##### Table of Contents









SECURITIES AND EXCHANGE COMMISSION


Washington, D.C. 20549


Form 10-KSB


|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
|þ |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    SECURITIES EXCHANGE ACT OF 1934
|  |  | For the fiscal period ended December 31, 2005                                           
| 
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    EXCHANGE ACT               
|  |  | For the transition period
    from           to                                         

Commission file number 0-12627


MEDICAL DISCOVERIES, INC.


(Exact name of Small Business Issuer as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Utah                                                               |  | 87-0407858                              
|(State or other jurisdiction of
    incorporation or organization) |  | (I.R.S. Employer
    Identification No.)

1338 S. Foothill Drive, #266, Salt Lake City,
Utah 84108


(Address of principal executive offices)


(801) 582-9583


(Issuers telephone number, including area code)


Securities registered pursuant to Section 12(b) of the
Act:


None


Securities registered pursuant to Section 12(g) of the
Act:


Common Stock, no par value


(Title of Class)


o


þ o


S-B 10-KSB 10-KSB. þ


12b-2 o þ


The issuer had no revenues for its most recent fiscal
year.






DOCUMENTS INCORPORATED BY REFERENCE


10-KSB.


o þ










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##### 










TABLE OF CONTENTS


|             |  |                                                                                                                         |  |  |    | 
|------------ |  | ----------------------------------------------------------------------------------------------------------------------- |  |  | -- | 
|PART I      
|Item 1.      |  | Description of Business                                                                                                 |  |  | 4  | 
|Item 2.      |  | Description of Property                                                                                                 |  |  | 20 | 
|Item 3.      |  | Legal Proceedings                                                                                                       |  |  | 20 | 
|Item 4.      |  | Submission of Matters to a Vote of Security
    Holders                                                                 |  |  | 20 | 
|PART II     
|Item 5.      |  | Market for Common Equity, Related
    Stockholder Matters and Small Business Issuer Purchases of
    Equity Securities  |  |  | 20 | 
|Item 6.      |  | Managements Discussion and Analysis
    of Financial Condition and Results of Operations                               |  |  | 21 | 
|Item 7.      |  | Financial Statements                                                                                                    |  |  | 30 | 
|Item 8.      |  | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure                                |  |  | 51 | 
|Item 8A.     |  | Controls and Procedures                                                                                                 |  |  | 51 | 
|PART III    
|Item 9.      |  | Directors, Executive Officers, Promoters
    and Control Persons; Compliance with Section 16(a) of the
    Exchange Act |  |  | 51 | 
|Item 10.     |  | Executive Compensation                                                                                                  |  |  | 51 | 
|Item 11.     |  | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder Matters                      |  |  | 51 | 
|Item 12.     |  | Certain Relationships and Related
    Transactions                                                                      |  |  | 51 | 
|Item 13.     |  | Exhibits                                                                                                                |  |  | 51 | 
|Item 14.     |  | Principal Accountant Fees and Services                                                                                  |  |  | 52 | 
|EXHIBIT 21  
|EXHIBIT 31.1
|EXHIBIT 31.2
|EXHIBIT 32.1
|EXHIBIT 32.2



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DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS


This Report, including the documents incorporated by
reference into this Report, contains Forward-Looking
Statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended, including, without
limitation, statements regarding our products still being in the
developmental stage, our lack of operating revenues or profits,
our dependence on raising significant additional capital, our
auditors expression of substantial doubt as to our ability
to continue as a going concern, the government regulation to
which we are subject, our exposure to pricing and reimbursement
risks, the competition we face, the potential that our
intellectual property is not adequately protected, the fact that
we may need to litigate to secure certain of our intellectual
property rights, our risk of product liability, our stock being
thinly traded and subject to manipulation, the volatility of our
stock price, the risk that shareholders could suffer substantial
dilution, and the fact that we have not paid dividends to date.
All statements other than statements of historical fact are
Forward-Looking Statements for purposes of these
provisions, including any projections of earnings, revenues or
other financial items, any statements of the plans and
objectives of management for future operations, any statements
concerning proposed new products or services, any statements
regarding future economic conditions or performance, and any
statements of assumptions underlying any of the foregoing. All
Forward-Looking Statements included in this document are made as
of the date hereof and are based on information available to us
as of such date. We assume no obligation to update any
Forward-Looking Statement. In some cases, Forward-Looking
Statements can be identified by the use of terminology such as
may, will, expects,
plans, anticipates, intends,
believes, estimates,
potential, or continue, or the negative
thereof or other comparable terminology. Although we believe
that the expectations reflected in the Forward-Looking
Statements contained herein are reasonable, there can be no
assurance that such expectations or any of the Forward-Looking
Statements will prove to be correct, and actual results could
differ materially from those projected or assumed in the
Forward-Looking Statements. Future financial condition and
results of operations, as well as any Forward-Looking Statements
are subject to inherent risks and uncertainties, including any
other factors referred to in the Companys press releases
and reports filed with the Securities and Exchange Commission.
All subsequent Forward-Looking Statements attributable to the
Company or persons acting on its behalf are expressly qualified
in their entirety by these cautionary statements. Additional
factors that may have a direct bearing on the Companys
operating results are described under Managements
Discussion and Analysis of Financial Condition and Results of
Operations  Cautionary Statement for Forward-Looking
Information and Factors Affecting Future Results and
elsewhere in this report.


3



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PART I







|        |                         
|------- | ------------------------
|ITEM 1. | DESCRIPTION OF BUSINESS.











| |                     
| | --------------------
| | Recent Developments.

Cystic Fibrosis IND.






| |   |                                                                                                                                                                        
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Use of the same mode of nebulization administration of MDI-P in
    small and large mammals as proposed for the Phase I cystic
    fibrosis clinical trial, to develop:



| |   |                                                                                                                                              
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------
| |  | Satisfactory safety pharmacology data from frank toxicity to
    minimal toxicity for periods mimicking the proposed clinical
    trial term;
|
| |  | Mouse safety pharmacology on potential central nervous system
    involvement; and                                                           
|
| |  | Dog safety pharmacology on potential cardiovascular system
    involvement;                                                                  



| |   |                                                                                                                          
| | - | -------------------------------------------------------------------------------------------------------------------------
| |  | A battery of genotoxicity studies; and                                                                                   
|
| |  | Data to support the safety of the maximum expected human
    exposure to listed extractables in our prior IND submission.

4



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SaveCream.    








S-X,


Series A Preferred Stock Financings.


5



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##### Table of Contents











| |                   
| | ------------------
| | Business Strategy.





| |   |                                                             
| | - | ------------------------------------------------------------
| |  | commence human clinical trials of MDI-P for cystic fibrosis;
|
| |  | file an IND for HIV; and                                    
|
| |  | develop a commercialization strategy for SaveCream.         





| |   |                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | listing the Companys common stock on a stock exchange or
    NASDAQ;                                                                                                              
|
| |  | how to provide shareholders with liquidity, transparency and a
    return on investment;                                                                                           
|
| |  | a decision on whether or when to relocate the Company or
    maintain its current location;                                                                                        
|
| |  | a decision as to what staffing requirements the Company will
    have, when to bring additional permanent staff on board and the
    best route for recruiting those staff members;
|
| |  | additional target indications and the formulation and
    development process required for those target indications;                                                               
|
| |  | a comprehensive intellectual property strategy;                                                                                                                                    
|
| |  | a potential partnering strategy; and                                                                                                                                               
|
| |  | projected long-term financing requirements.                                                                                                                                        

6



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| |                                        
| | ---------------------------------------
| | MDI-P: Novel Anti-Infective Technology.







| |                                                        
| | -------------------------------------------------------
| | Stratton V.A. Medical Center, Albany, New York         
| | Albany Medical College, Albany, New York               
| | Indiana University School Of Medicine And Dentistry    
| | University of California, Los Angeles                  
| | Baylor College of Medicine and Dentistry, Dallas, Texas
| | Dana-Farber Cancer Institute, Boston, Massachusetts    
| | University of Washington Medical School                





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | In 1998, we initiated in vitro testing, conducted at
    the Dana-Farber Cancer Institute in Boston, Massachusetts, a
    major teaching affiliate of the Harvard Medical School. The
    results of this independent testing confirmed that MDI-P
    achieved destruction of more than 90% of the HIV virus in cell
    cultures, with no toxicity to the cells.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|
| |  | In 2000, data and results published by Dr. Aldonna
    Baltch, M.D., of the Stratton V.A. Medical Center and
    Albany Medical College, Albany NY, indicated that MDI-P is a
    potent antibacterial and anti-fungal agent.
    Dr. Baltchs work demonstrated that MDI-P was
    effective in destroying the fungi Candida albicans and
    Legionella pneumophillia (Legionnaires Disease) within
    60 seconds of exposure to the fungi with no evidence of cell
    toxicity. This work was published in The American Journal of
    Infection Control in 2000 and as abstracts of the American
    Society of Microbiology meetings in 1997 and 1998.                                                                                                                                                                                                                                                                                                       
|
| |  | Toxicity tests completed in 2001 by WIL Research Laboratories
    demonstrated that various strengths of MDI-P (up to a 50%
    solution strength) produced no systemic toxicity in laboratory
    animal tests used to assess potential problems for human
    application. These preclinical studies were conducted following
    FDA guidelines and have helped establish that MDI-P is
    reasonably safe for human clinical trials.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | In 2004, Dr. Emil Chi, Chairman of the Department of
    Histopathology at the University of Washington Medical School,
    conducted a mouse study focused on MDI-P as a potential
    therapeutic agent for the treatment of sepsis. The results
    reaffirmed the anti-infective strength and low toxicity profile
    in preclinical models of MDI-P.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|
| |  | In 2004, we also commissioned a mouse study by Dr. Chi
    focused on MDI-P as a potential therapeutic agent for the
    treatment of the symptoms of asthma. In the study, 36 female
    mice were examined in a chronic asthma model, using various
    doses of MDI-P as a therapeutic agent as measured against a
    saline control. Samples of bronchial lavage lung fluid and
    tissue were taken from all mice, with assays performed in airway
    mucus build-up and
    eosinophil infiltration, a prime blood cell measure of asthmatic
    attacks. More than 70% of the MDI-P treated mice exhibited no
    increase in mucus secretions, comparable with saline control
    animals, with a marked reduction in eosinophil infiltration.
    Untreated asthmatic mice, in contrast, had more than a nine-fold
    increase in mucus
    build-up as compared
    with saline controls. Further, no toxicity was found in the
    MDI-P treated mice.
|
| |  | On July 15, 2004, we announced our receipt from Clagett
    Consulting of a large mammal toxicity report for MDI-P. The
    study found no sign of any toxicity from MDI-P in the anatomy,
    behavior, clinical chemical, hematological, or histopathological
    measures of adverse events. The study was conducted in                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

7



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| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   | a rabbit species (New Zealand white rabbits) because of their
    acknowledged hyper-reactivity to toxicity in drugs. These
    results, when combined with our prior toxicological work,
    suggest that MDI-P should not cause toxic events in humans. Also
    included in the Clagett Consulting report was a further genomic
    analysis for toxicology of MDI-P. This genomics analysis
    indicated that MDI-P had no effect on any of the following: bone
    marrow function, hematocrit levels in peripheral blood, serum
    levels for alanine aminotransferase levels and aspartate
    aminotransferase levels, both of which provide sensitive
    measures of hepatic toxicity, serum protein and albumin levels,
    bound urinary nitrogen levels, serum calcium levels or blood
    glucose levels. In addition, this genomics analysis provided
    confirmation that various measures of impact on the hundreds of
    genes controlling toxicity as well as the immuno-regulatory
    system were neither up-or-down regulated by MDI-P.
|
| |  | In 2004 Dr. Chi also studied MDI-P as a potential
    therapeutic agent for the treatment of the symptoms of cystic
    fibrosis. In this study of 48 mice, it was found that MDI-P is a
    useful agent to reduce primary measures of disease in cystic
    fibrosis, including bacterial infection, mucus secretion,
    cellular infiltration, lung edema (swelling with excess fluid),
    lung hemorrhage, and lung infiltration by neutrophils and
    eosinophils, the principal white blood cells responding to
    allergic and infectious pathogens. Excessive presence of
    neutrophils and eosinophils can lead to cell death in
    surrounding tissues, causing serious health problems from their
    over-expression. No overt signs of toxicity were found in the
    primary organs (lungs, liver, spleen, kidneys, brain) of mice
    treated with MDI-P.                                                                                                                                                                                  
|
| |  | In 2004 we conducted a chronic toxicity study of MDI-P. The
    study involved the weekly injection of MDI-P into the body
    cavity of test mice for six-months. 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| |  | In 2005 and 2006 we conducted a battery of tests in response to
    the FDAs clinical hold items for our cystic fibrosis IND.
    Those studies included a mouse central nervous system toxicity
    study conducted by Ascentia Bio-Medical Technologies, a dog
    cardiovascular toxicity study conducted by MPI Research, and the
    following genotoxicity studies conducted by NAMSA: Mouse
    Peripheral Blood Micronucleus Study, Dose Range Study in Mouse
    Peripheral Blood Micronucleus, In-Vitro Chromosomal Aberration
    Study in Mammalian Cells, and Bacterial Reverse Mutation Study.
    No adverse events were discovered in these studies.                                                                                                                                                                                                                                                                                                                                                                                            



| |                             
| | ----------------------------
| | Application of MDI-P to HIV.

Overview.


Background of HIV/ AIDS.


Existing Therapies for HIV.


8



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® best-of ®


Potential Benefits of MDI-P.




| |   |                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | MDI-Ps mechanism of action is not accomplished by enzyme
    or nucleic acid inhibition, but rather by direct intra-cellular
    effects. In preliminary testing, MDI-P has been shown to be very
    rapid in effect and to destroy viruses without destroying host
    cells.
|
| |  | MDI-Ps broad-spectrum antiviral effects appear to make it
    active against even highly resistant viral strains and not
    subject to rapid resistance.                                                                                                                      
|
| |  | The destruction of bacterial organisms by exposure to MDI-P does
    not appear to produce any potential harmful effects.                                                                                                                                                       
|
| |  | MDI-P appears to have a low toxicity profile and therefore may
    be better tolerated by patients.                                                                                                                                                                             

MDIs HIV Protocol. ®






| |                                         
| | ----------------------------------------
| | Application of MDI-P to Cystic Fibrosis.

Overview.


9



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Background of Existing Therapies.




| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Dietary control to lessen the
    build-up of fats,
    proteins (and to a lesser extent, carbohydrates) which can not
    be readily absorbed and metabolized. Typically, such dietary
    control is augmented with oral pancreatic enzymes to assist in
    fat metabolism.                                                                                                                                                           
|
| |  | Treatment of bacterial infection with erythromycin,
    Tobramycin®
    (TOBI), and in severe infection cases, vancomycin to eradicate
    or control the infection. In some cases, daily use of oral
    antibiotics may be prescribed due to the high frequency of lung
    infection in CF patients and its risk of mortality.                                                                                                        
|
| |  | Frequent use of mucolytic agents such as N-acetylcysteine and
    bronchodilator therapy with
    Pulmozyme®.
    Clinical response may further indicate bronchial drainage
    through recombinant human Dnase or flutter devices to assist in
    mucus airway clearance, together with clapping of the chest to
    dislodge mucus. In extreme cases, broncho-alveolar lavage may be
    used, and if necessary, lung transplantation.
|
| |  | Periodic corticosteroid tablets and inhaled anti-asthma
    medications (e.g.,
    Advair®,
    Singulair®,
    etc.) to combat lung inflammation (frequently resulting from the
    presence of infection), together with high doses of ibuprofen
    for its anti-inflammatory effect.                                                                                                                                                 
|
| |  | In addition, the CF patient may have insulin prescribed for
    CF-related diabetes, as well as medications for CF-associated
    liver disease, supplements of vitamins A and D, and medication
    to treat constipation. Oxygen therapy may also be prescribed.                                                                                                                                                                       

build-up


Prospective Benefits of MDI-P. build-up






| |   |                                                                                                                                                                                               
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to serve as a highly active anti-microbial agent for CF patients
    with bacterial pulmonary infection, as well as viral pulmonary
    infection, with low drug resistance probability; and  
|
| |  | to serve as the
    best-of-breed mucolytic
    agent in clearing the continuous mucus
    build-up in CF, when
    applied by nebulization into the lungs, as an adjunct therapy to
    TOBI.





| |   |                                                                                                                                                                                                             
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | to avoid the possibility of significant clinical risk of adverse
    events with CF patients that a lengthy drug-clearance period
    might introduce if TOBI was discontinued and MDI-P used
    alone; and
|
| |  | to lessen the likelihood of adverse events due to endotoxin
    reaction, due to the high level of activity MDI-P may exhibit in
    killing pathogens.                                                     



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MDIs CF Protocols.




| |   |                                                                                                                                                                                                                                                                                                                                                                                       
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Arm I-a: a clinical trial will be conducted on a healthy
    normal adult population consisting of 10-15 individuals to
    establish the safety of MDI-P as a prospective adjunct therapy,                                                                                                                                                                                           
|
| |  | Arm I-b: a clinical trial will be conducted on a
    TOBI-dependent adult CF population consisting of 30 individuals,
    in which MDI-P is used as an adjunct therapy during TOBIs
    28-day rest period on a
    dose-rising regimen. Fifteen of the 30 patients will
    undergo each dose regimen, to determine if greater efficacy is
    achieved on the higher dose of MDI-P.

e-Flow 24-hour




| |                             
| | ----------------------------
| | Other Indications for MDI-P.





| |                    
| | -------------------
| | SaveCream Overview.



follow-up


Background on the Breast Cancer Market. ®


® ® ®


Background on Aromatase Inhibitors.


11



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®




® ®




Potential Benefits of SaveCream in Treating ER-Positive
Breast Cancers.










| |   |                                                                                                                  
| | - | -----------------------------------------------------------------------------------------------------------------
| |  | pre-menopausal breast cancer patients, thereby expanding the
    targeted breast cancer indication substantially;

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| |   |                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------
| |  | other cancer indications, including ovarian, uterine,
    endometrial and skin cancers; and           
|
| |  | osteoporosis, effectively turning the therapeutic into a
    technology platform for drug development.

MDIs Commercialization Program for
SaveCream.




| |                                         
| | ----------------------------------------
| | Patents: MDI-P and Related Technologies.





| |   |                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Patent No. 5,334,383: Electrically Hydrolyzed
    Salines as In Vivo Microbicides for the Treatment of
    Cardiomyopathy and Multiple Sclerosis



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | This patent covers a method of treating antigen related
    infections related to cardiomyopathy and multiple sclerosis in
    humans and other warm blooded animals. It does not cover the
    MDI-P Substance itself, but covers a particular use of the
    substance. This method of treatment includes the use of an
    electrolyzed saline solution in conjunction with one or more
    modulating agents such as ascorbic acid (Vitamin C), with or
    without concurrent colchicine, to mimic or enhance the
    bodys naturally occurring immune response to bacterial,
    viral or fungal infection. The duration of this patent is until
    August 2, 2011, subject to patent term extension for
    clinical trial time.



| |   |                                                               
| | - | --------------------------------------------------------------
| |  | Patent No. 5,507,932: Apparatus for
    Electrolyzing Fluids



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | This patent covers equipment that exposes a liquid solution to
    an electrical current, creating an electrolyzed solution. This
    equipment may be used to produce an electrolyzed saline
    solution, capable of killing bacterial, viral and fungal agents,
    for use in medical applications such as the treatment of antigen
    related infections in humans and other warm blooded animals.
    This patent covers the equipment used to produce MDI-P, not the
    substance itself. The duration of this patent is until
    August 26, 2014.



| |   |                                                            
| | - | -----------------------------------------------------------
| |  | Patent No. 5,560,816: Method for Electrolyzing
    Fluids



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | This patent covers a method for electrolyzing fluids, by using
    specialized equipment to expose liquid solutions to an
    electrical current. Saline, for example, may be treated by this
    process to yield an electrolyzed saline solution, capable of
    killing bacterial, viral and fungal agents, for the treatment of
    antigen related infection in humans and other warm blooded
    animals. This patent covers the method by which MDI-P is
    produced, not the substance itself. The duration of this patent
    is until August 26, 2014, subject to patent term extension
    for clinical trial time.



| |   |                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Patent No. 5,622,848: Electrically Hydrolyzed
    Saline Solution as Microbicides for In Vitro Treatment of
    Contaminated Fluids Containing Blood



| |                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | This patent covers a method of treating whole blood and other
    blood products with an electrolyzed saline solution to reduce
    infection with bacterial, viral and fungal agents. This patent
    covers a particular use of MDI-P, not substance itself. The
    duration of this patent is until April 22, 2014, subject to
    patent term extension for clinical trial time.



| |   |                                                                                                                             
| | - | ----------------------------------------------------------------------------------------------------------------------------
| |  | Patent No. 5,674,537: An Electrolyzed Saline
    Solution Containing Concentrated Amount of Ozone and Chlorine
    Species

13



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##### Table of Contents





| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | This patent covers a specific electrolyzed saline solution
    containing a regulated amount of microbicidal agents including
    ozone and active chlorine species. This solution is intended for
    use in the treatment of infections in the body of humans and
    other warm blooded animals, or in blood or blood products. This
    patent covers the MDI-P substance. The duration of this patent
    is until October 7, 2014, subject to patent term extension
    for clinical trial time.



| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | Patent No. 5,731,008: Electrically Hydrolyzed
    Salines as Microbicides



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | This patent covers a method of using a specific electrolyzed
    saline solution containing a regulated amount of microbicidal
    agents including ozone and active chlorine species for the
    treatment of microbial infections, including HIV infection. The
    method includes intravenous administration of the solution along
    with one or more modulating agents such ascorbic acid (Vitamin
    C), with or without concurrent colchicine. This patent covers a
    method for using MDI-P, not the substance itself. The duration
    of this patent is until May 23, 2010, subject to patent
    term extension for clinical trial time.



| |   |                                                                                            
| | - | -------------------------------------------------------------------------------------------
| |  | Patent No. 6,007,686: System for Electrolyzing
    Fluids for Use as Antimicrobial Agents



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | This patent covers a system for electrolyzing fluids, such as a
    saline solution, for use in sterilizing dental and medical
    instruments and other health care equipment. The patent covers
    the necessary equipment for generating and circulating the
    electrolyzed saline solution around the instruments to be
    sterilized, and includes specific claims for equipment designed
    for use with dental drill handpieces and flexible tubing. This
    patent covers a process by which MDI-P may be made for a
    particular use, not the substance itself. The duration of this
    patent is until August 26, 2014.



| |   |                                                                               
| | - | ------------------------------------------------------------------------------
| |  | Patent No. 6,117,285: System for Carrying Out
    Sterilization of Equipment



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | This patent covers a system for cleaning and sterilizing medical
    and dental instruments to prevent the spread of infection from
    one patient to another. The covered system bathes the instrument
    in an electrolyzed saline solution and causes the solution to
    flow into and sterilize any openings in the equipment. It
    includes specific claims for systems designed specifically for
    the sterilization of dental drills and flexible tubing. This
    patent covers a particular use of MDI-P, not the substance
    itself. The duration of this patent is until August 26,
    2014.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | A patent application for the use of MDI-P in the treatment of
    sepsis. This patent, if it is ultimately granted, would cover a
    particular use of the MDI-P substance, not the substance itself.                                                                                                                                                                                                                                                                                                
|
| |  | A provisional patent application for the use of MDI-P in the
    treatment of sepsis. A provisional patent application is an
    abbreviated application intended to establish a priority filing
    date for this technology. A full patent application will be
    required before this patent application is reviewed by the
    U.S. Patent and Trademark Office. This patent, if it is
    ultimately granted, would cover a particular use of the MDI-P
    substance, not the substance itself.
|
| |  | A provisional patent application for the use of MDI-P in the
    treatment of asthma. A provisional patent application is an
    abbreviated application intended to establish a priority filing
    date for this technology. A full patent application will be
    required before this patent application is reviewed by the
    U.S. Patent and Trademark Office. This patent, if it is
    ultimately granted, would cover a particular use of the MDI-P
    substance, not the substance itself.



14



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| |                                             
| | --------------------------------------------
| | Patents: SaveCream and Related Technologies.





| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | Substances and Agents for Positively Influencing
    Collagen. This includes an EU patent application and a
    Canadian patent. This patent covers the use of a substance such
    as an aromatase inhibitor to inhibit the local formation of
    estrogen to stabilize, multiply and/or restore collagen in the
    skin for cosmetic purposes. It does not cover the SaveCream
    substance itself.                                                                                                                                                                         
|
| |  | Topical Treatment for Mastalgia. This
    includes U.S. patent application 10/416,096 filed
    October 30, 2001. A European Union patent application has
    been filed as well. This patent application seeks to cover a
    substance containing an aromatase inhibitor for topical
    administration for medicinal treatment, including prevention and
    treatment of mastalgia.                                                                                                                                                                                          
|
| |  | Medicament for Preventing and/or Treating a Mammary
    Carcinoma Containing a Steroidal Aromatase Inhibitor.
    This includes a U.S. patent application,
    No. 09/646,355, filed November 16, 2000 and divisional
    and continuation applications based upon the initial
    application. These applications seek to cover a method or
    prevention or treatment of breast cancer involving the local,
    topical application of an aromatase inhibitor. These
    applications seek to cover a particular use of the SaveCream
    substance, not the substance itself.
|
| |  | Aromatase Marking. This includes a
    U.S. Patent application, No. 10/487,953, filed
    August 28, 2002, as well as a European Union patent
    application. These patents seek to cover a group of compounds
    that exhibit an inhibitory action toward the enzyme aromatase,
    permitting them to be used for the medical diagnosis and
    treatment of tumor diseases including breast cancer.                                                                                                                                                                         







| |             
| | ------------
| | Competition.





15



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| |                        
| | -----------------------
| | Government Regulations.





in vitro


16



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1 2 1 2


in vitro








17



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| |               
| | --------------
| | Raw Materials.





| |                                       
| | --------------------------------------
| | Research and Development Expenditures.





| |           
| | ----------
| | Employees.





| |                           
| | --------------------------
| | Scientific Advisory Board.



Bruce I. Dezube, M.D.


Director of AIDS Oncology, Beth Israel Deaconess Medical
Center, Boston


Associate Professor of Medicine, Harvard Medical School


18



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Robert A. Mastico, Ph.D.


Physical Chemist, Independent Consultant




Craig R. Palmer, Ph.D.


Principal, Palmer Consulting Group




Dr. Henry R. Thompson, M.D.


Director, Cystic Fibrosis Program Therapeutics Center, St.
Lukes Health Center, Boise, Idaho






| |                        
| | -----------------------
| | Organizational History.



19



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|        |                         
|------- | ------------------------
|ITEM 2. | DESCRIPTION OF PROPERTY.








|        |                   
|------- | ------------------
|ITEM 3. | LEGAL PROCEEDINGS.








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






PART II







|        |                                                                                                                    
|------- | -------------------------------------------------------------------------------------------------------------------
|ITEM 5. | MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
    SMALL BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES.

MARKET INFORMATION




|                                    |  |          |       |  |         |   |       | 
|----------------------------------- |  | -------- | ----- |  | ------- | - | ----- | 
|Fiscal Year Ended December 31, 2005 |  | High Bid |       |  | Low Bid |  
|                                    |  |          |       |  |         |  
|First Quarter                       |  | $        | 0.220 |  |         | $ | 0.130 | 
|Second Quarter                      |  |          | 0.170 |  |         |   | 0.082 | 
|Third Quarter                       |  |          | 0.180 |  |         |   | 0.080 | 
|Fourth Quarter                      |  |          | 0.135 |  |         |   | 0.090 | 

|                                    |  |          |       |  |         |   |       | 
|----------------------------------- |  | -------- | ----- |  | ------- | - | ----- | 
|Fiscal Year Ended December 31, 2004 |  | High Bid |       |  | Low Bid |  
|                                    |  |          |       |  |         |  
|First Quarter                       |  | $        | 0.170 |  |         | $ | 0.100 | 
|Second Quarter                      |  |          | 0.300 |  |         |   | 0.115 | 
|Third Quarter                       |  |          | 0.301 |  |         |   | 0.150 | 
|Fourth Quarter                      |  |          | 0.260 |  |         |   | 0.180 | 

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SHAREHOLDERS




DIVIDENDS




SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION
PLANS




|                                                           |                           |                   |            |            |                      |                     |                     |                      |  |  |           |           | 
|---------------------------------------------------------- | ------------------------- | ----------------- | ---------- | ---------- | -------------------- | ------------------- | ------------------- | -------------------- |  |  | --------- | --------- | 
|                                                           |                           |                   |            |            |                      | Number of           |                    
|                                                           |                           |                   |            |            |                      | Securities          |                    
|                                                           |                           |                   |            |            |                      | Remaining Available |                    
|                                                           |                           | Number of         |            |            |                      |                     | for Future Issuance |                     
|                                                           |                           | Securities to be  |            |            |                      |                     | Under Equity        |                     
|                                                           |                           | Issued Upon       |            |            |                      |                     | Compensation Plans  |                     
|                                                           |                           | Exercise of       |            |            | Weighted-Average     |                     |                     | (Excluding           | 
|                                                           |                           | Outstanding       |            |            | Exercise Price of    |                     |                     | Securities Reflected | 
|                                                           |                           | Options, Warrants |            |            | Outstanding Options, |                     |                     | in the First         | 
|Plan Category                                              |                           | and Rights        |            |            | Warrants and Rights  |                     |                     | Column)              | 
|                                                           |                           |                   |            |            |                      |                     |                     |                      | 
|Equity compensation plans approved by security holders     |                           |                   |            |            |                      |                     |                     |                      |  |  |           |          
|                                                           | 1993 Incentive Plan       |                   |            | 3,483,000  |                      |                     | $                   | 0.11                 |  |  |           | -0-       | 
|                                                           | 2002 Stock Incentive Plan |                   |            | 16,000,000 |                      |                     | $                   | 0.02                 |  |  |           | 4,000,000 | 
|Equity compensation plans not approved by security holders |                           |                   |           |            |                      |                     |                    |                      |  |  |          |          
|                                                           |                           |                   |            |            |                      |                     |                     |                      | 
|Total                                                      |                           |                   | 19,483,000 |            |                      | $                   | 0.04                |                      |  |  | 4,000,000 |          






|        |                                                                                           
|------- | ------------------------------------------------------------------------------------------
|ITEM 6. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
    CONDITION AND RESULTS OF OPERATIONS.





RESULTS OF OPERATIONS


Revenues and Gross Profit.


Operating Expenses and Operating Loss.


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Other Income/ Expense and Net Loss.


Future Expectations.


LIQUIDITY AND CAPITAL RESOURCES










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OFF-BALANCE SHEET ARRANGEMENTS


S-B.


FOREIGN CURRENCY RISK




CAUTIONARY STATEMENT FOR FORWARD LOOKING INFORMATION


AND FACTORS AFFECTING FUTURE RESULTS






We Are A Development-Stage Company That Has Not Yet
Commercialized A Product.


We Have Incurred Substantial Losses Since Our Inception And
May Continue To Operate At A Loss.


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We May Not Be Able To Raise Sufficient Capital To Meet
Present And Future Obligations














| |   |                                                                            
| | - | ---------------------------------------------------------------------------
| |  | our ability to raise additional funding and the amounts raised,
    if any;
|
| |  | the time and costs involved in obtaining regulatory approvals;             
|
| |  | the results of pre-clinical studies and clinical trials;                   
|
| |  | the cost of manufacturing scale-up;                                        
|
| |  | competing technological and market developments;                           
|
| |  | the costs of filing, prosecuting and enforcing patent
    claims; and      
|
| |  | the effectiveness of our commercialization activities.                     





| |   |                                                                             
| | - | ----------------------------------------------------------------------------
| |  | market factors affecting the availability and cost of capital
    generally;
|
| |  | our performance;                                                            
|
| |  | the size of our capital needs;                                              
|
| |  | the markets perception and acceptance of our
    technologies; and         
|
| |  | the price, volatility and trading volume of our common shares.              

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Obtaining Additional Capital Though The Sale Of Common Stock
Will Result In Dilution Of Stockholder Interests.


Selling Pressure From Our Series A Convertible Preferred
Shareholders May Negatively Impact Our Stock Price, Our Market
Value, And Our Ability To Raise Additional Capital.


Our Independent Auditors Have Expressed Substantial Doubt As
To Our Ability To Continue As A Going Concern.


Our Operations Are And Will Be Subject To Extensive
Regulation.


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Our Products Will Be Exposed To Pricing And Reimbursement
Risks.


We Face Intense Competition And Competing Products.






26



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Our Intellectual Property May Not Be Adequately
Protected.






We May Need to Litigate to Secure Our Rights to SaveCream And
Related Assets.






27



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We Face Significant Product Liability.


The Market For Our Stock Is Thin And Subject To
Manipulation.


|                                 |  |          |       |  |         |   |       | 
|-------------------------------- |  | -------- | ----- |  | ------- | - | ----- | 
|Period                           |  | High Bid |       |  | Low Bid |  
|                                 |  |          |       |  |         |  
|Quarter ended December 31, 2005  |  |          | 0.135 |  |         |   | 0.090 | 
|Quarter ended September 30, 2005 |  |          | 0.180 |  |         |   | 0.080 | 
|Quarter ended June 30, 2005      |  |          | 0.170 |  |         |   | 0.082 | 
|Quarter ended March 31, 2005     |  | $        | 0.220 |  |         | $ | 0.130 | 

The Market Price For Our Common Stock Will Likely Be Volatile
And May Change Dramatically At Any Time.




| |   |                                                                                                                                                                                                   
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |  | intentional manipulation of our stock price by existing or
    future stockholders;                                                                                                               
|
| |  | short selling of our common stock or related derivative
    securities;                                                                                                                           
|
| |  | the interest, or lack of interest, of the market in our business
    sector, without regard to our financial condition or results of
    operations;                                              
|
| |  | the adoption of governmental regulations and similar
    developments in the United States or abroad that may affect our
    ability to develop our products or affect our cost
    structure; and
|
| |  | economic and other external market factors, such as poor
    economic indicators or investor distrust.                                                                                            

Penny stock rules may make buying or selling our
securities difficult which may make our stock less liquid and
make it harder for investors to buy and sell our shares.


28



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We Are Unlikely To Pay Dividends On Our Common Stock In the
Foreseeable Future.


29



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|        |                      
|------- | ---------------------
|ITEM 7. | FINANCIAL STATEMENTS.

FINANCIAL STATEMENTS TABLE OF CONTENTS


|                                                            |                                                                 |      |    |    | 
|----------------------------------------------------------- | --------------------------------------------------------------- | ---- | -- | -- | 
|                                                            |                                                                 | Page |   
|                                                            |                                                                 | No.  |   
|                                                            |                                                                 |      |   
|REPORT OF INDEPENDENT REGISTERED PUBLIC
    ACCOUNTING FIRM |                                                                 |      | 31 |   
|FINANCIAL STATEMENTS                                        |                                                                 |      |    |   
|                                                            | Consolidated Balance Sheets                                     |      |    | 33 | 
|                                                            | Consolidated Statements of Operations                           |      |    | 34 | 
|                                                            | Consolidated Statements of Changes in
    Stockholders Deficit |      |    | 35 | 
|                                                            | Consolidated Statements of Cash Flows                           |      |    | 39 | 
|                                                            | Notes to Consolidated Financial
    Statements                  |      |    | 40 | 

30



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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM














31



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| |                              
| | -----------------------------
| | /s/ HANSEN, BARNETT & MAXWELL





32



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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES


(A DEVELOPMENT STAGE COMPANY)





CONSOLIDATED BALANCE SHEETS


|                                      |                                                                                                                                                                                                                                                             |                                             |           |             |              |   |           |             |            |  
|------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------- | --------- | ----------- | ------------ | - | --------- | ----------- | ---------- | -
|                                      |                                                                                                                                                                                                                                                             | December 31,                                |           |             | December 31, |  
|                                      |                                                                                                                                                                                                                                                             | 2005                                        |           |             | 2004         |  
|                                      |                                                                                                                                                                                                                                                             |                                             |           |             |              |  
|ASSETS                               
|CURRENT ASSETS                        |                                                                                                                                                                                                                                                             |                                             |           |             |              |   |           |            
|                                      | Cash                                                                                                                                                                                                                                                        |                                             | $         | 654,438     |              |   | $         | 1,455,397   |           
|                                      | Deposits                                                                                                                                                                                                                                                    |                                             |           |            |              |   |           | 51,100      |           
|                                      |                                                                                                                                                                                                                                                             |                                             |           |             |              |  
|                                      |                                                                                                                                                                                                                                                             | Total Current Assets                        |           |             | 654,438      |   |           |             | 1,506,497  |  
|                                      |                                                                                                                                                                                                                                                             |                                             |           |             |              |  
|                                      | Note receivable                                                                                                                                                                                                                                             |                                             |           | 296,050     |              |   |           |            |           
|                                      | Property and equipment, net                                                                                                                                                                                                                                 |                                             |           | 80,635      |              |   |           |            |           
|                                      |                                                                                                                                                                                                                                                             |                                             |           |             |              |  
|                                      |                                                                                                                                                                                                                                                             | TOTAL ASSETS                                |           | $           | 1,031,123    |   |           | $           | 1,506,497  |  
|                                      |                                                                                                                                                                                                                                                             |                                             |           |             |              |  
|                                     
|LIABILITIES AND STOCKHOLDERS DEFICIT
|CURRENT LIABILITIES                   |                                                                                                                                                                                                                                                             |                                             |           |             |              |   |           |            
|                                      | Accounts payable                                                                                                                                                                                                                                            |                                             | $         | 2,608,783   |              |   | $         | 2,448,454   |           
|                                      | Accrued interest payable                                                                                                                                                                                                                                    |                                             |           | 237,836     |              |   |           | 415,262     |           
|                                      | Notes payable                                                                                                                                                                                                                                               |                                             |           | 56,000      |              |   |           | 336,717     |           
|                                      | Convertible notes payable                                                                                                                                                                                                                                   |                                             |           | 193,200     |              |   |           | 193,200     |           
|                                      | Research and development obligation                                                                                                                                                                                                                         |                                             |           | 592,100     |              |   |           |            |           
|                                      | Financial instrument                                                                                                                                                                                                                                        |                                             |           | 2,859,596   |              |   |           |            |           
|                                      |                                                                                                                                                                                                                                                             |                                             |           |             |              |  
|                                      |                                                                                                                                                                                                                                                             | Total Current Liabilities                   |           |             | 6,547,515    |   |           |             | 3,393,633  |  
|                                      |                                                                                                                                                                                                                                                             |                                             |           |             |              |  
|TOTAL LIABILITIES                     |                                                                                                                                                                                                                                                             |                                             | 6,547,515 |             |              |   | 3,393,633 |            
|                                      |                                                                                                                                                                                                                                                             |                                             |           |             |              |  
|STOCKHOLDERS DEFICIT                 |                                                                                                                                                                                                                                                             |                                             |           |             |              |   |           |            
|                                      | Preferred Stock  undesignated, 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     |              |   |           | 523,334     |           
|                                      | Common stock, no par value; 250,000,000 shares authorized;
    107,679,724 and 105,653,335 shares issued and outstanding,
    respectively                                                                                                                  |                                             |           | 15,211,895  |              |   |           | 14,918,657  |           
|                                      | Additional paid-in capital                                                                                                                                                                                                                                  |                                             |           | 988,670     |              |   |           | 3,424,383   |           
|                                      | Deficit accumulated prior to the development stage                                                                                                                                                                                                          |                                             |           | (1,399,577  | )            |   |           | (1,399,577  | )         
|                                      | Deficit accumulated during the development stage                                                                                                                                                                                                            |                                             |           | (20,840,714 | )            |   |           | (19,353,933 | )         
|                                      |                                                                                                                                                                                                                                                             |                                             |           |             |              |  
|                                      |                                                                                                                                                                                                                                                             | Total Stockholders Deficit                 |           |             | (5,516,392   | ) |           |             | (1,887,136 | )
|                                      |                                                                                                                                                                                                                                                             |                                             |           |             |              |  
|                                      |                                                                                                                                                                                                                                                             | TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT |           | $           | 1,031,123    |   |           | $           | 1,506,497  |  
|                                      |                                                                                                                                                                                                                                                             |                                             |           |             |              |  

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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES


(A DEVELOPMENT STAGE COMPANY)





CONSOLIDATED STATEMENTS OF OPERATIONS


Years Ended December 31, 2005 and 2004, and


Cumulative Amounts Since November 20, 1991 (Date of
Inception)


|                                              |                                                             |                               |             |                       |                      |   |            |           |           |   |             |            |            | 
|--------------------------------------------- | ----------------------------------------------------------- | ----------------------------- | ----------- | --------------------- | -------------------- | - | ---------- | --------- | --------- | - | ----------- | ---------- | ---------- | 
|                                              |                                                             |                               |             | From Inception of the |                     
|                                              |                                                             | For the Years Ended           |             |                       | Development Stage    |  
|                                              |                                                             | December 31,                  |             |                       | on November 20, 1991 |  
|                                              |                                                             |                               |             |                       | through December 31, |  
|                                              |                                                             | 2005                          |             |                       | 2004                 |   |            | 2005      |          
|                                              |                                                             |                               |             |                       |                      |   |            |           |          
|REVENUES                                      |                                                             | $                             |            |                       |                      | $ |           |           |           | $ | 157,044     |           
|COST OF GOODS SOLD                            |                                                             |                               |            |                       |                      |   |           |           |           |   | 14,564      |           
|                                              |                                                             |                               |             |                       |                      |   |            |           |          
|                                              | GROSS PROFIT                                                |                               |             |                      |                      |   |            |          |           |   |             | 142,480    |           
|                                              |                                                             |                               |             |                       |                      |   |            |           |          
|OPERATING EXPENSES                            |                                                             |                               |             |                       |                      |   |            |           |           |   |             |           
|                                              | General and administrative                                  |                               |             | 1,878,027             |                      |   |            | 3,057,429 |           |   |             | 17,054,997 |           
|                                              | Research and development                                    |                               |             | 2,172,461             |                      |   |            | 550,093   |           |   |             | 5,721,199  |           
|                                              | Inventory write-down                                        |                               |             |                      |                      |   |            |          |           |   |             | 96,859     |           
|                                              | Impairment loss                                             |                               |             |                      |                      |   |            |          |           |   |             | 9,709      |           
|                                              | License fees                                                |                               |             |                      |                      |   |            |          |           |   |             | 1,001,500  |           
|                                              |                                                             |                               |             |                       |                      |   |            |           |          
|                                              |                                                             | Total Expenses                |             |                       | 4,050,488            |   |            |           | 3,607,522 |   |             |            | 23,884,264 | 
|                                              |                                                             |                               |             |                       |                      |   |            |           |          
|LOSS FROM OPERATIONS                          |                                                             |                               | (4,050,488  | )                     |                      |   | (3,607,522 | )         |           |   | (23,741,784 | )         
|                                              |                                                             |                               |             |                       |                      |   |            |           |          
|OTHER INCOME (EXPENSES)                       |                                                             |                               |             |                       |                      |   |            |           |           |   |             |           
|                                              | Unrealized gain on financial instrument                     |                               |             | 2,300,191             |                      |   |            |          |           |   |             | 2,300,191  |           
|                                              | Interest income                                             |                               |             | 25,727                |                      |   |            | 6,165     |           |   |             | 55,298     |           
|                                              | Interest expense                                            |                               |             | (38,264               | )                    |   |            | (131,526  | )         |   |             | (1,155,701 | )         
|                                              | Foreign currency transaction gain                           |                               |             | 56,480                |                      |   |            |          |           |   |             | 56,480     |           
|                                              | Gain on forgiveness of debt                                 |                               |             | 196,353               |                      |   |            |          |           |   |             | 1,431,889  |           
|                                              | Other income                                                |                               |             | 23,220                |                      |   |            | 1,408     |           |   |             | 905,112    |           
|                                              |                                                             |                               |             |                       |                      |   |            |           |          
|                                              |                                                             | Total Other Income (Expenses) |             |                       | 2,563,707            |   |            |           | (123,953  | ) |             |            | 3,593,269  | 
|                                              |                                                             |                               |             |                       |                      |   |            |           |          
|NET LOSS                                      |                                                             |                               | (1,486,781  | )                     |                      |   | (3,731,475 | )         |           |   | (20,148,515 | )         
|                                              |                                                             |                               |             |                       |                      |   |            |           |          
|                                              | Preferred stock dividend from beneficial conversion feature |                               |             |                      |                      |   |            | (692,199  | )         |   |             | (692,199   | )         
|                                              |                                                             |                               |             |                       |                      |   |            |           |          
|NET LOSS APPLICABLE TO COMMON SHAREHOLDERS    |                                                             | $                             | (1,486,781  | )                     |                      | $ | (4,423,674 | )         |           | $ | (20,840,714 | )         
|                                              |                                                             |                               |             |                       |                      |   |            |           |          
|BASIC AND DILUTED LOSS PER COMMON SHARE       |                                                             | $                             | (0.01       | )                     |                      | $ | (0.05      | )         |           |   |             |           
|                                              |                                                             |                               |             |                       |                      |   |            |           |          
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |                                                             |                               | 107,398,164 |                       |                      |   | 93,947,646 |           |           |   |             |           
|                                              |                                                             |                               |             |                       |                      |   |            |           |          

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MEDICAL DISCOVERIES INC. AND SUBSIDIARIES


(A DEVELOPMENT STAGE COMPANY)





CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
DEFICIT


Period From November 20, 1991 (Date of Inception of the
Development Stage)through


December 31, 2005


|                                                                                                   |                       |                        |   |  |              |  |   |               |   |             |             |             |             |         |              |       |         |   |       |  |             |   |            |       |   |   |   |  |   |   |   |  |         |   |            |   |         | 
|-------------------------------------------------------------------------------------------------- | --------------------- | ---------------------- | - |  | ------------ |  | - | ------------- | - | ----------- | ----------- | ----------- | ----------- | ------- | ------------ | ----- | ------- | - | ----- |  | ----------- | - | ---------- | ----- | - | - | - |  | - | - | - |  | ------- | - | ---------- | - | ------- | 
|                                                                                                   |                       |                        |   |  |              |  |   |               |   |             |             | Accumulated |             |         | Deficit      |       |         |   |      
|                                                                                                   |                       |                        |   |  |              |  |   | Deficit Prior |   |             | Accumulated |             |             |         |             
|                                                                                                   |                       | Preferred Stock        |   |  | Common Stock |  |   | Additional    |   | to          |             |             | During the  |         | Escrow/      |       |         |  
|                                                                                                   |                       |                        |   |  |              |  |   | Paid in       |   | Development |             |             | Development |         | Subscription |       |         |  
|                                                                                                   |                       | Shares                 |   |  | Amount       |  |   | Shares        |   |             | Amount      |             |             | Capital |              | Stage |         |   | Stage |  | Receivables |   |            | Total |  
|                                                                                                   |                       |                        |   |  |              |  |   |               |   |             |             |             |             |         |              |       |         |   |       |  |             |   |            |       |  
|Balance at October 31,1991                                                                         |                       |                        |   |  |              |  |   |               |   |             | 1,750,000   |             |             | $       | 252,997      |       |         | $ |      |  |             | $ | (1,482,514 | )     |   | $ |  |  |   | $ |  |  |         | $ | (1,229,517 | )
|Restatement for reverse acquisition of WPI Pharmaceutical, Inc.
    by Medical Discoveries, Inc.   |                       |                        |  |  |              |  |  |               |   |             |            |             |             |         | (252,997     | )     |         |   |      |  |             |   | 252,997    |       |   |   |  |  |   |   |  |  |         |   |           |  
|Shares issued in merger of WPI Pharmaceutical, Inc. Medical
    Discoveries, Inc., $0.01 per share |                       |                        |  |  |              |  |  |               |   |             | 10,000,000  |             |             |         | 135,000      |       |         |   |      |  |             |   | (170,060   | )     |   |   |  |  |   |   |  |  |         |   | (35,060    | )
|                                                                                                   |                       |                        |   |  |              |  |   |               |   |             |             |             |             |         |              |       |         |   |       |  |             |   |            |       |   |   |  
|Balance at November 20,1991
    (Date of Inception of Development Stage)                           |                       |                        |  |  |              |  |  |               |   |             | 11,750,000  |             |             |         | 135,000      |       |         |   |      |  |             |   | (1,399,577 | )     |   |   |  |  |   |   |  |  |         |   | (1,264,577 | )
|Issuance of common stock for:                                                                      |                       |                        |   |  |              |  |   |               |   |             |             |             |             |         |              |       |         |   |       |  |             |   |            |       |   |   |   |  |   |   |   |  |         |   |            |  
|                                                                                                   | Cash                  |                        |   |  |              |  |   |               |   |             |             |             |             |         |              |       |         |   |       |  |             |   |            |       |   |   |   |  |   |   |   |  |         |   |            |   |        
|                                                                                                   |                       | 1992  $0.50 per share |   |  |             |  |   |               |  |             |             |             | 200,000     |         |              |       | 100,000 |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  |        |   |            |   | 100,000 | 
|                                                                                                   |                       | 1992  $1.50 per share |   |  |             |  |   |               |  |             |             |             | 40,000      |         |              |       | 60,000  |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  |        |   |            |   | 60,000  | 
|                                                                                                   |                       | 1993  $0.97 per share |   |  |             |  |   |               |  |             |             |             | 542,917     |         |              |       | 528,500 |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  |        |   |            |   | 528,500 | 
|                                                                                                   |                       | 1994  $1.20 per share |   |  |             |  |   |               |  |             |             |             | 617,237     |         |              |       | 739,500 |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  |        |   |            |   | 739,500 | 
|                                                                                                   |                       | 1995  $0.67 per share |   |  |             |  |   |               |  |             |             |             | 424,732     |         |              |       | 283,200 |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  |        |   |            |   | 283,200 | 
|                                                                                                   |                       | 1996  $0.66 per share |   |  |             |  |   |               |  |             |             |             | 962,868     |         |              |       | 635,000 |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  | (60,000 | ) |            |   | 575,000 | 
|                                                                                                   |                       | 1997  $0.43 per share |   |  |             |  |   |               |  |             |             |             | 311,538     |         |              |       | 135,000 |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  | 60,000  |   |            |   | 195,000 | 
|                                                                                                   |                       | 1998  $0.29 per share |   |  |             |  |   |               |  |             |             |             | 2,236,928   |         |              |       | 650,000 |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  |        |   |            |   | 650,000 | 
|                                                                                                   |                       | 1999  $0.15 per share |   |  |             |  |   |               |  |             |             |             | 13,334      |         |              |       | 2,000   |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  |        |   |            |   | 2,000   | 
|                                                                                                   |                       | 2001  $0.15 per share |   |  |             |  |   |               |  |             |             |             | 660,000     |         |              |       | 99,000  |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  |        |   |            |   | 99,000  | 
|                                                                                                   |                       | 2003  $0.04 per share |   |  |             |  |   |               |  |             |             |             | 20,162,500  |         |              |       | 790,300 |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  |        |   |            |   | 790,300 | 
|                                                                                                   | Services and Interest |                        |   |  |              |  |   |               |   |             |             |             |             |         |              |       |         |   |       |  |             |   |            |       |   |   |   |  |   |   |   |  |         |   |            |   |        
|                                                                                                   |                       | 1992  $0.50 per share |   |  |             |  |   |               |  |             |             |             | 500,000     |         |              |       | 250,000 |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  |        |   |            |   | 250,000 | 
|                                                                                                   |                       | 1993  $0.51 per share |   |  |             |  |   |               |  |             |             |             | 251,450     |         |              |       | 127,900 |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  |        |   |            |   | 127,900 | 
|                                                                                                   |                       | 1993  $0.50 per share |   |  |             |  |   |               |  |             |             |             | 800,000     |         |              |       | 400,000 |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  |        |   |            |   | 400,000 | 
|                                                                                                   |                       | 1994  $1.00 per share |   |  |             |  |   |               |  |             |             |             | 239,675     |         |              |       | 239,675 |   |       |  |            |   |            |       |  |   |   |  |  |   |   |  |        |   |            |   | 239,675 | 

35



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##### Table of Contents



MEDICAL DISCOVERIES INC. AND SUBSIDIARIES


(A DEVELOPMENT STAGE COMPANY)


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
DEFICIT  (Continued)


Period From November 20, 1991 (Date of Inception of the
Development Stage)through


December 31, 2005


|                                    |                                                                                 |                 |  |   |              |  |  |               |  |  |             |             |   |             |         |           |              |  |  |       |  |  |             |   |  |       |  |   |  |  |  |          |   |  |  |           | 
|----------------------------------- | ------------------------------------------------------------------------------- | --------------- |  | - | ------------ |  |  | ------------- |  |  | ----------- | ----------- | - | ----------- | ------- | --------- | ------------ |  |  | ----- |  |  | ----------- | - |  | ----- |  | - |  |  |  | -------- | - |  |  | --------- | 
|                                    |                                                                                 |                 |  |   |              |  |  |               |  |  |             | Accumulated |   |             | Deficit |           |              |  |  |      
|                                    |                                                                                 |                 |  |   |              |  |  | Deficit Prior |  |  | Accumulated |             |   |             |         |          
|                                    |                                                                                 | Preferred Stock |  |   | Common Stock |  |  | Additional    |  |  | to          |             |   | During the  |         |           | Escrow/      |  |  |      
|                                    |                                                                                 |                 |  |   |              |  |  | Paid in       |  |  | Development |             |   | Development |         |           | Subscription |  |  |      
|                                    |                                                                                 | Shares          |  |   | Amount       |  |  | Shares        |  |  | Amount      |             |   | Capital     |         |           | Stage        |  |  | Stage |  |  | Receivables |   |  | Total | 
|                                    |                                                                                 |                 |  |   |              |  |  |               |  |  |             |             |   |             |         |           |              |  |  |       |  |  |             |   |  |       | 
|                                    | 1995  $0.39 per share                                                          |                 |  |  |              |  |  |              |  |  |             | 4,333,547   |   |             |         | 1,683,846 |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  | (584,860 | ) |  |  | 1,098,986 | 
|                                    | 1996  $0.65 per share                                                          |                 |  |  |              |  |  |              |  |  |             | 156,539     |   |             |         | 101,550   |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  | 101,550   | 
|                                    | 1997  $0.29 per share                                                          |                 |  |  |              |  |  |              |  |  |             | 12,500      |   |             |         | 3,625     |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  | 3,625     | 
|                                    | 1998  $0.16 per share                                                          |                 |  |  |              |  |  |              |  |  |             | 683,000     |   |             |         | 110,750   |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  | 110,750   | 
|                                    | 1999  $0.30 per share                                                          |                 |  |  |              |  |  |              |  |  |             | 100,000     |   |             |         | 30,000    |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  | 30,000    | 
|                                    | 2001  $0.14 per share                                                          |                 |  |  |              |  |  |              |  |  |             | 1,971,496   |   |             |         | 284,689   |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  | 284,689   | 
|                                    | 2002  $0.11 per share                                                          |                 |  |  |              |  |  |              |  |  |             | 2,956,733   |   |             |         | 332,236   |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  | 332,236   | 
|                                    | 2003  $0.06 per share                                                          |                 |  |  |              |  |  |              |  |  |             | 694,739     |   |             |         | 43,395    |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  | 43,395    | 
|Conversion of Debt                  |                                                                                 |                 |  |   |              |  |  |               |  |  |             |             |   |             |         |           |              |  |  |       |  |  |             |   |  |       |  |   |  |  |  |          |   |  |  |          
|                                    | 1996  $0.78 per share                                                          |                 |  |   |              |  |  |               |  |  |             | 239,458     |   |             |         | 186,958   |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  | 186,958   | 
|                                    | 1997  $0.25 per share                                                          |                 |  |  |              |  |  |              |  |  |             | 100,000     |   |             |         | 25,000    |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  | 25,000    | 
|                                    | 1998  $0.20 per share                                                          |                 |  |  |              |  |  |              |  |  |             | 283,400     |   |             |         | 56,680    |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  | 56,680    | 
|                                    | 2002  Debt  $0.03 per share                                                   |                 |  |  |              |  |  |              |  |  |             | 17,935,206  |   |             |         | 583,500   |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  | 583,500   | 
|Other Issuances                     |                                                                                 |                 |  |   |              |  |  |               |  |  |             |             |   |             |         |           |              |  |  |       |  |  |             |   |  |       |  |   |  |  |  |          |   |  |  |          
|                                    | 1993  License  $0.50 share                                                    |                 |  |  |              |  |  |              |  |  |             | 2,000,000   |   |             |         | 1,000,000 |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  | 1,000,000 | 
|                                    | 1997  Settlement of contract                                                   |                 |  |  |              |  |  |              |  |  |             | 800,000     |   |             |         | 200,000   |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  | 200,000   | 
|                                    | 1998  Issuance of common stock from exercise of
    warrants, $0.001 per share |                 |  |  |              |  |  |              |  |  |             | 200,000     |   |             |         | 200       |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  | 200       | 
|                                    | 2000  Reversal of shares issued                                                |                 |  |  |              |  |  |              |  |  |             | (81,538     | ) |             |         |          |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  |         |   |  |  |          | 
|Escrow and Subscription Receivables |                                                                                 |                 |  |   |              |  |  |               |  |  |             |             |   |             |         |           |              |  |  |       |  |  |             |   |  |       |  |   |  |  |  |          |   |  |  |          
|                                    | 1996  Common stock canceled  $.34 per
    share                               |                 |  |  |              |  |  |              |  |  |             | (1,400,000  | ) |             |         | (472,360  | )            |  |  |      |  |  |             |  |  |       |  |  |  |  |  | 472,360  |   |  |  |          | 
|                                    | 2000  Issuance for escrow receivable $0.09 per
    share                       |                 |  |  |              |  |  |              |  |  |             | 5,500,000   |   |             |         | 500,000   |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  | (500,000 | ) |  |  |          | 
|                                    | 2000  Write-off of subscription receivable                                     |                 |  |  |              |  |  |              |  |  |             |            |   |             |         |          |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  | 112,500  |   |  |  | 112,500   | 
|                                    | 2000  Research and development costs                                           |                 |  |  |              |  |  |              |  |  |             |            |   |             |         |          |              |  |  |      |  |  |             |  |  |       |  |  |  |  |  | 115,400  |   |  |  | 115,400   | 

36



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##### Table of Contents



MEDICAL DISCOVERIES INC. AND SUBSIDIARIES


(A DEVELOPMENT STAGE COMPANY)


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
DEFICIT  (Continued)


Period From November 20, 1991 (Date of Inception of the
Development Stage)through


December 31, 2005


|                                                           |                                                                          |                                            |   |        |              |  |   |               |   |  |             |             |         |             |          |            |              |  |           |         |         |  |             |            |   |       |             |             |   |  |         |          |         |  |             |            |           | 
|---------------------------------------------------------- | ------------------------------------------------------------------------ | ------------------------------------------ | - | ------ | ------------ |  | - | ------------- | - |  | ----------- | ----------- | ------- | ----------- | -------- | ---------- | ------------ |  | --------- | ------- | ------- |  | ----------- | ---------- | - | ----- | ----------- | ----------- | - |  | ------- | -------- | ------- |  | ----------- | ---------- | --------- | 
|                                                           |                                                                          |                                            |   |        |              |  |   |               |   |  |             | Accumulated |         |             | Deficit  |            |              |  |           |        
|                                                           |                                                                          |                                            |   |        |              |  |   | Deficit Prior |   |  | Accumulated |             |         |             |          |           
|                                                           |                                                                          | Preferred Stock                            |   |        | Common Stock |  |   | Additional    |   |  | to          |             |         | During the  |          |            | Escrow/      |  |           |        
|                                                           |                                                                          |                                            |   |        |              |  |   | Paid in       |   |  | Development |             |         | Development |          |            | Subscription |  |           |        
|                                                           |                                                                          | Shares                                     |   |        | Amount       |  |   | Shares        |   |  | Amount      |             |         | Capital     |          |            | Stage        |  |           | Stage   |         |  | Receivables |            |   | Total |            
|                                                           |                                                                          |                                            |   |        |              |  |   |               |   |  |             |             |         |             |          |            |              |  |           |         |         |  |             |            |   |       |            
|                                                           |                                                                          | 2001  Research and development costs      |   |        |             |  |   |               |  |  |             |             |        |             |          |            |             |  |           |         |        |  |             |            |  |       |             |             |  |  |         |          | 132,300 |  |             |            | 132,300   | 
|                                                           |                                                                          | 2001  Operating expenses                  |   |        |             |  |   |               |  |  |             |             |        |             |          |            |             |  |           |         |        |  |             |            |  |       |             |             |  |  |         |          | 25,000  |  |             |            | 25,000    | 
|                                                           | Exercise of Options and Warrants                                         |                                            |   |        |              |  |   |               |   |  |             |             |         |             |          |            |              |  |           |         |         |  |             |            |   |       |             |             |   |  |         |          |         |  |             |            |          
|                                                           |                                                                          | 1997  $0.25 per share                     |   |        |             |  |   |               |  |  |             |             | 87,836  |             |          |            | 21,959       |  |           |         |        |  |             |            |  |       |             |             |  |  |         |          |        |  |             |            | 21,959    | 
|                                                           |                                                                          | 1999  Waived option price $0.14 per share |   |        |             |  |   |               |  |  |             |             | 170,000 |             |          |            | 24,000       |  |           |         |        |  |             |            |  |       |             |             |  |  |         |          |        |  |             |            | 24,000    | 
|                                                           | Value of Issued for Servies                                              |                                            |   |        |              |  |   |               |   |  |             |             |         |             |          |            |              |  |           |         |         |  |             |            |   |       |             |             |   |  |         |          |         |  |             |            |          
|                                                           |                                                                          | 1998                                       |   |        |             |  |   |               |  |  |             |             |        |             |          |            | 2,336,303    |  |           |         |        |  |             |            |  |       |             |             |  |  |         |          |        |  |             |            | 2,336,303 | 
|                                                           |                                                                          | 1999                                       |   |        |             |  |   |               |  |  |             |             |        |             |          |            | 196,587      |  |           |         |        |  |             |            |  |       |             |             |  |  |         |          |        |  |             |            | 196,587   | 
|                                                           |                                                                          | 2001                                       |   |        |             |  |   |               |  |  |             |             |        |             |          |            |             |  |           |         | 159,405 |  |             |            |  |       |             |             |  |  |         |          |        |  |             |            | 159,405   | 
|                                                           |                                                                          | 2002                                       |   |        |             |  |   |               |  |  |             |             |        |             |          |            |             |  |           |         | 124,958 |  |             |            |  |       |             |             |  |  |         |          |        |  |             |            | 124,958   | 
|                                                           |                                                                          | 2003                                       |   |        |             |  |   |               |  |  |             |             |        |             |          |            |             |  |           |         | 295,000 |  |             |            |  |       |             |             |  |  |         |          |        |  |             |            | 295,000   | 
|Other                                                      |                                                                          |                                            |   |        |              |  |   |               |   |  |             |             |         |             |          |            |              |  |           |         |         |  |             |            |   |       |             |             |   |  |         |          |         |  |             |           
|                                                           | 1994  Cash contributed                                                  |                                            |   |       |              |  |   |              |   |  |             |            |         |             |          | 102,964    |              |  |           |        |         |  |             |           |   |       |             |            |   |  |         |         |         |  |             | 102,964    |          
|                                                           | 1995  Issuance of common stock option to satisfy debt
    restructuring |                                            |   |       |              |  |   |              |   |  |             |            |         |             |          | 20,000     |              |  |           |        |         |  |             |           |   |       |             |            |   |  |         |         |         |  |             | 20,000     |          
|Net loss from inception through December 31, 2003          |                                                                          |                                            |  |        |              |  |  |               |   |  |            |             |         |             |         |            |              |  |          |         |         |  |            |            |   |       | (14,930,259 | )           |   |  |        |          |         |  | (14,930,259 | )         
|                                                           |                                                                          |                                            |   |        |              |  |   |               |   |  |             |             |         |             |          |            |              |  |           |         |         |  |             |            |   |       |            
|                                                           | Balance at December 31, 2003                                             |                                            |   |       |              |  |   |              |   |  |             | 76,456,095  |         |             |          | 12,546,957 |              |  |           | 579,363 |         |  |             | (1,399,577 | ) |       |             | (14,930,259 | ) |  |         | (227,300 | )       |  |             | (3,430,816 | )        
|Extension of options for services                          |                                                                          |                                            |  |        |              |  |  |               |   |  |            |             |         |             |         |            |              |  | 1,675,000 |         |         |  |            |            |   |       |            |             |   |  |        |          |         |  | 1,675,000   |           
|Termination of escrow agreement                            |                                                                          |                                            |  |        |              |  |  |               |   |  | (2,356,200  | )           |         |             | (227,300 | )          |              |  |          |         |         |  |            |            |   |       |            |             |   |  | 227,300 |          |         |  |            |           
|Issuance of preferred stock and warrants for cash          |                                                                          |                                            |   |        |              |  |   |               |   |  |             |             |         |             |          |            |              |  |           |         |         |  |             |            |   |       |             |             |   |  |         |          |         |  |             |           
|                                                           | (net $130,000, common stock and warrants issued to placement
    agent)  |                                            |   | 12,000 |              |  |   | 523,334       |   |  |             | 350,000     |         |             |          | 68,845     |              |  |           | 477,821 |         |  |             |           |   |       |             |            |   |  |         |         |         |  |             | 1,070,000  |          
|Convertible preferred stock beneficial conversion dividend |                                                                          |                                            |  |        |              |  |  |               |   |  |            |             |         |             |         |            |              |  | 692,199   |         |         |  |            |            |   |       | (692,199    | )           |   |  |         |          |         |  |            |           
|Issuance of common stock for:                              |                                                                          |                                            |   |        |              |  |   |               |   |  |             |             |         |             |          |            |              |  |           |         |         |  |             |            |   |       |             |             |   |  |         |          |         |  |             |           
|                                                           | Cash $0.09 per share                                                     |                                            |   |       |              |  |   |              |   |  |             | 20,138,024  |         |             |          | 1,813,186  |              |  |           |        |         |  |             |           |   |       |             |            |   |  |         |         |         |  |             | 1,813,186  |          
|                                                           | Debt and interest $0.07 per share                                        |                                            |   |       |              |  |   |              |   |  |             | 9,875,951   |         |             |          | 650,468    |              |  |           |        |         |  |             |           |   |       |             |            |   |  |         |         |         |  |             | 650,468    |          
|                                                           | Services $0.06 per share                                                 |                                            |   |       |              |  |   |              |   |  |             | 1,189,465   |         |             |          | 66,501     |              |  |           |        |         |  |             |           |   |       |             |            |   |  |         |         |         |  |             | 66,501     |          
|Net loss for the year ended December 31, 2004              |                                                                          |                                            |  |        |              |  |  |               |   |  |            |             |         |             |         |            |              |  |          |         |         |  |            |            |   |       | (3,731,475  | )           |   |  |        |          |         |  | (3,731,475  | )         
|                                                           |                                                                          |                                            |   |        |              |  |   |               |   |  |             |             |         |             |          |            |              |  |           |         |         |  |             |            |   |       |            

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MEDICAL DISCOVERIES INC. AND SUBSIDIARIES


(A DEVELOPMENT STAGE COMPANY)


CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
DEFICIT  (Continued)


Period From November 20, 1991 (Date of Inception of the
Development Stage)through


December 31, 2005


|                                                                                                                                       |                              |                 |        |        |              |  |   |               |  |  |             |             |  |             |         |            |              |  |            |           |  |  |             |            |       |  |            |             |   |  |   |   |  |  |            |            |  
|-------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------- | --------------- | ------ | ------ | ------------ |  | - | ------------- |  |  | ----------- | ----------- |  | ----------- | ------- | ---------- | ------------ |  | ---------- | --------- |  |  | ----------- | ---------- | ----- |  | ---------- | ----------- | - |  | - | - |  |  | ---------- | ---------- | -
|                                                                                                                                       |                              |                 |        |        |              |  |   |               |  |  |             | Accumulated |  |             | Deficit |            |              |  |            |          
|                                                                                                                                       |                              |                 |        |        |              |  |   | Deficit Prior |  |  | Accumulated |             |  |             |         |           
|                                                                                                                                       |                              | Preferred Stock |        |        | Common Stock |  |   | Additional    |  |  | to          |             |  | During the  |         |            | Escrow/      |  |           
|                                                                                                                                       |                              |                 |        |        |              |  |   | Paid in       |  |  | Development |             |  | Development |         |            | Subscription |  |           
|                                                                                                                                       |                              | Shares          |        |        | Amount       |  |   | Shares        |  |  | Amount      |             |  | Capital     |         |            | Stage        |  |            | Stage     |  |  | Receivables |            | Total | 
|                                                                                                                                       |                              |                 |        |        |              |  |   |               |  |  |             |             |  |             |         |            |              |  |            |           |  |  |             |            |       | 
|                                                                                                                                       | Balance at December 31, 2004 |                 |        | 12,000 |              |  |   | 523,334       |  |  |             | 105,653,335 |  |             |         | 14,918,657 |              |  |            | 3,424,383 |  |  |             | (1,399,577 | )     |  |            | (19,353,933 | ) |  |   |  |  |  |            | (1,887,136 | )
|Issuance of common stock for services                                                                                                  |                              |                 |       |        |              |  |  |               |  |  | 104,167     |             |  |             | 11,312  |            |              |  |           |           |  |  |            |            |       |  |           |             |   |  |  |   |  |  | 11,312     |           
|Issuance of common stock for cash at $0.18 per share                                                                                   |                              |                 |       |        |              |  |  |               |  |  | 1,922,222   |             |  |             | 281,926 |            |              |  |           |           |  |  |            |            |       |  |           |             |   |  |  |   |  |  | 281,926    |           
|Issuance of preferred stock and warrants for cash (net $340,000,
    entire amount was reclassified to financial instrument liability) |                              |                 | 30,000 |        |              |  |  |               |  |  |            |             |  |             |        |            |              |  |           |           |  |  |            |            |       |  |           |             |   |  |  |   |  |  |           |           
|Reclassification of warrants to a financial instrument liability                                                                       |                              |                 |       |        |              |  |  |               |  |  |            |             |  |             |        |            |              |  | (2,435,713 | )         |  |  |            |            |       |  |           |             |   |  |  |   |  |  | (2,435,713 | )         
|Net loss for the year ended December 31, 2005                                                                                          |                              |                 |       |        |              |  |  |               |  |  |            |             |  |             |        |            |              |  |           |           |  |  |            |            |       |  | (1,486,781 | )           |   |  |  |   |  |  | (1,486,781 | )         
|                                                                                                                                       |                              |                 |        |        |              |  |   |               |  |  |             |             |  |             |         |            |              |  |            |           |  |  |             |            |       |  |           
|                                                                                                                                       | Balance at December 31, 2005 |                 |        | 42,000 |              |  | $ | 523,334       |  |  |             | 107,679,724 |  |             | $       | 15,211,895 |              |  | $          | 988,670   |  |  | $           | (1,399,577 | )     |  | $          | (20,840,714 | ) |  | $ |  |  |  | $          | (5,516,392 | )
|                                                                                                                                       |                              |                 |        |        |              |  |   |               |  |  |             |             |  |             |         |            |              |  |            |           |  |  |             |            |       |  |           

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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES


(A Development Stage Company)





Consolidated Statements of Cash Flows


|                                                                                |                                                                               |                                           |            |                       |                      |   |            |           |            |   |             |            |             |  
|------------------------------------------------------------------------------- | ----------------------------------------------------------------------------- | ----------------------------------------- | ---------- | --------------------- | -------------------- | - | ---------- | --------- | ---------- | - | ----------- | ---------- | ----------- | -
|                                                                                |                                                                               |                                           |            | From Inception of the |                     
|                                                                                |                                                                               | For the Year Ended                        |            |                       | Development Stage on |  
|                                                                                |                                                                               | December 31,                              |            |                       | November 20, 1991    |  
|                                                                                |                                                                               |                                           |            |                       | through Dec. 30,     |  
|                                                                                |                                                                               | 2005                                      |            |                       | 2004                 |   |            | 2005      |           
|                                                                                |                                                                               |                                           |            |                       |                      |   |            |           |           
|CASH FLOWS FROM OPERATING ACTIVITIES                                            |                                                                               |                                           |            |                       |                      |   |            |           |            |   |             |           
|Net Loss                                                                        |                                                                               | $                                         | (1,486,781 | )                     |                      | $ | (3,731,475 | )         |            | $ | (20,148,515 | )         
|Adjustments to reconcile net loss to net cash used by operating
    activities: |                                                                               |                                           |            |                       |                      |   |            |           |            |   |             |           
|                                                                                | Foreign currency transaction gain                                             |                                           |            | (56,480               | )                    |   |            |          |            |   |             | (56,480    | )          
|                                                                                | Gain on debt restructuring                                                    |                                           |            | (196,353              | )                    |   |            |          |            |   |             | (1,431,889 | )          
|                                                                                | Common stock issued for services, expenses, and litigation                    |                                           |            |                      |                      |   |            | 66,501    |            |   |             | 4,267,717  |            
|                                                                                | Commitment for research and development obligation                            |                                           |            | 665,700               |                      |   |            |          |            |   |             | 665,700    |            
|                                                                                | Depreciation                                                                  |                                           |            | 8,515                 |                      |   |            |          |            |   |             | 108,786    |            
|                                                                                | Reduction of escrow receivable from research and development                  |                                           |            |                      |                      |   |            |          |            |   |             | 272,700    |            
|                                                                                | Unrealized gain on financial instrument                                       |                                           |            | (2,300,191            | )                    |   |            |          |            |   |             | (2,300,191 | )          
|                                                                                | Stock options and warrants granted for services                               |                                           |            |                      |                      |   |            | 1,675,000 |            |   |             | 4,811,253  |            
|                                                                                | Reduction of legal costs                                                      |                                           |            |                      |                      |   |            |          |            |   |             | (130,000   | )          
|                                                                                | Write-off of subscriptions receivable                                         |                                           |            |                      |                      |   |            |          |            |   |             | 112,500    |            
|                                                                                | Impairment of loss on assets                                                  |                                           |            |                      |                      |   |            |          |            |   |             | 9,709      |            
|                                                                                | Loss on disposal of equipment                                                 |                                           |            |                      |                      |   |            |          |            |   |             | 30,364     |            
|                                                                                | Write-off of receivable                                                       |                                           |            | 51,100                |                      |   |            |          |            |   |             | 245,065    |            
|                                                                                | Note payable issued for litigation                                            |                                           |            |                      |                      |   |            |          |            |   |             | 385,000    |            
|Changes in operating assets and liabilities                                     |                                                                               |                                           |            |                       |                      |   |            |           |            |   |             |           
|                                                                                | Increase in accounts receivable                                               |                                           |            |                      |                      |   |            |          |            |   |             | (7,529     | )          
|                                                                                | Decrease in prepaid expenses                                                  |                                           |            |                      |                      |   |            | 11,331    |            |   |             |           |            
|                                                                                | Decrease in deferred charges                                                  |                                           |            |                      |                      |   |            | 12,077    |            |   |             |           |            
|                                                                                | Increase in accounts payable                                                  |                                           |            | 171,641               |                      |   |            | 381,727   |            |   |             | 2,464,186  |            
|                                                                                | Increase in accrued expenses                                                  |                                           |            | 38,210                |                      |   |            | 53,934    |            |   |             | 637,919    |            
|                                                                                |                                                                               |                                           |            |                       |                      |   |            |           |           
|                                                                                |                                                                               | Net Cash Used by Operating Activities     |            |                       | (3,104,639           | ) |            |           | (1,530,905 | ) |             |            | (10,063,705 | )
|                                                                                |                                                                               |                                           |            |                       |                      |   |            |           |           
|CASH FLOWS FROM INVESTING ACTIVITIES                                            |                                                                               |                                           |            |                       |                      |   |            |           |            |   |             |           
|                                                                                | Increase in deposits                                                          |                                           |            |                      |                      |   |            | (51,100   | )          |   |             | (51,100    | )          
|                                                                                | Purchase of equipment                                                         |                                           |            | (89,150               | )                    |   |            |          |            |   |             | (221,334   | )          
|                                                                                | Issuance of note receivable                                                   |                                           |            | (313,170              | )                    |   |            |          |            |   |             | (313,170   | )          
|                                                                                | Payments received on note receivable                                          |                                           |            |                      |                      |   |            |          |            |   |             | 130,000    |            
|                                                                                |                                                                               |                                           |            |                       |                      |   |            |           |           
|                                                                                |                                                                               | Net Cash Used by Investing Activities     |            |                       | (402,320             | ) |            |           | (51,100    | ) |             |            | (455,604    | )
|                                                                                |                                                                               |                                           |            |                       |                      |   |            |           |           
|CASH FLOWS FROM FINANCING ACTIVITIES                                            |                                                                               |                                           |            |                       |                      |   |            |           |            |   |             |           
|                                                                                | Issuance of common stock, preferred stock and warrants for cash               |                                           |            | 3,006,000             |                      |   |            | 2,883,186 |            |   |             | 10,033,845 |            
|                                                                                | Contributed equity                                                            |                                           |            |                      |                      |   |            |          |            |   |             | 131,374    |            
|                                                                                | Proceeds from notes payable                                                   |                                           |            |                      |                      |   |            |          |            |   |             | 1,336,613  |            
|                                                                                | Payments on notes payable                                                     |                                           |            | (300,000              | )                    |   |            | (270,000  | )          |   |             | (801,287   | )          
|                                                                                | Proceeds from convertible notes payable                                       |                                           |            |                      |                      |   |            |          |            |   |             | 571,702    |            
|                                                                                | Payments on convertible notes payable                                         |                                           |            |                      |                      |   |            |          |            |   |             | (98,500    | )          
|                                                                                |                                                                               |                                           |            |                       |                      |   |            |           |           
|                                                                                |                                                                               | Net Cash Provided by Financing Activities |            |                       | 2,706,000            |   |            |           | 2,613,186  |   |             |            | 11,173,747  |  
|                                                                                |                                                                               |                                           |            |                       |                      |   |            |           |           
|                                                                                | NET INCREASE (DECREASE) IN CASH                                               |                                           |            | (800,959              | )                    |   |            | 1,031,181 |            |   |             | 654,438    |            
|                                                                                | CASH AT BEGINNING OF PERIOD                                                   |                                           |            | 1,455,397             |                      |   |            | 424,216   |            |   |             |           |            
|                                                                                |                                                                               |                                           |            |                       |                      |   |            |           |           
|                                                                                | CASH AT END OF PERIOD                                                         |                                           | $          | 654,438               |                      |   | $          | 1,455,397 |            |   | $           | 654,438    |            
|                                                                                |                                                                               |                                           |            |                       |                      |   |            |           |           
|SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION                               |                                                                               |                                           |            |                       |                      |   |            |           |            |   |             |           
|Interest paid                                                                   |                                                                               | $                                         | 19,283     |                       |                      | $ | 77,592     |           |            |   |             |           
|NONCASH INVESTING AND FINANCING ACTIVITIES                                      |                                                                               |                                           |            |                       |                      |   |            |           |            |   |             |           
|                                                                                | Retirement of notes payable and interest through issuance of
    common stock |                                           | $          |                      |                      |   | $          | 650,468   |            |   |             |            |            
|                                                                                | Release of shares as part of Perrigrine settlement                            |                                           | $          |                      |                      |   | $          | 227,300   |            |   |             |            |            
|                                                                                | Common stock and warrants issued to placement agent                           |                                           | $          | 11,312                |                      |   | $          | 162,746   |            |   |             |            |            
|                                                                                | Preferred stock divedend as part of beneficial conversion feature             |                                           | $          |                      |                      |   | $          | 692,199   |            |   |             |            |            

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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES


(A Development Stage Company)





Notes to Consolidated Financial Statements


NOTE A  SIGNIFICANT ACCOUNTING POLICIES










| |                            
| | ---------------------------
| | Principles of Consolidation





| |                          
| | -------------------------
| | Development Stage Company





| |                          
| | -------------------------
| | Cash and Cash Equivalents





| |                       
| | ----------------------
| | Property and Equipment







| |             
| | ------------
| | Income Taxes



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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES


(A Development Stage Company)


Notes to Consolidated Financial
Statements  (Continued)




| |                         
| | ------------------------
| | Research and Development





| |                                    
| | -----------------------------------
| | Fair Value of Financial Instruments





| |          
| | ---------
| | Estimates





| |                                 
| | --------------------------------
| | Basic and Diluted Loss per Share





| |                        
| | -----------------------
| | Concentration of Credit





| |                         
| | ------------------------
| | Stock Based Compensation





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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES


(A Development Stage Company)


Notes to Consolidated Financial
Statements  (Continued)




|                                                                                                                    |  |                                |            |   |      |   |            |  
|------------------------------------------------------------------------------------------------------------------- |  | ------------------------------ | ---------- | - | ---- | - | ---------- | -
|                                                                                                                    |  | Fiscal Year Ended December 31, |           
|                                                                                                                    |  |                                |           
|                                                                                                                    |  | 2005                           |            |   | 2004 |  
|                                                                                                                    |  |                                |            |   |      |  
|Net loss applicable to common stockholders, as reported                                                             |  | $                              | (1,486,781 | ) |      | $ | (4,423,674 | )
|Add: Stock-based employee compensation expense included in
    reported net loss                                    |  |                                |           |   |      |   | 1,675,000  |  
|Deduct: Total stock based employee compensation expense
    determined under fair value based method for all awards |  |                                |           |   |      |   | (1,979,237 | )
|                                                                                                                    |  |                                |            |   |      |  
|Pro forma net loss applicable to common shareholders                                                                |  | $                              | (1,486,781 | ) |      | $ | (4,727,911 | )
|                                                                                                                    |  |                                |            |   |      |  
|Basic and diluted loss per share, as reported                                                                       |  | $                              | (0.01      | ) |      | $ | (0.05      | )
|                                                                                                                    |  |                                |            |   |      |  
|Basic and diluted loss per share, pro forma                                                                         |  | $                              | (0.01      | ) |      | $ | (0.05      | )
|                                                                                                                    |  |                                |            |   |      |  



| |                                      
| | -------------------------------------
| | Recently Issued Accounting Statements



.


Accounting
Changes and Error Corrections - a replacement of APB
Opinion No. 20 and FASB Statement No. 3.


NOTE B  BASIS OF PRESENTATION AND GOING CONCERN




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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES


(A Development Stage Company)


Notes to Consolidated Financial
Statements  (Continued)






NOTE C  PROPERTY AND EQUIPMENT




|                         |  |      |         |   |      |   |         |  
|------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                         |  | 2005 |         |   | 2004 |  
|                         |  |      |         |   |      |  
|Equipment                |  | $    | 168,468 |   |      | $ | 79,318  |  
|Accumulated depreciation |  |      | (87,833 | ) |      |   | (79,318 | )
|                         |  |      |         |   |      |  
|                         |  | $    | 80,635  |   |      | $ |        |  
|                         |  |      |         |   |      |  



NOTE D  INCOME TAXES




|                                                   |  |                          |            |   |      |   |           |  
|-------------------------------------------------- |  | ------------------------ | ---------- | - | ---- | - | --------- | -
|                                                   |  | Years Ended December 31, |           
|                                                   |  |                          |           
|                                                   |  | 2005                     |            |   | 2004 |  
|                                                   |  |                          |            |   |      |  
|Federal income tax benefit at statutory rate (34%) |  | $                        | 506,000    |   |      | $ | 1,268,000 |  
|State income tax, net of federal benefit           |  |                          | 89,000     |   |      |   | 224,000   |  
|Unrealized gain on financial instrument            |  |                          | 920,000    |   |      |   |          |  
|Revaluation and expiration of options              |  |                          |           |   |      |   | (631,000  | )
|Change in valuation allowance                      |  |                          | (1,515,000 | ) |      |   | (861,000  | )
|                                                   |  |                          |            |   |      |  
|                                                   |  | $                        |           |   |      | $ |          |  
|                                                   |  |                          |            |   |      |  



|                                 |  |              |            |   |      |   |            |  
|-------------------------------- |  | ------------ | ---------- | - | ---- | - | ---------- | -
|                                 |  | December 31, |           
|                                 |  |              |           
|                                 |  | 2005         |            |   | 2004 |  
|                                 |  |              |            |   |      |  
|Net operating loss carryforward  |  | $            | 6,663,000  |   |      | $ | 5,132,000  |  
|Research and development credits |  |              | 80,000     |   |      |   | 80,000     |  
|Stock options                    |  |              | 646,000    |   |      |   | 646,000    |  
|Accrued compensation             |  |              | 380,000    |   |      |   | 396,000    |  
|Valuation allowance              |  |              | (7,769,000 | ) |      |   | (6,254,000 | )
|                                 |  |              |            |   |      |  
|Net deferred tax asset           |  | $            |           |   |      | $ |           |  
|                                 |  |              |            |   |      |  

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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES


(A Development Stage Company)


Notes to Consolidated Financial
Statements  (Continued)






NOTE E  NOTES PAYABLE




|                                                                                              |  |      |        |  |      |   |         | 
|--------------------------------------------------------------------------------------------- |  | ---- | ------ |  | ---- | - | ------- | 
|                                                                                              |  | 2005 |        |  | 2004 |  
|                                                                                              |  |      |        |  |      |  
|Notes payable to shareholders, which are currently due and in
    default. Interest is at 12% |  | $    | 56,000 |  |      | $ | 336,717 | 



NOTE F  CONVERTIBLE NOTES PAYABLE




|                                                                                                                                                                                   |  |      |         |  |      |   |         | 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ------- |  | ---- | - | ------- | 
|                                                                                                                                                                                   |  | 2005 |         |  | 2004 |  
|                                                                                                                                                                                   |  |      |         |  |      |  
|Convertible notes payable to a trust, which is currently due and
    in default. Interest is at 12%. Each $1,000 note is convertible
    into 667 shares of Companys common stock |  | $    | 193,200 |  |      | $ | 193,200 | 

NOTE G  STOCKHOLDERS EQUITY




| |             
| | ------------
| | Common Stock







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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES


(A Development Stage Company)


Notes to Consolidated Financial
Statements  (Continued)




| |                             
| | ----------------------------
| | Preferred Stock and Warrants

2005










2004






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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES


(A Development Stage Company)


Notes to Consolidated Financial
Statements  (Continued)








| |                     
| | --------------------
| | Financial Instrument









| |                                     
| | ------------------------------------
| | Commitment Regarding Peregrine Stock



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MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES


(A Development Stage Company)


Notes to Consolidated Financial
Statements  (Continued)




NOTE H  STOCK OPTIONS AND WARRANTS






|                                                              |  |         |            |           |                |   |      |         |           |  |                |  |  |   |      | 
|------------------------------------------------------------- |  | ------- | ---------- | --------- | -------------- | - | ---- | ------- | --------- |  | -------------- |  |  | - | ---- | 
|                                                              |  | 2005    |            |           | 2004           |  
|                                                              |  |         |            |           |                |  
|                                                              |  |         |            | Weighted- |                |   |      |         | Weighted- | 
|                                                              |  |         |            | Average   |                |   |      |         | Average   | 
|                                                              |  | Options |            |           | Exercise Price |   |      | Options |           |  | Exercise Price | 
|                                                              |  |         |            |           |                |   |      |         |           |  |                | 
|Outstanding at beginning of year                              |  |         | 19,483,000 |           |                | $ | 0.04 |         |           |  | 18,783,000     |  |  | $ | 0.04 | 
|Issued                                                        |  |         |           |           |                |   |     |         |           |  | 700,000        |  |  |   | 0.05 | 
|Forfeited                                                     |  |         |           |           |                |   |     |         |           |  |               |  |  |   |     | 
|                                                              |  |         |            |           |                |   |      |         |           |  |                | 
|Outstanding at end of year                                    |  |         | 19,483,000 |           |                |   | 0.04 |         |           |  | 19,483,000     |  |  |   | 0.04 | 
|                                                              |  |         |            |           |                |   |      |         |           |  |                | 
|Exercisable at end of year                                    |  |         | 19,483,000 |           |                | $ | 0.04 |         |           |  | 19,483,000     |  |  | $ | 0.04 | 
|                                                              |  |         |            |           |                |   |      |         |           |  |                | 
|Weighed average fair value of options granted during the year |  |         |            |           |                | $ |     |         |           |  |                |  |  | $ | 0.14 | 
|                                                              |  |         |            |           |                |   |      |         |           |  |                | 



|                         |  |                     |            |             |                     |  |          |          |  |   |             |          |  |          |            |  |  |   |      | 
|------------------------ |  | ------------------- | ---------- | ----------- | ------------------- |  | -------- | -------- |  | - | ----------- | -------- |  | -------- | ---------- |  |  | - | ---- | 
|                         |  | Options Outstanding |            |             | Options Exercisable | 
|                         |  |                     |            |             |                     | 
|                         |  |                     |            | Weighted    |                     |  |          |          | 
|                         |  |                     |            | Average     |                     |  |          |          | 
|                         |  |                     |            | Remaining   |                     |  | Weighted |          |  |   |             | Weighted | 
|                         |  |                     |            | Contractual |                     |  | Average  |          |  |   |             | Average  | 
|                         |  | Number              |            |             | Life                |  |          | Exercise |  |   | Number      |          |  | Exercise |           
|Range of Exercise Prices |  | Outstanding         |            |             | (Years)             |  |          | Price    |  |   | Exercisable |          |  | Price    |           
|                         |  |                     |            |             |                     |  |          |          |  |   |             |          |  |          |           
|$0.01 to 0.02            |  |                     | 16,000,000 |             |                     |  | 7.6      |          |  | $ | 0.02        |          |  |          | 16,000,000 |  |  | $ | 0.02 | 
|$0.05                    |  |                     | 1,500,000  |             |                     |  | 6.1      |          |  | $ | 0.05        |          |  |          | 1,500,000  |  |  | $ | 0.05 | 
|$0.15 to 0.50            |  |                     | 1,983,000  |             |                     |  | 6.1      |          |  | $ | 0.02        |          |  |          | 1,983,000  |  |  | $ | 0.02 | 
|                         |  |                     |            |             |                     |  |          |          |  |   |             |          |  |          |           
|                         |  |                     | 19,483,000 |             |                     |  |          |          |  |   |             |          |  |          | 19,483,000 |  |  |   |      | 
|                         |  |                     |            |             |                     |  |          |          |  |   |             |          |  |          |           

47



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##### Table of Contents



MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES


(A Development Stage Company)


Notes to Consolidated Financial
Statements  (Continued)




|                                      |  |      |   |      |  |   |         |  
|------------------------------------- |  | ---- | - | ---- |  | - | ------- | -
|                                      |  | 2005 |   | 2004 | 
|                                      |  |      |   |      | 
|Expected dividend yield               |  |      |  |      |  |   |        |  
|Risk free interest rate               |  |      |  |      |  |   | 3.8     | %
|Expected volatility                   |  |      |  |      |  |   | 220     | %
|Expected life                         |  |      |  |      |  |   | 7 years |  
|Weighted average fair value per share |  | $    |  |      |  | $ | 0.10    |  





| |               
| | --------------
| | Stock Warrants



|                                 |  |          |            |           |                |   |      |          |           |  |                |   |  |   |      | 
|-------------------------------- |  | -------- | ---------- | --------- | -------------- | - | ---- | -------- | --------- |  | -------------- | - |  | - | ---- | 
|                                 |  | 2005     |            |           | 2004           |  
|                                 |  |          |            |           |                |  
|                                 |  |          |            | Weighted- |                |   |      |          | Weighted- | 
|                                 |  |          |            | Average   |                |   |      |          | Average   | 
|                                 |  | Warrants |            |           | Exercise Price |   |      | Warrants |           |  | Exercise Price |  
|                                 |  |          |            |           |                |   |      |          |           |  |                |  
|Outstanding at beginning of year |  |          | 14,904,029 |           |                | $ | 0.28 |          |           |  | 3,616,005      |   |  | $ | 0.61 | 
|Issued                           |  |          | 26,019,832 |           |                |   | 0.20 |          |           |  | 12,954,029     |   |  |   | 0.17 | 
|Expired                          |  |          |           |           |                |   |     |          |           |  | (1,666,005     | ) |  |   | 0.16 | 
|Exercised                        |  |          |           |           |                |   |     |          |           |  |               |   |  |   |     | 
|                                 |  |          |            |           |                |   |      |          |           |  |                |  
|Outstanding at end of year       |  |          | 40,923,861 |           |                | $ | 0.23 |          |           |  | 14,904,029     |   |  | $ | 0.28 | 
|                                 |  |          |            |           |                |   |      |          |           |  |                |  



|                        |  |             |            |             |         |  |          |          |  |   |      | 
|----------------------- |  | ----------- | ---------- | ----------- | ------- |  | -------- | -------- |  | - | ---- | 
|                        |  |             |            | Weighted    |         |  |         
|                        |  |             |            | Average     |         |  |         
|                        |  |             |            | Remaining   |         |  | Weighted |         
|                        |  |             |            | Contractual |         |  | Average  |         
|                        |  | Number      |            |             | Life    |  |          | Exercise | 
|Range of Exercise Price |  | Outstanding |            |             | (Years) |  |          | Price    | 
|                        |  |             |            |             |         |  |          |          | 
|$0.09                   |  |             | 2,356,700  |             |         |  | 1.5      |          |  | $ | 0.09 | 
|$0.18 to 0.20           |  |             | 36,617,161 |             |         |  | 2.1      |          |  |   | 0.19 | 
|$1.00                   |  |             | 1,950,000  |             |         |  | 1.0      |          |  |   | 1.00 | 
|                        |  |             |            |             |         |  |          |          | 
|                        |  |             | 40,923,861 |             |         |  | 2.0      |          |  | $ | 0.23 | 
|                        |  |             |            |             |         |  |          |          | 

NOTE I  RELATED PARTY TRANSACTIONS




48



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##### Table of Contents



MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES


(A Development Stage Company)


Notes to Consolidated Financial
Statements  (Continued)


    


start-up 


NOTE J  OTHER SIGNIFICANT TRANSACTIONS




| |                         
| | ------------------------
| | SaveCream Asset Purchase



   


 




| |                                
| | -------------------------------
| | Formation of MDI Oncology, Inc.



49



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##### Table of Contents



MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES


(A Development Stage Company)


Notes to Consolidated Financial
Statements  (Continued)


NOTE K - SUBSEQUENT EVENTS




| |                                                     
| | ----------------------------------------------------
| | Exercise of Series A Convertible Preferred
    Stock





| |                         
| | ------------------------
| | Re-Grant of Stock Option



50



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##### Table of Contents








|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|ITEM 8. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
    ACCOUNTING AND FINANCIAL DISCLOSURE.






ITEM 8A.     CONTROLS AND
PROCEDURES.


Evaluation of Disclosure Controls and Procedures. 13a-14(c)


Changes in Internal Controls.





PART III







|        |                                                                                                                         
|------- | ------------------------------------------------------------------------------------------------------------------------
|ITEM 9. | DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
    PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE
    ACT.








|         |                        
|-------- | -----------------------
|ITEM 10. | EXECUTIVE COMPENSATION.








|         |                                                                                                    
|-------- | ---------------------------------------------------------------------------------------------------
|ITEM 11. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
    MANAGEMENT AND RELATED STOCKHOLDER MATTERS.








|         |                                                
|-------- | -----------------------------------------------
|ITEM 12. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.








|         |          
|-------- | ---------
|ITEM 13. | EXHIBITS.

10-KSB.


|       |     |         |  |                                                                                                                                                                                                                                                                                                                                                                                                       
|------ | --- | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |     | Exhibit
|       |     |        
|      
|       | 2.1 |         |  | 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).                                                                                                                                                                     

51



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##### Table of Contents



|       |      |         |  |                                                                                                                                                                                                                                                                                                                                                                  
|------ | ---- | ------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |      | Exhibit
|       |      |        
|      
|       | 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 Gropu, 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).    
|      
|       | 4.3  |         |  | Certificate of Designations of Preferences and Rights of
    Series A Convertible Preferred Stock of Medical
    Discoveries, Inc. (filed as Exhibit 4.1 to Registration
    Statement No. 333-121635 filed on Form SB-2 on
    December 23, 2004, and incorporated herein by reference).                                                                        
|      
|       | 4.4  |         |  | Amendment to Certificate of Designations of Preferences and
    Rights of Series A Convertible Preferred Stock of Medical
    Discoveries, Inc. (filed as Exhibit 4.2 to Registration
    Statement No. 333-121635 filed on Form SB-2 on
    December 23, 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).                                                                                                              
|      
|       | 10.2 |         |  | Subscription Agreement dated October 18, 2004 among Monarch
    Pointe Fund, Ltd., Mercator Advisory Group, LLC, and Medical
    Discoveries, Inc. (filed as Exhibit 10.2 to Amendment
    No. 2 to Registration Statement No. 333-121635 filed
    on Form SB-2 on June 2, 2005, and incorporated herein
    by reference).                                     
|      
|       | 10.3 |         |  | Subscription 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 10.3 to Amendment No. 2 to
    Registration Statement No. 333-121635 filed on
    Form SB-2 on June 2, 2005, and incorporated herein by
    reference).
|      
|       | 10.4 |         |  | Employment Agreement dated as of March 1, 2005 between
    Medical Discoveries, Inc. and Judy M. Robinett (filed as
    Exhibit 10.4 to Amendment No. 3 to Registration
    Statement No. 333-121635 filed on Form SB-2 on
    October 13, 2005, 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.






|         |                                        
|-------- | ---------------------------------------
|ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES.



52



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##### Table of Contents



SIGNATURES






| |                                      
| | -------------------------------------
| | MEDICAL DISCOVERIES, INC.            
|
| | /s/ Judy M. Robinett                 
| |                                      
| | Judy M. Robinett                     
| | President and Chief Executive Officer





|                                         |  |                                                                                   |  |                |  | 
|---------------------------------------- |  | --------------------------------------------------------------------------------- |  | -------------- |  | 
|Name                                     |  | Position                                                                          |  | Date          
|                                         |  |                                                                                   |  |               
|                                        
|/s/ Judy M. RobinettJudy M. Robinett     |  | President, Chief Executive Officer and Director (Principal
    Executive Officer) |  | March 31, 2006
|                                        
|/s/ Deirdra J. BurgessDeirdra J. Burgess |  | Controller (Principal Financial Officer)                                          |  | March 31, 2006
|                                        
|/s/ David R. WalkerDavid R. Walker       |  | Chairman of the Board of Directors                                                |  | March 31, 2006
|                                        
|/s/ Larry AndersonLarry Anderson         |  | Director                                                                          |  | March 31, 2006



















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##### Table of Contents



INDEX TO EXHIBITS


|       |    |         |  |                                                                                                                                                                                                                                                                                                                                                                                                       
|------ | -- | ------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Number |    | Exhibit
|       |    |        
|      
|       | 2  | .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 Gropu, 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).                                         
|      
|       | 4  | .3      |  | Certificate of Designations of Preferences and Rights of
    Series A Convertible Preferred Stock of Medical
    Discoveries, Inc. (filed as Exhibit 4.1 to Registration
    Statement No. 333-121635 filed on Form SB-2 on
    December 23, 2004, and incorporated herein by reference).                                                                                                             
|      
|       | 4  | .4      |  | Amendment to Certificate of Designations of Preferences and
    Rights of Series A Convertible Preferred Stock of Medical
    Discoveries, Inc. (filed as Exhibit 4.2 to Registration
    Statement No. 333-121635 filed on Form SB-2 on
    December 23, 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).                                                                                                                                                   
|      
|       | 10 | .2      |  | Subscription Agreement dated October 18, 2004 among Monarch
    Pointe Fund, Ltd., Mercator Advisory Group, LLC, and Medical
    Discoveries, Inc. (filed as Exhibit 10.2 to Amendment
    No. 2 to Registration Statement No. 333-121635 filed
    on Form SB-2 on June 2, 2005, and incorporated herein
    by reference).                                                                          
|      
|       | 10 | .3      |  | Subscription 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 10.3 to Amendment No. 2 to
    Registration Statement No. 333-121635 filed on
    Form SB-2 on June 2, 2005, and incorporated herein by
    reference).                                     
|      
|       | 10 | .4      |  | Employment Agreement dated as of March 1, 2005 between
    Medical Discoveries, Inc. and Judy M. Robinett (filed as
    Exhibit 10.4 to Amendment No. 3 to Registration
    Statement No. 333-121635 filed on Form SB-2 on
    October 13, 2005, 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.

54