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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-QSB (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934For the quarterly period ended September 30, 2004o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACTFor the transition period from  to
 Commission file number 0-12627 MEDICAL DISCOVERIES, INC. 
 Utah
    
    87-0407858(State or other jurisdiction of
incorporation or organization)
    
    (I.R.S. Employer
Identification No.)
 738 Aspenwood Lane, Twin Falls, Idaho 83301 
 (208) 736-1799 
 N/A 
 Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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 þ No o APPLICABLE ONLY TO CORPORATE ISSUERS: State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date: As of November 9, 2004,
there were 104,581,669 shares of the issuers Common Stock and
12,000 shares of the issuers Series A Preferred Stock outstanding. Transitional Small Business Disclosure Format (check one): Yes o No þ




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.ITEM 3. CONTROLS AND PROCEDURESPART II OTHER INFORMATIONITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 6. EXHIBITSSIGNATURESINDEX TO EXHIBITSEXHIBIT 31EXHIBIT 32    Table of Contents  
 PART I
FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS The following financial statements are filed with this report: Condensed Consolidated Balance Sheet as of September 30, 2004, (unaudited) and
December 31, 2003 (unaudited) Condensed Consolidated Statements of Operations for the three- and nine-month
periods ended September 30, 2004 (unaudited) and September 30, 2003 (unaudited)
and cumulative amounts since inception through September 30, 2004 (unaudited) Condensed Consolidated Statements of Cash Flows for the nine-month
periods ended September 30, 2004 (unaudited) and September 30, 2003 (unaudited)
and cumulative amounts since inception through September 30, 2004 (unaudited) Notes to Unaudited Financial Statements 2




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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED BALANCE SHEET
As of September 30, 2004 and December 31, 2003
(Unaudited) September 30, 2004
    
    December 31, 2003Current assetsCash
    
    $
    434,455
    
    
    $
    424,216Prepaid expenses
    
    
    
    
    
    
    11,331Current portion of deferred charges
    
    
    
    
    
    
    12,077Total current assets
    
    $
    434,455
    
    
    $
    447,624Current liabilitiesAccounts payable
    
    $
    2,331,015
    
    
    $
    2,066,727Accrued interest
    
    
    399,233
    
    
    
    524,294Current portion of notes payable
    
    
    336,717
    
    
    
    789,217Convertible notes payable
    
    
    193,200
    
    
    
    498,202Total current liabilities
    
    
    3,260,165
    
    
    
    3,878,440Stockholders deficitPreferred stock, no par value, authorized
50,000 shares; no series designated or shares
issued and outstanding
    
    
    
    
    
    
    Common stock, no par value, authorized
250,000,000 shares; 102,746,101 and 76,456,095
shares issued and outstanding at September 30,
2004
and December 31, 2003
    
    
    14,389,511
    
    
    
    12,546,957Additional
paid-in capital
    
    
    2,254,363
    
    
    
    579,363Escrow receivable
    
    
    
    
    
    
    (227,300
    )Accumulated deficit  prior to development stage
    
    
    (1,399,577
    )
    
    
    (1,399,577
    )Deficit
accumulated during the development stage
    
    
    (18,070,007
    )
    
    
    (14,930,259
    )Total stockholders deficit
    
    
    (2,825,710
    )
    
    
    (3,430,816
    )Total
liabilities and stockholders deficit
    
    $
    434,455
    
    
    $
    447,624
 See notes to condensed consolidated financial statements 3




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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2004 and
Cumulative Amounts
(Unaudited) For the Three Months
Ended September 30,
    
    For the Nine Months
Ended September 30,
    
    CumulativeAmounts
SinceNovember 20,1991 (Date of2004
    
    2003
    
    2004
    
    2003
    
    Inception)Revenues
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    157,044Cost of goods sold
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    14,564Gross profit
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    142,480Research and development expenses
    
    
    191,506
    
    
    
    35,423
    
    
    
    362,484
    
    
    
    35,423
    
    
    
    3,361,129Inventory writedown
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    96,859Impairment loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    9,709License
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,001,500General and administrative expenses
    
    
    250,819
    
    
    
    215,392
    
    
    
    2,667,782
    
    
    
    573,725
    
    
    
    14,787,323Operating loss
    
    
    (442,325
    )
    
    
    (250,815
    )
    
    
    (3,030,266
    )
    
    
    (609,148
    )
    
    
    (19,114,040
    )Other income (expense)Interest income
    
    
    854
    
    
    
    
    
    
    
    3,980
    
    
    
    
    
    
    
    27,386Other income
    
    
    39
    
    
    
    495
    
    
    
    759
    
    
    
    495
    
    
    
    881,243Interest expense
    
    
    (27,497
    )
    
    
    (63,142
    )
    
    
    (114,221
    )
    
    
    (190,108
    )
    
    
    (1,100,132
    )Forgiveness of debt
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,235,536(26,604
    )
    
    
    (62,647
    )
    
    
    (109,482
    )
    
    
    (189,613
    )
    
    
    (1,044,033
    )Net loss available to shareholders
    
    $
    (468,929
    )
    
    $
    (313,462
    )
    
    $
    (3,139,748
    )
    
    $
    (798,761
    )
    
    $
    (18,070,007
    )Net basic and diluted loss per share
    
    $
    (0.00
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.01
    )Weighted average shares outstanding
    
    
    96,482,603
    
    
    
    55,698,856
    
    
    
    89,667,882
    
    
    
    55,665,523
 See notes to condensed consolidated financial statements 4




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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2004, September 30,
2003, and Cumulative Amounts
(Unaudited) For the Nine MonthsEnded September 30,
    

CumulativeAmountsSinceNovember
20,1991 (Date of2004
    
    2003
    
    Inception)Cash flows from operating activitiesNet loss
    
    $
    (3,139,748
    )
    
    $
    (798,761
    )
    
    $
    (18,070,007
    )Adjustments to reconcile net loss to net
cash used by operating activitiesCommon stock issued for services, expenses,
and litigation
    
    
    66,500
    
    
    
    7,000
    
    
    
    4,276,716Stock compensation expense
    
    
    1,675,000
    
    
    
    
    
    
    
    4,811,253Reduction of escrow receivable from
research and development
    
    
    
    
    
    
    
    
    
    
    272,700Reduction of legal costs
    
    
    
    
    
    
    
    
    
    
    (130,000
    )Notes payable issued for litigation
    
    
    
    
    
    
    
    
    
    
    385,000Depreciation
    
    
    
    
    
    
    
    
    
    
    100,271Write-off of subscription receivables
    
    
    
    
    
    
    
    
    
    
    112,500Impairment loss on assets
    
    
    
    
    
    
    
    
    
    
    9,709Loss on disposal of equipment
    
    
    
    
    
    
    
    
    
    
    30,364Gain on debt restructuring
    
    
    
    
    
    
    
    
    
    
    (1,235,536
    )Write-off of receivables
    
    
    
    
    
    
    
    
    
    
    193,965Changes in assets and liabilitiesPrepaid expenses
    
    
    11,331
    
    
    
    12,108
    
    
    
    Deferred charges
    
    
    12,077
    
    
    
    40,614
    
    
    
    Accounts receivable
    
    
    
    
    
    
    
    
    
    
    (7,529
    )Accounts payable
    
    
    264,288
    
    
    
    292,580
    
    
    
    2,175,106Accrued expenses
    
    
    37,905
    
    
    
    130,797
    
    
    
    583,680Net cash used by operating activities
    
    
    (1,072,647
    )
    
    
    (315,662
    )
    
    
    (6,500,808
    )Cash flows from investing activitiesPurchase of equipment
    
    
    
    
    
    
    
    
    
    
    (132,184
    )Payments received on note receivable
    
    
    
    
    
    
    
    
    
    
    130,000Net cash used by investing activities
    
    
    
    
    
    
    
    
    
    
    (2,184
    )Cash flows from financing activitiesContributed equity
    
    
    
    
    
    
    
    
    
    
    131,374Issuance of common stock
    
    
    1,352,886
    
    
    
    107,800
    
    
    
    5,497,545Payments on notes payable
    
    
    (270,000
    )
    
    
    (25,000
    )
    
    
    (501,287
    )Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    1,336,613Payments on convertible notes payable
    
    
    
    
    
    
    
    
    
    
    (98,500
    )Proceeds from convertible notes payable
    
    
    
    
    
    
    225,000
    
    
    
    571,702Net cash provided by financing activities
    
    
    1,082,886
    
    
    
    307,800
    
    
    
    6,937,447Net increase (decrease) in cash
    
    
    10,239
    
    
    
    (7,862
    )
    
    
    434,455Cash, beginning of period
    
    
    424,216
    
    
    
    14,555
    
    
    
    Cash, end of period
    
    $
    434,455
    
    
    $
    6,693
    
    
    $
    434,455Supplemental disclosure of non-cash activitiesConversion of notes payable and interest to common stock
    
    $
    650,468
    
    
    $
    Write off of escrow receivable
    
    $
    227,300
    
    
    $
    
 See notes to condensed consolidated financial statements 5




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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
NOTES TO UNAUDITED FINANCIAL STATEMENTS
September 30, 2004 Note 1. Basis of Presentation. Unaudited Interim Financial Statements The accompanying unaudited financial statements have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, all adjustments and disclosures
necessary to a fair presentation of these financial statements have been
included. These financial statements should be read in conjunction with the
financial statements and notes thereto included in the Companys 2003 Annual
Report on Form 10-KSB for the year ended December 31, 2003, as filed with the
Securities and Exchange Commission. Certain reclassifications and other
corrections for rounding have been made in prior period financial statements to
conform to the current period presentation. The consolidated financial
statements include the accounts of the Company and its wholly owned
subsidiaries. All significant inter-company transactions and balances have been
eliminated in consolidation. Stock Based Compensation and Restatement The Company has two incentive stock option plans wherein 24,000,000 shares of
the Companys common stock can be issued. The Company granted 700,000 fully
vested stock options during the nine months ended September 30, 2004 to
consultants with an exercise price of $.05. These options were valued at
$98,000 using the Black Scholes pricing model using the following weighted
average assumptions: risk free interest rate of 3.8%, expected dividend yield
of 0%, volatility of 220% and an expected life of 7 years. During the first quarter of 2004, the Company extended the expiration date of
options to purchase an aggregate amount of 18,403,000 shares of stock. As a
result of such extension, such options expire from between 2011 to 2013.
Initially we reported that due to the change in expiration date, the options
were subject to variable accounting treatment. We have subsequently determined
that the options are not subject to variable accounting treatment, but rather a
remeasurement of the options as if they were newly granted. This remeasurement
resulted in an expense to the Company totaling $1,577,000. We have amended our
quarterly filing for the second quarter of 2004 to reflect this change, and
such treatment will be consistent in the current and any subsequent periods.
The expense associated with the variable accounting treatment for the second
quarter of 2004 has been restated from $2,022,500 to zero. There was no change
to the first quarter expense. In October 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 123, which established financial accounting
and reporting standards for stock-based compensation. This standard defines a
fair value method of accounting for an employee stock option or similar equity
instrument. In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 148, which revised certain
provisions of adopting a fair value method of accounting for stock options and
required certain additional disclosures regarding stock options. These
statements give entities the choice between adopting the fair value method or
continuing to use the intrinsic value method under Accounting Principles Board
(APB) Opinion No. 25 with footnote disclosures of the pro forma effects if the
fair value method had been adopted. The Corporation has opted for the latter
approach. The Company accounts for its stock options under Accounting Principles Board
(APB) Opinion No. 25 using the intrinsic value method. The Company has elected
not to adopt the provisions of Statement of Financial Accounting Standards No.
123, Accounting for Stock-Based Compensation (FAS 123). In accordance with
Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure, pro-forma net income, stock-based
compensation expense, and earnings per share using the fair value method are
stated as follows: 6




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For the Three Months
    
    For the Nine Months EndedEnded September 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net loss applicable to common stockholders,
as reported
    
    $
    (468,929
    )
    
    $
    (313,462
    )
    
    $
    (3,139,748
    )
    
    $
    (798,761
    )Add:
Stock-based employee compensation expense included in reported net
loss
    
    
    
    
    
    
    
    
    
    
    1,577,000
    
    
    
    Deduct: Total stock based employee
compensation expense determined under fair
value based method for all awards
    
    
    
    
    
    
    
    
    
    
    (1,916,768
    )
    
    
    (5,000
    )Pro forma net loss applicable to common
shareholders
    
    $
    (468,929
    )
    
    $
    (313,462
    )
    
    $
    (3,479,516
    )
    
    $
    (803,761
    )Basic and diluted loss per share, as reported
    
    $
    (.00
    )
    
    $
    (.01
    )
    
    $
    (.03
    )
    
    $
    (.01
    )Basic and diluted loss per share, pro forma
    
    $
    (.00
    )
    
    $
    (.01
    )
    
    $
    (.04
    )
    
    $
    (.01
    )
 Assumptions used to calculate the income statement impact of stock options
granted as if the Company had adopted FAS 123 were as follows: 2004
    
    2003Expected divided yield
    
    
    
    
    
    
    Risk free interest rate
    
    
    3.8
    %
    
    
    5.0
    %Expected volitility
    
    
    220
    %
    
    
    511
    %Expected life
    
    7 years
    
    10 yearsWeighted average fair value per share
    
    $
    0.10
    
    
    $
    0.04
 Earnings Per Share Earnings per share are computed by dividing net income applicable to common
shareholders by the weighted average number of shares outstanding.
Potential common shares from convertible notes payable, warrants and stock options have not been included as they are
anti-dilutive. Note 2. Going Concern Considerations. The Companys recurring losses from the Companys development-stage activities
in current and prior years raise substantial doubt about the Companys ability
to continue as a going concern. The financial statements do not include any
adjustments to reflect the possible effects on the recoverability and
classification of assets or amounts and classifications of liabilities that may
result from the possible inability of the Company to continue as a going
concern. The Company is attempting to raise additional capital to sustain
operations. However, there can be no assurance that these plans will be
successful. Note 3. Commitment Regarding Peregrine Stock. Peregrine Properties, LLC, a Utah limited liability company (Peregrine),
entered into an agreement to provide $500,000 to the Company to fund testing
and research steps necessary to continue development of MDI-P. The studies were
funded through an escrow agent. As of December 31, 2000, the Company had
deposited in escrow a single certificate for 5.5 million shares of common stock
for these purposes. Through December 31, 2003, Peregrine had funded $275,800 to
the escrow, of which $272,700 had been disbursed and recorded as research and
development expense on the financial statements of the Company. The remaining
$227,300 to be expended under the agreement had been recorded on the balance
sheet in equity under the caption escrow receivable. On March 22, 2002, the parties entered into
an agreement the result of which was to partially close the escrow agreement to
the extent of Peregrines funding to date. On that date, 3,143,800 shares were
distributed to Peregrine and all research conducted to date was disbursed to
the Company. As of February 20, 2004, the Company held Peregrine in breach
with respect to its remaining funding obligation and terminated the Peregrine
research agreement. Subsequent to the period end, the Company and Peregrine
resolved the matter by the Company agreeing to grant Peregrine a warrant to
purchase 2,356,200 shares of restricted common stock at an exercise price of
$0.09 per share and exercisable at any time within 3 years. The Company also wrote off the escrow receivable against common stock. 7




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Note 4. Issuance of Common
Stock and Warrants. During the first nine months
of 2004, the Company issued 28,646,206 shares of
restricted common stock, 1,189,465 of which were issued for services
valued at $66,500, 9,875,951 of which were issued upon conversion of
debt and interest totaling $650,468, and
17,580,780 of which were issued for cash totaling $1,352,886. In
connection with the sales for cash, the Company also issued warrants
to purchase 2,993,779 shares of restricted common stock at $0.18
per share, expiring 5 years from the date of issuance. Note 5. Expiration of Warrants. During the first nine months of 2004, warrants to purchase 1,666,005 shares of
common stock of the Company at prices ranging between $0.10 and $0.40 per share
expired. Note 6. Subsequent Events. On October 18, 2004, we sold 12,000 shares of our Preferred Stock and warrants
to purchase 4,575,496 shares of common stock for a total offering price of $1.2
million. Each share of Preferred Stock entitles the holder to convert the
share of Preferred Stock into the number of shares of common stock resulting
from multiplying $100 by the conversion price. The conversion price is 85% of
the average of the lowest three intra-day trading prices for the Companys
common stock during the 10 trading days immediately preceding the conversion
date, but the conversion price may not exceed $0.1967 or be lower than $0.05.
The warrants entitle the holder to
purchase up to 4,575,496 shares of common stock of the Company on or before the
third anniversary of the issuance date of the warrants at $0.1967 per share.
The number of shares of common stock subject to the warrants and the exercise
price are subject to equitable adjustment in connection with a stock split,
stock dividend or similar transaction. In connection with that sale, we also
entered into a Registration Rights Agreement with Monarch Pointe Fund, Ltd. and
Mercator Advisory Group, LLC, requiring us to file a registration statement
with the Securities and Exchange Commission registering the shares of common
stock issuable upon conversion of the Preferred Stock and exercise of the
warrants. The registration statement must be filed within 30 days of the
closing of the sale of the Preferred Stock and the warrants, and the
registration statement must be declared effective by the SEC no later than 90
days after it is filed. Subsequent to the period
covered by this report, the Company sold 1,835,567 shares of
restricted common stock for cash totaling $330,402. In connection
with those sales, the Company also issued warrants to purchase
1,835,567 shares of restricted common stock at $0.18 per share,
expiring 5 years from the date of issuance. 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The purpose of this section is to discuss and analyze our consolidated
financial condition, liquidity and capital resources, and results of
operations. This analysis should be read in conjunction with the financial
statements and notes thereto at pages 2 through 8 and Managements Discussion
and Analysis of Financial Condition and Results of Operations contained in our
Annual Report on Form 10-KSB for the year ended December 31, 2003 (the 2003
10-KSB). This section contains certain forward-looking statements that involve risks and
uncertainties, including statements regarding our plans, objectives, goals,
strategies and financial performance. Our actual results could differ
materially from the results anticipated in these forward-looking statements as
a result of factors set forth under Cautionary Statement for Forward-Looking
Information and Factors Affecting Future Results below and elsewhere in this
report. Overview We are a development-stage bio-pharmaceutical company engaged in the research,
validation, development and ultimate commercialization of a patented
anti-infective technology. Our electrolyzed solution of free radicals
represents a novel approach to treating our initial target indications, HIV and
Cystic Fibrosis. We have concluded our pre-clinical work and are preparing to
enter the clinic in our initial target indications. If our Cystic Fibrosis or
HIV clinical trials are successful, we plan to develop this therapy for
additional target indications. Our product, called MDI-P, appears to have the ability to destroy certain
viruses, bacteria and fungi without any associated toxicity both in animals and
in cell-based assays. We are committed to the development of MDI-P as an 8




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anti-infective therapeutic product for in-vitro and in-vivo applications. Our
highest priorities are to develop and commercialize MDI-P as a pharmaceutical
for the treatment of Cystic Fibrosis and HIV. We have completed pre-clinical development for our initial indications and have
filed an Investigative New Drug application (IND) for Cystic Fibrosis with the
Food and Drug Administration (FDA). If the FDA approves our IND for Cystic
Fibrosis, we will conduct our Phase I clinical tests at St. Lukes Regional
Medical Center in Boise, Idaho, under the direction of Dr. Henry R. Thompson.
We plan to file an IND for HIV in the first quarter of 2005. If the FDA
approves the IND for HIV, we will begin a Phase I clinical test at the Harvard
School of Medicine using a protocol designed by Dr. Bruce Dezube. To date, we have not generated significant revenues from operations or realized
a profit. Through September 30, 2004, we had incurred a cumulative net loss
since inception of $18,070,007. We believe we have sufficient capital to
complete Phase I trials for Cystic Fibrosis. We are currently attempting to
secure capital commitments to finance HIV clinical trials, determine additional
potential indications for MDI-P, and to otherwise continue research and testing
of our technologies in order to secure required approvals to bring products to
market. In that we are a development stage company, we will increasingly
require additional funding to continue the development of our technology and to
finance submittal of our testing and trials to the appropriate regulatory
agencies in order to secure approvals for product development and sales. Recent Events IND Filing for Cystic Fibrosis Completed.On November 10, 2004, we completed
the milestone filing of our IND with the FDA for Cystic Fibrosis for a Phase I
clinical trial of MDI-P in late-term Cystic Fibrosis adults. We are
awaiting the FDAs receipt with the assigned IND number. If the FDA
approves our IND for Cystic Fibrosis, we will conduct our Phase I clinical
tests at St. Lukes Regional Medical Center in Boise, Idaho, under the direction
of Dr. Henry R. Thompson. Dr. Thompson agreed to serve as Project Manager and Principal Investigator for
Medical Discoverys Phase I trials in late-term adult Cystic Fibrosis patients
on September 23, 2004. Dr. Thompson is currently the director of the Cystic
Fibrosis Program Therapeutics Center at Boise, Idahos Cystic Fibrosis Clinic,
located in St. Lukes Regional Medical Center. This Phase I clinical study
will be conducted with MDI-P as an adjunct therapy to Tobramycin, an
aminoglycoside antibiotic used to treat infections caused by many different
bacteria. Plans call for MDI-P to be monitored for both its ability to
synergistically improve the anti-infective activity of Tobramycin, a current
front-line drug for Cystic Fibrosis patients, as well as its impact on clearing
mucus from the lungs of Cystic Fibrosis study patients for improved pulmonary
function. Dr. Thompson is a gastroentologist, having received his M.D. from Oregon Health
Sciences University. He held a Fellowship in pediatric gastroenterology at
Childrens Hospital in Denver, at the University of Colorado Health Sciences
unit, where he also participated in clinical studies. Dr. Thompson has been an
Assistant Professor at the University of Utahs Medical School, and is a Board
certified Fellow in the American Association of Pediatrics. He has previously
received grants from both the Cystic Fibrosis Foundation and the NIH. Dr.
Thompson plans to use St. Lukes Boise Cystic Fibrosis Clinic for recruitment
of patients in this planned study. Pre-Clinical Research for Cystic Fibrosis Completed. The completion of the IND
for Cystic Fibrosis came after our completion of pre-clinical research. On
October 6, 2004, we announced our receipt of the last in a series of research
reports required by the FDA for the companys submission of the IND application
for treating Cystic Fibrosis. The report focused on the use of MDI-P as an adjunct therapy to Tobramycin in
pulmonary infection of juvenile New Zealand rabbits. The acute study,
encompassing 25 rabbits in various study arms including saline control, showed
that no inhibitory effects as a result of MDI-P occurred in rabbits also given
Tobramycin, when administered intra-nasally in sequence with intra-nasal
Tobramycin. When applied alone, Tobramycin showed satisfactory reduction in
the extent of Pseudomonas aeruginosa pulmonary infection, as compared with
saline control animals, and measured by broncheoaveolar lavage analysis of
Pseudomonas aeruginosa infection from the rabbit lungs. When applied in
sequence, both drugs also produced satisfactory reductions in infection. Under FDA guidelines, when an investigational drug such as MDI-P is proposed as
an adjunct therapy, the agency desires data on the potential synergistic or
inhibitory effects of the drug when used with the base-line medication. This
will be the case in the proposed Phase I clinical trials of MDI-P involving
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patients who are dependent upon an inhaled form
of Tobramycin, brand-named TOBI, manufactured by Chiron Corporation. Tobramycin and TOBI are registered trademarks of Chiron Corporation. Lack of Chronic Toxicity in MDI-P Report. On August 17, 2004, we announced our
receipt of a chronic toxicity study of MDI-P. Chronic toxicity studies test
maximum dosages over longer timeframes in order to establish safety parameters
for human usage and are required for any IND filings we make. This study, when
combined with our recently completed large mammal toxicology study, indicates
that MDI-P is safe for use in humans under ICH guidelines, and appears
non-toxic for use in human clinical trials. The study involved the weekly injection of MDI-P into the body cavity of test
mice (inter-peritoneal) for six-months, in a multi-dose regimen to establish
the safety of MDI-P for use in humans. Doses ranged from 25%-100% solutions of
MDI-P. Tests included body weight, together with full microscopic
histopathological examination of the mouse liver, kidneys, spleen, intestines,
heart and lungs. No statistically relevant changes in body weight, or
morphometry or histopathology of vital organs were observed, when compared with
mice receiving saline control injections or with untreated animals. The study
resulted in no dose-dependency and no toxic effects. Private Placement Financing. On October 20, 2004, we completed a private
placement financing consisting of convertible preferred stock and warrants,
generating gross proceeds of $1,200,000 to the Company. Mercator Advisory
Group, LLC of Los Angeles, California participated in the investment through
its designated accredited fund, Monarch Pointe Fund, Ltd. Ascendiant
Securities LLC of Irvine, California served as placement agent on the
transaction. This capital infusion, when combined with funds from the private
placement discussed below, will help to complete our Phase I clinical trials in
Cystic Fibrosis which we plan to commence in the first quarter of 2005 once our
IND is accepted by the FDA. Completion of Equity Financing. On September 29, 2004 and November 8, 2004, we
completed successive tranches of a total of $924,182 in equity financing
through subscriptions of restricted common stock and warrants by private investors, in
accordance with Rule 144 of the Securities Exchange Act of 1934. The
investment proceeds from these financings will help complete our Phase I
clinical trials in Cystic Fibrosis which we plan to commence in the first
quarter of 2005 once our IND is accepted by the FDA. Change in Accountant. On October 25, 2004, Balukoff, Lindstrom & Co., P.A. was
dismissed as our independent accountant. We have engaged Hanson, Barnett &
Maxwell, P.C. as Balukoff, Lindstrom & Co.s replacement. Neither Balukoff,
Lindstrom & Co., P.A.s report on the Companys financial statements for the
year ended December 31, 2003, nor its report for the year ended December 31,
2002, contained an adverse opinion or a disclaimer of opinion, and neither
report was qualified or modified as to uncertainty, audit scope or accounting
principles, except that both reports were modified as to uncertainty regarding
the ability of the company to continue as a going concern. During the years
ended December 31, 2003 and December 31, 2002, and the subsequent interim
periods through October 25, 2004, there were no disagreements with Balukoff,
Lindstrom & Co., P.A. on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure, which
disagreements, if not resolved to the satisfaction of Balukoff, Lindstrom &
Co., P.A., would have caused Balukoff, Lindstrom & Co., P.A. to make reference
to the subject matter of the disagreement in connection with its report. Results of Operations Revenues and Gross Profit.We did not book any revenue for the three- or
nine-month periods ended September 30, 2004 or September 30, 2003. As we
continue to pursue pre-clinical and clinical testing of MDI-P as a
pharmaceutical for the treatment of Cystic Fibrosis and HIV as well as other
pre-commercialization testing of our technologies, we do not anticipate booking
significant revenues in the near future. Operating Expenses and Operating Loss.We incurred $191,506 in research and
development expenses for the quarter ended September 30, 2004, on preclinical
tests of MDI-P. We incurred $35,423 in research and development expenses for
the same period of 2003. Our general and administrative expenses were $250,819
during the third quarter of 2004, as compared to $215,392 during the quarter
ended September 30, 2003. As a result of the foregoing, we sustained an
operating loss of $442,325 for the quarter ended September 30, 2004, as
compared with an operating loss of $250,815 for the same period of 2003. 10




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For the nine months ended September 30, 2004 we incurred $362,484 in research
and development expenses as compared with $35,423 during the same period of
2003. Our general and administrative expenses for the first three quarters of
2004 were $2,667,782 as compared with $573,725 for the first three quarters of
2003, resulting in
operating losses of $3,030,266 through September 30, 2004 and $609,148 through
September 30, 2003. The increase in general and administrative expense is due
largely to a non-cash charge of $1,577,000 taken in the first quarter of 2004
associated with the extension of certain options. The increase is also partly
due to an increase in the size of our operations. Other Income/Expense and Net Loss.We booked $854 in interest income and
incurred interest expenses of $27,497 for the quarter ended September 30, 2004,
as compared with no interest income and $63,142 in interest expenses for the
same period of 2003. The decrease in interest expense is a result of our
successful efforts to convert high-interest debt to equity. We also booked $39
in other income in the third quarter of 2004. In sum, our net loss for the
third quarter of 2004 was $468,929 or a loss of less than $0.01 per fully
diluted share. For the quarter ended September 30, 2003, we incurred a net
loss of $313,462, also a loss of less than $0.01 per fully diluted share. For the nine months ended September 30, 2004, we booked $3,980 in interest
income and incurred interest expenses of $114,221, as compared with no interest
income and interest expenses of $190,108 for the comparable period of 2003.
Our net loss for the first three quarters of 2004 was $3,139,748 or $0.03 per
fully diluted share. Our net loss for the first three quarters of 2003 was
$798,761 or $0.01 per fully diluted share. Future Expectations.We expect to operate at a loss for several more years
while we continue to study, gain regulatory approval of and commercialize our
technologies. We will spend more in the remainder of 2004 in research and
development expenses over the prior year as we continue to implement our
commercialization strategy. Similarly, we expect our higher general and
administrative expenses for the remainder of 2004 to continue as we increase
the size of our operations. As a result, we expect to sustain a greater net
loss in 2004, than we have in recent years. Liquidity and Capital Resources As of September 30, 2004, we had $434,455 in cash and had a working capital
deficit of $2,825,710. Since our inception, we have financed our operations
primarily through private sales of equity and the issuance of convertible and
non-convertible notes. We will require significant additional funding to
continue to develop, research and seek regulatory approval of our technologies.
We do not currently generate any cash from operations and have no credit
facilities in place or available. Currently, we are funding operations through
private issuances of equity. We are seeking to raise substantial additional funds in private stock offerings
in order to meet our near-term and mid-term funding requirements. While we are
optimistic that we can raise such funds, we cannot assure you we will be
successful. Given that we are still in an early development stage and do not
have revenues from operations, raising equity financing is difficult. In
addition, any additional equity financing will have a substantial dilutive
effect to our current shareholders. We believe we have sufficient capital on hand to complete Phase I clinical
trials for Cystic Fibrosis once the FDA approves our IND. We also believe we
have sufficient capital to file our IND for HIV. Once an IND application for HIV is submitted, and assuming it is approved, we
will need additional capital to initiate Phase I clinical trials. We estimate
the cost to complete Phase I and Phase II clinical trials to be several million
dollars per indication and the cost to complete Phase III testing and obtain
approval of an NDA to be in the tens of millions of dollars per indication. While our ability to obtain financing may improve in the event our IND
application is approved, we cannot give assurances that we will have access to
the significant capital required to take a drug through regulatory approvals
and to market. We may seek a partner in the global pharmaceutical industry to
help us co-develop, license, or even purchase some or all of our technologies. Off-Balance Sheet Arrangements We have no off-balance sheet arrangements as defined in Item 303(c) of
Regulation S-B. 11




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Cautionary Statement for Forward Looking Information Certain information set forth in this report contains forward-looking
statements within the meaning of federal
securities laws. Forward looking statements include statements concerning our
plans, objectives, goals, strategies, future events, future revenues or
performance, capital expenditures, and financing needs and other information
that is not historical information. When used in this report, the words
estimates, expects, anticipates, forecasts, plans, intends,
believes and variations of such words or similar expressions are intended to
identify forward-looking statements. Additional forward-looking statements may
be made by us from time to time. All such subsequent forward-looking
statements, whether written or oral and whether made by us or on our behalf,
are also expressly qualified by these cautionary statements. Our forward-looking statements are based upon our current expectations and
various assumptions. Our expectations, beliefs and projections are expressed
in good faith and are believed by us to have a reasonable basis, including
without limitation, our examination of historical operating trends, data
contained in our records and other data available from third parties, but there
can be no assurance that our expectations, beliefs and projections will result
or be achieved or accomplished. Our forward-looking statements apply only as
of the date made. We undertake no obligation to publicly update or revise
forward-looking statements which may be made to reflect events or circumstances
after the date made or to reflect the occurrence of unanticipated events. There are a number of risks and uncertainties that could cause actual results
to differ materially from those set forth in, contemplated by or underlying the
forward-looking statements contained in this report. Those risks and
uncertainties include, but are not limited to, our lack of significant
operating revenues and lack of profit to date, our need for substantial and
immediate additional capital, the fact that we may dilute existing shareholders
through additional stock issuances, the extensive governmental regulation to
which we are subject, the fact that our technologies remain unproven, the
intense competition we face from other companies and other products, and our
reliance upon potentially inadequate intellectual property. Those risks and
certain other uncertainties are discussed in more detail in the 2003 10-KSB.
There may also be other factors, including those discussed elsewhere in this
report, that may cause our actual results to differ from the forward-looking
statements. Any forward-looking statements made by us or on our behalf should
be considered in light of these factors. 
 ITEM 3. CONTROLS AND PROCEDURES (a) Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of our disclosure controls and procedures, as such term
is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act
of 1934, as amended (the Exchange Act), as of September 30, 2004. Based on
this evaluation, our principal executive officer and principal financial
officer concluded that our disclosure controls and procedures were effective as
of September 30, 2004. (b) There have been no significant changes (including corrective actions with
regard to significant deficiencies or material weaknesses) in our internal
controls or in other factors that could significantly affect these controls
subsequent to the date of the evaluation referenced in paragraph (a) above. 
 PART II
OTHER INFORMATION 
 ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS On September 9, 2004 and November 4, 2004, we completed $243,880 and
$680,302, respectively, in equity financing through subscriptions for a total
of 7,247,136 shares of restricted common stock by private investors, in
accordance with Rule 144 of the Securities Exchange Act of 1934. None of the
sales involved an underwriter. We believe these sales were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933 because the
sales did not involve a public offering. The investment proceeds will help
complete our Phase I clinical trials in Cystic Fibrosis which we plan to
commence in the first quarter of 2005 once our IND is accepted with the FDA. 
 ITEM 6. EXHIBITS The following documents are furnished as exhibits to this Form 10-QSB.
Exhibits marked with an asterisk are filed 12




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herewith. The remainder of the
exhibits previously have been filed with the Commission and are incorporated
herein by reference. NUMBER
    
    EXHIBIT3.1
    
    Amended and Restated Articles of Incorporation of the Company (filed as
Exhibit 3.1 to the Companys Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994, and incorporated herein by reference).3.2
    
    Amended Bylaws of the Company (filed as Exhibit 3.2 to the Companys
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994,
and incorporated herein by reference).10.1
    
    Employment Agreement dated as of May 15, 2002 between Medical
Discoveries, Inc. and Judy M. Robinett (filed as Exhibit 10.4 to the
Companys Quarterly Report on Form 10-QSB for the quarter ended June 30,
2002, and incorporated herein by reference).10.2
    
    2002 Stock Incentive Plan adopted by the Board of Directors as of July
11, 2002 (filed as Exhibit 10.5 to the Companys Quarterly Report on Form
10-QSB for the quarter ended June 30, 2002, and incorporated herein by
reference).31
    
    Rule 13a-14(a) Certification, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *32
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
   *
    
    Filed herewith. 13




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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. MEDICAL DISCOVERIES, INC./S/ JUDY M. ROBINETTJudy M. RobinettPresident and Chief Executive OfficerDate: November 15, 2004
 14




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INDEX TO EXHIBITS NUMBER
    
    EXHIBIT3.1
    
    Amended and Restated Articles of Incorporation of the Company (filed as
Exhibit 3.1 to the Companys Annual Report on Form 10-KSB for the fiscal
year ended December 31, 1994, and incorporated herein by reference).3.2
    
    Amended Bylaws of the Company (filed as Exhibit 3.2 to the Companys
Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994,
and incorporated herein by reference).10.1
    
    Employment Agreement dated as of May 15, 2002 between Medical
Discoveries, Inc. and Judy M. Robinett (filed as Exhibit 10.4 to the
Companys Quarterly Report on Form 10-QSB for the quarter ended June 30,
2002, and incorporated herein by reference).10.2
    
    2002 Stock Incentive Plan adopted by the Board of Directors as of July
11, 2002 (filed as Exhibit 10.5 to the Companys Quarterly Report on Form
10-QSB for the quarter ended June 30, 2002, and incorporated herein by
reference).31
    
    Rule 13a-14(a) Certification, as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.*32
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.*
   *
    
    Filed herewith. 15