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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-QSB/A (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2005 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
 For the transition period from to Commission file number 0-12627 MEDICAL DISCOVERIES, INC. 
  Utah
    
    87-0407858(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)
 1388 S. Foothill Drive, #266, Salt Lake City, Utah 84108 
  (801) 582-9583 
  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 o þ
 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 May 12, 2005, there were 107,101,947 shares of the issuers Common
Stock and 42,000 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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Explanatory
Note




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##### 



TABLE OF CONTENTS PART IFINANCIAL INFORMATIONITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
    
    
    2ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    11ITEM 3. CONTROLS AND PROCEDURES
    
    
    14PART IIOTHER INFORMATIONITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
    
    
    14ITEM 6. EXHIBITS
    
    
    15SIGNATURES
    
    
    15INDEX TO EXHIBITS
    
    
    16EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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PART I
FINANCIAL INFORMATION 
 ITEM 1. FINANCIAL STATEMENTS The following financial statements are filed with this report: Condensed Consolidated Balance Sheets as of March 31, 2005, (unaudited) and December 31, 2004
(audited) Condensed Consolidated Statements of Operations for the three-month periods ended March 31, 2005
(unaudited), March 31, 2004 (unaudited) and from inception of the development stage on November 20,
1991 through March 31, 2005 (unaudited) Condensed Consolidated Statements of Cash Flows for the three-month periods ended March 31, 2005
(unaudited), March 31, 2004 (unaudited), and from inception of the development stage on November
20, 1991 through March 31, 2005 (unaudited) Notes to Unaudited Consolidated Financial Statements 2




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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
 March 31,
    
    
    December 31,2005
    
    
    2004(Restated)ASSETSCURRENT ASSETSCash
    
    $
    3,158,525
    
    
    $
    1,455,397Deposits
    
    
    51,100
    
    
    
    51,100Total Current Assets
    
    
    3,209,625
    
    
    
    1,506,497TOTAL ASSETS
    
    $
    3,209,625
    
    
    $
    1,506,497LIABILITIES
AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable
    
    $
    2,363,550
    
    
    $
    2,448,454Accrued interest payable
    
    
    431,160
    
    
    
    415,262Notes payable
    
    
    336,717
    
    
    
    336,717Convertible notes payable
    
    
    193,200
    
    
    
    193,200Research and development obligation
    
    
    645,800
    
    
    
    Financial instrument
    
    
    5,249,284
    
    
    
    Total Current Liabilities
    
    
    9,219,711
    
    
    
    3,393,633TOTAL LIABILITIES
    
    
    9,219,711
    
    
    
    3,393,633STOCKHOLDERS DEFICITPreferred stock, Series A, convertible; no par value; 50,000 shares
authorized; 42,000 and 12,000 shares issued and outstanding, respectively;
(aggregate liquidation preference of $4,200,000 and $1,200,000, respectively)
    
    
    523,334
    
    
    
    523,334Common stock, no par value; 250,000 shares authorized; 107,101,947
and 105,653,335 shares issued and outstanding, respectively
    
    
    15,168,098
    
    
    
    14,918,657Additional paid-in capital
    
    
    988,670
    
    
    
    3,424,383Deficit accumulated prior to the development stage
    
    
    (1,399,577
    )
    
    
    (1,399,577
    )Deficit accumulated during the development stage
    
    
    (21,290,611
    )
    
    
    (19,353,933
    )Total Stockholders Deficit
    
    
    (6,010,086
    )
    
    
    (1,887,136
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    $
    3,209,625
    
    
    $
    1,506,497
  3




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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
 From Inceptionof theDevelopment StageFor the Three
    
    
    on November 20, 1991Months Ended
    
    
    ThroughMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)REVENUES
    
    $
    
    
    
    $
    
    
    
    $
    157,044COST OF GOODS SOLD
    
    
    
    
    
    
    
    
    
    
    14,564GROSS PROFIT
    
    
    
    
    
    
    
    
    
    
    142,480OPERATING EXPENSESGeneral and administrative
    
    
    251,996
    
    
    
    2,047,693
    
    
    
    15,428,966Research and development
    
    
    1,551,986
    
    
    
    38,643
    
    
    
    5,100,724Inventory write-down
    
    
    
    
    
    
    
    
    
    
    96,859Impairment loss
    
    
    
    
    
    
    
    
    
    
    9,709License fees
    
    
    
    
    
    
    
    
    
    
    1,001,500Total Expenses
    
    
    1,803,982
    
    
    
    2,086,336
    
    
    
    21,637,758LOSS FROM OPERATIONS
    
    
    (1,803,982
    )
    
    
    (2,086,336
    )
    
    
    (21,495,278
    )OTHER INCOME (EXPENSES)Unrealized
loss on financial instrument
    
    
    (142,262
    )
    
    
    
    
    
    
    (142,262
    )Interest income
    
    
    5,564
    
    
    
    1,700
    
    
    
    35,135Interest expense
    
    
    (15,898
    )
    
    
    (53,676
    )
    
    
    (1,133,335
    )Foreign currency transaction gain
    
    
    19,900
    
    
    
    
    
    
    
    19,900Gain on forgiveness of debt
    
    
    
    
    
    
    
    
    
    
    1,235,536Other income
    
    
    
    
    
    
    
    
    
    
    881,892Total Other Expenses
    
    
    (132,696
    )
    
    
    (51,976
    )
    
    
    896,866NET LOSS
    
    
    (1,936,678
    )
    
    
    (2,138,312
    )
    
    
    (20,598,412
    )Preferred stock dividend from beneficial
conversion feature
    
    
    
    
    
    
    
    
    
    
    (692,199
    )NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS
    
    $
    (1,936,678
    )
    
    $
    (2,138,312
    )
    
    $
    (21,290,611
    )BASIC AND DILUTED LOSS PER
COMMON SHARE
    
    $
    (0.02
    )
    
    $
    (0.03
    )WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
    
    
    106,506,793
    
    
    
    84,830,304
  4




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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
 From Inceptionof theFor the Three
    
    
    Development StageMonths Ended
    
    
    on November 20, 1991March 31,
    
    
    Through March 31,2005
    
    
    2004
    
    
    2005(Restated)
    
    
    
    
    
    
    (Restated)CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (1,936,678
    )
    
    $
    (2,138,312
    )
    
    $
    (20,598,412
    )Adjustments to reconcile net loss to
net cash used by operating activities:Foreign currency transaction gain
    
    
    (19,900
    )
    
    
    
    
    
    
    (19,900
    )Common stock issued for services, expenses,
and litigation
    
    
    18,750
    
    
    
    1,727,466
    
    
    
    4,286,467Acquired research and development costs
    
    
    665,700
    
    
    
    
    
    
    
    665,700Unrealized loss on financial instrument
    
    
    142,262
    
    
    
    
    
    
    
    142,262Depreciation
    
    
    
    
    
    
    
    
    
    
    100,271Reduction of
escrow receivable from research and development
    
    
    
    
    
    
    
    
    
    
    272,700Stock options and warrants granted
for services
    
    
    
    
    
    
    
    
    
    
    4,811,253Reduction of legal costs
    
    
    
    
    
    
    
    
    
    
    (130,000
    )Write-off of subscriptions receivable
    
    
    
    
    
    
    
    
    
    
    112,500Impairment loss on assets
    
    
    
    
    
    
    
    
    
    
    9,709Loss on disposal of equipment
    
    
    
    
    
    
    
    
    
    
    30,364Gain on debt restructuring
    
    
    
    
    
    
    
    
    
    
    (1,235,536
    )Write-off of accounts receivable
    
    
    
    
    
    
    
    
    
    
    193,965Note payable issued for litigation
    
    
    
    
    
    
    
    
    
    
    385,000Changes in operating assets and liabilities:Increase in accounts receivable
    
    
    
    
    
    
    
    
    
    
    (7,529
    )Decrease in prepaid expenses
    
    
    
    
    
    
    11,331
    
    
    
    Decrease in deferred charges
    
    
    
    
    
    
    12,077
    
    
    
    Increase (decrease) in accounts payable
    
    
    (84,904
    )
    
    
    133,292
    
    
    
    2,207,641Increase (decrease) in accrued expenses
    
    
    15,898
    
    
    
    (3,264
    )
    
    
    615,607Net Cash Used by Operating Activities
    
    
    (1,198,872
    )
    
    
    (257,410
    )
    
    
    (8,157,938
    )CASH FLOWS FROM INVESTING ACTIVITIESIncrease in deposits
    
    
    
    
    
    
    
    
    
    
    (51,100
    )Purchase of equipment
    
    
    
    
    
    
    
    
    
    
    (132,184
    )Payments received on note receivable
    
    
    
    
    
    
    
    
    
    
    130,000Net Cash Used by Investing Activities
    
    
    
    
    
    
    
    
    
    
    (53,284
    )CASH FLOWS FROM FINANCING ACTIVITIESIssuance of common stock, preferred
stock and warrants for cash
    
    
    2,902,000
    
    
    
    441,504
    
    
    
    9,929,845Contributed equity
    
    
    
    
    
    
    
    
    
    
    131,374Proceeds from notes payable
    
    
    
    
    
    
    
    
    
    
    1,336,613Payments on notes payable
    
    
    
    
    
    
    
    
    
    
    (501,287
    )Proceeds from convertible notes payable
    
    
    
    
    
    
    
    
    
    
    571,702Payments on convertible notes payable
    
    
    
    
    
    
    
    
    
    
    (98,500
    )Net Cash Provided by Financing Activities
    
    
    2,902,000
    
    
    
    441,504
    
    
    
    11,369,747NET INCREASE IN CASH
    
    
    1,703,128
    
    
    
    184,094
    
    
    
    3,158,525CASH AT BEGINNING OF PERIOD
    
    
    1,455,397
    
    
    
    424,216
    
    
    
    CASH AT END OF PERIOD
    
    $
    3,158,525
    
    
    $
    608,310
    
    
    $
    3,158,525
  5




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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
 For the ThreeMonths EndedMarch 31,2005
    
    
    2004(Restated)SUPPLIMENTAL DISCLOSURES OF CASH FLOW INFORMATIONInitial valuation of financial instrument
    
    $
    6,279,829
    
    
    $
    Retirement of notes payable with common stock
    
    $
    
    
    
    $
    175,000
  6




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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements Note 1  Basis of Presentation Unaudited Interim Consolidated Financial Statements The accompanying unaudited consolidated 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 2004 Annual Report on Form 10-KSB for the year ended December 31, 2004, 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. Loss Per Common Share Loss per share is computed by dividing net loss applicable to common shareholders by the
weighted-average number of shares outstanding. Potential common
shares from convertible preferred stock, convertible notes
payable, warrants and stock options have not been included as they are anti-dilutive. Stock Based Compensation The Company accounts for its
stock options under Accounting Principles Board (APB) Option 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: Three
months Ended March 31,2005
    
2004Net loss
applicable to common stockholders, as reported
    
    $
    (1,936,678
    )
    
    $
    (2,138,812
    )Add:
stock-based employee compensation expense included in reported net loss
    
    
    
    
    
    
    1,577,000Deduct:
Total stock based employee compensation expense determined under
fair value based method for all awards
    
    
    
    
    
    
    (1,916,768
    )Pro forma net
loss applicable to common shareholders
    
    $
    (1,936,678
    )
    
    $
    (2,478,080
    )Basic and
diluted loss per share, as reported
    
    $
    (0.02
    )
    
    $
    (0.03
    )Basic and
diluted loss per share, pro forma
    
    $
    (0.02
    )
    
    $
    (0.03
    )
 Assumptions used to calculate
the income statement impact of stock options granted as it the
Company had adopted FAS 123 were as follows: 2005
    
2004Expected
dividend yield
    
    n/a
    
    
    Risk free interest rate
    
    n/a
    
    
    3.8
    %Expected
volatility
    
    n/a
    
    
    220
    %Expected Life
    
    n/a
    
    
    7 yearsWeighted
average fair value per share
    
    n/a
    
    $
    0.10
 Note 2  Restatement of
Financial Statements The Companys previously issued condensed consolidated
financial statements as of and for the three months ended March 31, 2005 have been restated to record
the accounting of warrants resulting from the issuance of the Series A Convertible Preferred Stock entered into in October 2004 and March 2005
 (See Note 4). These warrants, and all other warrants previously
issued by the Company, were measured at their fair value and are
reflected as a liability on the financial statements. The excess of
the fair value of the warrants over the net proceeds received is
recognized as an unrealized loss on financial instrument. The
reclassification of previously issued warrants to a liability was
recognized as a decrease to equity. The Company also remeasured the
fair value of the warrants as of March 31, 2005 with the difference being
recorded on the  income statement as a change in financial
instrument. As a result of this restatement,
the Company recorded $5,249,284 of additional current liability
related to the fair value of the warrants  with a reduction of
$5,107,022 in equity along with an additional
expense of $142,262 recorded as an unrealized loss on financial
instrument as of and for the three months ended March 31,
2005.  As Previously
    
    Effect ofStated
    
    Restatement
    
    As RestatedFor the Three Months Ended March 31, 2005Operating expenses
    
    $
    1,803,982
    
    
    $
    
    
    
    $
    1,803,982Unrealized loss on financial instrument
    
    
    
    
    
    
    (142,262
    )
    
    
    (142,262
    )Net loss
    
    
    (1,794,416
    )
    
    
    (142,262
    )
    
    
    (1,936,678
    )Net loss applicable to common shareholders
    
    
    (3,058,824
    )
    
    
    1,122,146
    
    
    
    (1,936,678
    )Preferred stock dividend from beneficial
conversion feature
    
    
    (1,264,408
    )
    
    
    1,264,408
    
    
    
    Basic and diluted loss per common share
    
    
    (0.03
    )
    
    
    0.01
    
    
    
    (0.02
    )
 As Previously
    
    Effect ofStated
    
    Restatement
    
    As RestatedFrom Inception of the Development Stage on
November 20, 1991 through March 31, 2005Revenues
    
    $
    157,044
    
    
    $
    
    
    
    $
    157,044Cost of goods sold
    
    
    14,564
    
    
    
    
    
    
    
    14,564Operating expenses
    
    
    21,637,758
    
    
    
    
    
    
    
    21,637,758Unrealized loss on financial instrument
    
    
    
    
    
    
    (142,262
    )
    
    
    (142,262
    )Net loss
    
    
    (20,456,150
    )
    
    
    (142,262
    )
    
    
    (20,598,412
    )Preferred stock dividend from beneficial
conversion feature
    
    
    (1,956,608
    )
    
    
    1,264,409
    
    
    
    (692,199
    )Net loss applicable to common shareholders
    
    
    (22,412,758
    )
    
    
    1,122,147
    
    
    
    (21,290,611
    )
 March 31, 2005As Previously
    
    Effect ofStated
    
    Restatement
    
    As RestatedTotal current liabilities
    
    
    3,970,427
    
    
    
    5,249,284
    
    
    
    9,219,711Total liabilities
    
    
    3,970,427
    
    
    
    5,249,284
    
    
    
    9,219,711Preferred stock
    
    
    1,570,109
    
    
    
    (1,046,775
    )
    
    
    523,334Common stock
    
    
    15,179,407
    
    
    
    (11,309
    )
    
    
    15,168,098Additional paid-in capital
    
    
    6,302,017
    
    
    
    (5,313,347
    )
    
    
    988,670Deficit accumulated during the
development stage
    
    
    (22,412,758
    )
    
    
    1,122,147
    
    
    
    (21,290,611
    )Total stockholders deficit
    
    
    (760,802
    )
    
    
    (5,249,284
    )
    
    
    (6,010,086
    )
 Note 3  Going Concern Considerations The Companys recurring losses from 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 fund research and development costs until it is able to consistently
generate revenues and sustain profitable operations. However, there can be no assurance that these
plans will be successful. Note 4  Issuance of
Common Stock, Preferred Stock,  Warrants and Financial Instrument Common Stock During the three months ended March 31, 2005, the Company issued 1,448,612 shares of restricted
common stock, 104,167 of which were issued for services valued at $18,750 and 1,344,445 of which
were issued for cash totaling $242,000. In connection with the sales for cash, the Company also
issued warrants to purchase 1,344,445 shares of restricted common stock at $0.18 per share,
expiring 3 years from the date of issuance. 7




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Preferred Stock and  Warrants During the three months ended March 31, 2005, the Company
issued 30,000 shares of Series A Convertible Preferred Stock and warrants to purchase 22,877,478 shares
of common stock for a total offering price of $3.0 million. The Company incurred $340,000 of offering costs
and issued to the placement agent warrants to purchase 1,220,132 shares of common stock exercisable at $0.1967
per share which are exercisable for a period of three years. 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 75% of the average of the three lowest intra-day trading prices for
the Companys common stock during the 10 trading days immediately preceding the conversion date. The conversion
price may not exceed $0.1967. The warrants are subject to equitable adjustment in connection with a stock split,
stock dividend or similar transaction. The warrants entitle the holder to purchase up to 22,877,478 shares of common
stock of the Company at $0.1967 per share. The warrants expire three years after the date of issuance. The Series A Convertible Preferred Stock has no voting rights.
In the event of liquidation, the holders are entitled to a liquidating distribution of $100 per share. The
Company also entered into a Registration Rights Agreement with the
investors requiring the Company to use its best efforts
to timely 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. There are no significant
liquidation damages  in the event the Company is unable to file its
registration statement. The conversion feature of the
Series A Convertible Preferred Stock has more of the attributes of an
equity instrument than a liability instrument, and thus is not
considered a derivative. However, the Company is unable to guarantee
that there will be enough shares of stock to settle other
freestanding instruments. Accordingly, the warrants attached to
the convertible preferred stock were measured at their fair value and classified as liability in the financial statements.
The fair value of the warrants was $3,844,116 on the date of issuance
computed using the  Black Scholes model with
the following assumptions: volatility of 170%, risk-free interest rate of 3.9%, and an expected life of three years. The
fair value of the warrants exceeded the proceeds received by $1,184,116, which was recorded as an expense on the
statement of operations. Due to the fact that the value of the warrants exceeded the proceeds received, no value was
assigned to the preferred stock. Financial Instrument As noted above, all warrants
and options outstanding on March 11, 2005 (with the exception of stock options issued to
employees) were measured at their fair value and reclassified as a
liability in the financial statements. There were
16,215,100 warrants issued prior to March 11, 2005 with a fair value of $2,435,713. The value of the warrants was
computed using the Black Scholes model with the following assumptions: volatility of 170%, risk-free interest rate of
3.9%, and an expected life of three years. As a result of the reclassification, additional paid-in capital was decreased by
the fair value of the liability. Subsequent to March 11, 2005, 83,333 warrants were issued as part of a common stock offering of 83,333 shares. The
warrants had a fair value of $11,309 and are classified as a liability on the financial statements.  The value of the
warrants was computed using the Black Scholes model with the following assumptions: volatility of 165%, risk-free
interest rate of 4.1%, and an expected life of three years. The proceeds received from this issuance exceeded the value
of the warrants by $3,691, which was attributed to the common stock. The Company adjusted to
market value the outstanding warrants as of March 31, 2005. The fair value
of the financial instrument was $5,249,284. The Company used the Black-Scholes model in calculating fair value with the following assumptions: volatility of 166%, risk
free interest rate of 3.9% and an expected life of three years. The
changes in fair market value have been recorded as adjustments in the
line Unrealized loss on financial
instrument in the financial statements. 8




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Note 5  Other Significant Events SaveCream Asset Purchase On March 16, 2005, the Company completed the purchase of the intellectual property assets (the
Assets) of Savetherapeutics AG, a German corporation in liquidation in Hamburg, Germany
(SaveT). The Assets consist primarily of patents, patent applications, pre-clinical study data
and clinical trial data concerning SaveCream, SaveTs developmental-stage topical aromatase
inhibitor treatment for breast cancer. SaveCream never generated revenues for SaveT. The
Companys analysis as to whether the intellectual property purchased constituted a business
resulted in the conclusion that no such business had been acquired. The purchase price of the Assets was negotiated to be 2,350,000 (approximately $3.1 million under
current exchange rates), payable as follows: 500,000 at closing, 500,000 (approximately $645,800
using the March 31, 2005 exchange rates) upon conclusion of certain pending transfers of patent and
patent application rights from SaveTs inventors to the Company, and the remaining 1,350,000
(approximately $1.74 million at current exchange rates) upon successful commercialization of the
Assets. The Companys source of funds for the acquisition was a $3 million investment in the
Companys Series A Preferred Stock by an unrelated third party, as described in Note 3. SaveT inventors have yet to assign the patent and application rights to the Company, management has
deemed the assignment of the rights to be reasonably likely because the inventors are contractually
bound to execute and deliver the assignments; therefore, the Company has recorded the second
500,000 payment as a current liability in these financial statements. At present it is
undeterminable whether the intellectual property will ever be
commercialized; therefore, the final
1,350,000 under this acquisition has 9




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not been accrued as a liability as of March 31, 2005. The Company determined the intellectual
property purchased should be expensed as research and development costs Formation of MDI Oncology, Inc. On March 22, 2005, the Company formed MDI Oncology, Inc., a Delaware Corporation, as a wholly-owned
subsidiary for the purpose of acquiring and operating the assets and associated business ventures
associated with the SaveCream purchase. Note 6  Subsequent Event In April, 2005, the Company
negotiated a settlement regarding notes payable totaling $336,717 and
accrued interest of $269,364, by payment of $300,000 in
cash. The Company will recognize a gain on
settlement of debt totaling $306,081. 10




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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 consolidated financial statements and notes
thereto at pages 2 through 10 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, 2004 (the 2004 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 developmental-stage bio-pharmaceutical company engaged in the research, validation,
development and ultimate commercialization of two drugs: MDI-P and SaveCream. MDI-P is an
anti-infective drug that we believe will be a safe and effective treatment for bacterial
infections, viral infections and fungal infections. SaveCream is a breast cancer medication that is
applied topically to reduce breast cancer tumors. Both of these drugs are still in development and
have not been approved by the U.S. Food and Drug Administration (FDA). Our initial target indications for MDI-P are Cystic Fibrosis and HIV. We have filed an
Investigatory New Drug application (IND) with the FDA seeking
permission to begin Phase I human
clinical trials of MDI-P as a treatment for Cystic Fibrosis. The FDA has responded to our IND and
we are hopeful that we can satisfactorily answer the FDAs questions and satisfy the FDAs
follow-up requests for further animal testing, resulting in the FDA approving the application. If
the FDA approves that IND, we will begin human trials at St. Lukes Regional Medical Center in
Boise, Idaho using a protocol designed by Dr. Henry Thompson. If
our Phase I IND for Cystic
Fibrosis is successful, we intend to file an IND for Phase I testing of MDI-P as a treatment for
HIV at Harvard School of Medicine using a protocol designed by Dr. Bruce Dezube. We also expect to
add additional indications for the use of MDI-P in the future as we further our pre-clinical
development. We recently purchased the intellectual property for SaveCream from the liquidation estate of a
defunct German biotechnology company. In a European Union study of
SaveCream used by over 100 women
diagnosed with breast cancer, a significant number of those women experienced a significant tumor
reduction. This study, while preliminary, indicates that SaveCream may be substantially more
effective and faster acting than similar drugs already on the market. We are in the process of
developing a global commercialization strategy for SaveCream. Recent Events SaveCream Asset Purchase.On March 16, 2005 we announced the purchase of intellectual property
assets from the liquidation estate of Savetherapeutics AG, a defunct German biotechnology company
headquartered in Hamburg. The purchase price was 2,350,000 (approximately $3.035 million, using
the March 31, 2005 exchange rate). Before it ceased business in 2004, Savetherapeutics (SaveT) had
been developing SaveCream, a topical steroidal form of aromatase inhibitor (AI) for breast cancer
that never generated revenues for SaveT. 11




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This promising cancer therapeutic product has been tested in the European Union under a unique
German regulatory scheme that allows patients with limited treatment options to receive novel
treatments. In the study, over 100 women diagnosed with breast cancer received special permission
to be treated with SaveCream. A significant number of those women experienced significant tumor
reduction. This study indicates substantially improved efficacy in reduction of breast tumors, in
shorter time frames than the three approved AIs currently on the market. We are in the process of
developing a global commercialization strategy for SaveCream. M.A.G. Capital, LLC (formerly Mercator Advisory Group, LLC), through its designated funds, Mercator
Momentum Fund, L.P., and Mercator Momentum Fund III, L.P., provided us with $3 million for the
purchase. We expect to perform additional CMC (chemistry manufacturing and control) work and expand the
clinical trials over 2005, and believe this will open the door to commercialization opportunities
for SaveCream by late 2006, which may be quicker than we can commercialize MDI-P. This purchase
also allows us to diversify our product base. We analyzed whether the intellectual property purchased was a business within the contemplation of
Regulation S-X, and concluded that no such business had been acquired. Cystic Fibrosis IND.We are continuing to prosecute our IND for Cystic Fibrosis with the FDA. We
have agreed with the FDA on a large animal model protocol to establish pharmacological safety with
relation to cardio and central nervous system toxicity for this IND. We expect to begin that phase
of testing in the very near future and to start Phase I clinical trials on Cystic Fibrosis in Q4 of
2005. Results of Operations Revenues and Gross Profit We did not book any revenue for the three-month periods ended March 31,
2005 or March 31, 2004. As we continue to pursue pre-clinical and clinical testing of our
pharmaceuticals, we do not anticipate booking significant revenues in the near future. Operating Expenses and Operating Loss We incurred $1,551,986 in research and development expenses
for the quarter ended March 31, 2005, $1,345,000 of which related to our acquiring the patents and
patent rights relating to SaveCream. We incurred $38,643 in research and development expenses for
the same period of 2004. Our general and administrative expenses were $251,996 during the first
quarter of 2005, as compared to $2,047,693 during the quarter ended March 31, 2004. As a result of
the foregoing, we sustained an operating loss of $1,803,982 for the quarter ended March 31, 2005,
as compared with an operating loss of $2,086,336 for the same period of 2004. Other Income/Expense and Net Loss-We booked $5,564 in interest income and incurred interest
expenses of $15,898 for the quarter ended March 31, 2005, as compared with interest income of
$1,700 and $53,676 in interest expenses for the same period of 2004. The decrease in interest
expense is a result of our successful efforts to convert high-interest debt to equity. In
addition, we realized a gain of $19,900 on the foreign currency adjustment relating to our
obligations in the SaveCream asset purchase.
We also recorded $142,262 in unrealized loss on financial instrument
to record the accounting of warrants resulting from the issuance of
the Series A Convertible Preferred Stock entered into in October 2004
and March 2005.
 There was no such
loss recorded during the first quarter of 2004. In sum, our net
loss applicable to common
shareholders for the first quarter of 2005 was $1,936,678 or a loss
of $0.02 per fully diluted
share. For the quarter ended March 31, 2004 we incurred a net loss applicable to common
shareholders of $2,138,312, making a loss of $0.03 per fully diluted share. Future Expectations-We expect to operate at a loss for several more years while we continue to
research, gain regulatory approval of, and commercialize our technologies. We will spend more in
the remainder of the 2005 fiscal year in research and development expenses than we did over the
prior year as we continue 12




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to implement our commercialization strategy. Similarly, we expect our general and administrative
expenses to continue to increase for the remainder of 2005 as we continue to expand the scope of
our operations. As a result, we expect to sustain a greater net loss in 2005 than we have in recent
years. Liquidity and Capital Resources As of March 31, 2005, we
had $3,158,525 in cash and had a working capital deficit of $6,010,086.
Since our inception, we have financed our operations primarily through private sales of equity and
the issuance of convertible and non-convertible notes. We continue to require significant
supplementary 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. During the three months ended March 31, 2005, we issued 30,000 shares of our Series A Preferred
Stock to an unrelated third-party in exchange for $3 million in cash, less offering costs of
$340,000. We intend to use this cash for additional research and development, including making the
second installment on our purchase of the SaveCream assets. 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 provide positive assurances that we will be successful in our efforts. Given that
we are still in an early development stage and do not have revenues from operations, raising equity
financing can, at times, be 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. 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 13




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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 2004 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 March 27, 2006. Based on
this evaluation, our principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of
March 27, 2006. (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 During the three months ended March 31, 2005, we issued 1,344,445 restricted shares of common stock
to unrelated private investors for a cash inflow of $242,000, in accordance with Rule 144 of the
Securities Exchange Act of 1934. In addition, we issued 30,000 shares of our Series A Preferred
Stock in March 2005, in exchange for $3,000,000 in cash. Neither of these issuances involved an
underwriter. We believe these issuances 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 were utilized toward the purchase of the SaveCream assets, and 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. In addition, we intend to utilize a significant portion of
these proceeds in further research, development, and commercialization of the patents and patent
rights acquired in the SaveCream purchase. 14




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ITEM 6. EXHIBITS The following documents are
furnished as exhibits to this Form 10-QSB/A. Exhibits marked with an
asterisk are filed herewith. The remainder of the exhibits previously have been filed with the
Commission and are incorporated herein by reference. Number
    
    Exhibit2 .1
    
    Sale and Purchase Agreement between Attorney
Hinnerk-Joachim Müller as liquidator of
Savetherapeutics AG i.L. and Medical
Discoveries, Inc. regarding the purchase of the
essential assets of Savetherapeutics AG i.L.
(filed as Exhibit 2.1 to the Companys Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 2004, and incorporated herein by
reference).3 .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).4 .1
    
    Registration Rights Agreement dated October 18,
2004 among Monarch Pointe Fund, Ltd., Mercator
Advisory Group, LLC and Medical Discoveries,
Inc. (filed as Exhibit 4.1 to the Companys
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2004, and incorporated herein
by reference).4 .2
    
    Registration Rights Agreement dated December 3,
2004 among Mercator Momentum Fund, LP, Mercator
Momentum Fund III, LP, Mercator Advisory Group,
LLC and Medical Discoveries, Inc. (filed as
Exhibit 4.2 to the Companys Annual Report on
Form 10-KSB for the fiscal year ended December
31, 2004, and incorporated herein by reference).10 .1
    
    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).21
    
    Subsidiaries.31.1
    
    Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*31.2
    
    Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*32.1
    
    Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*32.2
    
    Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
   *
    
    Filed herewith.
    
    Previously filed. 
 SIGNATURES In accordance with the
requirements of the Exchange Act, the registrant caused this amended 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:
March 28, 2006
 15




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INDEX TO EXHIBITS Number
    
    Exhibit2.1
    
    Sale and Purchase Agreement between Attorney
Hinnerk-Joachim Müller as liquidator of
Savetherapeutics AG i.L. and Medical
Discoveries, Inc. regarding the purchase of the
essential assets of Savetherapeutics AG i.L.
(filed as Exhibit 2.1 to the Companys Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 2004, and incorporated herein by
reference).3.1
    
    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).4.1
    
    Registration Rights Agreement dated October 18,
2004 among Monarch Pointe Fund, Ltd., Mercator
Advisory Group, LLC and Medical Discoveries,
Inc. (filed as Exhibit 4.1 to the Companys
Annual Report on Form 10-KSB for the fiscal year
ended December 31, 2004, and incorporated herein
by reference).4.2
    
    Registration Rights Agreement dated December 3,
2004 among Mercator Momentum Fund, LP, Mercator
Momentum Fund III, LP, Mercator Advisory Group,
LLC and Medical Discoveries, Inc. (filed as
Exhibit 4.2 to the Companys Annual Report on
Form 10-KSB for the fiscal year ended December
31, 2004, and incorporated herein by reference).10.1
    
    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).21
    
    Subsidiaries.31.1
    
    Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*31.2
    
    Rule 13a-14(a) Certification, as adopted
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.*32.1
    
    Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*32.2
    
    Certification pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.*
   *
    
    Filed herewith.
    
    Previously filed. 16