<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 September 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, SUITE 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 [ ].

The number of shares of common stock of the registrant outstanding was
26,851,989 as of November 9, 2006.

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

Transitional Small Business Disclosure Format (check one): Yes [  ] No [ X ]

Documents incorporated by reference: None.






<PAGE>

<TABLE>
<S>     <C>

PART I. FINANCIAL INFORMATION


ITEM 1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

         CONDENSED CONSOLIDATED BALANCE SHEET AT SEPTEMBER 30, 2006 (UNAUDITED)           3

         CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE
         THREE AND SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED)
         AND FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30, 2006       4

         CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX
         MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 (UNAUDITED) AND FOR THE
         PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30, 2006                   5

         NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS                             6

ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION                       15

ITEM 3.  CONTROLS AND PROCEDURES                                                         19

                           PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS                                                               20

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS                     20

ITEM 3.  DEFAULTS UPON SENIOR SECURITIES                                                 20

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS                             20

ITEM 5.  OTHER INFORMATION                                                               20

ITEM 6.  EXHIBITS                                                                        21


                                       2
</TABLE>





<PAGE>

PART I.
                              FINANCIAL INFORMATION


               ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

                                                                   September 30,
                                                                       2006
                                                                   ------------

                                     ASSETS
Current assets
     Cash                                                          $     36,959
     Prepaid expenses and other current assets                           54,027
                                                                   ------------
                                                                         90,986

Property and equipment, net                                              16,442
Patents and patents pending, net                                        127,017
Other assets                                                             13,240
                                                                   ------------

                                                                   $    247,685
                                                                   ============

                     LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
     Accounts payable and accrued liabilities                      $    842,269
     Due to related parties                                           1,112,513
     Notes payable                                                      502,500
     Convertible notes payable, net of discount                         251,377
                                                                   ------------
                                                                      2,708,659
Commitments and Contingencies

Stockholders' Deficit
     Common stock, par value $0.001 per share;
         50,000,000 shares authorized;
         26,635,881 shares issued and outstanding                        26,636
     Additional paid-in capital                                      20,842,064
     Deferred consulting fees                                           (20,417)
     Deficit accumulated during
         development stage                                          (23,309,257)
                                                                   ------------
                                                                     (2,460,974)
                                                                   ------------
                                                                   $    247,685
                                                                   ============

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

                                       3





<PAGE>

<TABLE>
                                                      AETHLON MEDICAL, INC.
                                                  (A Development Stage Company)
                                         CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                              For the Three and Six Months Ended September 30, 2006 and 2005 and
                            For the Period January 31, 1984 (Inception) Through September 30, 2006
                                                           (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,
                                           2006               2005               2006               2005                2006
                                       -------------      -------------      -------------      -------------      --------------
<S>                                    <C>                <C>                <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                          166,144            268,746            366,648            655,016           5,604,783
  Payroll and related                        207,020            168,131            391,277            347,221           7,637,282
  General and administrative                 161,776            117,509            281,508            287,218           4,713,539
  Impairment                                      --                 --                 --                 --           1,313,253
                                       -------------      -------------      -------------      -------------      --------------
                                             534,940            554,386          1,039,433          1,289,455          19,268,857
                                       -------------      -------------      -------------      -------------      --------------
OPERATING LOSS                              (534,940)          (554,386)        (1,039,433)        (1,289,455)        (17,735,289)
                                       -------------      -------------      -------------      -------------      --------------

OTHER EXPENSE (INCOME)
  Change in fair value of
      warrant liability                          --                  --                 --                 --             360,125
  Interest and other debt expenses            92,714            115,185            207,377            182,118           5,078,829
  Interest income                                 --                 --                 --                 --             (17,415)
  Other                                           --              3,750                 --              3,750             152,429
                                       -------------      -------------      -------------      -------------      --------------
                                              92,714            118,935            207,377            185,868           5,573,968
                                       -------------      -------------      -------------      -------------      --------------
NET LOSS                               $    (627,654)     $    (673,321)     $  (1,246,810)     $  (1,475,323)        (23,309,257)
                                       =============      =============      =============      =============      ==============

BASIC AND DILUTED LOSS PER
  COMMON SHARE                         $       (0.02)     $       (0.04)     $       (0.05)     $       (0.08)
                                       =============      =============      =============      =============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING                        25,990,706         19,045,651         25,779,241         18,373,416
                                       =============      =============      =============      =============

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

                                                                4





<PAGE>

                                                        AETHLON MEDICAL, INC.
                                                    (A DEVELOPMENT STAGE COMPANY)
                                              CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                      FOR THE SIX MONTHS ENDED SEPTEMBER 30, 2006 AND 2005 AND
                               FOR THE PERIOD JANUARY 31, 1984 (INCEPTION) THROUGH SEPTEMBER 30, 2006
                                                             (Unaudited)


                                                                                                                 January 31, 1984
                                                               Six Months Ended         Six Months Ended            (Inception)
                                                              September 30, 2006       September 30, 2005            Through
                                                                 (Unaudited)              (Unaudited)            September 30,2006
                                                             --------------------     --------------------     --------------------
Cash flows from operating activities:

      Net loss                                               $         (1,246,810)    $         (1,475,323)    $        (23,309,257)
      Adjustments to reconcile net loss to net cash
        used in operating activities:

          Depreciation and amortization                                    14,972                   15,341                  998,965
          Amortization of deferred consulting fees                         24,500                   30,000                   88,583
          Gain of 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                                          9,500                       --                  433,762
          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                                 164,458                  296,241                3,376,460
          Change in fair value of warrant liability                            --                    3,750                  360,125
          Amortization of debt discount                                   109,012                  121,095                1,217,037
          Beneficial conversion feature of convertible
            notes payable                                                      --                       --                      --
          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 and other current assets                 (21,805)                     (45)                 107,510
                Other assets                                                3,960                    3,975                  (13,240)
                Accounts payable and accrued
                liabilities                                               (19,754)                 263,383                1,494,196
                Due to related parties                                   (103,000)                  (4,367)               1,369,125
                                                             --------------------     --------------------     --------------------
      Net cash used in operating activities                            (1,064,967)                (745,950)              (9,632,517)
                                                             --------------------     --------------------     --------------------

Cash flows from investing activities:

      Purchases of property and equipment                                 (14,454)                      --                 (263,341)
      Patents and patents pending                                              --                       --                 (363,833)
      Proceeds from the sale of property and equipment                         --                       --                   17,065
      Cash of acquired company                                                 --                       --                   10,728
                                                             --------------------     --------------------     --------------------


      Net cash used in investing activities                               (14,454)                      --                (599,381)
                                                             --------------------     --------------------     --------------------

Cash flows from financing activities:

      Proceeds from the issuance of notes payable                              --                  100,000                1,710,000
      Principal repayments of notes payable                                    --                       --                (292,500)
      Proceeds from the issuance of convertible notes
        payable                                                                --                  535,000                2,028,000
      Proceeds from the issuance of common stock                          280,003                  177,600                6,900,088
      Professional fees related to registration statement                      --                       --                  (76,731)
                                                             --------------------     --------------------     --------------------

      Net cash provided by financing activities                           280,003                  812,600               10,268,857
                                                             --------------------     --------------------     --------------------

Net (decrease) increase in cash                                          (799,418)                  66,650                   36,959

Cash at beginning of period                                               836,377                   8,625                       --
                                                             --------------------     --------------------     --------------------

Cash at end of period                                        $             36,959     $             75,275     $             36,959
                                                             ====================     ====================     ====================


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

                                                                 5
</TABLE>





<PAGE>

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

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 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 initiated 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, some have already expired and other of our 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. 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, 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 cumulative losses of $23,309,257 for the period from January 31,
1984 (Inception) through September 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 financial 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 sufficient revenue and operating cash flow to meet
its obligations on a timely basis.


                                       6





<PAGE>

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.

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. There
were 1,842,028 and 6,310,908 potentially dilutive common shares outstanding for
the three and six months ended September 30, 2006, respectively.

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 $335,463 and $478,203 of research and
development expenses during the six months ended September 30, 2006 and 2005,
respectively. For the fiscal quarter ended September 30, 2006 and 2005, the
Company incurred research and development expense of approximately $176,931 and
$235,806, respectively.

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.


                                       7





<PAGE>

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
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, 2006.

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.

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 liability, 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. Based on the Company's evaluation, no derivative
liabilities existed at or during the three months ended September 30, 2006.

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 September 30, 2006, the
Company has sufficient registered shares to settle the exercise of warrants. As
a result, at September 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.


                                       8





<PAGE>

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 and six
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 September 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.

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 September 30, 2006 and $9,500 for
the six month period ended September 30, 2006. This expense was recorded as
stock compensation included in payroll and related expenses in the accompanying
September 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   Six Months Ended
                                         September 30, 2006   September 30, 2006

Payroll and related                         $    4,750          $  (9,500)
                                            ==========          =========
Net share-based compensation effect
   in net loss from continuing operations   $    4,750          $  (9,500)
                                            ==========          =========

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


                                       9





<PAGE>

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
for the six month period ended September 30, 2006 was insignificant.

Pro forma information required under SFAS No. 123 for periods prior to April 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:

<TABLE>
<CAPTION>
                                                         Three Months Ended     Six Months Ended
                                                           September 30,          September 30,
                                                               2005                   2005
                                                          --------------          -----------

<S>                                                       <C>                     <C>
Net loss as reported                                      $   673,321             $ 1,475,323
   Less: Total stock-based employee compensation
    expense determined under the Binomial Lattice
    option pricing model                                       57,000                  57,000
                                                          -----------             -----------
Pro forma net loss                                        $   730,321             $ 1,532,323
                                                          ===========             ===========

Basic and diluted loss per common share:
   As reported                                            $     (0.04)            $     (0.08)
                                                          ===========             ============
   Pro forma                                              $     (0.04)            $     (0.08)
                                                          ===========             ============
</TABLE>

Pro forma compensation expense reported in the above table is generally based on
the vesting provisions in the related stock option grants.

Share compensation expense in the three and six months ended September 30, 2006
relates solely to the vesting of existing grants (issued prior to April 1,
2006), the date the Company adopted SFAS No. 123-R.

The following weighted average assumptions were used in the valuation of these
instruments.



Annual dividends                                 zero
Expected volatility                               72%
Risk free interest rate                         4.18%
Expected life                               5.0 years

The expected volatility is based on the historic 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 September
30, 2006 are as follows:

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

Vested                       7,068,972    $  0.39        5.85       $  117,586
Expected to vest             1,635,088       0.35        4.55       $    6,700
                           -----------                              ----------
     Total                   8,704,060                              $  124,286
                           ===========                              ==========

(1) These amounts represent the difference between the exercise price and $0.25,
the closing market price of the Company's common stock on September 30, 2006 as
quoted on the Over-the-Counter Bulletin Board under the symbol "AEMD.OB" for all
in-the-money options outstanding.


                                       10





<PAGE>

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                       --     308,725       $ 0.38
                             ----------  ----------
September 30, 2006             467,500   8,704,060       $ 0.38       $  168,954
                             ==========  ==========                   ==========

Options exerciseable at:
March 31, 2006                            7,135,518      $ 0.39
September 30, 2006                        7,068,972      $ 0.39

(1) Represents the difference between the exercise price and the March 31, 2006
or September 30, 2006 market price of the Company's common stock, which was
$0.81 and $0.25, respectively.

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.

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.

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.


                                       11





<PAGE>

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 is currently assessing the impact of SFAS No. 155. The adoption of this
pronouncement is not expected to have a material impact on its future
consolidated financial statements.

In September 2006, the FASB issued SFAS No.157, "FAIR VALUE MEASUREMENTS," which
defines fair value, establishes a framework for measuring fair value in
accordance with GAAP, and expands disclosures about fair value measurements.
SFAS No. 157 simplifies and codifies related guidance within GAAP, but does not
require any new fair value measurements. The guidance in SFAS No. 157 applies to
derivatives and other financial instruments measured at estimated fair value
under SFAS No. 133 and related pronouncements. SFAS No. 157 is effective for
financial statements issued for fiscal years beginning after November 15, 2007,
and interim periods within those fiscal years. Management does not expect the
adoption of SFAS No. 157 to have a significant effect on the Company's financial
position or results of operation.

NOTE 4. NOTES PAYABLE

At September 30, 2006, the Company had $502,500 in principal amount of notes
payable outstanding with twelve 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 September 30, 2006 the Company had accrued
interest in the amount of $311,847 associated with these defaulted notes
payable.

At September 30, 2006, the Company had $1,000,000 in principal amount of
convertible notes payable outstanding, net of $748,623 discount, held by four
noteholders (the 10% Series A Convertible Notes). The $748,623 discount is
comprised of $18,748 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 6. 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.

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.


                                       12





<PAGE>

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.

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 based on the value of the services.

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 based on the value of the services.

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 based on the value of the services.

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 based on the value of the services.

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 based on the value of the services.

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 based on the value of the services.

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 based on the value of the services.

During August 2006, the Company issued 113,235 shares of common stock at prices
between $0.26 and $0.27 per share to Fusion Capital under its $6,000,000 common
stock purchase agreement for net cash proceeds totaling $30,000. These shares
are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.

In August 2006, the Company issued 9,434 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.32 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000 based on the value of the services.

In August 2006, the Company issued 86,779 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.25 per share in payment for general legal expenses to the
Company valued at $22,085 based on the value of the services.

In August 2006, the Company issued 114,132 shares of restricted common stock at
$0.20 per share in payment for accrued accounting consulting services provided
to the Company by a third party valued at $23,111 based upon he value of the
services.


                                       13





<PAGE>

During September 2006, the Company issued 439,936 shares of common stock at
prices between $0.25 and $0.26 per share to Fusion Capital under its $6,000,000
common stock purchase agreement for net cash proceeds totaling $110,000. These
shares are registered pursuant to the Company's Form SB-2 registration statement
effective December 7, 2004.

In September 2006, the Company issued 4,808 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.31 per share in payment for regulatory affairs consulting
services to the Company valued at $1,500.

In September 2006, the Company issued 15,723 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.32 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.

In September 2006, the Company issued 9,868 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.30 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.

In September 2006, the Company issued 16,447 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.30 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.

In September 2006, the Company issued 9,733 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.26 per share in payment for regulatory affairs consulting
services to the Company valued at $2,550.

NOTE 7. SUBSEQUENT EVENTS

During October 2006, the Company issued 160,932 shares of common stock at $0.25
per share to Fusion Capital under its $6,000,000 common stock purchase agreement
for net cash proceeds totaling $40,000. These shares are registered pursuant to
the Company's Form SB-2 registration statement effective December 7, 2004.

In October 2006, the Company issued 8,065 shares of restricted common stock at
$0.31 per share in payment for investor relations services to the Company valued
at $2,500.

In October 2006, the Company issued 8,929 shares of restricted common stock at
$0.28 per share in payment for investor relations services to the Company valued
at $2,500.

In October 2006, the Company issued 18,797 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.27 per share in payment for regulatory affairs consulting
services to the Company valued at $5,000.

In October 2006, the Company issued 11,278 shares of common stock pursuant to
the Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.27 per share in payment for regulatory affairs consulting
services to the Company valued at $3,000.

In October 2006, the Company issued 7,540 shares of common stock pursuant to the
Company's S-8 registration statement covering the Company's 2003 Consulting
Stock Plan at $0.25 per share in payment for regulatory affairs consulting
services to the Company valued at $1,900.


                                       14





<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. the Company's
headquarters are located at 3030 Bunker Hill Street, Suite 4000, San Diego, CA
92109. Our phone number at that address is (858) 459-7800. Its Web site is
maintained at http://www.aethlonmedical.com.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2005

Operating Expenses

Consolidated operating expenses for the three months ended September 30, 2006
were $534,940 in comparison with $554,386 for the comparable quarter a year
ago. The reduction of $19,446, or 3.5% was comprised of increases in Payroll &
Related and General & Administrative expenses of $38,889 and $44,267,
respectively, offset by a decrease in overall Professional fee expense of
$102,601.


                                       15





<PAGE>

Payroll & Related expenses increased by $38,889 or approximately 23% from the
prior period one year ago. The primary reason for this was the hiring of a new
President in July 2006. General & Administrative expenses increased $44,267 or
approximately 38% due to increases in investor conference expense of $20,720,
insurance expense of $4,661, license expense of $4,396, equipment expense of
$3,151 and other expense of $1,835. Professional Fee expense decreased $102,602,
or 38%, as compared to the prior quarter one year ago a result of a $118,860
reduction in scientific consulting fees, an $11,401 decrease in legal expense, a
$6,837 reduction in other professional expenses offset by an increase of $34,497
related to investor relations. The large decrease in scientific consulting fees
reflects the higher prior period consulting expenses incurred related to the
Company's Human Safety Trials conducted in India.

Interest Expense

Interest expense decreased $22,471 or approximately 20%, reflecting the
retirement of certain notes payable as compared to the prior quarter one year
ago.

Net Loss

The Company recorded a consolidated net loss of $627,654 and $673,321 for the
quarters ended September 30, 2006 and 2005, respectively. The decreased net loss
of approximately 7% was primarily attributable to a $19,446 reduction in
operating expense and a $22,470 reduction in interest expense as described
above. In addition, we also saw a reduction in other, non-operating expenses, of
$3,750.

Basic and diluted loss per common share were ($0.02) for the three month period
ended September 30, 2006 compared to ($0.04) for the same period ended September
30, 2005. 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, 2006, as compared to the three month period ended September 30,
2005.

SIX MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 2005

Operating Expenses

Consolidated operating expenses were $1,039,433 for the six months ended
September 30, 2005, versus $1,289,455 for the comparable period ended September
30, 2004. The reduction of $250,022, or approximately 19%, is a result of
reductions in Professional Fees and General & Administrative expenses of
$288,368 and $5,710, respectively, offset by a $44,056 increase in Payroll and
Related expenses.

For the comparable six-month periods, Professional Fees decreased $288,368 or
approximately 44%, while General and Administrative expenses decreased $5,710 or
approximately 2%. These decreases were offset by an increase in Payroll and
related expenses of $44,056 or approximately 13%.

The Professional Fee expense decrease is comprised of a reduction in legal fees
of $213,133, a reduction in scientific consulting expense of $85,442 and an
increase in all other expenses of $10,207. Legal fee expense was higher in the
prior period due to the issuance of warrants in settlement of a legal fee
obligation. There was no similar issuance in the current fiscal year. Scientific
consulting expense decreased because in the prior period the Company was
conducting its Human Safety Trials in India.

The General and Administrative expense decrease is comprised of a $67,687
reduction in laboratory supplies and a $13,859 reduction in rental expense
offset by increases in investor conference expenses of $45,889, insurance
expense of $5,108, license expense of $9,550, office equipment expense of $3,252
and other expense increases of $2,535. The reduced laboratory supplies expense
is explained by the higher expenses recognized during the prior six-month period
one year ago during the Company's Human Safety Trial in India. Rental expense
declined because we are no longer renting the facilities associated with trials
conducted in 2005. Investor conference expense increased due to our increased
participation in various investor related conferences and programs.

Payroll and related expense increases are comprised of $29,742 primarily as a
result of now having a full-time CFO and $23,814 a result of the addition of a
new President in July 2006.


                                       16





<PAGE>

Interest Expense

Interest expense increased $25,259 or approximately 14% reflecting the increased
outstanding balance of the Company's 10% Series A Convertible Notes a portion of
which first originated in July 2005 offset by the retirement of certain other
notes payable.

Net Loss

We recorded a consolidated net loss of $1,246,810 and $1,475,323 for the
six-month periods ended September 30, 2006 and 2005, respectively. The decrease
in net loss was primarily attributable to a net decrease in operating expenses
offset slightly by a net increase in interest expense as described above.

Basic and diluted loss per common share were ($0.05) for the six month period
ended September 30, 2006 compared to ($0.08) for the same period ended September
30, 2005. 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, 2006, as compared to the six-month period ended September 30, 2005, and by
the decreased net loss for the six-month period ended September 30, 2006, 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, 2006 was $36,959 compared
to $836,377, at March 31, 2006, representing a decrease of $799,418. During the
six months ended September 30, 2006, operating activities used net cash of
$1,064,968 while the Company received $280,003 from the issuance of common stock
and purchased $14,454 of new equipment.

During the six month period ended September 30, 2006, net cash used in operating
activities primarily consisted of net loss of $1,246,809. Net loss was offset
principally by depreciation and amortization of $39,472 plus the fair market
value of common stock of $164,458 in payment for services, $109,012 of
amortization of debt discount, $9,500 in stock-based compensation offset by a
net decrease in accounts payable and other current balance sheet accounts of
$140,601.

A decrease in working capital during the six months ended September 30, 2006 in
the amount of $697,009 increased the Company's negative working capital position
to ($2,617,672) at September 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 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.

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.


                                       17





<PAGE>

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 September 30, 2006 the Company had received $1,875,001 and
has $4,124,999 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.


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<PAGE>

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 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 September 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 three and six month periods ended September 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

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.


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<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).

In July 2006, the Company issued 6,250 shares of restricted common stock at
$0.40 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 July 2006, the Company issued 7,813 shares of restricted common stock at
$0.32 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 August 2006, the Company issued 114,132 shares of restricted common stock at
$0.20 per share in payment for accrued accounting services. The shares were
issued without registration under the Securities Act in reliance upon the
exemption from registration set forth in Section 4(2).

In October 2006, the Company issued 8,065 shares of restricted common stock at
$0.31 per share in payment for investor relations services. The shares were
issued without registration under the Securities Act in reliance upon the
exemption from registration set forth in Section 4(2).

In October 2006, the Company issued 8,929 shares of restricted common stock at
$0.28 per share in payment for investor relations services. 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 continually reviewing other financing arrangements
to retire all past due notes. At September 30, 2006 the Company had accrued
interest in the amount of $311,847 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


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<PAGE>

ITEM 6. EXHIBITS

(a) Exhibits. The following documents are filed as part of this report:

31.1     Certification of CEO pursuant to Securities Exchange Act rules 13a-15
         and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley
         Act of 2002.

31.2     Certification of CFO pursuant to Securities Exchange Act rules 13a-15
         and 15d-15(c) as adopted pursuant to section 302 of the Sarbanes-Oxley
         Act of 2002.

32.1     Certification of James A. Joyce, Chief Executive Officer pursuant to 18
         U.S.C. section 1350, as adopted pursuant to section 906 of the
         Sarbanes-Oxley Act of 2002.

32.2     Certification of James W. Dorst, Chief Financial Officer (Principal
         Accounting Officer) pursuant to 18 U.S.C. section 1350, as adopted
         pursuant to section 906 of the Sarbanes-Oxley Act of 2002.


                                   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: November 13, 2006


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


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