<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-QSB

                                   (Mark One)

[X]      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934.

                  For the quarterly period ended June 30, 2006

                                       OR

[ ]      TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
         EXCHANGE ACT OF 1934.

                   For the transition period from _____to_____

                         COMMISSION FILE NUMBER 0-21846

                              AETHLON MEDICAL, INC.
                              ---------------------
             (Exact name of registrant as specified in its charter)

           NEVADA                                                 13-3632859
------------------------------                               -------------------
State or other jurisdiction of                                (I.R.S. Employer
incorporation or organization)                               Identification No.)

3030 Bunker Hill St, Ste 4000, San Diego, CA                         92109
--------------------------------------------                       ---------
  (Address of principal executive offices)                         (Zip Code)

                                 (858)-459-7800
                                 ---------------
              (Registrant's telephone number, including area code)

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

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

The number of shares of common stock of the registrant outstanding as of August
10, 2006 was 25,815,789.

Transitional Small Business Disclosure Format: Yes [ ]  No [X]

Documents incorporated by reference: None





<PAGE>


                          PART I. FINANCIAL INFORMATION


ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

        CONDENSED CONSOLIDATED BALANCE SHEET AT JUNE 30, 2006                 1

        CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
        THREE MONTHS ENDED JUNE 30, 2006 AND 2005 AND FOR THE PERIOD
        JANUARY 31, 1984 (INCEPTION) THROUGH JUNE 30, 2006                    2

        CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE
        THREE MONTHS ENDED JUNE 30, 2006 AND 2005 AND FOR THE PERIOD
        JANUARY 31, 1984 (INCEPTION) THROUGH JUNE 30, 2006                    3

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                  4

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION             12

ITEM 3. CONTROLS AND PROCEDURES                                               15

                           PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS                                                     16

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS           16

ITEM 3. DEFAULTS UPON SENIOR SECURITIES                                       16

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                   16

ITEM 5. OTHER INFORMATION                                                     16

ITEM 6. EXHIBITS                                                              16




<PAGE>


                                     PART I.
                              FINANCIAL INFORMATION

         All references to "us", "we", "our" "Aethlon", "Aethlon Medical", or
"the Company" refer to Aethlon Medical, Inc., its predecessors and its
subsidiaries.


ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

                              AETHLON MEDICAL, INC.
                          (A Development Stage Company)
                      CONDENSED CONSOLIDATED BALANCE SHEET
                                   (UNAUDITED)


                                                                     June 30,
                                                                       2006
                                                                   ------------
                                     ASSETS
Current assets
     Cash                                                          $    421,083
     Prepaid expenses                                                    19,503
                                                                   ------------
                                                                        440,586

Property and equipment, net                                              14,153
Patents, net                                                            129,308
Other assets                                                             13,800
                                                                   ------------

                                                                   $    597,847
                                                                   ============

                     LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
     Accounts payable and accrued
       liabilities                                                 $    817,803
     Due to related parties                                           1,195,624
     Notes payable                                                      502,500
     Convertible notes payable, net of discount                         207,345
                                                                   ------------
                                                                      2,723,272

Commitments and Contingencies

Stockholders' Deficit
     Common stock, par value $0.001 per
         share; 50,000,000 shares authorized;
         25,626,300 shares issued
         and outstanding                                                 25,626
     Additional paid-in capital                                      20,563,219
     Deferred consulting fees                                           (32,667)
     Deficit accumulated during development stage                   (22,681,603)
                                                                   ------------
                                                                     (2,125,425)
                                                                   ------------
                                                                   $    597,847
                                                                   ============

         The accompanying notes are an integral part of these condensed
                       consolidated financial statements.

                                       1



<PAGE>
<TABLE>


                                  AETHLON MEDICAL, INC.
                              (A Development Stage Company)
                     CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                  For the Three Months Ended June 30, 2006 and 2005 and
            For the Period January 31, 1984 (Inception) through June 30, 2006
                                       (UNAUDITED)


                                                                             JANUARY 31,
                                          Three             Three              1984
                                          Months            Months           (INCEPTION)
                                          Ended             Ended             Through
                                         June 30,          June 30,           June 30,
                                           2006              2005               2006
                                       ------------      ------------      ------------
<S>                                    <C>               <C>               <C>
REVENUES
  Grant income                         $         --      $         --      $  1,424,012
  Subcontract income                             --                --            73,746
  Sale of research and development               --                --            35,810
                                       ------------      ------------      ------------
                                                 --                --         1,533,568

EXPENSES

  Professional fees                         200,504           386,270         5,438,639
  Payroll and related                       184,257           179,090         7,430,262
  General and administrative                117,071           169,709         4,549,102
  Impairment                                     --                --         1,313,253
                                       ------------      ------------      ------------
                                            501,832           735,069        18,731,256

OPERATING LOSS                             (501,832)         (735,069)      (17,197,688)

OTHER (INCOME) EXPENSE
  Change in fair value of
      warrant liability                         --                --            360,125
  Interest and other debt expense           114,663            66,933         4,986,115
  Interest income                                --                --           (17,415)
  Other                                       2,661                --           155,090
                                       ------------      ------------      ------------
                                            117,324            66,933         5,483,915
                                       ------------      ------------      ------------

         NET LOSS                      $   (619,156)     $   (802,002)     $(22,681,603)
                                       ============      ============      ============

BASIC AND DILUTED LOSS PER
COMMON SHARE                           $      (0.02)     $      (0.05)
                                       ============      ============

WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING                25,567,776        17,701,182
                                       ============      ============

             The accompanying notes are an integral part of these condensed
                           consolidated financial statements.


                                        2



<PAGE>
                                               AETHLON MEDICAL, INC.
                                           (A Development Stage Company)
                                  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                               For the Three Months Ended June 30, 2006 and 2005 and
                         For the Period January 31, 1984 (Inception) Through June 30, 2006
                                                    (UNAUDITED)


                                                                     Three             Three        January 31, 1984
                                                                    Months            Months          (Inception)
                                                                     Ended             Ended            Through
                                                                   June 30,          June 30,           June 30,
                                                                     2006              2005              2006
                                                                 ------------      ------------      ------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss                                                         $   (619,156)     $   (802,002)     $(22,681,603)
Adjustments to reconcile net loss to net cash
   used in operating activities:
     Depreciation and amortization                                      8,307             5,972           992,300
     Amortization of deferred consulting fees                          12,250            30,000            76,333
     Gain on sale of property and equipment                                --                --           (13,065)
     Gain on settlement of debt                                            --                --          (131,175)
     Loss on settlement of accrued legal liabilities                       --                --           142,245
     Stock based compensation                                           4,750                --             4,750
     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                                   52,466           208,085         3,264,468
     Change in fair value of warrant liability                             --                --           360,125
     Intrinsic value of stock options issued to directors                  --                --           424,262
     Amortization of debt discounts                                    64,980            39,489         1,173,005
     Impairment of patents and patents pending                             --                --           416,026
     Impairment of goodwill                                                --                --           897,227
     Deferred compensation forgiven                                        --                --           217,223
     Changes in operating assets and liabilities:
         Prepaid expenses                                              12,719            (4,388)          142,034
         Other assets                                                   3,400             6,225           (13,800)
         Accounts payable and accrued liabilities                     (44,220)          194,754         1,469,730
         Due to related parties                                       (43,000)           12,688         1,429,125
                                                                 ------------      ------------      ------------
Net cash used in operating activities                                (547,504)         (309,177)       (9,115,054)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment                                    (7,791)               --          (256,678)
Acquisition of patents                                                     --                --          (363,833)
Proceeds from sale of property and equipment                               --                --            17,065
Cash of acquired company                                                   --                --            10,728
                                                                 ------------      ------------      ------------
Net cash used in investing activities                                  (7,791)               --          (592,718)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable                          $         --      $    100,000      $  1,710,000
Principal payments of notes payable                                        --                --          (292,500)
Proceeds from issuance of convertible notes payable                        --            30,000         2,028,000
Proceeds from issuance of common stock                                140,001           177,600         6,760,086
Professional fees related to registration statement                                                       (76,731)
                                                                 ------------      ------------      ------------

Net cash provided by financing activities                             140,001           307,600        10,128,855
                                                                 ------------      ------------      ------------

NET (DECREASE) INCREASE IN CASH                                      (415,294)           (1,577)          421,083
CASH - beginning of period                                            836,377             8,625                --
                                                                 ------------      ------------      ------------

CASH - end of period                                             $    421,083      $      7,048      $    421,083
                                                                 ============      ============      ============

                          The accompanying notes are an integral part of these condensed
                                        consolidated financial statements.


                                                         3
</TABLE>




<PAGE>

                              AETHLON MEDICAL, INC.
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2006
                                   (UNAUDITED)


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 pathogens targeted as potential biological warfare
agents, HIV/AIDS, and Hepatitis C. 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 Hemopurifier(TM) is in the development stage 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 and
such approval may take several years. Since some 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 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 and with the instructions to Form 10-QSB. 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-month period ended June 30,
2006 are not necessarily indicative of the results that may be expected for the
year ending March 31, 2007. For further information, refer to the Company's
Annual Report on Form 10-KSB for the year ended March 31, 2006, which includes
audited financial statements and footnotes as of March 31, 2006 and for the
years ended March 31, 2005 and 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 $22,681,603 for the period from
January 31, 1984 (Inception) through June 30, 2006. 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 financing agreement with
Fusion Capital Fund II, LLC ("Fusion Capital").

         No assurance can be given that the Company will receive any additional
funds under the Company's agreement with Fusion Capital however, the Company
anticipates that the Fusion Capital financing agreement will satisfy its cash
requirements for the foreseeable future. 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 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 condensed
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.

                                       4



<PAGE>

                              AETHLON MEDICAL, INC.
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2006
                                   (UNAUDITED)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

PRINCIPLES OF CONSOLIDATION

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

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 Statement of Financial Accounting Standards ("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. Had
such securities been factored in, an additional 7,133,811 common stock
equivalents would have been included in the calculation of earnings per share.

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 $177,107 and $305,692 of research and
development expenses during the three months ended June 30, 2006 and 2005,
respectively, which are included in operating expenses in the accompanying
condensed consolidated statements of operations.

EQUITY INSTRUMENTS FOR SERVICES PROVIDED BY OTHER THAN EMPLOYEES

The Company follows SFAS No. 123-R (as interpreted by Emerging Issues Task Force
("EITF") Issue No. 96-18, "ACCOUNTING FOR EQUITY INSTRUMENTS THAT ARE ISSUED TO
OTHER THAN EMPLOYEES FOR ACQUIRING, OR IN CONJUNCTION WITH SELLING, GOODS OR
SERVICES") ("EITF No. 96-18") to account for transactions involving goods and
services provided by third parties where the Company issues equity instruments
as part of the total consideration. Pursuant to paragraph 7 of SFAS No. 123-R,
the Company accounts for such transactions using the fair value of the
consideration received (i.e. the value of the goods or services) or the fair
value of the equity instruments issued, whichever is more reliably measurable.

The Company applies EITF No. 96-18, in transactions, when the value of the goods
and/or services are not readily determinable and (1) the fair value of the
equity instruments is more reliably measurable and (2) the counterparty receives
equity instruments in full or partial settlement of the transactions, using the
following methodology:

(a)  For transactions where goods have already been delivered or services
     rendered, the equity instruments are issued on or about the date the
     performance is complete (and valued on the date of issuance).
(b)  For transactions where the instruments are issued on a fully vested,
     non-forfeitable basis, the equity instruments are valued on or about the
     date of the contract.
(c)  For any transactions not meeting the criteria in (a) or (b) above, the
     Company re-measures the consideration at each reporting date based on its
     then current stock value.

IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

The Company follows SFAS No. 144, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED
ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF" ("SFAS No. 144") addresses
financial accounting and reporting for the impairment or disposal of long-lived
assets. SFAS No. 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 No. 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, if any. Management noted no impairment indicators requiring review for
impairment at or during the three months ended June 30, 2006.


                                       5



<PAGE>

                              AETHLON MEDICAL, INC.
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2006
                                   (UNAUDITED)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

BENEFICIAL 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 No. 98-5,
"ACCOUNTING FOR CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR
CONTINGENTLY ADJUSTABLE CONVERSION RATIO" and EITF 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.

DERIVATIVE LIABILITIES

The Company evaluates free-standing instruments (or embedded derivatives)
indexed to its common stock to properly classify such instruments within equity
or as liabilities in its financial statements, pursuant to the requirements of
the EITF No. 00-19, "Accounting for Derivative Financial Instruments Indexed to,
and Potentially Settled in, a Company's Own Stock," EITF No. 01-06, "The Meaning
of Indexed to a Company's Own Stock," EITF No. 05-04, "The Effect of a
Liquidated Damages Clause on a Freestanding Financial Instrument Subject to EITF
No. 00-19," and Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as amended. The
Company's policy is to settle instruments indexed to its common shares on a
first-in- first-out basis.

The Company accounts for the effects of registration rights and related
liquidated damages pursuant to EITF No. 05-04, View C, subject to EITF No.
00-19. Pursuant to EITF No. 05-04, View C, liquidated damages payable in cash or
stock are accounted for as a separate derivative, which requires a periodical
valuation of its fair value and a corresponding recognition of liabilities
associated with such derivative. The Company accounts for certain embedded
conversion features and free-standing warrants pursuant to SFAS No. 133 and EITF
No. 00-19, which require corresponding recognition of liabilities associated
with such derivatives at their fair values and changes in fair values to be
charged to earnings.


CLASSIFICATION OF WARRANT ISSUANCE

In connection with the issuance of its 10% Series A Convertible Promissory
Notes, the Company has an obligation to issue warrants upon conversion of the
notes, which are convertible at any time at the discretion of the noteholders
(see Note 4). The obligation to issue the warrants meets the criteria of an
embedded derivative to be bifurcated pursuant to SFAS No. 133, "ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" ("SFAS No. 133"), as amended.
Under this transaction, the Company is obligated to and has registered for
resale the common shares underlying the warrants. At June 30, 2006, the Company
has sufficient registered shares to settle the exercise of warrants. As a
result, at June 30, 2006, the embedded derivative associated with this warrant
obligation meets the scope exception of paragraph 11 (a) of SFAS No. 133. If
such were not the case, these warrants would need to be classified as a
liability. The classification of these warrants will be evaluated at each
reporting date.


STOCK BASED COMPENSATION

Effective April 1, 2006, the Company adopted the provisions of SFAS No. 123-R,
"Share-Based Payment," ("SFAS No. 123-R"). SFAS No. 123-R requires employee
stock options and rights to purchase shares under stock participation plans to
be accounted for under the fair value method and requires the use of an option
pricing model for estimating fair value. Accordingly, share-based compensation
is measured at the grant date, based on the fair value of the award. The Company
previously accounted for awards granted under its equity incentive plan under
the intrinsic value method prescribed by Accounting Principles Board Opinion No.
25, "ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES," and related interpretations, and
provided the required pro forma disclosures prescribed by SFAS No. 123,
"ACCOUNTING FOR STOCK BASED COMPENSATION," as amended. The exercise price of
options is generally equal to the market price of the Company's common stock
(defined as the closing price as quoted on the Over-the-Counter Bulletin Board
administered by Nasdaq) on the date of grant. Accordingly, no share-based
compensation was recognized in the financial statements for the three months
ended June 30, 2005. Under the modified prospective method of adoption for SFAS
No. 123-R, the compensation cost recognized by the Company beginning April 1,
2006 includes (a) compensation cost for all equity incentive awards granted
prior to, but not yet vested as of April 1, 2006, based on the grant-date fair
value estimated in accordance with the original provisions of SFAS No. 123, and
(b) compensation cost for all equity incentive awards granted subsequent to
April 1, 2006, based on the grant-date fair value estimated in accordance with
the provisions of SFAS No. 123-R.

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 and generally expire within five
years from the grant date.

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 June 30, 2006, the Company had granted 47,500 options under
the 2000 Stock Option Plan of which 15,000 had been forfeited, with 467,500
available for future issuance. All of these options vested prior to the adoption
of FAS 123-R.

                                       6
<PAGE>

                              AETHLON MEDICAL, INC.
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2006
                                   (UNAUDITED)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

The effects of share-based compensation resulting from the application of SFAS
No. 123-R to options granted outside of the Company's Stock Option Plan resulted
in an expense of $4,750 for the quarter ended June 30, 2006. This expense was
recorded as stock compensation included in payroll and related expenses in the
accompanying June 30, 2006 condensed consolidated statement of operations.
Share-based compensation recognized as a result of the adoption of SFAS No.
123-R as well as pro forma disclosures according to the original provisions of
SFAS No. 123 for periods prior to the adoption of SFAS No. 123-R use the
Binomial Lattice option pricing model for estimating fair value of options
granted.

The following table summarizes the effect of share-based compensation resulting
from the application of SFAS No. 123-R to options granted:

                                                        Three Months Ended
                                                          June 30, 2006

Payroll and related                                       $   (4,750)
                                                           =========
Net share-based compensation effect
   in net loss from continuing operations                  $  (4,750)
                                                           =========

Basic and diluted loss per common share                    $   (0.00)
                                                           =========

In accordance with SFAS No. 123-R, the Company adjusts share-based compensation
on a quarterly basis for changes to the estimate of expected award forfeitures
based on actual forfeiture experience. The effect of adjusting the forfeiture
rate for all expense amortization after March 31, 2006 is recognized in the
period the forfeiture estimate is changed. The effect of forfeiture adjustments
in the first quarter of fiscal 2007 was insignificant.

Pro forma information required under SFAS No. 123 for periods prior to fiscal
2007 as if the Company had applied the fair value recognition provisions of SFAS
No. 123 to options granted under and outside of the Company's equity incentive
plans was as follows:

                                                      Three Months Ended
                                                            June 30,
                                                             2005
                                                          -----------

Net loss as reported                                      $  (802,002)
   Less: Total stock-based employee compensation
    expense determined under the Binomial Lattice
    option pricing model, net of tax                              --
                                                          -----------
Pro forma net loss                                        $  (802,002)
                                                          ===========

Basic and diluted loss per common share:
   As reported                                            $     (0.05)
                                                          ===========
   Pro forma                                              $     (0.05)
                                                          ===========

Pro forma compensation expense reported in the above table is generally based on
the vesting provisions in the related stock option grants. Since the requisite
service period for all options granted prior to April 1, 2005 had been completed
prior to such date, there is no pro forma compensation expense to disclose for
the three months ended June 30, 2005, as reflected in the above table. The
following weighted average assumptions were used as applicable in the above
tables:

                                    Three Months Ended
                                          June 30
                              ------------------------------
                                 2006                2005
                              ----------          ----------
Annual dividends                 zero                N/A
Expected volatility              72%                 N/A
Risk free interest rate          4.18%               N/A
Expected life                 4.7 years              N/A

                                       7



<PAGE>


                              AETHLON MEDICAL, INC.
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2006
                                   (UNAUDITED)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)


The expected volatility is based on the historical volatility. The expected life
of options granted is based on the "simplified method" described in the SEC's
Staff Accounting Bulletin No. 107 due to changes in the vesting terms and
contractual life of current option grants compared to the Company's historical
grants. Options outstanding that have vested and are expected to vest as of June
30, 2006 are as follows:

                                                      Weighted
                                         Weighted      Average
                                         Average      Remaining      Aggregate
                             Number of   Exercise    Contractual     Intrinsic
                              Shares      Price     Term in Years    Value (1)
---------------------------  ---------   --------   -------------    ---------

Vested                       7,135,518    $  0.39        6.12         $     --
Expected to vest             1,877,267       0.23        4.60         $168,954
                           -----------                               --------
     Total                   9,012,785                                $168,954
                            ===========                              =========

(1) These amounts represent the difference between the exercise price and $0.32,
the closing market price of the Company's common stock on June 30, 2006 as
quoted on the Over-the-Counter Bulletin Board under the symbol "AEMD.OB" for all
in-the-money options outstanding.

Options outstanding that are expected to vest are net of estimated future
forfeitures in accordance with the provisions of SFAS No. 123-R, which are
estimated when compensation costs are recognized. Additional information with
respect to stock option activity is as follows:

                                                   Outstanding Options
                                           -------------------------------------
                               Shares                   Weighted       Aggregate
                             Available     Number of     Average       Intrinsic
                             for Grant     Shares     Exercise Price   Value (1)
---------------------------  ---------     ------     --------------  ----------
March 31, 2006                 467,500   9,012,785       $ 0.38       $3,875,498
                                                                      ==========
Grants                              --          --          --
Exercises                           --          --          --
Cancellations                       --          --          --
                             ----------  ----------      ------
June 30, 2006                   467,500   9,012,785      $ 0.38       $  168,954
                             ==========  ==========      ======       ==========

Options exerciseable at:
March 31, 2006                            7,135,518      $ 0.39
June 30, 2006                             7,135,518      $ 0.39

(1) Represents the difference between the exercise price and the March 31, 2006
or June 30, 2006 market price of the Company's common stock, which was $0.81 and
$0.32, respectively.


INCOME TAXES

Under SFAS No. 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.


RECENT ACCOUNTING PRONOUNCEMENTS

In June 2005, the FASB issued SFAS No. 154, "ACCOUNTING CHANGES AND ERROR
CORRECTIONS, A REPLACEMENT OF APB OPINION NO. 20 AND SFAS NO. 3." ("SFAS No.
154") The statement applies to all voluntary changes in accounting principles,
and changes the requirements for accounting for and reporting of a change in
accounting principle. The Company does not believe the adoption of SFAS No. 154
will have a material impact on the Company's financial statements.

                                       8



<PAGE>

                              AETHLON MEDICAL, INC.
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2006
                                   (UNAUDITED)

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

In February 2006, the FASB issued SFAS No. 155 entitled "Accounting for Certain
Hybrid Financial Instruments," ("SFAS No. 155") an amendment of SFAS No. 133
("Accounting for Derivative Instruments and Hedging Activities") ("SFAS 133")
and SFAS No. 140 ("Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities") ("SFAS 140"). In this context, a hybrid
financial instrument refers to certain derivatives embedded in other financial
instruments. SFAS No. 155 permits fair value re-measurement of any hybrid
financial instrument that contains an embedded derivative that otherwise would
require bifurcation under SFAS No. 133. SFAS No. 155 also establishes a
requirement to evaluate interests in securitized financial assets in order to
identify interests that are either freestanding derivatives or "hybrids" which
contain an embedded derivative requiring bifurcation. In addition, SFAS No. 155
clarifies which interest/principal strips are subject to SFAS No. 133, and
provides that concentrations of credit risk in the form of subordination are not
embedded derivatives. SFAS No. 155 amends SFAS No. 140 to eliminate the
prohibition on a qualifying special-purpose entity from holding a derivative
financial instrument that pertains to a beneficial interest other than another
derivative. When SFAS No. 155 is adopted, any difference between the total
carrying amount of the components of a bifurcated hybrid financial instrument
and the fair value of the combined "hybrid" must be recognized as a
cumulative-effect adjustment of beginning deficit/retained earnings.

SFAS No. 155 is effective for all financial instruments acquired or issued after
the beginning of an entity's first fiscal year that begins after September 15,
2006. Earlier adoption is permitted only as of the beginning of a fiscal year,
provided that the entity has not yet issued any annual or interim financial
statements for such year. Restatement of prior periods is prohibited. The
Company has not determined the impact of SFAS No. 155 on its future consolidated
financial statements.

NOTE 4. NOTES PAYABLE

At June 30, 2006, the Company had $502,500 in principal amount of notes payable
outstanding with 12 noteholders.

The Company is currently in default on $502,500 of amounts owed under various
unsecured notes payable and is currently seeking other financing arrangements to
retire all past due notes. At June 30, 2006 the Company had accrued interest in
the amount of $290,066 associated with these defaulted notes payable.

At June 30, 2006, the Company had $1,000,000 in principal amount of convertible
notes payable outstanding, net of $792,655 discount, held by 4 noteholders (the
10% Series A Convertible Notes). The $792,655 discount is comprised of $62,780
in unamortized BCF discount and $729,875 in unamortized discount attributable to
the valuation of warrant rights associated with the issuance of the convertible
notes.

NOTE 5. EQUITY TRANSACTIONS

In April 2006, the Company issued 3,782 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.79 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.

In April 2006, the Company issued 25,601 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for past due rents owed by the Company
valued at $12,801 based on the value of the services.

In April 2006, the Company issued 6,313 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.79 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.

In April 2006, the Company issued 10,000 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.50 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.

In April 2006, the Company issued 14,563 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.29 per share in payment for regulatory affairs consulting
services to the Company valued at $4,165 based on the value of the services.

In April 2006, the Company issued 3,086 shares of restricted common stock at
$0.81 per share in payment for investor relations valued at $2,500 based on the
value of the services.

                                       9



<PAGE>

                              AETHLON MEDICAL, INC.
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2006
                                   (UNAUDITED)

NOTE 5. EQUITY TRANSACTIONS (continued)

During April 2006, the Company issued 209,679 shares of common stock at prices
between $0.57 and $0.74 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $140,002. These shares
are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.

In April 2006, the Company repaid a $25,000 15% promissory notes, including
accrued interest of $18,750, through the issuance of 107,759 restricted common
shares at $0.406 per share to an accredited individual investor.

In May 2006, the Company issued 8,532 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.59 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.

In May 2006, the Company issued 5,703 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.53 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.

In May 2006, the Company issued 4,545 shares of restricted common stock at $0.55
per share in payment for investor relations valued at $2,500 based on the value
of the services.

In June 2006, the Company issued 8,681 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.58 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000 based on the value of the services.

In June 2006, the Company issued 5,703 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.53 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.

In June 2006, the Company issued 3,363 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consultant
Stock Plan at $0.45 per share in payment for regulatory affairs consulting
services to the Company valued at $1,500 based on the value of the services.

NOTE 6. COMMITMENTS AND CONTINGENCIES

LEGAL MATTERS

From time to time, claims are made against the Company in the ordinary course of
business, which could result in litigation. Claims and associated litigation are
subject to inherent uncertainties and unfavorable outcomes could occur, such as
monetary damages, fines, penalties or injunctions prohibiting the Company from
selling one or more products or engaging in other activities. The occurrence of
an unfavorable outcome in any specific period could have a material adverse
effect on the Company's results of operations for that period or future periods.
The Company is not presently a party to any pending or threatened legal
proceedings.

REGISTRATION RIGHTS AGREEMENT

In January, 2006 the Company registered the common stock for resale underlying
the warrants to be issued upon conversion of its 10% Series A Convertible Notes
(the "Series A Notes"). Upon the occurrence of certain events, as defined,
including if (i) after a registration statement has been declared effective,
such registration statement ceases to be effective at any time prior to the end
of the effectiveness period without being succeeded with an amendment within 10
business days of such registration elapsing or by subsequent registration
statement filed with and declared effective by the SEC (ii) the common stock is
delisted or suspended from trading on an exchange, the Company shall pay
liquidated damages in cash of 1% of the original principal amount of the Series
A Notes. For each month that the event has not been cured, the Company shall pay
1.5 % in cash of the original principal balance of the Series A Notes. If the
Company fails to pay liquidated damages timely within seven days, the Company
shall be obligated to pay interest thereon at 12% per annum, accruing daily. At
the option of the Company, shares may be issued instead of cash for such
liquidated damages based upon the conversion price, then in effect. At June 30,
2006, the Company had an effective registration statement covering these
obligations. Accordingly, no value was ascribed to the registration rights
agreement obligation as the likelihood of an event triggering liquidated damages
is deemed to be remote at June 30, 2006. The Company will re-evaluate this
obligation at each reporting date in accordance with SFAS No. 133.

                                       10



<PAGE>

                              AETHLON MEDICAL, INC.
                          (A Development Stage Company)
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  June 30, 2006
                                   (UNAUDITED)

NOTE 7. SUBSEQUENT EVENTS

In July 2006, the Company issued 8,721 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.34 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.

In July 2006, the Company issued 10,684 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.47 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.

In July 2006, the Company issued 6,250 shares of restricted common stock at
$0.40 per share in payment for investor relations services to the Company valued
at $2,500.

In July 2006, the Company issued 7,813 shares of restricted common stock at
$0.32 per share in payment for investor relations services to the Company valued
at $2,500.

In July 2006, the Company issued 8,721 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.34 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.

In July 2006, the Company issued 132,765 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 valued at $48,858.

In July 2006, the Company issued 14,535 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.34 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.



                                       11



<PAGE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion of Aethlon Medical's financial condition and results of
operations should be read in conjunction with, and is qualified in its entirety
by the condensed consolidated financial statements and notes thereto, included
in Item 1 in this Quarterly Report on Form 10-QSB. This item contains
forward-looking statements that involve risks and uncertainties. Actual results
may differ materially from those indicated in such forward-looking statements.

FORWARD LOOKING STATEMENTS

All statements, other than statements of historical fact, included in
this Form 10-QSB are, or may be deemed to be, "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 Exchange Act. Such
forward-looking statements involve assumptions, known and unknown risks,
uncertainties and other factors which may cause the actual results, performance,
or achievements of Aethlon Medical, Inc. ("the Company") to be materially
different from any future results, performance, or achievements expressed or
implied by such forward looking statements contained in this Form 10-QSB. Such
potential risks and uncertainties include, without limitation, completion of the
Company's capital-raising activities, FDA approval of the Company's products,
other regulations, patent protection of the Company's proprietary technology,
product liability exposure, uncertainty of market acceptance, competition,
technological change, and other risk factors detailed herein and in other of the
Company's filings with the Securities and Exchange Commission. The
forward-looking statements are made as of the date of this Form 10-QSB, and the
Company assumes no obligation to update the forward-looking statements, or to
update the reasons actual results could differ from those projected in such
forward-looking statements.

THE COMPANY

We are a developmental 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. As such, we focus on developing therapeutic devices to treat acute viral
conditions brought on by pathogens targeted as potential biological warfare
agents and chronic viral conditions including HIV/AIDS and Hepatitis-C. The
Hemopurifier (tm) combines the established scientific technologies of
hemodialysis and affinity chromatography 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 these afflictions but can
lower viral loads and allow compromised immune systems to overcome otherwise
serious or fatal medical conditions.

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, California 92109. Our
telephone number is 858/459-7800. Our Web site is maintained at
http://www.aethlonmedical.com.

Our common stock is traded on the OTCBB under the symbol "AEMD.OB".

RESULTS OF OPERATIONS

THE THREE MONTHS ENDED JUNE 30, 2006 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2005.

OPERATING EXPENSES

Consolidated operating expenses were $501,832 for the three months ended June
30, 2006, versus $735,069 for the comparable period one year ago. This
represents an absolute dollar decrease of $233,237 or approximately 32% as
compared to the prior time period. This difference is comprised of reductions in
professional fees and general and administrative expenses of approximately
$185,766 and $52,637, respectively, offset by a slight increase in payroll
expense of $417.

Professional fees decreased by $185,766 or approximately 48% from the prior
period one year ago. The primary reason for this was a decrease in legal expense
of $201,732 and a decrease in public relations expense of $21,106 offset by a
$33,418 increase in scientific consulting expense and a net $3,654 increase in
all other professional expenses. The significant decrease in legal expense
results from the comparatively high legal expense in the period ending June 30,
2005, a result of three factors:

                                       12



<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)


the first was the payment of a previously outstanding legal bill in a negotiated
transaction for restricted stock and warrants in the earlier period. The
warrants were provided as an inducement to settle the obligation and were valued
at approximately $145,245; secondly, the prior period's 10-KSB filing required
significant legal resources, unnecessary in the more recent quarter as the
Company had a full-time Chief Financial Officer; and finally, there were
additional legal costs incurred in the prior period associated with a Proxy
filing and Special Meeting of Stockholders in June 2005.

General and administrative expenses declined $52,638 or approximately 31% as
compared to the prior comparable quarter one year ago. The decrease is
attributable to a reduction in research and development supplies of $67,525 and
rent expense of $14,901 offset by increases in industry conference expense of
$24,721, license expense of $5,154 and all other general expenses by $85.
Research and development supplies decreased from the prior quarter one year ago
because in the prior period the Company incurred expenses related to the
completion of its clinical animal studies and had begun to ramp up to begin its
Human Safety Trials in India. Rent expense declined during the current quarter
as the Company no longer leased facilities required to maintain its clinical
animal trials.

INTEREST EXPENSE

Interest expense increased $47,730 or approximately 71%, reflective of the
additional interest expense associated with the issuance of the Company's 10%
Series A Convertible Notes, none of which were outstanding in the quarter ended
June 30, 2005.


NET LOSS

We recorded a consolidated net loss of $619,156 and $802,002 for the quarters
ended June 30, 2006 and 2005, respectively. The decrease in net loss of
approximately 23% was primarily attributable to decreased professional fees and
general expenses. These were offset somewhat by increased interest expense
associated with the issuance of the Company's 10% Series A Convertible Notes in
comparison to the prior year quarter.

Basic and diluted loss per common share were ($0.02) for the three month period
ended June 30, 2006 as compared to ($0.05) for the same period ended June 30,
2005. This decrease in loss per share was attributable to the decrease in net
loss as compared to the prior quarter one year ago and the effect of a greater
number of common shares outstanding during the current quarter.


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 March 31, 2006 was $836,377 compared to
$421,083, at June 30, 2006, representing an decrease of $421,083. During the
three months ended June 30, 2006, operating activities used net cash of
$547,504. The Company received $140,001 from the issuance of common stock and
purchased $7,791 of property and equipment.

A decrease in working capital during the three months in the amount of $362,023
increased the Company's negative working capital position to ($2,282,686) at
June 30, 2006 as compared to a negative working capital of ($1,920,663) at March
31, 2006.

The Company's current deficit in working capital requires 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 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, and presently requires a minimum of $150,000
per month to sustain operations.


                                       13



<PAGE>


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)

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.


PLAN OF OPERATION

The Company's current plan of operation is to fund our anticipated increased
research and development activities and operations 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 June 30, 2006 the Company had received $1,685,001 and has
$4,314,999 remaining available 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. However, due to market conditions, and to assure
availability of funding for operations in the long term, we may 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.

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 calendar 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 outsource research and development 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 outsourced research
and development during this period.

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.


                                       14



<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION (continued)

CRITICAL ACCOUNTING POLICIES

The preparation of condensed consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America
requires the Company 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, classification
of warrant obligation, 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.

There have been no changes to the Company's critical accounting policies as
disclosed in its Form 10-KSB for the year ended March 31, 2006.


OFF BALANCE SHEET ARRANGEMENTS

There are no guarantees, commitments, lease and debt agreements or other
agreements that could trigger an adverse change in our credit rating, earnings,
cash flows or stock price, including requirements to perform under standby
agreements.

ITEM 3. CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including
our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), we
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the
Securities Exchange Act of 1934) as of the end of the period covered by this
report (the "Evaluation Date"). Based upon that evaluation, the CEO and CFO
concluded that, as of June 30, 2006, our disclosure controls and procedures were
effective in timely alerting them to the material information relating to us (or
our consolidated subsidiaries) required to be included in our periodic filings
with the SEC.

Changes in Controls and Procedures

There were no significant changes made in our internal controls over financial
reporting during the quarter ended June 30, 2006 that have materially affected
or are reasonably likely to materially affect these controls. Thus, no
corrective actions with regard to significant deficiencies or material
weaknesses were necessary.

Limitations on the Effectiveness of Internal Control

Our management, including the CEO, does not expect that our disclosure controls
and procedures or our internal control over financial reporting will necessarily
prevent all fraud and material errors. An internal control system, no matter how
well conceived and operated, can provide only reasonable, not absolute,
assurance that the objectives of the control system are met. Further, the design
of a control system must reflect the fact that there are resource constraints,
and the benefits of controls must be considered relative to their costs. Because
of the inherent limitations on all internal control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, within Aethlon Medical have been detected. These inherent
limitations include the realities that judgments in decision-making can be
faulty, and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people, and/or by management override of
the control. The design of any system of internal control is also based in part
upon certain assumptions about the likelihood of future events, and there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions. Over time, controls may become inadequate
because of changes in circumstances, and/or the degree of compliance with the
policies and procedures may deteriorate. Because of the inherent limitations in
a cost-effective internal control system, financial reporting misstatements due
to error or fraud may occur and not be detected on a timely basis.


                                       15



<PAGE>



                                     PART II

                                OTHER INFORMATION



ITEM 1. LEGAL PROCEEDINGS

None

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

In April 2006, the Company issued 3,086 shares of restricted common stock at
$0.81 per share in payment for investor relations. The shares were issued
without registration under the Securities Act in reliance upon the exemption
from registration set forth in Section 4(2).

In April 2006, the Company repaid a $25,000 15% promissory notes, including
accrued interest of $18,750, through the issuance of 107,759 restricted common
shares at $0.405 per share to an accredited individual investor. The shares were
issued without registration under the Securities Act in reliance upon the
exemptions from registration set forth in Section 4(2) and Regulation D.


In May 2006, the Company issued 4,545 shares of restricted common stock at $0.55
per share in payment for investor relations. The shares were issued without
registration under the Securities Act in reliance upon the exemption from
registration set forth in Section 4(2).


ITEM 3. DEFAULTS UPON SENIOR SECURITIES

As of the date of this report, various promissory and convertible notes
payable in the aggregate principal amount of $502,500 have reached maturity and
are past due. The Company is currently seeking other financing arrangements to
retire all past due notes. At June 30, 2006, the Company had accrued interest in
the amount of $290,066 associated with these notes and accrued liabilities
payable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

The following documents are filed as part of this report:

31.1     Certification of our Chief Executive Officer and President, pursuant to
         Securities Exchange Act rules 13a-14(a) and 15d-14(a) as adopted
         pursuant to Section 302 of the Sarbanes Oxley Act of 2002.

31.2     Certification of our Chief Financial Officer and Chief Accounting
         Officer, pursuant to Securities Exchange Act rules 13a-14(a) and
         15d-14(a) as adopted pursuant to Section 302 of the Sarbanes Oxley Act
         of 2002.

32.1     Statement of our Chief Executive Officer under Section 906 of the
         Sarbanes-Oxley Act of 2002 (18 U.S.C. Section 1350)

32.2     Statement of our Chief Financial Officer and Chief Accounting Officer
         under Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. Section
         1350)



                                       16



<PAGE>



                                   SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

                              AETHLON MEDICAL, INC

Date: August 11, 2006

BY: /S/ JAMES A. JOYCE                  BY: /S/ JAMES W. DORST
    ---------------------------             ---------------------------
    JAMES A. JOYCE                          JAMES W. DORST
    CHAIRMAN, PRESIDENT AND                 CHIEF FINANCIAL OFFICER AND CHIEF
    CHIEF EXECUTIVE OFFICER                 ACCOUNTING OFFICER

                              AETHLON MEDICAL, INC.