UPON      EXERCISE PRICE   EQUITY COMPENSATION PLANS
                                                      EXERCISE OF     OF OUTSTANDING    (EXCLUDING SECURITIES TO
                                                      OUTSTANDING        OPTIONS,       BE ISSUED UPON EXERCISE
                                                       OPTIONS,          WARRANTS       OF OUTSTANDING OPTIONS,
                                                       WARRANTS         AND RIGHTS      WARRANTS AND RIGHTS) (3)
PLAN CATEGORY                                       OR RIGHTS(1)(2)
- ----------------------------------------------------------------------------------------------------------------
                                                                                                 
Equity compensation plans approved
  by shareholders:                                           32,500            $ 2.65                     467,500

Equity compensation plans not
approved by shareholders(1):                              9,180,285             $0.44                         N/A

                                                   ---------------------------------------------------------------

        Total                                             9,212,785             $0.44                     467,500
                                                   ---------------------------------------------------------------


(1)      The description of the material terms of non-plan issuances of equity
         instruments is discussed in Notes 6 through 9 to the accompanying
         consolidated financial statements for the fiscal year ended March 31,
         2005.
(2)      Net of equity instruments forfeited, exercised or expired. (3) This
         column does not include 1,165,798 shares of common stock that
         remain to be issued under the 2003 Consultant Stock Plan.

                                       47




DESCRIPTION OF EQUITY COMPENSATION PLANS

2000 STOCK OPTION PLAN

         Our 2000 Stock Option Plan (the "Plan"), adopted by the Company in
August 2000, provides for the grant of incentive stock options ("ISOs") to
full-time employees (who may also be Directors) and nonstatutory stock options
("NSOs") to non-employee Directors, consultants, customers, vendors or providers
of significant services. The exercise price of any ISO may not be less than the
fair market value of the Common Stock on the date of grant or, in the case of an
optionee who owns more than 10% of the total combined voting power of all
classes of our outstanding stock, not be less than 110% of the fair market value
on the date of grant. The exercise price, in the case of any NSO, must not be
less than 75% of the fair market value of the Common Stock on the date of grant.
The amount reserved under the Plan is 500,000 shares of common stock issuable
under options.

         CONSULTANT STOCK PLAN

         Our 2003 Consultant Stock Plan (the "Stock Plan"), adopted by the
Company in August 2003, advances the our interests by helping us obtain and
retain the services of persons providing consulting services upon whose
judgment, initiative, efforts and/or services we are substantially dependent, by
offering to or providing those persons with incentives or inducements affording
such persons an opportunity to become owners of our capital stock. Consultants
or advisors are eligible to receive grants under the plan program only if they
are natural persons providing bona fide consulting services to us, with the
exception of any services they may render in connection with the offer and sale
of our securities in a capital-raising transaction, or which may directly or
indirectly promote or maintain a market for our securities.

         We reserved a total of 1,000,000 common shares for issuance under the
Stock Plan in March 2004. In August 2005, we amended our 2003 Consultant Stock
Plan to increase the number of shares of common stock issuable pursuant to the
Stock Plan to 3,000,000 shares of common stock. The Stock Plan provides for the
grants of common stock. No awards may be issued after the ten year anniversary
of the date we adopted the Stock Plan, the termination date for the plan.

         On March 29, 2004, we filed with the SEC a registration statement on
Form S-8 for the purpose of registering 1,000,000 common shares issuable under
the Stock Plan under the Securities Act of 1933. On August 29, 2005 we filed
with the SEC an additional registration statement on Form S-8 for the purpose of
registering an additional 2,000,000 shares of common stock issuable under the
amended Stock Plan.

         STAND-ALONE GRANTS

         From time to time our board of directors grants common share purchase
options or warrants to selected directors, officers, employees, consultants and
advisors in payment of goods or services provided by such persons on a
stand-alone basis outside of any of our formal stock plans. The terms of these
grants are individually negotiated.


                                       48




            MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

DESCRIPTION OF MARKET

    Our common shares are currently quoted on the OTCBB under the symbol "AEMD."
Our Common Stock has had a limited and sporadic trading history. The following
table sets forth the quarterly high and low bid prices for our common shares on
the OTCBB for the periods indicated. The prices set forth below represent
inter-dealer quotations, without retail markup, markdown or commission and may
not be reflective of actual transactions.

                                                            BID PRICE
                                              -------------------------------
PERIOD                                                 HIGH            LOW
- -----------------------------------------------------------------------------

2005:
Third Quarter                                          $   0.25      $   0.18
Second Quarter                                             0.33          0.22
First Quarter                                              0.52          0.25

2004:
Fourth Quarter                                             1.00          0.46
Third Quarter                                              0.95          0.44
Second Quarter                                             1.80          0.48
First Quarter                                              4.25          0.37

2003:
Fourth Quarter                                             0.55          0.36
Third Quarter                                              1.01          0.25
Second Quarter                                             0.60          0.20
First Quarter                                              0.56          0.15

         There are approximately 142 record holders of our Common Stock at
December 15, 2005. The number of registered shareholders includes an estimate of
the number of beneficial owners of common shares held in street name. The
transfer agent and registrar for our common stock is Computershare Trust
Company, located in Denver, Colorado.

DIVIDEND POLICY

         We have never paid any cash dividends on our common shares, and we do
not anticipate that we will pay any dividends with respect to those securities
in the foreseeable future. Our current business plan is to retain any future
earnings to finance the expansion and development of our business. Any future
determination to pay cash dividends will be at the discretion of our board of
directors, and will be dependent upon our financial condition, results of
operations, capital requirements and other factors as our board may deem
relevant at that time.


                              SELLING SHAREHOLDERS

         The following table sets forth the total number of common shares
beneficially owned by each of the selling shareholders as of December 15, 2005,
the total number of common shares they may sell under this prospectus, and the
number of common shares they will own thereafter assuming no other acquisitions
or dispositions of common shares. The number and percentage of shares
beneficially owned before and after the sales is determined in accordance with
Rule 13d-3 and 13d-5 of the Securities Exchange Act, and the information is not
necessarily indicative of beneficial ownership for any other purpose. See
footnote (1) to this table. We believe that each individual or entity named has
sole investment and voting power with respect to the securities indicated as
beneficially owned by them, subject to community property laws, where
applicable, except where otherwise noted.

         The selling shareholders are under no obligation to sell all or any
portion of the common shares offered for sale under this prospectus.
Accordingly, no estimate can be given as to the amount or percentage of our
common shares that will ultimately be held by the selling shareholders upon
termination of sales pursuant to this prospectus.

         The total number of common shares sold under this prospectus may be
adjusted to reflect stock dividends, stock distributions, splits, combinations
or recapitalizations.

                                       49




         Unless otherwise stated below, to our knowledge no selling shareholder
nor any of affiliate of such shareholder has held any position or office with,
been employed by or otherwise has had any material relationship with us or our
affiliates during the three years prior to the date of this prospectus. To our
knowledge, no selling shareholder is a broker-dealer or an affiliate of a
broker-dealer within the meaning of Rule 405.


                                                    COMMON SHARES
                                                        OWNED                                      COMMON SHARES
SELLING SHAREHOLDER                               BEFORE SALES (1)               COMMON                OWNED
                                               ------------------------          SHARES           AFTER SALES (2)
                                               NUMBER        UNDERLYING          OFFERED          ----------------
                                                              WARRANTS         FOR SALE(3)          NUMBER     %
- ------------------------------------------------------------------------------------------------------------------

                                                                                               

Ellen R. Weiner Family Revocable Trust(6)  4,078,070 (5)       3,800,000 (4)     7,878,070          278,070   1.4%

Allan S. Bird                              1,125,000 (7)       1,125,000 (4)     2,250,000               --     --

Christian J. Hoffmann, III                    91,500 (8)          50,000 (4)       100,000           41,500   0.2%

Claypoole Capital, LLC(9)                     25,000 (10)         25,000 (4)        50,000             --       --


- ------------

(1)      Pursuant to Rules 13d-3 and 13d-5 of the Securities Exchange Act,
         beneficial ownership includes any common shares as to which a
         shareholder has sole or shared voting power or investment power, and
         also any common shares which the shareholder has the right to acquire
         within 60 days. There were 19,909,016 common shares outstanding as of
         the applicable date.
(2)      Assumes the sale of all common shares offered under this prospectus.
(3)      Includes all shares underlying warrants and convertible promissory
         notes.
(4)      Includes warrants issuable upon conversion of the convertible
         promissory notes.
(5)      Ellen R. Weiner holds voting and investment control as trustee.
(6)      Includes 3,800,000 shares underlying convertible promissory notes and
         278,070 shares of common stock.
(7)      Includes 1,125,000 shares underlying convertible promissory notes.
(8)      Includes 50,000 shares underlying convertible promissory notes and
         41,500 shares of common stock.
(9)      Christian J. Hoffmann III holds voting and investment control.
(10)     Includes 25,000 shares underlying convertible promissory notes.


                              PLAN OF DISTRIBUTION

       The selling shareholders and any of their pledgees, assignees and
successors-in-interest may, from time to time, sell any or all of their shares
of Common Stock on any stock exchange, market or trading facility on which the
shares are traded or in private transactions. These sales may be at fixed or
negotiated prices. The selling shareholders may use any one or more of the
following methods when selling shares:

* ordinary brokerage transactions andtransactions in which the broker-dealer
solicits purchasers;

* block trades in which the broker-dealer will attempt to sell the shares as
agent but may position and resell a portion of the block as principal to
facilitate the transaction;

* purchases by a broker-dealer as principal and resale by the broker-dealer for
its account;

* an exchange distribution in accordance with the rules of the applicable
exchange;

* privately negotiated transactions;

* shortsales;

* broker-dealers may agree with the Selling Stockholders to sell a specified
number of such shares at a stipulated price per share;

* a combination of any such methods of sale; and

* any other method permitted pursuant to applicable law.

         The selling shareholders may also sell shares under Rule 144 under the
Securities Act of 1933, if available, rather than under this prospectus.
Broker-dealers engaged by the selling shareholders may arrange for other
brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling shareholders (or, if any broker-dealer acts as
agent for the purchaser of shares, from the purchaser) in amounts to be
negotiated. The selling shareholders do not expect these commissions and
discounts to exceed what is customary in the types of transactions involved.

                                       50




         The selling shareholders may from time to time pledge or grant a
security interest in some or all of the Shares or Common Stock or Warrant owned
by them and, if they default in the performance of their secured obligations,
the pledgees or secured parties may offer and sell the shares of common stock
from time to time under this prospectus, or under an amendment to this
prospectus under Rule 424(b)(3) or other applicable provision of the Securities
Act amending the list of selling shareholders to include the pledgee, transferee
or other successors in interest as Selling Stockholders under this prospectus.
The selling shareholders also may transfer the shares of Common Stock in other
circumstances, in which case the transferees, pledgees or other successors in
interest will be the selling beneficial owners for purposes of this prospectus.
The selling shareholders and any broker-dealers or agents that are involved in
selling the shares may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales. In such event, any commissions
received by such broker-dealers or agents and any profit on the resale of the
shares purchased by them may be deemed to be underwriting commissions or
discounts under the Securities Act. The selling shareholders have informed the
Company that it does not have any agreement or understanding, directly or
indirectly, with any person to distribute the Common Stock. The Company is
required to pay all fees and expenses incident to the registration of the
shares. The Company has agreed to indemnify the selling shareholders against
certain losses, claims, damages and liabilities, including liabilities under the
Securities Act.


                  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                     ON ACCOUNTING AND FINANCIAL DISCLOSURE

         The report of Squar, Milner, Reehl & Williamson, LLP on our financial
statements as of and for the years ended March 31, 2005, 2004 and 2003 did not
contain an adverse opinion, or a disclaimer of opinion.


                                 TRANSFER AGENT

         The transfer agent for our common shares is Computershare Trust
Company, Inc., 350 Indiana Street, Suite 800, Golden, Colorado 80401. We act as
our own transfer agent with regard to our outstanding common share purchase
options and warrants.


                                  LEGAL MATTERS

         The validity of the issuance of the common shares to be sold by the
selling shareholders under this prospectus and common share purchase options and
warrants was passed upon for our company by Richardson & Patel LLP. As of
December 15, 2005, Richardson & Patel LLP owns a warrant to purchase 225,000
shares with an exercise price of $0.76 and 445,811 shares of common stock.
Additionally, partners of Richardson & Patel LLP own 836,730 shares of common
stock. The shares and warrant were issued to Richardson & Patel LLP as payment
for services rendered in connection with the representation of Aethlon Medical
in our financings and this registration statement. Additionally, Erick E.
Richardson and Nimish Patel, the principals of Richardson & Patel LLP own a
warrant to purchase 113,636 shares with an exercise price of $0.76 through RP
Capital, LLP.


                                     EXPERTS

         Squar, Milner, Reehl & Williamson, LLP, a registered independent public
accounting firm, have audited the accompanying consolidated balance sheet as of
March 31, 2005 and the related consolidated statements of operations,
stockholders' deficit and cash flows for each of the years in the two-year
period then ended and for the period from January 31, 1984 (Inception) to March
31, 2005 to the extent set forth in their report, and are set forth in this
prospectus in reliance upon such report given upon their authority as experts in
auditing and accounting.


                                       51




     DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
                                  LIABILITIES

         Our Articles of Incorporation permit us to limit the liability of our
directors to the fullest extent permitted under Section 78.037 of the Nevada
General Corporation Law. As permitted by Section 78.037 of the Nevada General
Corporation Law, our Bylaws and Articles of Incorporation also include
provisions that eliminate the personal liability of each of its officers and
directors for any obligations arising out of any acts or conduct of such officer
or director performed for or on behalf of the Company. To the fullest extent
allowed by Section 78.751 of the Nevada General Corporation Law, we will defend,
indemnify and hold harmless its directors or officers from and against any and
all claims, judgments and liabilities to which each director or officer becomes
subject to in connection with the performance of his or her duties and will
reimburse each such director or officer for all legal and other expenses
reasonably incurred in connection with any such claim of liability. However, we
will not indemnify any officer or director against, or reimburse for, any
expense incurred in connection with any claim or liability arising out of the
officer's or director's own negligence or misconduct in the performance of duty.

         The provisions of our Bylaws and Articles of Incorporation regarding
indemnification are not exclusive of any other right we have to indemnify or
reimburse our officers or directors in any proper case, even if not specifically
provided for in our Articles of Incorporation or Bylaws.

         We believe that the indemnity provisions contained in our bylaws and
the limitation of liability provisions contained in our certificate of
incorporation are necessary to attract and retain qualified persons for these
positions. No pending material litigation or proceeding involving our directors,
executive officers, employees or other agents as to which indemnification is
being sought exists, and we are not aware of any pending or threatened material
litigation that may result in claims for indemnification by any of our directors
or executive officers.

         Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, we have been informed that, in the opinion of the
SEC, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.


                           REPORTS TO SECURITY HOLDERS

         We file annual and quarterly reports with the SEC. In addition, we file
additional reports for matters such as material developments or changes. Our
executive officers, directors and beneficial owners of 10% or more of our common
shares also file reports relative to the acquisition or disposition of our
common shares or acquisition, disposition or exercise of our common share
purchase options or warrants. These filings are a matter of public record and
any person may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers, including us, that file electronically with
the SEC. We are not required to deliver an annual report with this prospectus,
nor will we do so. However, you may obtain a copy of our annual report, or any
of our other public filings, by contacting the Company or from the SEC as
mentioned above.


                       WHERE YOU CAN FIND MORE INFORMATION

         We are subject to the informational requirements of the Securities
Exchange Act and must file reports, proxy statements and other information with
the SEC. The reports, information statements and other information we file with
the Commission can be inspected and copied at the Commission Public Reference
Room, 450 Fifth Street, N.W. Washington, D.C. 20549. You may obtain information
on the operation of the Public Reference Room by calling the SEC at (800)
SEC-0330. The Commission also maintains a Web site (http://www.sec.gov) that
contains reports, proxy, and information statements and other information
regarding registrants, like us, which file electronically with the Commission.
Our headquarters are located at 3030 Bunker Hill Street, Suite 4000, San Diego,
CA 92109. Our phone number at that address is (858) 459-7800. Our Web site is
maintained at http://www.aethlonmedical.com.

                                       52




         This prospectus constitutes a part of a registration statement on Form
SB-2 filed by us with the Commission under the Securities Act of 1933. As
permitted by the rules and regulations of the Commission, this prospectus omits
certain information that is contained in the registration statement. We refer
you to the registration statement and related exhibits for further information
with respect to us and the securities offered. Statements contained in the
prospectus concerning the content of any documents filed as an exhibit to the
registration statement (or otherwise filed with the Commission) are not
necessarily complete. In each instance you may refer to the copy of the filed
document. Each statement is qualified in its entirety by such reference.

         No person is authorized to give you any information or make any
representation other than those contained or incorporated by reference in this
prospectus. Any such information or representation must not be relied upon as
having been authorized. Neither the delivery of this prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that there
has been no change in our affairs since the date of the prospectus.


                                       53




                     AETHLON MEDICAL, INC. AND SUBSIDIARIES
                          (A DEVELOPMENT STAGE COMPANY)


                          INDEX TO FINANCIAL STATEMENTS


                       CONSOLIDATED FINANCIAL STATEMENTS

                            YEAR ENDED MARCH 31, 2005


Report of Independent Registered Public Accounting Firm...................  F-1

Consolidated Balance Sheet ................................................ F-2

Consolidated Statements of Operations ..................................... F-3

Consolidated Statements of Stockholders' Deficit........................... F-4

Consolidated Statements of Cash Flows ..................................... F-10

Notes to Consolidated Financial Statements................................. F-11



             CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

                      SIX MONTHS ENDED SEPTEMBER 30, 2005


Condensed Consolidated Balance Sheet (Unaudited) .......................... F-38

Condensed Consolidated Statements of Operations (Unaudited) ............... F-39

Condensed Consolidated Statements of Cash Flows (Unaudited)................ F-40

Notes to the Condensed Consolidated Financial Statements................... F-42


                                       54





REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders
Aethlon Medical, Inc. and Subsidiaries

We have audited the accompanying consolidated balance sheet of Aethlon Medical,
Inc. and Subsidiaries (the "Company"), a development stage company, as of March
31, 2005 and the related consolidated statements of operations, stockholders'
deficit and cash flows for each of the years in the two-year period then ended
and for the period from January 31, 1984 (Inception) to March 31, 2005. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aethlon Medical,
Inc. and Subsidiaries as of March 31, 2005 and the consolidated results of their
operations and their cash flows for each of the years in the two-year period
then ended and for the period from January 31, 1984 (Inception) to March 31,
2005, in conformity with accounting principles generally accepted in the United
States of America.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. At March 31, 2005, the
Company has negative working capital of approximately $3,349,000 and a deficit
accumulated during the development stage of approximately $19,142,000. As
discussed in Note 1 to the consolidated financial statements, a significant
amount of additional capital will be necessary to advance the development of the
Company's products to the point at which they may become commercially viable.
These conditions, among others, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans regarding these
matters are also described in Note 1. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

/S/ SQUAR, MILNER, REEHL & WILLIAMSON, LLP

JUNE 27, 2005
NEWPORT BEACH, CALIFORNIA


                                      F-1







                           AETHLON MEDICAL, INC. AND SUBSIDIARIES
                              (A Development Stage Company)
                               CONSOLIDATED BALANCE SHEET
                                     March 31, 2005

                                         ASSETS

    CURRENT ASSETS

           Cash                                                    $      8,625
           Prepaid expenses                                              10,188
                                                                   ------------

    TOTAL CURRENT ASSETS                                                 18,813
                                                                   ------------

           Property and equipment, net                                   30,366
           Patents, net                                                 213,923
           Other assets                                                  37,250
                                                                   ------------

    TOTAL NONCURRENT ASSETS                                             281,539
                                                                   ------------

           TOTAL ASSETS                                            $    300,352
                                                                   ============

                     LIABILITIES AND STOCKHOLDERS' DEFICIT

    CURRENT LIABILITIES

           Accounts payable and accrued liabilities                $  1,307,512
           Due to related parties                                     1,567,502
           Notes payable, net of discounts                              492,309
                                                                   ------------

    TOTAL CURRENT LIABILITIES                                         3,367,323
                                                                   ------------

    COMMITMENTS AND CONTINGENCIES

    STOCKHOLDERS' DEFICIT

           Common stock, par value of $0.001, 25,000,000 shares
             authorized; 17,014,696 issued and outstanding               17,015
           Additional paid in capital (as restated)                  16,058,278
           Deficit accumulated during the
             development stage (as restated)                        (19,142,264)
                                                                   ------------

    TOTAL STOCKHOLDERS' DEFICIT                                      (3,066,971)
                                                                   ------------

           TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT             $    300,352
                                                                   ============

         SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS


                                       F-2






                             AETHLON MEDICAL, INC. AND SUBSIDIARIES
                                  (A Development Stage Company)
                               CONSOLIDATED STATEMENTS OF OPERATIONS
                     For the Years Ended March 31, 2005 and 2004 and For the
                    Period January 31,1984 (Inception) Through March 31, 2005

    -------------------------------------------------------------------------------------


                                                                       January 31, 1984
                                                                      (Inception) Through
                                          2005              2004          March 31, 2005
                                      ------------      ------------      ------------
                                                                 
Grant income                          $         --      $         --      $  1,424,012
Subcontract income                              --                --            73,746
Sale of research and development                --                --            35,810
                                      ------------      ------------      ------------
                                                --                --         1,533,568
OPERATING EXPENSES
Professional fees                          748,837           339,787         4,386,541
Payroll and related                      1,000,324           417,486         6,570,834
General and administrative                 434,216           238,276         3,945,579
Impairment of intangible assets                 --                --         1,231,531
                                      ------------      ------------      ------------
                                         2,183,377           995,549        16,134,485
                                      ------------      ------------      ------------
OPERATING LOSS                          (2,183,377)         (995,549)      (14,600,917)

OTHER (INCOME) EXPENSE
Interest expense                           (86,426)          523,249         4,421,155
Interest income                                 --                --           (17,415)
Other                                           --                --           137,607
                                      ------------      ------------      ------------
                                           (86,426)          523,249         4,541,347
                                      ------------      ------------      ------------
NET LOSS                              $ (2,096,951)     $ (1,518,798)     $(19,142,264)
                                      ============      ============      ============
Basic and diluted loss
  per common share                    $      (0.15)     $      (0.19)
                                      ============      ============
Weighted average number of common
  shares outstanding                    14,037,341         8,181,612
                                      ============      ============


                SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                              F-3







- --------------------------------------------------------------------------------------------------------------------------------
                                              AETHLON MEDICAL, INC. AND SUBSIDIARIES
                                                  (A Development Stage Company)
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                         FOR THE YEARS ENDED MARCH 31, 2005 AND 2004 AND
                                FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2005
 --------------------------------------------------------------------------------------------------------------------------------


                                                                                               ACCUMULATED
                                                    COMMON STOCK               ADDITIONAL          DURING             TOTAL
                                            -----------------------------       PAID IN         DEVELOPMENT      STOCKHOLDERS'
                                               SHARES           AMOUNT          CAPITAL            STAGE        EQUITY (DEFICIT)
                                            ------------     ------------     ------------      ------------      ------------
Balance, January 31, 1984 (Inception)                 --     $         --     $         --      $         --      $         --

Common stock issued for cash at $1
per share                                         22,000               22           26,502                --            26,524

Common stock issued for cash at $23
per share                                          1,100                1           24,999                --            25,000

Common stock issued for cash at $86
per share                                            700                1           59,999                --            60,000

Common stock issued for cash at $94
per share                                            160                1           14,999                --            15,000

Common stock issued for cash at $74
per share                                            540                1           39,999                --            40,000

Common stock issued for cash at $250
per share                                          4,678                5        1,169,495                --         1,169,500

Capital contributions                                 --               --          521,439                --           521,439

Common stock issued for compensation
at $103 per share                                  2,600                3          267,403                --           267,406

Conversion of due to related parties
to common stock at $101 per share                  1,120                1          113,574                --           113,575

Conversion of due to related parties
to common stock at $250 per share                  1,741                2          435,092                --           435,094

Effect of reorganization                       2,560,361            2,558           (2,558)               --                --

Common stock issued in connection with
employment contract at $8 per share               65,000               65          519,935                --           520,000

Common stock issued in connection with
the acquisition of patents at $8 per
share                                             12,500               13           99,987                --           100,000

Warrants issued to note holders in
connection with notes payable                         --               --          734,826                --           734,826

Warrants issued for services                          --               --            5,000                --             5,000

Net loss                                              --               --               --        (4,746,416)       (4,746,416)

BALANCE, MARCH 31, 2000                        2,672,500            2,673        4,030,691        (4,746,416)         (713,052)

Common stock and options issued in
connection with acquisition of Cell
Activation, Inc. at $7.20 per share               99,152               99        1,067,768                --         1,067,867

Warrants issued to note holders in
connection with notes payable                         --               --          218,779                --           218,779

Warrants issued to promoter in
connection with notes payable                         --               --          298,319                --           298,319

Beneficial conversion feature of
convertible notes payable                             --               --          150,000                --           150,000

Warrants issued to promoter in
connection with convertible notes
payable                                               --               --          299,106                --           299,106

Options issued to directors for
services as board members                             --               --           14,163                --            14,163

Options and warrants issued for
services                                              --               --          505,400                --           505,400

Common stock issued for services at
$3 per share                                       5,500                5           16,495                --            16,500

Common stock issued for cash at $1
per share                                        100,000              100           99,900                --           100,000

Net loss                                              --               --               --        (4,423,073)       (4,423,073)
                                            ------------     ------------     ------------      ------------      ------------

BALANCE, MARCH 31, 2001                        2,877,152     $      2,877     $  6,700,621      $ (9,169,489)     $ (2,465,991)


- --------------------------------------------------------------------------------------------------------------------------------
                                 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                          F-4





- --------------------------------------------------------------------------------------------------------------------------------
                                              AETHLON MEDICAL, INC. AND SUBSIDIARIES
                                                  (A Development Stage Company)
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                         FOR THE YEARS ENDED MARCH 31, 2005 AND 2004 AND
                          FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2005 (CONTINUED)
 --------------------------------------------------------------------------------------------------------------------------------


                                                                                               ACCUMULATED
                                                    COMMON STOCK               ADDITIONAL          DURING             TOTAL
                                            -----------------------------       PAID IN         DEVELOPMENT      STOCKHOLDERS'
                                               SHARES           AMOUNT          CAPITAL            STAGE        EQUITY (DEFICIT)
                                            ------------     ------------     ------------      ------------      ------------
BALANCE, MARCH 31, 2001                        2,877,152     $      2,877     $  6,700,621      $ (9,169,489)     $ (2,465,991)

Common stock, warrants and options
issued for accounts payable and
accrued liabilities                               21,750               22          243,353                --           243,375

Common stock issued for services at
$2.65 per share                                    6,038                6           15,994                --            16,000

Common stock issued for cash at $1.00
per share, net of issuance costs of
$41,540 paid to a related party                  730,804              731          688,533                --           689,264

Common stock issued for services at
$2.75 per share                                   10,000               10           27,490                --            27,500

Common stock issued in connection with
license agreement at $3.00 per share               6,000                6           17,994                --            18,000

Common stock issued to holder of
convertible notes payable at $3.00
per share                                         70,586               71          211,687                --           211,758

Options issued to directors for
services as board members                             --               --            7,459                --             7,459

Common stock issued for cash at $1.50
per share, net of issuance costs
of $2,500                                         16,667               17           22,483                --            22,500

Beneficial conversion feature of
convertible notes payable                             --               --          185,000                --           185,000

Common stock issued for conversion of
convertible notes payable and accrued
interest at an average price of
$1.24 per share                                  134,165              134          166,352                --           166,486

Common stock issued for services at
$2.72 per share                                    9,651               10           26,240                --            26,250

Options issued to consultant for
services                                              --               --          562,000                --           562,000

Common stock and warrants for services
at $1.95 per share                                62,327               62          161,475                --           161,537

Common stock issued for services at
$1.90 per share                                    9,198                9           17,491                --            17,500

Stock options exercised for cash                 400,000              400          199,600                --           200,000

Warrants issued to note holders for
90-day forebearance                                   --               --          118,000                --           118,000

Common stock and warrants issued to
note holders and vendors in the
debt-to-equity conversion program at
$1.25 per share                                  816,359              816        1,623,635                --         1,624,451

Other warrant transactions                            --               --          (32,715)               --           (32,715)

Net loss                                              --               --               --        (3,995,910)       (3,995,910)
                                            ------------     ------------     ------------      ------------      ------------

BALANCE - MARCH 31, 2002                       5,170,697     $      5,171     $ 10,962,692      $(13,165,399)     $ (2,197,536)
- --------------------------------------------------------------------------------------------------------------------------------
                                 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                             F-5





- --------------------------------------------------------------------------------------------------------------------------------
                                              AETHLON MEDICAL, INC. AND SUBSIDIARIES
                                                  (A Development Stage Company)
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                         FOR THE YEARS ENDED MARCH 31, 2005 AND 2004 AND
                          FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2005 (CONTINUED)
 --------------------------------------------------------------------------------------------------------------------------------


                                                                                               ACCUMULATED
                                                    COMMON STOCK               ADDITIONAL          DURING             TOTAL
                                            -----------------------------       PAID IN         DEVELOPMENT      STOCKHOLDERS'
                                               SHARES           AMOUNT          CAPITAL            STAGE        EQUITY (DEFICIT)
                                            ------------     ------------     ------------      ------------      ------------
BALANCE - MARCH 31, 2002                       5,170,697     $      5,171     $ 10,962,692      $(13,165,399)     $ (2,197,536)

Proceeds from the issuance of common
stock at $0.50 per share in connection
with the exercise of options                     200,000              200           99,800                --           100,000

Interest expense related to beneficial
conversion feature                                    --               --          150,000                --           150,000

Pro-rata value assigned to warrants
issued in connection with conversion of
accounts payable                                      --           71,000               --            71,000

Pro-rata value assigned to warrants
issued in connection with note payable                --               --           30,000                --            30,000

Issuance of common stock at $1.25 per
share in connection with the conversion
of accounts payable                              150,124              150          187,505                --           187,655

Issuance of common stock at $1.25 per
share in connection with the conversion
of notes payable                                 420,000              420          104,580                --           105,000

Estimated fair market value of options
issued for services                                   --               --          114,000                --           114,000

Issuance of common stock at $0.25 per
share for cash                                   461,600              462          114,938                --           115,400

Issuance of common stock at $0.26 per
share for cash                                    19,230               19            4,981                --             5,000

Issuance of common stock at $1.25 per
share for cash                                     8,000                8            9,992                --            10,000

Issuance of common stock at $0.65 per
share for services                                69,231               69           44,931                --            45,000

Issuance of common stock at $0.51 per
share for services                               196,078              196           99,804                --           100,000

Adjustment booked                                     --               --         (100,000)          100,000                --

Net loss                                              --               --               --        (2,461,116)       (2,461,116)
                                            ------------     ------------     ------------      ------------      ------------

BALANCE - MARCH 31, 2003                       6,694,960     $      6,695     $ 11,894,223      $(15,526,515)     $ (3,625,597)
- --------------------------------------------------------------------------------------------------------------------------------
                                 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                             F-6





- --------------------------------------------------------------------------------------------------------------------------------
                                              AETHLON MEDICAL, INC. AND SUBSIDIARIES
                                                  (A Development Stage Company)
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                         FOR THE YEARS ENDED MARCH 31, 2005 AND 2004 AND
                          FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2005 (CONTINUED)
 --------------------------------------------------------------------------------------------------------------------------------


                                                                                               ACCUMULATED
                                                    COMMON STOCK               ADDITIONAL          DURING             TOTAL
                                            -----------------------------       PAID IN         DEVELOPMENT      STOCKHOLDERS'
                                               SHARES           AMOUNT          CAPITAL            STAGE        EQUITY (DEFICIT)
                                            ------------     ------------     ------------      ------------      ------------
BALANCE - MARCH 31, 2003                       6,694,960     $      6,695     $ 11,894,223      $(15,526,515)     $ (3,625,597)

Proceeds from the issuance of common
stock at $0.25 per share in connection
with the exercise of warrants                    540,000              540          134,460                --           135,000

Issuance of common stock at $0.25 per
share in connection with the conversion of
notes payable, including interest
of $15,099                                       300,397              300           74,799                --            75,099

Issuance of common stock at $0.35 per
share in connection with the conversion of
notes payable, including interest
of $59,827                                       813,790              814          284,013                --           284,827

Issuance of common stock at $0.50 per
share in connection with the conversion of
notes payable, including interest
of $509                                           11,017               11            5,498                --             5,509

Issuance of common stock at $0.42 per
share in connection with the conversion of
notes payable, including interest
of $696                                           13,725               14            5,682                --             5,696

Issuance of common stock at $0.65 per
share in connection with the conversion of
notes payable, including interest
of $5,088                                         27,059               27           17,561                --            17,588

Issuance of common stock at $0.25 per
share in connection with the conversion of
notes payable, including interest
of $15,416                                       461,667              462          114,954                --           115,416

Issuance of common stock at $0.25 per
share for cash                                 1,226,000            1,226          305,274                --           306,500

Issuance of common stock at $0.30 per
share for cash                                   180,000              180           53,820                --            54,000

Issuance of common stock at $0.525 per
share for cash                                    40,000               40           20,960                --            21,000

Issuance of common stock at $1.125 per
share for cash                                     5,000                5            5,620                --             5,625

Issuance of common stock at $0.25 per
share for services                                10,000               10            2,490                --             2,500

Issuance of common stock at $0.34 per
share for services                                73,529               73           24,927                --            25,000

Issuance of common stock at $0.40 per
share for services                                62,000               62           24,763                --            24,825

Issuance of common stock at $0.45 per
share for services                               185,185              185           83,148                --            83,333

Issuance of common stock at $0.50 per
share for services                                 5,000                5            2,495                --             2,500

Interest expense related to beneficial
conversion feature                                    --               --          324,800                --           324,800

Net loss                                              --               --               --        (1,518,798)       (1,518,798)
                                            ------------     ------------     ------------      ------------      ------------

BALANCE - MARCH 31, 2004                      10,649,329     $     10,649     $ 13,379,487      $(17,045,313)     $ (3,655,177)
- --------------------------------------------------------------------------------------------------------------------------------
                                 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                             F-7





- --------------------------------------------------------------------------------------------------------------------------------
                                              AETHLON MEDICAL, INC. AND SUBSIDIARIES
                                                  (A Development Stage Company)
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                         FOR THE YEARS ENDED MARCH 31, 2005 AND 2004 AND
                          FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2005 (CONTINUED)
 --------------------------------------------------------------------------------------------------------------------------------


                                                                                               ACCUMULATED
                                                    COMMON STOCK               ADDITIONAL          DURING             TOTAL
                                            -----------------------------       PAID IN         DEVELOPMENT      STOCKHOLDERS'
                                               SHARES           AMOUNT          CAPITAL            STAGE        EQUITY (DEFICIT)
                                            ------------     ------------     ------------      ------------      ------------
BALANCE - MARCH 31, 2004                      10,649,329     $     10,649     $ 13,379,487      $(17,045,313)     $ (3,655,177)

Proceeds from the issuance of common
stock at $0.25 per share in connection
with the exercise of warrants                  1,126,564            1,127          280,515                --           281,642

Issuance of common stock at $0.44 per
share for cash                                 1,415,909            1,416          621,584                --           623,000

Issuance of common stock at $0.25 per
share for cash                                    40,233               40            9,960                --            10,000

Issuance of common stock at $0.28 per
share for cash                                    35,947               36            9,964                --            10,000
Issuance of common stock at $0.29 per
share for cash                                    69,431               69           19,931                --            20,000

Issuance of common stock at $0.32 per
share for cash                                    94,449               94           29,906                --            30,000

Issuance of common stock at $0.33 per
share for cash                                    60,620               61           19,939                --            20,000

Issuance of common stock at $0.35 per
share for cash                                   172,824              173           59,826                --            59,999

Issuance of common stock at $0.36 per
share for cash                                   223,756              224           79,776                --            80,000

Issuance of common stock at $0.37 per
share for cash                                   108,079              108           39,892                --            40,000

Issuance of common stock at $0.38 per
share for cash                                    26,549               27            9,973                --            10,000

Issuance of common stock at $0.39 per
share for cash                                    51,748               52           19,948                --            20,000

Issuance of common stock at $0.40 per
share for cash                                    25,233               25            9,975                --            10,000

Issuance of common stock at $0.42 per
share for cash                                   143,885              144           59,857                --            60,001

Issuance of common stock at $0.43 per
share for cash                                    70,467               70           29,930                --            30,001

Issuance of common stock at $0.45 per
share for cash                                    22,455               22            9,978                --            10,000

Issuance of common stock at $0.46 per
share for cash                                    43,944               44           19,956                --            20,000

Issuance of common stock at $0.47 per
share for cash                                   128,836              129           59,872                --            60,001

Issuance of common stock at $0.52 per
share for cash                                    95,502               96           49,904                --            49,999

Issuance of common stock with warrants
at $0.36 per unit for cash                        55,556               56           19,944                --            20,000

Issuance of common stock at $0.27 per
share for cash                                    90,000               90           24,210                --            24,300

Issuance of common stock at $0.50 per
share for cash                                     3,000                3            1,497                --             1,500

Issuance of common stock to Fusion
Capital for "commitment" shares                   50,000               50              (50)               --                --


- --------------------------------------------------------------------------------------------------------------------------------
                                 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                             F-8





- --------------------------------------------------------------------------------------------------------------------------------
                                              AETHLON MEDICAL, INC. AND SUBSIDIARIES
                                                  (A Development Stage Company)
                                         CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
                                         FOR THE YEARS ENDED MARCH 31, 2005 AND 2004 AND
                          FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2005 (CONTINUED)
 --------------------------------------------------------------------------------------------------------------------------------


                                                                                               ACCUMULATED
                                                    COMMON STOCK               ADDITIONAL          DURING             TOTAL
                                            -----------------------------       PAID IN         DEVELOPMENT      STOCKHOLDERS'
                                               SHARES           AMOUNT          CAPITAL            STAGE        EQUITY (DEFICIT)
                                            ------------     ------------     ------------      ------------      ------------
Issuance of common stock to Fusion
Capital for fees                                 418,604              419             (419)               --                (0)

Issuance of common stock at $0.34 per
share in connection with the conversion of
notes payable, including interest
of $38,371                                       479,513              480          162,891                --           163,371

Issuance of common stock at $0.44 per
share in connection with the conversion
of notes payable                                 113,636              114           49,886                --            50,000

Issuance of common stock at $0.25 per
share in connection with the conversion
of notes payable                                  80,000               80           19,920                --            20,000

Issuance of common stock at $0.49 per
share in connection with the conversion
of notes payable                                 174,606              175           85,382                --            85,557

Issuance of common stock at $1.75 per
share for services                                17,143               17           29,983                --            30,000

Issuance of common stock at $0.44 per
share for services                               265,273              265          116,455                --           116,720

Issuance of common stock at $0.70 per
share for services                                10,715               11            7,489                --             7,500

Issuance of common stock at $0.73 per
share for services                                 6,850                7            4,993                --             5,000

Issuance of common stock at $0.55 per
share for services                                46,364               46           25,454                --            25,500

Issuance of common stock at $0.25 per
share for services                               165,492              165           41,208                --            41,373

Issuance of common stock at $0.45 per
share for services                                28,377               28           12,741                --            12,769

Issuance of common stock at $0.50 per
share for services for deferred
consulting services                               60,000               60              (60)               --                --

Issuance of common stock at $0.49 per
share for services                                25,087               25           12,318                --            12,343

Issuance of common stock at $0.45 per
share for services for deferred
consulting services                               66,666               67              (67)               --                --

Issuance of common stock at $0.37 per
share for services                                13,369               13            4,987                --             5,000

Issuance of common stock at $0.42 per
share for services                                19,231               19            7,981                --             8,000

Issuance of common stock at $0.39 per
share for services                                18,042               18            6,982                --             7,000


Issuance of common stock at $0.32 per
share for services                               162,678              163           52,382                --            52,545

Issuance of common stock at $0.31 per
share for services                                16,234               16            4,984                --             5,000

Issuance of common stock at $0.39 per
share for employee bonus                          22,500               22            8,754                --             8,776

Debt discount on debt issued with
detachable warrants                                   --               --           84,000                --            84,000

Amortization of deferred consulting
fees                                                  --               --           30,000                --            30,000

Intrinsic value of options issued to
directors                                             --               --          424,262                --           424,262

Net loss                                              --               --               --        (2,096,951)       (2,096,951)
                                            ------------     ------------     ------------      ------------      ------------

BALANCE - MARCH 31, 2005                      17,014,696     $     17,015     $ 16,058,278      $(19,142,264)     $ (3,066,971)
                                            ============     ============     ============      ============      ============


- --------------------------------------------------------------------------------------------------------------------------------
                                 SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                                                             F-9







                                           AETHLON MEDICAL, INC. AND SUBSIDIARIES
                                                (A DEVELOPMENT STAGE COMPANY)
                                            CONSOLIDATED STATEMENTS OF CASH FLOWS
                                       FOR THE YEARS ENDED MARCH 31, 2005 AND 2004 AND
                             FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH MARCH 31, 2005
 ---------------------------------------------------------------------------------------------------------------------------


                                                                                                            January 31, 1984
                                                                                                          (Inception) Through
                                                                             2005              2004          March 31, 2005
                                                                         ------------      ------------      --------------
Cash flows from operating activities:
     Net loss                                                            $ (2,096,951)     $ (1,518,798)     $  (19,242,264)
     Adjustments to reconcile net loss to net cash used in
       operating activities:
          Depreciation and amortization                                        39,836           127,000             949,752
          Amortization of deferred consulting fees                             30,000                --              30,000
          Gain of sale of property and equipment                                   --                --             (13,065)
          Fair market value of warrants issued in connection
            with accounts payable and debt related costs                           --                --           2,715,736
          Fair market value of common stock, warrants and
            options issued for services and interest                          339,027           138,158           2,607,619
          Intrinsic value of stock options issued
            to directors                                                      424,262                --             424,262
          Amortization of debt discount                                        38,809           324,800             848,609
          Beneficial conversion feature of convertible notes payable               --                --             334,304
          Impairment of patents and patents pending                                --                --             897,227
          Impairment of goodwill                                                   --                --             217,223

          Changes in operating assets and liabilities:
     Prepaid expenses                                                          (4,606)            4,728             151,349
     Other assets                                                             (16,845)          (14,800)            (37,250)
     Accounts payable and accrued liabilities                                (206,943)          138,398           1,632,226
     Due to related parties                                                  (105,955)          258,458           1,501,003
                                                                         ------------      ------------      --------------

     Net cash used in operating activities                                 (1,559,366)         (542,056)         (6,983,269)
                                                                         ------------      ------------      --------------

Cash flows from investing activities:
     Purchases of property and equipment                                      (30,070)           (4,782)           (244,236)
     Patents and patents pending                                                   --                --            (352,833)
     Proceeds from the sale of property and equipment                              --                --              17,065
     Cash of acquired company                                                      --                --              10,728
                                                                         ------------      ------------      --------------

     Net cash used in investing activities                                    (30,070)           (4,782)           (569,276)
                                                                         ------------      ------------      --------------
Cash flows from financing activities:
     Net proceeds from the issuance of notes payable                          130,000                --           1,610,000
     Principal repayments of notes payable                                    (22,500)         (180,000)           (212,500)
     Proceeds from the issuance of convertible notes payable                       --           200,000             998,000
     Net proceeds from the issuance of common stock                         1,488,942           522,125           5,165,670
                                                                         ------------      ------------      --------------

     Net cash provided by financing activities                              1,596,442           542,125           7,561,170
                                                                         ------------      ------------      --------------

Net increase (decrease) in cash                                                 7,006            (4,713)              8,625

Cash at beginning of period                                                     1,619             6,332                  --
                                                                         ------------      ------------      --------------

Cash at end of period                                                    $      8,625             1,619      $        8,625
                                                                         ============      ============      ==============

Supplemental disclosure of cash flow information
- - Cash paid during the period for:
          Interest                                                       $     34,766      $     13,000             255,258
                                                                         ============      ============      ==============
          Income taxes                                                   $         --      $      1,180              13,346
                                                                         ============      ============      ==============

Supplement schedule of noncash investing and financing activities:

Debt and accrued interest converted to common stock                      $    318,925      $    407,500           2,367,019
                                                                         ============      ============      ==============
Debt discount on notes payable issued with
  detachable warrants                                                    $     84,000      $         --      $           --
                                                                         ============      ============      ==============
Issuance of common stock, warrants and options for
  accounts payable                                                       $         --      $         --             512,816
                                                                         ============      ============      ==============
Issuance of common stock in connection with license
  agreements                                                             $         --      $         --              18,000
                                                                         ============      ============      ==============
Net assets of entities acquired in exchange for
  equity securities                                                      $         --      $         --           1,597,867
                                                                         ============      ============      ==============
Debt placement fees paid by issuance of warrants                         $         --      $         --             843,538
                                                                         ============      ============      ==============
Patent pending acquired for 12,500 shares of common stock                $         --      $         --             100,000
                                                                         ============      ============      ==============
Common stock issued for prepaid expenses                                 $         --      $         --             161,537
                                                                         ============      ============      ==============


- ---------------------------------------------------------------------------------------------------------------------------
                              SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.


                                                            F-10






AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Aethlon Medical, Inc. ("Aethlon") engages in the research and development of a
medical device known as the Hemopurifier (TM) that removes harmful substances
from the blood. Aethlon is in the development stage on the Hemopurifier(TM) and
significant research and testing are still needed to reach commercial viability.
Any resulting medical device or process will require approval by the U.S. Food
and Drug Administration ("FDA") or the regulatory agency of any foreign country
where it intends to sell its device. Aethlon has not yet begun efforts to obtain
any FDA approval, which may take several years, but it intends to initiate human
trials in India to obtain regulatory approval there. Since many of Aethlon's
patents were issued in the 1980's, some have expired and other are scheduled to
expire in the near future. Thus, some patents may expire before FDA approval or
approval in a foreign country, if any, is obtained. However, the Company
believes that certain patent applications and/or other patents issued more
recently will help protect the proprietary nature of the Hemopurifier(TM)
treatment technology.

Aethlon is classified as a development stage enterprise under accounting
principles generally accepted in the United States of America ("GAAP"), and has
not generated revenues from its planned principal operations.

Aethlon's common stock is quoted on the Over-the-Counter Bulletin Board
administered by the National Association of Securities Dealers ("OTCBB") under
the symbol "AEMD."

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
Aethlon Medical, Inc. and its inactive legal wholly-owned subsidiaries Aethlon,
Inc., Hemex, Inc., Syngen Research, Inc. and Cell Activation, Inc.(hereinafter
collectively referred to as the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.

GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates, among other
things, the realization of assets and satisfaction of liabilities in the
ordinary course of business. The Company has negative working capital of
approximately $3,349,000, a deficit accumulated during the development stage of
approximately $19,142,000 at March 31, 2005 and is in default on certain debt
(see Notes 7 and 8), which among other matters, raises substantial doubt about
its ability to continue as a going concern. A significant amount of additional
capital will be necessary to advance the development of the Company's products
to the point at which they may become commercially viable. The Company intends
to fund operations through debt and/or equity financing arrangements, which
management believes may be insufficient to fund its capital expenditures,
working capital and other cash requirements (consisting of accounts payable,
accrued liabilities, amounts due to related parties and amounts due under
various notes payable) for the fiscal year ending March 31, 2006. Therefore, the
Company will be required to seek additional funds to finance its long-term
operations.


                                      F-11





AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The Company is currently addressing its liquidity issue by continually seeking
investment capital through the public markets, specifically, through private
placement of common stock and a common stock purchase agreement with an investor
that has committed to buy up to an additional $6,000,000 of the Company's common
stock over a 30-month period, that commenced, at the Company's election, when
the Securities Exchange Commission (the "SEC") declared effective on December 7,
2004 a registration statement covering such shares. However, no assurance can be
given that the Company will receive any funds in addition to the funds it has
received to date under such agreement and there is no guarantee that these
strategies will enable the Company to meet its obligations for the foreseeable
future. The successful outcome of future activities cannot be determined at this
time and there is no assurance that, if achieved, the Company will have
sufficient funds to execute its intended business plan or generate positive
operating results.

The consolidated financial statements do not include any adjustments related to
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.

RISKS AND UNCERTAINTIES

The Company operates in an industry that is subject to intense competition,
government regulation and rapid technological change. The Company's operations
are subject to significant risk and uncertainties including financial,
operational, technological, regulatory and other risks associated with a
development stage company, including the potential risk of business failure.

USE OF ESTIMATES

The Company prepares its consolidated financial statements in conformity with
GAAP, which requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting periods. Significant
estimates made by management include, among others, realization of long-lived
assets and valuation of deferred tax assets. Actual results could differ from
those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards ("SFAS") No. 107, "DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS," requires disclosure of fair value
information about financial instruments when it is practicable to estimate that
value. The carrying amount of the Company's cash, accounts payable, accrued
liabilities and notes payable approximates their estimated fair values due to
the short-term maturities of those financial instruments. The fair values of
amounts due to related parties are not determinable as these transactions are
with related parties and were not necessarily consummated at arm's length.

CONCENTRATIONS OF CREDIT RISKS

    Cash is maintained at various financial institutions. The Federal Deposit
    Insurance Corporation ("FDIC") insures accounts at each institution for up
    to $100,000. At times, cash may be in excess of the FDIC insurance limit.
    The Company had no amounts exceeding this limit at March 31, 2005.


                                      F-12





AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
which range from two to five years. Repairs and maintenance are charged to
expense as incurred while improvements are capitalized. Upon the sale or
retirement of property and equipment, the accounts are relieved of the cost and
the related accumulated depreciation with any gain or loss included in the
statements of operations.

INCOME TAXES

Under SFAS 109, "ACCOUNTING FOR INCOME TAXES," deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the consolidated financial statements and their respective
tax basis. Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts reported for income tax purposes, and (b) tax
credit carryforwards. The Company records a valuation allowance for deferred tax
assets when, based on management's best estimate of taxable income in the
foreseeable future, it is more likely than not that some portion of the deferred
income tax assets may not be realized.

LONG-LIVED ASSETS

SFAS 144, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF," addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. If the cost basis
of a long-lived asset is greater than the projected future undiscounted net cash
flows from such asset, an impairment loss is recognized.

Impairment losses are calculated as the difference between the cost basis of an
asset and its estimated fair value. SFAS 144 also requires companies to
separately report discontinued operations and extends that reporting requirement
to a component of an entity that either has been disposed of (by sale,
abandonment or in a distribution to owners) or is classified as held for sale.
Assets to be disposed of are reported at the lower of the carrying amount or the
estimated fair value less costs to sell. The Company adopted SFAS 144 on January
1, 2002. The provisions of this pronouncement relating to assets held for
disposal generally are required to be applied prospectively after the adoption
date to newly initiated commitments to sell or dispose of such assets, (as
defined), by management. As a result, management cannot determine the potential
effects that adoption of SFAS 144 will have on the Company's financial
statements with respect to future disposal decisions, if any. Management noted
no impairment indicators requiring review for impairment during the year ended
March 31, 2005.

EARNINGS PER SHARE

Under SFAS 128, "EARNINGS PER SHARE," basic earnings per share is computed by
dividing net income available to common stockholders by the weighted average
number of common shares assumed to be outstanding during the period of


                                      F-13





AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

computation. Diluted earnings per share is computed similar to basic earnings
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive
(If the Company had net income in each of the years ended March 31, 2005 and
2004, approximately 2,100,000 and 2,500,000 shares would have been considered
additional common stock equivalents, respectively, based on the treasury stock
method). As the Company had net losses for the periods presented, basic and
diluted loss per share are the same, as any additional common stock equivalents
would be antidilutive.

SEGMENTS

SFAS 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,"
requires public companies to report selected segment information in their
quarterly reports issued to shareholders. It also requires entity-wide
disclosures about the products and services an entity provides, the foreign
countries in which it holds significant assets and how the Company reports
revenues and its major customers. The Company currently operates in one segment,
as disclosed in the accompanying consolidated statements of operations.

STOCK BASED COMPENSATION

The Company accounts for stock-based compensation issued to employees using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock issued to Employees." Under the
intrinsic value based method, compensation expense is the excess, if any, of the
estimated fair value of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. Compensation expense,
if any, is recognized over the applicable service period, which is usually the
vesting period.

SFAS 123, "Accounting for Stock-Based Compensation," if fully adopted, changes
the method of accounting for employee stock-based compensation plans to the fair
value based method. For stock options and warrants, fair value is estimated
using an option pricing model that takes into account the stock price at the
measurement date, the exercise price, the expected life of the option or
warrant, stock volatility and the annual rate of quarterly dividends.
Compensation expense, if any, is recognized over the applicable service period,
which is usually the vesting period.

The adoption of the accounting methodology of SFAS 123 is optional and the
Company has elected to continue accounting for stock-based compensation issued
to employees using APB 25; however, pro forma disclosures, as if the Company had
adopted the cost recognition requirement under SFAS 123, are required to be
presented (see below). For stock-based compensation issued to non-employees, the
Company uses the fair value method of accounting under the provisions of SFAS
123.

Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB 25" clarifies the application of APB 25 for (a) the
definition of employee for purpose of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a non compensatory plan, (c) the


                                      F-14





AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

accounting consequence for various modifications to the terms of a previously
fixed stock option or award and (d) the accounting for an exchange of stock
compensation awards in a business combination. Management believes that the
Company accounts for transactions involving stock-based employee compensation in
accordance with FIN 44.

SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,
an amendment of FASB Statement No. 123," provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.

In December 2004, the FASB issued SFAS No. 123-R, "Share-Based Payment," which
requires that the compensation cost relating to share-based payment transactions
(including the cost of all employee stock options) be recognized in the
financial statements. That cost will be measured based on the estimated fair
value of the equity or liability instruments issued. SFAS No. 123-R covers a
wide range of share-based compensation arrangements including share options,
restricted share plans, performance-based awards, share appreciation rights, and
employee share purchase plans. SFAS No.123-R replaces SFAS No. 123 and
supersedes APB 25. As originally issued, SFAS No. 123 established as preferable
a fair-value-based method of accounting for share-based payment transactions
with employees. However, that pronouncement permitted entities to continue
applying the intrinsic-value model of APB 25, provided that the financial
statements disclosed the pro forma net income or loss based on the preferable
fair-value method.

Small Business Issuers are required to apply SFAS No. 123-R in the first interim
or annual reporting period of the registrant's first fiscal year that begins
after December 15, 2005. Thus, the Company's consolidated financial statements
will reflect an expense for (a) all share-based compensation arrangements
granted on or after January 1, 2006 and for any such arrangements that are
modified, cancelled, or repurchased on or after that date, and (b) the portion
of previous share-based awards for which the requisite service has not been
rendered as of that date, based on the grant-date estimated fair value.
Management has not yet determined the future effect of FAS 123-R on its
consolidated financial statements.

At March 31, 2005, the Company has one stock-based employee compensation plan
(the "Plan"), which is described more fully in Note 9. The Company accounts for
the Plan under the recognition and measurement principles of APB 25, and related
interpretation. Prior to the year ended March 31, 2005, no stock-based employee
compensation cost was recognized in net loss. Stock options granted under the
Plan had exercise prices equal to or greater than the estimated fair value of
the underlying common stock on the dates of grant. In February 2005, the Company
granted 5,303,275 stock options to directors, all at a price that was $0.08
below the estimated fair value of the underlying common stock on the date of
grant. Accordingly, the Company recorded approximately $424,000 of compensation
expense in the accompanying consolidated statement of operations for the year
ended March 31, 2005. The following table illustrates the effect on net loss and
loss per common share if the Company had applied the fair value recognition


                                      F-15





AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

provisions of SFAS 123 to stock-based employee compensation.



                                                                YEAR ENDED MARCH 31,
                                                            ----------------------------
                                                                2005            2004
                                                            ------------    ------------

                                                                      
Net loss available to common stockholders, as reported      $ 2,096,951     $ 1,518,798
Add back: Recorded intrinsic value                             (424,262)             --
Pro forma compensation expense                                2,386,474           6,000
                                                            ------------    ------------
Pro forma net loss available to common stockholders         $ 4,059,163     $ 1,524,798
                                                            ============    ============
Loss per common share, as reported
  Basic and diluted                                         $     (0.15)    $    (0.19)

Loss per common share, pro forma
  Basic and diluted                                         $     (0.29)    $    (0.19)




SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are
to provide guidance on the identification of entities for which control is
achieved through means other than voting rights (variable interest entities or
"VIEs") and how to determine when and which business enterprise should
consolidate the VIE. This new model for consolidation applies to an entity for
which either: (1) the equity investors do not have a controlling financial
interest; or (2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, FIN No. 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. As amended in December 2003, the effective
dates of FIN No. 46 for public entities that are small business issuers, as
defined ("SBIs"), are as follows: (a) For interests in special-purpose entities
("SPEs": periods ended after December 15, 2003; and (b) For all other VIEs:
periods ending after December 15, 2004. The December 2003 amendment of FIN No.
46 also includes transition provisions that govern how an SBI which previously
adopted the pronouncement (as it was originally issued) must account for
consolidated VIEs. The Company has determined that it does not have any variable
interest in any SPEs, and is presently evaluating the other effects of FIN No.
46 (as amended) on its consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
is effective for public companies as follows: (i) in November 2003, the FASB
issued FASB Staff Position ("FSP") FAS 150-03 ("FSP 150-3"), which defers
indefinitely (a) the measurement and classification guidance of SFAS No. 150 for
all mandatorily redeemable non-controlling interests in (and issued by)
limited-life consolidated subsidiaries, and (b) SFAS No. 150's measurement


                                      F-16





AETHLON MEDICAL, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (continued)

guidance for other types of mandatorily redeemable non-controlling interests,
provided they were created before November 5, 2003; (ii) for financial
instruments entered into or modified after May 31, 2003 that are outside the
scope of FSP 150-3; and (iii) otherwise, at the beginning of the first interim
period beginning after June 15, 2003. The Company adopted SFAS No. 150 on the
aforementioned effective dates. The adoption of this pronouncement did not have
a material impact on the Company's results of operations or financial condition.

In December 2004, the FASB issued SFAS No. 153, "EXCHANGE OF NONMONETARY ASSETS,
AND AMENDMENT OF APB NO. 29, "ACCOUNTING FOR NONMONETARY TRANSACTIONS." The
amendments made by SFAS No. 153 are based on the principle that exchanges of
nonmonetary assets should be measured using the estimated fair value of the
assets exchanged. SFAS No. 153 eliminates the narrow exception for nonmonetary
exchanges of similar productive assets, and replaces it with a broader exception
for exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has "commercial substance" if the future cash flows of the
entity are expected to change significantly as a result of the transaction. This
pronouncement is effective for nonmonetary exchanges in fiscal periods beginning
after June 15, 2005. Management is evaluating the future effect of this
pronouncement.

In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections," which replaces APB Opinion No. 20 and FASB Statement No. 3. This
pronouncement applies to all voluntary changes in accounting principle, and
revises the requirements for accounting for and reporting a change in accounting
principle. SFAS No. 154 requires retrospective application to prior periods'
financial statements of a voluntary change in accounting principle, unless it is
impracticable to do so. This pronouncement also requires that a change in the
method of depreciation, amortization, or depletion for long-lived, non-financial
assets be accounted for as a change in accounting estimate that is effected by a
change in accounting principle. SFAS No. 154 retains many provisions of APB
Opinion 20 without change, including those related to reporting a change in
accounting estimate, a change in the reporting entity, and correction of an
error. The pronouncement also carries forward the provisions of SFAS No. 3 which
govern reporting accounting changes in interim financial statements. SFAS No.
154 is effective for accounting changes and corrections of errors made in fiscal
years beginning after December 15, 2005. The Statement does not change the
transition provisions of any existing accounting pronouncements, including those
that are in a transition phase as of the effective date of SFAS No. 154.
Management is evaluating the future effect of this pronouncement.

Other recent accounting pronouncements are discussed elsewhere in these notes to
the consolidated financial statements.


                                      F-17





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (continued)

         Other recent accounting pronouncements issued by the FASB (including
its Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the SEC did not or are not believed by management to have a
material impact on the Company's present or future consolidated financial
statements.

         PATENTS

         The Company capitalizes the cost of patents and patents pending, some
of which were acquired, and amortizes such costs over the shorter of the
remaining legal life or their estimated economic life, upon issuance of the
patent.

         STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE

         The Company granted warrants in connection with the issuance of certain
notes payable (see Notes 6, 7 and 8). Under Accounting Principles Board Opinion
No. 14, "ACCOUNTING FOR CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE
WARRANTS", as amended, the relative estimated fair value of such warrants
represents a discount from the face amount of the notes payable. Accordingly,
the relative estimated fair value of the warrants has been recorded in the
consolidated financial statements as a discount from the face amount of the
notes. The discount is amortized using the effective yield method over the
respective lives of the related notes payable.

         BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE

         The convertible feature of certain notes payable (see Notes 6 and 7)
provides for a rate of conversion that is below market value. Such feature is
normally characterized as a "beneficial conversion feature" ("BCF"). Pursuant to
Emerging Issues Task Force Issue No. 98-5 ("EITF Issue No. 98-5"), "ACCOUNTING
FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY
ADJUSTABLE CONVERSION RATIO" and Emerging Issues Task Force Issue No. 00-27,
"APPLICATION OF EITF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS," the
estimated fair value of the BCF is recorded in the consolidated financial
statements as a discount from the face amount of the notes. Such discounts are
amortized to interest expense over the term of the notes using the effective
yield method. The Company has determined the fair value of such BCF to be
approximately $0 and $325,000 for the years ended March 31, 2005 and 2004,
respectively.

         RESEARCH AND DEVELOPMENT EXPENSES

         The Company incurred approximately $496,000 and $200,000 of research
and development expenses during the years ended March 31, 2005 and 2004,
respectively, which are included in operating expenses in the accompanying
consolidated statements of operations.

         OFF-BALANCE SHEET ARRANGEMENTS

         The Company has not entered into any off-balance sheet arrangements
that have or are reasonably likely to have a current or future material effect
on the Company's financial statements.

         RECLASSIFICATIONS

         Certain reclassifications have been made to the 2004 financial
statement presentation to correspond to the 2005 presentation.


                                      F-18





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------

2. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at March 31, 2005:

    Furniture and office equipment                       $      239,073
    Accumulated depreciation                                   (208,707)
                                                         ---------------

                                                         $       30,366
                                                         ===============


Depreciation expense for the years ended March 31, 2005 and 2004 approximated
$16,000 and $8,000, respectively.

3. PATENTS

         Patents include both foreign and domestic patents. There were no
patents pending at March 31, 2005 and there were no patents or patents pending
acquired during the years ended March 31, 2005 and 2004. The unamortized cost of
patents and patents pending is written off when management determines there is
no future benefit. During the years ended March 31, 2005 and 2004, no
capitalized patent costs were written off. At March 31, 2005, the gross carrying
amount of patents and the related accumulated amortization approximated $339,000
and $125,000, respectively. Amortization of patents approximated $23,000 and
$29,000 during the years ended March 31, 2005 and 2004, respectively.
Amortization expense on patents is estimated to be approximately $15,000 per
year for the next five fiscal years. The weighted average amortization period
for patents was approximately 14 years at March 31, 2005.Some of the Company's
patents have expired and others may expire before FDA approval, if any, is
obtained.

4. OTHER ASSETS

         Other assets consist of approximately $17,000 of deposits and
approximately $20,000 of advances to employees.

5. EMPLOYMENT CONTRACT

         On January 10, 2000, the Company completed the acquisition of the
assets of Syngen Research, Inc. ("Syngen"). As part of the transaction, the
Company executed a two-year employment contract, which was subsequently amended
to increase the term to four years, with Syngen's sole shareholder to perform
research. The cost associated with this employment contract was amortized over
four years on a straight-line basis and was fully amortized as of March 31,
2004.

6. DEBT-TO-EQUITY CONVERSION PROGRAM

         In March 2002, for a limited time, the Company extended an offer to
certain note holders and vendors to convert past due amounts into restricted
common stock and warrants to purchase common stock of the Company. The offer
entailed the conversion of liabilities at a rate of one share and one-half of a
warrant for every $1.25 converted. The warrants had an exercise price of $2.00
per share and expired three years from the date of issuance; none are
outstanding at March 31, 2005.

7. NOTES PAYABLE

12% AND 15% NOTES

         From August 1999 through September 2000, the Company entered into
arrangements for the issuance of notes payable from private placement offerings
(the "12% Notes") in the original aggregate amount of $422,500. The 12% Notes


                                      F-19





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------

7. NOTES PAYABLE (continued)

12% AND 15% NOTES (continued)

bore annual interest at 12% (15% after maturity), required interest to be paid
quarterly, matured one year from the date of issuance, and carried detachable
warrants. These notes have no acceleration provisions. In June 2004, one such
note in the principal amount of $12,500 plus accrued interest was repaid. In
December 2004, each of two such notes in the principal amount of $25,000, plus
$17,778 accrued interest, were converted to 87,303 restricted common shares at
$0.49 per share. At March 31, 2005, $272,500 of the 12% Notes were outstanding
and delinquent, in default, and bore interest at 15% (the "15% Notes").

During the year ended March 31, 2004, $37,500 of principal balance of the 15%
Notes held by two note holders were converted to Company common stock. One Note
holder converted $12,500 of notes including interest of $5,088 for 27,059 shares
of common stock and warrants to purchase 27,059 shares of common stock at $0.65
per share (see Note 9). These warrants were valued using the Black Scholes
option pricing model; the relative fair value was insignificant and was charged
to interest expense upon grant. The second note holder converted an aggregate of
$25,000 of notes including interest of $9,766 for 139,063 shares of common stock
and 139,063 warrants to purchase shares of common stock at $0.25 per share (see
Note 9). These warrants were valued using the Black Scholes option pricing
model; the relative fair value was insignificant and charged to interest expense
upon grant. A beneficial conversion feature approximating $37,500 was recorded
during the year ended March 31, 2004 related to these two notes.

10% NOTES

In October 2004, the Company issued two $40,000, 10% one year promissory notes
each with 80,000 three-year warrants to purchase common stock at $0.50 per share
and 44,444 three-year warrants to purchase common stock at $0.90 per share for
cash in the total amount of $80,000 to two accredited individual investors. In
accordance with GAAP, the proceeds of the financing have been allocated to the
debt and the warrants, based on their relative fair values. Accordingly, a
discount of $46,000 has been recorded as a reduction in the debt balance, and
the off-setting credit has been recorded as additional paid-in capital. The debt
discount is amortized and charged to interest expense over the life of the debt.
At March 31, 2005, approximately $23,000 of such discount was unamortized and is
included in notes payable in the accompanying consolidated balance sheet. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.

In October 2004, the Company issued a $50,000, 10% one-year promissory note plus
100,000 three-year warrants to purchase common stock at $0.50 per share and
55,555 three-year warrants to purchase common stock at $0.90 per share for cash
in the amount of $50,000 to an accredited individual investor. In accordance
with GAAP, the proceeds of the financing have been allocated to the debt and the
warrants, based on their relative fair values. Accordingly, a discount of
$38,000 has been recorded as a reduction in the debt balance, and the
off-setting credit has been recorded as additional paid-in capital. The debt
discount is amortized and charged to interest expense over the life of the debt.
At March 31, 2005, approximately $22,000 of such discount was unamortized and is
included in notes payable in the accompanying consolidated balance sheet. This
transaction was exempt from registration pursuant to Section 4(2) of the


                                      F-20





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
7. NOTES PAYABLE (continued)

Securities Act of 1933. As of March 31, 2005, $20,000 in principal amount of
this note has been reduced through application of the note to exercise a portion
of the warrants.

The total outstanding balance of the 15% Notes at March 31, 2005 was $272,500,
which is included in notes payable in the accompanying consolidated balance
sheet. The remaining $219,809 net balance included in notes payable is comprised
of the $150,000 9% Convertible Note (see Note 8), one $5,000 10% Convertible
Note (see Note 8), both of which were no longer convertible as of March 31,
2005, and the three 10% notes mentioned above, of which the remaining principal
amounts totaling $110,000 was reduced by the remaining $45,191 unamortized debt
discounts attributed to the warrants attached to these notes.

Notes payable consist of the following at March 31, 2005:

             15% Notes payable, all past due                       $272,500
             10% Note payable, past due                               5,000
             18% Note payable, past due                             150,000
             10% Notes payable, principal due in
                October 2005, net of discounts of $45,191            64,809
                                                                   --------
                                                                   $492,309
                                                                   ========

Management's plans to satisfy the remaining outstanding balance on these notes
include converting the notes to common stock at market value or repayment with
available funds.

8. CONVERTIBLE NOTES PAYABLE

8% CONVERTIBLE NOTE

In November 2000, the Company issued convertible notes payable ("8% Convertible
Notes") with original issue amounts totaling $395,000, bearing interest at 8%
per annum, with principal and accrued interest due on November 1, 2002. The 8%
Convertible Notes require no payment of principal or interest during the term
and may be converted to common stock of the Company at any time at the option of
the holder. The number of common shares issuable upon conversion is equal to the
total principal and unpaid interest as of the date of conversion, divided by the
conversion price. The conversion price per common share was changed effective
August 31, 2001 to the lesser of (a) 80% of the closing market price for the
common stock; or (b) 70% of the average of the three lowest closing market
prices for the common stock for the ten trading days prior to conversion. Such
change resulted in additional BCF approximating $57,000 during the year ended
March 31, 2002.

During fiscal year 2002, the holder converted principal and accrued interest of
approximately $49,000 into 40,267 shares of common stock, leaving principal of
$350,000 and interest thereon due and outstanding. The average conversion price
was approximately $1.22 per common share.

The 8% Convertible Notes required the Company to file an effective registration
statement by February 2001. The Company filed a Form SB-2 with the SEC in
December 2000; however, such registration statement was never declared effective


                                      F-21





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
8. CONVERTIBLE NOTES PAYABLE (continued)

and was subsequently abandoned. However, as the underlying securities are no
longer restricted under Rule 144 of the Securities Act of 1933, the Company no
longer plans on filing a registration statement in connection with this
transaction. The Company accrued and expensed penalties approximating $244,000
through March 31, 2004 in connection with not filing an effective registration
statement. During the year ended March 31, 2005 it was discovered that the
penalties did not have to be paid. Accordingly, such amount was reversed in
fiscal 2005 and is included as a credit to interest expense in the accompanying
consolidated statements of operations.

In March 2004, the note holder converted $225,000 of principal and accrued
interest in the amount of $59,827 into 813,790 shares of common stock. At March
31, 2004, this was the only outstanding 8% Convertible Note, which had a
remaining balance of $125,000. This note balance, including accrued interest of
$38,370, was converted in September 2004 to 479,513 shares of common stock at
$0.34 in accordance with the original agreement.

9% CONVERTIBLE NOTE

In April 2003, the Company issued a convertible note in the amount of $150,000
("9% Convertible Note"), bearing interest at 9% per annum, with principal and
interest due in June 2003, which is in default and currently bears penalty
interest at 18% per annum. The 9% Convertible Note required no payment of
principal or interest during the term and was convertible into common stock of
the Company at the conversion price of $0.25 per share through June 2003 at the
option of the note holder. The Company recorded a BCF of $150,000 in connection
with the issuance of the note and amortized such amount to interest expense upon
issuance based on the related conversion feature. As this note is no longer
convertible, the outstanding balance totaling $150,000 has been recorded as
notes payable in the accompanying consolidated balance sheet. Therefore, there
were no remaining 9% Convertible Notes outstanding as of March 31, 2005.

10% CONVERTIBLE NOTES

From time to time, the Company issued convertible notes payable ("10%
Convertible Notes") to various investors, bearing interest at 10% per annum,
with principal and interest due six months from the date of issuance. The 10%
Convertible Notes require no payment of principal or interest during the term
and may be converted to common stock of the Company at the conversion price of
$0.50 per share at any time at the option of the note holder. The total amount
of the original notes issued was $275,000.

In April 2002, the Company issued a 10% Convertible Note in the amount of
$50,000. The conversion price of this note was $1.25 at the time of issuance,
but in August 2002, the Company reduced the conversion price to $0.50.

During the year ended March 31, 2003, the Company issued additional
10%Convertible Notes totaling $225,000, of which $30,000 was converted into
restricted common stock.

In November 2003, a note holder converted $5,000 of principal and accrued
interest of $509 for 11,017 shares of common stock.

In December 2003, a note holder converted $100,000 of principal and accrued
interest of $15,416 for461,667 shares of common stock and 461,667 warrants to
purchase common stock at $0.25 per share (see


                                      F-22





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
8. CONVERTIBLE NOTES PAYABLE (continued)

NOTE 9). These warrants were valued using the Black Scholes option pricing
model; the relative pro- rata fair value was insignificant and was charged to
interest expense upon grant.

In January 2004, two note holders converted $35,000 of principal and accrued
interest of $5,333 for 161,334 shares of common stock and 161,334 warrants to
purchase common stock at $0.25 per share. These warrants were valued using the
Black Scholes option pricing model; the relative pro-rata fair value was
insignificant and was charged to interest expense upon grant.

In March 2004, the Company borrowed $50,000 under a non-interest bearing
convertible note payable, which was due in April 2004. In June 2004, the note
was converted into common stock of the Company at $0.44 per share, in connection
with the Company's private placement with Fusion Capital.

In March 2004, a note holder converted $5,000 of principal and accrued interest
of $696 for 13,725 shares of common stock and 13,725 warrants to purchase common
stock at $0.42 per share. These warrants were valued using the Black Scholes
option pricing model, the relative pro-rata fair value was insignificant, and
charged to interest expense upon grant.

In July 2004, the Company repaid a 10% Convertible Note in the principal amount
of $10,000, plus accrued interest. This note was classified as notes payable as
of March 31, 2004 since the note was no longer convertible at such time.

A BCF approximating $137,000 was recorded during the year ended March 31, 2004
related to the issuance of the 10% Convertible Notes.

A 10% Convertible Note in the amount of $5,000, was past due and in default at
March 31, 2005. As this note is no longer convertible at March 31, 2005, the
outstanding balance is included in notes payable in the accompanying
consolidated balance sheet (see Note 7). At March 31, 2005, interest payable on
this note totaled $1,875.

9. EQUITY TRANSACTIONS

2003 CONSULTANT STOCK PLAN

In August 2003, the Company adopted the 2003 Consultant Stock Plan (the "Stock
Plan"), which provides for grants of common stock through August 2013, to assist
the Company in obtaining and retaining the services of persons providing
consulting services for the Company. A total of 1,000,000 common shares are
reserved for issuance under the Stock Plan. On March 29, 2004, the Company filed
a registration statement on Form S-8 for the purpose of registering 1,000,000
common shares issuable under the Stock Plan under the Securities Act of 1933.

2005 DIRECTORS COMPENSATION PROGRAM

In February 2005, the Company adopted the 2005 Directors Compensation Program
(the "Directors Compensation Program") to assist in obtaining and retaining the
services of outside directors. Under the Directors Compensation Program, a newly
elected director will receive a one time grant of a non-qualified stock option
of 1.5% of the common stock outstanding at the time of election. The options
will vest one-third at the time of election to the board and the remaining
two-thirds will vest equally at year end over three years. Additionally, each


                                      F-23





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
9. EQUITY TRANSACTIONS (continued)

director will also receive an annual $25,000 non-qualified stock option
retainer, $15,000 of which is to be paid at the first of the year to all
directors who are on the Board prior to the first meeting of the year and a
$10,000 retainer will be paid if a director attends 75% of the meetings either
in person, via conference call or other electronic means. The exercise price for
the options under the Directors Compensation Program will equal the average
closing of the last ten (10) trading days prior to the date earned.

COMMON STOCK

During the year ended March 31, 2004, the Company issued 540,000 shares of
restricted common stock for cash totaling $135,000 in connection with the
exercise of warrants at $0.25 per share.

During the year ended March 31, 2004, the Company issued 1,226,000 shares of
restricted common stock at $0.25 per share for cash totaling $306,500. In
connection with the issuance of common stock, the Company granted the
stockholders warrants to purchase 1,226,000 shares of common stock. The warrants
vested upon grant and expire through January 2005.

During the year ended March 31, 2004, the Company issued 180,000 shares of
restricted common stock at $0.30 per share for cash totaling $54,000. In
connection with the issuance of common stock, the Company granted the
stockholders warrants to purchase 180,000 shares of common stock. The warrants
vested upon grant and expire through March 2005.

During the year ended March 31, 2004, the Company issued 40,000 shares of
restricted common stock at $0.525 per share for cash totaling $21,000. In
connection with the issuance of common stock, the Company granted the
stockholders warrants to purchase 40,000 shares of common stock. The warrants
vested upon grant and expire through March 2005.

During the year ended March 31, 2004, the Company issued 5,000 shares of
restricted common stock at $1.125 per share for cash totaling $5,625. In
connection with the issuance of common stock, the Company granted the
stockholders warrants to purchase 5,000 shares of common stock. The warrants
vested upon grant and expire through March 2005.

During the year ended March 31, 2004, the Company issued 10,000 shares of
restricted common stock at $0.25 for services valued at $2,500.

During the year ended March 31, 2004, the Company issued 73,529 shares of
restricted common stock at $0.34 for services valued at $25,000.

During the year ended March 31, 2004, the Company issued 62,000 shares of
restricted common stock at $0.40 for services valued at $24,825.

During the year ended March 31, 2004, the Company issued 185,185 shares of
restricted common stock at $0.45 for services valued at $83,333.

During the year ended March 31, 2004, the Company issued 5,000 shares of
restricted common stock at $0.50 for services valued at $2,500.


                                      F-24





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
9. EQUITY TRANSACTIONS (continued)

COMMON STOCK (continued)

During the year ended March 31, 2004, note holders converted $504,135 of
principal and interest into 1,627,655 shares of common stock (see Notes 7 and 8)
and warrants to purchase 802,848 shares of common stock ( see "Warrants" below).

In April 2004, the Company issued 500,000 shares of restricted common stock to
an accredited individual investor in connection with the exercise of warrants at
$0.25 per share for cash totaling $125,000. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.

In April 2004, the Company issued 17,143 shares at $1.75 per share to an
accredited individual investor for investor relations services in the amount of
$30,000. This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.

In April 2004, the Company issued 50,000 shares of restricted common stock to
Fusion Capital Fund II, LLC, an accredited institutional investor, for a
financing commitment to provide $6,000,000 under a registered private placement.
In connection with the $6,000,000 financing the Company paid a fee to Fusion
Capital in the amount of 418,604 shares of common stock. The Company recorded no
expense related to the issuance of these shares since they were related to
equity fund raising activities. This transaction was exempt from registration
pursuant to Regulation D promulgated under the Securities Act of 1933.

In May 2004, the Company issued 225,000 shares of common stock at $0.44 per
share and 225,000 warrants to purchase the Company's common stock at a price of
$0.76 per share to legal counsel for legal services in the amount of $99,000,
which was recorded as expense in the accompanying consolidated financial
statements. This transaction was exempt from registration pursuant to Section
4(2)of the Securities Act of 1933.

In May 2004, a $50,000 10% convertible note was converted at $0.44 per share for
113,636 shares of common stock and 113,636 warrants to purchase the Company's
common stock at a price of $0.76 per share. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.

In May 2004, the Company issued a total of 1,415,909 shares of restricted stock
at a price of $0.44 per share for cash totaling $623,000 to fourteen accredited
investors. In connection with the issuance of these shares, the Company granted
the stockholders 1,640,908 warrants to purchase the Company's common stock at a
price of $0.76 per share. The warrants vested immediately and expire on the
fifth anniversary from the date when a registration statement covering the
common stock underlying such warrants is declared effective. This transaction
was exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.

In July 2004, the Company issued 10,715 shares of restricted common stock at
$0.70 per share to an accredited individual for employee placement services in
the amount of $7,500. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.

In July 2004, the Company issued 6,850 shares of restricted common stock at


                                      F-25





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
9. EQUITY TRANSACTIONS (continued)

COMMON STOCK (continued)

$0.73 per share to an accredited individual for consulting services on
opportunities for the Company's Hemopurifier(TM) within the biodefense
marketplace in the amount of $5,000. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.

In September 2004, the Company issued 479,513 shares of restricted common stock
to an accredited investor, in conjunction with the conversion of $125,000 in
principal amount of notes, plus accrued interest, at $0.34 per share, in
accordance with their convertible note agreement (see Note 8). This transaction
was exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.

In November and December 2004, the Company issued 80,000 shares of restricted
common stock to an accredited individual investor in connection with the
exercise of 80,000 warrants at $0.25 per share for consideration of a $20,000
reduction in the principal amount of a 10% one-year promissory note. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.

In December 2004, the Company issued 461,667 shares of restricted common stock
to two accredited individual investors in connection with the exercise of
461,667 warrants at $0.25 per share for cash totaling $115,417. This transaction
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.

In December 2004, the Company repaid two $25,000 12% promissory notes, including
accrued interest of $17,778 each, through the issuance of 87,303 restricted
common shares at $0.49 per share to each of two separate accredited individual
investors. These transactions were exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.

In December 2004, the Company issued 60,000 shares of restricted common stock at
$0.50 per share under a consulting agreement with an accredited individual
investor, for investor relations consulting services to the Company. The fair
value of the transaction of $30,000 was recorded as deferred compensation and
presented as an offset to additional paid-in capital in the accompanying
consolidated financial statements. Such amount is being amortized to expense
over the six month term of the agreement. At March 31, 2005, $15,000 of such
amount remained unamortized. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.

In January 2005, the Company issued 55,556 shares of restricted common stock at
$0.36 per share and a warrant to purchase 55,556 shares of common stock at $0.44
per share for cash in the amount of $20,000 to an accredited individual
investor. This transaction was exempt from registration pursuant to Section
4(2)of the Securities Act of 1933.

In January 2005, the Company issued 66,666 shares of restricted common stock at
$0.45 per share to an accredited individual investor under a consulting
agreement for investor relations services to the Company. The fair value of the
transaction of $30,000 was recorded as deferred compensation and presented as an
offset to additional paid-in capital in the accompanying consolidated financial


                                      F-26





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
9. EQUITY TRANSACTIONS (continued)

COMMON STOCK (continued)

statements. Such amount is being amortized to expense over the six month term of
the agreement. At March 31, 2005, $15,000 of such amount remained unamortized.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.

In January 2005, the Company issued 25,834 shares of restricted common stock to
an accredited individual investor in connection with the exercise of a warrant
to purchase 25,834 shares of common stock at $0.25 per share for cash totaling
$6,459. This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.

In February 2005, the Company issued 139,063 shares of restricted common stock
to an accredited individual investor in connection with the exercise of a
warrant to purchase 139,063 shares of common stock at $0.25 per share for cash
totaling $34,766. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.

In February 2005, the Company issued 90,000 shares of restricted common stock at
$0.27 per share and a three-year warrant to purchase 90,000 shares of common
stock at $0.34 per share for cash in the amount of $24,300 to an accredited
individual investor. This transaction was exempt from registration pursuant to
Section 4(2)of the Securities Act of 1933.

During the year ended March 31, 2005, the Company issued an additional total of
1,416,958 shares of restricted common stock at prices ranging from $0.25 to
$0.52 for total cash proceeds of approximately $541,000.

During the year ended March 31, 2005, the Company issued an additional 557,647
shares of restricted common stock at prices ranging from $0.25 to $0.55 under
various consulting service agreements for total recorded value of approximately
$196,000. All services on these agreements were completed and expensed during
the year ended March 31, 2005.

WARRANTS

During the year ended March 31, 2004, the Company granted 1,226,000 warrants to
investors in connection with the purchase of common stock. The warrants have an
exercise price of $0.25 per share, vest immediately and are exercisable through
March 2005. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.

During the year ended March 31, 2004, the Company granted 180,000 warrants to
investors in connection with the purchase of common stock. The warrants have an
exercise price of $0.30 per share, vest immediately and are exercisable through
March 2005. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.

During the year ended March 31, 2004, the Company granted 40,000 warrants to
investors in connection with the purchase of common stock. The warrants have an
exercise price of $0.525 per share, vest immediately and are exercisable through
March 2005. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.


                                      F-27





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
9. EQUITY TRANSACTIONS (continued)

WARRANTS (continued)

During the year ended March 31, 2004, the Company granted 5,000 warrants to
investors in connection with the purchase of common stock. The warrants have an
exercise price of $1.125 per share, vest immediately and are exercisable through
March 2005. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.

During the year ended March 31, 2004, the Company issued 762,064 warrants to
purchase common stock for $0.25 per share, which are exercisable through March
2005 and vested upon grant. The warrants were issued in connection with the
conversion of notes payable (see Notes 7 and 8). These warrants were valued
using the Black Scholes option pricing model; the relative pro-rata estimated
fair value was insignificant and was charged to interest expense upon grant.

During the year ended March 31, 2004, the Company issued 13,725 warrants to
purchase common stock for $0.42 per share, which are exercisable through March
2005 and vested upon grant. The warrants were issued in connection with the
conversion of notes payable (see Notes 7 and 8). These warrants were valued
using the Black Scholes option pricing model; the relative pro-rata estimated
fair value was insignificant and was charged to interest expense upon grant.

In the year ended March 31, 2004, the Company issued 27,059 warrants to purchase
common stock for $0.65 per share, which vested upon grant and expire through
March 2005. The warrants were issued in connection with the conversion of notes
payable (see Notes 7 and 8). These warrants were valued using the Black Scholes
option pricing model; the relative pro-rata fair estimated value was
insignificant and was charged to interest expense upon grant.

As noted under "Common Stock" above, 540,000 of the warrants granted to
investors in connection with the purchase of common stock during the year ended
March 31, 2004 were exercised.

In August 2004, the Company issued a one-year warrant, which vests immediately,
to purchase 7,000 shares of common stock at $0.55 per share to an accredited
corporate entity in conjunction with a $6,000 fee for investor and public
relations services. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.

During the year ended March 31, 2005, the Company granted 568,181 warrants to an
investor in connection with a commitment fee for the purchase of common stock.
The warrants have an exercise price of $0.76 per share, vest immediately and are
exercisable through May 2009. As the warrants were issued in connection with
equity financing, no expense has been recorded in the accompanying consolidated
financial statements.

During the year ended March 31, 2005, the Company granted 847,727 warrants to
investors in connection with the purchase of common stock. The warrants have an
exercise price of $0.76 per share, vest immediately and are exercisable through
May 2009. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.

During the year ended March 31, 2005, the Company issued 113,636 warrants to
purchase common stock for $0.76 per share, which are exercisable through May


                                      F-28





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
9. EQUITY TRANSACTIONS (continued)

WARRANTS (continued)

2009 and vested upon grant. The warrants were issued in connection with the
conversion of notes payable (see Notes 7 and 8). These warrants were valued
using the Black Scholes option pricing model; the relative pro-rata estimated
fair value was insignificant and was charged to interest expense upon grant.

During the year ended March 31, 2005, the Company issued 225,000 warrants to
purchase common stock for $0.76 per share, which are exercisable through May
2009 and vested upon grant. The warrants were issued in connection with common
stock issued for legal services expense totaling $99,000 (see "Common Stock"
above).

During the year ended March 31, 2005, the Company issued 260,000 warrants to
purchase common stock for $0.50 per share, which vested upon grant and expire in
October 2007. The warrants were issued in connection with the issuance of notes
payable (see Note 7). These warrants were valued using the Black Scholes option
pricing model; the relative pro-rata estimated fair value is being amortized to
interest expense over the life of the notes.

During the year ended March 31, 2005, the Company issued 144,443 warrants to
purchase common stock for $0.90 per share, which vested upon grant and expire in
October 2007. The warrants were issued in connection with the issuance of notes
payable (see Note 7). These warrants were valued using the Black Scholes option
pricing model; the relative pro-rata estimated fair value was amortized to
interest expense over the life of the notes.

During the year ended March 31, 2005, the Company granted 55,556 warrants to an
investor in connection with the purchase of common stock. The warrants have an
exercise price of $0.44 per share, vest immediately and are exercisable through
January 2008. As the warrants were issued in connection with equity financing,
no expense has been recorded in the accompanying consolidated financial
statements.

During the year ended March 31, 2005, the Company granted 90,000 warrants to
investors in connection with the purchase of common stock. The warrants have an
exercise price of $0.34 per share, vest immediately and are exercisable through
February 2008. As the warrants were issued in connection with equity financing,
no expense has been recorded in the accompanying consolidated financial
statements.

As noted under "Common Stock", 1,206,564 warrants with an exercise price of
$0.25 per share, which were granted to investors in connection with the purchase
of common stock, were exercised during the year ended March 31, 2005.


                                      F-29





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
9. EQUITY TRANSACTIONS (continued)

WARRANTS (continued)

A summary of the aggregate warrant activity for the years ended March 31, 2005
and 2004 is presented below:



                                                 Year Ended March 31,
                                 -----------------------------------------------------
                                          2005                         2004
                                 -------------------------   -------------------------
                                                Weighted                    Weighted
                                            Average Exercise            Average Exercise
                                   Warrants       Price        Warrants       Price
                                 -----------   -----------   -----------   -----------

                                                                
Outstanding, beginning of year     3,793,194     $   2.22     2,906,746     $   2.29
      Granted                      2,311,543     $   0.71     2,253,848         0.29
      Exercised                   (1,206,564)    $   0.25      (540,000)        0.25
Cancelled/Forfeited               (2,064,339)    $   2.75      (827,400)        0.25
                                  -----------    ---------    ----------    ---------

Outstanding, end of year           2,833,834     $   0.91     3,793,194     $   2.22
                                  ===========    =========    ==========    =========

Exercisable, end of year           2,833,834     $   0.91     3,793,194     $   2.22
                                  ===========    =========    ==========    =========

Weighted average estimated fair
  value of warrants granted                      $   0.60                   $   0.40
                                                 =========                  =========



The following outlines the significant weighted average assumptions used to
estimate the fair value information presented utilizing the Black-Scholes option
pricing model:


                                        Years Ended March 31,
                                         2005          2004
                                      -----------   -----------
Risk free interest rate                  2.00%          2.50%
Average expected life                   2 years        3 years
Expected volatility                       139%           365%
Expected dividends                        None           None


                                      F-30





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
9. EQUITY TRANSACTIONS (continued)

WARRANTS (continued)


The detail of the warrants outstanding and exercisable as of March 31, 2005 is
as follows:



                                         Warrants Outstanding                Warrants Exercisable
                               ---------------------------------------   --------------------------
                                                 Weighted     Weighted                     Weighted
                                                 Average       Average                      Average
                                   Number       Remaining     Exercise        Number       Exercise
Range of Exercise Prices        Outstanding   Life (Years)      Price      Outstanding       Price
- ---------------------------   -------------- ------------- ----------   --------------- ----------

                                                                         
         $0.25                     185,430          2.72      $  0.25         185,430      $  0.25
     $0.34 - $0.90               2,311,543          3.76      $  0.71       2,311,543      $  0.71
     $2.00 - $4.00                 302,986          0.82      $  2.77         302,986      $  2.77
         $5.00                      33,875          0.28      $  5.00          33,875      $  5.00
                               --------------                            ---------------
                                 2,833,834                                  2,833,834
                               ==============                            ===============



OPTIONS

At March 31, 2005 the Company had issued 1,337,825 options to outside directors
and 3,965,450 options to employee-directors under the 2005 Directors
Compensation Program.

From time to time, the Company's Board of Directors grants common share purchase
options or warrants to selected directors, officers, employees, consultants and
advisors in payment of goods or services provided by such persons on a
stand-alone basis outside of any of the Company's formal stock plans. The terms
of these grants are individually negotiated.

In August 2000, the Company adopted the 2000 Stock Option Plan ("Stock Option
Plan"), which was approved by its stockholders in September 2000. The Stock
Option Plan provides for the issuance of up to 500,000 options to purchase
shares of common stock. Such options can be incentive options or nonstatutory
options, and may be granted to employees, directors and consultants. The Stock
Option Plan has limits as to the eligibility of those stockholders who own more
than 10% of Company stock, as defined. The options granted pursuant to the Stock
Option Plan may have exercise prices of no less than 100% of fair market value
of the Company's common stock at the date of grant (incentive options), or no
less than 75% of fair market value of such stock at the date of grant
(nonstatutory). At March 31, 2005, the Company had granted 47,500 options under
the 2000 Stock Option Plan, with 452,500 available for future issuance.

In March 2002, the Board of Directors granted the Company's Chief Executive
Officer ("CEO") and Chief Scientific Officer ("CSO") non-qualified stock options
to purchase up to 250,000 shares of common stock each, at an exercise price of
$1.90 per share (the estimated fair value of the underlying common stock at
grant date) and expire March 2012. Awards are earned upon achievement of certain
financial and/or research and development milestones. On July 1, 2005, the
Company's CEO forfeited all of his aforementioned 250,000 options.


                                      F-31





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
9. EQUITY TRANSACTIONS (continued)

OPTIONS (continued)

In February 2005, the Board of Directors granted the Company's Chief Executive
Officer ("CEO")and Chief Scientific Officer ("CSO") non-qualified stock options
to purchase up to 2,231,100 and 1,734,350 shares of common stock, respectively,
at an exercise price of $0.38 per share and vest fifty percent immediately,
twenty-five percent in December 2005 and twenty-five percent in December 2006.
In addition Mr. Calvin Leung, a board member, was granted non-qualified stock
options to purchase up to 308,725 shares at $0.38 that vest fifty percent
immediately, twenty-five percent in December 2005 and twenty-five percent in
December 2006. Messrs. Franklyn S Barry and Edward G Broenniman, board members,
were each granted non-qualified stock options to purchase up to 514,550 shares
at $0.38 that vest forty percent immediately, twenty-five percent in December
2005 and twenty-five percent in December 2006. All of these options granted
expire in 2010 and 2011 and were granted at a price that was $0.08 below the
estimated fair value of the underlying common stock on the date of grant.
Accordingly, the Company recorded approximately $424,000 of compensation expense
in the accompanying consolidated statement of operations for the year ended
March 31, 2005.

The following is a summary of the stock options outstanding at March 31, 2005
and 2004 and the changes during the two years then ended:



                                                  Year Ended March 31,
                                 -----------------------------------------------------
                                            2005                       2004
                                 -------------------------   -------------------------
                                                 Weighted                     Weighted
                                                 Average                      Average
                                                 Exercise                     Exercise
                                   Options        Price         Options        Price
                                 -----------   -----------    -----------   -----------

                                                                 
Outstanding, beginning of year   1,376,115     $    2.49       1,376,115     $    2.49
      Granted                    5,303,275          0.38              --            --
      Exercised                         --            --              --            --
      Cancelled/Forfeited               --            --              --            --
                                 -----------   -----------    -----------    ----------

Outstanding, end of year         6,679,390     $    0.80       1,376,115     $    2.49
                                 ===========   ===========    ===========    ==========

Exercisable, end of year         3,924,856     $    1.10       1,363,615     $    2.51
                                 ===========   ===========    ===========    ==========

Weighted average estimated fair
  value of options granted                     $    0.45                     $      --
                                               ===========                   ==========




                                           F-32





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
9. EQUITY TRANSACTIONS (continued)

OPTIONS (continued)

The following outlines the significant weighted average assumptions used to
estimate the fair value information presented utilizing the Black-Scholes option
pricing model for the year ended March 31, 2005 (there were no issuances in
fiscal 2004):

Risk free interest rate                                               3.75
Average expected life                                              4 years
Expected volatility                                                   225%
Expected dividends                                                    None

The detail of the options outstanding and exercisable as of March 31, 2005 is as
follows:



                                            Options Outstanding               Options Exercisable
                                ------------------------------------------ -------------------------
                                                  Weighted     Weighted                     Weighted
                                                  Average       Average                      Average
                                    Number       Remaining     Exercise        Number       Exercise
Range of Exercise Prices         Outstanding        Life         Price      Outstanding       Price
                                --------------- ------------- ------------ --------------- ---------

                                                                       
    $0.38 - $0.39                5,354,123      5.58 years      $ 0.38     2,599,589        $ 0.38
    $1.78 - $2.00                  515,267      6.91 years      $ 1.90       515,267        $ 1.90
    $2.25 - $3.00                  602,500      2.26 years      $ 2.78       602,500        $ 2.78
    $3.25 - $3.75                  207,500      0.92 years      $ 3.27       207,500        $ 3.27
                                -----------                                ----------
                                 6,679,390                                 3,924,856
                                ===========                                ==========



10. RELATED PARTY TRANSACTIONS

DUE TO RELATED PARTIES

Certain officers of the Company and other related parties have advanced the
Company funds, agreed to defer compensation and/or paid expenses on behalf of
the Company to cover working capital deficiencies. These non interest-bearing
liabilities have been included as due to related parties in the accompanying
consolidated financial statements.

Other related party transactions are disclosed elsewhere in these notes to
consolidated financial statements.

11. INCOME TAX PROVISION

Income tax expense for the years ended March 31, 2005 and 2004 differed from the
amounts computed by applying the U.S. Federal income tax rate of 34 percent to
the loss from continuing operations before provision for income taxes as a
result of the following:


                                      F-33





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------

11. INCOME TAX PROVISION (continued)

2005 2004
- ----------------------
Computed "expected" tax benefit$(713,000) $(516,000)

                                                          2005          2004
                                                       -----------   -----------
Computed "expected" tax benefit                        $(713,000)    $(516,000)

Reduction in income taxes resulting from:
    Interest for warrants and BCF                             --        94,000
    Change in deferred tax assets valuation allowance    814,000       583,000
    State and local income taxes,
      net of federal benefit                            (125,000)     (134,000)
    Other                                                 24,000       (27,000)
                                                       -----------   -----------
                                                       $      --     $      --
                                                       ===========   ===========

The tax effects of temporary differences that give rise to significant portions
of deferred tax assets at March 31, 2005 are presented below:

Deferred tax assets:
    Capitalized research and development                            $ 2,099,000
    Net operating loss carryforwards                                  3,679,000
    Equity based compensation                                           136,000
                                                                    -----------
        Total gross deferred tax assets                               5,914,000

        Less valuation allowance                                     (5,914,000)
                                                                    -----------
        Net deferred tax assets                                     $        --
                                                                    ===========

As of March 31, 2005, the Company had tax net operating loss carryforwards of
approximately $9,700,000 and $4,500,000 available to offset future taxable
Federal and state income, respectively. The carryforward amounts expire in
various years through 2025.

Due to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carryforwards for Federal income tax reporting purposes are
subject to annual limitations. Should a change in ownership occur, net operating
loss carryforwards may be limited as to use in future years.

12. COMMITMENTS AND CONTINGENCIES

EMPLOYMENT CONTRACTS

In addition to the employment contract discussed in Note 3, the Company entered
into an employment agreement with its Chairman of the Board effective April 1,
1999. The agreement, which is cancelable by either party upon sixty days notice,
will be in effect until the employee retires or ceases to be employed by the
Company. The Chairman of the Board was appointed President and Chief Executive
Officer ("CEO") effective June 1, 2001 upon which the base annual salary was
increased from $120,000 to $180,000. Effective January 1, 2005, the CEO's salary
was increased from $180,000 to $205,000 per year. The CEO is eligible for an


                                      F-34





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
12. COMMITMENTS AND CONTIGENCIES (continued)

EMPLOYMENT CONTRACTS (continued)

annual bonus at the discretion of the Board of Directors, of which $20,000 and
nil was earned during each of the years ended March 31, 2005 and 2004,
respectively. Under the terms of the agreement, if the employee is terminated he
may become eligible to receive a salary continuation payment in the amount of at
least twelve months' base salary.

The Company entered into an employment agreement with Dr. Tullis effective
January 10, 2000. Effective June 1, 2001, Dr. Tullis was appointed the Company's
Chief Science Officer of the Company. His compensation under the agreement was
modified in June 2001 from $80,000 to $150,000 per year. Effective January 1,
2005 Dr. Tullis' salary was increased from $150,000 to $165,000 per year Under
the terms of the agreement, his employment continues at a salary of $165,000 per
year for successive one-year periods, unless given notice of termination 60 days
prior to the anniversary of his employment agreement. Dr. Tullis was granted
250,000 stock options to purchase the Company's common stock in connection the
completing certain milestones, such as the initiation and completion of certain
clinical trials, the submission of proposals to the FDA and the filing of a
patent application. Under the terms of the agreement, if the employee is
terminated he may become eligible to receive a salary continuation payment in
the amount of twelve months base salary.

LEASE COMMITMENTS

The Company leases its office and research and development space under an
operating lease agreement which expires in July 2006.

The Company is committed to make the approximate future aggregate rental
payments under the terms of the lease agreement as noted below.


                                                      Year Ended
                                                       March 31,
                                                      ----------
    2006                                              $   90,000
    2007                                                  23,000
                                                      ----------
    Total commitment                                  $  113,000
                                                      ==========

Rent expense approximated $106,000 and $57,000 for the years ended March 31,
2005 and 2004, respectively.


                                      F-35





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------

13. SUBSEQUENT EVENTS (unaudited)

In April 2005, the Company issued 9,740 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.308 per share in payment for scientific consulting services to
the Company

In April 2005, the Company issued 12,567 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.2984 per share in payment for regulatory affairs consulting
services to the Company

In April 2005, the Company issued 12,567 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.2984 per share in payment for regulatory affairs consulting
services to the Company

In April 2005, the Company issued 15,712 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.2514 per share in payment for regulatory affairs consulting
services to the Company

In April 2005, the Company issued 15,712 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.2514 per share in payment for regulatory affairs consulting
services to the Company

In April 2005, the Company issued 394,235 shares of common stock at prices
between $0.250 to and $0.280 per share to Fusion Capital under its $6,000,000
common stock purchase agreement. Fusion advanced the Company $100,000 in April
2005 for the purchase of additional shares under such agreement. These shares
are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.

In May 2005, the Company issued 19,084 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.262 per share in payment for regulatory affairs consulting
services to the Company.

In May 2005, the Company issued 11,450 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.262 per share to in payment for regulatory affairs consulting
services to the Company.

On May 11, 2005, the Company agreed to issue 836,730 shares of restricted common
stock and a three-year warrant to purchase 418,365 shares of the Company's
restricted common stock at an exercise price of $0.25 to legal counsel for
payment of legal services in the amount of $167,346. The Company and legal
counsel agreed that the issuance of the restricted shares and the warrant will
be delayed until the Company receives shareholder approval to increase the
Company's authorized number of shares of common stock to 50,000,000.

On May 16, 2005 the Company issued Fusion Capital ("Fusion) a $30,000
Convertible Promissory Note (the "Note") with an interest rate of fifteen
percent (15%) per annum that matures on August 15, 2005. The Note is convertible


                                      F-36





AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
- --------------------------------------------------------------------------------
13. SUBSEQUENT EVENTS (unaudited)

into shares of restricted common stock at any time at the election of Fusion at
a conversion price equal to $0.20 per share for any conversion occurring on or
prior to the Maturity Date, or at a price equal to the lesser of (i) 75% of the
average of the three (3) lowest closing sale prices of the common shares during
the twelve (12) trading days prior to the submission of a conversion notice or
(ii) $0.20 per share, for any conversion occurring after the Maturity Date. In
addition, the Company issued Fusion a five-year warrant to purchase 300,000
shares of the Company's common stock at an exercise price of $0.25 per share
(the "Warrant"). The Note and the Warrant have piggyback registration rights.
This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.


                                      F-37





                     AETHLON MEDICAL, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                   (Unaudited)


                                                                   September 30,
                                                                       2005
                                                                   ------------
                                     ASSETS
Current assets
  Cash                                                             $     75,275
  Prepaid expenses                                                       10,233
                                                                   ------------
                                                                         85,508

Property and equipment, net                                              19,016
Patents and patents pending, net                                        209,932
Other assets                                                             33,275
                                                                   ------------

                                                                   $    347,731
                                                                   ============

                     LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
  Accounts payable and accrued liabilities                         $  1,403,550
  Due to related parties                                              1,263,135
  Notes payable, net of discount                                        606,404
  Convertible notes payable, net of discount                             65,140
  Warrant liability                                                     286,377
                                                                   ------------
                                                                      3,624,606
Commitments and Contingencies

Stockholders' Deficit
  Common stock, par value $0.001 per share;
50,000,000 shares authorized;
19,239,829 shares issued and outstanding                                 19,240
  Additional paid-in capital                                         17,321,472
  Deficit accumulated during
development stage                                                   (20,617,587)
                                                                   ------------
                                                                     (3,276,875)
                                                                   ------------
                                                                   $    347,731
                                                                   ============


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


                                      F-38






                                              AETHLON MEDICAL, INC. AND SUBSIDIARIES
                                                  (A Development Stage Company)
                                         CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                           For the Three and Six Months Ended September
                                                    30, 2005 and 2004 and For
                                the Period January 31, 1984 (Inception) Through September 30, 2005
                                                           (Unaudited)


                                                                                                                January 31, 1984
                                          Three Months      Three Months       Six Months        Six Months        (Inception)
                                              Ended            Ended             Ended              Ended            through
                                          September 30,     September 30,     September 30,     September 30,     September 30,
                                              2005              2004              2005              2004              2005
                                          ------------      ------------      ------------      ------------      ------------
                                                                                                   
REVENUES

      Grant income                        $         --      $         --      $         --      $         --      $  1,424,012
      Subcontract income                            --                --                --                --            73,746
Sale of research and development                    --                --                --                --            35,810
                                          ------------      ------------      ------------      ------------      ------------
                                                    --                --                --                --         1,533,568

EXPENSES

Professional Fees                              268,746           251,831           655,016           466,952         5,041,557
Payroll and related                            168,131           200,912           347,221           384,455         6,918,055
  General and administrative                   117,509           109,204           287,218           168,912         4,232,797
  Impairment                                        --                --                --                --         1,231,531
                                          ------------      ------------      ------------      ------------      ------------
                                               554,386           561,947        (1,289,455)        1,020,319        17,423,940
                                          ------------      ------------      ------------      ------------      ------------
OPERATING LOSS                                (554,386)         (561,947)       (1,289,455)       (1,020,319)      (15,890,372)
                                          ------------      ------------      ------------      ------------      ------------

    OTHER EXPENSE (INCOME)
     Interest and other debt expenses          115,185          (213,342)          182,118          (190,374)        4,603,273
     Interest income                                --                --                --                --           (17,415)
 Other                                           3,750                --             3,750                --           141,357
                                          ------------      ------------      ------------      ------------      ------------
                                               118,935          (213,342)          185,868          (190,374)        4,727,215
                                          ------------      ------------      ------------      ------------      ------------
NET LOSS                                  $   (673,321)     $   (348,605)     $ (1,475,323)         (829,945)      (20,617,587)
                                          ============      ============      ============      ============      ============

    BASIC AND DILUTED LOSS PER
      COMMON SHARE                        $      (0.04)     $      (0.03)     $      (0.08)     $      (0.06)
                                          ============      ============      ============      ============


    WEIGHTED AVERAGE NUMBER
    OF COMMON SHARES
    OUTSTANDING                             19,045,651        13,604,294        18,373,416        12,906,408
                                          ============      ============      ============      ============


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


                                                              F-39





                                        AETHLON MEDICAL, INC. AND SUBSIDIARIES
                                            (A DEVELOPMENT STAGE COMPANY)
                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                               FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 AND
                        FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30, 2005
                                                     (Unaudited)


                                                                                                   JANUARY 31, 1984
                                                   SIX MONTHS ENDED        SIX MONTHS ENDED            (INCEPTION)
                                                  SEPTEMBER 30, 2005      SEPTEMBER 30, 2004             THROUGH
                                                      (UNAUDITED)             (UNAUDITED)          SEPTEMBER 30,2005
                                                  ------------------      ------------------      ------------------
Cash flows from operating activities:

Net loss                                          $       (1,475,323)     $         (829,945)     $      (20,617,587)
Adjustments to reconcile net loss to net cash
  used in operating activities:

 Depreciation and amortization                                15,341                  17,623                 965,093
 Amortization of deferred consulting fees                     30,000                      --                  60,000
 Gain of sale of property and equipment                           --                      --                 (13,065)

 Fair market value of warrants issued in
    connection with accounts payable
    and debt                                                      --                      --               2,715,736

 Fair market value of common stock, warrants
    and options issued for services                          296,241                 259,512               2,803,860
 Change in fair value of warrant liability                     3,750                      --                   3,750
 Intrinsic value of stock options issued to
   directors                                                      --                      --                 424,262

 Amortization of debt discount                               121,095                      --                 969,704

 Beneficial conversion feature of convertible
   notes payable                                                  --                      --                 334,304
 Impairment of patents and patents pending                        --                      --                 897,227
 Impairment of goodwill                                           --                      --                 217,223

 Changes in operating assets and liabilities:


 Prepaid expenses                                                (45)                (10,942)                151,304

 Other assets                                                  3,975                 (15,050)                (33,275)
 Accounts payable and accrued
 liabilities                                                 263,383                (162,384)              1,895,609

 Due to related parties                                       (4,367)                 36,781               1,496,636
                                                  ------------------      ------------------      ------------------

Net cash used in operating activities                       (745,950)               (704,405)             (7,729,219)
                                                  ------------------      ------------------      ------------------


                                                        F-40





                                        AETHLON MEDICAL, INC. AND SUBSIDIARIES
                                            (A DEVELOPMENT STAGE COMPANY)
                                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                               FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2005 AND 2004 AND
                        FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30, 2005
                                                     (Unaudited)


Cash flows from investing activities:

Purchases of property and equipment                                        --            (18,285)           (244,236)
Patents and patents pending                                                --                 --            (352,833)
Proceeds from the sale of property and equipment                           --                 --              17,065
Cash of acquired company                                                   --                 --              10,728
                                                                  -----------        -----------         -----------

Net cash used in investing activities                                      --            (18,285)           (569,276)
                                                                  -----------        -----------         -----------

Cash flows from financing activities:

Proceeds from the issuance of notes payable                           100,000                 --           1,710,000

Principal repayments of notes payable                                      --            (22,500)           (212,500)
Proceeds from the issuance of convertible notes
  payable                                                             535,000                 --           1,533,000

Proceeds from the issuance of common stock                            177,600            748,000           5,343,270
                                                                  -----------        -----------         -----------

Net cash provided by financing activities                             812,600            725,500           8,373,770
                                                                  -----------        -----------         -----------

Net increase in cash                                                   66,650              2,810              75,275

Cash at beginning of period                                             8,625              1,619                  --
                                                                  -----------        -----------         -----------

Cash at end of period                                             $    75,275        $     4,429         $    75,275
                                                                  ===========        ===========         ===========


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


                                                              F-41






                     AETHLON MEDICAL, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2005

NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

Aethlon Medical, Inc. (the "Company") is a development stage therapeutic device
company focused on expanding the applications of its Hemopurifier(TM) platform
technology, which is designed to rapidly reduce the presence of infectious
viruses and other toxins from human blood. In this regard, the Company's core
focus is the development of therapeutic devices that treat HIV/AIDS,
Hepatitis-C, and pathogens targeted as potential biological warfare agents. In
pre-clinical testing, the Company has published that its HIV-Hemopurifier(TM)
removed 55% of HIV from human blood in three hours and in excess of 85% of HIV
in twelve hours. Additionally, the HIV-Hemopurifier(TM) captured 90% of gp120, a
toxic protein that depletes human immune cells, during a one-hour pre-clinical
blood study.

The Company is in the development stage on the Hemopurifier(TM) and significant
research and testing are still needed to reach commercial viability. Any
resulting medical device or process will require approval by the U.S. Food and
Drug Administration ("FDA"), and the Company has not yet begun efforts to obtain
FDA approval on its current lead product candidate, which may take several
years. Since many of the Company's patents were issued in the 1980's, they are
scheduled to expire in the near future. Thus, such patents may expire before FDA
approval, if any, is obtained.

The Company is classified as a development stage enterprise under accounting
principles generally accepted in the United States of America ("GAAP"), and has
not generated revenues from its principal operations.

The Company's common stock is quoted on the Over-the-Counter Bulletin Board of
the National Association of Securities Dealers under the symbol "AEMD.OB".

The accompanying unaudited condensed consolidated financial statements of the
Company have been prepared in accordance with GAAP for interim financial
information. Accordingly, they do not include all of the information and
footnotes required by GAAP for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the three and six month periods ended September 30, 2005 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2006.

NOTE 2. GOING CONCERN AND LIQUIDITY CONSIDERATIONS

The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the ordinary course of business. The Company has
experienced a loss of approximately $20.6 million for the period from January
31, 1984 (Inception) through September 30, 2005. The Company has not generated
significant revenue or any profit from operations since inception. A substantial
amount of additional capital will be necessary to advance the development of the
Company's products to the point at which they may become commercially viable.
The Company's current plan of operation is to fund the Company's anticipated
increased research and development activities and operations for the near future
utilizing its existing financial agreement with Fusion Capital Fund II, LLC
("Fusion Capital") as well as the remaining $295,000 under the 10% Series A
Convertible Promissory Notes (see Note 4, Notes Payable).


                                      F-42





                     AETHLON MEDICAL, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2005

NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION (continued)

No assurance can be given that the Company will receive any additional funds
under its agreement with Fusion Capital. Based on the Company's projections of
additional employees for operations and to complete research, development and
testing associated with its Hemopurifier(TM) products, the Company anticipates
that these funds will satisfy its cash requirements, including this anticipated
increase in operations, in excess of the next twelve months. However, due to
market conditions, and to assure availability of funding for operations in the
long term, the Company may arrange for additional funding, subject to acceptable
terms, during the next twelve months.

The condensed consolidated financial statements do not include any adjustments
relating to the recoverability of assets that might be necessary should the
Company be unable to continue as a going concern. The Company's continuation as
a going concern is dependent upon its ability to obtain additional financing as
may be required, and generate sufficient revenue and operating cash flow to meet
its obligations on a timely basis.

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies of the Company presented below is
designed to assist the reader in understanding the Company's consolidated
financial statements. Such financial statements and related notes are the
representations of Company management, who is responsible for their integrity
and objectivity. These accounting policies conform to GAAP in all material
respects, and have been consistently applied in preparing the accompanying
condensed consolidated financial statements.

PRINCIPLES OF CONSOLIDATION

The accompanying condensed consolidated financial statements include the
accounts of Aethlon Medical, Inc. and its legal wholly-owned subsidiaries
Aethlon, Inc., Hemex, Inc. and Cell Activation, Inc.(collectively hereinafter
referred to as the "Company"). These subsidiaries are dormant and there exist no
material intercompany transactions or balances.

STOCK BASED COMPENSATION

At September 30, 2005, the Company has two stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES" ("APB 25"), and related
Interpretations.

No stock-based employee compensation cost is reflected in net loss, as all
options granted under those plans had an exercise price equal to or greater than
the market value of the underlying common stock on the date of grant. The
following table illustrates the effect on net loss and loss per share if the
Company had applied the fair value recognition provisions of Statement of
Financial Accounting Standards "SFAS" No. 123, "ACCOUNTING FOR STOCK BASED
COMPENSATION", ("SFAS 123") as Amended, to stock-based employee compensation for


                                      F-43





                     AETHLON MEDICAL, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2005

STOCK BASED COMPENSATION (continued)

the period indicated.

          Six Months Ended September 30,            2005                2004
                                                 -----------        -----------
Net loss:
    As reported                                  $ 1,475,323        $   829,945
    Pro forma compensation expense                    57,000                 --
                                                 -----------        -----------
    Pro forma                                    $ 1,532,323        $   829,945
                                                 ===========        ===========

Basic and diluted net loss per share:
    As reported                                  $     (0.08)       $     (0.06)
                                                 ===========        ===========
    Pro forma                                    $     (0.08)       $     (0.06)
                                                 ===========        ===========


The Company accounts for stock-based compensation to non-employees in accordance
with the fair value recognition requirements of SFAS 123 No. and Emerging Issues
Task Force 96-18 "ACCOUNTING FOR EQUITY INVESTMENTS THAT ARE ISSUED TO OTHER
THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS AND
SERVICES."

LOSS PER COMMON SHARE

Loss per common share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the year in
accordance with SFAS No. 128, "EARNINGS PER SHARE."

Securities that could potentially dilute basic loss per share (prior to their
conversion, exercise or redemption) were not included in the
diluted-loss-per-share computation because their effect is anti-dilutive.

PATENTS

The Company capitalizes the cost of patents, some of which were acquired, and
amortizes such costs over the shorter of the remaining legal life or their
estimated economic life, upon issuance of the patent.

RESEARCH AND DEVELOPMENT EXPENSES

The Company incurred approximately $478,203 and $153,095 of research and
development expenses during the six months ended September 30, 2005 and 2004,
respectively. For the fiscal quarter ended September 30, 2005 and 2004, the
Company incurred research and development expense of approximately $235,806 and
$124,080, respectively.

IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

SFAS No.144 ("SFAS 144"), "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS
AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144 requires
that long-lived assets be reviewed for impairment whenever events or changes in


                                      F-44





                     AETHLON MEDICAL, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2005

IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (Continued)

circumstances indicate that their carrying amounts may not be recoverable. If
the cost basis of a long-lived asset is greater than the projected future
undiscounted net cash flows from such asset (excluding interest), an impairment
loss is recognized. Impairment losses are calculated as the difference between
the cost basis of an asset and its estimated fair value. SFAS 144 also requires
companies to separately report discontinued operations and extends that
reporting requirement to a component of an entity that either has been disposed
of (by sale, abandonment or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or the estimated fair value less costs to sell. Management
believes that no impairment existed at or during the six months ended September
30, 2005.

STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE

The Company granted warrants in connection with the issuance of certain notes
payable. Under Accounting Principles Board Opinion No. 14, "ACCOUNTING FOR
CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE WARRANTS," the relative
estimated fair value of such warrants represents a discount from the face amount
of the notes payable. Such discounts are amortized to interest expense over the
term of the notes.

DERIVATIVES

The Company has an obligation to register for resale the shares underlying
warrants in connection with the issuance of its 10% Series A Convertible
Promissory Notes (see Note 4). In accordance with Emerging Issues Task Force
("EITF") No. 00-19, "ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS INDEXED TO,
AND POTENTIALLY SETTLED IN, A COMPANY'S OWN STOCK," the value of the warrants is
recorded as a liability until such registration is effective. The Company will
be required to re-measure the fair value of these warrants at the end of each
quarter until a registration statement for the common shares underlying the
warrants is declared effective, at which time the fair value of the warrant is
adjusted and any remaining associated liability is then reclassified to equity.

BENEFICAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE

The convertible feature of certain notes payable provides for a rate of
conversion that is below market value. Such feature is normally characterized as
a "Beneficial Conversion Feature" ("BCF"). Pursuant to EITF Issue No. 98-5,
"ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR
CONTINGENTLY ADJUSTABLE CONVERSION RATIO" and EITF No. 00-27, "APPLICATION OF
EITF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS," the estimated fair
value of the BCF is recorded in the consolidated financial statements as a
discount from the face amount of the notes. Such discounts are amortized to
interest expense over the term of the notes.

ACCOUNTING FOR TRANSACTIONS INVOLVING STOCK COMPENSATION

Financial Accounting Standards Board ("FASB") Interpretation No. 44 ("FIN 44"),
"ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION, AN
INTERPRETATION OF APB 25" clarifies the application of APB 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence for various modifications to the terms of a previously


                                      F-45





                     AETHLON MEDICAL, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2005

ACCOUNTING FOR TRANSACTIONS INVOLVING STOCK COMPENSATION (continued)

fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination.

Under APB 25, compensation expense is the excess, if any, of the estimated fair
value of the stock at the grant date or other measurement date over the amount
an employee must pay to acquire the stock. Compensation expense, if any, is
recognized over the applicable service period, which is usually the vesting
period.

SFAS 123, if fully adopted, changes the method of accounting for employee
stock-based compensation plans to the fair value based method. For stock options
and warrants, fair value is estimated using an option pricing model that takes
into account the stock price at the grant date, the exercise price, the expected
life of the option or warrant, stock volatility and the annual rate of quarterly
dividends. Compensation expense, if any, is recognized over the applicable
service period, which is usually the vesting period. The adoption of the
accounting methodology of SFAS 123 is optional and we have elected to continue
accounting for stock-based compensation issued to employees using APB 25;
however, pro forma disclosures, as the Company adopted the cost recognition
requirement under SFAS 123, are required to be presented.

SFAS 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE,
AN AMENDMENT OF FASB STATEMENT NO. 123," provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this Statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.

INCOME TAXES

Under SFAS 109, "ACCOUNTING FOR INCOME TAXES," deferred tax assets and
liabilities are recognized for the future tax consequences attributable to the
difference between the consolidated financial statements and their respective
tax basis. Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts reported for income tax purposes, and (b) tax
credit carryforwards. The Company records a valuation allowance for deferred tax
assets when, based on management's best estimate of taxable income (if any) in
the foreseeable future, it is more likely than not that some portion of the
deferred tax assets may not be realized.

NOTE 4. NOTES PAYABLE

On May 16, 2005, the Company issued Fusion Capital a $30,000 Convertible
Promissory Note (the "Convertible Note") with an interest rate of fifteen
percent (15%) per annum that matured on August 15, 2005 (the "Maturity Date").
The Convertible Note is convertible into shares of restricted common stock at
any time at the election of Fusion at a conversion price equal to $0.20 per
share for any conversion occurring on or prior to the Maturity Date, or at a
price equal to the lesser of (i) 75% of the average of the three (3) lowest
closing sale prices of the common shares during the twelve (12) trading days
prior to the submission of a conversion notice or (ii) $0.20 per share, for any


                                      F-46





                     AETHLON MEDICAL, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2005


NOTE 4. NOTES PAYABLE (continued)

conversion occurring after the Maturity Date. In addition, the Company issued
Fusion a five-year warrant to purchase 300,000 shares of the Company's common
stock at an exercise price of $0.25 per share (the "Warrant"). The warrant has
been valued using a Black-Scholes option pricing model and an associated
discount of $19,655, which will accrete to interest expense over the term of the
Convertible Note, has been recorded. The convertible feature of the Convertible
Note provides for a rate of conversion that is below market value. Pursuant to
EITF 98-5 and EITF 00-27, the Company has estimated the fair value of such
Beneficial Conversion Feature ("BCF") to be $10,345 and records such amount as a
debt discount. Such discount is being accreted to interest expense over the term
of the Convertible Note. Total interest expense on the Convertible Note for
amortization of the above debt discount and BCF totaled $30,000 for the six
months ended September 30, 2005.

On May 27, 2005, the Company issued a promissory note (the "Note") to an
accredited investor in an amount of $100,000 with 12% interest maturing on
December 1, 2005. In conjunction with the issuance of the Note, the Company also
issued a 12-month warrant to acquire 400,000 shares of Common Stock at $0.25 per
share. Accordingly, this warrant has been valued using a Black Scholes option
pricing model and an associated discount of $41,860, which will accrete to
interest expense over the term of the Note, has been recorded. Such interest
expense totaled $31,466 for the six months ended September 30, 2005.

From July 11, 2005 through September 30, 2005 the Company received cash
investments of $455,000 from an accredited investor (Ellen R. Weiner Family
Revocable Trust) based on agreed-upon terms reached on the cash receipt dates.
Such investments were documented on November 2, 2005 in a 10% Series A
Convertible Note ("Note"). The Note accrues interest at a rate of ten percent
(10%) per annum and matures on January 2, 2007. The Note is convertible into
shares of restricted common stock at any time at the election of the holder at a
conversion price equal to $0.20 per share for any conversion occurring on or
prior to the maturity date. In addition, upon conversion, the Company is
obligated to issue a three-year Warrant (the "Warrant") to purchase a number of
shares equal to the number of shares into which the Note was converted at an
exercise price of $0.20. The Warrant has been valued using a Binomial Lattice
option pricing model and an associated discount of $253,875, measured at the
commitment dates, will be expensed as future conversions occur. The convertible
feature of the Convertible Note provides for a rate of conversion that is below
market value. Pursuant to EITF 98-5 and EITF 00-27, the Company has estimated
the fair value of such Beneficial Conversion Feature ("BCF") to be $201,125 and
records such amount as a debt discount. Such discount is being accreted to
interest expense over the term of the Convertible Note. Total interest expense
on the Convertible Note for amortization of the above debt discount and BCF
totaled $31,297 for the three months ended September 30, 2005.

From August 8, 2005 through September 30, 2005 the Company received cash
investments of $50,000, from an accredited investor (Allan S. Bird) based on
agreed upon terms on the cash receipt dates. Such investments were documented on
November 2, 2005 in a 10% Series A Convertible Note ("Note"). The Note accrues
interest at a rate of ten percent (10%) per annum and matures on January 2,
2007. The Note is convertible into shares of restricted common stock at any time
at the election of the holder at a conversion price equal to $0.20 per share for
any conversion occurring on or prior to the maturity date. In addition, upon


                                      F-47





                     AETHLON MEDICAL, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2005

NOTE 4. NOTES PAYABLE (continued)

conversion, the Company is obligated to issue a three-year Warrant (the
"Warrant") to purchase a number of shares equal to the number of shares into
which the Note was converted at an exercise price of $0.20. The Warrant has been
valued using a Binomial Lattice option pricing model and an associated discount
of $28,750, measured at the commitment dates, will be expensed as future
conversions occur. The convertible feature of the Convertible Note provides for
a rate of conversion that is below market value. Pursuant to EITF 98-5 and EITF
00-27, the Company has estimated the fair value of such Beneficial Conversion
Feature ("BCF") to be $21,250 and records such amount as a debt discount. Such
discount is being accreted to interest expense over the term of the Convertible
Note. Total interest expense on the Convertible Note for amortization of the
above debt discount and BCF totaled $3,639 for the three months ended September
30, 2005.

The Company is currently in default on approximately $457,500 of amounts owed
under various notes payable and accrued liabilities and is currently seeking
other financing arrangements to retire all past due notes. At September 30, 2005
the Company had accrued interest in the amount of $210,155 associated with these
notes and accrued liabilities payable.

NOTE 5. COMMITMENTS AND CONTINGENCIES

REGISTRATION RIGHTS AGREEMENTS

In June 2004, the Company completed a private placement of common stock with
accredited investors, including Fusion Capital Fund II, LLC. In connection with
the private placement, the Company entered into a common stock purchase
agreement with Fusion Capital, whereby Fusion Capital has committed to purchase
up to an additional $6,000,000 of the Company's common stock over a 30-month,
commencing, at the Company's election, after the Securities and Exchange
Commission ("SEC") has declared effective a registration statement covering such
shares. The SEC declared the registration statement effective on December 7,
2004. On September 7, 2005, the Company was obligated to file a post-effective
amendment to its registration statement to update the financial statements. At
September 30, 2005, the Company had not yet filed such post-effective amendment
to its registration statement. In accordance with the Registration Rights
Agreement with Fusion Capital, the Company may accrue liquidated damages equal
to 2% of the aggregate amount paid by Fusion Capital for the shares held by
Fusion Capital during such period that the registration statement ceases to
remain effective. As of November 9, 2005, Fusion Capital does not own any
Purchase Shares of the Company's common stock, thus there are no liquidated
damages owed to Fusion Capital as of the date of this report.

NOTE 6. EQUITY TRANSACTIONS

On September 9, 2005, the Company granted 2,857,143 options to James A. Joyce,
its Chief Executive Officer, in exchange for $300,000 of accrued related-party
liabilities. The fair value of such options approximated the value of the
accrued related-party liability.

In July 2005, the Company issued 43,479 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.23 per share in payment for regulatory affairs consulting
services to the Company.


                                      F-48





                     AETHLON MEDICAL, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2005

NOTE 6. EQUITY TRANSACTIONS (continued)

In July 2005, the Company issued 2,155 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.232 per share in payment for regulatory affairs consulting
services to the Company.

In August 2005, the Company issued 37,863 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.226 per share in payment for regulatory affairs consulting
services to the Company.

In August 2005, the Company issued 91,739 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.230 per share in payment for regulatory affairs consulting
services to the Company.

In August 2005, the Company issued 21,368 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.234 per share in payment for regulatory affairs consulting
services to the Company.

In August 2005, the Company issued 175,755 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.212 per share in payment for regulatory affairs consulting
services to the Company.

In September 2005, the Company issued 27,852 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.206 per share in payment for regulatory affairs consulting
services to the Company.

NOTE 7. SUBSEQUENT EVENTS

In October 2005, the Company issued 21,186 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.236 per share in payment for regulatory affairs consulting
services to the Company.

In October 2005, the Company issued 35,278 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.216 per share in payment for regulatory affairs consulting
services to the Company.

In November 2005, the Company issued 19,948 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.384 per share in payment for regulatory affairs consulting
services to the Company.

In November 2005, the Company issued 97,662 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.37 per share in payment for regulatory affairs consulting
services to the Company.

In November 2005, the Company issued 13,298 shares of common stock pursuant to


                                      F-49





                     AETHLON MEDICAL, INC. AND SUBSIDIARIES
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                               September 30, 2005

NOTE 7. SUBSEQUENT EVENTS (continued)

the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.376 per share in payment for regulatory affairs consulting
services to the Company.

The Company is required to file a registration statement on Form SB-2 the later
of November 30, 2005 or 30 days after the date the Company completes an
additional financing of at least $1.0 million but in no event later than
December 31, 2005 for the purposes of registering the resale of the shares of
common stock issuable upon conversion of the Promissory Notes and exercise of
the Warrants.


                                      F-50