SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-KSB ý
     Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended
December 31, 2006 OR  ̈
     Transition report under section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________ to _________. Commission File Number:
0-000-26875 VIRAL GENETICS, INC. (Name of small business issuer in its charter) Delaware(State or other jurisdiction of
incorporation or organization)
     
     33-0814123(I.R.S. Employer
Identification No.)1321 Mountain View Circle, Azusa, CA 91702(Address of principal executive offices) (626) 334-5310(Issuers telephone number) Securities registered pursuant to Section 12(b)
of the Exchange Act: None Securities registered under Section 12(g) of
the Exchange Act: Common Stock, par value $0.0001 Check whether the Issuer is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.   ̈ Check whether the Issuer (1) filed all reports required to
be filed by section 13 or 15(d) of the Exchange Act during the past 12 months (or for
such shorter period that the registrant was required to file such report(s), and (2) has
been subject to such filing requirements for the past 90 days.  Yes ý    No  ̈ Check if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is contained in this form, and no disclosure will
be contained, to the best of the registrants knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form 10-KSB or any
amendment to this Form 10-KSB.  ̈ Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ̈    No ý The issuers revenue for its most recent fiscal year was: $0 The aggregate market value of the issuers voting stock
held as of April 12, 2007 by non-affiliates of the issuer was $3,448,693. As of April 12, 2007 the issuer had 128,127,828 shares of
its common stock outstanding. Transitional Small Business Format:  Yes  ̈    No ý Documents incorporated by reference: None




TABLE OF CONTENTS ITEM NUMBER AND CAPTION
     PagePart I1.
     Description of Business
     42.
     Description of Property
     163.
     Legal Proceedings
     174.
     Submission of Matters to a Vote of Security Holders
     17Part II5.
     Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity
    Securities
     176.
     Managements Discussion and Analysis or Plan of Operation
     187.
     Financial Statements
     208.
     Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
     208.A
     Controls and Procedures
     208.B
     Other Information
     21Part III9.
     Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the
       Exchange Act
     2110.
     Executive Compensation
     2311.
     Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
     2612.
     Certain Relationships and Related Transactions
     2713.
     Exhibits
     2814.
     Principal Accountant Fees and Services
     31 2




FORWARD LOOKING STATEMENTS This Annual Report on Form 10-KSB contains forward-looking
statements that are subject to certain risks, uncertainties or assumptions and may be
affected by certain other factors, including but not limited to the specific factors
discussed in Part I, Item 1 under Description of business, and Part II, Item 6 under Managements
Discussion and Analysis or Plan of Operation. In some cases, you can identify
forward-looking statements by terminology such as may, should, could, expects, plans, projected,anticipates, believes, estimates, predicts, potential, or
continues, or the negative of these terms or other comparable terminology. Should one
or more of these risks, uncertainties or other factors materialize, or should underlying
assumptions prove incorrect, actual results, performance or achievements of Viral
Genetics may vary materially from any future results, performance or achievements
expressed or implied by such forward-looking statements. Forward-looking statements are based on beliefs and
assumptions of Viral Genetics management and on information currently available to such
management. Forward-looking statements speak only as of the date they are made, and Viral
Genetics undertakes no obligation to update publicly any of them in light of new
information or future events. Undue reliance should not be placed on such forward-looking
statements, which are based on current expectations. Forward-looking statements are not
guarantees of performance. 3




PART I Item 1.  BUSINESS Overview Viral
Genetics, Inc., was incorporated under the laws of the state of Delaware on June 8, 1998,
and in October 2001 acquired its subsidiary, Viral Genetics, Inc., a California
corporation formed in 1995 (VGI). VGI was founded in 1995 to discover, develop, and
commercialize a series of proprietary proteins based primarily on Thymus Nuclear Protein
or TNP. Our research interests are infectious disease  in particular HIV/AIDS  autoimmune
conditions and immunological deficiency. TNP is a
processed extract of mammalian thymus tissue from which we recently isolated what we
believe are the active components: two protein fragments or peptides.  The lead product
based on TNP is VGV-1, which is TNP suspended in alum adjuvant dosed through
intramuscular injections. We have studied VGV-1 in five human clinical trials to examine
for safety and efficacy as a treatment for HIV/AIDS. VGV-1 is in the preclinical stage of
development in the USA where we have yet to file an IND with the FDA, but have completed
pre-IND correspondence. VGV-1 is in later-stage development outside the United States
where we have completed several clinical trials, including our recent South African study. Based on our
evaluation of published research on the active peptides that we discovered in VGV-1,
preclinical test results, immunological data gathered from our TNP001 human clinical
trial, and anecdotal information from our prior human clinical trials, we believe that
TNP may have potential for other applications in other diseases and that additional in
these areas research is warranted. At present, we will limit our research into other uses
of TNP to early-stage activity studies and focus the majority of our efforts and
resources on the HIV and AIDS application. We expect to continue this strategy until we
have sufficient resources to expand beyond that. Over the next
year we expect to focus on completing preclinical studies required to seek FDA approval
for a clinical trial of VGV-1, while in parallel seeking to continue clinical development
of VGV-1 in South Africa. In conjunction with those efforts, which are focused on the
HIV/AIDS application of TNP, we are now planning a series of in vitro laboratory studies
to examine the activity of the TNP peptides to determine their effects against not only
the HIV virus, but other viruses, human immune system cells, bacteria, and various other
pathogens. Last year we
announced the results of our human clinical trial of VGV-1 in South Africa. This study  the
TNP001 Study  was authorized by the South African Medicines Control Council (MCC) in
February 2004. It was a multi-center, randomized, double-blind, placebo-controlled study
of VGV-1 treated HIV-infected subjects with CD4+ cell counts of 250-500. We completed
enrollment of 137 subjects. The primary endpoint for the study was the decrease in viral
load as measured by PCR-RNA assay. Other endpoints include CD4+ cell counts, PBMC culture
assays and certain immune markers. Patients received 16 intra-muscular injections over a
51-day period, and were followed up after treatment to day 240. The study was
administered by Virtus Clinical Development Services, a leading South African contract
research organization. The results
of the TNP001 Study indicated statistically significant reductions in viral load (the
amount of HIV in the blood) in some patients, only mild adverse events attributed to the
drug, and a mechanism of action that appears to be markedly different than existing HIV
therapies. During the study, statistically significant reductions in viral load were seen
in 22% of patients overall that were equivalent to a 70% decrease in the amount of virus
in the blood at day 150 (approximately three months after treatment). Further, patients
who began TNP001 with reduced immune function (CD4+ cell count below 300) did best on
VGV-1. Of the patients that started the study with lower CD4+ counts, 36% had a 0.5 log
(70%) or greater drop in viral load at day 150 and 25% had this result at day 240. CD4+
cells are a key element in the formation of an immune response to viruses and other
foreign bodies. Reducing HIV viral load is the only known way to delay disease
progression. In the TNP001
study we also observed that certain immune markers related to infection in general and
specific immune responses to HIV were altered in an intriguing manner. 4




In summary, we view
these results as confirming the biological activity and antiviral properties of VGV-1,
its apparently higher degree of efficacy in sicker patients, and the lack of safety or
toxicity issues associated with receiving it, while suggesting that the optimal dosing of
the product has not yet been identified. We intend to focus primarily on dose
optimization this year. Our management team
consists of two executive officers and one senior manager, who are supported by a team of
four employees and consultants. The management team is advised by a Scientific and
Medical Advisory Board composed of physicians and scientists with substantial experience
in the areas of HIV treatment, drug and vaccine development, clinical trials, immunology
and statistics. The Company leases
adjacent facilities located in Azusa, California that house its corporate offices,
laboratory, and a production facility. Glossary AIDS - A severe
immunological disorder caused by the retrovirus HIV, resulting in a defect in
cell-mediated immune response that is manifested by increased susceptibility to
opportunistic infections and to certain rare cancers, especially Kaposis sarcoma. CD4+ T cells  A
T-Helper cell expressing the CD4 receptor that is attacked by the HIV virus. CDC  Center for
Disease Control FDA  The United
States Food and Drug Administration HAART  Highly-Active
Anti-Retroviral Therapy is a treatment approach to HIV that employs combinations of
various antiretroviral drugs (such as Nonnucleoside Reverse Transcriptase Inhibitors, and
Nucleoside Analog Reverse Transcriptase Inhibitors, and at least one Protease Inhibitor)
that target the virus itself or its method of reproduction. HIV - A retrovirus
that causes AIDS by infecting helper T cells of the immune system. The most common
serotype, HIV-1, is distributed worldwide, while HIV-2 is primarily confined to West
Africa. IND - Investigational
New Drug application that is filed with the FDA to obtain approval for human clinical
trials in the United States. PBMC - Peripheral
Blood Mononuclear Cell viral load assays, which is a type of blood test that detects
living HIV in the blood. PCR - Polymerase Chain
Reaction, which is a type of blood test that detect HIV genetic material. RNA  Ribonucleic
Acid, which is genetic material and in the case of the HIV-RNA PCR assay is used to
detect and quantify the amount of HIV virus in the subjects blood. Products, Research and Development Our research focuses
on isolating and identifying biologically-active proteins and protein fragments with
diagnostic and therapeutic applications in infectious disease  in particular HIV
infection and AIDS - autoimmune conditions, cancer, and immunological deficiency. At the
core of our technology is TNP - an extract of mammalian thymus tissue. Over the next year we
expect to focus on completing preclinical studies required to seek FDA approval for a
clinical trial of VGV-1, while in parallel seeking a distribution and development partner
in Africa to continue clinical development of VGV-1 in that region. In conjunction with
those efforts, which are focused on the HIV/AIDS application of TNP, we are now planning
a series of in vitro laboratory studies to examine the activity of the TNP peptides to
determine their effects against not only the HIV virus, but other viruses, human immune
system cells, bacteria, and various other pathogens. 5




VGV-1 VGV-1 is a suspension
of TNP in alum adjuvant. It is our lead drug candidate and is a prospective treatment for
HIV infection and AIDS. We have studied VGV-1
in five human clinical trials outside of the United States including on HIV-infected
patients with no prior history of antiretroviral treatment, patients who were resistant
to antiretroviral therapy, and others. We have conducted follow up testing of patients at
up to 18 months following treatment. In our South African study we studied VGV-1 on
patients in Stage CDC-2 of HIV infection, which is the stage prior to full-blown AIDS.
Only mild side effects related to VGV-1 have been noted by physical exam, subjective
complaints from patients, or routine blood work during any of the trials. Last year we announced
the results of our human clinical trial of VGV-1 in South Africa. This study  the TNP001
Study  was authorized by the South African Medicines Control Council (MCC) in
February 2004. It was a multi-center, randomized, double-blind, placebo-controlled study
of VGV-1 treated HIV-infected subjects with CD4+ cell counts of 250-500. We completed
enrollment of 137 subjects. The primary endpoint for the study was the decrease in viral
load as measured by PCR-RNA assay. Other endpoints include CD4+ cell counts, PBMC culture
assays and certain immune markers. Patients received 16 intra-muscular injections over a
51-day period, and were followed up after treatment to day 240. The study was
administered by Virtus Clinical Development Services, a leading South African contract
research organization. The results of the
TNP001 Study indicated statistically significant reductions in viral load (the amount of
HIV in the blood) in some patients. The study also indicates there may be a mechanism of
action that is markedly different than existing HIV therapies. During the study,
statistically significant reductions in viral load were seen in 22% of patients overall
that were equivalent to a 70% decrease in the amount of virus in the blood at day 150
(approximately three months after treatment). Further, patients who began TNP001 with
reduced immune function (CD4+ cell count below 300) did best on VGV-1. Of the patients
that started the study with lower CD4+ counts, 36% had a 0.5 log (70%) or greater drop in
viral load at day 150 and 25% had this result at day 240. CD4+ cells are a key element in
the formation of an immune response to viruses and other foreign bodies. Reducing HIV
viral load is the only known way to delay disease progression. In summary, we view
these results as confirming the biological activity and antiviral properties of VGV-1,
its apparently higher degree of efficacy in sicker patients, and the lack of safety or
toxicity issues associated with receiving it, while suggesting that the optimal dosing of
the product has not yet been identified. We intend to focus on these areas  dose
optimization and later-stage AIDS patients  going forward. Optimization of the
dose requires the precise manipulation of concentrations of the active ingredients and an
understanding of the mechanism by which the ingredients create an antiviral or
immune-modulating effect. Our preclinical studies of the active components of TNP are an
important aspect of this line of research, and our identification of the peptides is a
crucial first step. The next steps will include confirming the peptides identities using
additional methods, as well as studying their interactions with the HIV virus and immune
cells important in combating HIV infection. It is our goal to achieve a more complete and
specific understanding of how the observed antiviral effect is caused, improve it by
modifying the dose, and initiate US human clinical trials using the optimized regimen. HIV and AIDS According to the 2006
AIDS Epidemic Update published by UNAIDS, approximately 39.5 million people are currently
believed to be HIV positive worldwide. AIDS is the leading cause of death in Africa and
the fourth leading cause globally. The means of making available effective treatment to
the majority of people with HIV/AIDS is an urgent issue of global significance. In most developed
countries, HIV infection is primarily treated through HAART. Where it has succeeded,
HAART has altered the nature of HIV infection, transforming an almost uniformly fatal
illness into a chronic, but apparently stable condition. According to Rapid Report, XIII
International HIV Drug Resistance Workshop, June 2004, an 6




estimated 70% of those
receiving HAART are resistant to one or more classes of the antiretroviral drugs
comprising HAART, and 11-18% are resistant to three of the major classes. In the poorer nations
of the world, simpler versions of combination therapy with fewer, older versions of
antiretroviral drugs are used. However most HIV infected patients worldwide receive no
antiviral medication. In Sub-Saharan Africa it is estimated by UNAIDS that HAART is
available to 23% of people with HIV. In 2006, an estimated 2.1 million deaths due to AIDS
resulted in Africa. An estimated 90% of the 5 to 6 million people in low-income countries
who require treatment to avoid dying within the next two years are not receiving it. Even where treatment
is available its use is complicated by a number of factors, including moderate to severe
side effects, onerous and complex dosing regimens, drug-drug interactions, and the
development of mutated drug-resistant strains of the virus. In addition, these drugs are
generally quite expensive, although discounted generic versions of antiretroviral drugs
are becoming available in African and certain parts of Asia. Notwithstanding this, the
often debilitating side effects of such therapies and the undiscounted cost of
medications required to alleviate side effects are costly in their own right. Thus,
development of new and inexpensive therapeutics with simple dosing regimens, lower levels
of toxicity, and lower resistance profiles is an extremely important task and represents
a clear market opportunity. 2006 Research & Development Viral Genetics spent
$1,769,373 on development of its drug candidates in calendar year 2006, compared to
$561,399 in 2005. We estimate we will spend $750,000 in 2007 on product testing and
development. Joint Ventures, Business Relationships
and Distribution South Africa On December 15, 2004,
we entered into a Distribution Management Agreement with Timothy & Thomas LLC, (T&T) an
Illinois limited liability company, with an effective date of July 1, 2004 (the Distribution
Agreement). The owners of T&T are a former director of Viral Genetics and a former
creditor of Viral Genetics. This Distribution Agreement replaces and supersedes the prior
agreements with T&T that were referred to in our reports on Form 10-QSB for the quarters
ended September 30, 2004, and June 30, 2004. The Distribution
Agreement granted to T&T the exclusive right to establish, appoint, and manage
distribution and sub-distribution of all Viral Genetics products that are used or useful
for the prevention or treatment of HIV and/or AIDS in continental Africa and certain
island nations off the coast of Africa. The term of the Distribution Agreement is 20
years. In consideration for these rights, T&T made a payment of $650,000 in cash to Viral
Genetics, surrendered for cancellation a convertible debenture in the principal amount of
$200,000 originally issued in the name of Thomas Little, and agreed to pay expenses of
the ongoing clinical trial up to a maximum threshold amount beyond which we are
responsible for 50% of expenses. Additional expenses related to the establishment of
distribution in Africa over and above the South African clinical trial will also be
shared by T&T and the Company. On April 3, 2006, T&T filed
a complaint against Viral Genetics in the United States District Court for the Northern
District of Illinois, case No. 0601813. The complaint alleges that Viral Genetics made
false statements regarding its ownership of certain intellectual property rights to the
drug candidate for the treatment of HIV/ AIDS that is the subject of the Distribution
Agreement and that Viral Genetics did not have the right to grant the distribution rights
to T&T under the Distribution Agreement because of rights T&T alleges were held by
another party. The complaint seeks damages in excess of $5 million. Viral Genetics denies
all of the substantive allegations unequivocally, has filed an answer to the complaint
denying the substantive allegations, and asserted counterclaims that it believes it has
against T&T for breach of the Distribution Agreement. Until the litigation
is resolved, there is uncertainty as to our ability to enter into other arrangements for
advancing VGV-1 to distribution and commercialization in Africa.  The parties are
pursuing discovery in the case, and at this time we cannot predict the potential outcome
of the proceeding. 7




Latin America In 2007 we entered
into agreements with various parties related to the establishment of a distribution and
development joint venture intended to focus on the pursuit of clinical development,
registration, and distribution of our products in South America, Central America, Mexico,
and the Caribbean. Under the general terms of the agreements, we have agreed to transfer
certain rights to develop and distribute our products in the regions listed above in
return for a royalty and certain lump sum cash payments.  We are in the process of
finalizing the structure and documentation of this relationship, and we expect to
complete it in the second quarter of 2007. Manufacturing and Raw Materials The Company has
historically produced VGV-1 for clinical trials and testing purposes in-house or through
a subcontracted manufacturer, and will continue to use a combination of these resources
for future requirements of VGV-1 for preclinical research or clinical trials. The
production of larger, commercial-scale batches will require capital investment in our
Azusa facility to increase capacity. Proprietary Rights In the aggregate,
considering the vigorous competition among drug manufacturers and the competition we
might expect should any of our drug candidates prove to be accepted, our patent and
related intellectual property rights are important to our proposed business in the United
States and other countries. The patent rights we consider significant in relation to our
business as a whole are in part covered by U.S. patent application number 10/336512,
Compositions and Methods for Detecting and Treating Immunodeficiency Syndrome, which is
now pending. We are continually evaluating whether additional applications may be
appropriate to protect extensions and variations of our product, have filed additional
and new applications related thereto. Other international patents we consider significant
to our business are those issued by or pending in South Africa, New Zealand, Canada,
Bulgaria, the European Patent Office (Austria, Switzerland, Germany, Denmark, Spain,
France, Great Britain, Ireland, Italy, Liechtenstein, Monaco, Netherlands), Brazil,
Japan, China, Hong Kong Eurasian Patent Convention (Armenia, Azerbaijan, Belarus,
Kazakhstan, Kyrgyzstan, Moldova, Russia, Tajikistan, Turkmenistan). Under international
agreements in recent years, global protection of intellectual property rights is
improving. The General Agreement on Tariffs and Trade requires participant countries to
amend their intellectual property laws to provide patent protection for pharmaceutical
products by the end of a ten-year transition period. A number of countries are doing
this. Patent protection in other countries where we have registered patents, including,
the European Patent Office, The Eurasian Patent Organization, New Zealand, Australia, and
Israel, extend for varying periods according to the date of patent filing or grant and
the legal term of patents in the various countries where patent protection is obtained.
The actual protection afforded by a patent, which can vary from country to country,
depends upon the type of patent, the scope of its coverage and the availability of legal
remedies in the country. The expiration of a
product patent or loss of patent protection resulting from a legal challenge would be
expected to result in significant competition from generic products against the covered
product and, particularly in the U.S., could result in a significant reduction in sales
of the pioneering product. If we were to lose patent protection, we may be able to
continue to obtain commercial benefits from product manufacturing trade secrets, patents
on use of our product, and patents on processes and intermediates for the economical
manufacture of the active ingredients. The effect of product patent expiration or loss
also depends upon the nature of the market and the position of the product in it, the
growth of the market, the complexities and economics of manufacture of the product, and
the requirements of generic drug laws. With respect to
proprietary know-how and products and processes for which patents are of questionable
value or are difficult or impossible to obtain or enforce, we rely on confidentiality
agreements and other trade secret protection measures to protect our interests. We take
measures to protect our proprietary know-how and technologies and confidential data,
including requiring all employees, consultants and customers to enter into
confidentiality agreements. In arrangements with our customers or suppliers that require
the sharing of processes and data, our policy is to make available only such data as is
relevant to our agreements with such customers and suppliers, subject to appropriate
contractual restrictions, including requirements for them to maintain confidentiality and
use such processes and data solely for our benefit. However, such measures may not
adequately protect our data. 8




Competition Competition is intense
in the pharmaceutical business and includes many large and small competitors.
Technological innovations affecting efficacy, safety, patient ease of use, and cost
effectiveness by other pharmaceutical companies with greater financial and research
resources working on competitive products could result in products that offer the same or
similar benefits as our products. We intend to compete with existing products on the
basis of product quality and efficacy, product safety, economic benefit, and/or promotion
directly and through distributor relationships we are now forming. There are currently 27
drugs approved for the treatment of HIV-infection by the United States FDA. The three
primary classes of treatment are Nonnucleoside Reverse Transcriptase Inhibitors (NNRTIs);
Nucleoside Analog Reverse Transcriptase Inhibitors (NRTIs), and Protease Inhibitors (PIs).
Fusion or Entry Inhibitors are a newer, less commonly-used class of anti-HIV medications.
There are an estimated 50-60 HIV treatments under various stages of development worldwide. HAART is the standard
of care for HIV. HAART slows multiplication of the virus and delays the onset of AIDS,
but does not cure HIV infection or cure AIDS. HAART drug regimens are complex, often
requiring 10 or more pills a day; expensive, costing upwards of $10,000-$15,000 per
patient per annum in the United States; and are associated with moderate to severe
gastro-intestinal, neurological, and hematological side effects that adversely impact the
patients quality of life. Furthermore, HIV patients who use the drugs for a long period
of time tend to develop resistance to the drugs, resulting in the drugs becoming less
effective and engendering resistant strains of the HIV virus. Studies indicate that 70%
of patients receiving standard HAART are resistant to one or more of the primary classes
of HIV/AIDS drugs and 11-18% are resistant to all three primary classes of
antiretrovirals (Source: Rapid Report, XIII International HIV Drug Resistance Workshop,
June 2004). It is estimated by
UNAIDS that approximately 50% of the estimated 940,000 to 2.23 million HIV positive
patients in the USA and Western Europe are receiving HAART. Based on estimates of drug
resistance, we estimate the size of the market for salvage therapies in these regions to
be approximately 50,000 to 200,000. Given growth in the number of HIV cases overall,
increased usage of HAART, and continued development of resistance, we expect this
population to continue to grow for the foreseeable future. Newer formulations of HAART,
newer drugs within the 3 primary classes, and newer classes of drugs such as Fusion or
CCR5 Inhibitors present competition for VGV-1, should it be approved. However, all
current approaches to HIV treatment are believed to create resistance by their very
nature, and we believe that an approach with success in resistant patients that is less
likely itself to create resistance possesses a competitive advantage. Government
Regulation Drug development is
time consuming, expensive, and unpredictable. On average, only one out of many thousands
of chemical compounds discovered by researchers proves to be both medically effective and
safe enough to become an approved medicine. The process from discovery to regulatory
approval can take many years; the FDA estimates an average of eight and a half years for
this process. Drug candidates can fail at any stage of the process. Candidates may not
receive regulatory approval even after many years of research, and products that have
been approved and marketed can be ordered to be withdrawn from the market by regulatory
authorities. Pharmaceutical
companies are subject to extensive regulation by numerous national, state and local
agencies. Of particular importance is the FDA in the United States. It has jurisdiction
over virtually all of our business and administers requirements covering the testing,
safety, effectiveness, approval, manufacturing, labeling, marketing, advertising and
post-marketing surveillance of our pharmaceutical products. The typical path of
drug development in the USA is to file an IND, which includes comprehensive data related
to the toxicity and pharmacology of the drug candidate. In most cases, this data will
have been obtained through animal testing, although in some cases it will include human
testing data from outside the USA. Typically, if the candidate is deemed to be free of
major harmful side effects or has an acceptable level of side effects, is a
well-characterized substance, and its functioning is reasonably well understood, the FDA
will grant permission to conduct a Phase I human clinical trial provided that the sponsor
adhere to certain ethical principles. Phase I trials involve relatively small numbers of
subjects (usually 20-80) and are intended to establish the safety of the candidate in
humans, determine safe dosage ranges, and identify side effects. A Phase I human clinical
trial typically requires less than a year to complete although there are exceptions. 9




Following successful
Phase I trials, the candidate will typically be tested in a Phase II human clinical
trial. A Phase II trial is intended to further establish the safety of the candidate, as
well as obtain certain data related to the efficacy of the candidate. The number of
subjects tested is usually 100-300, although sample sizes vary on a case by case basis.
Sometimes, more than one Phase II trial can be required. Successful completion of Phase
II trials is sometimes referred to as proof of concept. It is at this point, prior to
Phase III, that many drug development companies seek to license the drug candidate or
joint venture. Finally, following
successful Phase II trials, a drug typically moves on to Phase III trials which are very
large and expensive studies in which usually 1,000-3,000 subjects are tested at a number
of locations in an attempt to establish the statistically significant efficacy of the
candidate, to further monitor side effects and to compare the candidate against existing
approved treatments. Following a successful Phase III study, the sponsor of the candidate
will file a New Drug Application (NDA) or Biologics License Application (BLA),
depending on the nature of the drug candidate, seeking permission to market the product
in the USA. The FDA generally
requires the collection of data following such approval, and this is typically referred
to as Phase IV. According to the FDAs
Guidelines for Industry: Acceptance of Foreign Clinical Trials, the results from human
clinical trials conducted outside of the United States but not under an IND can be
included in submissions to the FDA if the trials were conducted in accordance with the
ethical principles of the Declaration of Helsinki. The trial must also be designed and
implemented to be otherwise consistent with the FDAs standards of clinical practice. According to the FDAs
guidance document Antiretroviral Drugs Using Plasma HIV RNA Measurements  Clinical
Considerations for Accelerated and Traditional Approval, the FDA has developed a
systematic approach to the evaluation of HIV therapies. Treatments seeking accelerated
approval must demonstrate a significant reduction in RNA viral load (PCR is one means of
detecting HIV RNA) within a 24-week period, whereas treatments seeking traditional
approval must demonstrate significant reduction in RNA viral load over a 48 week period.
The FDA also considers changes in CD4+ counts consistent with observed HIV RNA changes in
both approval processes. A treatment may be
considered for accelerated approval if it is targeting a serious or life-threatening
disease, there is a testable indicator that is predictive of clinical benefit (such as
HIV RNA in the case of HIV infection) and there must be a demonstrable improvement in
activity relative to existing therapies in a population in need of additional therapeutic
options. Other bases for accelerated approval include a novel mechanism of action,
improved efficacy or safety or tolerability, more convenient dosing schedule, different
cross-resistance profile, favorable drug-drug interaction profile, or utility in a
specific population in need. The majority of accelerated approvals rely on safety data
for 400-500 patients who have received the proposed marketing dose for at least 6 months.
Further, efficacy data must include at least 2 well-designed and controlled studies a
minimum of 24 weeks in length. If granted accelerated approval, the FDA usually requires
that the treatment be studied continuously to monitor side effects, adverse events, and
longer term clinical benefit. In connection with preparing our IND for the FDA, we will
evaluate whether to pursue the accelerated approval process for VGV-1. Since 1998, the
approval of new drugs across the European Union (EU) is possible only using the
European Medicines Evaluation Agencys (EMEA) mutual recognition or central approval
processes. The use of either of these procedures provides a more rapid and consistent
approval within the member states than was the case when the approval processes were
operating independently within each member state. In addition, the agreement between the
EU and 12 other European states to base their approvals on the centralized EU approval
will significantly speed the regulatory process in those countries. The EMEA does not,
however, have jurisdiction over patient reimbursement or pricing matters in EU member
countries. We will be required to deal with individual countries on such issues. In South Africa, the
study and approval of drugs comes under the authority of the Medicines Control Council or
MCC. The MCC evaluates drugs for safety and efficacy in general compliance with ICH
guidelines adopted by most of the worlds developed nations. In recent years in the
US, various legislative proposals have been offered at the federal and state levels that
would bring about major changes in the affected health care systems. Some states have
passed such legislation, and further federal and state proposals are possible. Such
proposals and legislation include, and future proposals could include, price or patient
reimbursement constraints on medicines, increases in required rebates or discounts and
restrictions on access to certain products. Similar issues exist in many foreign
countries where we may do business. 10




We cannot predict the
outcome of such initiatives, but we will work to maintain patient access to our products
and to oppose price constraints. In the US federal
proposals have called for substantial changes in the Medicare program, and federal and
state proposals have called for substantial changes in the Medicaid program. If such
changes are enacted, they may require significant reductions from currently projected
government expenditures for these programs. Driven by budget concerns, Medicaid managed
care systems have been implemented in many states. If the Medicare and Medicaid programs
implement changes that restrict the access of a significant population of patients to our
products, our business could be materially affected. On the other hand, relatively little
pharmaceutical use is currently covered by Medicare. If changes to these programs shift
patients to managed care organizations that cover pharmaceuticals, or if an outpatient
drug benefit is added to Medicare, usage of pharmaceuticals could increase. Pressure to
lower prices would likely ensue in either case given the enhancement of the purchasing
power of the managed care organizations or the federal government. US law requires us to
give rebates to state Medicaid agencies based on each states reimbursement of
pharmaceutical products under the Medicaid program. Some states are seeking rebates in
excess of the amounts required by federal law. We also must give discounts or rebates on
purchases or reimbursements of pharmaceutical products by certain other federal and state
agencies and programs. Rebates potentially could be viewed as price discounts without
appreciable increases in volume as an offset. We will encounter
similar regulatory and legislative issues in most other countries. In Europe and some
other international markets, the government provides health care at low direct cost to
consumers and regulates pharmaceutical prices or patient reimbursement levels to control
costs for the government-sponsored health care system. This international patchwork of
price regulation has led to inconsistent prices and could lead to some third-party trade
in our products from markets with lower prices. Such trade exploiting price differences
between countries could undermine our sales in markets with higher prices. Human
Resources We presently have
seven employees and full-time consultants, including two executive officers. The Company
also relies on consulting and advisory relationships with several individuals and firms
where a full-time person is not warranted. Risks
Associated With Our Business Notwithstanding our
efforts to foresee and mitigate the effects of changes in our business and industry, we
cannot predict with certainty all potential changes that might affect our business.
Consequently, our business is subject to a number of risks, some of which are as follows. We
have a history of operating losses. We expect to incur net losses and we may never
achieve or maintain profitability. We have not been
profitable since our inception. We reported net losses of approximately $12 million and
$5 million for the years ended 2006 and 2005, respectively. As of December 31, 2006, we
had an accumulated deficit of approximately $54.6 million. We have not generated any
revenue from product sales or royalties from product sales to date, and it is possible
that we will never have significant product sales revenue or royalty revenue. We expect
to continue to incur losses for at least the next several years as we and our
collaborators pursue clinical trials and research and development efforts. To become
profitable, we, either alone or with our collaborators, must successfully develop,
manufacture, and market our current product candidates, particularly VGV-1, as well as
continue to identify, develop, manufacture, and market new product candidates. It is
possible that we will never have significant product sales revenue or receive significant
royalties on our licensed product candidates. We
may need additional financing, but our access to capital funding is uncertain. Our current and
anticipated operations, particularly our product development and commercialization
programs for VGV-1, require substantial capital, which we have not yet obtained. We are
now seeking funding for our 2007 planned operations.  However, these and future capital
needs will depend on many factors, including the extent to which we enter into
collaboration agreements with respect to any of our proprietary product candidates and
make progress in our internally funded research, development and commercialization
activities. Our capital requirements 11




will also depend on
the magnitude and scope of these activities, our ability to maintain existing and
establish new collaborations, the terms of those collaborations, the success of our
collaborators in the future to develop and market products under their respective
collaborations with us, our success in producing clinical and commercial supplies of our
product candidates on a timely basis and in sufficient quantities to meet our
requirements, competing technological and market developments, the time and cost of
obtaining regulatory approvals, the extent to which we choose to commercialize our future
products through our own sales and marketing capabilities, and the cost of preparing,
filing, prosecuting, maintaining and enforcing patent and other rights. We do not have
committed external sources of funding, and we cannot assure you that we will be able to
obtain additional funds on acceptable terms, if at all. If adequate funds are not
available, we may be required to: 
     Engage in equity financings that would be dilutive to current stockholders;
     Delay, reduce the scope of, or eliminate one or more of our development programs;
     Obtain funds through arrangements with collaborators or others that may require us to relinquish rights to
      technologies, product candidates or products that we would otherwise seek to develop or commercialize
        ourselves; or
     License rights to technologies, product candidates, or products on terms that are less favorable to us
        than might otherwise be available. If funding is
insufficient at any time in the future, we may not be able to develop or commercialize
our products, take advantage of business opportunities or respond to competitive
pressures. Failure
of T&T to obtain government approvals and implement distribution could affect our ability
to sell product in Africa and adversely affect results of operations. Under the Distribution
Agreement with T&T we would be reliant on the efforts of T&T to pursue clinical testing
and governmental approvals and to establish distribution arrangements in all of Africa.
Africa represents a major market for VGV-1 because of the epidemic proportions of HIV and
AIDS in Africa. The relationship with T&T deteriorated in 2006 to the point that a law
suit was filed by T&T in April 2006 against Viral Genetics alleging misrepresentations
were made in connection with the Distribution Agreement. Although Viral Genetics believes
the claims are without merit, the fact remains that the conflict between the parties
could have an adverse effect on establishing distribution of VGV-1 in Africa. Assuming
Viral Genetics is able to obtain regulatory approvals for distribution of VGV-1 in one or
more African nations, the ongoing dispute with T&T could effectively prevent Viral
Genetics from taking advantage of the opportunity until the dispute is resolved, which
would likely have an adverse impact on our results of operations and financial condition. We
have not developed any commercial drugs, and we may never develop any commercial drugs or
products that generate revenues. Our existing product
candidates will require significant additional development, clinical trials, regulatory
clearances and additional investment before they can be commercialized. Our product
development efforts may not lead to commercial drugs for a number of reasons, including
the failure of our product candidates to be safe and effective in 12




clinical trials or
because we have inadequate financial or other resources to pursue the programs through
the clinical trial process. We do not expect to be able to market VGV-1 for at least a
year or longer, if at all. We
are substantially dependent on our ability to successfully and timely complete clinical
trials and obtain regulatory approval to market our most advanced product candidate,
VGV-1. Our business will be materially harmed and our stock price adversely affected if
regulatory approval is not obtained with respect to this product candidate. We completed a
clinical trial in South Africa designated Phase III by the South African Medicines
Control Council. We hope to file an IND with the FDA in 2007. We are also conducting
other laboratory testing and research to support the filing of the IND. Our success will
depend, to a great degree, on our ability to obtain the requisite regulatory approval to
market VGV-1, initially overseas and then in the US. The process of obtaining regulatory
approvals is costly, time consuming, uncertain, and subject to unanticipated delays. In
order to obtain the necessary regulatory approval, we must demonstrate with substantial
evidence from well-controlled clinical trials and to the satisfaction of the applicable
regulatory reviewing agency that VGV-1 is both safe and efficacious. While we have
completed clinical trials in China, Mexico, Bulgaria, and South Africa, there is no
assurance that any regulatory agency will accept and rely on the results of these studies
and determine that the applicable regulatory requirements for approval have been met. We
cannot predict the ability of our third party service providers to collect the data from
our trials with VGV-1, analyze the data, and deliver their final reports to us. There may
be significant delays in this process. Regulatory authorities may require additional
testing for safety and efficacy, which would result in a substantial delay in the
regulatory approval process. If we fail to successfully obtain regulatory approvals for
VGV-1 or we face significant delays, our business will be materially harmed and our stock
price will be adversely affected. We
intend to establish a manufacturing facility for VGV-1 used in our clinical trials and
planned for use in our commercial launch of our products. Product introductions may be
delayed or suspended and commercial sales may be restricted, if the manufacture of our
products is delayed or interrupted. We do not have
manufacturing capacity to produce sufficient supplies of VGV-1 to support commercial
launch of this product, if approved overseas for distribution. Our existing facility is
sufficient only for small batches of product and requires additional equipment to
increase our capacity. If we encounter delays or difficulties in funding the acquisition
of this equipment, we may not have sufficient production capacity to support commercial
launch of our product overseas, if approved. We depend on various
suppliers to supply the bovine thymus gland material we use to produce VGV-1. We believe
these suppliers can produce sufficient material to support initial commercial launch of
VGV-1 overseas, if approved. While we believe there are a number of alternative sources
for this material, it is possible that the failure of these suppliers to supply thymus
gland material as needed for manufacturing of VGV-1 would cause a disruption of the
production schedule until alternative sources are located and material from these sources
delivered on a schedule that meets our production obligations. Any such disruptions, if
they continue too long, could materially harm our business and financial condition. Clinical
trials are long, expensive and uncertain processes and overseas regulators and the FDA
may ultimately not approve any of our product candidates. We cannot assure you that data
collected from preclinical studies and clinical trials of our product candidates will be
sufficient to support approval by overseas regulators or the FDA, the failure of which
could delay our profitability and adversely affect our stock price. All of our research
and development programs are at an early stage, except for the human clinical trials on
VGV-1 conducted overseas. Clinical trials are long, expensive, and uncertain processes.
Clinical trials may not be commenced or completed on schedule, and government regulators
may not ultimately approve our product candidates for commercial sale. Further, even if
the results of our preclinical studies or clinical trials are initially positive, it is
possible that we will obtain different results in the later stages of drug development or
that results seen in clinical trials will not continue with longer-term treatment. Drugs
in late stages of clinical development may fail to show the desired safety and efficacy
traits despite having progressed through initial clinical testing. For example, positive
results in early Phase I or Phase II clinical trials may not be repeated in larger Phase
II or Phase III clinical trials. All of our potential drug  candidates are prone to the
risks of failure inherent in drug development. The clinical trials of any of our drug
candidates, including VGV-1, could be unsuccessful, which would prevent us from 13




commercializing the
drug. Our failure to develop safe, commercially viable drugs would substantially impair
our ability to generate revenues and sustain our operations and would materially harm our
business and adversely affect our stock price. If
we fail to maintain our existing or establish new collaborative relationships, or if our
collaborators do not devote adequate resources to the development and commercialization
of our licensed drug candidates, we may have to reduce our rate of product development
and may not see products brought to market or be able to achieve profitability. Our primary strategy
for distributing our products is to enter into various relationships with other firms or
companies overseas with the resources to pursue the process of obtaining regulatory
approvals and implement marketing and distribution. We have not settled on any strategy
for distribution in the US and do not expect to formulate a strategy until an IND is
approved and/or clinical trials in the US have progressed. We have granted exclusive
commercialization and marketing rights to T&T in Africa and will likely establish similar
arrangements for other parts of the world. T&T has, and our other collaborators will
likely have, substantial control over those efforts in their territories and the
resources they commit to the programs, except for initial funding requirements imposed on
our collaborators to fund the regulatory approval process. Accordingly, the success of
the commercialization of our products in those territories substantially depends on their
efforts and is to a degree beyond our control. For us to receive any significant revenues
from sale of our products, our collaborators must advance drugs through clinical trials,
establish the safety and efficacy of our drug candidates, obtain regulatory approvals and
achieve market acceptance of those products. As a result, if a collaborator elects to
terminate its efforts, our ability to commercialize our products in the collaborators
territory may be significantly impaired. Because
of the uncertainty of pharmaceutical pricing, reimbursement, and healthcare reform
measures, we may be unable to sell our products profitably. The availability of
reimbursement by governmental and other third-party payors affects the market for any
pharmaceutical product. These third-party payors continually attempt to contain or reduce
the costs of healthcare. There have been a number of legislative and regulatory proposals
to change the healthcare system and further proposals are likely. Significant uncertainty
exists with respect to the reimbursement status of newly approved healthcare products. In
addition, third-party payors are increasingly challenging the price and
cost-effectiveness of medical products and services. We might not be able to sell our
products profitably or recoup the value of our investment in product development if
reimbursement is unavailable or limited in scope. As
a result of intense competition and technological change in the pharmaceutical industry,
the marketplace may not accept our products, and we may not be able to complete
successfully against other companies in our industry and achieve profitability. Many of our
competitors have drug products that have already been approved or are in development, and
operate large, well-funded research and development programs in these fields. Many of our
competitors have substantially greater financial and management resources, superior
intellectual property positions and greater manufacturing, marketing and sales
capabilities, areas in which we have limited or no experience. In addition, many of our
competitors have significantly greater experience than we do in undertaking preclinical
testing and clinical trials of new or improved pharmaceutical products and obtaining
required regulatory approvals. Consequently, our competitors may obtain FDA and other
regulatory approvals for product candidates sooner and may be more successful in
manufacturing and marketing their products than we or our collaborators. Existing and future
products, therapies and technological approaches will compete directly with the products
we seek to develop. Current and prospective competing products may provide greater
therapeutic benefits for a specific problem, may offer easier delivery or may offer
comparable performance at a lower cost. Any product candidate that we develop and that
obtains regulatory approval must then compete for market acceptance and market share. Our
product candidates may not gain market acceptance among physicians, patients, healthcare
payors and the medical community. Further, any products we develop may become obsolete
before we recover any expenses we incurred in connection with the development of these
products. As a result, we may never achieve profitability. 14




We
may be unable to obtain patents to protect our technologies from other companies with
competitive products, and patents of other companies could prevent us from manufacturing,
developing or marketing our products. The patent positions
of pharmaceutical and biotechnology firms are uncertain and involve complex legal and
factual questions. The U.S. Patent and Trademark Office has not established a consistent
policy regarding the breadth of claims that it will allow in biotechnology patents. If it
allows broad claims, the number and cost of patent interference proceedings in the U.S.
and the risk of infringement litigation may increase. If it allows narrow claims, the
risk of infringement may decrease, but the value of our rights under our patents,
licenses and patent applications may also decrease. In addition, the scope of the claims
in a patent application can be significantly modified during prosecution before the
patent is issued. Consequently, we cannot know whether our pending applications will
result in the issuance of patents or, if any patents are issued, whether they will
provide us with significant proprietary protection or will be circumvented, invalidated,
or found to be unenforceable. Until recently, patent applications in the United States
were maintained in secrecy until the patents issued, and publication of discoveries in
scientific or patent literature often lags behind actual discoveries. Patent applications
filed in the United States after November 2000 generally will be published 18 months
after the filing date unless the applicant certifies that the invention will not be the
subject of a foreign patent application. We cannot assure you that, even if published, we
will be aware of all such literature. Accordingly, we cannot be certain that the named
inventors of our products and processes were the first to invent that product or process
or that we were the first to pursue patent coverage for our inventions. Our commercial success
depends in part on our ability to maintain and enforce our proprietary rights. If third
parties engage in activities that infringe our proprietary rights, our managements focus
will be diverted and we may incur significant costs in asserting our rights. We may not
be successful in asserting our proprietary rights, which could result in our patents
being held invalid or a court holding that the third party is not infringing, either of
which would harm our competitive position. In addition, we cannot assure you that others
will not design around our patented technology. Moreover, we may have
to participate in interference proceedings declared by the United States Patent and
Trademark Office or other analogous proceedings in other parts of the world to determine
priority of invention and the validity of patent rights granted or applied for, which
could result in substantial cost and delay, even if the eventual outcome is favorable to
us. We cannot assure you that our pending patent applications, if issued, would be held
valid or enforceable. Additionally, many of our foreign patent applications have been
published as part of the patent prosecution process in such countries. Protection of the
rights revealed in published patent applications can be complex, costly and uncertain. We also rely on trade
secrets, know-how and confidentially provisions in our agreements with our collaborators,
employees and consultants to protect our intellectual property. However, these and other
parties may not comply with the terms of their agreements with us, and we might be unable
to adequately enforce our rights against these people or obtain adequate compensation for
the damages caused by their unauthorized disclosure or use. Our trade secrets or those of
our collaborators may become known or may be independently discovered by others. Our
products and product candidates may infringe the intellectual property rights of others,
which could increase our costs and negatively affect our profitability. Our success also
depends on avoiding infringement of the proprietary technologies of others. In
particular, there may be certain issued patents and patent applications claiming subject
matter that we or our collaborators may be required to license in order to research,
develop or commercialize our product candidates. In addition, third parties may assert
infringement or other intellectual property claims against us based on our patents or
other intellectual property rights. An adverse outcome in these proceedings could subject
us to significant liabilities to third parties, require disputed rights to be licensed
from third parties or require us to cease or modify our use of the technology. If we are
required to license such technology, we cannot assure you that a license under such
patents and patent applications will be available on acceptable terms or at all. Further,
we may incur substantial costs defending ourselves in lawsuits against charges of patent
infringement or other unlawful use of anothers proprietary technology. 15




We
are subject to extensive government regulations that may cause us to cancel or delay the
introduction of our products to market. Our research and
development activities and the clinical investigation, manufacture, distribution and
marketing of drug products are subject to extensive regulation by governmental
authorities in the United States and other countries. Prior to marketing in the United
States, a drug must undergo rigorous testing and an extensive regulatory approval process
implemented by the FDA under federal law, including the Federal Food, Drug and Cosmetic
Act. To receive approval, we or our collaborators must, among other things, demonstrate
with substantial evidence from well-controlled clinical trials that the product is both
safe and effective for each indication where approval is sought. Depending upon the type,
complexity and novelty of the product and the nature of the disease or disorder to be
treated, that approval process can take several years and require substantial
expenditures. Data obtained from testing are susceptible to varying interpretations that
could delay, limit or prevent regulatory approvals of our products. Drug testing is
subject to complex FDA rules and regulations, including the requirement to conduct human
testing on a large number of test subjects. We, our collaborators or the FDA may suspend
human trials at any time if a party believes that the test subjects are exposed to
unacceptable health risks. We cannot assure you that any of our product candidates will
be safe for human use. Other countries also have extensive requirements regarding
clinical trials, market authorization and pricing. These regulatory schemes vary widely
from country to country, but, in general, are subject to all of the risks associated with
United States approvals. If any of our products
receive regulatory approval, the approval will be limited to those disease states and
conditions for which the product is safe and effective, as demonstrated through clinical
trials. In addition, results of pre-clinical studies and clinical trials with respect to
our products could subject us to adverse product labeling requirements which could harm
the sale of such products. Even if regulatory approval is obtained, later discovery of
previously unknown problems may result in restrictions of the product, including
withdrawal of the product from the market. Further, governmental approval may subject us
to ongoing requirements for post-marketing studies. Even if we obtain governmental
approval, a marketed product, its respective manufacturer and its manufacturing
facilities are subject to unannounced inspections by the FDA and must comply with the FDAs
cGMP and other regulations. These regulations govern all areas of production, record
keeping, personnel and quality control. If a manufacturer fails to comply with any of the
manufacturing regulations, it may be subject to, among other things, product seizures,
recalls, fines, injunctions, suspensions or revocations of marketing licenses, operating
restrictions and criminal prosecution. Other countries also impose similar manufacturing
requirements. If
product liability claims are brought against us or we are unable to obtain or maintain
product liability insurance, we may incur substantial liabilities that could reduce our
financial resources. The clinical testing
and commercial use of pharmaceutical products involves significant exposure to product
liability claims. We have obtained limited product liability insurance coverage for our
clinical trials on humans, however, our insurance coverage may be insufficient to protect
us against all product liability damages. Further, liability insurance coverage is
becoming increasingly expensive and we might not be able to obtain or maintain product
liability insurance in the future on acceptable terms or in sufficient amounts to protect
us against product liability damages. Regardless of merit or eventual outcome, liability
claims may result in decreased demand for a future product, injury to reputation,
withdrawal of clinical trial volunteers, loss of revenue, costs of litigation,
distraction of management and substantial monetary awards to plaintiffs. Additionally, if
we are required to pay a product liability claim, we may not have sufficient financial
resources to complete development or commercialization of any of our product candidates
and our business and results of operations will be adversely affected. Our
operations involve hazardous materials and we must comply with environmental laws and
regulations, which can be expensive and restrict how we do business. Our research and
development activities may involve the controlled use of hazardous materials and other
potentially dangerous chemicals and biological agents. Although we believe our safety
procedures for these materials comply with governmental standards, we cannot entirely
eliminate the risk of accidental contamination or injury from these materials. We
currently have insurance, in amounts and on terms typical for companies in businesses
that are similarly situated, that could cover all or a portion of a damage claim arising
from our use of hazardous and other materials. However, if an accident or environmental
discharge occurs, and we are held liable for any resulting damages, the associated
liability could exceed our insurance coverage and our financial resources. Item
2.  Description of Property. Our main corporate
office, located at 1321 Mountain View Circle in Azusa, California, is leased and provides
offices, laboratory, and small scale manufacturing facilities. 16




Item
3.  Legal Proceedings. On April 3, 2006, T&T filed
a complaint against Viral Genetics in the United States District Court for the Northern
District of Illinois, case No. 0601813. The complaint alleges that Viral Genetics made
false statements regarding its ownership of certain intellectual property rights to the
drug candidate for the treatment of HIV/ AIDS that is the subject of the Distribution
Agreement and that Viral Genetics did not have the right to grant the distribution rights
to T&T under the Distribution Agreement because of rights T&T alleges were held by
another party. The complaint seeks damages in excess of $5 million. Viral Genetics denies
all of the substantive allegations unequivocally, has filed an answer to the complaint
denying the substantive allegations, and asserted counterclaims that it believes it has
against T&T for breach of the Distribution Agreement. The parties are pursuing discovery
in the case, and at this time we cannot predict the potential outcome of the proceeding. Item
4.  Submission of Matters to a Vote of Securities Holders. No matter was
submitted to a vote of security holders in the fourth calendar quarter of 2006. PART II Item
5.  Market for Common Equity and Related Stockholder Matters. Market
Information Viral Genetics common
stock is traded on the Over the Counter Bulletin Board (OTCBB) market, under the symbol
VRAL. The following quotations, as provided by the OTC Bulletin Board, Nasdaq Trading & Market
Services, represent prices between dealers and do not include retail markup, markdown or
commission. In addition, these quotations do not represent actual transactions. Calendar Quarter Ended
     High Bid ($)
     Low Bid ($)March 31, 2005
     0.50
     0.24June 30, 2005
     0.33
     0.19September 30, 2005
     0.29
     0.20December 31, 2005
     0.68
     0.18March 31, 2006
     0.86
     0.59June 30, 2006
     0.72
     0.26September 30, 2006
     0.35
     0.13December 31, 2006
     0.15
     0.07 Dividends Viral Genetics has not
paid any dividends in the past five years.  Our present intention is to retain earnings,
if any, for use in its business activities, so it is not expected that any dividends on
the common stock will be declared and paid in the foreseeable future. Security
Holders At March 31, 2007,
there were approximately 355 holders of record of the Companys common stock. The
Company made no repurchases of its common stock during the quarter ended December 31,
2006. 17




Equity
Compensation Plans Plan Category
     (a)Number of securities to beissued upon exercise of outstanding options,warrants and rights
     (b)Weighted average exercise price ofoptions, warrants andrights
     (c)Number of securities remaining available forfuture issuances underequity compensation plans(excluding securitiesreflected in column (a))Equity compensation plansapproved by stockholders
     None
     N/A
     NoneEquity compensation plans notapproved by stockholders
     10,717,600
     $0.47
     N/A *      This
figure represents options issued to officers and employees under individual compensation
arrangements. Item
6.  Managements Discussion and Analysis or Plan of Operation. Plan
of Operation Over the next year we
expect to focus on completing preclinical studies required to seek FDA approval for a
clinical trial of VGV-1, while in parallel seeking a distribution and development partner
in Africa to continue clinical development of VGV-1 in that region. In conjunction with
those efforts, which are focused on the HIV/AIDS application of TNP, we are now planning
a series of in vitro laboratory studies to examine the activity of the TNP peptides to
determine their effects against not only the HIV virus, but other viruses, human immune
system cells, bacteria, and various other pathogens. Last year we announced
the results of our human clinical trial of VGV-1 in South Africa. This study  the TNP001
Study  was authorized by the South African Medicines Control Council (MCC) in
February 2004. It was a multi-center, randomized, double-blind, placebo-controlled study
of VGV-1 treated HIV-infected subjects with CD4+ cell counts of 250-500. We completed
enrollment of 137 subjects. The primary endpoint for the study was the decrease in viral
load as measured by PCR-RNA assay. Other endpoints include CD4+ cell counts, PBMC culture
assays and certain immune markers. Patients received 16 intra-muscular injections over a
51-day period, and were followed up after treatment to day 240. The study was
administered by Virtus Clinical Development Services, a leading South African contract
research organization. The results of the
TNP001 Study showed statistically significant reductions in viral load (the amount of HIV
in the blood) in some patients and only mild adverse events attributed to the drug.  The
study also indicates there may be a mechanism of action at work that is markedly
different than existing HIV therapies. During the study, statistically significant
reductions in viral load were seen in 22% of patients overall that were equivalent to a
70% decrease in the amount of virus in the blood at day 150 (approximately three months
after treatment). Further, patients who began TNP001 with reduced immune function (CD4+
cell count below 300) did best on VGV-1. Of the patients that started the study with
lower CD4+ counts, 36% had a 0.5 log (70%) or greater drop in viral load at day 150 and
25% had this result at day 240. CD4+ cells are a key element in the formation of an
immune response to viruses and other foreign bodies. Reducing HIV viral load is the only
known way to delay disease progression. In summary, we view
these results as confirming the biological activity and antiviral properties of VGV-1,
its apparently higher degree of efficacy in sicker patients, and the lack of safety or
toxicity issues associated with receiving it, while suggesting that the optimal dosing of
the product has not yet been identified. We intend to focus on these areas  dose
optimization and later-stage AIDS patients  going forward. Optimization of the
dose requires the precise manipulation of concentrations of the active ingredients and an
understanding of the mechanism by which the ingredients create an antiviral or
immune-modulating effect. Our 18




preclinical studies of
the active components of TNP are an important aspect of this line of research, and our
identification of the peptides is a crucial first step. The next steps will include
confirming the peptides identities using additional methods, as well as studying their
interactions with the HIV virus and immune cells important in combating HIV infection. It
is our goal to achieve a more complete and specific understanding of how the observed
antiviral effect is caused, improve it by modifying the dose, and initiate US human
clinical trials using the optimized regimen. We anticipate that this series of steps,
excluding the clinical trial itself, would require 3-6 months to complete and
approximately $500,000. In March 2006 Viral
Genetics, Inc., sold convertible debentures to a limited group of investors in the
principal amount of $2,891,549 that accrue interest at the rate of 10% per annum
payable quarterly in arrears beginning October 1, 2006 (the New Debentures). The
principal amount of the New Debentures was convertible into our common stock at the
option of the holders at the rate of $0.45 of principal per share. The New Debentures
were to be repaid, at our election, in cash with a 5% premium or Viral Genetics common
stock priced at the lower of $0.45 or 80% of the market price for our common stock over a
term of 24 months beginning in October 2006. In connection with the purchase of the New
Debentures the investors also acquired warrants to purchase a total of 6,570,242 common
shares at an exercise price of $0.78 per share that expire at the end of March 2011 (the Warrants),
and unit purchase warrants to purchase an additional $2.1 million in principal amount of
New Debentures and additional Warrants to purchase 4.7 million shares of common stock
(the Unit Warrants). The investors also
acquired in March 2006 previously outstanding convertible debentures in the principal
amount of $598,450 that accrued interest at the rate of 10% per annum (the Old
Debentures). The principal amount of the Old Debentures was convertible into our common
stock at the option of the holders at the rate of $0.18 of principal per share. Viral Genetics filed a
registration statement under the Securities Act of 1933 to permit the investors to resell
the shares of common stock issuable under the New Debentures, Old Debentures, and
Warrants, which was effective in August 2006. A total of 9,695,409 shares of common stock
covered by the prospectus included in the registration statement have been issued under
the New Debentures and Old Debentures to the investors. In March 2007, the
holders of $1,968,810 in principal amount and accrued interest of the New Debentures,
$446,934 in principal amount and accrued interest of the Old Debentures, and 5,431,436
of the Warrants agreed to amend the terms of the instruments they hold to provide for the
following: 
     Change in the voluntary conversion price of the Old Debentures and the New Debentures, as well as the exercise price of the
              Warrants, to a fixed $0.08 per share.
     Removal of the monthly amortization payments from the New Debentures. All unpaid principal and accrued interest on
              these securities is due and payable by us on September 1, 2008.
     Immediate conversion of principal and interest on the Old Debentures and New Debentures at the new fixed price of
              $0.08 as follows:
     $21,096 of the Old Debentures for 263,711 shares of common stock
     $284,138  of the New Debentures for 3,551,728 shares of common stock
     Immediate exercise of Warrants in exchange for cancellation of principal and interest on the Old Debentures and New
              Debentures at the new price as follows:
     $162,796  of the Old Debentures for 2,034,957 shares of common stock
     $362,822 of the New Debentures for 4,535,285 shares of common stock
     The sum effect of the preceding four transactions is to reduce the balance we owe to the holders on the Old
              Debentures from $446,934 to $0, and to reduce the balance we owe to the holders on the New Debentures from
              $1,968,810 to $1,584,890. Therefore, in aggregate, $830,854 of principal and interest on the Old Debentures and
              the New Debentures has been exchanged or tendered for cancellation for a total of 10,385,681 shares of our common stock.
     Cancel their Unit Warrants in exchange for new common stock purchase warrants for the purchase of 5,431,436 shares at an
              exercise price of $0.15 per share that expire February 28, 2012. The holders of
$354,194 in principal amount and accrued interest of the New Debentures, $31,154 in
principal amount and accrued interest of the Old Debentures, and 994,228 of the Warrants
did not participate in the 19




restructuring
modifications described above, but the practical effect of the transactions is to
decrease the voluntary conversion price of the New Debentures and Old Debentures and
exercise price of the Warrants they hold to $0.08 per share. Viral Genetics intends to
make all future payments of principal and interest on debentures held by these persons in
cash. At December 31, 2006,
we had $0 of current assets, current liabilities of $5,846,053, and long-term liabilities
of $1,965,667. We estimate that we will need to fund approximately $750,000 of research
and development costs in the United States and South Africa, and $750,000 of
administrative expenses during 2007. Item
7.  Financial Statements. The financial
statements of Viral Genetics appear at the end of this report beginning with the Index to
Financial Statements on page 33. Item
8.  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure. On March 9, 2006,
Viral Genetics and Williams and Webster P.S. mutually agreed that the Company would
engage another firm to conduct the Companys independent audit. Williams and Webster
declined to renew the engagement because accounting firms are required by applicable
rules to rotate the audit partner responsible for the client at least every five years,
the current audit partner for the Company had come to the end of his five-year term of
responsibility, and Williams and Webster did not have another audit partner able to take
on the Company. Accordingly, on March 9, 2006, the Company also appointed Killman,
Murrell & Company, P.C. as its independent auditors to replace the firm of Williams and
Webster. With respect to the
prior engagement of Williams and Webster: (a) There have been no disputes between management and the
auditors and the auditors reports contained no adverse opinion or disclaimer of
opinion, and was not qualified or modified as to audit scope, accounting principles, or
uncertainties, except for the issue of going concern, for the last two fiscal
years or any later interim period through the date hereof. In the auditors report
for the fiscal years ended December 31, 2003 and 2004, the last two years for which the
auditor issued a report, the auditor expressed doubts about the Companys ability
to continue as a going concern. (b) The decision to change accountants from Williams and
Webster to Killman, Murrell & Company was approved by the Viral       Genetics Board of
Directors. (c) During the Viral Genetics two most recent fiscal
years and any subsequent interim period through the date of the change       in
accountants, there were no disagreements with the Williams and Webster on any matter of
accounting principles or practices,       financial statement disclosure, or auditing
scope or procedure. Viral Genetics authorized Williams and Webster to respond fully
      to the inquiries of the successor accountant. (d) Williams and Webster expressed no disagreement or
difference of opinion regarding any reportable event as that term is       defined in
Item 304(a)(1)(iv) of Regulation S-B. (e) In response to a comment letter received by Viral
Genetics from the Securities and Exchange Commission, it discussed issues       raised
therein with Killman, Murrell & Company, including the written response to the comment
letter, the application of       various accounting principles and a proposed second
written response to remaining follow up questions. As of March 9, 2006, the       date of
the change in accounting firms, Killman Murrell & Company, had not provided advice on
those issues. This was neither an       important factor nor formed any part of the
decision relating to the accounting, auditing or financial reporting issues of
      Viral Genetics. Further, this was not a factor in the decision of Williams and
Websters to decline to continue its engagement       by Viral Genetics. The discussions
with Williams and Webster concerning the SEC comment letter identified that there is a
      possibility that to resolve all comments Viral Genetics will need to make certain
adjustments to prior financial statements to       resolve the final issues outstanding
concerning certain accounting issues. Item
8A. Controls And Procedures With the participation
of management, the chief executive officer and chief financial officer of Viral Genetics
evaluated its disclosure controls and procedures as of December 31, 2006. Based on this
evaluation, the 20




chief executive
officer and the chief financial officer concluded that the disclosure controls and
procedures are effective in connection with Viral Genetics filing of its annual
report on Form 10-KSB for the year ended December 31, 2006. During the fourth
quarter of the year ended December 31, 2006, there were no significant changes in Viral
Genetics internal controls or in other factors that could significantly affect
these controls, and no significant deficiencies or material weaknesses of internal
controls that would require corrective action were identified during that period. Item
8B.  Other Information Not applicable. PART III Item
9. Directors and Executive Officers of the Registrant Directors
and Officers. The following table
sets forth the names, ages, and positions for each of the directors and officers of Viral
Genetics. Name
     Age
     Positions
     SinceHaig Keledjian
     44
     Chief Executive Officer, Chief Financial Officer, President, Secretary, and Director
     October 2001Arthur Ammann
     71
     Director
     May 2005Elizabeth Hoffman
     60
     Director
     January 2006Hampar Karageozian
     66
     Director
     October 2001Monica Ord
     44
     Senior Vice President, Corporate Development & Communications
     May 2005Arthur Keledjian
     39
     Director
     October 2001 Harry Zhabilov, Jr. resigned
as a director in April 2007.  The following is
information on the business experience of each officer and director. Haig
Keledjian Mr. Keledjian has been
instrumental in guiding the growth and development of Viral Genetics, Inc., having acted
as its Chairman, CEO and President since its 1995 founding. He has overseen the Companys
completion of 4 human clinical trials, the approval of the ongoing Phase III trial in
South Africa, the creation of the Companys global intellectual property portfolio,
and the financing of the Company including a substantial portion of his own assets. Mr.
Keledjian formerly practiced tax and estate law and litigation in the State of
California. He received his B.S. in Business and Accounting in 1983 from California State
University (Los Angeles), followed by a Masters degree in taxation (MBT) from Golden Gate
University in 1985. In 1989, Mr. Keledjian completed his undergraduate law studies by
obtaining a B.S. in law from Glendale University and in 1991 obtained his Juris Doctorate
from Glendale University. He was admitted to the bar of the State of California in 1993. 21




Arthur
Ammann Dr. S Ammann has
served since October 1999 as the President of Global Strategies for HIV, an organization
located in San Rafael, California that directs and organizes international programs for
HIV prevention, including, education and training programs for approximately 41 clinics
and hospitals in 15 countries. Since September 1998 Dr. Ammann has served as the Chairman
of International Conferences: Global Strategies for Prevention of HIV Transmission, which
organized international conferences in 1997, 1999, and 2001 on HIV education and
training. From July 1985 to the present he has served as a Professor of Pediatric
Immunology at the University of California San Francisco. Dr. Ammann earned his Bachelor
of Science degree in biology from Wheaton College (1958) and a doctor of medicine degree
from New Jersey College of Medicine (1962). He received residency training from the
department of pediatrics at the University of California, San Francisco; and completed
fellowship training in immunology at both the University of Minnesota Medical Center and
the University of Wisconsin Medical Center. Elizabeth
Hoffman Dr. Hoffman served as
President of the University of Colorado system from 2000 to 2005, and was named President
Emerita upon the completion of her 5-year tenure. She currently serves as Professor of
Economics and Public Affairs at the University of Colorado. Dr. Hoffman received a PhD.
in economics from the California Institute of Technology, a Masters and PhD. in history
from the University of Pennsylvania, and a Bachelor in history from Smith College. Dr.
Hoffmans academic career has been focused on economics, history and game theory and she
has published several dozen articles. From 2003 to 2005 she
was a member of the Board of Directors of Target Corporation. Dr. Hoffman also has a
lengthy history of experience in governance and fundraising for non-profit and academic
organizations including the Colorado Institute of Technology, the Denver Metro Chamber of
Commerce, the National Science Board, the University of Colorado Hospital, as well as a
lifetime of community service. Hampar
Karageozian Mr. Karageozian
received his Masters of Science from MIT in 1969, specializing in biochemistry, and his
MBA from the University of California, Irvine in 1977. From 1994 until 2001, he was
Senior Vice President of Discovery, Research and Development with ISTA Pharmaceuticals,
Inc. where he invented and developed three products for the treatment of various
opthamological conditions. From 1992 until 1994, Mr. Karageozian served as President and
CEO of Prima Pharmaceutical Inc., a contract manufacturer of pharmaceuticals and related
products. From 1970 until 1992, Mr. Karageozian held several progressively higher
positions at Allergan Pharmaceuticals, starting as a research chemist and ultimately
acting as Senior Vice President of Research and Development where he had responsibility
for worldwide research, development, regulatory affairs and matrix marketing for lens
care products with $400 million in total revenues. Mr. Karageozian has over 20 patents
granted and pending, as well as over 70 developed drugs and devices. During his tenure at
Allergan, Mr. Karageozian also managed regulatory and development initiatives in Europe
and the Pacific Rim. He has written or collaborated on over 25 publications. Monica
Ord Ms. Ord has been
involved in the healthcare industry for over thirteen years, including as an entrepreneur
with her own health promotion and marketing company, and as an international sales
manager. She has been active in venture capital and financial consulting with public
companies for over 5 years and also has extensive experience in recruitment of high-level
executives, advisory board members, and directors in the healthcare industry. Ms. Ord
also is active in the entertainment industry where she is currently a partner in Paradise
FX and Just Production, both based in California. Arthur
Keledjian Arthur Keledjian
obtained his B.S. in Marketing from California State University (Los Angeles) in June
1989, and has been employed by Farmers Insurance Group since then. Mr. Keledjian has also
served as a volunteer peace officer for the City of Glendale Police Department since
1996. He is the brother of Haig Keledjian. 22




Section
16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the
Securities Exchange Act of 1934 requires officers and Directors of Viral Genetics and
persons who own more than ten percent of a registered class of Viral Genetics equity
securities to file reports of ownership and changes in their ownership with the
Securities and Exchange Commission, and forward copies of such filings to Viral Genetics.
Based on the copies of filings received by Viral Genetics, during the most recent fiscal
year, the directors, officers, and beneficial owners of more than ten percent of the
equity securities of Viral Genetics registered pursuant to Section 12 of the Exchange
Act, have filed on a timely basis, all required Forms 3, 4, and 5 and any amendments
thereto. Financial
Expert The Board of directors
has not established an audit committee, so the entire Board of Directors performs the
functions associated with an audit committee, including, evaluating financial reporting
matters, monitoring internal controls, compliance with internal financial polices, and
engaging the registered independent accounting firm to audit the financial statements of
Viral Genetics.  The Board of Directors has not recruited a member who is an audit
committee financial expert within the meaning of Item 407(d)(5) of Regulation S-B.  Due
to the fact Viral Genetics is in the development stage with no operating revenue and
activities limited to research and development, the Board of Directors determined that it
is not necessary or practical for Viral/ Genetics to establish an audit committee,
recruit a financial expert to serve on the Board, or adopt an audit committee charter. Director
Nominations The Board of Directors
has not made any changes to the procedures by which security holders may recommend
nominees to our Board of Directors. Code
of Ethics Viral Genetics has
adopted a Code of Ethics applicable to its chief executive officer and chief financial
officer, a copy of which will be provided to any person, free of charge, upon request.  A
request for a copy of the Code of Ethics should be in writing and sent to Haig Keledjian,
President, Viral Genetics, Inc., 1321 Mountain View Circle, Azusa, CA 91702. Item
10. Executive Compensation Summary
Compensation Table The following table
sets forth certain summary information regarding the annual and long-term compensation
for services in all capacities to Viral Genetics for the prior fiscal years ended
December 31, 2006, 2005, and 2004 of those persons who were (i) the principal executive
officer during the last completed fiscal year (ii) the two most highly compensated
executive officers as of the end of the last completed fiscal year whose total
compensation  exceeded $100,000, and (iii) up to two additional persons who served during
2006 as executive officer, but were not serving at the end of the year, and whose total
compensation in 2006 exceeded $100,000 (collectively, the Named Executive Officers). Name and Principal Position
     Year
     Salary($)
     Bonus($)
     Award($)
     All OtherCompensation($)
     Total($)Haig Keledjian (2)
     2006
     195,000
     -0-
     -0-
     -0-
     195,000President, CEO, CFO
     2005
     195,000
     -0-
     -0-
     -0-
     195,0002004
     136,556
     -0-
     -0-
     -0-
     136,556Monica Ord
     2006
     149,200
     -0-
     -0-
     -0-
     149,200Senior Vice Pres
     2005
     146,450
     -0-
     385,750
     -0-
     146,4502004
     159,935
     -0-
     316,500
     -0-
     159,935Harry Zhabilov
     2006
     172,532
     -0-
     -0-
     (1)Former Executive Vice Pres
     2005
     195,000
     -0-
     -0-
     42,290 (1)
     237,290Research and Development (2)
     2004
     162,841
     -0-
     -0-
     32,432(1)
     195,273 (1)  Represents cash
payments made by Viral Genetics on the mortgage for the residence of Mr. Zhabilov. (2)
 Terminated December 2006. 23




Discussion
of Summary Compensation Table On June 1, 2003 Viral
Genetics entered into a written employment agreement with Haig Keledjian. The employment
agreement, (1) provides for an annual base salary of $150,000 (2) is for a term of three
years and may be renewed for additional one-year terms by agreement of the parties, (3)
entitles the employee to participate in employee benefit plans, insurance, and similar
programs adopted from time to time for full time employees, (4) provides for an annual
grant of options to purchase 1,800,000 common shares with an exercise price set at the
market price on the date of grant, (5) may be terminated by Viral Genetics for cause, as
defined in the agreement, without severance payment; and (6) may be terminated by Viral
Genetics without cause on payment of severance equal to 1 times the employees annual
base salary. On April 12, 2007, the agreement was extended until December 31, 2009. On May 1, 2005, the
Company entered into a written employment agreement with Monica Ord. The employment
agreements, (1) provides for an annual base salary of $150,000 (2) is for a term of two
years and may be renewed for additional one-year terms by agreement of the parties, (3)
entitles the employee to participate in employee benefit plans, insurance, and similar
programs adopted from time to time for full time employees, (4) provides for annual
bonuses based on certain performance targets, (5) may be terminated by Viral Genetics for
cause, as defined in the agreement, without severance payment; (6) provided for a signing
bonus of 800,000 options to acquire shares of Viral Genetics common stock at a purchase
price of $0.01 vesting in increments of 100,000 options per three months of employment,
and (7) may be terminated by Viral Genetics without cause on payment of severance equal
to half the employees annual base salary. Outstanding
Equity Awards The following table
sets forth certain information with respect to outstanding equity awards at December 30,
2006 with respect to the Named Executive Officers. Outstanding Equity Awards at Fiscal Year-End Name and PrincipalPosition
     Number ofSecuritiesUnderlyingUnexercisedOptions(#)Exercisable
     Number ofSecuritiesUnderlyingUnxercisedOptions(#)Unexercisable
     Equity IncentivePlan Awards:Number of SecuritiesUnderlying UnxercisedUnearned Options(#)
     OptionExercisePrice($/Sh)
     Option ExpirationDateHaig Keledjian
     
     
     
     1,800,000
     
     
     -0-
     
     
     -0-
     
     
     $0.25
     
     
     March 31, 2008President, CEO, CFO
     
     
     
     1,800,000
     
     
     -0-
     
     
     -0-
     
     
     $0.45
     
     
     March 31, 20082,300,000
     
     
     -0-
     
     
     -0-
     
     
     $0.52
     
     
     March 31, 2008Monica Ord
     
     
     
     100,000
     
     
     -0-
     
     
     -0-
     
     
     $0.01
     
     
     June 30, 2007Senior Vice Pres.
     
     
     
     100,000
     
     
     -0-
     
     
     -0-
     
     
     $0.01
     
     
     June 30, 2007100,000
     
     
     -0-
     
     
     -0-
     
     
     $0.01
     
     
     June 30, 2007100,000
     
     
     -0-
     
     
     -0-
     
     
     $0.01
     
     
     June 30, 2007100,000
     
     
     -0-
     
     
     -0-
     
     
     $0.01
     
     
     June 30, 2007100,000
     
     
     -0-
     
     
     -0-
     
     
     $0.01
     
     
     June 30, 2007-0-
     
     
     100,000
     
     
     -0-
     
     
     $0.01
     
     
     June 30, 2007Harry Zhabilov
     
     
     
     1,800,000
     
     
     -0-
     
     
     -0-
     
     
     $0.25
     
     
     March 31, 2008Former Executive Vice
     
     
     
     1,800,000
     
     
     -0-
     
     
     -0-
     
     
     $0.45
     
     
     March 31, 2008Pres. Research and
     
     
     
     2,300,000
     
     
     -0-
     
     
     -0-
     
     
     $0.52
     
     
     March 31, 2008Development (1) (1)  Terminated
December 2006. 24




Potential
Payments Future Payments Under his employment
agreement, Haig Keledjian is entitled to receive severance and other benefits on the
occurrence of certain events.  These events include termination of his employment by
Viral Genetics for reasons other than cause as defined in the agreement, termination by
Mr. Keledjian if Viral Genetics breaches the agreement, termination by Mr. Keledjian upon
a change of 50% or more in voting control, or termination by Mr. Keledjian upon a merger
or reorganization of Viral Genetics pursuant to which the holders of all of the shares of
Viral Genetics outstanding prior to the transaction hold less than 50% of the combined
voting power of the shares of Viral Genetics or any successor company outstanding after
the transaction.  Upon the occurrence of one or more of these events, Mr. Keledjian is
entitled to receive a single sum payment payable within 30 days after such termination in
an amount equal to the annual rate of salary in effect as of the date of termination.  In
addition, Viral Genetics is required to maintain for Mr. Keledjian at the expense of
Viral Genetics all life, long-term disability, and health and medical insurance in effect
as of the date of termination. Under her employment
agreement, Monica Ord is entitled to receive severance and other benefits on the
occurrence of certain events. These events include termination of her employment by Viral
Genetics for reasons other than cause as defined in the agreement, termination by Ms. Ord
if Viral Genetics breaches the agreement, termination by Ms. Ord upon a change of 50% or
more in voting control, or termination by Ms. Ord upon a merger or reorganization of
Viral Genetics pursuant to which the holders of all of the shares of Viral Genetics
outstanding prior to the transaction hold less than 50% of the combined voting power of
the shares of Viral Genetics or any successor company outstanding after the transaction.
 Upon the occurrence of one or more of these events, Ms. Ord is entitled to receive a
single sum payment payable within 30 days after such termination in an amount equal to
one-half of the annual rate of salary in effect as of the date of termination. Director
Compensation Table Our two independent,
non-employee director receive an annual director fee of $20,000.  Each non-employee
director receives on the one-year anniversary of their election an option to purchase
50,000 shares of Viral Genetics common stock exercisable over a term of 2 years with an
exercise price equal to the market price for our common stock on the date of issuance. The following table
summarizes the compensation paid to the non-employee directors for the year ended
December 30, 2006. Name
     Fees Earned or
Paid in Cash
($)
     Option Awards
($)
     All Other
Compensation
($)
     Total
($)Arthur Ammann
     $20,000
     0
     0
     $20,000Elizabeth Hoffman
     $20,000
     0
     0
     $20,000Hampar Karageozian
     0
     0
     0
     0Arthur Keledjian
     0
     0
     0
     0 25




Item
11.  Security Ownership of Certain Beneficial Owners and Management The following table
sets forth as of March 19, 2007 the number and percentage of the 128,127,828 outstanding
shares of common stock which, according to the information supplied to Viral Genetics,
were beneficially owned by (i) each person who is currently a director, (ii) each
executive officer, (iii) all current directors and executive officers of Viral Genetics
as a group and (iv) each person who, to our knowledge, is the beneficial owner of more
than 5% of the outstanding common stock. Except as otherwise indicated, the persons named
in the table have sole voting and dispositive power with respect to all shares
beneficially owned, subject to community property laws where applicable. Name and Address
     Shares Beneficially Owned
     Percent of ClassHaig Keledjian (1)
     22,505,302(2)
     28.4%P.O. Box 1020
     5,900,000(3)South Pasadena, CA 91031
     10,149,126(4)6,754,669(5)Arthur Ammann (1)
     100,000(7)
     0.1%PO Box 1020South Pasadena, CA 91031Elizabeth Hoffman (1)
     100,000(8)
     0.1%PO Box 1020South Pasadena, CA 91031Monica Ord (1)
     1,715,000
     1.9%PO Box 1020
     700,000(9)South Pasadena, CA 91031Hampar Karageozian (1)
     9,276,221
     10.7%31021 Marbella Vista
     4,934,712(5)San Juan Capistrano, CA 92675Arthur Keledjian (1)
     -0-
     0%P.O. Box 1020South Pasadena, CA 91032John D. Lefebvre
     10,000,000
     11.9%P.O. Box N7120
     6,000,000(6)Nassau, BahamasCaribou Investments, Inc.
     7,700,000
     6.0%Abbott Building, 2nd FloorRoad Town, TortolaBritish Virgin IslandsHarry Zhabilov, Jr.
     7,893,679
     12.3%P.O. Box 1020
     4,100,000(3)South Pasadena, CA 91031
     4,927,299(5)All officers and directors (7 persons)
     62,024,584
     37.5% _________ (1)
     Officer or Director of Viral Genetics.(2)
     Haig Keledjian holds 2,302,667 shares personally. He holds 5,932,761 and 4,540,773 shares as Trustee for two
     irrevocable voting trusts for the benefit of his children; 4,005,924 shares as Trustee for an irrevocable
     trust established for a group of private investors; 3,201,393 shares as Trustee for an irrevocable
     discretionary trust established for a group of Mr. Keledjians family members; 21,784 shares as Trustee for a
     non-profit 26




foundation; 2,500,000 shares as Trustee for a revocable trust established for an arms-length third
     party. Mr. Keledjian has sole voting and investment control over the shares he holds as Trustee.(3)
     Each of these persons holds an option to purchase 2,300,000 shares of common stock at an exercise price of
     $0.52 per share exercisable and an option to purchase 1,800,000 shares of common stock at an exercise price
     of $0.45 per share. In June 2007 Haig Keledjian will receive additional options to purchase 1,800,000 shares
     at an exercise price equal to the then market price of Viral Genetics common stock. All of these options are
     exercisable until the earlier of two years following termination of their employment agreement with the
     Company or May 31, 2008.(4)
     Haig Keledjian is the sole officer and director of Best Investments, Inc., which holds three notes totaling
     $1,505,802 that were assigned to Best Investments, Inc., on August 5, 2004 by Haig Keledjian, Hampar
     Karageozian, and Tomson Voting Trust (of which Harry Zhabilov, Jr. is a beneficiary). At December 31, 2006,
     these notes were convertible to 5,074,563 shares of common stock and warrants to purchase an additional
     5,074,563 shares at $0.40 per share. If the warrants were exercised, Best Investments, Inc. would hold
     10,149,126 shares of the Company. Mr. Keledjian has sole voting and investment control over all of the shares
     held by Best Investments, Inc., including those it may acquire through exercise of the warrants. In regard to
     the shares held by Best Investments, Inc., including those it may acquire through exercise of the warrants,
     Mr. Karageozian and Mr. Zhabilov, Jr. each disclaim any beneficial interest in or control of the shares.(5)
     Each of these persons holds warrants to purchase shares of common stock at a price of $0.40 per share that
     are exercisable until September 30, 2009. The warrants were issued in connection with the conversion of notes
     payable by Therapeutic Genetic, Inc.(6)
     Mr. Lefebvre holds 4,000,000 warrants to purchase shares of common stock at a price of $0.60 per share that
     are exercisable until December 31, 2007 and 2,000,000 warrants to purchase shares of common stock at a price
     of $0.45 per share that are exercisable until December 5, 2008.(7)
     Arthur Ammann holds an option to purchase 100,000 shares of common stock at an exercise price of $0.25
     exercisable until June 1, 2007 of which 100,000 are vested and exercisable.(8)
     Elizabeth Hoffman holds an option to purchase 100,000 shares of common stock at an exercise price of $0.80
     exercisable until January 30, 2008 of which 100,000 are vested and exercisable.(9)
     Monica Ord holds an option to purchase 700,000 shares of common stock at an exercise price of $0.01
     exercisable until June 30, 2007 of which 600,000 are vested and exercisable and the remaining 100,000 vest
     and become exercisable in May 2007. Item
12. Certain Relationships and Related Transactions, and Director Independence Related
Transactions Pursuant to agreements
dated May 22, 2003, Viral Genetics, Inc., completed on June 4, 2003 a restructuring of
certain outstanding debt obligations owed to Haig Keledjian, an officer, director and
principal stockholder, Hampar Karageozian, a director and principal
stockholder, the Tomson Voting Trust of which the trustee is Mr. Keledjian and a
beneficiary is Harry Zhabilov, Jr., a former officer and director, and Therapeutic Genetics
Inc., a privately held California corporation and the principal creditor of Viral
Genetics (TGI). Viral Genetics was
indebted as of March 31, 2003 to: 
     Mr. Keledjian in the amount of $835,310 representing the principal and accrued interest on funds
        previously advanced to Viral Genetics.
     Mr. Karageozian in the amount of $784,904 representing the principal and accrued interest on funds
        previously advanced to Viral Genetics.
     The Tomson Trust in the amount of $460,539 representing the principal and accrued interest on funds
        previously advanced to Viral Genetics.
     TGI in the amount of $6,976,758 representing the principal and accrued interest on obligations incurred in
        connection with the acquisition of the TNP product and technology by Viral Genetics from TGI in 1995. A substantial portion
of the foregoing obligations was due in 2003, and Viral Genetics did not have the funds
necessary to pay the obligations. Viral Genetics extended and restructured the
obligations through the issuance of convertible promissory notes due 2008 with identical
terms but for the principal amounts (the Notes). The Notes 27




bear interest at the
rate of five percent per annum and all principal and accrued interest is due March 31,
2008. The principal and accrued interest on the Notes may be exchanged at the election of
the holder at the rate of $0.30 for one share of common stock and one warrant to purchase
an additional share at an exercise price of $0.40 per that expires five years from the
date the warrant is issued. On June 30, 2004, TGI
exercised the option to convert the convertible debentures they held under the Debt
Restructuring Agreement dated May 22, 2003 to 24,708,580 shares of common stock and
warrants to purchase an additional 24,708,580 shares. The warrants are exercisable at a
price of $0.40 per share over a five-year period expiring on September 19, 2009. On August 5, 2004, the
notes owed by the Company to Haig Keledjian, Hampar Karageozian, and Harry Zhabilov, Jr.,
were assigned to Best Investments, Inc., a corporation of which Haig Keledjian is the
sole officer and director. As of December 31, 2004, the total principal and accrued
interest on the notes owed to Best Investment was $2,156,543. Assuming Best Investments,
Inc., exchanged its Note for stock and warrants on December 31, 2004, it would have
received 7,188,477 shares and 7,188,477 warrants. On March 27, 2006, Best Investments,
Inc. sold and assigned $598,060 of principal value of the notes to three unaffiliated
parties for cash as an inducement to the purchasing parties to sell unsecured convertible
debentures to investors acquiring Senior Secured Amortizing Convertible Notes issued by
the Company. Director
Independence and Committees Our board of directors
has six members.  Our President and Chief Executive Officer, Haig Keledjian, is a member
of the Board and is a full time employee of Viral Genetics.  Another director, Arthur
Keledjian, is the brother of Haig Keledjian.  Hampar Karegeozian served as an executive officer until 2005.  The
other two members of the Board, Arthur Ammann and Elizabeth Hoffman, are non-employee
directors, and the Board has determined that these persons are independent directors under
the criteria set forth in Rule 4200(15) of the Nasdaq Marketplace Rules.  The Board does
not have a separately designated nominating committee, so the function of evaluating and
nominating persons for election as directors is performed by the entire Board.  All
directors are elected by vote of the existing board of directors and serve indefinitely.
 There are no standing compensation or audit committees of the Board of Directors. Due to
the fact Viral Genetics is in the development stage with no operating revenue and
activities limited to research and development, the Board of Directors determined that it
is not necessary or practical to establish a compensation committee or audit committee. Item
13. Exhibits Copies of the
following documents are included as exhibits to this report pursuant to Item 601 of
Regulation S-B. Exhibit No
     Title of Document3.1
     Certificate of Incorporation (2)3.2
     Certificate of Amendment (3)3.3
     Certificate of Amendment effective November 17, 2004 (7)3.4
     Bylaws (2)10.1
     Assignment of Patent dated August 5, 1995 (3)10.2
     Debt Restructuring Agreement dated May 22, 2003 with Haig Keledjian (4)10.3
     Debt Restructuring Agreement dated May 22, 2003 with Therapeutic Genetics, Inc. (4)10.4
     Debt Restructuring Agreement dated May 22, 2003 with Hampar Karageozian (4)10.5
     Debt Restructuring Agreement dated May 22, 2003 with The Tomson Trust (4)10.6
     Termination Agreement with New York International Commerce Group (5) 28




10.7
     Termination Agreement with L&M Global Ventures (5)10.8
     Form of Employment Agreement with Executive Officers (5)10.9
     Form of Option issued to Executive Officers (5)10.10
     Consulting Agreement with Therapeutic Genetic, Inc. (5)10.11
     Consulting Agreement with Monica Ord (5)10.12
     Subscription Agreement with John D. Lefebvre dated October 13, 2004 (6)10.13
     Form of Warrant issued to John D. Lefebvre (6)10.14
     Distribution Management Agreement effective July 1, 2004 (7)10.15
     Lease Agreement for 1321 Mountain View Circle, Azusa, CA (7)10.16
     Form of Securities Purchase Agreement dated October 18, 2005 (Exhibits are not includedbecause they are presented with this report as separate exhibits) (8)10.17
     Form of 10% Unsecured Convertible Debenture dated October 18, 2005 (8)10.18
     Form of Common Stock Purchase Warrant dated October 18, 2005 (8)10.19
     Form of Registration lefts Agreement dated October 18, 2005 (8)10.20
     Form of Guarantee and Security Agreement dated October 18, 2005 (8)10.21
     Form of Pledge Agreement dated October 18, 2005 (8)10.22
     Form of Common Stock Purchase Warrant for offering closed December 5, 2005 (9)10.23
     Form of Subscription Agreement for offering closed December 5, 2005 (9)10.24
     Securities Purchase Agreement dated November 7, 2005 (9)10.25
     Subscription Agreement dated November 7, 2005 (9)10.26
     Warrant dated November 7, 2005 (9)10.27
     Registration lefts Agreement dated November 7, 2005 (9)10.28
     Securities Purchase Agreement dated March 29, 2006, excluding all exhibits, which areincluded herewith as separate exhibits (except for Exhibit E  Form of Legal Opinion,and Exhibit G  Form of Escrow Agreement, which are not material agreements and notprovided), and excluding the Disclosure Schedules of Viral Genetics (10)10.29
     Form of 10% Senior Secured Amortizing Convertible Debentures (10)10.30
     Form of Registration lefts Agreement (10)10.31
     Form of Unit Purchase Warrant (10)10.32
     Form of Warrant (10)10.33
     Form of Security Agreement (10)10.34
     Form of Subsidiary Guaranty (10)10.35
     Form of Lock-up Agreement (10)16.1
     Letter regarding change in certifying accountant from Williams and Webster (11)14.1
     Code of Ethics (5)21.1
     List of Subsidiaries (5) 29




31.1
     Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of
               the Sarbanes-Oxley Act of 2002 (5)32.1
     Certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906
               of the Sarbanes-Oxley Act of 2002 _________ (1)
     This exhibit is incorporated herein by this reference to Viral Genetics Current Report on Form 8-K filed
          with the Securities and Exchange Commission on September 28, 2004.(2)
     These exhibits are incorporated herein by this reference to Viral Genetics Registration Statement on Form
          10-SB filed with the Securities and Exchange Commission on July 29, 1999.(3)
     These exhibits are incorporated herein by this reference to Viral Genetics Annual Report on Form 10-KSB for
          the year ended December 31, 2001, filed with the Securities and Exchange Commission on April 24, 2002.(4)
     These exhibits are incorporated herein by this reference to Viral Genetics Current Report on Form 8-K filed
          with the Securities and Exchange Commission on June 18, 2003.(5)
     These exhibits are incorporated herein by this reference to Viral Genetics Annual Report on Form 10-KSB for
          the year ended December 31, 2003, filed with the Securities and Exchange Commission on May 11, 2004.(6)
     These exhibits are incorporated herein by this reference to Viral Genetics Current Report on Form 8-K filed
          with the Securities and Exchange Commission on October 13, 2004.(7)
     These exhibits are incorporated herein by this reference to Viral Genetics Annual Report on Form 10-KSB for
          the year ended December 31, 2004, filed with the Securities and Exchange Commission on April 5, 2005.(8)
     These exhibits are incorporated herein by this reference to Viral Genetics Current Report on Form 8-K filed
          with the Securities and Exchange Commission on October 24, 2005.(9)
     These exhibits are incorporated herein by this reference to Viral Genetics Current Report on Form 8-K filed
          with the Securities and Exchange Commission on December 9, 2005.(10)
     These exhibits are incorporated herein by this reference to Viral Genetics Current Report on Form 8-K filed
          with the Securities and Exchange Commission on March 30, 2006.(11)
     This exhibit is incorporated herein by this reference to Viral Genetics Current Report on Form 8-K/A filed
          with the Securities and Exchange Commission on March 27, 2006. 30




ITEM
14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES The Companys board of
directors reviews and approves audit and permissible non-audit services performed by the
authorized independent public accountants as well as the fees charged by the authorized
independent public accountants for such services. In its review of non-audit service fees
and its appointment of the authorized independent public accountants as the Companys
independent accountants, the board of directors considered whether the provision of such
services is compatible with maintaining the authorized independent public accountants
independence. All of the services provided and fees charged by the authorized independent
public accountants in 2005 were pre-approved by the board of directors. Audit
Fees The aggregate fees
billed by Killman, Murrell & Company, P.C., the authorized independent public
accountants, for professional services for the audit of the annual financial statements
of the Company and the reviews of the financial statements of the Company and the reviews
of the financial statements included in the Companys quarterly reports on Form 10-QSB
for 2006 and 2005 during 2006 were $0 and $82,061 respectively, net of expenses. Audit-Related
Fees There were no other
fees billed by Killman, Murrell & Company, P.C. during the last two fiscal years for
assurance and related services that were reasonably related to the performance of the
performance of the audit or review of the Companys financial statements and not reported
under Audit Fees above. Tax
Fees There were no fees
billed for tax services by Killman, Murrell & Company, P.C. during the last two fiscal
years for tax compliance or related services. All
Other Fees There were no other
fees billed by Killman, Murrell & Company, P.C. during the last two fiscal years for
products and services provided by authorized independent public accountants. 31




VIRAL GENETICS, INC. Date:  April 26, 2007
     By:
     /s/   Haig KeledjianHaig Keledjian, PresidentPrincipal Executive OfficerPrincipal Financial & Accounting Officer In accordance with the
Exchange Act, this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated. Date:  April 26, 2007
     By:
     /s/   Haig KeledjianHaig Keledjian, Director   Date:  April 19, 2007
     By:
     /s/    Hampar KarageozianHampar Karageozian, Director   Date:  April 19, 2007
     By:
     /s/    Arthur KeledjianArthur Keledjian, Director   Date:  April 23, 2007
     By:
     /s/    Arthur AmmannArthur Ammann, Director   Date:  April 23, 2007
     By:
     /s/     Elizabeth HoffmanElizabeth Hoffman, Director 32




INDEX TO FINANCIAL STATEMENTS VIRAL GENETICS, INC. December 31, 2006 CONTENTS Report of Independent Registered Public Accounting Firm
     F-1Financial Statements:Consolidated Balance Sheets
     F-2Consolidated Statements of Operations
     F-3Consolidated Statements of Cash Flows
     F-4Consolidated Statements of Stockholders Deficit
     F-5Notes to Consolidated Financial Statements
     F-11 33




Killman, Murrell & Company P.C.
                                                     Certified Public Accountants 300 N. A Street, Bldg. 4, Suite 200
     1931 E. 37th Street, Suite 7
     2626 Royal CircleMidland, Texas 79705
     Odessa, Texas 79762
     Kingwood, Texas 77339(432) 686-9381
     (432) 363-0067
     (281) 359-7224Fax (432) 684-6722
     Fax (432) 363-0376
     Fax (281) 359-7112 REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM To the Board of Directors and Stockholders
 Viral Genetics, Inc. Azusa, California We have audited the accompanying consolidated balance sheets
of Viral Genetics, Inc. (a development stage company) as of December 31, 2006 and 2005, and the
related consolidated statements of operations, changes in stockholders deficit and cash
flows for the years then ended and for the cumulative development stage period from July
11, 1995 (inception) to December 31, 2006. Our report on the cumulative statements of operations, stockholders deficit
and cash flows from July 11, 1995 to December 31, 2006, insofar as it relates to amounts
for periods ended on or prior to December 31, 2004, is based solely on the report of the
other auditors. These financial statements are the responsibility of the companys
management. Our responsibility is to express an opinion on these financial statements
based on our audits. We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of material misstatement.  The
company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing
audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the company's internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements, assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide
a reasonable basis for our opinion. In our opinion, the consolidated financial statements
referred to above present fairly, in all material respects, the consolidated financial
position of Viral Genetics, Inc. as of December 31, 2006 and 2005, and the consolidated results of
its operations and its cash flows for the years then ended and from July 11, 1995
(inception) to December 31, 2006, in conformity with United States generally accepted
accounting principles. The accompanying consolidated financial statements have been prepared
assuming that Viral Genetics, Inc. will continue as a going concern. As discussed in Note
2 to the consolidated financial statements, Viral Genetics, Inc. has suffered recurring losses from
operations and its limited capital resources raise substantial doubt about its ability to
continue as a going concern. Managements plan in regard to these matters are described
in Note 2. The consolidated financial statements do not include any adjustments that might result from
the outcome of this uncertainty /s/  KILLMAN, MURRELL & COMPANY, P.C. Odessa, Texas April 20, 2007 F-1




VIRAL GENETICS, INC.
                                                     (A DEVELOPMENT STAGE COMPANY)
                                                      CONSOLIDATED BALANCE SHEETS December 31, 2006
     
     December 31, 2005ASSETSCURRENT ASSETSCash
        
        
     $
        --
        
     
     $
        180,198Total Current Assets
     --
        
     
     180,198PROPERTY AND EQUIPMENT, NET
     980,284
        
     
     960,761OTHER ASSETSDeposits and other
     42,940
        
     
     43,940Total Other Assets
     42,940
        
     
     43,940TOTAL ASSETS
     $1,023,224
        
     
     $1,184,899LIABILITIES AND STOCKHOLDERS DEFICITCURRENT LIABILITIESAccounts payable
     $387,896
        
     
     $829,201Accrued wages payable
     140,500
        
     
     140,500Advances -- related parties
     74,283
        
     
     --Other current liabilities
     136,000
        
     
     --Bank overdrafts payable
     42,801
        
     
     --Accrued interest
        
        
     
        111,716
        
     
     
        48,724Convertible notes payable, current portion
        
        
     
        3,008,075
        
     
     
        --Derivative Liability
     1,944,782
        
     
     --Total Current Liabilities
     5,846,053
        
     
     1,018,425LONG-TERM LIABILITIESConvertible notes payable, related parties
     1,505,802
        
     
     2,080,753Convertible notes payable, net of current portion
     459,865
        
     
     516,800Total Long-Term Liabilities
     1,965,667
        
     
     2,597,553TOTAL LIABILITIES
     7,811,720
        
     
     3,615,978COMMITMENTS AND CONTINGENCIES
     --
        
     
     --CONTINGENTLY ISSUED COMMON STOCK
     535,291
        
     
     --STOCKHOLDERS DEFICITPreferred stock, 20,000,000 shares authorized, $0.0001par value; no shares issued and outstanding
     --
        
     
     --Common stock, 250,000,000 shares authorized, $0.0001 parvalue; 113,533,667 and 98,284,709 issued andoutstanding, respectively
     11,354
        
     
     9,828Additional paid-in capital
     35,927,873
        
     
     31,109,178Common stock warrants
     5,702,455
        
     
     3,564,483Common stock options
     5,088,786
        
     
     4,330,500Deficit accumulated during development stage
     (54,054,255
        )
     
     (41,445,068
        )Total Stockholders Deficit
     (7,323,787
        )
     
     (2,431,079
        )TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT
     $1,023,224
        
     
     $1,184,899  The accompanying notes are an integral part of these consolidated financial
statements. F-2




VIRAL GENETICS, INC.
                                                     (A DEVELOPMENT STAGE COMPANY)
                                                      CONSOLIDATED STATEMENTS OF OPERATIONS Years EndedDecember 31,
     FromJuly 11, 1995(Inception)2006
     2005
     toDecember 31,2006REVENUES
     
     
     $
        --
        
     
     $
        --
        
      
     $
        347,750EXPENSESResearch and development
     1,769,373
        
     
     650,428
        
     
     14,409,331Management salaries
     256,000
        
     
     577,600
        
     
     3,363,572Amortization and depreciation expense
     90,350
        
     
     74,226
        
     
     380,286Legal and professional
     285,332
        
     
     236,733
        
     
     1,123,151Consulting fees
     2,518,134
        
     
     1,644,207
        
     
     11,854,923General and administrative expenses
     1,457,712
        
     
     1,225,822
        
     
     4,735,916Total Expenses
     6,376,901
        
     
     4,409,016
        
     
     35,867,179LOSS FROM OPERATIONS
     (6,376,901
        )
     
     (4,409,016
        )
     
     (35,519,429
        )OTHER INCOME (EXPENSE)Sale of distribution rights
     --
        
     
     --
        
     
     1,309,966Interest income
        
        
     
        4,845
        
     
     
        2,396
        
     
     
        9,392Derivative expense
        
        
     
        (2,245,254
        )
     
     
        --
        
     
     
        (2,245,254
        )Interest expense
     (3,991,877
        )
     
     (626,173
        )
     
     (17,608,930
        )Total Other Income (Expense)
     (6,232,286
        )
     
     (623,777
        )
     
     (18,534,826
        )LOSS BEFORE INCOME TAXES
     (12,609,187
        )
     
     (5,032,793
        )
     
     (54,054,255
        )INCOME TAXES
     --
        
     
     --
        
     
     --NET LOSS
     $(12,609,187
        )
     
     $(5,032,793
        )
     
     $(54,054,255
        )NET LOSS PER COMMON SHARE, BASIC AND         DILUTED
     $(0.12
        )
     
     $(0.05
        )WEIGHTED AVERAGE NUMBER OF COMMONSHARES OUTSTANDING, BASIC AND DILUTED
     104,691,110
        
     
     92,530,821  The accompanying notes are an integral part of these consolidated financial
statements. F-3




VIRAL GENETICS, INC.
                                                     (A DEVELOPMENT STAGE COMPANY)
                                                 CONSOLIDATED STATEMENTS OF CASH FLOWS Years EndedDecember 31,
     
     FromJuly 11, 19952006

      2005

     (Inception)toDecember 31,2006CASH FLOWS FROM OPERATING ACTIVITIESNet loss
     $(12,609,187
        )
     
     $(5,032,793
        )
     
     $(54,054,255
        )Amortization and depreciation
     90,350
        
     
     74,226
        
     
     380,286Debt issuance costs
     3,197,304
        
     
     516,800
        
     
     13,339,211Increase (decrease) in derivative liability
     2,245,254
        
     
     --
        
     
     2,245,254Non-cash operating expenses
     --
        
     
     --
        
     
     5,387,663Non-cash income
     --
        
     
     --
        
     
     (309,966
        )Issuance of common stock for services and finders fee
     1,072,097
        
     
     591,000
        
     
     5,250,607Options and warrants issued for services and wages
     1,219,953
        
     
     1,290,590
        
     
     8,964,503Options exercised for services
     --
        
     
     --
        
     
     2,500Contingently issued stock issued for services
     535,291
        
     
     --
        
     
     535,291Convertible debt issued for services
     60,000
        
     
     --
        
     
     60,000Warrants exercised for services
     --
        
     
     --
        
     
     12,500Issuance of common stock for expenses paid by thirdparty
     --
        
     
     --
        
     
     593,947Issuance of common stock for settlement agreement
     --
        
     
     --
        
     
     835,000Issuance of stock for interest
     229,591
        
     
     --
        
     
     1,485,726Notes payable issued for expenses
     --
        
     
     --
        
     
     907,349Expenses paid with notes payable
     --
        
     
     --
        
     
     (10,043
        )Notes payable converted to accrued wages
     --
        
     
     --
        
     
     (25,000
        )(Increase) decrease in deposits and other assets
     1,000
        
     
     (1,000
        )
     
     (42,940
        )Increase (decrease) in accrued interest
     84,643
        
     
     (204,281
        )
     
     93,300Increase (decrease) in accounts payable
     (267,460
        )
     
     547,718
        
     
     561,740Increase (decrease) in accrued wages payable
     --
        
     
     65,500
        
     
     140,500Increase (decrease) in advances  related parties
     74,283
        
     
     --
        
     
     74,283Increase (decrease) in advances
     136,000
        
     
     --
        
     
     136,000Increase (decrease) in bank overdrafts payable
     42,801
        
     
     --
        
     
     42,801Net Cash Used in Operations
     (3,888,080
        )
     
     (2,152,240
        )
     
     (13,393,743
        )CASH FLOWS FROM INVESTING ACTIVITIESIncrease in leasehold improvements
     (100,679
        )
     
     (859,662
        )
     
     (1,039,306
        )Acquisition of equipment
     (9,194
        )
     
     (39,773
        )
     
     (361,665
        )Increase in patent
     --
        
     
     --
        
     
     (5,206,051
        )Net Cash Used in Investing Activities
     (109,873
        )
     
     (899,435
        )
     
     (6,607,022
        )CASH FLOWS FROM FINANCING ACTIVITIESProceeds from notes payable
     267,000
        
     
     --
        
     
     267,000Proceeds from notes payable related parties
     23,500
        
     
     177,215
        
     
     9,379,671Proceeds from convertible debentures
     2,891,549
        
     
     516,800
        
     
     2,363,369Proceeds from exercise of options and warrants
     5,706
        
     
     20,721
        
     
     78,061Proceeds from sale of common stock and warrants
     630,000
        
     
     1,114,968
        
     
     7,912,664Net Cash Provided by Financing Activities
     3,817,755
        
     
     1,829,704
        
     
     20,000,765Change in cash
     (180,198
        )
     
     (1,221,971
        )
     
     --Cash and cash equivalents, beginning of period
     180,198
        
     
     1,402,169
        
     
     --Cash and cash equivalents, end of period
     $--
        
     
     $180,198
        
     
     $--SUPPLEMENTAL CASH FLOW DISCLOSURES:Interest expense paid
     $51,611
        
     
     $313,654
        
     
     $511,118Income taxes paid
     $--
        
     
     $--
        
     
     $--NON-CASH TRANSACTIONS:Issuance of common stock for settlement agreement
     $--
        
     
     $--
        
     
     $835,000Options and warrants exercised for services
     $--
        
     
     $567,814
        
     
     $682,814Non-cash operating expenses
     $--
        
     
     $--
        
     
     $144,901Issuance of common stock for debt paid by third party
     $--
        
     
     $--
        
     
     $593,947Issuance of common stock for debt and interest
     $831,040
        
     
     $--
        
     
     $9,086,511Notes payable issued for services
     $--
        
     
     $--
        
     
     $147,155Notes payable issued for expenses
     $--
        
     
     $--
        
     
     $10,043Notes payables issued for accrued wages
     $--
        
     
     $--
        
     
     $25,000Issuance of common stock for finders fee
     $--
        
     
     $--
        
     
     $450,000Warrants issued with convertible debentures
     $--
        
     
     $516,800
        
     
     $516,800Transfer from derivative liability
     $300,472
        
     
     $--
        
     
     $300,472Issue of common stock for accounts payable
     $173,845
        
     
     $--
        
     
     $173,845 The accompanying notes are an integral part of these consolidated financial
statements. F-4




VIRAL GENETICS, INC.
                                                     (A DEVELOPMENT STAGE COMPANY)
                                       CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) CommonStockNumber ofShares
     
     CommonStockAmount
     
     AdditionalPaid-inCapital
     
     CommonStockWarrants
     
     DeficitAccumulatedDuringDevelopmentStage
     
     TotalStockholdersEquity(Deficit)(restated)
     
     (restated)Issuance of common stock for cashat nil per share
     23,800,079
        
     
     $2,380 $
        
     
     (1,380
        )
     
     $-
        
     
     $--
        
     
     $1,000Net loss for period endedDecember 31, 1995
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     (5,913,219
        )
     
     (5,913,219
        )Balance, December 31, 1995
     23,800,079
        
     
     2,380
        
     
     (1,380
        )
     
     --
        
     
     (5,913,219
        )
     
     (5,912,219
        )Issuance of common stock for cashat $0.84 per share
     59,500
        
     
     6
        
     
     49,994
        
     
     --
        
     
     --
        
     
     50,000Issuance of common stock forservices at $0.84 per share
     357,001
        
     
     36
        
     
     299,964
        
     
     --
        
     
     --
        
     
     300,000Net loss for year endedDecember 31, 1996
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     (810,189
        )
     
     (810,189
        )Balance, December 31, 1996
     24,216,580
        
     
     2,422
        
     
     348,578
        
     
     --
        
     
     (6,723,408
        )
     
     (6,372,408
        )Issuance of common stock for cashat $0.84 per share
     339,151
        
     
     34
        
     
     284,966
        
     
     --
        
     
     --
        
     
     285,000Issuance of common stock forservices at $0.84 per share
     499,802
        
     
     50
        
     
     419,950
        
     
     --
        
     
     --
        
     
     420,000Net loss for year endedDecember 31, 1997
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     (577,066
        )
     
     (577,066
        )Balance, December 31, 1997
     25,055,533
        
     
     2,506
        
     
     1,053,494
        
     
     --
        
     
     (7,300,474
        )
     
     (6,244,474
        )Issuance of common stock for cash
     --at $0.84 per share
     345,101
        
     
     35
        
     
     289,965
        
     
     --
        
     
     --
        
     
     290,000Net loss for year endedDecember 31, 1998
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     (708,567
        )
     
     (708,567
        )Balance, December 31, 1998
     25,400,634
        
     
     2,541
        
     
     1,343,459
        
     
     --
        
     
     (8,009,041
        )
     
     (6,663,041
        )Issuance of common stock for cashat $0.42 per share
     595,002
        
     
     59
        
     
     249,941
        
     
     --
        
     
     --
        
     
     250,000Issuance of common stock for cashat $0.84 per share
     34,272
        
     
     3
        
     
     28,797
        
     
     --
        
     
     --
        
     
     28,800Net loss for year endedDecember 31, 1999
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     (2,037,638
        )
     
     (2,037,638
        )Balance, December 31, 1999
     26,029,908
        
     
     2,603
        
     
     1,622,197
        
     
     --
        
     
     (10,046,679
        )
     
     (8,421,879
        )Issuance of common stock for cashat $0.42 per share
     595,002
        
     
     59
        
     
     249,941
        
     
     --
        
     
     --
        
     
     250,000Issuance of common stock for cashat $0.84 per share
     842,523
        
     
     84
        
     
     707,916
        
     
     --
        
     
     --
        
     
     708,000Issuance of common stock for cashat $1.94 per share
     51,567
        
     
     6
        
     
     99,994
        
     
     --
        
     
     --
        
     
     100,000Issuance of common stock forservices at $0.84 per share
     2,163,824
        
     
     216
        
     
     1,818,117
        
     
     --
        
     
     --
        
     
     1,818,333Net loss for year endedDecember 31, 2000
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     (2,185,117
        )
     
     (2,185,117
        )Balance, December 31, 2000
     29,682,824
        
     
     $2,968
        
     
     $4,498,165
        
     
     --
        $
     
     $(12,231,796
        )
     
     $(7,730,663
        ) F-5




VIRAL GENETICS, INC.
                                                     (A DEVELOPMENT STAGE COMPANY)
                                       CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) CommonStockNumber ofShares
     CommonStockAmount
     AdditionalPaid-inCapital
     CommonStockOptions
     CommonStockWarrants
     DeficitAccumulatedDuringDevelopmentStage
     TotalStockholders'Equity(Deficit)(restated)
     
     
     
     (restated)
     (restated)Balance,December 31, 2000
        
     29,682,824
        
     
     $2,968
        
     
     $4,498,165
        
     
     $-
        
     
     $--
        
     
     $(12,231,796
        )
     
     $(7,730,663
        )Issuance ofcommon stockfor cash at$0.84 per share
     29,464
        
     
     3
        
     
     24,747
        
     
     --
        
     
     --
        
     
     --
        
     
     24,750Issuance ofcommon stockfor servicesat $0.84 pershare
     37,811
        
     
     4
        
     
     31,464
        
     
     --
        
     
     --
        
     
     --
        
     
     31,468Recapitalizationthroughreverse mergerandacquisition of5 StarlivingOnline, Inc.
     8,035,693
        
     
     804
        
     
     (281,079
        )
     
     --
        
     
     --
        
     
     --
        
     
     (280,275
        )Miscellaneousadjustment dueto merger
     481
        
     
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     --Net loss for theyear endedDecember 31, 2001
        
        
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     (1,356,117
        )
     
     (1,356,117
        )Balance, December31, 2001
     37,786,273
        
     
     3,779
        
     
     4,273,297
        
     
     --
        
     
     --
        
     
     (13,587,913
        )
     
     (9,310,837
        )Issuance ofcommon stockfor cash at$0.70 per share
     215,000
        
     
     21
        
     
     149,979
        
     
     --
        
     
     --
        
     
     --
        
     
     150,000Issuance ofcommon stockfrom theexercise ofoptions forcash at $0.01per share
     1,000,000
        
     
     100
        
     
     149,900
        
     
     --
        
     
     --
        
     
     --
        
     
     150,000Issuance ofcommon stockfor debt at$0.80 per share
     1,654,027
        
     
     165
        
     
     1,223,815
        
     
     --
        
     
     99,242
        
     
     --
        
     
     1,323,222Issuance ofcommon stockfor servicesat $0.22 pershare
     67,837
        
     
     7
        
     
     14,993
        
     
     --
        
     
     --
        
     
     --
        
     
     15,000Net loss for theyear endedDecember 31, 2002
        
        
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     (1,776,851
        )
     
     (1,776,851
        )Balance, December31, 2002
     40,723,137
        
     
     4,072
        
     
     5,811,984
        
     
     --
        
     
     99,242
        
     
     (15,364,764
        )
     
     (9,449,466
        ) F-6




VIRAL GENETICS, INC.
                                                     (A DEVELOPMENT STAGE COMPANY)
                                       CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) CommonStockNumber ofShares
     CommonStockAmount
     AdditionalPaid-inCapital
     CommonStockOptions
     CommonStockWarrants
     DeficitAccumulatedDuringDevelopmentStage
     TotalStockholders'Equity(Deficit)(restated)
     
     
     
     (restated)
     (restated)Balance, December31, 2002
     40,723,137
        
     
     4,072
        
     
     5,811,984
        
     
     --
        
     
     99,242
        
     
     (15,364,764
        )
     
     (9,449,466
        )Issuance ofoptions forservices at$0.10 to $0.66
     --
        
     
     --
        
     
     --
        
     
     2,384,000
        
     
     --
        
     
     --
        
     
     2,384,000Issuance ofwarrants forservices at$0.29 to $0.35
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     177,000
        
     
     --
        
     
     177,000Issuance ofcommon stockfor cash at$0.20 to $0.35per share
     3,531,456
        
     
     354
        
     
     873,889
        
     
     --
        
     
     --
        
     
     --
        
     
     874,243Issuance ofcommon stockfor cash at$0.2135 pershare
     2,341,675
        
     
     234
        
     
     499,766
        
     
     --
        
     
     --
        
     
     --
        
     
     500,000Issuance ofcommon stockfrom theexercise ofoptions forcash at $0.01per share
     700,000
        
     
     70
        
     
     269,930
        
     
     (263,000
        
     
     --
        
     
     --
        
     
     7,000Issuance ofcommon stockfrom theexercise ofoptions fordebt at $0.01per share
     480,769
        
     
     48
        
     
     197,260
        
     
     (192,500
        
     
     --
        
     
     --
        
     
     4,808Issuance ofcommon stockfrom theexercise ofoptions forservices at$0.01 per share
     250,000
        
     
     25
        
     
     84,975
        
     
     (82,500
        
     
     --
        
     
     --
        
     
     2,500Issuance ofcommon stockfrom theexercise ofwarrants forexpenses at$0.05 per share
     250,000
        
     
     25
        
     
     84,975
        
     
     --
        
     
     (72,500
        )
     
     --
        
     
     12,500Issuance ofcommon stockfor servicesat $0.20 to$0.70 per share
     383,096
        
     
     38
        
     
     132,984
        
     
     --
        
     
     --
        
     
     --
        
     
     133,022Issuance ofcommon stockand warrantsfor debt andinterest at$0.30 per share
     450,880
        
     
     45
        
     
     69,841
        
     
     --
        
     
     65,378
        
     
     --
        
     
     135,264Allocation ofexpiredwarrants toadditionalpaid-in capital
     --
        
     
     --
        
     
     99,242
        
     
     --
        
     
     --
        
     
     --
        
     
     --Beneficialconversionfeature ofconvertibledebt
     --
        
     
     --
        
     
     9,322,066
        
     
     --
        
     
     --
        
     
     --
        
     
     9,322,066Net loss for theyear endedDecember 31, 2003
        
        
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     (13,765,173
        )
     
     (13,765,173
        )Balance,December 31, 2003
     49,111,013
        
     
     $4,911
        
     
     $17,446,912
        
     
     $1,846,000
        
     
     $169,878
        
     
     $(29,129,937
        )
     
     $(9,662,236
        ) F-7




VIRAL GENETICS, INC.
                                                     (A DEVELOPMENT STAGE COMPANY)
                                       CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) CommonStockNumber ofShares
     CommonStockAmount
     AdditionalPaid-inCapital
     CommonStockOptions
     CommonStockWarrants
     DeficitAccumulatedDuringDevelopmentStage
     TotalStockholdersEquity(Deficit)(restated)
     
     
     
     (restated)
     (restated)Balance, December31, 2003
        
        
     
        49,111,013
        
     
     $
        4,911
        
     
     $
        17,446,912
        
     
     $
        1,846,000
        
     
     $
        169,878
        
     
     $
        (29,129,937
        )
     
     $
        (9,662,236
        )Issuance of commonstock andwarrants forcash at $0.25per share
     8,000,000
        
     
     800
        
     
     1,799,200
        
     
     --
        
     
     200,000
        
     
     --
        
     
     2,000,000Issuance of commonstock andwarrants fordebt at $0.30per share inconnection withnote conversion
     24,708,580
        
     
     2,471
        
     
     4,274,965
        
     
     --
        
     
     3,226,838
        
     
     --
        
     
     7,504,274Issuance of commonstock forexercise ofwarrants forcash at $0.01to $0.05 pershare
     350,000
        
     
     35
        
     
     119,965
        
     
     --
        
     
     (104,500
        )
     
     --
        
     
     15,500Issuance ofoptions forconsultingservices at$0.34 to $0.84per option
     --
        
     
     --
        
     
     --
        
     
     3,892,960
        
     
     --
        
     
     --
        
     
     3,892,960Issuance of commonstock from theexercise ofoptions at$0.01 per share
        
        
     
        2,913,400
        
     
     
        291
        
     
     
        1,497,553
        
     
     
        (1,468,710
        )
     

        --
        
     

        --
        
     
     
        29,134Issuance of commonstock forservices at$0.30 to $0.67per share
     979,722
        
     
     98
        
     
     467,589
        
     
     --
        
     
     --
        
     
     --
        
     
     467,687Issuance of commonstock for cashat $0.30 to$0.53 per share
     1,337,865
        
     
     134
        
     
     506,769
        
     
     --
        
     
     --
        
     
     --
        
     
     506,903Issuance of commonstock andwarrants fordebt conversionat $0.30 pershare
     66,666
        
     
     7
        
     
     10,726
        
     
     --
        
     
     9,267
        
     
     --
        
     
     20,000Issuance of commonstock forsettlement at$0.44 to $0.70per share
     1,750,000
        
     
     175
        
     
     834,825
        
     
     --
        
     
     --
        
     
     --
        
     
     835,000Issuance of commonstock forfinders fee at$0.45 per share
     1,000,000
        
     
     100
        
     
     449,900
        
     
     --
        
     
     --
        
     
     --
        
     
     450,000Cancellation ofcommon stockfor sharesissued in errorat $0.48 pershare
     (100,000
        )
     
     (10
        )
     
     (47,990
        )
     
     --
        
     
     --
        
     
     --
        
     
     (48,000
        )Allocation ofexpired optionsto additionalpaid-in capital
     --
        
     
     --
        
     
     520,000
        
     
     (520,000
        )
     
     --
        
     
     --
        
     
     --Beneficialconversionfeature ofconvertible debt
     --
        
     
     --
        
     
     338,751
        
     
     --
        
     
     --
        
     
     --
        
     
     338,751Net loss for theyear endedDecember 31, 2004
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     (7,282,338
        )
     
     (7,282,338
        )Balance, December31, 2004
        
        
     
        90,117,246
        
     
     $
        9,012
        
     
     $
        28,219,165
        
     
     $3,750,250
        
     
     $3,501,483
        
     
     $(36,412,275
        )
     
     $(932,365
        ) F-8




VIRAL GENETICS, INC.
                                                     (A DEVELOPMENT STAGE COMPANY)
                                       CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(DEFICIT) Number ofCommonStockShares
     CommonStockAmount
     AdditionalPaid-inCapital
     CommonStockOptions
     CommonStockWarrants
     DeficitAccumulatedDuringDevelopmentStage
     TotalStockholdersEquity(Deficit)(restated)
     
     
     
     (restated)
     (restated)Balance, December31, 2004
     90,117,246
        
     
     9,012
        
     
     28,219,165
        
     
     3,750,250
        
     
     3,501,483
        
     
     (36,412,275
        )
     
     (932,365
        )Issuance ofoptions forconsultingservices at$.01$.41
     --
        
     
     --
        
     
     --
        
     
     1,290,662
        
     
     --
        
     
     --
        
     
     1,290,662Issuance of commonstock for theexercise ofoptions at $.01per share
     2,064,900
        
     
     206
        
     
     588,257
        
     
     (567,814
        
     
     --
        
     
     --
        
     
     20,649Issuance of1,650,000shares forconsultingservices
     1,650,000
        
     
     165
        
     
     590,835
        
     
     --
        
     
     --
        
     
     --
        
     
     591,000Sale of commonstock andissuance ofwarrants atexercise pricesof $.45$.50per share
     4,230,555
        
     
     423
        
     
     1,016,577
        
     
     --
        
     
     63,000
        
     
     --
        
     
     1,080,000Adjustment foroptions expired
     --
        
     
     --
        
     
     142,598
        
     
     (142,598
        )
     
     --
        
     
     --
        
     
     --Beneficialconversionfeature ofconvertible debt
     --
        
     
     --
        
     
     516,800
        
     
     --
        
     
     --
        
     
     --
        
     
     516,800Sale of commonstock at $.15and $.18 pershare
     222,008
        
     
     22
        
     
     34,946
        
     
     --
        
     
     --
        
     
     --
        
     
     34,968Net Loss
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     (5,032,793
        )
     
     (5,032,793
        )Balance, DecemberDecember 31, 2005
     98,284,709
        
     
     $9,828
        
     
     $31,109,178
        
     
     $4,330,500
        
     
     $3,564,483
        
     
     (41,445,068
        )
     
     $(2,431,079
        ) F-9




VIRAL GENETICS, INC.
                                                     (A DEVELOPMENT STAGE COMPANY)
                                       CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) Number ofCommonStockShares
     CommonStockAmount
     AdditionalPaid-inCapital
     CommonStockOptions
     CommonStockWarrants
     DeficitAccumulatedDuringDevelopmentStage
     TotalStockholdersEquity(Deficit)(restated)
     
     
     
     (restated)
     (restated)Balance, DecemberDecember 31, 2005
     98,284,709
        
     
     $9,828
        
     
     $31,109,178
        
     
     $4,330,500
        
     
     $3,564,483
        
     
     (41,445,068
        )
     
     $(2,431,079
        )Issuance of commonstock for services at$.15$.79 per share
        
        
     2,405,579
        
     
     241
        
     
     1,245,734
        
     
     --
        
     
     --
        
     
     --
        
     
     1,245,975Issuance of commonstock for debtrepayment at$.40 per share
        
        
     667,500
        
     
     67
        
     
     266,933
        
     
     --
        
     
     --
        
     
     --
        
     
     267,000Issuance of commonstock for theexercise of optionsat $.01 per share
     570,550
        
     
     57
        
     
     335,316
        
     
     (329,667
        )
     
     --
        
     
     --
        
     
     5,706Issuance of commonstock at$.35 per share
     1,800,000
        
     
     180
        
     
     629,820
        
     
     --
        
     
     --
        
     
     --
        
     
     630,000Issuance of commonstock for redemptionof convertible debtat $.12$.18 per shareand payment ofinterest at$.08 - $.14 per share
     9,805,329
        
     
     981
        
     
     837,469
        
     
     --
        
     
     --
        
     
     --
        
     
     838,450Issuance of options forwages and services at$.01 - $.80 per share
     --
        
     
     --
        
     
     --
        
     
     1,087,953
        
     
     --
        
     
     --
        
     
     1,087,953Issuance of warrants asinducement to sellconvertible debt
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     598,741
        
     
     --
        
     
     598,741Beneficial convertible limitation
     --
        
     
     --
        
     
     516,800
        
     
     --
        
     
     (516,800
        )
     
     --
        
     
     --Exercise of warrants inconnection withissuance of 667,500shares ofcommon stock
     --
        
     
     --
        
     
     87,443
        
     
     --
        
     
     (87,443
        )
     
     --
        
     
     --Issuance of warrants inconnection withconvertible debt
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     2,540,732
        
     
     --
        
     
     2,540,732Issuance of warrants tobroker in connectionwith convertibledebt issue
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     57,831
        
     
     --
        
     
     57,831Issuance of warrants forservices at$.80 per share
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     132,000
        
     
     --
        
     
     132,000Cancellation of warrants
     --
        
     
     --
        
     
     587,089
        
     
     --
        
     
     (587,089
        )
     
     --
        
     
     --Additional interest chargefor stock issued atbelow market prices
     --
        
     
     --
        
     
     11,619
        
     
     --
        
     
     --
        
     
     --
        
     
     11,619Adjustment ofderivative liability dueto conversion ofconvertible debt
     --
        
     
     --
        
     
     300,472
        
     
     --
        
     
     --
        
     
     --
        
     
     300,472Net Loss
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     --
        
     
     (12,609,187
        )
     
     (12,609,187
        )Balance atDecember 31, 2006
     113,533,667
        
     
     $11,354
        
     
     $35,927,873
        
     
     $5,088,786
        
     
     $5,702,455
        
     
     (54,054,255
        )
     
     $(7,323,787
        ) The accompanying notes are an integral part of these consolidated financial
statements. F-10




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 1  ORGANIZATION AND DESCRIPTION OF BUSINESS Viral
Genetics Inc. (the Company) was incorporated in California on July 11, 1995 and is in
the development stage. The Company is engaged in the research and development of
protein-based therapeutic and diagnostic products with applications in infectious
disease, autoimmune conditions, and immunological deficiency. The Company was acquired by
a Delaware corporation and reporting issuer on October 1, 2001. The Companys year-end is
December 31. See Note 11. Viral
Genetics, Inc. owns 100% of a Chinese subsidiary called Viral Genetics Beijing, Ltd.
which was organized for prospective operations in China. At this time, the office in
China has a president and two full-time employees working on regulatory related activity
seeking registration for the Companys HIV/AIDS product. There is no financial activity
in this office other than monthly stipends sent from the U.S. company to cover certain
expenses, which are included in the reported operating expenses of Viral Genetics, Inc.
 The Company established a subsidiary in South Africa in 2003 which has been subsequently
sold in May 2004. See Note 5. NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This summary
of significant accounting policies is presented to assist in understanding the financial
statements. The financial statements and notes are representations of the Companys
management, which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United States of
America, and have been consistently applied in the preparation of the financial
statements. Accounting Methods The Companys
financial statements are prepared using the accrual method of accounting, which conforms
to accounting principles generally accepted in the United States of America. Accounting for Stock Options
and Warrants Granted to Employees and Non-Employees Statement of
Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment (hereinafter
SFAS No. 123R), defines a fair value-based method of accounting for stock options and
other equity instruments. The Company has adopted this method, which measures
compensation costs based on the estimated fair value of the award and recognizes that
cost over the service period. Cash and Cash Equivalents For purposes
of the statements of cash flows, the Company considers all highly liquid investments with
original maturities of three months or less to be cash equivalents. Compensated Absences The Companys
policy is to recognize the cost of compensated absences when actually paid to employees.
If the amount were estimatable, it would not be currently recognized as the amount would
be deemed immaterial. Consolidated Financial
Statements The
accompanying financial statements include those of the Company and its subsidiaries. All
intercompany balances and transactions have been eliminated upon consolidation. F-11




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Development Stage Activities The Company
has been in the development stage since its formation on July 11, 1995. It is primarily
engaged in medical research and development. Loss Per Share On January 1,
1998, the Company adopted Statement of Financial Accounting Standards No. 128, which
provides for calculation of basic and diluted loss per share. Basic loss per share
includes no dilution and is computed by dividing net loss available to common
shareholders by the weighted average common shares outstanding for the period. Diluted
earnings per share reflect the potential dilution of securities that could share in the
earnings of an entity similar to fully diluted loss per share. Although there was
approximately 60,440,639 common stock equivalents outstanding at December 31, 2006, they
were not included in the calculation of earnings per share because they would have been
considered anti-dilutive. Fair Value of Financial
Instruments The Companys
financial instruments as defined by Statement of Financial Accounting Standards No. 107, Disclosures
about Fair Value of Financial Instruments, include accounts payable, accrued expenses
and borrowings from related parties. All of the Companys financial instruments are
accounted for on a historical cost basis, which approximates fair value at December 31,
2006. Going Concern As shown in
the accompanying financial statements, the Company has incurred an accumulated deficit of
$54,054,255 through December 31, 2006. The Company is currently in need of funds to
continue its research and development goals. The Company has substantial debt and
recurring losses from operations. These factors and uncertainties raise substantial doubt
about the Companys ability to continue as a going concern. The financial statements do
not include any adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary in the
event the Company cannot continue in existence. Management has designed plans for sales
of the Companys products. Management intends to seek additional capital from new equity
securities offerings and from debt financing that will provide funds needed to increase
liquidity, fund internal growth and fully implement its business plan. An estimated
$1,500,000 of cash is believed necessary to continue operations and increase development
through the next fiscal year. The timing and amount of capital requirements will depend
on a number of factors, including demand for products and services and the availability
of opportunities for international expansion through affiliations and other business
relationships. Management intends to seek additional capital from new equity securities
issuances to provide funds needed to increase liquidity, fund internal growth, and fully
implement its business plan. F-12




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Impaired Asset Policy In October
2001, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS
No. 144). SFAS No. 144 replaces SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This standard establishes
a single accounting model for long-lived assets to be disposed of by sale, including
discontinued operations. SFAS No. 144 requires that these long-lived assets be measured
at the lower of carrying amount or fair value less cost to sell, whether reported in
continuing operations or discontinued operations. This statement is effective beginning
for fiscal years after December 15, 2001, with earlier application encouraged. The
Company adopted SFAS No. 144 and does not believe any adjustments are needed to the
carrying value of its assets at December 31, 2006. Provision for Taxes Income taxes
are provided based upon the liability method of accounting pursuant to Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes. Under this
approach, deferred income taxes are recorded to reflect the tax consequences in future
years of differences between the tax basis of assets and liabilities and their financial
reporting amounts at each year-end. A valuation allowance is recorded against deferred
tax assets if management does not believe the Company has met the more likely than not standard
imposed by SFAS No. 109 to allow recognition of such an asset. Reclassification Certain amounts from prior periods have been reclassified
to conform to the current period presentation. These reclassifications have not resulted
in any changes to the Companys accumulated deficit or the net losses presented. Research and Development Research and
development expenses are charged to operations as incurred. Revenue Recognition The Company
recognizes revenue from product sales upon shipment to the customer if collectability is
reasonably assured. F-13




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) Segment Reporting The Company
does not utilize segment information at this time as defined by Statement of Financial
Accounting Standards No. 131 because it has only one principal business activity and
because its wholly owned Beijing subsidiary had no activity other than expenses of
$56,000 and $123,000 for the years ended December 31, 2006 and 2005, respectively which
are included in the accompanying statement of operations. Use of Estimates The process
of preparing financial statements in conformity with accounting principles generally
accepted in the United States of America requires the use of estimates and assumptions
regarding certain types of assets, liabilities, revenues, and expenses. Such estimates
primarily relate to unsettled transactions and events as of the date of the financial
statements. Accordingly, upon settlement, actual results may differ from estimated
amounts. Recent Accounting
Pronouncements In February 2007, the Financial Accounting Standards Boards (FASB)
issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities, including an amendment
of FASB Statement No. 115.  This statement provides companies with an option to report selected financial assets
and liabilities at fair value.  This statement is effective for fiscal years beginning after November 15, 2007
with early adoption permitted.  The Company is currently assessing the impact of SFAS No. 159 on its
consolidated financial position and results of operations. In September
2006, the FASB issued SFAS No. 157 (SFAS 157) Fair Value Measurements.SFAS 157
establishes a framework for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value measurements. The provisions of
SFAS 157 will be effective for the Company beginning January 1, 2007. The Company is in
the process of determining the effect, if any, the adoption of SFAS 157 will have on its
financial statements. In September
2006, the Securities and Exchange Commission issued SAB No. 108 Considering the Effects
of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements.SAB No. 108 addresses quantifying the financial statement effects of
misstatements, specifically, how the effects of prior year uncorrected errors must be
considered in quantifying misstatements in the current year financial statements. The
provisions of SAB No. 108 are effective in the current fiscal year for the Company. The
adoption of SAB No. 108 did not have a material impact on the Companys financial
statements. In July 2006,
the FASB issued Interpretation No. 48 (FIN 48) Accounting for Uncertainty in Income
Taxes,which prescribes a recognition threshold and measurement process for recording in
the financial statements uncertain tax positions taken or expected to be taken in a tax
return. Additionally, FIN 48 provides guidance on the derecognition, classification,
accounting in interim periods and disclosure requirements for uncertain tax positions.
The provisions of FIN 48 will be effective for the Company beginning January 1, 2007. The
Company is in the process of determining the effect, if any, the adoption of FIN 48 will
have on its financial statements. F-14




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) In February 2006,  the
FASB issued SFAS No. 155,  Accounting  for Certain Hybrid  Instruments.This
 statement  provides an election,  on an instrument by  instrument  basis,  to measure at
fair value an entire hybrid  financial  instrument that contains an embedded  derivative
 requiring  bifurcation,  rather than measuring only the  embedded  derivative  on a fair
value  basis.  This  statement  also  eliminates  an  exception  from the requirement  to
bifurcate  an embedded  derivative  feature from  beneficial  interests  in  securitized
 financial assets.  The Company has used this exception for investments the Company has
made in securitized  financial  assets in the normal course of operations,  and thus has
not previously had to consider whether such  investments  contain an embedded
 derivative.  The new  requirement to identify  embedded  derivatives  in beneficial
 interests will be applied on a prospective basis only to beneficial interests acquired,
 issued, or subject to certain  remeasurement conditions  after the adoption of the
guidance.  The Company  expects to adopt this guidance  effective  January 1, 2007.  The
 Companys  adoption  of this  guidance  is not  expected  to have a  material  effect on
the  Companys consolidated financial position or results of operations. In  November  2005,
 the FASB  issued FSP FAS 115-1 and FAS 124-1,  The  Meaning of  Other-Than-Temporary
Impairment  and its  Application  to Certain  Investments.  This FSP provides
 impairment  models for  determining whether to record impairment  losses  associated
with investments in certain equity and debt securities,  primarily by  referencing
 existing  accounting  guidance.  It also  requires  income to be  accrued on a
 level-yield  basis following an  impairment of debt  securities,  where  reasonable
 estimates of the timing and amount of future cash flows can be made.  The Company
 adopted this guidance  effective  January 1, 2006,  and it did not have a material
effect on the Companys consolidated financial position or results of operations. In June 2005,  the
FASB issued  Statement No. 133  Implementation  Issue No. B39,  Embedded  Derivatives:
Application of Paragraph 13(b) to Call Options That are Exercisable Only by the Debtor.  Implementation
 Issue No. B39 indicates that debt  instruments  where the right to accelerate the
settlement of debt can be exercised only by the  debtor  do not meet  the  criteria  of
 Paragraph  13(b) of  Statement  No.  133,  and  therefore  should  not individually
 lead to such options  being  considered  embedded  derivatives.  Such options must still
be evaluated under  paragraph  13(a) of  Statement  No. 133.  This  implementation
 guidance is  effective  for the first fiscal quarter  beginning after December 15, 2005.
The Companys  adoption of this guidance  effective January 1, 2006 did not have a
material  effect on the  Companys  consolidated  financial  position  or results of
 operations  as the guidance is consistent with the Companys existing accounting policy. NOTE 3  PROPERTY AND EQUIPMENT Property and
equipment are stated at cost. Depreciation is provided using the straight-line method
over the estimated useful lives of the assets. The useful lives of property, plant and
equipment for purposes of computing depreciation are three to five years. The estimated
useful lives of leasehold improvements are twenty years, the expected term of the lease
plus extensions. F-15




NOTE 3  PROPERTY AND EQUIPMENT (continued) The following
is a summary of property, equipment, and accumulated depreciation: December 31
2006
     December 31
2005Equipment
     
     
     $
        322,132
        
     
     $
        313,070Leasehold improvements
     1,039,306
        
     
     938,6271,361,438
        
     
     1,251,697Less accumulated depreciation
     (381,154
        )
     
     (290,936
        )$980,284
        
     
     $960,761 Equipment
principally consists of machines that can be used to manufacture the Companys drug
candidates. Depreciation for the years ended December 31, 2006 and 2005 was $90,350 and
$74,226, respectively. The Company evaluates the recoverability of property and equipment
when events and circumstances indicate that such assets might be impaired. The Company
determines impairment by comparing the undiscounted future cash flows estimated to be
generated by these assets to their respective carrying amounts. Maintenance and repairs
are expensed as incurred.   Replacements and betterments are capitalized. The cost and
related reserves of assets sold or retired are removed from the accounts, and any
resulting gain or loss is reflected in results of operations. NOTE 4  PATENTS The Company
has the following patents issued: Region
     Date Issued
     Patent No.Australia
     October 19, 2000
     721463Canada
     March 18, 2003
     2220347EPC (Austria, Denmark, France, Germany, Great Britain, Ireland, Italy,Liechtenstein, Monaco, Netherlands, Spain, and Switzerland)
     September 5, 2001
     69615015.8Hong Kong
     August 9, 2002
     HK1009457Israel
     January 5, 1996
     118103/5Russia and Former Soviet Republics
     July 4, 2000
     001100 These patents
all relate to certain of the Companys products which are based on TNP. The Company also
has patents issued in Bulgaria and New Zealand, and pending patent applications in
Argentina, Brazil, China, Japan, South Africa and United States. The Company
can give no assurance that other companies, having greater economic resources, will not
be successful in developing products similar to those of the Company. There can be no
assurance that patents, if obtained for the aforementioned patent applications, will be
enforceable. Patents that had been acquired from Therapeutic Genetics, Inc. were the
security for a note payable which was converted to common stock and warrants in 2004. F-16




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 5  COMMITMENTS AND CONTINGENCIES Product Liability The Company
may be subjected to future claims resulting from the use of its drug candidates, although
the Company is unaware of any product-related litigation or potential claims to date. As
of December 31, 2006, the Company does not have product liability insurance for any of
its drug candidate products. Consulting Agreements During the
year ended December 31, 2006, the Company had in place agreements with several
individuals and entities for various consulting and advisory services which provided that
each contracted consultant or advisor would periodically receive stock or stock options
(See Note 10 regarding stock options). As of December 31, 2006, the Company had ten
individuals and firms engaged under such agreements. The Company
also has other agreements with consultants for future issuance of common stock as
compensation. Employment Agreements On June 1,
2003, the Company entered into employment agreements with three executive officers who
are also directors and principal shareholders of the Company, Mr. Haig Keledjian as
president and chief executive officer; Mr. Hampar Karageozian as chief operating officer;
and Mr. Harry Zhabilov, Jr. as executive vice president of research and development. Mr. Hampar
Karagezian resigned his position on August 5, 2004, which voids his employment agreement.  Mr. Harry Zhabilov, Jr.
was terminated by the Company in December 2006.
The remaining agreement is effective until May 31, 2006 and may be extended for
additional one year terms upon the mutual consent of the employee and the Company. The
agreement provides for a salary of $150,000 per annum, a signing bonus of 500,000 options
to purchase shares of the Companys common stock at a price equal to market value on the
date of the options issuance, and an annual grant of 1,800,000 stock options to purchase
shares of the Companys common stock at a price equal to market value on the date of the
options issuance. In April 2007, the Company extended the employment agreement with Mr.
Keledjian until December 31, 2009.  On May 1, 2005, the Company entered into an
employment agreement with Monica Ord, an officer of the Company. The agreement provides
for a salary of $150,000 per annum plus 800,000 options to acquire shares of common stock
at a price of $0.01 which vests in eight increments of 100,000 for each three months of
employment. The agreement also provides for certain performance-based bonuses. See Note 9
regarding stock options. Distribution Agreements On March 24,
2004, the arms length party accepted an offer to purchase 10% of the Companys former
South African subsidiary for total consideration of $500,000. The Company agreed to the
first 5% being fully paid for by $100,000 advanced in June, 2002, and the second 5%,
which was valued at $400,000, was to be paid no later than November 30, 2004. In relation
to this, the $109,966 unsecured note was cancelled. Subsequently, in May 2004, the
Company and the arms length party agreed to cancel all outstanding agreements and in
lieu of this the Company has granted to this party a royalty of 2.5% of the net sales of
VGV-1 in Africa for a period of 20 years commencing from the first commercial sale of
VGV-1 in Africa with no further obligations in regard to the $109,966 note or the
$100,000 advanced in June, 2002. Further, this party was granted an option to acquire
1,000,000 shares of the Companys common stock at a purchase price of $0.40 per share,
exercisable until December 31, 2004. This option expired unexercised. F-17




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 5  COMMITMENTS AND CONTINGENCIES (continued) In May and
June 2004, the Company entered into several agreements with Timothy and Thomas LLC (T & T)
which is controlled by the holder of the $200,000 convertible debenture issued by the
Company in September 2003, and Timothy W. Wright III, a former director of the Company.
The agreements included the sale of the former South African subsidiary, Viral Genetics
South Africa (Pty) Limited (VGSA), to the buyer for cash consideration of $650,000 and
forgiveness of the $200,000 convertible debenture. In December 2004, the Company and T & T
entered into an agreement which superceded previous agreements and obligated T & T to pay
for the costs of the Companys ongoing clinical trial of VGV-1 in South Africa up to a
maximum threshold amount. As the exclusive distribution management partner of the Company
in Africa with respect to Companys HIV and AIDS products, T & T will secure and
establish distributors in Africa, and provide management and oversight of the Companys
relationships with distributors. VGSA is the exclusive distributor of the Companys HIV
and AIDS products in South Africa. (See Note 12 regarding litigation.) Lease On April 7,
2004, the Company signed a five-year lease for an administrative, research and
development facility to commence August 1, 2004. The base rent and fees are $6,450 per
month, after payment of an initial deposit of $40,590. The Company expects to have its
corporate headquarters, primary manufacturing, and primary research and development
facilitate located at this new facility in Azusa, California.
On January 1, 2005, the Company signed a three year lease for additional administrative,
research and development facility to commence immediately. The base rent and fees are
$6,018 per month. The Company
expects to locate additional office space, as well as a quality control laboratory, at
this facility. Also, the Companys Chinese subsidiary has a month to month lease for
approximately $2,000 per month. Total lease
commitments for the subsequent years ended December 31 are as follows: 2007
     $149,6162008
     $  77,4002009
     $  45,150$272,166 NOTE 6  COMMON STOCK In November
2006, the Company issued 418,104 shares of common stock as partial payment for the second
of 24 principal and interest payments on the Companys 10% Senior Secured Amortizing
Convertible Debentures Due September 1, 2008 based upon a value of $0.45 per share. In
accordance with the terms of the agreement, the Company issued an additional 2,660,319
shares in January 2007. (See Note 8 regarding convertible notes payable) In November
2006, the Company issued 267,731 shares of common stock as partial payment for the third
of 24 principal and interest payments on the Companys 10% Senior Secured Amortizing
Convertible Debentures Due September 1, 2008 based upon a value of $0.45 per share. In
accordance with the terms of the agreement, the Company issued an additional 1,161,459
shares in December 2006. (See Note 8 regarding convertible notes payable) In October
2006, the Company issued 267,731 shares of common stock as partial payment for the second
of 24 principal and interest payments on the Companys 10% Senior Secured Amortizing
Convertible Debentures Due September 1, 2008 based upon a value of $0.45 per share. In
accordance with the terms of the agreement, the Company issued an additional 1,414,961
shares in November 2006. (See Note 8 regarding convertible notes payable) F-18




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 6  COMMON STOCK (continued) In October of
2006, the Company issued 25,000 shares to Robert Siegel on exercise of an option and
payment of the exercise price of $250. In October of
2006, the Company issued 400,000 shares of common stock to Michael Agadjanyan as
compensation for research and development services valued at $60,000 which were provided to the Company. In August and November
2006, certain holders of the Companys unsecured convertible debentures due October 2007,
elected to convert their holdings into shares of the Companys common stock at a
conversion price of $0.18 per share as provided for in the underlying agreements. In
connection with these conversions the Company issued 770,418 shares of its common stock.
(See Note 7 regarding convertible notes payable) In August
2006, the Company issued 601,502 shares of common stock as partial payment for the first
of 24 principal and interest payments on the Companys 10% Senior Secured Amortizing
Convertible Debentures due September 1, 2008 based upon a value of $0.45 per share. In
accordance with the terms of the agreement, the Company issued an additional 1,717,241
shares in October 2006. (See Note 8 regarding convertible notes payable) In May of
2006, the Company issued 100,000 shares to Ronald Moss on exercise of an option and
payment of the exercise price of $1,000; 25,000 shares to Eric Rosenberg on exercise of
an option and payment of the exercise price of $250 and 25,000 shares to Robert Siegel on
exercise of an option and payment of the exercise price of $250. In March
2006, the Company issued 667,500 shares to Southwest Land Trust and Investments on
exercise of warrants for cash received in January, February and March 2006. In March
2006, Caribou Investments, Inc., subscribed for the purchase of 1,800,000 shares of
common stock at a price of $0.35 per share, or a total of $630,000, payable $250,000 on
March 10, 2006, $250,000 on April 10, 2006, and $130,000 on May 10, 2006. In connection
with the transaction, Caribou Investments agreed to cancel outstanding options to
purchase 88,417 shares at an average exercise price of $0.53 per share and warrants to
purchase 1,747,719 shares at an exercise price of $0.40. The first two installments
totaling $500,000 each were received in March and April 2006 and the Company issued to
Caribou Investments 1,428,572 shares of common stock. In March
2006, the Company issued 750,000 shares to Imperial Consulting Network, Inc. as partial
compensation for a publication agreement valued at $555,000. In March
2006, the Company issued 308,334 shares of common stock to Medbridge Development
Corporation and 151,866 shares to Joseph Natale as compensation for consulting services valued at $200,417
and $98,713 which were rendered to the Company. In February
2006, the Company issued: 100,000 shares of common stock to Michael Agadjanyan on
exercise of an option and payment of the exercise price of $1,000; 25,000 shares of
common stock to Dr. Robert Siegel on exercise of an option and payment of the exercise
price of $250; 96,000 shares of common stock to five individuals on exercise of an option
issued to Ashot Petrossian and payment of the exercise price of $960. In
January 2006, the Company issued 35,200 shares of common stock to Andre Bagdasarian on
exercise of an option and payment of the exercise price of $352. In March 2006, the Company issued 139,350
shares of common stock to GxP Bipharm on exercise of an option and payment of the exercise price of $1,394.
All of the foregoing options were issued as compensation for consulting services. In February
2006, the Company settled an outstanding payment obligation for construction on the
Companys facility in the amount of $173,845 owed to Kizyma Electric by issuing 695,379
shares of common stock. F-19




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 6  COMMON STOCK  (continued) Pursuant to a
placement agency agreement with Stonegate Securities, Inc., the Company issued to the
three principals of Stonegate Securities 200,000 shares of common stock valued at $0.79 per share in January 2006.
The shares were issued as compensation for services in reviewing and analyzing the
Company with a view to assisting the Company in raising capital. Between
December 2, 2005 and December 5, 2005, the Company completed the sale of 2,800,000 shares
of common stock and warrants to purchase an additional 2,800,000 shares at a price of
$.45 per share that are exercisable for a term of three years to individual investors for
$700,000. In December
2005, the Company issued 500,000 shares to four consultants for services valued at
$260,000. The Company also issued 150,000 and 100,000 shares to consultants for cash of
$1,500 and $1,000 and services valued at $40,750 and $28,000, respectively. On November
7, 2005, the Company completed the sale of 555,555 shares of common stock and warrants to
purchase an additional 555,555 shares at a price of $.30 per share that is exercisable
for a term of two years to an individual investor for $100,000. In November
2005, the Company completed the sale of 222,008 shares of common stock to individual
investors for $34,968. In October
2005, the Company issued 750,000 shares to five consultants for services valued at
$750,000. The Company also issued 102,000 shares to a consultant for cash of $1,020 and
services valued at $23,460. In November
2005, the Company issued 143,100 shares to a consultant for cash of 1,431 and services
valued at $52,110. In September
2005, the Company issued 108,800 shares to two consultants for cash of $1,088 and
services valued at $24,848. In August
2005, the Company issued 210,000 shares to an officer for exercise of options for cash of
$2,100 and services valued at $45,100. In July 2005,
the Company issued 19,200 shares to a consultant for cash of $192 and services valued at
$4,136. In June 2005,
the Company issued 390,800 shares to four consultants for cash of $3,980 and services
valued at $85,904. In May 2005,
the Company issued 197,200 shares to two consultants and two equipment vendors for cash
of $1,972 and services valued at $39,440. In April
2005, the Company issued 199,000 shares to two consultants for cash of $1,990 and
services valued at $53,730; and 100,000 shares to a consultant for services valued at
$28,000. On April 25,
2005, the Company completed the sale of 625,000 shares of common stock and warrants to
purchase an additional 500,000 shares at a price of $0.50 per share that are exercisable
for a term of two years to General Global Ventures, LLC, a Delaware limited liability
company, for $200,000. On June 29, 2005, the Company completed the sale of 250,000
additional shares of common stock and warrants to purchase an additional 200,000 shares
at a price of $0.50 per share that are exercisable for a term of two years to General
Global Ventures, LLC. F-20




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 6  COMMON STOCK  (continued) The shares
and warrants were issued under a securities purchase agreement, which further provided
that General Global Ventures could purchase up to an additional 2,656,250 shares of
common stock and 2,125,000 warrants on or before May 31, 2005 at an additional total
purchase price of $850,000. The securities purchase agreement is now expired. The Company
granted General Global Ventures certain piggy-back registration rights to include the
shares in future registration statements files by the Company under the Securities Act of
1933. On the
occurrence of either authorization by the FDA to conduct a human clinical trial or
authorization by a foreign regulatory agency permitting a human clinical trial in the
Caribbean, Central America (including Mexico), and South America, the
securities purchase agreement grants to General Global Ventures the option of investing
in any business entity formed by the Company for distribution of the Companys
products, VGV-1, in the Caribbean, Central America (including Mexico), and South America. In March
2005, the Company issued 125,000 shares to two consultants for cash of $1,250 and
services valued at $46,250. In February
2005, the Company issued 110,400 shares to two consultants for cash of $1,104 and
services valued at $39,744. In January
2005, the Company issued 209,400 shares to three consultants for cash of $2,094 and
services valued at $83,896; and 300,000 shares to a consultant for services valued at
$118,000. NOTE 7  INCOME TAXES At December
31, 2006, the Company had net deferred tax assets of approximately $15.3 million (calculated at
an expected rate of 34%) principally arising from net operating loss carryforwards for
income tax purposes. As management of the Company cannot determine that it is more likely
than not that the Company will realize the benefit of the net deferred tax asset, a
valuation allowance equal to the net deferred tax asset was recorded at December 31, 2006
and 2005. The
significant components of the deferred tax asset at December 31, 2006 and 2005 were as
follows: December 31
2006
     December 31,
2005Net operating loss carryforward before adjustments
     
     
     $
        55,054,255
        
      
     $
        41,445,068Section 197 amortization of patents
        
        
     
        347,070
        
     
     
        347,070Options/warrants issued for expenses and interest
        
        
     
        (9,499,794
        )
     
     
        (7,744,550
        )Net operating loss carryforward
        
        
     
        44,901,531
        
     
     
        34,047,588Deferred tax asset
        
        
     $
        15,266,521
        
     
     $11,576,180Deferred tax asset valuation allowance
        
        
     $
        (15,266,521
        )
      
      $
        (11,576,180
        ) At December
31, 2006, the Company has utilizable net operating loss carryforwards of approximately
$44.9 million, which expire in the years 2016 through 2025. The Company recognized approximately
$1,755,244 of losses from issuance of restricted common stock, stock options and warrants for
services and interest in fiscal 2006, which are not deductible for tax purposes and are
not included in the above calculation of deferred tax assets. The change in the allowance
account from December 31, 2005 to December 31, 2006 was $3,690,341. F-21




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 8  CONVERTIBLE NOTES PAYABLE At December
31, 2006 and 2005, respectively, the Company had the following obligations: 2006
     20055% Convertible notes payable to related parties
     
     
     $
        1,505,802
        
     
     $
        2,080,753Total
     $1,505,802
        
     
     $2,080,753 Accrued
interest on convertible notes payable to related parties was $89,254 and $40,067 at
December 31, 2006 and 2005, respectively. The related
party notes were due in 2003, the Company did not have the funds necessary to pay the
obligations. The debts were restructured in June 2003 with the issuance of 5% convertible
notes whose terms included all underlying principal and interest due March 31, 2008. All
of these convertible notes are exchangeable into units of the Company at the rate of
$0.30 per unit. Each unit consists of one common share of the Companys common stock and one warrant to purchase a share of the Companys common stock at a price of $0.40,
exercisable for 5 years. The
convertible notes payable, aggregating $516,800, are due at maturity from December 2007
to October 2008 and accrue interest at 10% which is paid monthly. The principal amount of
the notes is convertible to common stock at any time at a rate of one common share for
each $.18 of principal. The holders of the notes acquired warrants to purchase 2,871,111
shares of the Companys common stock over terms from two to three years at an exercise
price of $.30 per share. The fair value of the warrants and beneficial conversion feature
are determined to be $516,800 and this amount was recognized as interest expense
immediately since the debt was convertible immediately. On June 30,
2004, a related party converted a note payable-related party in the amount of $6,976,758
plus accrued interest of $527,516 into 24,708,580 shares of common stock and 24,708,580,
$0.40 stock purchase warrants. On September
30, 2003, the Company executed a convertible debenture in the amount of $200,000 with an
arms length individual. The terms of this note require payment due on the earlier of
December 30, 2003, or the date of any event of default as defined in the agreement.
However, any amount of the outstanding principal can be converted at any time at the
option of the holder. On December 30, 2003, the debenture holder agreed to extend the
maturity date of the debenture to July 31, 2004. The rights to this note were assigned to
the Company on May 21, 2004 as part of the sale of the former South African subsidiary,
and it has been effectively cancelled. See Note 5. Other On March 29,
2006, Viral Genetics, Inc. entered into securities purchase agreements with eleven
private investors providing for convertible debt financing to Viral Genetics. In the
transactions, Viral Genetics agree to issue to the investors: (1) 10% Senior Secured Amortizing Convertible Debentures
Due September 1, 2008 (the Debentures), in the aggregate principal      amount of
approximately $2.9 million; (2) Warrants to purchase approximately 6.4 million shares
of Viral Genetics common stock at an exercise price of $0.78 per share      exercisable
over a term of five years (the Warrants); and (3) Unit Purchase Warrants to purchase an additional $2.1
million in principal amount of Debentures and additional Warrants to      purchase 4.7
million shares of common stock (the Unit Warrants). F-22




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 8  CONVERTIBLE NOTES PAYABLE (continued) The initial
purchase of approximately $2.5 million in principal amount of the Debentures was closed
on March 29, 2006 and the remainder of the transaction closed in April The Company
generated net proceeds from the Debentures, after commissions and the investors professional
fees of approximately $2.6 million. The principal
amount of the Debentures is convertible into shares of the Companys common stock at any
time at the election of the holder at a rate of one common share for each $0.45 of
principal. Principal is payable over a term of 24 months beginning October 1, 2006, and
may, at the election of Viral Genetics and subject to certain conditions, be paid in
shares of common stock priced at the lower of $0.45 or 80 percent of the average of the
three lowest closing bid prices during the ten trading days prior to the monthly payment
date. If monthly installments of principal are paid in cash, Viral Genetics must pay an
additional premium equal to five percent of the monthly principal payment. Interest on
the Debentures is paid quarterly beginning October 1, 2006, and may, at the election of
Viral Genetics and subject to the satisfaction of certain conditions, be paid with shares
of common stock. In 2006, the
Company issued  5,848,729 shares of its common stock payment for the first four principal and interest payments and for partial payment of the fourth principal and
interest payment. In accordance with the agreements underlying the Debentures the
conversion price per share were valued at $0.055 to $.096 per share for the principal due
and to $0.075 to $0.137 per share for the interest due.   The total value of the shares
issued were $537,715, of which $376, 303 represented a reduction of principal and
$161,412 represented payment of accrued interest.  In addition, the Company issued an
additional 2,660,319 shares in January 2007 to satisfy in full the fourth principal and
interest payment due January 2, 2007. The conversion feature and the common stock
payment provision of these convertible notes were accounted for as embedded derivatives and valued on the
transaction date using a Black-Scholes pricing model.  At the end of the each quarterly reporting date, the value
of the derivative is evaluated and adjusted to current fair value.  When common stock is issued as payment on the
convertible debt, a portion of the derivative  liability is transferred to additional paid-in capital.  The
derivative liability has been reported as a current liability since the convertible notes were restructued in February 2007. As of December 31, 2006, the Company recorded a cumulative
derivative expense of $2,245,254 and reported a reduction in the liability of $300,472 applicable to the common
shares issued in payment of the convertible debt.  The derivative values were calculated using the Black-Scholes pricing model
with the following assumptions: 
     Risk-free Interest Rate
     5%
     Expected life (in years)
     1.25
     Expected volatility
     98.33%
     Dividend yield
     0.00%
     Stock trading price
     $0.09 The Unit Warrants are exercisable over a term of nine months
following the effective date of the registration statement. Beginning six months
following the effective date of the registration statement, Viral Genetics can prepay the
Debentures, subject to certain conditions and the payment of a 20 percent premium on the
principal amount of the Debentures prepaid. The
Debentures are secured by substantially all of the assets of Viral Genetics. So long as
the Debentures are outstanding, Viral Genetics is prohibited from incurring additional
debt, except in the ordinary course of business in an amount in the aggregate not to
exceed $25,000 and indebtedness incurred for purchase or lease of fixtures and equipment
in an aggregate amount not to exceed $8,000,000, allowing any liens to attach to its
assets, except for capital leases and purchase money security interests established on
the acquisition of fixtures and equipment, repay or redeem any of its securities, and
making any distributions on its outstanding securities. The
securities were offered and sold in reliance on the exemption from registration set forth
in Section 4(2) of the Securities Act of 1933 and Rule 506 of Regulation D. HPC Capital
Management Corporation assisted with placement of the financing and received a cash
commission of approximately $290,000, and Warrants to purchase approximately 145,000
shares of common stock valued at $57,831. In a related
transaction, the investors purchasing the Debentures negotiated for and purchased from
three other creditors of Viral Genetics unsecured convertible debentures in the principal
amount of $576,800 that accrue interest at the rate of 10 percent per annum originally
issued in October 2005. Accrued interest on the unsecured debentures at the time of the
purchase was $21,650, so the total purchase price paid was $598,450. The maturity date of
the unsecured debentures is October 18, 2007. The principal amount of the debentures is
convertible to common stock at any time at the election of the holder at a rate of one
common share for each $0.18 of principal. Viral Genetics will include the shares
underlying the F-23




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 8  CONVERTIBLE NOTES PAYABLE (continued) unsecured debentures in the registration statement
described above. In August 2006, certain of the holders of the unsecured convertible
debentures elected to convert their holdings into shares of the Companys common stock.
In connection with these conversion, the Company issued 492,641 shares of common stock,
valued at $88,675, of which $88,586 represented payment of outstanding principal and $89
represented shares issued for accrued interest through the conversion date. As an
inducement to the three creditors to sell the unsecured debentures to the investors
purchasing the Debentures, Best Investments, Inc., which holds convertible promissory
notes issued by Viral Genetics, agreed to sell to the three creditors $598,450 in
principal amount of the convertible notes for cash in that amount. Haig Keledjian, an
officer, director, and principal shareholder of Viral Genetics, is the sole officer and
director of Best Investments, Inc. These convertible notes have a carrying value of $598,450
as at December 31, 2006. In March 2007, the Debentures were restructured.  (See Note
13  - Subsequent Event) NOTE 9  WARRANTS During the
year ended December 31, 2006, the Company granted 600,000 warrants in connection with a
services agreement with an exercise price of $0.80 per share and an expiration date of
May 30, 2010.  The Company also granted 6,425,658 warrants in connection with the private
placement of 10% Senior Secured Convertible Debentures due September 1, 2008 in the
aggregate principal amount of approximately $2.9 million.  In connection with this
transaction, the Company issued 144,578 warrants to the broker who assisted with the
private placement.  The Company also granted 3,204,442 warrants to investors at a lower
exercise price as an inducement to the investors to sell debentures to the purchasers of
the Senior Secured Debentures discussed above. An investor exercised 667,500 warrants by
purchasing common stock shares for $267,000 and the Company cancelled 9,237,093 warrants
during the year ended December 31, 2006. During the
year ended December 31, 2005, the Company granted 4,055,555 warrants to investors in
connection with private placements of 4,230,555 shares of common stock for $1,118,533
cash. The Company also granted 2,771,109 warrants to investors in connection with the
issuance of unsecured convertible debentures in the principle amount of $516,800. The
Company cancelled 4,000,000 warrants to an investor replacing them with an additional
4,000,000 warrants. During the
year ended December 31, 2006, the fair value of each warrant granted was estimated using
the Black-Scholes Option Pricing Model.  The following assumptions were made in
estimating fair value:  risk free interest of 5%, volatility of 93.3%, expected life of
1-2.5 years, and no expected dividends. The value of these warrants in the amount of
$3,329,304 of which $3,197,304 was charged to interest expense and $132,000 was charged
to consulting expense during the period. During the
year ended December 31, 2005, the fair value of each warrant granted was estimated using
the Black-Scholes Option Price Model. The following assumptions were made in estimating
fair value: risk free interest of 5%, volatility of 164%, expected life of 1-5 years, and
no expected dividends. The value of these warrants in the amount of $481,089 reduced
notes payable. The following
is a summary of stock warrants activity: Number ofWarrantsWarrants outstanding at December 31, 2004
     
     
     
        29,226,126Granted
     10,826,664Cancelled
     (4,000,000
        )Warrants outstanding and exercisable at December 31, 2005
     36,052,790Granted
     10,374,684Cancelled
     (9,237,093
        )Exercised
     (667,500
        )Warrants outstanding and exercisable at December 31, 2006
     36,522,881Weighted average fair value of warrants granted during the year endedDecember 31, 2006
        
        
     $
        0.44 F-24




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 9  WARRANTS (continued) The following
summarizes information related to stock warrants outstanding at December 31, 2006: Warrants OutstandingExercise Prices
      Shares
     WeightedAverageRemainingContractualLife (Years)
     WeightedAverageExercisePrice$    .50 - $  .80
     
     6,158,806
     
     3.5
     
     $    .62$    .45
     
     2,800,000
     
     1.9
     
     $    .45$    .40
     
     23,804,078
     
     2.9
     
     $    .40$    .30
     
     555,555
     
     .8
     
     $    .30$    .18
     
     3,204,442
     
     3.8
     
     $    .1836,522,881
     
     2.9
     
     $    .42 NOTE 10  STOCK OPTIONS In the year
ended December 31, 2006, the Company granted 5,199,950 options under various consulting,
employment or advising agreements at an exercise prices between $0.01 and $0.781 per
share. These options are generally granted at varying rates per consultant or advisor for
every month or three months of service until the termination of the individual
agreements. At December 31, 2006, 198,150 of these options had been exercised. During the
year ended December 31, 2006, 3,525,000 options granted in 2003 and 2004 expired
unexercised. During the
three months ended December 31, 2005, the Company granted 551,500 options under various
consulting or advising agreements at an exercise price of $.01. These options are
generally granted at varying rates per consultant or advisor for every month or three
months of service until the termination of the individual agreements. At December 31,
2005, 292,100 of the options granted had been exercised. There were also 199,000 of
options granted during the three months ended September 30, 2005 that were exercised by
December 31, 2005. During the
three months ended September 30, 2005, the Company granted 620,400 options under various
consulting or advising services agreements at an exercise price of $0.01. These options
are generally granted at varying rates per consultant or advisor for every month or three
months of service until the termination of the individual agreements. At September 30,
2005, 227,600 of the options granted had been exercised. During the
three months ended June 30, 2005, the Company granted 980,000 options under various
consulting or advising services agreements at an exercise price of $0.01. These options
are generally granted at varying rates per consultant or advisor for every month or three
months of service until the termination of the individual agreements, although the
current period included options that had previously vested but were not issued. At June
30, 2005, 715,000 of the options granted had been exercised. Also during the three months
ended June 30, 2005, the Company granted 800,000 options under an Employment Agreement at
an exercise price of $0.01, which vest in eight quarterly increments of 100,000 from July
31, 2005 to April 30, 2007; and 100,000 options to a Director of the Company at an
exercise price of $0.25 which vests in two increments of 50,000 on the six month and
twelve month anniversary of the issuance. During the
three months ended March 31, 2005, the Company granted 528,200 options under various
consulting or advising services agreements at an exercise price of $0.01. These options
are generally granted at varying rates per consultant or advisor for every month or three
months of service until the termination of the individual agreements. At March 31, 2005,
444,800 of the options granted had been exercised. Also during the three months ended
March 31, 2005, the Company granted 500,000 options under an Employment Agreement at an
exercise price of $0.41. F-25




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 10  STOCK OPTIONS  (continued) During the
year ended December 31, 2006, the fair value of each option granted was estimated using
the Black-Scholes Option Price Calculation. The following assumptions were made in
estimating fair value: risk free interest of 5%, expected volatility of 93% - 100%,
expected life of 1-2.5 years, and no expected dividends. The value of these options,
$1,087,953, was charged to consulting fees, research and development expense and payroll
expense during the period. During the
year ended December 31, 2005, the fair value of each option granted was estimated using
the Black-Scholes Option Price Calculation. The following assumptions were made in
estimating fair value: risk free interest of 5%; volatility of 164%; expected life of 1-5
years; and no expected dividends. The value of these options in the amount of $1,290,662
is included in consulting fees expense in the accompanying financial statements. The following
is a summary of stock option activity: Number ofOptions
     WeightedAverageExercisePriceOptions outstanding and exercisable at January 1, 2005
     
     
     
        14,800,000
        
     
     $
        0.38Granted
     4,180,100
        
     
     $0.06Exercised
     (2,736,900
        )
     
     $0.01Options outstanding and exercisable at December 31, 2005
     16,243,200
        
     
     $0.47Granted
     5,199,950
        
     
     $0.60Exercised
     (224,550
        )
     
     $0.32Cancelled
     (3,525,000
        )
     
     $0.01Options outstanding and exercisable at December 31, 2006
     17,693,600
        
     
     $0.63Weighted average fair value of options granted during the year endedDecember 31, 2006
        
        
       $
        0.22  Options
exercisable at December 31, 2006. The following
summarizes information related to stock options outstanding at June 30, 2005: Options Outstanding
     Options ExercisableExercise Prices
      Shares
     WeightedAverageRemainingContractualLife (Years)
     WeightedAverageExercisePrice
     Shares
     WeightedAverageExercisePrice$    17 - $    1.00
     
     15,700,000
     
     2.2
     
     $    .56
     
     14,383,333
     
     $    .55$    .01
     
     1,993,600
     
     1.1
     
     $    .01
     
     1,793,600
     
     $    .0117,693,600
     
     1.6
     
     $    .50
     
     16,176,933
     
     $    .49 There is no formal stock option plan in place. Stock options are issued by management for consulting
services as deemed appropriate. F-26




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE  11    LITIGATION On April 3,
2006, T & T filed a complaint against Viral Genetics in the United States District Court
for the Northern District of Illinois, case No. 0601813. The complaint alleges that Viral
Genetics made false statements regarding its ownership of certain intellectual property
rights to the drug candidate for the treatment of HIV/ AIDS that is the subject of the
Distribution Agreement and that Viral Genetics did not have the right to grant the
distribution rights to T & T under the Distribution Agreement because of rights T & T
alleges were held by another party. The complaint seeks damages in excess of $5 million.
Viral Genetics denies all of the allegations unequivocally, has filed an answer to the
complaint denying the substantive allegations, and asserting counterclaims that it
believes it has against T & T for breach of the Distribution Agreement. Viral Genetics
believes this lawsuit to be part of a calculated effort by T & T to extract concessions
from Viral Genetics on manufacturing and related product rights on terms that Viral
Genetics believes to be disadvantageous and unacceptable to Viral Genetics. NOTE 12 CONTINGENTLY ISSUED COMMON STOCK In March
2006, the Company issued 643,800 shares to two employees pursuant to the terms of
employment agreements as partial compensation for services to the Company to be performed
under the agreements. The shares are subject to forfeiture if employment is terminated.
In July, September, and December 2006, the Company issued 86,400 shares to one employee pursuant to the terms
of employment agreement as partial compensation for services to the Company to be
performed under the agreement. For the year ended December 31, 2006, the Company charged
$535,291 to expenses for services rendered under these agreements. NOTE 13  SUBSEQUENT EVENTS In March 2006
Viral Genetics, Inc., sold to a limited group of investors convertible debentures in the
principal amount of $2,891,549 that accrue interest at the rate of 10% per annum
payable quarterly in arrears beginning October 1, 2006 (the New Debentures). The
principal amount of the New Debentures was convertible into our common stock at the
option of the holders at the rate of $0.45 of principal per share. The New Debentures
were to be repaid, at our election, in cash with a 5% premium or Viral Genetics common
stock priced at the lower of $0.45 or 80% of the market price for our common stock over a
term of 24 months beginning in October 2006. In connection with the purchase of the New
Debentures the investors acquired warrants to purchase a total of 6,570,242 common shares
at an exercise price of $0.78 per share that expire at the end of March 2011 (the Warrants),
and unit purchase warrants to purchase an additional $2.1 million in principal amount of
New Debentures and additional Warrants to purchase 4.7 million shares of common stock
(the Unit Warrants). The investors also acquired in March 2006, previously outstanding
convertible debentures in the principal amount of $598,450 that accrued interest at
the rate of 10% per annum (the Old Debentures). The principal amount of the Old
Debentures is convertible into our common stock at the option of the holders at the rate
of $0.18 of principal per share. Viral Genetics filed a registration statement under the
Securities Act of 1933 to permit the investors to resell the shares of common stock
issuable under the New Debentures, Old Debentures, and Warrants, which was effective in
August 2006. A total of 9,695,409 shares of common stock covered by the prospectus
included in the registration statement have been issued under the New Debentures and Old
Debentures to the investors. F-27




VIRAL GENETICS, INC.
                                                     (A Development Stage Company)
                                            Notes to the Consolidated Financial Statements
                                                            December 31, 2006 NOTE 13  SUBSEQUENT EVENTS (continued) Summary of Restructuring
Changes The holders
of $1,968,810 in principal amount and accrued interest of the New Debentures,
$446,934 in principal amount and accrued interest of the Old Debentures, and 5,431,436
of the Warrants agreed to amend the terms of the instruments they hold to provide for the
following: 
     Change in the voluntary conversion price of the Old Debentures and the New Debentures, as well as
         the exercise price of the Warrants, to a fixed $0.08 per share.
     Removal of the monthly amortization payments from the New Debentures. All unpaid principal and
         accrued interest on these securities is due and payable by us on September 1, 2008.
     Immediate conversion of principal and interest on the Old Debentures and New Debentures at the new
         fixed price of $0.08 as follows:
     $21,096 of the Old Debentures for 263,711 shares of common stock
     $284,138 of the New Debentures for 3,551,728 shares of common stock
     Immediate exercise of Warrants in exchange for cancellation of principal and interest on the Old
         Debentures and New Debentures at the new price as follows:
     $162,796 of the Old Debentures for 2,034,957 shares of common stock
     $362,822 of the New Debentures for 4,535,285 shares of common stock
     The sum effect of the preceding four transactions is to reduce the balance we owe to the holders on
         the Old Debentures from $446,934 to $0, and to reduce the balance we owe to the holders on the
         New Debentures from $1,968,810 to $1,584,890. Therefore, in aggregate, $830,854 of
         principal and interest on the Old Debentures and the New Debentures has been exchanged or tendered
         for cancellation for a total of 10,385,681 shares of our common stock; and
     Cancel their Unit Warrants in exchange for new common stock purchase warrants for the purchase of
         5,431,436 shares at an exercise price of $0.15 per share that expire February 28, 2012. The holders
of $354,194 in principal amount and accrued interest of the New Debentures, $31,154
in principal amount and accrued interest of the Old Debentures, and 994,228 of the
Warrants did not participate in the restructuring modifications described above, but the
practical effect of the transactions is to decrease the voluntary conversion price of the
New Debentures and Old Debentures and exercise price of the Warrants they hold to $0.08
per share. Viral Genetics intends to make all future payments of principal and interest
on debentures held by these persons in cash. All
securities issued or deemed issued by Viral Genetics in the foregoing transactions were
issued in reliance on the exemption from registration set forth in Section 3(a)(9) of the
Securities Act of 1933. F-28