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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



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Form 10-KSB/A



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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



|x | Annual report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ------------------------------------------------------------------------------------

For the fiscal year ended December 31, 2005



| ̈ | Transition report under section 13 or 15(d) of the Securities Exchange Act of 1934
|- | ----------------------------------------------------------------------------------

For the transition period from  to
.

Commission File Number 000-26875



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VIRAL GENETICS, INC.

(Name of small business issuer in its charter)



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|                                                              |  |                                 
|------------------------------------------------------------- |  | --------------------------------
|Delaware                                                      |  | 33-0814123                      
|(State or other jurisdiction ofincorporation or organization) |  | (IRS EmployerIdentification No.)

1321 Mountain View Circle, Azusa, CA 91702

(Address of principal executive offices)

(626) 334-5310

(Issuers telephone number)



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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



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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  x    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  x

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 March 31, 2006 by non-affiliates of the issuer was $35,116,904.

As of
March 31, 2006 the issuer had 102,167,624 shares of its common stock outstanding.

Transitional Small Business
Format:    Yes ̈No  x

Documents incorporated by reference: None



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TABLE OF CONTENTS



|                        |  |                                                                                                                 |  |     
|----------------------- |  | --------------------------------------------------------------------------------------------------------------- |  | ----
|                        |  |                                                                                                                 |  | Page
|ITEM NUMBER AND CAPTION |  |                                                                                                                
|                        | 
|Part I                  |  |                                                                                                                
|                        |  |                                                                                                                
|1.                      |  | Description of Business                                                                                         |  | 3   
|2.                      |  | Description of Property                                                                                         |  | 18  
|3.                      |  | Legal Proceedings                                                                                               |  | 18  
|4.                      |  | Submission of Matters to a Vote of Security Holders                                                             |  | 18  
|                        | 
|Part II                 |  |                                                                                                                
|                        |  |                                                                                                                
|5.                      |  | Market for Common Equity, Related Stockholder Matters and Small Business Issuer Purchases of Equity Securities  |  | 18  
|6.                      |  | Managements Discussion and Analysis or Plan of Operation                                                       |  | 19  
|7.                      |  | Financial Statements                                                                                            |  | 22  
|8.                      |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                            |  | 22  
|8.A                     |  | Controls and Procedures                                                                                         |  | 23  
|8.B                     |  | Other Information                                                                                               |  | 23  
|                        | 
|Part III                |  |                                                                                                                
|                        |  |                                                                                                                
|9.                      |  | Directors, Executive Officers, Promoters and Control Persons; Compliance with Section 16(a) of the Exchange Act |  | 23  
|10.                     |  | Executive Compensation                                                                                          |  | 26  
|11.                     |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters                  |  | 27  
|12.                     |  | Certain Relationships and Related Transactions                                                                  |  | 29  
|13.                     |  | Exhibits                                                                                                        |  | 31  
|14.                     |  | Principal Accountant Fees and Services                                                                          |  | 32  

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.



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This amended report is filed to revise amounts stated on Viral Genetics consolidated financial statements as accrued interest; convertible notes payable, related parties; convertible notes payable; total
long-term liabilities; additional paid-in capital; deficit accumulated during development stage; interest expense; and total stockholders equity.



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PART I

Item 1. BUSINESS

Overview

Viral Genetics, Inc. (Viral Genetics or the Company) is a drug discovery and development company developing products based on its Thymus Nuclear Protein compound aimed primarily at the treatment of infectious
disease, and in particular HIV infection and AIDS. The Companys research interests also include autoimmune diseases, cancer and immunological deficiency. If we are successful in our development efforts, our corporate strategy is to seek out
and establish strategic relationships with third parties through licensing, joint venture, or other arrangements to effect commercial manufacture, marketing and/or distribution. The Company is in the development stage, and currently has no revenues.

At the core of our technology is Thymus Nuclear Protein or TNP  a processed extract of mammalian thymus tissue. Our lead drug candidate
is VGV-1, a suspension of TNP in adjuvant, which is a treatment for HIV and AIDS. Over the past eleven years we have conducted five human clinical trials in South Africa, China, Bulgaria and Mexico. In the trials, we have not observed any
significant adverse effects related to VGV-1 by physical exam, subjective complaints from patients, or routine blood work. Based on blood tests of the principal indicators of HIV infection, we believe the results of the trials show a meaningful
decrease in HIV viral load.

We also observed during these studies that some test subjects suffering from other clinical conditions reported anecdotal
improvements in the symptoms of other illnesses. Consequently, we have distinguished VGV-1 as a separate drug candidate from other potential applications of the TNP technology. Over at least the next year we expect to focus our efforts and resources
on advancing VGV-1 through the process for approval as a treatment for HIV and AIDS both overseas and in the United States. Consequently, we do not expect to commit meaningful resources to researching these other applications until after VGV-1 is
further along in the clinical development process.

VGV-1 is in the preclinical stage of development in the USA where we have yet to formally file an IND
with the FDA, and in later-stage development outside the United States. We plan to continue to seek commercial registration of VGV-1 in South Africa and China, but our current primary clinical development goal is to begin human clinical trials of
VGV-1 under an IND in the United States.

The clinical trial completed in South Africa was a double-blind, placebo-controlled, randomized, multi-center
study of 137 HIV positive patients treated with either VGV-1 or placebo that began enrollment in August 2004. The treatment phase of the study was concluded in May 2005, and the final collection of follow-up data on the last patients was completed
in November 2005. The database is now unblinded and is being analyzed. If the results are positive following analysis, the Company will be offering VGV-1 therapy to the patients who received placebo in a crossover study.

Our management team consists of three executive officers and one senior manager, who are supported by a team of six full-time employees and consultants. The management
team is advised by a Scientific and Medical Advisory Board composed of physicians, scientists, and consultants with substantial experience in the areas of HIV treatment, infection, drug development, public health issues, clinical trials, immunology
and biochemistry.

The Company leases two adjacent facilities located at 1321 and 1291 Mountain View Circle in Azusa, California that house its corporate
offices and a production facility. The 1321 Mountain View Circle facility renovations are completed and we are installing our existing equipment in the new facility. When operational, we believe the new facility will be adequate to manufacture
sufficient product to meet our clinical testing and other needs for at least the nest 12 months. The adjacent 1291 facility is expected to be used for research and development, additional office space, and as a quality control laboratory.

Our Chinese subsidiary leases offices in Beijing, China, and is managed by one officer.



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The Company 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). In September 2004 we completed a restructuring and conversion to equity of an outstanding note payable to Therapeutic Genetic, Inc. in connection with a
statutory tax a merger of that company with and into VGI.

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 PCR-RNA assay is used to detect and quantify the amount of HIV virus in the infected
person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.

We view TNP as a platform for
development of products with a number of therapeutic uses following anecdotal observations of improvements in some subjects suffering from other conditions in our human clinical trials and our hypothesized mechanism of action. Many people who suffer
from AIDS  particularly in the later stages of the disease  also suffer from other infections or clinical conditions including viral infection, rare types of cancer, and bacterial infections. During the course of our human trials we have
observed that some of our subjects that were suffering from other conditions appeared to show anecdotal signs of improvement in their other symptoms. We believe it possible that TNP contributed to the improvements and that future research of TNP and
potential benefits in the treatment of other ailments is warranted in the future. Viral Genetics intends to pursue that research as its resources permit.



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VGV-1

Our lead drug candidate, VGV-1, is a prospective treatment for HIV infection and AIDS. According to reports published by UNAIDS, approximately 42 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 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 sometimes 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 12% of people with HIV; in Southeast Asia, the figure is estimated at 2%. 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.

We have studied our investigational HIV/AIDS therapy, 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 Phase III study we studied VGV-1 on patients in Stage CDC-2 of HIV infection,
which is the stage prior to full-blown AIDS. In the USA, we intend to study VGV-1 as a potential salvage therapy  a treatment option for HIV-infected patients who have failed traditional anti-retroviral therapy, as well as in
patients on drug holidays  periods of time where patients stop taking antiretroviral medication to allow their bodies to recuperate.

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. In our first four trials in Mexico and China, overall decreases in viral load
from baseline were noted in over half of the subjects tested. The mean decrease in viral load in blood samples as measured by PCR in our first four human clinical studies has been approximately 80%.

For example, we conducted a masked, non-randomized, single-center study consisting of 34 HIV-1 infected patients with CDC Stage-3 classification of AIDS (less than 200 T
cells/mm3) in China in 2003. The patients, who had not received any other form of HIV/AIDS treatment, received intramuscular injections of VGV-1 biweekly for eight weeks, and were then followed up until day 240 without additional treatment. Patients
tolerated the injections well and there were no significant adverse reactions to VGV-1 reported. The protocol for the trial examined several of the standard measurements of HIV infection and immunological health. Analysis of the study data revealed
sustained viral suppression during the follow-up period. The mean viral load for all patients at baseline (prior to treatment) was 79,800 copies of HIV RNA per milliliter of blood. By day 180 during the no-treatment follow-up period, plasma HIV RNA
was suppressed with a mean change of -0.70 log from baseline, which is approximately equivalent to an 83%



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decrease in the groups mean or average viral load. By day 270 during the no-treatment follow-up period, viral load
remained suppressed with a mean change of -0.484 log from baseline, which is approximately equivalent to a 75% decrease in the groups mean viral load. Additionally, 36% of patients overall had a greater than 1 log drop in viral load from
baseline by day 180, and 28% of subjects overall were observed to have a greater than 1 log drop in viral load from baseline by day 270. In percentage terms, a 1 log decrease is equivalent to a 90% decrease. Overall, counts of CD4+ T cells,
which are key components of the human immune system, remained unchanged from baseline during the follow-up period.

In 2004, an article entitled
Diminution of plasma viral load and cultured HIV-infected peripheral blood mononuclear cells in non-responding patients treated with two calf thymus nuclear proteins and conventional antivirals, written by the investigators of our study
in Monterrey, Mexico, was published in a peer reviewed journal HIV & AIDS Review (2004, 3(3), 8-13). The investigators observed that in patients failing anti-retroviral drug therapy, treatment with VGV-1 for sixty days was associated
with undetectable PCR RNA viral load in half of the patients (5/10) within three months of treatment. Furthermore, by six months there was an average one log drop in virus levels, which is equivalent to a 90% decrease. The trial in Mexico
enrolled 10 HIV-positive patients who were failing to respond to their second or third regimen of anti-retroviral drug therapy. Enrolled subjects in the Mexican study had been receiving anti-retroviral therapy but were demonstrating decreasing viral
control, and received VGV-1 injections twice weekly for eight consecutive weeks. They were then followed for safety and efficacy on markers of disease progression such as HIV RNA (viral load or virus in the blood) to six months.

The human clinical trial we completed in South Africa 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 137 VGV-1 treated HIV-infected subjects This study examined subjects with CD4+ T cell counts of 250-500 at seven test centers throughout South Africa and was designated by the
MCC as a Phase III study. The primary endpoint for the study is the decrease in viral load as measured by PCR assay. Other endpoints include CD4+ T cell counts and PBMC culture assays. Patients received 16 intra-muscular injections over a
51-day period, and were followed up post-treatment to day 240. Follow up testing was completed in the fourth calendar quarter of 2005. The study also includes extensive immunological assays designed to detect a potential immune response associated
with VGV-1 in an effort to further advance our understanding of its mechanism of action.

The study was administered by Virtus Clinical Development
Services, a leading South African contract research organization. We have unblended the data and are now analyzing it. We will disclose results of the studyas soon as analysis is complete. If the results are positive following analysis, the Company
will be offering VGV-1 therapy to the patients who received placebo in a crossover study.

The mechanism by which VGV-1 affects HIV infection
is not fully understood, and is a current focus of our research. We have confirmed that TNP binds HIV-1 surface proteins as well as human CD4+ T cells. While further laboratory studies need to be conducted to understand the exact mechanism of
action, these binding properties could explain its apparent activity in our 4 prior clinical studies. We are now engaged in research specifically designed to address the mechanism of action of VGV-1, including extensive immunological assays of the
participants in our ongoing South African study.

2005 Research & Development

Viral Genetics spent $561,399 on development of its drug candidates in calendar year 2005, compared to $1,500,585 in 2004. We estimate we will spend $1.5 million
in 2006 on product testing and development, including our portion of South African clinical development expenses.



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Joint Ventures, Business Relationships and Distribution

CHINA

Our wholly-owned subsidiary,
Viral Genetics (Beijing) Limited, maintains offices at leased facilities in Beijing, China, and is staffed by 3 individuals.

In 2002, we entered into
several agreements that culminated in the Chinese Center for Disease Controls authorization of a prospective clinical study of VGV-1 at the Chinese National AIDS Center at Beijing Ditan Hospital. This study was conducted by Ditan Hospital,
with Viral Genetics acting as co-sponsor with its former joint venture partner. The follow-up portion of this study was completed in late 2003, and we announced a summary of the results by press release in July 2004.

In connection with the termination of our former joint venture in China, we will pay royalties to the former joint venture partners totaling 7% of the gross profits
generated through the sale of VGV-1 in China for 15 years.

In January 2004 we submitted an application to the Chinese State Food and Drug Administration
(SFDA) requesting permission to import VGV-1 for the treatment of late-stage AIDS patients in China (the Import Application). This application remains open and under review, pending our delivery to the SFDA of
manufacturing-related documentation and certain long-term toxicity data. We anticipate that we will submit both of these items in 2005. We intend to rely on the data from the Ditan Hospital study and data gathered from our study in South Africa to
address the toxicity issue. Should the SFDA not find the data or protocols from these studies appropriate or sufficent, we expect that we will need to conduct another study in China of between 30-100 subjects. We do not expect approval of our Import
Application before the end of 2006, and such approval could be delayed beyond 2006, if the SFDA requires additional data or testing.

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 supercedes 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.

As contemplated by the Distribution Agreement, T&T will establish distributors in each African country who will purchase our HIV/AIDS products
directly from us and distribute those products in their respective countries. Viral Genetics will pay to T&T a management fee based on gross sales of Viral Genetics products in Africa. Distributors will pay an amount to us for product based on
its final selling price, with a minimum guaranteed price. Pursuant to the settlement of a terminated license, we are obligated to pay a former licensee 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.



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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, intends to file an answer to the complaint denying the substantive allegations, and will assert counterclaims that it believes it has against
T&T for breach of the Distribution Agreement. Viral Genetics believes this lawsuit to be part 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.

Manufacturing and Raw Materials

The Company has historically produced VGV-1 for clinical trials and testing purposes in-house or through a subcontracted manufacturer. Using our temporary clean room and
existing equipment, we can produce small-scale quantities of VGV-1 for preclinical research purposes. Now that construction of our new facility is completed, we plan to transfer our existing equipment to the permanent facility and continue with the
finalization of current Good Manufacturing Practices (cGMP) documentation. This will enable us to produce larger batches of VGV-1 suitable for clinical study. The production of larger, commercial-scale batches will require the purchase
of additional processing equipment to increase capacity.

The Azusa facility is designed to be capable of supporting a maximum capacity sufficient to meet
early commercial sales of VGV-1, and to support large-scale clinical trials. It is also designed to allow for production of other sterile biologic products.

In order to retain control of certain proprietary processes, the Company intends to complete early stages of production of VGV-1 for the foreseeable future. Later stages of manufacturing, including bottling, labeling, and packaging, will be
contracted out to an approved subcontractor.

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 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, Krygyzstan, Modolva, 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.



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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.

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.



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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.

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



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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. In China, the State Food and Drug Administration or SFDA is responsible for drug regulation. Both the
SFDA and MCC evaluate 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. 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.



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Human Resources

We
presently have eight employees, including three executive officers. Additionally, our Chinese subsidiary is managed by an executive officer with 2 administrative employees. The Company also relies on consulting and advisory relationships with
several individuals and firms where a full-time person is not warranted. There are currently several entities providing services to the Company as consultants or advisors in areas including domestic and foreign government relations, regulatory
affairs, investor relations, public relations, public health issues, finance, corporate and business development, immunology, biochemistry, intellectual property, and other areas.

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 $5.1 million and $7.2 million for the years ended 2005 and 2004,
respectively. As of December 31, 2005, we had an accumulated deficit of approximately $41.4 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. We expect that our existing cash and cash equivalents will sufficiently fund our current and planned operations through the end of 2006. However, our 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 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;
| | - |  | ---------------------------------------------------------------------------------



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| |  |  | 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 are 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 has declined as a
result of what Viral Genetics believes to be 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 to Viral Genetics and
unacceptable. The most recent event in this declining relationship is the filing of a lawsuit by T&T 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 on 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.

An adverse result in pending litigation with T&T could drain our financial resources, which would likely hinder the
development of our business.

On April 3, 2006, T&T filed a complaint against Viral Genetics in the United States District Court for the
Northern District of Illinois. 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 intends to file an answer to the complaint denying the substantive allegations and asserting counterclaims that Viral Genetics believes it has against T&T for breach of the Distribution Agreement. Nevertheless, an
adverse result in the litigation would likely result in a substantial drain on the financial resources of Viral Genetics, which would have a significant adverse affect on its ability to pursue the development and commercialization of its drug
candidate for the treatment of HIV/ AIDS and consequently have a negative impact on results of operations.

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 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.



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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 have filed a drug import application in China for sale of VGV-1 to late stage AIDS patients and we completed a Phase III clinical trial in South Africa. We hope to
file an IND with the FDA in 2006. 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 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



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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 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



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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.

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



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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.

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.



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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. We are currently engaged in the renovation of this building to accommodate a cGMP manufacturing facility suitable for clinical study and early market-entry production of VGV-1. This facility will also allow the manufacture of other biologic
products. We have also leased the adjacent facility at 1291 Mountain View Circle, and will be using it for additional office space. It currently houses our temporary clean room, which we use for research and development. Following completion of
renovations of 1321 Mountain View Circle, the 1291 facility is intended to house our quality control laboratory and to accommodate a small research and development lab.

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, intends to file an answer to the complaint denying the substantive allegations, and will assert counterclaims that it believes
it has against T&T for breach of the Distribution Agreement. Viral Genetics believes this lawsuit to be part 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.

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 2005.

PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

Viral Genetics common stock is traded on the Over
the Counter Bulletin Board (OTCBB) market, under the symbol VRAL. As of March 31, 2006 we had approximately 355 direct shareholders of record.

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.



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|                       |  |              |  |            
|---------------------- |  | ------------ |  | -----------
|Calendar Quarter Ended |  | High Bid ($) |  | Low Bid ($)
|March 31, 2004         |  | 1.00         |  | 0.46       
|June 30, 2004          |  | 0.72         |  | 0.33       
|September 30, 2004     |  | 0.88         |  | 0.35       
|December 31, 2004      |  | 0.72         |  | 0.31       
|March 31, 2005         |  | 0.50         |  | 0.24       
|June 30, 2005          |  | 0.33         |  | 0.19       
|September 30, 2005     |  | 0.29         |  | 0.20       
|December 31, 2005      |  | 0.68         |  | 0.18       

Item 6. Managements Discussion and Analysis or Plan of Operation.

Plan of Operation

Viral Genetics, Inc., the Companys subsidiary (VGI), was founded in 1995 to discover, develop, and commercialize a series of proprietary proteins. Our
research interests include infectious disease  in particular, HIV infection and AIDS  autoimmune conditions and immunological deficiency. In October 2001, all of the issued and outstanding common stock of VGI was acquired by Viral
Genetics, Inc., a Delaware corporation.

At the core of our technology is Thymus Nuclear Protein or TNP  a processed extract of mammalian thymus
tissue. We have conducted five human clinical trials of the lead drug candidate developed from this compound, VGV-1, outside of the United States to examine its safety and efficacy as a treatment for HIV and AIDS. We view TNP as a platform
technology following anecdotal observations of other potential applications of the TNP technology.

During and after our human clinical trials, we observed
that some test subjects suffering from other clinical conditions and diseases, such as oral and genital herpes, Hepatitis C infection, rheumatoid arthritis, and others, reported anecdotal improvements in the symptoms of these other illnesses. We
have therefore elected to distinguish VGV-1 from other potential applications of Thymus Nuclear Protein for future research.

Historically, we have
allocated the majority of our efforts to the development of VGV-1 and we expect to continue to do so in the immediate future. Further, due to managements ties to and experience in foreign markets, we actively pursued clinical development of
VGV-1 in markets outside the United States with the goal of attaining commercialization leading to sales and/or licensing with distribution partners.

This
strategy resulted in the Company completing five human clinical trials of VGV-1 outside the United States, and most recently a 137-patient Phase III study in South Africa.

Our primary corporate goal is to pursue development of our drug candidates, starting with VGV-1, through Phase II in the United States and to seek licensing or joint venturing with a partner with global manufacturing,
marketing and distribution capabilities.

We are working through various testing related to VGV-1s mechanism of action and characterization that we
believe is necessary to complete and enhance our IND application. Although it is not strictly required for safety evaluation, this data would further support our request to begin human trials in the USA.

Contemporaneously, we plan to continue to seek commercial registration in China and South Africa, where we are in advanced stages of clinical development and where we
believe the demand for VGV-1 will be strongest.

In December 2004, we entered into a Distribution Management Agreement with Timothy & Thomas LLC,
(T&T). The Distribution Agreement grants 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



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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 the expenses incurred to complete the on-going clinical trial of VGV-1 in South Africa up to a maximum threshold amount beyond which we are required to pay for 50% of all 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.

As
contemplated by the Distribution Agreement, T&T will establish distributors in each African country who will purchase our HIV/AIDS products directly from us and distribute those products in their respective countries. Viral Genetics will pay to
T&T a management fee based on gross sales of Viral Genetics products in Africa. Distributors will pay an amount to us for product based on its final selling price, with a minimum guaranteed price.

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 intends to
file an answer to the complaint denying the substantive allegations and asserting counterclaims that Viral Genetics believes it has against T&T for breach of the Distribution Agreement. Because this matter arose just recently, it is not possible
to evaluate or predict what impact, if any, it will have on the financial condition and future operations of Viral Genetics.

The human clinical trial we
completed in South Africa 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. This study
examined subjects with CD4+ counts of 250-500 at 7 test centers throughout South Africa and was designated by the MCC as a Phase III study. We completed enrollment of 137 subjects. The primary endpoint for the study is the decrease
in viral load as measured by PCR-RNA assay. Other endpoints include CD4+ counts, PBMC culture assays and other immunological markers. Patients received 16 intra-muscular injections over a 51-day period, and were followed up post-treatment to
day 240. The study was administered by Virtus Clinical Development Services, a leading South African contract research organization. The study also included extensive immunological assays designed to detect a potential immune response associated
with VGV-1 in an effort to further advance our understanding of its mechanism of action.

If the South African trial is successful, we intend to support an
application to seek registration of VGV-1 in South Africa in 2006.

In January 2005, we completed the renovation of our 1321 Mountain View Circle facility.
Once our existing equipment is installed, the facility will be capable of supporting cGMP manufacture of VGV-1 for clinical trial purposes although to produce larger quantities of VGV-1 we will be required to add additional manufacturing equipment.
We require the completion of the facility to cGMP standards in order to support clinical trials in the USA, as well as to support commercial approval in China and South Africa.

Through an Assignment of Patent Agreement dated August 1, 1995, VGI acquired all of the rights in the patents pertaining to Thymus Nuclear Protein (TNP), which is the basis of several of the
Companys drug candidates. The patents were acquired by VGI from Therapeutic Genetic, Inc., another California corporation (TGI), for a note in the principal amount of $6,250,000 (the Note) and a continuing royalty equal
to 5 percent of the worldwide gross sales of products using the patented technology (the Royalty). The stockholders of TGI were all of the same persons who were former stockholders of VGI prior to its acquisition by Viral Genetics in October
2001. The Royalty was assigned to a limited liability company with the same shareholders as TGI and TGI has no further interest in the Royalty.



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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.

From 1995 through 2002, certain directors of Viral Genetics have made loans and other advances to fund operations (the Founders Notes).
On April 1, 2003, the principal and accrued interest of the Founders Notes were restructured such that the due date of repayment was extended to April 1, 2008. It was also agreed that the holders of the Founders Notes could exchange the
principal and accrued interest for Units of the Company at a price of $0.30 per Unit with each Unit consisting of one share of the common stock of the Company and one warrant to purchase one share of the common stock of the Company for $0.40
exercisable for 5 years. On August 5, 2004, the Founders Notes were assigned to Best Investment, Inc., a corporation of which Haig Keledjian, an officer and director, is the sole officer and director. As of December 31, 2005, the
total principal and accrued interest on the Founders Notes was $2,120,820. If exchanged pursuant to the foregoing terms, the Company would issue to the holders of the Founders Notes 7,069,400 shares and 7,069,400 warrants.

On March 29, 2006, Viral Genetics entered into securities purchase agreements with 8 private investors providing for convertible debt financing to Viral Genetics.
In the transactions, Viral Genetics agreed to issue to the investors:



| |  |  | 10% Senior Secured Amortizing Convertible Debentures Due September 1, 2008 (the Debentures), in the aggregate principal amount of approximately $2.9 million;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | 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).
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

The initial purchase of $2.9 million in principal amount of the Debentures was closed on March 29, 2006 and
April 14, 2006, resulting in proceeds to Viral Genetics after commissions and the investors professional fees of approximately $2.6 million.

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 $0.45 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



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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. The shares of common stock underlying the securities sold in this financing transaction will be registered for resale on a registration
statement to be filed by Viral Genetics within 45 days following closing. 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.

At December 31, 2005, we had $180,198 of current assets, current liabilities of $1,018,425, and long-term liabilities of $2,597,553. We
estimate that we will need to fund approximately $1.5 million of research and development costs in the United States and South Africa $100,000 of patent work, and $900,000 of administrative expenses and product manufacturing costs
during 2006.

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 35.

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.



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(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



Subsequent to the end of the period covered by this report, Viral Genetics carried out an evaluation, under the supervision and with the participation of its management, including the Chief Executive Officer and the Chief Financial Officer,
of the effectiveness of the design and operation of its disclosure controls and procedures as of December 31, 2005. Based upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that Viral Genetics
disclosure controls and procedures were effective as of that date, but that two significant issues not properly addressed in prior periods required restatement of Viral Genetics financial statements for the years ended December 31, 2005 and 2004.

Specifically, Viral Genetics misinterpreted accounting guidelines related to recognizing non-cash expenses associated with beneficial
conversion features resulting from a debt restructuring in 2003 and guidelines for categorizing the acquisition of certain patents and technology in 1995 as a purchase of assets as opposed to a purchase of a business. Accordingly, the nature of the
oversight was not in failing to record or report the two transactions, but misinterpreting the accounting guidelines correctly so as to effect the appropriate accounting treatment for the transactions. Since these were one-time non-recurring
transactions and Viral Genetics is not contemplating any unusual or extraordinary transactions at the present time, it does not expect similar events in the foreseeable future. Furthermore, Viral Genetics intends to obtain independent advice from
its accountants on transactions that raise questions about the appropriate accounting treatment before adopting any particular form of accounting treatment in its financial statements.

Except as otherwise discussed herein, there have been no changes in Viral Genetics internal control over financial reporting during the most
recently completed fiscal quarter, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

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                                                                            |  | Since        
|Haig Keledjian      |  | 43  |  | Chief Executive Officer, Chief Financial Officer, President, Secretary, and Director |  | October 2001 
|Harry Zhabilov, Jr. |  | 39  |  | Executive Vice President of Research and Development, and Director                   |  | May 2003     
|Arthur Ammann       |  | 70  |  | Director                                                                             |  | May 2005     
|Hampar Karageozian  |  | 65  |  | Director                                                                             |  | October 2001 
|Arthur Keledjian    |  | 38  |  | Director                                                                             |  | October 2001 
|Elizabeth Hoffman   |  | 60  |  | Director                                                                             |  | February 2006
|Monica Ord          |  | 43  |  | Senior Vice President, Corporate Development & Communications                        |  | May 2005     



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##### Table of Contents

The following is information on the business experience of each officer, director and
director appointee.

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.

Harry Zhabilov, Jr.

Mr. Zhabilov, Jr. earned his Masters of Chemistry from the University of Sofia in 1997 and immediately began working with his late father, Dr. Zhabilov, Sr.
 Viral Genetics, Inc. co-Founder and TNPs discoverer. From October 1997 to December 1999, Harry worked with the Company on its Mexican human clinical trials. From January 2000, until May 2003, Harry worked side by side with his father as
a research chemist for Viral Genetics. In May 2003, following his fathers passing, Harry was appointed Executive Vice President of Research and Development and was elected as a Director. Harry has been integral in the discovery and development
of the Companys drug candidates. Harry is a member of the American Institute of Chemical Engineers. His main roles are split between Research and Development, and production.

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.



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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.

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, with the exceptions of Form 3 for Elizabeth Hoffman filed on March 13, 2006, Form 3 of Arthur J. Ammann filed on July 28, 2005; Form 4 of Haig Keledjian filed April 7,
2006, Form 4 of Monica D. Ord filed October 20, 2005, and Form 4 of Harry Zhabilov filed August 2, 2005.

Board and Committees; Code of Ethics

In the fiscal year ended December 31, 2005, the board of directors of the Company met 4 times and these meetings were attended by a quorum of the
directors via teleconference. From time to time the directors also acted through written consents of the board. There are no standing committees of the board of directors. Due to the fact the Company 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 the Company to establish an audit committee, recruit a financial expert to serve on the board, or adopt an audit
committee charter. Viral Genetics has adopted a Code of Ethics applicable to its principal executive officer and principal financial officer, a copy of which 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, 1321 Mountain View Circle, Azusa, CA 91702.



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Item 10. Executive Compensation

Annual Compensation

The following table sets forth certain information regarding the annual and long-term compensation for services in all capacities to Viral Genetics for the prior fiscal years ended December 31, 2005, 2004, and
2003 of those persons who were either (i) the chief executive officer during the last completed fiscal year or (ii) one of the other four most highly compensated executive officers as of the end of the last completed fiscal year whose
annual salary and bonuses exceeded $100,000 (collectively, the Named Executive Officers).



|                                                                           |  |              |  |                                |  |                                                              |  |                           |          
|-------------------------------------------------------------------------- |  | ------------ |  | ------------------------------ |  | ------------------------------------------------------------ |  | ------------------------- | ---------
|Name and Principal Position                                                |  | Year         |  | Annual Compensation Salary
($) |  | Long Term Compensation SecuritiesUnderlying Options/SARs (#) |  | All OtherCompensation ($) |          
|                                                                           |  |              | 
|Haig Keledjian President, Chief
Executive And Financial Officer            |  | 200520042003 |  | 195,000136,556148,854          |  | 01,800,0002,300,000                                          |  | 001,146                   |          
|                                                                           |  |              |  |                               
|Harry Zhabilov, Jr. Executive
Vice President of Research and Development   |  | 200520042003 |  | 195,000162,841111,756          |  | 01,800,0002,300,000                                          |  | 42,29032,43238,244        | (1)(1)(1)
|                                                                           |  |              |  |                               
|Monica Ord Senior Vice
President, Communications and Corporate Development |  | 200520042003 |  | 146,450159,935108,236          |  | 1,360,000775,000550,000                                      |  | 165,900385,750316,500     | (2)(2)(2)

---

|(1) | Represents cash payments made by Viral Genetics on the mortgage for the residence of Mr. Zhabilov.
|--- | --------------------------------------------------------------------------------------------------



|(2) | Represents dollar value of the difference between the price paid by Ms. Ord for shares of common stock and the fair market value of such shares on the date of purchase.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Stock Options

The following table sets
forth certain information with respect to grants of stock options during 2005 to the Named Executive Officers.



|                                                                           |  |                                                 |  |                                                             |   |  |                               |  |                
|-------------------------------------------------------------------------- |  | ----------------------------------------------- |  | ----------------------------------------------------------- | - |  | ----------------------------- |  | ---------------
|Name and Principal Position                                                |  | Number of Securities Underlying
Options Granted |  | % of Total Options/SARs Granted
to Employees in Fiscal Year |   |  | Exercise or Base Price ($/Sh) |  | Expiration Date
|Monica Ord Senior Vice
President, Communications and Corporate Development |  | 1,360,000                                       |  | 73.1                                                        | % |  | 0.01                          |  | June 30, 2007  



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The following table sets forth certain information with respect to unexercised options held by the Named Executive
Officers. No outstanding options held by the Named Executive Officers were exercised in 2005.



|                                                                           |  |                                                                                                     |  |                                                                                               
|-------------------------------------------------------------------------- |  | --------------------------------------------------------------------------------------------------- |  | ----------------------------------------------------------------------------------------------
|Name and Principal Position                                                |  | Number of Securities Underlying UnexercisedOptions at Fiscal Year End (#) Exercisable/Unexercisable |  | Value of Unexercised In-the-Money Options At Fiscal Year End ($) (1) Exercisable/Unexercisable
|                                                                           | 
|                                                                           |  |                                                                                                    
|Haig Keledjian President Chief
Executive And Financial Officer             |  | 4,100,000 / -0-                                                                                     |  | 372,000 / -0-                                                                                 
|                                                                           |  |                                                                                                    
|Harry Zhabilov, Jr. Executive
Vice President of Research and Development   |  | 4,100,000 / -0-                                                                                     |  | 372,000 / -0-                                                                                 
|                                                                           |  |                                                                                                    
|Monica Ord Senior Vice
President, Communications and Corporate Development |  | 200,000 / 500,000                                                                                   |  | 114,000 / 285,000                                                                             

---

|(1) | This value is determined on the basis of the difference between the fair market value of the securities underlying the options and the exercise price at December 30, 2005. The
fair market value of Viral Geneticss common stock at December 30, 2005, is determined by the last sale price on that date, which was $0.58 per share.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Employment Arrangements

On June 1, 2003 Viral Genetics entered into written employment agreements with Haig
Keledjian and Harry Zhabilov, Jr. Each of the employment agreements, (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 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.

Item 11. Security Ownership of Certain Beneficial Owners and Management

The following table sets forth as of
April 11, 2006 the number and percentage of the 101,201,974 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



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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 Class |  
|Haig Keledjian (1)(2) P.O. Box 1020 South Pasadena, CA 91031                                   |  | 20,522,5305,900,00010,149,1269,857,441 | (2)(3)(5)(6) |  | 36.5             | %
|                                                                                               |  |                                       
|Harry Zhabilov, Jr. (1)(2)(4) P.O. Box 1020
South Pasadena, CA 91031                           |  | 10,393,6795,900,0004,927,299           | (3)(6)       |  | 18.7             | %
|                                                                                               |  |                                       
|Arthur Ammann (1) PO Box 1020 South Pasadena, CA 91031                                         |  | 100,000                                | (8)          |  | 0.1              | %
|                                                                                               |  |                                       
|Elizabeth Hoffman (1) PO Box 1020 South Pasadena, CA 91031                                     |  | 100,000                                | (9)          |  | 0.1              | %
|                                                                                               |  |                                       
|Monica Ord (1) PO Box 1020 South Pasadena, CA 91031                                            |  | 2,015,000700,000                       | (10)         |  | 2.6              | %
|                                                                                               |  |                                       
|Hampar Karageozian (1) 31021 Marbella Vista
San Juan Capistrano, CA 92675                      |  | 10,276,2212,300,0004,934,712           | (4)(6)       |  | 15.9             | %
|                                                                                               |  |                                       
|Arthur Keledjian (1) P.O. Box 1020 South Pasadena, CA 91032                                    |  | -0-                                    |              |  | 0                | %
|                                                                                               |  |                                       
|John D. Lefebvre P.O. Box N7120 Nassau, Bahamas                                                |  | 10,000,0006,000,000                    | (7)          |  | 14.7             | %
|                                                                                               |  |                                       
|Caribou Investments, Inc. Abbott Buidling, 2nd
Floor Road Town, Tortola British Virgin Islands |  | 5,828,572371,428                       | (11)         |  | 6.0              | %
|                                                                                               |  |                                       
|All officers and directors (7 persons)                                                         |  | 88,076,008                             |              |  | 60.3             | %

---

|(1) | Officer or Director of Viral Genetics.
|--- | --------------------------------------

|(2) | Haig Keledjian holds 2,302,667 shares personally. He holds 5,932,761 and 5,058,001 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; and 21,784 shares as
Trustee for a non-profit foundation. 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. They will each receive in June 2006 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.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



28



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##### Table of Contents

|(4) | Hampar Karageozian holds an option to purchase 2,300,000 shares of common stock at an exercise price of $0.52 per share exercisable until August 5, 2006.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Haig Keledjian is the sole officer and director of Best Investments, Inc., which holds three notes totaling $1,522,369 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, 2005, 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.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | 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.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(7) | 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 November 17, 2006 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.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(8) | 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 50,000 are vested and exercisable
and 50,000 vest and become exercisable May 10, 2006.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(9) | 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 50,000 vest and become
exercisable July 9, 2006 and 50,000 vest and become exercisable January 9, 2007.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(10) | 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 200,000 are vested and exercisable
and the remaining 500,000 vest and become exercisable in increments of 100,000 every three months.
|---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(11) | Effective February 15, 2006, Caribou Investments, Inc. has entered into a subscription agreement with the Company whereby Caribou will purchase 371,418 shares of the
Companys common stock for consideration of $130,000 cash and cancellation of 360,639 warrants to acquire shares of the Companys common stock with an exercise price of $0.40.
|---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 12. Certain Relationships and 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, an officer, director and principal stockholder, the Tomson
Voting Trust of which the trustee is Mr. Keledjian and a beneficiary is Harry Zhabilov, Jr., an 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.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------



29



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##### Table of Contents

| |  |  | 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 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.



30



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##### Table of Contents

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 Document                                                                                                                                                                                                                                                                                                                       
|2.1         |  | Agreement and Plan of Merger dated June 30, 2004, including the Agreement of Merger attached as Exhibit B (1)                                                                                                                                                                                                                           
|            | 
|3.1         |  | 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)                                                                                                                                                                                                                                                                    
|            | 
|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. Lefebre 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 included because 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 Rights 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 Rights Agreement dated November 7, 2005 (9)                                                                                                                                                                                                                                                                                
|            | 
|10.28       |  | Securities Purchase Agreement dated March 29, 2006, excluding all exhibits, which are included 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 not provided), 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 Rights 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)                                                                                                                                                                                                                                                                                                                      



31



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|     |  |                                                                                                                                    
|---- |  | -----------------------------------------------------------------------------------------------------------------------------------
|21.1 |  | List of Subsidiaries (5)                                                                                                           
|     | 
|31.1 |  | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 
|     | 
|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.
|---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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.



32



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##### Table of Contents

Audit Fees

The aggregate fees billed by Williams & Webster, P.S., 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 2005 and 2004 during 2005 were $0 and $29,028 respectively, net of expenses.

Audit-Related Fees

There
were no other fees billed by Williams & Webster 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 Williams & Webster, P.S. during the last two fiscal years for tax compliance or related services.

All Other Fees

There were no other fees
billed by Williams & Webster, P.S. during the last two fiscal years for products and services provided by authorized independent public accountants.



33



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##### Table of Contents

SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



|                    |  |                      |  |                                         
|------------------- |  | -------------------- |  | ----------------------------------------
|                    |  | VIRAL GENETICS, INC.
|                    |  |                     
|Date August 3, 2006 |  | By:                  |  | /s/    Haig Keledjian                   
|                    |  |                      |  | Haig Keledjian, President               
|                    |  |                      |  | Principal Executive Officer             
|                    |  |                      |  | Principal 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 August 3, 2006 |  | By: |  | /s/    Haig Keledjian        
|                    |  |     |  | Haig Keledjian, Director     
|                    |  |    
|Date August 3, 2006 |  | By: |  | /s/    Harry Zhabilov, Jr.   
|                    |  |     |  | Harry Zhabilov, Jr., Director
|                    |  |    
|Date August 3, 2006 |  | By: |  | /s/    Hampar Karageozian    
|                    |  |     |  | Hampar Karageozian, Director 
|                    |  |    
|Date August 3, 2006 |  | By: |  | /s/    Arthur Keledjian      
|                    |  |     |  | Arthur Keledjian, Director   
|                    |  |    
|Date August 3, 2006 |  | By: |  | /s/    Arthur Ammann         
|                    |  |     |  | Arthur Ammann, Director      
|                    |  |    
|Date August 3, 2006 |  | By: |  | /s/    Elizabeth Hoffman     
|                    |  |     |  | Elizabeth Hoffman, Director  



34



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##### Table of Contents

INDEX TO FINANCIAL STATEMENTS

VIRAL GENETICS, INC.

December 31, 2005

CONTENTS



|                                                          |  |     
|--------------------------------------------------------- |  | ----
|Reports of Independent Registered Public Accounting Firms |  | F-1 
|                                                          | 
|Financial Statements:                                     |  |     
|                                                          | 
|Consolidated Balance Sheets                               |  | F-3 
|                                                          | 
|Consolidated Statements of Operations                     |  | F-4 
|                                                          | 
|Consolidated Statements of Cash Flows                     |  | F-5 
|                                                          | 
|Consolidated Statements of Stockholders Deficit          |  | F-6 
|                                                          | 
|Notes to Consolidated Financial Statements                |  | F-10



35



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##### Table of Contents

Killman, Murrell & Company P.C.

Certified Public Accountants



|                                    |  |                              |  |                      
|----------------------------------- |  | ---------------------------- |  | ---------------------
|300 N. A Street, Bldg. 4, Suite 200 |  | 1931 E. 37th Street, Suite 7 |  | 2626 Royal Circle    
|Midland, Texas 79705                |  | Odessa, Texas 79762          |  | Kingwood, Texas 77339
|(432) 686-9381                      |  | (432) 363-0067               |  | (281) 359-7224       
|Fax (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
sheet of Viral Genetics, Inc. (a development stage company) as of December 31, 2005, and the related consolidated statements of operations, changes in stockholders deficit and cash flows for the year then ended and for the cumulative
development stage period from July 11, 1995 (inception) to December 31, 2005. The consolidated financial statements of Viral Genetics, Inc. as of December 31, 2004 and for the year then ended and the cumulative statements of operations,
stockholders deficit and cash flows, from July 11, 1995 to December 31, 2004, were audited by other auditors whose report dated March 29, 2005, except for Note 13, as to which date is July 24, 2006, expressed an unqualified opinion on those
statements. Our report on the cumulative statements of operations, stockholders deficit and cash flows from July 11, 1995 to December 31, 2005, 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 audit.

We conducted our audit 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statements presentation. We believe that our audit provides 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, 2005, and the consolidated results of its operations and its cash flows for the year then ended and from July 11, 1995 (inception) to December 31, 2005, in conformity with the United States generally accepted
accounting principles.

As discussed in Note 13 to the financial statements, certain errors resulting in restatements of interest expense, goodwill and
patents, long-term liabilities, additional paid-in capital and accumulated deficit as at December 31, 2005, were discovered by management of the Company subsequent to December 31, 2005. Accordingly, certain amounts reflected in the 2005 financial
statements have been restated to correct the errors.

The accompanying financial statements have been prepared assuming that Viral Genetics, Inc. will
continue as a going concern. As discussed in Note 2 to the 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 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, 2006, except as to Note 13, as to which the date is July 24, 2006;



F-1



---

##### Table of Contents

Board of Directors

Viral
Genetics, Inc.

Azusa, CA

REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited the accompanying consolidated balance sheet of Viral Genetics, Inc. (a development
stage company) as of December 31, 2004 and the related consolidated statement of operations, stockholders deficit and cash flows for the year then ended and for the cumulative development stage period from July 11, 1995 (inception) to December
31, 2004. 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 audit.

We conducted our audit in accordance with the auditing 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Viral Genetics, Inc. as of
December 31, 2004 and the results of its operations, stockholders deficit and cash flows for the year then ended and from July 11, 1995 (inception) to December 31, 2004, in conformity with accounting principles generally accepted in the United
States of America.

As discussed in Note 13 to the financial statements, certain errors resulting in an understatement of interest expense, long-term
liabilities, additional paid-in capital and accumulated deficit as at December 31, 2004, were discovered by management of the Company subsequent to December 31, 2004. Accordingly, certain amounts reflected in the 2004 financial statements have been
restated to correct the errors.

The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally
accepted in the United States of America, which contemplates continuation of the Company as a going concern. As discussed in Note 2, the Company has incurred an accumulated deficit through December 31, 2004, has substantial debt, and has recurring
losses from operations. These factors raise substantial doubt about the Companys ability to continue as a going concern. Managements plans regarding those matters also are described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

Williams & Webster, P.S.

Certified Public Accountants

Spokane, Washington

March 29, 2005, except for Note 13, as to which the date is July 24, 2006.



F-2



---

##### Table of Contents

VIRAL GENETICS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS



|                                                                                                                               |  |                  |             |   |                  |   |             |  
|------------------------------------------------------------------------------------------------------------------------------ |  | ---------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                                                                                               |  | December 31,2005 |             |   | December 31,2004 |  
|                                                                                                                               |  | (Restated)       |             |   | (Restated)       |  
|ASSETS                                                                                                                         |  |                  |             |   |                  |   |             |  
|                                                                                                                               |  |                 
|CURRENT ASSETS                                                                                                                 |  |                  |             |   |                  |   |             |  
|Cash                                                                                                                           |  | $                | 180,198     |   |                  | $ | 1,402,169   |  
|                                                                                                                               |  |                  |             |   |                  |   |             |  
|Total Current Assets                                                                                                           |  |                  | 180,198     |   |                  |   | 1,402,169   |  
|                                                                                                                               |  |                  |             |   |                  |   |             |  
|PROPERTY AND EQUIPMENT, NET                                                                                                    |  |                  | 960,761     |   |                  |   | 135,552     |  
|                                                                                                                               |  |                  |             |   |                  |   |             |  
|OTHER ASSETS                                                                                                                   |  |                  |             |   |                  |   |             |  
|Deposits and other                                                                                                             |  |                  | 43,940      |   |                  |   | 42,940      |  
|                                                                                                                               |  |                  |             |   |                  |   |             |  
|Total Other Assets                                                                                                             |  |                  | 43,940      |   |                  |   | 42,940      |  
|                                                                                                                               |  |                  |             |   |                  |   |             |  
|TOTAL ASSETS                                                                                                                   |  | $                | 1,184,899   |   |                  | $ | 1,580,661   |  
|                                                                                                                               |  |                  |             |   |                  |   |             |  
|LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                          |  |                  |             |   |                  |   |             |  
|                                                                                                                               |  |                 
|CURRENT LIABILITIES                                                                                                            |  |                  |             |   |                  |   |             |  
|Accounts payable                                                                                                               |  | $                | 829,201     |   |                  | $ | 281,483     |  
|Accrued wages payable                                                                                                          |  |                  | 140,500     |   |                  |   | 75,000      |  
|Accrued interest                                                                                                               |  |                  | 48,724      |   |                  |   | 75,790      |  
|                                                                                                                               |  |                  |             |   |                  |   |             |  
|Total Current Liabilities                                                                                                      |  |                  | 1,018,425   |   |                  |   | 432,273     |  
|                                                                                                                               |  |                  |             |   |                  |   |             |  
|LONG-TERM LIABILITIES                                                                                                          |  |                  |             |   |                  |   |             |  
|Convertible notes payable, related parties                                                                                     |  |                  | 2,080,753   |   |                  |   | 2,080,753   |  
|Convertible notes payable                                                                                                      |  |                  | 516,800     |   |                  |   |            |  
|                                                                                                                               |  |                  |             |   |                  |   |             |  
|Total Long-Term Liabilities                                                                                                    |  |                  | 2,597,553   |   |                  |   | 2,080,753   |  
|                                                                                                                               |  |                  |             |   |                  |   |             |  
|TOTAL LIABILITIES                                                                                                              |  |                  | 3,615,978   |   |                  |   | 2,513,026   |  
|                                                                                                                               |  |                  |             |   |                  |   |             |  
|COMMITMENTS AND CONTINGENCIES                                                                                                  |  |                  |            |   |                  |   |            |  
|                                                                                                                               |  |                  |             |   |                  |   |             |  
|STOCKHOLDERS DEFICIT                                                                                                          |  |                  |             |   |                  |   |             |  
|Preferred stock, 20,000,000 shares authorized, $0.0001 par value; no shares issued and outstanding                             |  |                  |            |   |                  |   |            |  
|Common stock, 250,000,000 shares authorized, $0.0001 par value; 98,284,709 and 90,117,246 issued and outstanding, respectively |  |                  | 9,828       |   |                  |   | 9,012       |  
|Additional paid-in capital                                                                                                     |  |                  | 31,109,178  |   |                  |   | 28,219,165  |  
|Common stock warrants                                                                                                          |  |                  | 3,564,483   |   |                  |   | 3,501,483   |  
|Common stock options                                                                                                           |  |                  | 4,330,500   |   |                  |   | 3,750,250   |  
|Deficit accumulated during development stage                                                                                   |  |                  | (41,445,068 | ) |                  |   | (36,412,275 | )
|                                                                                                                               |  |                  |             |   |                  |   |             |  
|Total Stockholders Deficit                                                                                                    |  |                  | (2,431,079  | ) |                  |   | (932,365    | )
|                                                                                                                               |  |                  |             |   |                  |   |             |  
|TOTAL LIABILITIES AND STOCKHOLDERS DEFICIT                                                                                    |  | $                | 1,184,899   |   |                  | $ | 1,580,661   |  
|                                                                                                                               |  |                  |             |   |                  |   |             |  

The accompanying condensed notes are an integral part of these financial statements.



F-3



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##### Table of Contents

VIRAL GENETICS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS



|                                                                        |  |                         |            |   |            |   |            |                                                   |  |   |             |  
|----------------------------------------------------------------------- |  | ----------------------- | ---------- | - | ---------- | - | ---------- | ------------------------------------------------- |  | - | ----------- | -
|                                                                        |  |                         |            |   |            |   |            | From July 11, 1995(Inception) toDecember 31, 2005 | 
|                                                                        |  | Year Ended December 31, |            |  
|                                                                        |  | 2005                    |            |   | 2004       |   |           
|                                                                        |  | (restated)              |            |   | (restated) |   |            | (restated)                                        | 
|REVENUES                                                                |  | $                       |           |   |            | $ |           |                                                   |  | $ | 347,750     |  
|                                                                        |  |                         |            |   |            |   |            |                                                   |  |   |             |  
|EXPENSES                                                                |  |                         |            |   |            |   |            |                                                   |  |   |             |  
|Research and development                                                |  |                         | 561,399    |   |            |   | 1,500,585  |                                                   |  |   | 12,344,268  |  
|Laboratory fees                                                         |  |                         | 89,029     |   |            |   | 76,990     |                                                   |  |   | 295,690     |  
|Management salaries                                                     |  |                         | 577,600    |   |            |   | 1,028,750  |                                                   |  |   | 3,107,572   |  
|Amortization and depreciation expense                                   |  |                         | 74,226     |   |            |   | 45,146     |                                                   |  |   | 289,936     |  
|Legal and professional                                                  |  |                         | 236,733    |   |            |   | 306,796    |                                                   |  |   | 837,819     |  
|Consulting fees                                                         |  |                         | 1,644,207  |   |            |   | 3,689,897  |                                                   |  |   | 9,336,789   |  
|General and administrative expenses                                     |  |                         | 1,255,822  |   |            |   | 995,828    |                                                   |  |   | 3,278,204   |  
|                                                                        |  |                         |            |   |            |   |            |                                                   |  |   |             |  
|Total Expenses                                                          |  |                         | 4,409,016  |   |            |   | 7,643,992  |                                                   |  |   | 29,490,278  |  
|                                                                        |  |                         |            |   |            |   |            |                                                   |  |   |             |  
|LOSS FROM OPERATIONS                                                    |  |                         | (4,409,016 | ) |            |   | (7,643,992 | )                                                 |  |   | (29,142,528 | )
|                                                                        |  |                         |           
|OTHER INCOME (EXPENSE)                                                  |  |                         |            |   |            |   |            |                                                   |  |   |             |  
|Sale of distribution rights                                             |  |                         |           |   |            |   | 1,059,966  |                                                   |  |   | 1,309,966   |  
|Interest income                                                         |  |                         | 2,396      |   |            |   | 2,040      |                                                   |  |   | 4,547       |  
|Interest expense                                                        |  |                         | (626,173   | ) |            |   | (700,352   | )                                                 |  |   | (13,617,053 | )
|                                                                        |  |                         |            |   |            |   |            |                                                   |  |   |             |  
|Total Other Income (Expense)                                            |  |                         | (623,777   | ) |            |   | 361,654    |                                                   |  |   | (12,302,540 | )
|                                                                        |  |                         |           
|LOSS BEFORE INCOME TAXES                                                |  |                         | (5,032,793 | ) |            |   | (7,282,338 | )                                                 |  |   | (41,445,068 | )
|                                                                        |  |                         |           
|INCOME TAXES                                                            |  |                         |           |   |            |   |           |                                                   |  |   |            |  
|                                                                        |  |                         |            |   |            |   |            |                                                   |  |   |             |  
|NET LOSS                                                                |  | $                       | (5,032,793 | ) |            | $ | (7,282,338 | )                                                 |  | $ | (41,445,068 | )
|                                                                        |  |                         |            |   |            |   |            |                                                   |  |   |             |  
|NET LOSS PER COMMON SHARE, BASIC AND DILUTED                            |  | $                       | (0.05      | ) |            | $ | (0.12      | )                                                 |  |   |             |  
|                                                                        |  |                         |            |   |            |   |            |                                                   |  |   |             |  
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED |  |                         | 92,530,821 |   |            |   | 60,127,809 |                                                   |  |   |             |  
|                                                                        |  |                         |            |   |            |   |            |                                                   |  |   |             |  

The accompanying condensed notes are an integral part of these financial statements.



F-4



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##### Table of Contents

VIRAL GENETICS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS



|                                                          |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|--------------------------------------------------------- |  | ----------------------- | ---------- | - | -------------------------------------------------- | - | ---------- | ---------- |  | - | ----------- | -
|                                                          |  | Year Ended December 31, |            |   | From July 11, 1995(Inception) to December 31, 2005 |  
|                                                          |  | 2005                    |            |   | 2004                                               |   |           
|                                                          |  | (restated)              |            |   | (restated)                                         |   |            | (restated) | 
|CASH FLOWS FROM OPERATING ACTIVITIES                      |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|Net loss                                                  |  | $                       | (5,032,793 | ) |                                                    | $ | (7,282,338 | )          |  | $ | (41,445,068 | )
|Amortization and depreciation                             |  |                         | 74,226     |   |                                                    |   | 45,146     |            |  |   | 289,936     |  
|Beneficial conversion feature of convertible debt         |  |                         | 516,800    |   |                                                    |   | 338,751    |            |  |   | 10,141,907  |  
|Non-cash operating expenses                               |  |                         |           |   |                                                    |   |           |            |  |   | 5,387,663   |  
|Non-cash income                                           |  |                         |           |   |                                                    |   | (309,966   | )          |  |   | (309,966    | )
|Issuance of common stock for services                     |  |                         | 591,000    |   |                                                    |   | 419,687    |            |  |   | 3,728,510   |  
|Issuance of common stock for finders fee                  |  |                         |           |   |                                                    |   | 450,000    |            |  |   | 450,000     |  
|Options and warrants issued for services                  |  |                         | 1,290,590  |   |                                                    |   | 3,892,960  |            |  |   | 7,744,550   |  
|Options exercised for services                            |  |                         |           |   |                                                    |   |           |            |  |   | 2,500       |  
|Warrants exercised for services                           |  |                         |           |   |                                                    |   |           |            |  |   | 12,500      |  
|Issuance of common stock for expenses paid by third party |  |                         |           |   |                                                    |   |           |            |  |   | 593,947     |  
|Issuance of common stock for settlement agreement         |  |                         |           |   |                                                    |   | 835,000    |            |  |   | 835,000     |  
|Issuance of stock for interest                            |  |                         |           |   |                                                    |   | 1,254,213  |            |  |   | 1,256,135   |  
|Notes payable issued for expenses                         |  |                         |           |   |                                                    |   | 762,527    |            |  |   | 907,349     |  
|Expenses paid with notes payable                          |  |                         |           |   |                                                    |   | (43        | )          |  |   | (10,043     | )
|Notes payable converted to accrued wages                  |  |                         |           |   |                                                    |   |           |            |  |   | (25,000     | )
|(Increase) decrease in deposits and other assets          |  |                         | (1,000     | ) |                                                    |   | (41,090    | )          |  |   | (43,940     | )
|Increase (decrease) in accrued interest                   |  |                         | (204,281   | ) |                                                    |   | (996,443   | )          |  |   | 8,657       |  
|Increase (decrease) in accounts payable                   |  |                         | 547,718    |   |                                                    |   | 39,826     |            |  |   | 829,200     |  
|Increase (decrease) in accrued wages payable              |  |                         | 65,500     |   |                                                    |   | (375,000   | )          |  |   | 140,500     |  
|Decrease in bank overdrafts payable                       |  |                         |           |   |                                                    |   |           |            |  |   |            |  
|Proceeds from customer deposit                            |  |                         |            |   |                                                    |   | (100,000   | )          |  |   |            |  
|                                                          |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|Net Cash Used in Operations                               |  |                         | (2,152,240 | ) |                                                    |   | (1,066,770 | )          |  |   | (9,505,663  | )
|                                                          |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|CASH FLOWS FROM INVESTING ACTIVITIES                      |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|Increase in leasehold improvements                        |  |                         | (859,662   | ) |                                                    |   | (78,965    | )          |  |   | (938,627    | )
|Acquisition of equipment                                  |  |                         | (39,773    | ) |                                                    |   | (37,618    | )          |  |   | (352,471    | )
|Increase in patent                                        |  |                         |           |   |                                                    |   |           |            |  |   | (5,206,051  | )
|                                                          |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|Net Cash Used in Investing Activities                     |  |                         | (899,435   | ) |                                                    |   | (116,583   | )          |  |   | (6,497,149  | )
|                                                          |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|CASH FLOWS FROM FINANCING ACTIVITIES                      |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|Proceeds from notes payable related parties               |  |                         | 177,215    |   |                                                    |   | 39,980     |            |  |   | 9,356,171   |  
|Proceeds from convertible debentures                      |  |                         | 516,800    |   |                                                    |   | (271,202   | )          |  |   | (528,180    | )
|Proceeds from exercise of options and warrants            |  |                         | 20,721     |   |                                                    |   | 44,634     |            |  |   | 72,355      |  
|Proceeds from sale of common stock                        |  |                         | 1,114,968  |   |                                                    |   | 2,506,903  |            |  |   | 7,282,664   |  
|                                                          |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|Net Cash Provided by Financing Activities                 |  |                         | 1,829,704  |   |                                                    |   | 2,320,315  |            |  |   | 16,183,010  |  
|                                                          |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|Change in cash                                            |  |                         | (1,221,971 | ) |                                                    |   | 1,136,962  |            |  |   | 180,198     |  
|                                                          |  |                         |           
|Cash and cash equivalents, beginning of period            |  |                         | 1,402,169  |   |                                                    |   | 265,207    |            |  |   |            |  
|                                                          |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|Cash and cash equivalents, end of period                  |  | $                       | 180,198    |   |                                                    | $ | 1,402,169  |            |  | $ | 180,198     |  
|                                                          |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|SUPPLEMENTAL CASH FLOW DISCLOSURES:                       |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|Interest expense paid                                     |  | $                       | 313,654    |   |                                                    | $ | 78,792     |            |  | $ | 459,507     |  
|                                                          |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|Income taxes paid                                         |  | $                       |           |   |                                                    | $ |           |            |  | $ |            |  
|                                                          |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|NON-CASH TRANSACTIONS:                                    |  |                         |            |   |                                                    |   |            |            |  |   |             |  
|Issuance of common stock for services                     |  | $                       | 591,000    |   |                                                    |   | 419,867    |            |  |   | 3,728,510   |  
|Issuance of common stock for settlement agreement         |  | $                       |           |   |                                                    |   | 835,000    |            |  |   | 835,000     |  
|Options and warrants issued for services                  |  | $                       | 1,290,590  |   |                                                    |   | 3,892,960  |            |  |   | 7,744,550   |  
|Options and warrants exercised for services               |  | $                       | 567,814    |   |                                                    |   |           |            |  |   | 682,814     |  
|Non-cash operating expenses                               |  | $                       |           |   |                                                    |   |           |            |  |   | 144,901     |  
|Issuance of common stock for debt paid by third party     |  | $                       |           |   |                                                    |   |           |            |  |   | 593,947     |  
|Issuance of common stock for debt and interest            |  | $                       |           |   |                                                    |   | 7,524,274  |            |  |   | 8,255,471   |  
|Notes payable issued for services                         |  | $                       |            |   |                                                    |   | 2,333      |            |  |   | 147,155     |  
|Notes payable issued for expenses                         |  | $                       |            |   |                                                    |   | 43         |            |  |   | 10,043      |  
|Notes payables issued for accrued wages                   |  | $                       |           |   |                                                    |   |           |            |  |   | 25,000      |  
|Issuance of common stock for finders fee                  |  | $                       |           |   |                                                    |   | 450,000    |            |  |   | 450,000     |  
|Warrants issued with convertible debentures               |  | $                       | 516,800    |   |                                                    |   |           |            |  |   | 516,800     |  

The accompanying condensed notes are an integral part of these financial statements.



F-5



---

##### Table of Contents

VIRAL GENETICS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)



|                                                         |  |                            |  |                   |       |                          |   |           |                     |  |                                          |   |  |                                   |             |   |  |   |            |  
|-------------------------------------------------------- |  | -------------------------- |  | ----------------- | ----- | ------------------------ | - | --------- | ------------------- |  | ---------------------------------------- | - |  | --------------------------------- | ----------- | - |  | - | ---------- | -
|                                                         |  | CommonStockNumber ofShares |  | CommonStockAmount |       | AdditionalPaid-inCapital |   |           | CommonStockWarrants |  | DeficitAccumulatedDuringDevelopmentStage |   |  | TotalStockholders'Equity(Deficit) |            
|                                                         |  |                            |  |                   |       |                          |   |           |                     |  | (restated)                               |   |  | (restated)                        |            
|Issuance of common stock for cash at nil per share       |  | 23,800,079                 |  | $                 | 2,380 |                          | $ | (1,380    | )                   |  | $                                        |  |  | $                                 |            |   |  | $ | 1,000      |  
|Net loss for period ended December 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 cash at $0.84 per share     |  | 59,500                     |  |                   | 6     |                          |   | 49,994    |                     |  |                                          |  |  |                                   |            |   |  |   | 50,000     |  
|Issuance of common stock for services at $0.84 per share |  | 357,001                    |  |                   | 36    |                          |   | 299,964   |                     |  |                                          |  |  |                                   |            |   |  |   | 300,000    |  
|Net loss for year ended December 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 cash at $0.84 per share     |  | 339,151                    |  |                   | 34    |                          |   | 284,966   |                     |  |                                          |  |  |                                   |            |   |  |   | 285,000    |  
|Issuance of common stock for services at $0.84 per share |  | 499,802                    |  |                   | 50    |                          |   | 419,950   |                     |  |                                          |  |  |                                   |            |   |  |   | 420,000    |  
|Net loss for year ended December 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   |                     |  |                                          |  |  |                                   |            |   |  |   |   290,000 |  
|Net loss for year ended December 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 cash at $0.42 per share     |  | 595,002                    |  |                   | 59    |                          |   | 249,941   |                     |  |                                          |  |  |                                   |            |   |  |   | 250,000    |  
|Issuance of common stock for cash at $0.84 per share     |  | 34,272                     |  |                   | 3     |                          |   | 28,797    |                     |  |                                          |  |  |                                   |            |   |  |   | 28,800     |  
|Net loss for year ended December 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 cash at $0.42 per share     |  | 595,002                    |  |                   | 59    |                          |   | 249,941   |                     |  |                                          |  |  |                                   |            |   |  |   | 250,000    |  
|Issuance of common stock for cash at $0.84 per share     |  | 842,523                    |  |                   | 84    |                          |   | 707,916   |                     |  |                                          |  |  |                                   |            |   |  |   | 708,000    |  
|Issuance of common stock for cash at $1.94 per share     |  | 51,567                     |  |                   | 6     |                          |   | 99,994    |                     |  |                                          |  |  |                                   |            |   |  |   | 100,000    |  
|Issuance of common stock for services at $0.84 per share |  | 2,163,824                  |  |                   | 216   |                          |   | 1,818,117 |                     |  |                                          |  |  |                                   |            |   |  |   | 1,818,333  |  
|Net loss for year ended December 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 | )
|                                                         |  |                            |  |                   |       |                          |   |           |                     |  |                                          |   |  |                                   |             |   |  |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.



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##### Table of Contents

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 of common stock for cash at $0.84 per share                                   |  | 29,464                     |  |                   | 3     |                          |   | 24,747     |                    |  |   |                    |   |  |                                          |        |   |                                    |   |            |   |  |   | 24,750      |  
|Issuance of common stock for services at $0.84 per share                               |  | 37,811                     |  |                   | 4     |                          |   | 31,464     |                    |  |   |                    |   |  |                                          |        |   |                                    |   |            |   |  |   | 31,468      |  
|Recapitalization through reverse merger and acquisition of 5 Starliving Online, Inc.   |  | 8,035,693                  |  |                   | 804   |                          |   | (281,079   | )                  |  |   |                    |   |  |                                          |        |   |                                    |   |            |   |  |   | (280,275    | )
|Miscellaneous adjustment due to merger                                                 |  | 481                        |  |                   |      |                          |   |           |                    |  |   |                    |   |  |                                          |        |   |                                    |   |            |   |  |   |            |  
|Net loss for the year ended December 31, 2001                                          |  |                           |  |                   |      |                          |   |           |                    |  |   |                    |   |  |                                          |        |   |                                    |   | (1,356,117  | ) |  |   | (1,356,117  | )
|                                                                                       |  |                            |  |                   |       |                          |   |            |                    |  |   |                     |   |  |                                          |         |   |                                    |   |             |   |  |   |             |  
|Balance, December 31, 2001                                                             |  | 37,786,273                 |  |                   | 3,779 |                          |   | 4,273,297  |                    |  |   |                    |   |  |                                          |        |   |                                    |   | (13,587,913 | ) |  |   | (9,310,837  | )
|Issuance of common stock for cash at $0.70 per share                                   |  | 215,000                    |  |                   | 21    |                          |   | 149,979    |                    |  |   |                    |   |  |                                          |        |   |                                    |   |            |   |  |   | 150,000     |  
|Issuance of common stock from the exercise of options for cash at $0.01 per share      |  | 1,000,000                  |  |                   | 100   |                          |   | 149,900    |                    |  |   |                    |   |  |                                          |        |   |                                    |   |            |   |  |   | 150,000     |  
|Issuance of common stock for debt at $0.80 per share                                   |  | 1,654,027                  |  |                   | 165   |                          |   | 1,223,815  |                    |  |   |                    |   |  |                                          | 99,242  |   |                                    |   |            |   |  |   | 1,323,222   |  
|Issuance of common stock for services at $0.22 per share                               |  | 67,837                     |  |                   | 7     |                          |   | 14,993     |                    |  |   |                    |   |  |                                          |        |   |                                    |   |            |   |  |   | 15,000      |  
|Net loss for the year ended December 31, 2002                                          |  |                           |  |                   |      |                          |   |           |                    |  |   |                    |   |  |                                          |        |   |                                    |   | (1,776,851  | ) |  |   | (1,776,851  | )
|                                                                                       |  |                            |  |                   |       |                          |   |            |                    |  |   |                     |   |  |                                          |         |   |                                    |   |             |   |  |   |             |  
|Balance, December 31, 2002                                                             |  | 40,723,137                 |  |                   | 4,072 |                          |   | 5,811,984  |                    |  |   |                    |   |  |                                          | 99,242  |   |                                    |   | (15,364,764 | ) |  |   | (9,449,466  | )
|Issuance of options for services at $0.10 to $0.66                                     |  |                           |  |                   |      |                          |   |           |                    |  |   | 2,384,000           |   |  |                                          |        |   |                                    |   |            |   |  |   | 2,384,000   |  
|Issuance of warrants for services at $0.29 to $0.35                                    |  |                           |  |                   |      |                          |   |           |                    |  |   |                    |   |  |                                          | 177,000 |   |                                    |   |            |   |  |   | 177,000     |  
|Issuance of common stock for cash at $0.20 to $0.35 per share                          |  | 3,531,456                  |  |                   | 354   |                          |   | 873,889    |                    |  |   |                    |   |  |                                          |        |   |                                    |   |            |   |  |   | 874,243     |  
|Issuance of common stock for cash at $0.2135 per share                                 |  | 2,341,675                  |  |                   | 234   |                          |   | 499,766    |                    |  |   |                    |   |  |                                          |        |   |                                    |   |            |   |  |   | 500,000     |  
|Issuance of common stock from the exercise of options for cash at $0.01 per share      |  | 700,000                    |  |                   | 70    |                          |   | 269,930    |                    |  |   | (263,000            | ) |  |                                          |        |   |                                    |   |            |   |  |   | 7,000       |  
|Issuance of common stock from the exercise of options for debt at $0.01 per share      |  | 480,769                    |  |                   | 48    |                          |   | 197,260    |                    |  |   | (192,500            | ) |  |                                          |        |   |                                    |   |            |   |  |   | 4,808       |  
|Issuance of common stock from the exercise of options for services at $0.01 per share  |  | 250,000                    |  |                   | 25    |                          |   | 84,975     |                    |  |   | (82,500             | ) |  |                                          |        |   |                                    |   |            |   |  |   | 2,500       |  
|Issuance of common stock from the exercise of warrants for expenses at $0.05 per share |  | 250,000                    |  |                   | 25    |                          |   | 84,975     |                    |  |   |                    |   |  |                                          | (72,500 | ) |                                    |   |            |   |  |   | 12,500      |  
|Issuance of common stock for services at $0.20 to $0.70 per share                      |  | 383,096                    |  |                   | 38    |                          |   | 132,984    |                    |  |   |                    |   |  |                                          |        |   |                                    |   |            |   |  |   | 133,022     |  
|Issuance of common stock and warrants for debt and interest at $0.30 per share         |  | 450,880                    |  |                   | 45    |                          |   | 69,841     |                    |  |   |                    |   |  |                                          | 65,378  |   |                                    |   |            |   |  |   | 135,264     |  
|Allocation of expired warrants to additional paid-in capital                           |  |                           |  |                   |      |                          |   | 99,242     |                    |  |   |                    |   |  |                                          | (99,242 | ) |                                    |   |            |   |  |   |            |  
|Beneficial conversion feature of convertible debt                                      |  |                           |  |                   |      |                          |   | 9,322,066  |                    |  |   |                    |   |  |                                          |        |   |                                    |   |            |   |  |   | 9,322,066   |  
|Net loss for the year ended December 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  | )
|                                                                                       |  |                            |  |                   |       |                          |   |            |                    |  |   |                     |   |  |                                          |         |   |                                    |   |             |   |  |   |             |  

The accompanying notes are an integral part of these financial statements.



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##### Table of Contents

VIRAL GENETICS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)



|                                                                                                     |  |                            |   |  |                   |       |   |                          |   |            |                     |  |   |                     |   |  |                                          |           |   |                                   |   |             |   |  |   |            |  
|---------------------------------------------------------------------------------------------------- |  | -------------------------- | - |  | ----------------- | ----- | - | ------------------------ | - | ---------- | ------------------- |  | - | ------------------- | - |  | ---------------------------------------- | --------- | - | --------------------------------- | - | ----------- | - |  | - | ---------- | -
|                                                                                                     |  | CommonStockNumber ofShares |   |  | CommonStockAmount |       |   | AdditionalPaid-inCapital |   |            | CommonStock Options |  |   | CommonStockWarrants |   |  | DeficitAccumulatedDuringDevelopmentStage |           |   | TotalStockholders'Equity(Deficit) |  
|                                                                                                     |  |                            |   |  |                   |       |   | (restated)               |   |            |                     |  |   |                     |   |  | (restated)                               |           |   | (restated)                        |  
|Balance, December 31, 2003                                                                           |  | 49,111,013                 |   |  | $                 | 4,911 |   |                          | $ | 17,446,912 |                     |  | $ | 1,846,000           |   |  | $                                        | 169,878   |   |                                   | $ | (29,129,937 | ) |  | $ | (9,662,236 | )
|Issuance of common stock and warrants for cash at $0.25 per share                                    |  | 8,000,000                  |   |  |                   | 800   |   |                          |   | 1,799,200  |                     |  |   |                    |   |  |                                          | 200,000   |   |                                   |   |            |   |  |   | 2,000,000  |  
|Issuance of common stock and warrants for debt at $0.30 per share in connection with note conversion |  | 24,708,580                 |   |  |                   | 2,471 |   |                          |   | 4,274,965  |                     |  |   |                    |   |  |                                          | 3,226,838 |   |                                   |   |            |   |  |   | 7,504,274  |  
|Issuance of common stock for exercise of warrants for cash at $0.01 to $0.05 per share               |  | 350,000                    |   |  |                   | 35    |   |                          |   | 119,965    |                     |  |   |                    |   |  |                                          | (104,500  | ) |                                   |   |            |   |  |   | 15,500     |  
|Issuance of options for consulting services at $0.34 to $0.84 per option                             |  |                           |   |  |                   |      |   |                          |   |           |                     |  |   | 3,892,960           |   |  |                                          |          |   |                                   |   |            |   |  |   | 3,892,960  |  
|Issuance of common stock from the exercise of options at $0.01 per share                             |  | 2,913,400                  |   |  |                   | 291   |   |                          |   | 1,497,553  |                     |  |   | (1,468,710          | ) |  |                                          |           |   |                                   |   |             |   |  |   | 29,134     |  
|Issuance of common stock for services at $0.30 to $0.67 per share                                    |  | 979,722                    |   |  |                   | 98    |   |                          |   | 467,589    |                     |  |   |                    |   |  |                                          |          |   |                                   |   |            |   |  |   | 467,687    |  
|Issuance of common stock for cash at $0.30 to $0.53 per share                                        |  | 1,337,865                  |   |  |                   | 134   |   |                          |   | 506,769    |                     |  |   |                    |   |  |                                          |          |   |                                   |   |            |   |  |   | 506,903    |  
|Issuance of common stock and warrants for debt conversion at $0.30 per share                         |  | 66,666                     |   |  |                   | 7     |   |                          |   | 10,726     |                     |  |   |                    |   |  |                                          | 9,267     |   |                                   |   |            |   |  |   | 20,000     |  
|Issuance of common stock for settlement at $0.44 to $0.70 per share                                  |  | 1,750,000                  |   |  |                   | 175   |   |                          |   | 834,825    |                     |  |   |                    |   |  |                                          |          |   |                                   |   |            |   |  |   | 835,000    |  
|Issuance of common stock for finders fee at $0.45 per share                                          |  | 1,000,000                  |   |  |                   | 100   |   |                          |   | 449,900    |                     |  |   |                    |   |  |                                          |          |   |                                   |   |            |   |  |   | 450,000    |  
|Cancellation of common stock for shares issued in error at $0.48 per share                           |  | (100,000                   | ) |  |                   | (10   | ) |                          |   | (47,990    | )                   |  |   |                    |   |  |                                          |          |   |                                   |   |            |   |  |   | (48,000    | )
|Allocation of expired options to additional paid-in capital                                          |  |                           |   |  |                   |      |   |                          |   | 520,000    |                     |  |   | (520,000            | ) |  |                                          |          |   |                                   |   |            |   |  |   |           |  
|Beneficial conversion feature of convertible debt                                                    |  |                           |   |  |                   |      |   |                          |   | 338,751    |                     |  |   |                    |   |  |                                          |          |   |                                   |   |            |   |  |   | 338,751    |  
|Net loss for the year ended December 31, 2004                                                        |  |                           |   |  |                   |      |   |                          |   |           |                     |  |   |                    |   |  |                                          |          |   |                                   |   | (7,282,338  | ) |  |   | (7,282,338 | )
|                                                                                                     |  |                            |   |  |                   |       |   |                          |   |            |                     |  |   |                     |   |  |                                          |           |   |                                   |   |             |   |  |   |            |  
|Balance, December 31, 2004                                                                           |  | 90,117,246                 |   |  | $                 | 9,012 |   |                          | $ | 28,219,165 |                     |  | $ | 3,750,250           |   |  | $                                        | 3,501,483 |   |                                   | $ | (36,412,275 | ) |  | $ | (932,365   | )
|                                                                                                     |  |                            |   |  |                   |       |   |                          |   |            |                     |  |   |                     |   |  |                                          |           |   |                                   |   |             |   |  |   |            |  

The accompanying notes are an integral part of these consolidated financial statements.



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##### Table of Contents

VIRAL GENETICS, INC.

(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)



|                                                                                        |  |                              |  |                   |       |                          |   |                    |  |   |                     |   |                                          |   |           |                                   |   |             |   |  |   |            |  
|--------------------------------------------------------------------------------------- |  | ---------------------------- |  | ----------------- | ----- | ------------------------ | - | ------------------ |  | - | ------------------- | - | ---------------------------------------- | - | --------- | --------------------------------- | - | ----------- | - |  | - | ---------- | -
|                                                                                        |  | Number of CommonStock Shares |  | CommonStockAmount |       | AdditionalPaid-inCapital |   | CommonStockOptions |  |   | CommonStockWarrants |   | DeficitAccumulatedDuringDevelopmentStage |   |           | TotalStockholdersEquity(Deficit) |  
|                                                                                        |  |                              |  |                   |       | (restated)               |   |                    |  |   |                     |   | (restated)                               |   |           | (restated)                        |  
|Balance, December 31, 2004                                                              |  | 90,117,246                   |  |                   | 9,012 |                          |   | 28,219,165         |  |   | 3,750,250           |   |                                          |   | 3,501,483 |                                   |   | (36,412,275 | ) |  |   | (932,365   | )
|Issuance of options for consulting services at $.01$.41                                |  |                              |  |                   |       |                          |   |                    |  |   | 1,290,662           |   |                                          |   |           |                                   |   |             |   |  |   | 1,290,662  |  
|Issuance of common stock for the exercise of options at $.01 per share                  |  | 2,064,900                    |  |                   | 206   |                          |   | 588,257            |  |   | (567,814            | ) |                                          |   |           |                                   |   |             |   |  |   | 20,649     |  
|Issuance of 1,650,000 shares for consulting services                                    |  | 1,650,000                    |  |                   | 165   |                          |   | 590,835            |  |   |                     |   |                                          |   |           |                                   |   |             |   |  |   | 591,000    |  
|Sale of common stock and issuance of warrants at exercise prices of $.45$.50 per share |  | 4,230,555                    |  |                   | 423   |                          |   | 1,016,577          |  |   |                     |   |                                          |   | 63,000    |                                   |   |             |   |  |   | 1,080,000  |  
|Adjustment for options expired                                                          |  |                              |  |                   |       |                          |   | 142,598            |  |   | (142,598            | ) |                                          |   |           |                                   |   |             |   |  |   |           |  
|Beneficial conversion feature of convertible debt                                       |  |                              |  |                   |       |                          |   | 516,800            |  |   |                     |   |                                          |   |           |                                   |   |             |   |  |   | 516,800    |  
|Sale of common stock at $.15 and $.18 per share                                         |  | 222,008                      |  |                   | 22    |                          |   | 34,946             |  |   |                     |   |                                          |   |           |                                   |   |             |   |  |   | 34,968     |  
|Net Loss                                                                                |  |                              |  |                   |       |                          |   |                    |  |   |                     |   |                                          |   |           |                                   |   | (5,032,793  | ) |  |   | (5,032,793 | )
|                                                                                        |  |                              |  |                   |       |                          |   |                    |  |   |                     |   |                                          |   |           |                                   |   |             |   |  |   |            |  
|Balance, December 31, 2005                                                              |  | 98,284,709                   |  | $                 | 9,828 |                          | $ | 31,109,178         |  | $ | 4,330,500           |   |                                          | $ | 3,564,483 |                                   | $ | (41,445,068 | ) |  | $ | (2,431,079 | )
|                                                                                        |  |                              |  |                   |       |                          |   |                    |  |   |                     |   |                                          |   |           |                                   |   |             |   |  |   |            |  



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

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.



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

Derivative Instruments

In April 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting
Standards No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities (hereinafter SFAS No. 149). SFAS No. 149 amends and clarifies the accounting for derivative instruments, including
certain derivative instruments embedded in other contracts, and for hedging activities under SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. This statement is effective for contracts entered into or
modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. The adoption of SFAS No. 149 is not expected to have a material impact on the financial position or results of operations of the Company.

In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 (SFAS
No. 133), Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, Accounting for Derivative Instruments and Hedging Activities  Deferral of the Effective Date of FASB
No. 133, and SFAS No. 138, Accounting for Certain Derivative Instruments and Certain Hedging Activities, which is effective for the Company as of January 1, 2001. These standards establish accounting and reporting
standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. They require that an entity recognize all derivatives as either assets or liabilities in the consolidated balance
sheet and measure those instruments at fair value.

If certain conditions are met, a derivative may be specifically designated as a hedge,
the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or
(ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change.

Historically, the Company has not entered into derivatives contracts to hedge existing risks or for speculative purposes.

At December 31, 2005 and 2004, the Company has not engaged in any transactions that would be considered derivative instruments or hedging
activities.

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 52,295,990 common stock equivalents outstanding at December 31, 2005, they were not included in the calculation of earnings per share because
they would have been considered anti-dilutive.



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

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, 2005.

Going Concern

As shown in the accompanying financial statements, the Company has incurred an accumulated deficit of $26,122,111 through December 31, 2005.
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 $2,500,000 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.

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, 2005.



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VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

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.

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 $123,000 which are included in the statement of operations as of
December 31, 2005.

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.



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VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 153. This statement addresses the measurement of exchanges of nonmonetary assets. The guidance in APB Opinion No. 29, Accounting for Nonmonetary Transactions, is based on the principle that exchanges of
nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in that opinion; however, included certain exceptions to that principle. This statement amends Opinion 29 to eliminate the exception for nonmonetary
exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetrary exchange has commercial substance if the future cash flows of the entity are
expected to change significantly as a result of the exchange. This statement is effective for financial statements for fiscal years beginning after June 15, 2005. Earlier application is permitted for nonmonetary asset exchanges incurred during
fiscal years beginning after the date of this statement is issued. Management believes the adoption of this statement will have no impact on the financial statements of the Company.

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 152, which amends FASB statement
No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in AICPA Statement of Position (SOP) 04-2, Accounting for
Real Estate Time-Sharing Transactions. This statement also amends FASB Statement No. 67, Accounting for Costs and Initial Rental Operations of Real Estate Projects, to state that the guidance for (a) incidental operations
and (b) costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The accounting for those operations and costs is subject to the guidance in SOP 04-2. This statement is effective for financial
statements for fiscal years beginning after June 15, 2005. Management believes the adoption of this statement will have no impact on the financial statements of the Company.

In December 2004, the Financial Accounting Standards Board issued a revision to Statement of Financial Accounting Standards No. 123R,
Accounting for Stock Based Compensations. This statement supercedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. This statement establishes standards for the
accounting for transactions in which an entity exchanges its equity instruments for goods or services. It also addresses transactions in which an entity incurs liabilities in exchange for goods or services that are based on the fair value of the
entitys equity instruments or that may be settled by the issuance of those equity instruments. This statement focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions.
This statement does not change the accounting guidance for share based payment transactions with parties other than employees provided in Statement of Financial Accounting Standards No. 123. This statement does not address the accounting for
employee share ownership plans, which are subject to AICPA Statement of Position 93-6, Employers Accounting for Employee Stock Ownership Plans. The Company has determined that there was no impact on the Companys financial
statements from the adoption of this statement.

This statement does not change the accounting guidance for share based payment
transactions with parties other than employees provided in Statement of Financial Accounting Standards No. 123. This statement does not address the accounting for employee share ownership plans, which are subject to AICPA Statement of Position
93-6, Employers Accounting for Employee Stock Ownership Plans. The Company has determined that there was no impact on the Companys financial statements from the adoption of this statement.



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

In
November 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 151, Inventory Costs an amendment of ARB No. 43, Chapter 4. This Statement amends the guidance in
ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously
stated that . . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . . This Statement requires
that those items be recognized as current-period charges regardless of whether they meet the criterion of so abnormal. In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based
on the normal capacity of the production facilities. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Management does not believe the adoption of this Statement will have any immediate
material impact on the Company.

In May 2003, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards
No. 150, Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (hereinafter SFAS No. 150). SFAS No. 150 establishes standards for classifying and measuring certain
financial instruments with characteristics of both liabilities and equity and requires that those instruments be classified as liabilities in statements of financial position. Previously, many of those instruments were classified as equity. SFAS
No. 150 is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The Company has determined that there
was no impact on the Companys financial statements from the adoption of this statement.

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.

The following is a summary of property, equipment, and accumulated depreciation:



|                              |  |                  |           |   |                  |   |          |  
|----------------------------- |  | ---------------- | --------- | - | ---------------- | - | -------- | -
|                              |  | December 31,2005 |           |   | December 31,2004 |  
|Equipment                     |  | $                | 313,070   |   |                  | $ | 273,298  |  
|Leasehold improvements        |  |                  | 938,627   |   |                  |   | 78,965   |  
|                              |  |                  |           |   |                  |   |          |  
|                              |  |                  | 1,251,697 |   |                  |   | 352,263  |  
|Less accumulated depreciation |  |                  | (290,936  | ) |                  |   | (216,711 | )
|                              |  |                  |           |   |                  |   |          |  
|                              |  | $                | 960,761   |   |                  | $ | 135,552  |  
|                              |  |                  |           |   |                  |   |          |  

Equipment principally consists of machines that can be used to manufacture the Companys drug
candidates. Depreciation for the years ended December 31, 2005 and 2004 was $74,226 and $45,146, 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.



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

NOTE 4  PATENTS

The Company has the following patents issued:



|                                                                                                                                   |  |                   |  |           
|---------------------------------------------------------------------------------------------------------------------------------- |  | ----------------- |  | ----------
|Region                                                                                                                             |  | Date Issued       |  | Patent No.
|Australia                                                                                                                          |  | October 19, 2000  |  | 721463    
|Canada                                                                                                                             |  | March 18, 2003    |  | 2220347   
|EPC (Austria, Denmark, France, Germany, Great Britain, Ireland, Italy, Liechtenstein, Monaco, Netherlands, Spain, and Switzerland) |  | September 5, 2001 |  | 69615015.8
|Hong Kong                                                                                                                          |  | August 9, 2002    |  | HK1009457 
|Israel                                                                                                                             |  | January 5, 1996   |  | 118103/5  
|Russia 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.

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, 2005, the Company does not have product liability insurance for any of its drug candidate products.

Consulting Agreements

During the year ended December 31, 2005, 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, 2005, 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. The two remaining agreements are effective until May 31, 2006 and may be extended for additional one year terms upon the mutual consent of the employee and the Company. Each 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. 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.



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VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

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 has expired unexercised.

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.

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:



|     |  |   |         |  | 
|---- |  | - | ------- |  | 
|2006 |  | $ | 149,616 |  | 
|2007 |  | $ | 149,616 |  | 
|2008 |  | $ | 77,400  |  | 
|2009 |  | $ | 45,150  |  | 
|     |  |   |         |  | 
|     |  | $ | 421,782 |  | 
|     |  |   |         |  | 

NOTE 6  COMMON STOCK

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. 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.

On
September 20, 2004, the Company filed documents with the state of California amending its certificate of incorporation to increase its authorized common shares to 250,000,000.

In December 2004, the Company issued 230,000 shares to five consultants for cash of $2,300 and services valued a $108,632.

In November 2004, for cash of $2,000,000, the Company issued to John D. Lefebvre 8,000,000 shares. Also in November 2004, the Company issued 1,000,000
shares valued at $450,000 to two parties for finders fees; 150,000 shares for investor relations services valued at $52,500; and 719,800 shares to four consultants for cash of $7,190 and services valued at $293,618.



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

In October 2004,
the Company issued 124,000 shares to two consultants for exercise of options for cash of $124 and services valued at $99,500.

In September
2004, the Company issued 24,708,580 shares to 37 entities in connection with the conversion of the Therapeutic Genetic, Inc. note payable. Included in this total are 19,719,452 shares issued to three directors of the Company or controlled entities.
Also in September 2004, the Company issued 315,600 shares to 5 consultants for cash of $3,156 and services valued at $157,924. These shares were issued in reliance on the exemption from registration set forth in Section4(2) of the Securities Act of
1933. No commission was paid to any person in connection with the transactions.

In August 2004, the Company cancelled 100,000 shares that
were issued in error pursuant to a consulting agreement that did not take effect.

In July 2004, the Company issued 275,000 shares to two
consultants for exercise of an option for cash of $2,750 and services valued at $137,500, and 121,065 shares to an individual for cash of $50,000. These shares were issued in reliance on the exemption from registration set forth in Section4(2) of
the Securities Act of 1933. No commission was paid to any person in connection with the transactions.

In May, 2004, the Company issued
175,000 shares to a consultant for exercise of an option for cash of $1,750 and services valued at $96,600 and 1,500,000 shares valued at $660,000 to two arms length entities for settlement of terminated agreements. These shares were issued in
reliance on the exemption from registration set forth in Section4(2) of the Securities Act of 1933. No commission was paid to any person in connection with the transactions.

During the three months ended March 31, 2004, the Company issued 1,240,800 shares for cash of $477,349 and subscription receivable of $600; 950,000
shares for exercise of options for cash of $9,500; 350,000 shares for exercise of warrants for a subscription receivable of $3,500; 729,722 shares for services valued at $370,187; 66,666 shares in exchange for debt of $10,726; and 250,000 shares in
exchange for a settlement agreement valued at $175,000.



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

NOTE 7  INCOME TAXES

At December 31, 2005, the Company had net deferred tax assets of approximately $6,369,913 (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, 2005 and 2004.

The significant components of the
deferred tax asset at December 31, 2005 and 2004 were as follows:



|                                                   |  |                  |             |   |                  |   |             |  
|-------------------------------------------------- |  | ---------------- | ----------- | - | ---------------- | - | ----------- | -
|                                                   |  | December 31,2005 |             |   | December 31,2004 |  
|Net operating loss carryforward before adjustments |  | $                | 36,236,762  |   |                  | $ | 31,206,223  |  
|Section 197 amortization of patents                |  |                  | 347,070     |   |                  |   | 347,070     |  
|Tax over book depreciation                         |  |                  | 10,406      |   |                  |   | 32,395      |  
|Options/warrants issued for expenses and interest  |  |                  | (17,859,201 | ) |                  |   | (16,114,777 | )
|                                                   |  |                  |             |   |                  |   |             |  
|Net operating loss carryforward                    |  |                  | 18,735,037  |   |                  |   | 15,470,911  |  
|                                                   |  |                  |             |   |                  |   |             |  
|Deferred tax asset                                 |  | $                | 6,369,913   |   |                  | $ | 5,260,110   |  
|Deferred tax asset valuation allowance             |  | $                | (6,369,913  | ) |                  | $ | (5,260,110  | )

At December 31, 2005, the Company has utilizable net operating loss carryforwards of
approximately $18,735,000, which expire in the years 2016 through 2025. The Company recognized approximately $2,362,679 of losses from issuance of restricted common stock, stock options and warrants for services and interest in fiscal
2005, 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, 2004 to December 31, 2005 was $1,109,803.

NOTE 8  CONVERTIBLE NOTES PAYABLE

At
December 31, 2005 and 2004, respectively, the Company had the following obligations:



|                                                |  |      |           |      |   |          
|----------------------------------------------- |  | ---- | --------- | ---- | - | ---------
|                                                |  | 2005 |           | 2004
|5% Convertible notes payable to related parties |  | $    | 2,080,753 |      | $ | 2,080,753
|                                                |  |      |           |      |   |          
|Total                                           |  | $    | 2,080,753 |      | $ | 2,080,753
|                                                |  |      |           |      |   |          

Accrued interest on convertible notes payable to related parties was $40,067 and $75,790 at
December 31, 2005 and 2004, 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.



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

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.

NOTE 9  WARRANTS

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 three months ended December 31, 2004, the Company granted
4,000,000 warrants to John D. Lefebvre in connection with a private placement of 8,000,000 units for $2,000,000 cash.

During the three
months ended September 30, 2004, the Company granted 24,708,580 warrants due to conversion of related party debt (see Note 9).

During
the three months ended March 31, 2004, the Company granted 66,666 warrants in exchange for debt valued at $9,267.

During the year
ended December 31, 2003, the Company granted 600,000 warrants for compensation for consulting services.

The Company also issued
450,880 warrants as part of the units issued pursuant to the exchange of debts totaling $135,264.

During the year ended December 31,
2005, the fair value of each warrant 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 warrants in the amount of $481,089 reduced notes payable.

During the year ended
December 31, 2004, the fair value of each warrant granted was estimated using the Black-Scholes Option Price Calculation. The following assumptions were made in estimating fair value: risk free interest of 4%, volatility of 77% to 137%,
expected life of 2-5 years, and no expected dividends. The value of these warrants was estimated at $3,436,105. Of this total, $3,236,105 reduced notes payable and accrued interest and $200,000 was the purchase price of 4,000,000 warrants included
in the purchase of 8,000,000 common stock shares.



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

The following is a
summary of stock warrants activity:



|                                                                                        |  |                   |            |  
|--------------------------------------------------------------------------------------- |  | ----------------- | ---------- | -
|                                                                                        |  | Number ofWarrants |           
|Warrants outstanding at December 31, 2003                                               |  |                   | 800,880    |  
|Granted                                                                                 |  |                   | 28,775,246 |  
|Exercised                                                                               |  |                   | (350,000   | )
|                                                                                        |  |                   |            |  
|Warrants outstanding and exercisable at December 31, 2004                               |  |                   | 29,226,126 |  
|                                                                                        |  |                   |            |  
|Weighted average fair value of warrants granted during the year ended December 31, 2004 |  | $                 | 0.12       |  
|                                                                                        |  |                   |            |  
|                                                                                        | 
|                                                                                        |  | Number ofWarrants |           
|Warrants outstanding at December 31, 2004                                               |  |                   | 29,226,126 |  
|Granted                                                                                 |  |                   | 10,826,664 |  
|Cancelled                                                                               |  |                   | (4,000,000 | )
|                                                                                        |  |                   |            |  
|Warrants outstanding and exercisable at December 31, 2005                               |  |                   | 36,052,790 |  
|                                                                                        |  |                   |            |  
|Weighted average fair value of warrants granted during the year ended December 31, 2005 |  | $                 | 0.24       |  
|                                                                                        |  |                   |            |  

NOTE 10  STOCK OPTIONS

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.

During the three months ended
December 31, 2004, the Company granted 623,800 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 three months
of service until the termination of the individual agreements. At December 31, 2004, 548,800 of the options granted had been exercised.

During the three months ended September 30, 2004, the Company granted 1,139,600 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 three months of service until the termination of the individual agreements. In one case, the consultant was granted a lump-sum option of 500,000 shares. The options are valid until two years following termination of
the consultant or advisor or May 31, 2008, whichever is sooner. At December 31, 2004, 1,039,600 of the options granted had been exercised.



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

During the three
months ended June 30, 2004, the Company granted 550,000 options under various consulting or advising services agreements at exercise price of $0.01. These options are granted at varying rates per consultant or advisor for every three months of
service until the termination of the individual agreements. The options are valid until two years following termination of the consultant or advisor or May 31, 2008, whichever is sooner. At December 31, 2004, 475,000 of the options granted
had been exercised. Also during this period, the Company issued 1,800,000 options to Mr. Haig Keledjian and Mr. Harry Zhabilov Jr. pursuant to each officers Employment Agreement (more fully described in Note 4). These options are at
exercise prices of $0.45 and are exercisable until two years following termination of the officer of May 31, 2008, whichever is sooner. The Company also issued 1,000,000 options to a company in conjunction with a cancelled distribution
agreement exercisable at $0.40 per share. This option expired unexercised December 31, 2004.

During the three months ended
March 31, 2004, the Company granted 1,050,000 options under various consulting or advising services agreements at exercise prices of $0.01 to $0.58. These options are granted at varying rates per consultant or advisor for every three months of
service until the termination of the individual agreements. The options are valid until two years following termination of the consultant or advisor, or May 31, 2008, whichever is sooner. At December 31, 2004, 450,000 of the options
granted had been exercised.

During the year ended December 31, 2003, the Company granted 13,080,769 options under various consulting
or advising services agreements at exercise prices of $0.01 to $1.00. These options are granted at varying rates per consultant or advisor for every three months of service until the termination of the individual agreements. The options are valid
until two years following termination of the consultant or advisor, or May 31, 2008, whichever is sooner. At December 31, 2004, 2,830,769 of these options had been exercised.

The Company issued 2,300,000 options each to three directors. which includes 1,800,000 options as part of an annual option and 500,000 options as a
signing bonus which were granted pursuant to each officers employment agreement; 1,250,000 options to consultants as compensation for management roles. Another 250,000 options were issued as a finders fee.

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.

During the year ended December 31, 2004, 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 4%; volatility of 77% to 137%; expected life of 1-5 years; and no expected dividends. The value of these
options in the amount of $3,892,960 is included in consulting fees, research and development, and management salaries expense in the accompanying financial statements.



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

The following is a
summary of stock option activity:



|                                                                                       |  |                  |            |   |                               |   |     
|-------------------------------------------------------------------------------------- |  | ---------------- | ---------- | - | ----------------------------- | - | ----
|                                                                                       |  | Number ofOptions |            |   | WeightedAverageExercise Price
|Options outstanding at January 1, 2004                                                 |  |                  | 10,650,000 |   |                               | $ | .42 
|Granted during 2004                                                                    |  |                  | 8,063,400  |   |                               |   | .29 
|Expired during 2004                                                                    |  |                  | (1,000,000 | ) |                               |   | .40 
|Exercised during 2004                                                                  |  |                  | (2,913,400 | ) |                               |   | .01 
|                                                                                       |  |                  |            |   |                               |   |     
|Options outstanding and exercisable at December 31, 2004                               |  |                  | 14,800,000 |   |                               |   | .38 
|                                                                                       |  |                  |            |   |                               |   |     
|Weighted average fair value of options granted during the year ended December 31, 2004 |  | $                | 0.49       |   |                               |   |     
|                                                                                       |  |                  |            |   |                               |   |     
|                                                                                       |  |                 
|                                                                                       |  | Number ofOptions |            |   | WeightedAverageExercise Price
|Options outstanding at January 1, 2005                                                 |  |                  | 14,800,000 |   |                               | $ | .38 
|Granted during 2005                                                                    |  |                  | 4,180,100  |   |                               |   | .06 
|Exercised during 2005                                                                  |  |                  | (2,736,900 | ) |                               |   | .01 
|                                                                                       |  |                  |            |   |                               |   |     
|Options outstanding and exercisable at December 31, 2005                               |  |                  | 16,243,200 |   |                               | $ | 0.47
|                                                                                       |  |                  |            |   |                               |   |     
|Weighted average fair value of options granted during the year ended December 31, 2005 |  | $                | .28        |   |                               |   |     
|                                                                                       |  |                  |            |   |                               |   |     

There is no formal stock option plan in place. Stock options are issued by management for
consulting services as deemed appropriate.

NOTE 11  MERGER AND ACQUISITION

Acquisitions



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

On October 1,
2001, Viral Genetics, Inc., a Delaware corporation, acquired all of the outstanding common stock of the Company. For accounting purposes, the acquisition has been treated as a recapitalization of Viral Genetics, Inc., a Delaware corporation, with
the Company as the acquirer (reverse acquisition), wherein the Company became the continuing reporting entity. The net book value of liabilities assumed was $280,275 in the form of notes payable. The historical financial statements prior to
October 1, 2001 are those of the Company, and are restated for the exchange of 29,750,580 shares of common stock for the original capital stock of the Company.

NOTE 12  SUBSEQUENT EVENTS

Debenture Financing

On March 29, 2006, Viral Genetics, Inc. entered into securities purchase agreements with eight 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).

The initial purchase of $2.5 million in principal amount of the Debentures was closed on March 29, 2006,
resulting in proceeds to Viral Genetics after commissions and the investors professional fees of approximately $2.2 million. The remainder of the transaction closed in April 2006.

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 $0.45 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. The shares of common stock underlying the securities sold in this financing
transaction will be registered for resale on a registration statement to be filed by Viral Genetics within 45 days following closing. 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.



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

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 will receive a
cash commission of approximately $290,000, and Warrants to purchase approximately 145,000 shares of common stock.

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 unsecured debentures in the registration statement
described above.

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.

Debt, Stock and Convertible Issuances

In January, February and March 2006, the Company received unsecured advances from five private investors totaling $267,000.

In March the Company was invoiced for approximately $500,000 of expenses related to reimbursement of clinical trial expenses owed to Timothy and Thomas, LLC pursuant to
our Distribution Management Agreement, which we paid.

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, Viral Genetics, Inc. issued 750,000 shares to Imperial Consulting
Network, Inc. as partial compensation for a publication agreement.



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

In March 2006, Viral Genetics, Inc.
(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 rendered to the Company.

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 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; and 100,000 shares to Ronald Moss on exercise of an option and payment of the exercise price of $1,000. In January 2006,
the Company issued 26,400 shares of common stock to Andre Bagdasarian on exercise of an option and payment of the exercise price of $264. 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.

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 in January 2006. The shares were and will be issued as compensation for services in reviewing and analyzing the Company with a view to assisting the Company in raising capital.

On December 23, 2005, the Company sold an unsecured convertible debenture in the principal amount of $116,800 that accrues interest at the rate of 10
percent per annum to Provident Holdings Group, LLC. The debenture matures on 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, which is subject to certain anti-dilution adjustments. Provident also acquired a warrant to purchase a total of 648,888 shares of the Companys common stock over a term of three years at an exercise price of $0.30 per share.
Provident has the right to tender the debenture for redemption before the maturity date if there is a change in control of the Company, which is defined as a sale of substantially all of the Companys assets or a change in more than 50 percent
of the voting control of the Company. Subject to certain exceptions, the Company agreed to register the shares of common stock underlying the convertible debentures and warrants under any registration statement filed by the Company to register
shares to be offered for the account of the Company or other selling shareholders. One of the exceptions is that the Company is not obligated to include the shares in any Registration Statement filed to register securities of the Company offered and
sold in a financing transaction involving the sale of Company securities where the underwriter of the transaction or, if there is no underwriter, the Company, reasonably determines in good faith that the inclusion of the shares underlying the
debentures and warrants would materially negatively affect the financing transaction. The debenture and warrant are identical to the debenture and warrant issued by the Company in October 2005.

In December 2005, the Company issued 100,000 shares of common stock to Ronald Moss on exercise of an option and payment of the exercise price of $1,000 and 50,000 shares
of common stock to Eric Rosenberg on exercise of an option and payment of the exercise price of $500.

New Director

On February 16, 2006, the board of directors of Viral Genetics, Inc., adopted resolutions increasing the number of persons comprising the board from five to six and
elected Elizabeth Hoffman, PhD., to fill the resulting vacancy. No decision was made regarding her appointment to committees of the board. At the time of her election Dr. Hoffman was granted an option to purchase 100,000 shares of Viral Genetics
common stock at an exercise price of $0.80 per share that expires February 16, 2008.



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##### Table of Contents

VIRAL GENETICS, INC.

(A Development Stage Company)

Notes to the Consolidated Financial Statements

December 31, 2005

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, intends to file an answer to the complaint denying the substantive allegations, and will assert counterclaims that it believes it has against T&T for breach of the Distribution Agreement. Viral Genetics believes
this lawsuit to be part 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 13  RESTATEMENT OF FINANCIAL STATEMENTS

The Company
had four (4) notes which were restructured as of March 31, 2003. The restructuring resulted in the following:



| |  |  | Interest Rates - Remained the same at 5%
| | - |  | ----------------------------------------



| |  |  | Due dates were extended to March 31, 2008
| | - |  | -----------------------------------------



| |  |  | Principal plus accrued interest was convertible into a unit comprised of
| | - |  | ------------------------------------------------------------------------



| | 1. | One share of common stock for each $0.30 of principal plus interest
| | -- | -------------------------------------------------------------------



| | 2. | One warrant with exercise price of $0.40
| | -- | ----------------------------------------

The new conversion feature of
the restructuring should have had an effect on the financial statements; however, the financial statements for the years ended December 31, 2003 and 2004 did not reflect the interest cost associated with the warrants to be issued and the beneficial
conversion feature of the common stock.

As of March 31, 2003, the following information was used to value the warrant interest expense and the beneficial
conversion feature:



| |  |  | Fair value of common stock $0.29 (adjusted closing price)
| | - |  | ---------------------------------------------------------



| |  |  | Fair value of the common stock $0.40 purchase warrant was $0.22 using the Black-Scholes method as follows:
| | - |  | ----------------------------------------------------------------------------------------------------------



|                               |  |           |  
|------------------------------ |  | --------- | -
|1.     Expected Volatility     |  | 160.9     | %
|2.     Expected Life           |  | 2.5 years |  
|3.     Expected Dividend Yield |  | 0.00      | %
|4.     Risk-Free Interest Rate |  | 4.0       | %

The beneficial conversion rate was computed as follows:



|                                |  |   |       |  
|------------------------------- |  | - | ----- | -
|Conversion Rate                 |  | $ | 0.30  |  
|Fair Value Warrant              |  |   | (0.22 | )
|                                |  |   |       |  
|Value Allocated to Common Stock |  |   | 0.08  |  
|                                | 
|Fair Value of Common Stock      |  |   | 0.29  |  
|                                |  |   |       |  
|Beneficial Conversion Rate      |  | $ | 0.21  |  
|                                |  |   |       |  

The beneficial conversion is limited to $0.08 as this amount would reduce the outstanding debts to zero at March
31, 2003, as follows:

|                          |  |              |           |               |   |            |                       |  |   |            |   |  |   |  
|------------------------- |  | ------------ | --------- | ------------- | - | ---------- | --------------------- |  | - | ---------- | - |  | - | -
|                          |  | NoteBalances |           | Warrant Value |   |            | Beneficial Conversion |  |   | Net       
|3 Related Party Notes     |  | $            | 2,080,753 |               | $ | (1,525,886 | )                     |  | $ | (554,867   | ) |  | $ | 
|Therapeutic Genetic, Inc. |  |              | 6,976,758 |               |   | (5,116,289 | )                     |  |   | (1,860,469 | ) |  | $ | 
|                          |  |              |           |               |   |            |                       |  |   |            |   |  |   |  
|                          |  | $            | 9,057,511 |               | $ | (6,642,175 | )                     |  | $ | (2,415,336 | ) |  | $ | 
|                          |  |              |           |               |   |            |                       |  |   |            |   |  |   |  

The value of the warrants and debt discount allocated to the common stock will collectively be treated as the
beneficial conversion feature.



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##### Table of Contents

NOTE 13  RESTATEMENT OF FINANCIAL STATEMENTS (continued)

Under Article I - of the debt restructuring agreements sub paragraph 1.3  Exchange of Loan Obligation contains the following provision:

The Term Loan plus all accrued interest on the Term Loan, may be exchanged at the election of the Lender at any time prior to the earlier of the
Prepayment Date or March 31, 2008.....

The Prepayment Date is defined in subparagraph 1.2 (b) Manner of Payment as follow:

The Term Loan may be prepaid by Borrower at any time without penalty upon not less than 30 days advance written notice from Borrower
to Lender specifying the date of prepayment.

Due to these provisions the Lender may convert the loan obligation immediately after the execution of
the debt restructuring agreement.

Upon conversion of the debt for common stock the Lenders will receive stock warrants in an amount equal to the number of
common shares received. The warrants agreement in sub-paragraph 1 states the following:

This warrant shall vest and be exercisable
immediately, and shall expire at 5:00 P.M. Pacific Time on the date that is five years from the date this warrant is signed.

In paragraph 6 of EITF
98-5 states:

.. the discount assigned to the convertible instrument, if any, should be amortized over the period to the
securitys earliest conversion date.

The earliest conversion date was March 31, 2003, therefore, the entire beneficial conversion feature was
recognized on that date and not amortized over the five year term of the debt.

In 1995 Viral Genetics, Inc. purchased all the assets of Therapeutic
Genetic, Inc. including inventory, equipment and in progress research and development costs for $5,000,000 and assumed certain liabilities. The purchase price was allocated amongst the various assets, including $5,206,052 allocated to goodwill. The
goodwill allocation was subsequently deemed to be in error as the allocated amount represented in progress research and development that was in the early stages of research without any significant patentable result of the research likely to arise
from it in the near future (at that time). The technology being developed by Therapeutic Genetic, Inc. prior to the 1995 transaction was a compound the nature, identity, method of manufacture, and function of which were still being discovered and
developed. As such the compound should properly have been viewed as a potential product in the process of being developed and not, for example, a platform method or tool for future research or similar asset with alternative future uses. Accordingly,
the amount should have been recorded as an expense at the date of purchase.

The following summarizes the effect on the financial statements for
adjustments related to the beneficial conversion feature and research and development costs:

December 31, 1995

|                  |  |             |             |   |                 |   |             |             |  |   |            |  
|----------------- |  | ----------- | ----------- | - | --------------- | - | ----------- | ----------- |  | - | ---------- | -
|Description       |  | As Reported |             |   | RestatedBalance |   |             | Differences | 
|Net Loss          |  | $           | (707,167    | ) |                 | $ | (5,913,219  | )           |  | $ | (5,206,052 | )
|Deficit           |  |             | (707,167    | ) |                 |   | (5,913,219  | )           |  |   | (5,206,052 | )
|                 
|December 31, 1996 | 
|Deficit           |  |             | (1,517,356  | ) |                 |   | (6,723,408  | )           |  |   | (5,206,052 | )
|                 
|December 31, 1997 | 
|Deficit           |  |             | (2,094,422  | ) |                 |   | (7,300,474  | )           |  |   | (5,206,052 | )
|                 
|December 31, 1998 | 
|Deficit           |  |             | (2,802,989  | ) |                 |   | (8,009,041  | )           |  |   | (5,206,052 | )
|                 
|December 31, 1999 | 
|Deficit           |  |             | (4,840,627  | ) |                 |   | (10,046,679 | )           |  |   | (5,206,052 | )
|                 
|December 31, 2000 | 
|Deficit           |  |             | (7,025,744  | ) |                 |   | (12,231,796 | )           |  |   | (5,206,052 | )
|                 
|December 31, 2001 | 
|Deficit           |  |             | (8,381,861  | ) |                 |   | (13,587,913 | )           |  |   | (5,206,052 | )
|                 
|December 31, 2002 | 
|Deficit           |  |             | (10,158,712 | ) |                 |   | (15,364,764 | )           |  |   | (5,206,052 | )



F-28



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##### Table of Contents

NOTE 13  RESTATEMENT OF FINANCIAL STATEMENTS (continued)

December 31, 2003



|                                             |  |             |             |   |                  |   |             |            |  |   |             |  
|-------------------------------------------- |  | ----------- | ----------- | - | ---------------- | - | ----------- | ---------- |  | - | ----------- | -
|Description                                  |  | As Reported |             |   | Restated Balance |   |             | Difference | 
|Accrued Interest                             |  | $           | 1,209,381   |   |                  | $ | 264,555     |            |  | $ | 944,826     |  
|Convertible notes payable, related parties   |  |             | 7,722,384   |   |                  |   | 8,667,210   |            |  |   | 944,826     |  
|Additional Paid-in Capital                   |  |             | 8,124,846   |   |                  |   | 17,446,912  |            |  |   | 9,322,066   |  
|Deficit                                      |  |             | (14,601,819 | ) |                  |   | (29,129,937 | )          |  |   | (14,528,118 | )
|Interest Expense                             |  |             | 452,775     |   |                  |   | 9,774, 841  |            |  |   | 9,322,066   |  
|Net Loss                                     |  |             | (4,443,107  | ) |                  |   | (13,765,173 | )          |  |   | (9,322,066  | )
|Net Loss Per Common Share, Basic and Diluted |  |             | (0.10       | ) |                  |   | (0.32       | )          |  |   | (0.22       | )

December 31, 2004



|                                             |  |             |             |   |                  |   |             |            |  |   |             |  
|-------------------------------------------- |  | ----------- | ----------- | - | ---------------- | - | ----------- | ---------- |  | - | ----------- | -
|Description                                  |  | As Reported |             |   | Restated Balance |   |             | Difference | 
|Accrued Interest                             |  | $           | 212,938     |   |                  | $ | 75,790      |            |  | $ | (137,148    | )
|Convertible notes payable, related parties   |  |             | 1,943,605   |   |                  |   | 2,080,753   |            |  |   | 137,148     |  
|Additional Paid-in Capital                   |  |             | 18,558,348  |   |                  |   | 28,219,165  |            |  |   | 9,660,817   |  
|Deficit                                      |  |             | (21,545,406 | ) |                  |   | (36,412,275 | )          |  |   | (14,866,869 | )
|Interest Expense                             |  |             | 361,601     |   |                  |   | 700,352     |            |  |   | 338,751     |  
|Net Loss                                     |  |             | (6,943,587  | ) |                  |   | (7,282,338  | )          |  |   | (338,751    | )
|Net Loss Per Common Share, Basic and Diluted |  |             | (0.12       | ) |                  |   | (0.12       | )          |  |   |            |  

In addition to the correction made to the 2003 and 2004 financial statements which would effect the 2005
consolidated balance sheet, the Companys management discovered that the convertible debt issued in October and December 2005 (aggregating $516,800) was immediately convertible therefore the value of the warrants and beneficial conversion
feature which aggregated $516,800 should have been recognized as interest expense at the time of the debt issuance. The net loss for the year ended December 31, 2005 was increased by $489,545 due to this accounting error.

The following summarizes the effect of all of the above described changes in the December 31, 2005 financial statements:

December 31, 2005



|                                             |  |             |             |   |                  |   |             |            |  |   |             |  
|-------------------------------------------- |  | ----------- | ----------- | - | ---------------- | - | ----------- | ---------- |  | - | ----------- | -
|Description                                  |  | As Reported |             |   | Restated Balance |   |             | Difference | 
|Accrued interest                             |  | $           | 8,657       |   |                  | $ | 48,724      |            |  | $ | 40,067      |  
|Convertible notes payable, related parties   |  |             | 2,120,820   |   |                  |   | 2,080,753   |            |  |   | (40,067     | )
|Convertible notes payable                    |  |             | 62,966      |   |                  |   | 516,800     |            |  |   | 453,834     |  
|Additional Paid-in Capital                   |  |             | 20,931,561  |   |                  |   | 31,109,178  |            |  |   | 10,177,617  |  
|Common stock warrants                        |  |             | 4,045,572   |   |                  |   | 3,564,483   |            |  |   | (481,089    | )
|Deficit                                      |  |             | (26,122,111 | ) |                  |   | (41,445,068 | )          |  |   | (15,322,957 | )
|Amortization and depreciation expense        |  |             | (107,683    | ) |                  |   | (74,226     | )          |  |   | 33,457      |  
|Interest Expense                             |  |             | (136,628    | ) |                  |   | (626,173    | )          |  |   | (489,545    | )
|Net Loss                                     |  |             | (4,576,705  | ) |                  |   | (5,032,793  | )          |  |   | (456,088    | )
|Net Loss Per Common Share, Basic and Diluted |  |             | (0.05       | ) |                  |   | (0.05       | )          |  |   |            |  



F-29