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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 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 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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TABLE OF CONTENTS PART IFINANCIAL INFORMATIONITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
    
    
    2ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
    
    
    10ITEM 3. CONTROLS AND PROCEDURES
    
    
    13PART IIOTHER INFORMATIONITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
AND USE OF PROCEEDS
    
    
    13ITEM 6. EXHIBITS
    
    
    14SIGNATURES
    
    
    14INDEX TO EXHIBITS
    
    
    15EXHIBIT 21EXHIBIT 31EXHIBIT 32EXHIBIT 21EXHIBIT 31EXHIBIT 32




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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
(A Development Stage Company)
Condensed Consolidated Balance Sheets
(Unaudited) March 31,
    
    
    December 31,2005
    
    
    2004ASSETSCURRENT 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
    
    
    
    Total Current Liabilities
    
    
    3,970,427
    
    
    
    3,393,633TOTAL LIABILITIES
    
    
    3,970,427
    
    
    
    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)
    
    
    1,570,109
    
    
    
    523,334Common stock, no par value; 250,000 shares authorized; 107,101,947
and 105,653,335 shares issued and outstanding, respectively
    
    
    15,179,407
    
    
    
    14,918,657Additional paid-in capital
    
    
    6,302,017
    
    
    
    3,424,383Deficit accumulated prior to the development stage
    
    
    (1,399,577
    )
    
    
    (1,399,577
    )Deficit accumulated during the development stage
    
    
    (22,412,758
    )
    
    
    (19,353,933
    )Total Stockholders Deficit
    
    
    (760,802
    )
    
    
    (1,887,136
    )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
    
    $
    3,209,625
    
    
    $
    1,506,497
 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
(Unaudited) From Inceptionof theDevelopment StageFor the Three
    
    
    on November 20, 1991Months Ended
    
    
    ThroughMarch 31,
    
    
    March 31,2005
    
    
    2004
    
    
    2005REVENUES
    
    $
    
    
    
    $
    
    
    
    $
    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)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 Income (Expenses)
    
    
    9,566
    
    
    
    (51,976
    )
    
    
    1,039,128NET LOSS
    
    
    (1,794,416
    )
    
    
    (2,138,312
    )
    
    
    (20,456,150
    )Preferred stock dividend from beneficial
conversion feature
    
    
    (1,264,409
    )
    
    
    
    
    
    
    (1,956,608
    )NET LOSS APPLICABLE TO COMMON
SHAREHOLDERS
    
    $
    (3,058,825
    )
    
    $
    (2,138,312
    )
    
    $
    (22,412,758
    )BASIC AND DILUTED LOSS PER
COMMON SHARE
    
    $
    (0.03
    )
    
    $
    (0.03
    )WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING
    
    
    106,506,793
    
    
    
    84,830,304
 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
(Unaudited) From Inceptionof theFor the Three
    
    
    Development StageMonths Ended
    
    
    on November 20, 1991March 31,
    
    
    Through March 31,2005
    
    
    2004
    
    
    2005CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (1,794,416
    )
    
    $
    (2,138,312
    )
    
    $
    (20,456,150
    )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
    
    
    
    
    
    
    
    665,700Depreciation
    
    
    
    
    
    
    
    
    
    
    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 FINIANCING 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
 See notes to condensed consolidated financial statements. 5




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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited) For the ThreeMonths EndedMarch 31,2005
    
    
    2004SUPPLIMENTAL DISCLOSURES OFCASH FLOW INFORMATIONPreferred stock dividend as part of beneficial conversion
conversion feature
    
    $
    1,264,409
    
    
    $
    Retirement of notes payable with
common stock
    
    $
    
    
    
    $
    175,000
 See notes to condensed consolidated financial statements. 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 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 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 3  Issuance of Common Stock, Preferred Stock, and Warrants 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. 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. The Company valued these warrants at
$213,889 ($0.18 per share) using a Black 7




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Scholes option pricing model with the following assumptions: risk free rate 2.82%, volatility of
203% and an expected life 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 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. 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 on or before the third
anniversary of the issuance date of the warrants at $0.1967 per share. The Company has allocated the proceeds from the issuance of the Series A Convertible Preferred
Stock and warrants, based on their relative fair values on the date of issuance which are as
follows: $3,000,000 to the Series A Convertible Preferred and $4,010,422 to the warrants. The
warrants were valued using the Black Scholes Pricing model using the following assumptions:
volatility of 203%, risk-free interest rate of 2.82% and a term of three years. The allocation of
the net proceeds resulted in $1,046,775 being allocated to the Series A Convertible Preferred Stock
and $1,399,336 being allocated to the warrants. The Company recognized a beneficial conversion
dividend of $1,264,409 on the date of issuance equal to the value allocated to the Series A
Convertible Preferred Stock (before offering costs). The actual amount of the beneficial conversion
was $4,037,917 but the dividend is limited to the amount of gross proceeds allocated to the Series
A Convertible Preferred Stock. 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 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. The Company also entered
into a Registration Rights Agreement with the investors requiring the Company 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. Note 4  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 8




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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 5  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. 9




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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 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, 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. To date, we have not generated significant revenues from operations or realized a profit. Through
December 31, 2004, we had incurred a accumulated deficit from
inception of 23,812,335. 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. 10




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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 recognized a net loss for the period of
$1,794,416, compared to a net loss of $2,138,312 in the first quarter of 2004. In addition, we
recognized a preferred stock dividend of $1,264,409 during the quarter as a result of the
beneficial conversion feature of the preferred shares issued during the period. There was no such
dividend recognized during the first quarter of 2004. In sum, our net loss applicable to common
shareholders for the first quarter of 2005 was $3,058,825 or a loss of $0.03 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 11




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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 $760,802.
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 12




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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 31, 2005. Based on
this evaluation, our principal executive officer and principal financial officer concluded that our
disclosure controls and procedures were effective as of March 31, 2005. (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. 13




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ITEM 6. EXHIBITS The following documents are furnished as exhibits to this Form 10-QSB. 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
    
    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. 
 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: May 16, 2005
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##### Table of Contents



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
    
    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