# U.S. SECURITIES AND
EXCHANGE COMMISSION Washington, D.C. 20549

# FORM 10-KSB

|      |                                                                                                          
|----- | ---------------------------------------------------------------------------------------------------------
|[ X ] | ANNUAL   REPORT   PURSUANT   TO   SECTION   13  OR  15(d)  OF  THE   SECURITIES   EXCHANGE   ACT  OF
1934
|      |                                                                                                          

| |                                                    
| | ---------------------------------------------------
| | For the fiscal year ended
        December 31, 2004
| |                                                    

|        |                                                                                                 
|------- | ------------------------------------------------------------------------------------------------
|[     ] | TRANSITION REPORT
        PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|        |                                                                                                 

| |                                                        
| | -------------------------------------------------------
| | For the transition period from __________ to __________
| |                                                        

Commission File No.
000-26875

VIRAL GENETICS, INC.(Name of small
business issuer in its charter)

|                                                                       |  |                                  
|---------------------------------------------------------------------- |  | ---------------------------------
|Delaware                                                               |  | 33-0814123                       
|(State or Other Jurisdiction of
        Incorporation or Organization) |  | (IRS Employer Identification No.)

|1321 Mountain View Circle, Azusa, CA 91702(Address of principal executive offices)
|----------------------------------------------------------------------------------

|(626) 334-5310
        (Issuers telephone number)
|--------------------------------------------------

Securities
        registered pursuant to Section 12(b) of the Exchange Act:  None

Securities
        registered under Section 12(g) of the Exchange Act:

Common Stock, par value $0.0001(Title of class)

Check whether the issuer (1) has
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 issuer 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. [  ]

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  30,  2005,  by  non-affiliates  of the  issuer  was
        $11,477,600.

As of March 30, 2005, the issuer had
        90,837,046 shares of its common stock outstanding.

Transitional Small
Business Format:  Yes [    ]  No [ X ]

Documents incorporated by
reference: None



# TABLE OF CONTENTS

|                        |     
|----------------------- | ----
|ITEM NUMBER AND CAPTION | Page
|                        |     

|         |                                                                                      |   
|-------- | ------------------------------------------------------------------------------------ | --
|Part I  
|         |                                                                                      |   
|        
|1.       | Description of Business                                                              | 3 
|2.       | Description of Property                                                              | 17
|3.       | Legal Proceedings                                                                    | 17
|4.       | Submission of Matters to a Vote of Security Holders                                  | 17
|        
|Part II 
|        
|5.       | Market for Common Equity, Related Stockholder Matters and                            | 18
|         | Registrant Purchases of Equity Securities                                            |   
|6.       | Management's Discussion and Analysis or Plan of Operation                            | 18
|7.       | Financial Statements                                                                 | 20
|8.       | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 20
|8.A      | Controls and Procedures                                                              | 21
|8.B      | Other Information                                                                    | 21
|        
|Part III
|        
|9.       | Directors and Executive Officers of the Registrant                                   | 21
|10.      | Executive Compensation                                                               | 23
|11.      | Security Ownership of Certain Beneficial Owners and Management and                   | 24
|         | Related Stockholder Matters                                                          |   
|12.      | Certain Relationships and Related Transactions                                       | 26
|13.      | Exhibits                                                                             | 27
|14.      | Principal Accountant Fees and Services                                               | 28

# 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

2

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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 technology aimed primarily at the
treatment of infectious disease, and in particular HIV infection and AIDS. The
Companys research interests also include autoimmune diseases and immunological
deficiency. If we are successful in our development efforts, our corporate strategy is to
partner 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, based on TNP, is a treatment for HIV and AIDS called
VGV-1 which we have studied in 4 human clinical trials outside of the United States for
safety and efficacy in reducing HIV viral load. A fifth clinical trial of VGV-1,
designated a Phase III study by the South African Medicines Control Council, is now in
progress in South Africa, and recently completed enrollment of 135 patients. During our 4
completed 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, including PCR (Polymerase Chain
Reaction  which detects HIV genetic material) and PBMC (Peripheral Blood Mononuclear
Cell  which detects living HIV in the blood) viral load assays, there was a marked
decrease in HIV viral load in over half of the subjects tested. This decrease sustained
through the post-treatment follow-up evaluation periods of up to 9 months.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

| |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.
Although we intend to research these other applications in the future, our primary focus
continues to be VGV-1.
| |                                                                                                                                                                                                                                                                                                                                                                                                                           

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | VGV-1 is in the preclinical stage of
development in the USA where we have yet to formally file an Investigational New Drug
application (IND) with the United States Food and Drug Administration (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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| |                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------
| | We are now in the process of
completing and filing an IND application with the FDA, which we hope to file later this
year.
| |                                                                                                                           

| |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In South Africa we have completed
enrollment of 135 patients for our Phase III study of VGV-1. The last follow-up for this
study is scheduled for the last calendar quarter of 2005. We expect final data summaries
shortly thereafter. The trial is a double-blind, placebo-controlled study examining
VGV-1s safety and efficacy with respect to viral load and other markers in Stage
CDC-2 HIV-infected subjects.
| |                                                                                                                                                                                                                                                                                                                                                                                                                       

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2004, we announced the results of
the prospective study of 34 patients treated with VGV-1 that was conducted at Ditan
Hospital in Beijing, China, in 2003. 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, additional human safety and efficacy data,
 and certain long-term toxicity data. We continue to pursue commercial approval of VGV-1 in China.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Also during 2004, HIV and AIDS
Review published a summary report written by the principal investigators of our
prospective study of VGV-1 that was conducted at IMSS Hospital 25 in Monterrey, Mexico in
1999-2000. We have suspended all activity in Mexico, as we believe our resources are
better allocated elsewhere.
| |                                                                                                                                                                                                                                                                                                                          

3

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| |                                                                                                                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our management team consists of 2
executive officers and 1 senior manager, who are supported by a team of 7 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, 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 temporary preclinical production facility. The Company has
begun construction of a permanent manufacturing and research facility at 1321 Mountain
View Circle suitable for clinical development and early market-entry. We anticipate
completion of the facility renovations in 2005. The adjacent 1291 facility is expected to
be used for research and development, additional office space, and a quality control
laboratory.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our Chinese subsidiary leases offices
in the Chaoyang District of Beijing, China, and is managed by one executive officer who is
supported by 2 employees.
| |                                                                                                                                                           

| |                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. pursuant to a merger of that
company with and into VGI.
| |                                                                                                                                                                                                                                                                                                                                                                                                      

# 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, and immunological deficiency. At the core of our technology
is TNP  an extract of mammalian thymus tissue. We are also researching other drug
candidates, although they are in the very early stages of development.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| |                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We view TNP as a platform for
development of products with a number of potential therapeutic uses following anecdotal observations
of improvements in some subjects suffering from other conditions in our human clinical
trials. We elected to distinguish the possible uses of TNP and therefore elected to rename our HIV and AIDS drug candidate as
VGV-1".
| |                                                                                                                                                                                                                                                                                                                                                                 

VGV-1

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our lead drug candidate, VGV-1, is a
prospective treatment for HIV infection and AIDS based on our TNP platform. VGV-1 is
extracted from mammalian thymus tissue, processed and administered through intramuscular
injection. Historically, the Company has allocated the majority of its efforts to the
development of VGV-1. Viral Genetics originally acquired the intellectual property rights
underlying VGV-1 from Therapeutic Genetic, Inc. through an Assignment of Patent in 1995.
We acquired Therapeutic Genetic, Inc., through its merger with VGI in September 2004.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

| |                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 Highly-Active Antiretroviral Therapy
(HAART)  combinations of various antiretroviral drugs that target the
virus itself or its method of reproduction. The major classes of HIV treatment are
Nonnucleoside Reverse Transcriptase Inhibitors, Nucleoside Analog Reverse
| |                                                                                                                                                                                                                                                                                                                                                   

4

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Transcriptase
Inhibitors and Protease Inhibitors, with Fusion or Entry Inhibitors representing a newer,
less-commonly utilized approach. 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 all three major classes.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In the poorer nations of the world,
simpler versions of such combination therapy with fewer, older versions of
antiretroviral drugs are sometimes used. However most HIV infected people in the world
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 dosing regimens, drug-drug interactions, and the development of mutated
drug-resistant strains of the virus. In addition, these drugs are very expensive. Thus,
development of new and inexpensive therapeutics with simple dosing regimens is an
extremely important task and represents a clear market opportunity.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We have studied VGV-1 in 4
prospective 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. Markers that have been examined have centered on viral
load testing, using both PCR-RNA assays and PBMC cultures, as well as CD4+ T cell
measurement. In our South African Phase III study we are studying 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. Overall decreases in viral load from baseline were
noted in over half of subjects tested. The mean decrease in viral load as measured by
PCR-RNA in our 4 human clinical studies has been 0.68 log, equivalent to an approximately
80% decrease in the amount of virus in the blood.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our most recent data is from the
results of our human clinical trial in China. This study was a prospective, masked,
non-randomized, single-center study consisting of 34 HIV-1 infected patients with CDC
Stage-3 classification of AIDS (less than 200 cells/mm3), who were treatment-naive.
Patients received intramuscular injections of VGV-1 biweekly for 8 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 including PCR RNA levels and CD4+ T cell counts. Other tests performed included
standard blood chemistries and HIV-infected PBMC counts.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Overall, analysis of the study data
revealed sustained viral suppression during the follow-up period. The mean PCR RNA viral
load for all patients at baseline (prior to treatment) was 4.902 log which is equivalent
to approximately 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% 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.
| |                                                                                                                                                                                                                                                                                                       

5

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| |                                                                                                                                                    
| | ---------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 written by the
investigators of our study in Monterrey, Mexico, was published in a peer reviewed journal
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, 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 1 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-1 RNA
(viral load or virus in the blood) to six months.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The mechanism by which VGV-1 affects
HIV infection is not fully understood, and is a current focus of our research. Last year
we confirmed that components of VGV-1 bind HIV-1 surface glycoproteins 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 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

2004 Research &
Development

| |                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Viral Genetics spent $1,500,585 on
development of its drug candidates in calendar year 2004, compared to $841,461 in 2003. We
estimate we will spend $850,000 in 2005 on the construction of our permanent GMP facility
and $500,000 on product testing and development. We further estimate approximately
$450,000 will be needed to meet our portion of the expenses of the ongoing South African
clinical trial.
| |                                                                                                                                                                                                                                                                                                                                                                                                                    

# 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, additional human safety and efficacy data,
         and certain long-term toxicity data.  We intend to rely on the data from the Ditan Hospital study and data gathered from
our study in South Africa to address the human safety and efficacy data issue, and we expect
to complete the manufacturing documentation and a required toxicity study in 2005. Should the SFDA not find the data
or protocols from our human studies appropriate or usable, 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 2006, and such approval could be delayed beyond 2006, if the
SFDA requires additional data or testing.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

6



| |                                                                                                                                                                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In 2004, we became aware that
Ditan Hospital should have obtained permission from the SFDA for the study over and above the authorization
provided by the Chinese Center for Disease Control.  We understand that the matter was resolved internally and
we do not foresee any material effect of this on our future clinical development in China or elsewhere.
| |                                                                                                                                                                                                                                                                                                                                                                 

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. At present, we estimate we will be responsible for approximately $450,000 of
expenses for this trial.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The human clinical trial we are now
conducting in South Africa was authorized by the South African Medicines Control Council
(MCC) in February 2004. It is a multi-center, randomized, double-blind,
placebo-controlled study of VGV-1 treated HIV-infected subjects This study will examine
subjects with CD4+ counts of 250-500 at 7 test centers throughout South Africa and is
designated by the MCC as a Phase III study. We have completed enrollment of 135 subjects.
The primary endpoint for the study is the decrease in viral load as measured by PCR-RNA
assay. Other endpoints include CD4+ T cell counts and PBMC culture assays. Patients will
receive 16 intra-muscular injections over a 51-day period, and will be followed up
post-treatment to day 240. Therefore, unless the protocol is amended, which we do not
expect, we anticipate completion of all follow up testing by the fourth calendar quarter
of 2005. The study is being administered by Virtus Clinical Development Services, a
leading South African contract research organization.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

| |                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.
| |                                                                                                                                                                                                          

# 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. Upon completion of
construction at our new facility and finalization of current Good Manufacturing Practices
(cGMP) documentation, the Company will be able to produce larger batches of
VGV-1 suitable for clinical study. The production of such larger batches will require the
purchase of additional processing equipment to increase capacity.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

7

---



| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Azusa facility is designed to
have 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.
| |                                                                                                                                                                                                                                          

| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Design, engineering, permitting, and
construction costs of the Azusa facility are estimated at a total of approximately
$850,000. Renovations are expected to be completed in 2005.
| |                                                                                                                                                                                    

| |                                                                                                                                                                                                                                                                                              
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 of material importance 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 608/641,936, Compositions and
Methods for Detecting and Treating Immunodeficiency Syndrome, which is now pending. These
patent rights have been approved in Armenia, Austria, Australia, Azerbaijan, Bulgaria,
Belarus, Canada, Switzerland, Germany, Denmark, Eurasia, EPC, Spain, France, Great
Britain, Hong Kong, Ireland, Israel, Italy, Kyrgyzstan, Kazakhstan, Liechtenstein, Monaco,
Moldova, Netherlands, New Zealand, Russia, Tajikistan, and Turkmenistan. We have also
filed for these patent rights in Argentina, Brazil, China, Japan, and South Africa. We are
continually evaluating whether additional applications may be appropriate to protect
extensions and variations of our product, and have filed additional applications and
provisional patents related thereto.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Under international agreements in
recent years, global protection of intellectual property rights is improving. The General
Agreement on Tariffs and Trade requires participant countries to amend their intellectual
property laws to provide patent protection for pharmaceutical products by the end of a
ten-year transition period. A number of countries are doing this. Patent protection in
other countries where we have registered patents, including, the European Patent Office,
The Eurasian Patent Organization, New Zealand, Australia, and Israel, extend for varying
periods according to the date of patent filing or grant and the legal term of patents in
the various countries where patent protection is obtained. The actual protection afforded
by a patent, which can vary from country to country, depends upon the type of patent, the
scope of its coverage and the availability of legal remedies in the country.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The expiration of a product patent or
loss of patent protection resulting from a legal challenge would be expected to result in
significant competition from generic products against the covered product and,
particularly in the U.S., could result in a significant reduction in sales of the
pioneering product. If we were to lose patent protection, we may be able to continue to
obtain commercial benefits from product manufacturing trade secrets, patents on use of our
product, and patents on processes and intermediates for the economical manufacture of the
active ingredients. The effect of product patent expiration or loss also depends upon the
nature of the market and the position of the product in it, the growth of the market, the
complexities and economics of manufacture of the product, and the requirements of generic
drug laws.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

# 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

8

---



HIV/AIDS

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | There are currently 26 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Combination therapy with 2 or more of
the drugs from the 3 primary classes of anti-HIV medications is the standard of care for
HIV, and this is known as Highly-Active Antiretroviral Therapy or HAART. 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 market 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 Entry Inhibitors present competition
for VGV-1, should it be approved. However, all current approaches to HIV treatment are
believed to create resistance by their very nature, and we believe that an approach with
success in resistant patients that is less likely itself to create resistance possesses a
competitive advantage.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

# Government Regulation

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Drug development is time consuming,
expensive, and unpredictable. On average, only one out of many thousands of chemical
compounds discovered by researchers proves to be both medically effective and safe enough
to become an approved medicine. The process from discovery to regulatory approval can take
many years; the FDA estimates an average of eight and a half years for this process. Drug
candidates can fail at any stage of the process. Candidates may not receive regulatory
approval even after many years of research, and products that have been approved and
marketed can be ordered to be withdrawn from the market by regulatory authorities.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| |                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pharmaceutical companies are subject
to extensive regulation by numerous national, state and local agencies. Of particular
importance is the FDA in the United States. It has jurisdiction over virtually all of our
business and administers requirements covering the testing, safety, effectiveness,
approval, manufacturing, labeling, marketing, advertising and post-marketing surveillance
of our pharmaceutical products.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The typical path of drug development
in the USA is to file an Investigational New Drug Application, which includes
comprehensive data related to the toxicity and pharmacology of the drug candidate. In most
cases, this data will have been obtained through animal testing, although in some cases it
will include human testing data from outside the USA. Typically, if the candidate is
deemed to be free of major harmful side effects or has an acceptable level of side
effects, is a well-characterized substance, and its functioning is reasonably well
understood, the FDA will grant permission to conduct a Phase I human clinical trial
provided that the sponsor adhere to certain ethical principles. Phase I trials involve
relatively small numbers of subjects (usually 20-80) and are intended to establish the
safety of the candidate in humans, determine safe dosage ranges, and identify side
effects. A Phase I human clinical trial typically requires less than a year to complete
although there are exceptions.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

9

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Following successful Phase I trials,
the candidate will typically be tested in a Phase II human clinical trial. A Phase II
trial is intended to further establish the safety of the candidate, as well as obtain
certain data related to the efficacy of the candidate. The number of subjects tested is
usually 100-300, although sample sizes vary on a case by case basis. Sometimes, more than
one Phase II trial can be required. Successful completion of Phase II trials is sometimes
referred to as proof of concept. It is at this point, prior to Phase III, that
many drug development companies seek to license the drug candidate or joint venture.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Finally, following successful Phase
II trials, a drug typically moves on to Phase III trials which are very large and
expensive studies in which usually 1,000-3,000 subjects are tested at a number of
locations in an attempt to establish the 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 will continue to require 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 to be
otherwise consistent with the FDAs standards of clinical practice.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                       

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | According to the FDAs guidance
document Antiretroviral Drugs Using Plasma HIV RNA Measurements  Clinical
Considerations for Accelerated and Traditional Approval, the FDA has developed a
systematic approach to the evaluation of HIV therapies. Treatments seeking accelerated
approval must demonstrate a significant reduction in RNA viral load (PCR is one means of
detecting HIV RNA) within a 24-week period, whereas treatments seeking traditional
approval must demonstrate significant reduction in RNA viral load over a 48 week period.
The FDA also considers changes in CD4+ counts consistent with observed HIV RNA changes in
both approval processes.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | A treatment may be considered for
accelerated approval if it is targeting a serious or life-threatening disease, there is a
testable indicator that is predictive of clinical benefit (such as HIV RNA in the case of
HIV infection) and there must be a demonstrable improvement in activity relative to
existing therapies in a population in need of additional therapeutic options. Other bases
for accelerated approval include a novel mechanism of action, improved efficacy or safety
or tolerability, more convenient dosing schedule, different cross-resistance profile,
favorable drug-drug interaction profile, or utility in a specific population in need. This
document reveals that 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

10

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| |                                                                                                                                                                                                                                                                                                                                                                          
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

# Human Resources

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We presently have 2 full-time
executive officers, 1 senior manager, and 2 administrative employees. We also currently
have 2 full-time senior consultants and 3 part-time junior consultants focused on
operations, compliance, process validation, quality control, and GMP-related
documentation. Our Chinese subsidiary is managed by a full-time executive officer, who
also has 2 full-time 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 12 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.
| |                                                                                                                                                                                                                                                                                          

11

---



# 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 $6.9 million and $4.4 million for the
years ended 2004 and 2003, respectively. As of December 31, 2004, we had an accumulated
deficit of approximately $21.5 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 at the third quarter of 2005.
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;                                                                                                                                                                   
| |  |                                                                                                                                                                                                                                                             
| |  | 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 would reduce our prospective
revenue and make us more dependent on outside financing sources.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. If T&T does not
dedicate sufficient resources to effecting distribution of VGV-1 or fails in its marketing
efforts, the revenues we would expect to receive from such a large market could be
substantially diminished and our business and operating results will be adversely
affected.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

12

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# 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

# 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 are pursuing a
Phase III clinical trial in South Africa. We hope to file an IND with the FDA in 2005. 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 and Mexico and are pursuing
a Phase III clinical trial in 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 facilities to produce sufficient supplies of VGV-1 to support
commercial launch of this product, if approved overseas for distribution. We are in the
process of developing a research and manufacturing facility that would enable us to meet
these product supply needs. Design, engineering, permitting, and construction costs of the
facility will require us to fund $850,000, and we plan to have the process complete in
2005. If we encounter delays or difficulties in funding the project or completing the
construction, we may not have sufficient product 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

13

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# 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 and clinical trials of our product candidates will be
sufficient to support approval by overseas regulators or the FDA, the failure of which
could delay our profitability and adversely affect our stock price.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | All of our research and development
programs are at an early stage, except for the human clinical trials on VGV-1 conducted
overseas. Clinical trials are long, expensive, and uncertain processes. Clinical trials
may not be commenced or completed on schedule, and government regulators may not
ultimately approve our product candidates for commercial sale. Further, even if the
results of our preclinical studies or clinical trials are initially positive, it is
possible that we will obtain different results in the later stages of drug development or
that results seen in clinical trials will not continue with longer-term treatment. Drugs
in late stages of clinical development may fail to show the desired safety and efficacy
traits despite having progressed through initial clinical testing. For example, positive
results in early Phase I or Phase II clinical trials may not be repeated in larger Phase
II or Phase III clinical trials. All of our potential drug candidates are prone to the
risks of failure inherent in drug development. The clinical trials of any of our drug
candidates, including VGV-1, could be unsuccessful, which would prevent us from
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 issued 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, full 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 depends on their efforts and is 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

14

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# As a result of
intense competition and technological change in the pharmaceutical industry, the
marketplace may not accept our products, and we may not be able to complete successfully
against other companies in our industry and achieve profitability.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Many of our competitors have drug
products that have already been approved or are in development, and operate large,
well-funded research and development programs in these fields. Many of our competitors
have substantially greater financial and management resources, superior intellectual
property positions and greater manufacturing, marketing and sales capabilities, areas in
which we have limited or no experience. In addition, many of our competitors have
significantly greater experience than we do in undertaking preclinical testing and
clinical trials of new or improved pharmaceutical products and obtaining required
regulatory approvals. Consequently, our competitors may obtain FDA and other regulatory
approvals for product candidates sooner and may be more successful in manufacturing and
marketing their products than we or our collaborators.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Existing and future products,
therapies and technological approaches will compete directly with the products we seek to
develop. Current and prospective competing products may provide greater therapeutic
benefits for a specific problem, may offer easier delivery or may offer comparable
performance at a lower cost. Any product candidate that we develop and that obtains
regulatory approval must then compete for market acceptance and market share. Our product
candidates may not gain market acceptance among physicians, patients, healthcare payors
and the medical community. Further, any products we develop may become obsolete before we
recover any expenses we incurred in connection with the development of these products. As
a result, we may never achieve profitability.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

# 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

15

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | We also rely on trade secrets,
know-how and confidentially provisions in our agreements with our collaborators, employees
and consultants to protect our intellectual property. However, these and other parties may
not comply with the terms of their agreements with us, and we might be unable to
adequately enforce our rights against these people or obtain adequate compensation for the
damages caused by their unauthorized disclosure or use. Our trade secrets or those of our
collaborators may become known or may be independently discovered by others.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

# Our products and
product candidates may infringe the intellectual property rights of others, which could
increase our costs and negatively affect our profitability.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our success also depends on avoiding
infringement of the proprietary technologies of others. In particular, there may be
certain issued patents and patent applications claiming subject matter that we or our
collaborators may be required to license in order to research, develop or commercialize
our product candidates. In addition, third parties may assert infringement or other
intellectual property claims against us based on our patents or other intellectual
property rights. An adverse outcome in these proceedings could subject us to significant
liabilities to third parties, require disputed rights to be licensed from third parties or
require us to cease or modify our use of the technology. If we are required to license
such technology, we cannot assure you that a license under such patents and patent
applications will be available on acceptable terms or at all. Further, we may incur
substantial costs defending ourselves in lawsuits against charges of patent infringement
or other unlawful use of anothers proprietary technology.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

16

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# If product liability
claims are brought against us or we are unable to obtain or maintain product liability
insurance, we may incur substantial liabilities that could reduce our financial resources.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The clinical testing and commercial
use of pharmaceutical products involves significant exposure to product liability claims.
We have obtained limited product liability insurance coverage for our clinical trials on
humans, however, our insurance coverage may be insufficient to protect us against all
product liability damages. Further, liability insurance coverage is becoming increasingly
expensive and we might not be able to obtain or maintain product liability insurance in
the future on acceptable terms or in sufficient amounts to protect us against product
liability damages. Regardless of merit or eventual outcome, liability claims may result in
decreased demand for a future product, injury to reputation, withdrawal of clinical trial
volunteers, loss of revenue, costs of litigation, distraction of management and
substantial monetary awards to plaintiffs. Additionally, if we are required to pay a
product liability claim, we may not have sufficient financial resources to complete
development or commercialization of any of our product candidates and our business and
results of operations will be adversely affected.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

# Our operations
involve hazardous materials and we must comply with environmental laws and regulations,
which can be expensive and restrict how we do business.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our research and development
activities may involve the controlled use of hazardous materials and other potentially
dangerous chemicals and biological agents. Although we believe our safety procedures for
these materials comply with governmental standards, we cannot entirely eliminate the risk
of accidental contamination or injury from these materials. We currently have insurance,
in amounts and on terms typical for companies in businesses that are similarly situated,
that could cover all or a portion of a damage claim arising from our use of hazardous and
other materials. However, if an accident or environmental discharge occurs, and we are
held liable for any resulting damages, the associated liability could exceed our insurance
coverage and our financial resources.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

# Item 2. Description of
Property.

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Our main corporate office, located at
1321 Mountain View Circle in Azusa, California, is leased. 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.

| |                                                                                             
| | --------------------------------------------------------------------------------------------
| | No legal proceedings are pending
against Viral Genetics or any of its officers or directors.
| |                                                                                             

Item 4. Submission of Matters to a
Vote of Securities Holders.

| |                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On October 23, 2004 stockholders of
Viral Genetics holding 51.1 percent of our outstanding common stock signed a written
consent of stockholders approving an amendment to the certificate of incorporation of
Viral Genetics increasing the authorized number of our common shares from 80,000,000
shares to 250,000,000 shares.
| |                                                                                                                                                                                                                                                                                                                                  

17

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# 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 30, 2005 we had approximately 363 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.
| |                                                                                                                                                                                                                                                                  

|                       |              |            
|---------------------- | ------------ | -----------
|Calendar Quarter Ended | High Bid ($) | Low Bid ($)
|                      
|March 31, 2003         | 0.55         | 0.08       
|June 30, 2003          | 1.00         | 0.22       
|September 30, 2003     | 0.55         | 0.27       
|December 31, 2003      | 1.01         | 0.32       
|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       

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

# Plan of Operation

Background

| |                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 4 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 reported anecdotal improvements in their symptoms. 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 4 human clinical trials of VGV-1 outside the United States, and most recently a
34-patient prospective study in the Peoples Republic of China. We have now completed
enrollment of a fifth human clinical trial of VGV-1 in the Republic of South Africa, a
Phase III study of 135 patients.
| |                                                                                                                                                                                                                                                                                                                                               

18

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| |                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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. We have suspended all activity in Mexico indefinitely.
| |                                                                                                                                                                                                                                                                              

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The human clinical trial we are now
conducting in South Africa was authorized by the South African Medicines Control Council
(MCC) in February 2004. It is a multi-center, randomized, double-blind,
placebo-controlled study of VGV-1 treated HIV-infected subjects. This study will examine
subjects with CD4+ counts of 250-500 at 7 test centers throughout South Africa and is
designated by the MCC as a Phase III study. We have now completed enrollment
of 135 subjects. The primary endpoint for the study is the decrease in viral load as
measured by PCR-RNA assay. Other endpoints include CD4+ counts and PBMC culture assays.
Patients will receive 16 intra-muscular injections over a 51-day period, and will be
followed up post-treatment to day 240. Therefore, unless the protocol is amended, which we
do not expect, we anticipate completion of all follow up testing and receipt of data by
the fourth calendar quarter of 2005. The study is being administered by Virtus Clinical
Development Services, a leading South African contract research organization. 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | 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
design and engineering plan for the renovation of our 1321 Mountain View Circle facility.
We have begun construction. We expect to be completed construction in 2005 at which time
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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

19

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 30, 2004, the Company, VGI
and TGI entered into an Agreement and Plan of Merger whereby TGI would be merged with our
California subsidiary Viral Genetics, Inc., which was the surviving corporation. On
September 20, 2004 we filed documents with the state of California for the purpose of
closing and effecting this merger. This had the effect of terminating our obligation to
repay any indebtedness related to the Note or issue any securities under the Debt
Restructuring Agreement dated May 22, 2003, between the Company and TGI
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Pursuant to the merger the Company
issued 24,708,580 shares of its common stock and warrants to purchase an additional
24,708,580 shares to the former stockholders of TGI for all capital stock of TGI. TGI no
longer exists as a legal entity as a consequence of the merger. The 24,708,580 warrants
issued to the former stockholders of TGI are exercisable at a price of $0.40 per share
over a five-year period expiring on September 19, 2009. Prior to the merger TGI
distributed to its stockholders on a pro rata basis options to purchase an additional
1,250,000 shares of the Companys common stock.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The effect of this transaction was to
convert the pre-existing debt obligation of $7.4 million of the Company to TGI, including
accrued interest, to equity represented by the common stock and warrants of the Company.
This decreased the Companys liabilities and increased the Companys equity by a
corresponding amount. At the time of the transaction the sole asset of TGI was the
Companys convertible note.
| |                                                                                                                                                                                                                                                                                                                                                                                                                         

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | From 1995 through 2002, certain
directors of Viral Genetics have made loans and other advances to fund operations (the
Founders Notes). In May 2003, the principal and accrued interest of the
Founders Notes were restructured such that the due date of repayment was extended to
May 22, 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, 2004, the total principal and accrued interest on the
Founders Notes was $2,156,543. If exchanged pursuant to the foregoing terms, the
Company would issue to the holders of the Founders Notes 7,188,477 shares and
7,188,477 warrants.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2004, we had
$1,402,169 of current assets, current liabilities of $569,421, and long-term liabilities
of $1,943,605. We estimate that we will need to fund approximately $500,000 of research
and development costs in the United States, $150,000 of patent work, $500,000 of
administrative expenses and product manufacturing costs, and $850,000 of renovation
expenses during 2005. Further, for our South African clinical trial, we will require an
additional approximately $450,000 in capital.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

# 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 30.
| |                                                                                                                                         

# Item 8. Changes In and
Disagreements with Accountants on Accounting andFinancial Disclosure.

| |      
| | -----
| | None.
| |      

20



# Item 8A. Controls And
Procedures

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | With the participation of management,
the chief executive officer and chief financial officer of Viral Genetics evaluated its
disclosure controls and procedures as of December 31, 2004. Based on this evaluation, the
chief executive officer and the chief financial officer concluded that the disclosure
controls and procedures are effective in connection with Viral Genetics filing of
its annual report on Form 10-KSB for the year ended December 31, 2004.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

| |                                                                                                                                                                                                                                                                                                                                                               
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the fourth quarter of the year
ended December 31, 2004, there were no significant changes in Viral Genetics
internal controls or in other factors that could significantly affect these controls, and
no significant deficiencies or material weaknesses of internal controls that would require
corrective action were identified during that period.
| |                                                                                                                                                                                                                                                                                                                                                               

# Item 8B. Other
Information

| |                
| | ---------------
| | Not applicable.
| |                

# PART III

# Item 9. Directors and
Executive Officers of the Registrant

# Directors and Officers

| |                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------
| | The following table sets forth the
names, ages, and positions for each of the directors and officers of Viral Genetics.
| |                                                                                                                        

|                   |     |                                                                                                |             
|------------------ | --- | ---------------------------------------------------------------------------------------------- | ------------
|Name               | Age | Positions                                                                                      | Since       
|Haig Keledjian     | 42  | Chief Executive Officer, Chief Financial   Officer,
        President, Secretary, and Director | October 2001
|Harry Zhabilov, Jr | 38  | Executive Vice President of Research and
          Development, and Director                   | May 2003    
|Hampar Karageozian | 64  | Director                                                                                       | October 2001
|Arthur Keledjian   | 37  | Director                                                                                       | October 2001
|                  

| |                                                                                                          
| | ---------------------------------------------------------------------------------------------------------
| | 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.
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|21



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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

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, except for a Form 3 and
Form 4 filed on behalf of one of our directors; a Form 5 for Therapeutic Genetics, Inc.
related to options acquired through a consulting agreement in 2003, and a Form 4 for
Therapeutic Genetics, Inc. related to options acquired through a consulting agreement in
2004.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

# Board and Committees;
Code of Ethics

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In
the fiscal year ended December 31, 2004, 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

22

---



# 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, 2004, 2003, and 2002 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).
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

|                             |      | Annual
Compensation | Long Term
Compensation |       
|---------------------------- | ---- | ------------------- | ---------------------- | ------
|
|Haig Keledjian               | 2004 | 136,556             | 1,800,000              | 0     
|President, Chief Executive   | 2003 | 148,854             | 2,300,000              | 1,146 
|And Financial Officer        | 2002 | 0                   | 0                      | 0     
|                            
|Harry Zhabilov, Jr           | 2004 | 162,841             | 1,800,000              | 32,432
|Executive Vice President of  | 2003 | 111,756             | 2,300,000              | 38,244
|Research and Development (1) | 2002 | 0                   | 0                      | 0     

| |                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)    
          Prior to 2003, Mr. Zhabilov, Jr. was employed by Viral Genetics in a
          non-Executive Officer capacity and he was paid less than $100,000 per annum,
          including salary and bonuses.
| |                                                                                                                                                                                                                      

| |                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------
| | (2)    
          Represents cash payments made by Viral Genetics on the mortgage for the
          residence of Mr. Zhabilov.
| |                                                                                                                               

# Stock Options

| |                                                                                                                                        
| | ---------------------------------------------------------------------------------------------------------------------------------------
| | The
following table sets forth certain information with respect to grants of stock options
during 2004 to the Named Executive Officers.
| |                                                                                                                                        

|Name and Principal Position | Number ofSecuritiesUnderlying
        Options Granted | % of TotalOptions/SARsGranted toEmployees in
        Fiscal Year | Exercise orBase Price ($/Sh) | ExpirationDate
|--------------------------- | ----------------------------------------------------- | ---------------------------------------------------------------- | ---------------------------- | --------------
|Haig Keledjian              | 1,800,000                                             | 44%                                                              | 0.45                         | 5/31/08       
|President Chief Executive  
|And Financial Officer      
|                           
|Harry Zhabilov, Jr          | 1,800,000                                             | 44%                                                              | 0.45                         | 5/31/08       
|Executive Vice President of
|Research and Development   

23

---



| |                                                                                                                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 2003.
| |                                                                                                                                                                                                                 

|                             | Number of SecuritiesUnderlying Unexercised
         Optionsat Fiscal Year End (#) | Value of UnexercisedIn-the-Money Options
        At Fiscal Year End ($) (1)
|---------------------------- | --------------------------------------------------------------------------------- | ---------------------------------------------------------------------------
|
|Haig Keledjian               | 4,100,000/ -0-                                                                    | -0- / -0-                                                                  
|President Chief Executive   
|And Financial Officer       
|                            
|Harry Zhabilov, Jr           | 4,100,000/ -0-                                                                    | -0- / -0-                                                                  
|Executive  Vice President of
|Research and Development    

---

| |                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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 31, 2004. The fair market value of Viral Geneticss common stock
          at December 30, 2004, is determined by the last sale price on that date, which
          was $0.41 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        

# Item 11. Security
Ownership of Certain Beneficial Owners and Management

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The following table sets forth as of
March 30, 2005, the number and percentage of the 90,837,046 outstanding shares of common
stock which, according to the information supplied to Viral Genetics, were beneficially
owned by (i) each person who is currently a director, (ii) each executive officer, (iii)
all current directors and executive officers of Viral Genetics as a group and (iv) each
person who, to our knowledge, is the beneficial owner of more than 5% of the outstanding
common stock. Except as otherwise indicated, the persons named in the table have sole
voting and dispositive power with respect to all shares beneficially owned, subject to
community property laws where applicable.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       

|                                                                                 |                                                                                   |                 
|-------------------------------------------------------------------------------- | --------------------------------------------------------------------------------- | ----------------
|Name and Address                                                                 | Shares Beneficially Owned                                                         | Percent of Class
|Haig Keledjian(1)(2) 
        P.O. Box 1020
          South Pasadena, CA 91031   | 20,522,530(2)  5,900,000 (3)  14,376,954 (5)
          9,857,557 (6)  498,685 (8) | 42.1%           
|Hampar Karageozian
          31021 Marbella Vista  San Juan Capistrano, CA 92675 | 10,276,221  2,300,000 (4)
          9,934,712 (6)  249,646 (8)                    | 18.1%           

24



|                                                                                |                                                               |      
|------------------------------------------------------------------------------- | ------------------------------------------------------------- | -----
|                                                                                |                                                               |      
|Arthur Keledjian (1)  P.O. Box 1020
          South Pasadena, CA 91032          | -0-                                                           | 0    
|Harry Zhabilov, Jr. (1)(2)(4)
          P.O. Box 1020  South Pasadena, CA 91031 | 7,893,679  5,900,000 (3)  4,927,299 (6)
          249,271 (8) | 18.6%
|John D. Lefebvre
          P.O. Box N7120
          Nassau, Bahamas             | 8,000,000  4,000,000 (7)                                      | 12.7%
|Caribou Investments, Inc.                                                       | 2,817,327  1,747,719 (6)  88,417 (8)                          | 5.0% 
|All officers and directors (4 persons)                                          | 86,086,438                                                    | 62.3%

| |                                            
| | -------------------------------------------
| | (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 2005 additional options to purchase
                    1,800,000 shares at an exercise price equal to the then market price of Viral
                    Genetics common stock. All of these options are exercisable until the
                    earlier of two years following termination of their employment agreement with
                    the Company or May 31, 2008.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               

| |                                                                                                                                                                                    
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (4)   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 $2,156,543 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, 2004, these notes were convertible to 7,188,477 shares of common stock and
                    warrants to purchase an additional 7,188,477 shares at $0.40 per share. If the
                    warrants were exercised, Best Investment, Inc. would hold 14,376,954 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 merger of Therapeutic Genetic, Inc.,
                    with our California subsidiary, VGI, in September 2004.
| |                                                                                                                                                                                                                                                                                                                                                                   

| |                                                                                                                                                                              
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (7)  Mr. Lefebvre holds 4,000,000 warrants to purchase shares of common stock at a
                    price of $1.00 per share that are exercisable until November 17, 2006.
| |                                                                                                                                                                              

25



| |                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (8)  Each of these persons holds options acquired through a distribution of options
                    by Therapeutic Genetic, Inc., acquired through a consulting agreement that is
                    now voided. The options are priced as follows: 40% at $0.52 per share; 20% at
                    $0.38 per share; 20% at $0.65 per share, and 20% at $0.58 per share.
| |                                                                                                                                                                                                                                                                                                                                                                                 

# 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.                                                                                   
| |  |                                                                                                                                                                                                                                       
| |  | 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, the Company, VGI
and TGI entered into an Agreement and Plan of Merger whereby TGI would be merged with our
California subsidiary Viral Genetics, Inc., which was the surviving corporation. On
September 20, 2004 we filed documents with the state of California for the purpose of
closing and effecting this merger. This had the effect of terminating our obligation to
repay any indebtedness or issue any securities under the Debt Restructuring Agreement
dated May 22, 2003, between the Company and TGI.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At June 30, 2004, the Company was
indebted to TGI in the amount of $7,442,808. Pursuant to the merger the Company issued
24,708,580 shares of its common stock and warrants to purchase an additional 24,708,580
shares to the former stockholders of TGI for all capital stock of TGI. TGI no longer
exists as a legal entity as a consequence of the merger. The 24,708,580 warrants issued to
the former stockholders of TGI are exercisable at a price of $0.40 per share over a
five-year period expiring on September 19, 2009.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The effect of this transaction was to
convert the pre-existing debt obligation of $7.4 million of the Company to TGI, including
accrued interest, to equity represented by the common stock and warrants of the Company.
This decreased the Companys liabilities and increased the Companys equity by a
corresponding amount. At the time of the transaction the sole asset of TGI was the
Companys convertible note.
| |                                                                                                                                                                                                                                                                                                                                                                                                                         

26

---



| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On August 5, 2004, the notes owed by
the Company to Haig Keledjian, Hampar Karageozian, and Harry Zhabilov, Jr., were assigned
to Best Investment, 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

# 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                                                                                         
|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                                                                                     
|10.15       | Lease Agreement for 1321 Mountain View Circle, Azusa, CA                                                                                     
|14.1        | Code of Ethics (5)                                                                                                                           
|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.
| |                                                                                                                                                                                                               

27

---



| |                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (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.
| |                                                                                                                                                                                                                  

# 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 accountants
independence. All of the services provided and fees charged by the authorized independent
public accountants in 2004 were pre-approved by the board of directors.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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 included in the Companys quarterly reports on Form 10-QSB for 2004 and 2003
 were $29,028 and $38,150 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.
| |                                                                                                                                                                              

28

---



# 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.
| |                                                                                                                                                                        

|                     |  |                                                                       
|-------------------- |  | ----------------------------------------------------------------------
|Date: March 30, 2005 |  | By: /s/ Haig Keledjian                                                
|                     |  | Haig Keledjian, President, Chief Executive and Chief Financial 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: March 30, 2005 |  | /s/ Haig Keledjian           
|                     |  | Haig Keledjian, Director     
|                     |  |                              
|                     |  |                              
|Date: March 30, 2005 |  | /s/ Harry Zhabilov, Jr.      
|                     |  | Harry Zhabilov, Jr., Director
|                     |  |                              
|                     |  |                              
|Date: March 30, 2005 |  | /s/ Hampar Karageozian       
|                     |  | Hampar Karageozian, Director 
|                     |  |                              
|                     |  |                              
|Date: March 30, 2005 |  | /s/ Arthur Keledjian         
|                     |  | Arthur Keledjian, Director   

29

---



# VIRAL GENETICS, INC.

# December 31, 2004

# CONTENTS

|                                                         |  
|-------------------------------------------------------- | -
|Report of Independent Registered Public Accounting Firm  | 1
|                                                        
|Financial Statements:                                   
|                                                        
|Consolidated Balance Sheets                              | 2
|                                                        
|Consolidated Statements of Operations                    | 3
|                                                        
|Consolidated Statement of Stockholders' Equity (Deficit) | 4
|                                                        
|Consolidate Statements of Cash Flows                     | 6
|                                                        
|Notes to Consolidated  Financial Statements              | 8

---



Board of DirectorsViral
Genetics, Inc.Azusa, CA

# REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM

We have audited the accompanying
consolidated balance sheets of Viral Genetics, Inc. (a development stage company) as of
December 31, 2004 and 2003 and the related consolidated statements of operations,
stockholders equity (deficit) and cash flows for the years ended December 31, 2004
and 2003. 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 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 2003 and the results of its
operations, stockholders equity (deficit) and cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America.

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 of $21,545,406 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
AccountantsSpokane, WashingtonMarch
29, 2005

---



# VIRAL GENETICS, INC.(A
DEVELOPMENT STAGE COMPANY)CONSOLIDATED BALANCE SHEETS

|                                                     | December 31,
2004 | December 31,
2003
|---------------------------------------------------- | ----------------- | -----------------
|ASSETS                                               |                   |                  
|                                                    
|CURRENT ASSETS                                       |                   |                  
|Cash and cash equivalents                            |                   |                  
|                                                    
|Total Current Assets                                 |                   |                  
|                                                    
|PROPERTY AND EQUIPMENT, net                          |                   |                  
|                                                    
|OTHER ASSETS                                         |                   |                  
|Deposits                                             |                   |                  
|Goodwill and patents                                 |                   |                  
|                                                    
|Total Other Assets                                   |                   |                  
|                                                    
|TOTAL ASSETS                                         |                   |                  
|                                                    
|LIABILITIES AND STOCKHOLDERS' DEFICIT                |                   |                  
|                                                    
|CURRENT LIABILITIES                                  |                   |                  
|Accounts payable                                     |                   |                  
|Accrued wages payable                                |                   |                  
|Accrued interest                                     |                   |                  
|Other notes payable                                  |                   |                  
|Other current liability                              |                   |                  
|                                                    
|Total Current Liabilities                            |                   |                  
|                                                    
|LONG-TERM LIABILITIES                                |                   |                  
|Convertible notes payable, related parties           |                   |                  
|                                                    
|TOTAL LIABILITIES                                    |                   |                  
|                                                    
|STOCKHOLDERS' EQUITY (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; 90,117,246 and 49,111,013         |                   |                  
|shares issued and outstanding, respectively          |                   |                  
|Additional paid-in capital                           |                   |                  
|Common stock warrants                                |                   |                  
|Common stock options                                 |                   |                  
|Deficit accumulated during development stage         |                   |                  
|                                                    
|Total Stockholders' Equity (Deficit)                 |                   |                  
|                                                    
|TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |                   |                  
|                                                    

|                                                                                  |  | 
|--------------------------------------------------------------------------------- |  | 
|                                                                                  |  | 
|The accompanying notes are
        an integral part of these financial statements
|                                                                                  |  | 
|2                                                                                



# VIRAL GENETICS, INC.(A DEVELOPMENT
STAGE COMPANY)CONSOLIDATED STATEMENTS OF
OPERATIONS

|                                    | Year EndedDecember 31, | FromJuly 11,1995(Inception)
        toDecember 31,
|----------------------------------- | ---------------------- | --------------------------------------------------
|
|REVENUES                            |                        |                                                   
|                                   
|EXPENSES                            |                        |                                                   
|Research and development            |                        |                                                   
|Management salaries                 |                        |                                                   
|Depreciation expense                |                        |                                                   
|Legal and professional              |                        |                                                   
|Consulting fees                     |                        |                                                   
|Joint venture costs                 |                        |                                                   
|General and administrative          |                        |                                                   
|                                   
|TOTAL EXPENSES                      |                        |                                                   
|                                   
|LOSS FROM OPERATIONS                |                        |                                                   
|                                   
|OTHER INCOME/(EXPENSE)              |                        |                                                   
|Sale of distribution rights         |                        |                                                   
|Interest income                     |                        |                                                   
|Interest expense                    |                        |                                                   
|                                   
|TOTAL OTHER INCOME (EXPENSE)        |                        |                                                   
|                                   
|LOSS BEFORE INCOME TAXES            |                        |                                                   
|                                   
|INCOME TAXES                        |                        |                                                   
|                                   
|NET LOSS                            |                        |                                                   
|                                   
|NET LOSS                            |                        |                                                   
|PER COMMON SHARE, BASIC AND DILUTED |                        |                                                   
|                                   
|WEIGHTED AVERAGE NUMBER OF          |                        |                                                   
|COMMON SHARES OUTSTANDING,          |                        |                                                   
|BASIC AND DILUTED                   |                        |                                                   
|                                   

The accompanying notes are
        an integral part of these financial statements

3

---



# VIRAL GENETICS, INC.(A
DEVELOPMENT STAGE COMPANY)CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)

| | CommonStockNumber of 
        Shares |  | Amount |  | AdditionalPaid-inCapital |  | StockWarrants |  | DeficitAccumulatedDuringDevelopmentStage |  | TotalStockholders'Equity
        (Deficit)
| | ------------------------------------ |  | ------ |  | ------------------------ |  | ------------- |  | ---------------------------------------- |  | ------------------------------------------
| |                                      |  |        |  |                          |  |               |  |                                          |  |                                           

|                                |  |  |  |            |  |  
|------------------------------- |  |  |  | ---------- |  | -
|Issuance of common stock        |  |  |  |            |  |  
|for cash at nil per share       |  |  |  | 23,800,079 |  | $
|                               
|Net loss for period ended       |  | 
|December 31, 1995               |  |  |  | --         |  |  
|                               
|Balance, December 31, 1995      |  |  |  | 23,800,079 |  |  
|                               
|Issuance of common stock        |  | 
|for cash at $0.84 per share     |  |  |  | 59,500     |  |  
|                               
|Issuance of common stock        |  | 
|for services at $0.84 per share |  |  |  | 357,001    |  |  
|                               
|Net loss for year ended         |  | 
|December 31, 1996               |  |  |  | --         |  |  
|                               
|Balance, December 31, 1996      |  |  |  | 24,216,580 |  |  
|                               
|Issuance of common stock        |  | 
|for cash at $0.84 per share     |  |  |  | 339,151    |  |  
|                               
|Issuance of common stock        |  | 
|for services at $0.84 per share |  |  |  | 499,802    |  |  
|                               
|Net loss for year ended         |  | 
|December 31, 1997               |  |  |  | --         |  |  
|                               
|Balance, December 31, 1997      |  |  |  | 25,055,533 |  |  
|                               
|Issuance of common stock        |  |  |  | --         | 
|for cash at $0.84 per share     |  |  |  | 345,101    |  |  
|                               
|Net loss for year ended         |  | 
|December 31, 1998               |  |  |  | --         |  |  
|                               
|Balance, December 31, 1998      |  |  |  | 25,400,634 |  |  
|                               
|Issuance of common stock        |  | 
|for cash at $0.42 per share     |  |  |  | 595,002    |  |  
|                               
|Issuance of common stock        |  | 
|for cash at $0.84 per share     |  |  |  | 34,272     |  |  
|                               
|Net loss for year ended         |  | 
|December 31, 1999               |  |  |  | --         |  |  
|                               
|Balance, December 31, 1999      |  |  |  | 26,029,908 |  |  
|                               
|Issuance of common stock        |  | 
|for cash at $0.42 per share     |  |  |  | 595,002    |  |  
|                               
|Issuance of common stock        |  | 
|for cash at $0.84 per share     |  |  |  | 842,523    |  |  
|                               
|Issuance of common stock        |  | 
|for cash at $1.94 per share     |  |  |  | 51,567     |  |  
|                               
|Issuance of common stock        |  | 
|for services at $0.84 per share |  |  |  | 2,163,824  |  |  
|                               
|Net loss for year ended         |  | 
|December 31, 2000               |  |  |  | --         |  |  
|Balance, December 31, 2000      |  |  |  | 29,682,824 |  | $

The accompanying notes are
        an integral part of these financial statements

4



|VIRAL GENETICS,
INC.(A DEVELOPMENT STAGE COMPANY)CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
|---------------------------------------------------------------------------------------------------------

| | CommonStockNumber of 
        Shares |  | CommonStockAmount |  | AdditionalPaid-inCapital |  | CommonStockOptions |  | CommonStockWarrants |  | DeficitAccumulatedDuringDevelopmentStage |  | TotalStockholders'Equity
        (Deficit)
| | ------------------------------------ |  | ----------------- |  | ------------------------ |  | ------------------ |  | ------------------- |  | ---------------------------------------- |  | ------------------------------------------
| |                                      |  |                   |  |                          |  |                    |  |                     |  |                                          |  |                                           

|                                              |  |  |  |            |  |   |      
|--------------------------------------------- |  |  |  | ---------- |  | - | -----
|Balance, December 31, 2000                    |  |  |  | 29,682,824 |  | $ | 2,968
|                                             
|Issuance of common stock                      |  | 
|for cash at $0.84 per share                   |  |  |  | 29,464     |  |   | 3    
|                                             
|Issuance of common stock                      |  | 
|for services at $0.84 per share               |  |  |  | 37,811     |  |   | 4    
|                                             
|Recapitalization through reverse merger       |  | 
|and acquisition of 5 Starliving Online, Inc.  |  |  |  | 8,035,693  |  |   | 804  
|                                             
|Miscellaneous adjustment due to merger        |  |  |  | 481        |  |   | --   
|                                             
|Net loss for the year ended December 31, 2001 |  |  |  | --         |  |   | --   
|Balance, December 31, 2001                    |  |  |  | 37,786,273 |  |   | 3,779
|                                             
|Issuance of common stock                      |  | 
|for cash at $0.70 per share                   |  |  |  | 215,000    |  |   | 21   
|                                             
|Issuance of common stock from the exercise    |  | 
|of options for cash at $0.01 per share        |  |  |  | 1,000,000  |  |   | 100  
|                                             
|Issuance of common stock for                  |  | 
|debt at $0.80 per share                       |  |  |  | 1,654,027  |  |   | 165  
|                                             
|Issuance of common stock for                  |  | 
|services at $0.22 per share                   |  |  |  | 67,837     |  |   | 7    
|                                             
|Net loss for the year ended December 31, 2002 |  | 
|                                              |  |  |  | --         |  |   | --   
|Balance, December 31, 2002                    |  |  |  | 40,723,137 |  |   | 4,072
|                                             
|Issuance of options for                       |  | 
|services at $0.10 to $0.66                    |  |  |  | --         |  |   | --   
|                                             
|Issuance of warrants for                      |  | 
|services at $0.29 to $0.35                    |  |  |  | --         |  |   | --   
|                                             
|Issuance of common stock for                  |  | 
|cash at $0.20 to $0.35 per share              |  |  |  | 3,531,456  |  |   | 354  
|                                             
|Issuance of common stock                      |  | 
|for cash at $0.2135 per share                 |  |  |  | 2,341,675  |  |   | 234  
|                                             
|Issuance of common stock from the exercise    |  | 
|of options for cash at $0.01 per share        |  |  |  | 700,000    |  |   | 70   
|                                             
|Issuance of common stock from the exercise    |  | 
|of options for debt at $0.01 per share        |  |  |  | 480,769    |  |   | 48   
|                                             
|Issuance of common stock from the exercise    |  | 
|of options for services at $0.01 per share    |  |  |  | 250,000    |  |   | 25   
|                                             
|Issuance of common stock from the exercise    |  | 
|of warrants for expenses at $0.05 per share   |  |  |  | 250,000    |  |   | 25   
|                                             
|Issuance of common stock for services         |  | 
|at $0.20 to $0.70 per share                   |  |  |  | 383,096    |  |   | 38   
|                                             
|Issuance of common stock and warrants for     |  | 
|debt and interest at $0.30 per share          |  |  |  | 450,880    |  |   | 45   
|                                             
|Allocation of expired warrants to             |  | 
|additional paid-in capital                    |  |  |  | --         |  |   | --   
|                                             
|Net loss for the year ended                   |  | 
|December 31, 2003                             |  |  |  | --         |  |   | --   
|Balance, December 31, 2003                    |  |  |  | 49,111,013 |  |   | 4,911

The accompanying notes are
        an integral part of these financial statements



# VIRAL GENETICS, INC.(A
DEVELOPMENT STAGE COMPANY)CONSOLIDATED STATEMENT OF
STOCKHOLDERS EQUITY (DEFICIT)

| | CommonStockNumber of 
        Shares |  | CommonStockAmount |  | AdditionalPaid-inCapital |  | CommonStockOptions |  | CommonStockWarrants |  | DeficitAccumulatedDuringDevelopmentStage |  | TotalStockholders'Equity
        (Deficit)
| | ------------------------------------ |  | ----------------- |  | ------------------------ |  | ------------------ |  | ------------------- |  | ---------------------------------------- |  | ------------------------------------------
| |                                      |  |                   |  |                          |  |                    |  |                     |  |                                          |  |                                           

|                                              |  |  |  |            |   |   |      
|--------------------------------------------- |  |  |  | ---------- | - | - | -----
|Balance, December 31, 2003                    |  |  |  | 49,111,013 |   | $ | 4,911
|                                             
|Issuance of common stock and                  |  | 
|warrants for cash at $0.25 per share          |  |  |  | 8,000,000  |   |   | 800  
|                                             
|Issuance of common stock and                  |  | 
|warrants for debt at $0.30  per share         |  |  |  | 24,708,580 |   |   | 2,471
|                                             
|Issuance of common stock for exercise of      |  | 
|warrants for cash at $0.01 to $0.05 per share |  |  |  | 350,000    |   |   | 35   
|                                             
|Issuance of options for consulting services   |  | 
|at $0.34 to $0.84 per option                  |  |  |  | --         |   |   | --   
|                                             
|Isssuance of common stock from                |  | 
|the exercise of options at $0.01 per share    |  |  |  | 2,913,400  |   |   | 291  
|                                             
|Issuance of common stock for services         |  | 
|at $0.30 to $0.67 per share                   |  |  |  | 979,722    |   |   | 98   
|                                             
|Issuance of common stock for cash             |  | 
|at $0.30 to $0.53 per share                   |  |  |  | 1,337,865  |   |   | 134  
|                                             
|Issuance of common stock  and warrants        |  | 
|for debt conversion at $0.30 per share        |  |  |  | 66,666     |   |   | 7    
|                                             
|Issuance of common stock for settlement       |  | 
|at $0.44 to $0.70 per share                   |  |  |  | 1,750,000  |   |   | 175  
|                                             
|Issuance of common stock                      |  | 
|for finders fee at $0.45 per share            |  |  |  | 1,000,000  |   |   | 100  
|                                             
|Cancellation of common stock for shares       |  | 
|issued in error at $0.48 per share            |  |  |  | (100,000   | ) |   | (10  
|                                             
|Allocation of expired options to              |  | 
|additional paid in capital                    |  |  |  | --         |   |   | --   
|                                             
|Net loss for the year ended                   |  | 
|December 31, 2004                             |  |  |  | --         |   |   | --   
|                                             
|Balance, December 31, 2004                    |  |  |  | 90,117,246 |   |   | 9,012
|                                             

The accompanying notes are
        an integral part of these financial statements

6

---



VIRAL GENETICS, INC.(A
DEVELOPMENT STAGE COMPANY)CONSOLIDATED STATEMENTS OF CASH FLOWS

| |                        |  |                               
| | ---------------------- |  | ------------------------------
| | Year EndedDecember 31, |  | FromJuly 11,1995(Inception)
to
| |                        |  |                               

| |      |  |      |  |                 
| | ---- |  | ---- |  | ----------------
| | 2004 |  | 2003 |  | December 31,2004
| |      |  |      |  |                 

|                                                          |  | 
|--------------------------------------------------------- |  | 
|
|CASH FLOWS FROM OPERATING ACTIVITIES                      |  | 
|Net loss                                                  |  | 
|Depreciation                                              |  | 
|Non-cash operating expenses                               |  | 
|Non-cash income                                           |  | 
|Issuance of common stock for services                     |  | 
|Issuance of common stock for finders fee                  |  | 
|Options and warrants issued for services                  |  | 
|Options exercised for services                            |  | 
|Warrants exercised for services                           |  | 
|Issuance of common stock for expenses paid by third party |  | 
|Issuance of common stock for settlement agreement         |  | 
|Issuance of stock for interest                            |  | 
|Notes payable issued for expenses                         |  | 
|Expenses paid with notes payable                          |  | 
|Notes payable converted to accrued wages                  |  | 
|Increase (decrease) in accrued interest                   |  | 
|Increase (decrease) in accounts payable                   |  | 
|Increase (decrease) in accrued wages payable              |  | 
|Decrease in bank overdrafts payable                       |  | 
|Proceeds from customer deposit                            |  | 
|Net cash used in operations                               |  | 
|CASH FLOWS FROM INVESTING ACTIVITIES                      |  | 
|Increase in leasehold improvements                        |  | 
|Increase in deposits                                      |  | 
|Acquisition of equipment                                  |  | 
|Increase in patent                                        |  | 
|Net cash used in investing activities                     |  | 
|CASH FLOWS FROM FINANCING ACTIVITIES                      |  | 
|Proceeds from notes payable                               |  | 
|Payments on notes payable                                 |  | 
|Proceeds from exercise of options and warrants            |  | 
|Proceeds from sale of common stock                        |  | 
|                                                         
|Net cash provided by financing activities                 |  | 
|                                                         
|Change in cash                                            |  | 
|                                                         
|Cash and cash equivalents, beginning of period            |  | 
|Cash and cash equivalents, end of period                  |  | 
|SUPPLEMENTAL CASH FLOW DISCLOSURES:                       |  | 
|                                                         
|Interest expense paid                                     |  | 
|Income taxes paid                                         |  | 
|NON-CASH TRANSACTIONS:                                    |  | 
|                                                         
|Issuance of common stock for services                     |  | 
|Issuance of common stock for settlement agreement         |  | 
|Options and warrants issued for services                  |  | 
|Options and warrants exercised for services               |  | 
|Non-cash operating expenses                               |  | 
|Issuance of common stock for debt paid by third party     |  | 
|Issuance of common stock for debt and interest            |  | 
|Notes payable issued for services                         |  | 
|Notes payable issued for expenses                         |  | 
|Notes payable issued for accrued wages                    |  | 
|Issuance of common stock for finders fee                  |  | 

The accompanying notes are
        an integral part of these financial statements

7



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

# 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. As of September 30,
2004, the Company merged with Therapeutic Genetic, Inc. 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.
| |                                                                                        

Accounting
for Stock Options and Warrants Granted to Employees and Non-employees

| |                                                                                                                                                                                                                                                                                                                                                                                                     
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (hereinafter
SFAS No. 123), 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 have been eliminated upon consolidation.
| |                                                                                                                                                                     

8



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

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, 2004 and 2003, 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.
| |                                                                                                                                                 

Earnings Per
Share

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On January 1, 1998, the Company
adopted Statement of Financial Accounting Standards No. 128, which provides for
calculation of basic and diluted earnings per share. Basic
earnings per share includes no dilution and is computed by dividing net income (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 earnings per share. Although
there was approximately 58,403,000 common stock equivalents outstanding at December 31,
2004, they were not included in the calculation of earnings per share because they would
have been considered anti-dilutive.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

9

---



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

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,
2004.
| |                                                                                                                                                                                                                                                                                                                                                                                             

Going
Concern

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As shown in the accompanying
financial statements, the Company has incurred an accumulated deficit of $21,545,406
through December 31, 2004. 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 $2.4 million 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

Goodwill and Patents

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Goodwill represents the excess of the
purchase price and related direct costs over the fair value of net assets acquired as of
the date of the acquisition of patents from Therapeutic Genetic, Inc., (hereinafter
TGI). In completing the acquisition, the Company issued to TGI notes, which
were cancelled for exchange of Companys common stock in the merger with TGI. See
Note 11. The Company periodically reviews its goodwill to assess recoverability based on
projected undiscounted cash flows from operations. Impairments are recognized in operating
results when a permanent diminution in value occurs. The Company intends to amortize the
aforementioned patent assets once the Company begins operations.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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, 2004.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

10

---



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

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 $220,122 which are included in the
statement of operations as of December 31, 2004.
| |                                                                                                                                                                                                                                                                                                                                                               

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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

11

---



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

12

---



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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,
2004 | December 31,
2003
|----------------------------- | ----------------- | -----------------
|Equipment                     |                   |                  
|Leasehold improvements        |                   |                  
|                              |                   |                  
|Less accumulated depreciation |                   |                  
|                             
|                              |                   |                  
|                             

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Equipment principally consists of
machines that can be used to manufacture the Companys drug candidates. Depreciation
for the years ended December 31, 2004 and 2003 was $45,146 and $42,378, 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

13



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

# 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   | September 5, 2001 | 69615015.8
|Britain, Ireland, Italy, Liechtenstein, Monaco,
|Netherlands, Spain, and Switzerland)           
|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 intends to amortize the
aforementioned patent assets once the Company begins production. 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 notes
payable issued for the aforementioned patents. (See Note 11 ). These notes were
subsequently cancelled upon the issuance of the companys common stock for the
acquisition of Therapeutic Genetic.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

# 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,
2004, the Company does not have product liability insurance for any of its drug candidate
products.
| |                                                                                                                                                                                                                                                                                                                   

Investment Banking
Agreement

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In November 2001, the Company signed
an agreement with Burlington Capital Markets, Inc. (Burlington), whereby
Burlington would provide strategic relationships and assistance in connection with future
financing of the Company in exchange for a combination of cash payments, common stock and
stock warrants. In 2003, this agreement was terminated and the Company has been
indemnified against any future litigation related thereto by a limited liability company
whose controlling member and manager is a former officer and principal shareholder of
Burlington. This matter was settled with the issuance of stock. (See Note 13)
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

Consulting Agreements

| |                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In December 2002, the Company signed
an agreement with Voluto Ventures, LLC for various management and advisory services. Under
the agreement, the Company issued 1,000,000 common stock options with an exercise price of
$0.01 per share, which were exercised in December 2002 and the Company agreed to issue to
Voluto Ventures, LLC up to a total of
| |                                                                                                                                                                                                                                                                                                                                                           

14



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

| |                                                                                                                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 2,000,000 additional stock options with an exercise
price of $0.01 per share and agreed to pay $10,000 per month for services rendered under
certain circumstances. During the year ended December 31, 2003, Voluto Ventures, LLC
received and exercised 480,769 options in accordance with this agreement. The agreement
was terminated during June 2003, and both parties provided each other with a mutual
release.
| |                                                                                                                                                                                                                                                                                                                                                                                                                       

| |                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the year ended December 31,
2004, 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, 2004, the Company had eleven individuals and firms engaged
under such agreements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                        

| |                                                                                                                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company also has other agreements with consultants for future issuance of common stock as compensation, including an
investor relations agreement for $6,500/month in cash and 150,000 shares of restricted stock, and a business services
agreement for 500,000 shares related to financing and investor relations.
| |                                                                                                                                                                                                                                                                                                                         

Joint Venture

| |                                                                                                                                                                                                                                                                                                                                         
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | The Company also has other agreements with consultants for future issuance of common
        stock as compensation, including an investor relations agreement for $6,500/month in cash and 150,000 shares
        of restricted stock, and a business services agreement for 500,000 shares related to financing and investor relations.
| |                                                                                                                                                                                                                                                                                                                                         

Finders Fee

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                              
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | As a finders fee in relation to
the joint venture with NYIC, the Company entered into a Services Agreement with L&M
Global Ventures, Inc. (L&M). This agreement provided for payment of a
royalty to L&M upon successful registration of the Companys prospective HIV and
AIDS treatment. The agreement also provided L&M with certain options to purchase
shares of the Companys common stock. This agreement was terminated effective October
1, 2003.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                              

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 anum, 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. See Note 9 regarding stock options.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    

Distribution Agreements

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In June 2002, the Company received
$100,000 from an arms length party relating to the potential sale of a
pharmaceutical product, VGV-1, in Mexico. In January 2003, the Company entered into a
distribution agreement with the same party in relation to the testing, distribution and
marketing of VGV-1 in Africa. Under this African distribution agreement, the Company
received approximately $250,000 as a non-refundable deposit in 2003. In April 2003, this
African distribution agreement was cancelled. The same arms length party had also advanced
a total of $109,966 to the Company as unsecured notes payable on various occasions.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

15



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                     

# NOTE 6  COMMON
STOCK

| |                                                                                                                                                                                   
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.
| |                                                                                                                                                                                                                                                                                                                                                                                

16



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

| |                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------
| | 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 merger with Therapeutic Genetic,
Inc. 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In December 2003, the Company issued
330,000 shares for cash of $99,000; 200,000 shares for exercise of options for cash of
$2,000 and services valued at $98,000; 30,000 shares for exercise of warrants for cash of
$1,500 and services valued at $8,700; 480,769 shares upon exercise of options in exchange
for debt of $4,808; and 117,307 shares in exchange for debt valued at $35,192.
| |                                                                                                                                                                                                                                                                                                                                                                                               

| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In November 2003, the Company issued
2,388,956 shares for cash of $612,695; 88,648 shares for services valued at $22,162;
67,760 shares for services valued at $16,940; and 10,819 shares for services valued at
$3,787.
| |                                                                                                                                                                                                                         

| |                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In October 2003, the Company issued
812,500 shares for cash of $162,500; 47,500 shares for services valued at $9,500; 9,450
shares for services valued at $1,890; 333,573 shares in exchange for convertible debt and
interest valued at $100,072; 220,000 shares for exercise of warrants for cash of $11,000
and services valued at $63,800.
| |                                                                                                                                                                                                                                                                                                                                               

| |                                                                                                                                                                                                                         
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In September 2003, the Company issued
250,000 shares for exercise of options for services valued at $118,500. Also in September
2003, the Company received $1,000 for the exercise of options for 100,000 common shares.
| |                                                                                                                                                                                                                         

| |                                                                                
| | -------------------------------------------------------------------------------
| | In August 2003, the Company issued
25,000 shares for services valued at $5,000.
| |                                                                                

| |                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In July 2003, the Company issued
1,405,005 shares for cash of $300,000 and 200,000 shares for exercise of options for cash
of $2,000 and services valued at $66,000.
| |                                                                                                                                                                     

17



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

| |                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In May 2003, the Company issued
33,919 shares for services valued at $23,743; 936,670 shares for cash of $200,000; 100,000
shares for services valued at $50,000; and 200,000 shares for exercise of options for cash
of $2,000 and services valued at $66,000.
| |                                                                                                                                                                                                                                                                

# NOTE 7  INCOME
TAXES

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2003, the Company had net
deferred tax assets of approximately $5,260,110 (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, 2004 and 2003.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

| |                                                                                                    
| | ---------------------------------------------------------------------------------------------------
| | The significant components of the
deferred tax asset at December 31, 2004 and 2003 were as follows:
| |                                                                                                    

|                                                   | December 31, 2004 | December 31, 2003
|-------------------------------------------------- | ----------------- | -----------------
|Net operating loss carryforward before adjustments |                   |                  
|Section 197 amortization of patents                |                   |                  
|Tax over book depreciation                         |                   |                  
|Options/warrants issued for expenses               |                   |                  
|                                                  
|Net operating loss carryforward                    |                   |                  
|                                                  
|                                                  
|Deferred tax asset                                 |                   |                  
|Deferred tax asset valuation allowance             |                   |                  

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | At December 31, 2004, the Company has
utilizable net operating loss carryforwards of approximately $15,470,000, which expire in
the years 2016 through 2025. The Company recognized approximately $3,892,960 of losses
from issuance of restricted common stock and stock options for services in fiscal 2004,
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, 2003 to
December 31, 2004 was $907,743.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

# NOTE 8  NOTES
PAYABLE AND RELATED PARTY TRANSACTIONS

| |                                                                                        
| | ---------------------------------------------------------------------------------------
| | At December 31, 2004 and 2003,
respectively, the Company had the following obligations:
| |                                                                                        

|                                      | 2004 | 2003
|------------------------------------- | ---- | ----
|Convertible notes payable and accrued |      |     
|interest to related parties           |      |     
|Other notes payable                   |      |     
|                                      |      |     
|                                     
|Total                                 |      |     
|                                     

18



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Although a large portion of 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 30, 2004, the Company entered
into an agreement and plan of merger with one of the former principal creditors of the
Company and holder of approximately $7.4 million of the convertible notes, Therapeutic
Genetic, Inc., (TGI), considered an affiliated company. The notes originated
with a patent transfer to the Company from TGI. The patents that were transferred were the
collateral underlying the notes. Two directors and principal stockholders of the Company,
were also principal stockholders of the affiliated company, TGI. On September 20, 2004,
documents were filed with the State of California effecting the merger, and on September
28, 2004, the Company issued 24,708,580 shares and 24,708,580 warrants to purchase shares
of the Company to the former stockholders of TGI.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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 as part of the merger with TGI
(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,
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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the year ended December 31,
2003, 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 164%, expected life of 1-5 years, and no expected dividends.
The value of these warrants in the amount of $242,378 is included in consulting fees
expense in the accompanying financial statements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                          

19



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

| |                                                       
| | ------------------------------------------------------
| | The following is a summary of stock
warrants activity:
| |                                                       

|                                                          | Numberof Warrants | WeightedAverageExercise
        Price
|--------------------------------------------------------- | ----------------- | -------------------------------------
|Warrants outstanding at December 31, 2002                 |                   |                                      
|Granted                                                   |                   |                                      
|Granted                                                   |                   |                                      
|Granted                                                   |                   |                                      
|Exercised                                                 |                   |                                      
|                                                         
|Warrants outstanding and exercisable at December 31, 2003 |                   |                                      
|                                                         
|Weighted average fair value of warrants granted during    |                   |                                      
|the year ended December 31, 2004                          |                   |                                      
|                                                         

|                                                          | Numberof Warrants | WeightedAverageExercise
        Price
|--------------------------------------------------------- | ----------------- | -------------------------------------
|Warrants outstanding at December 31, 2003                 |                   |                                      
|Granted                                                   |                   |                                      
|Exercised                                                 |                   |                                      
|                                                         
|Warrants outstanding and exercisable at December 31, 2004 |                   |                                      
|                                                         
|Weighted average fair value of warrants granted during    |                   |                                      
|the year ended December 31, 2004                          |                   |                                      
|                                                         

# NOTE 10  STOCK
OPTIONS

| |                                                                                                                                                                                                                                                                                                                                                                                                                           
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            

20

---



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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, 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.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                            
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | During the year ended December 31, 2003, 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 164%; expected life of 1-5 years; and no expected dividends.  The value of these options in the amount of
$2,524,000 is included in consulting fees expense in the accompanying financial statements.
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                            

21

---



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

| |                                                     
| | ----------------------------------------------------
| | The following is a summary of stock
option activity:
| |                                                     

|                                                                   | Number of Options | Weighted Average
Exercise Price
|------------------------------------------------------------------ | ----------------- | -------------------------------
|Options outstanding at January 1, 2003                             |                   |                                
|Granted during 2003                                                |                   |                                
|Exercised during 2003                                              |                   |                                
|                                                                  
|Options outstanding and exercisable at December 31, 2003           |                   |                                
|                                                                  
|Weighted  average  fair value of options  granted  during the year |                   |                                
|ended December 31, 2004                                            |                   |                                
|                                                                  

|                                                                   | Number of Options | Weighted Average
Exercise Price
|------------------------------------------------------------------ | ----------------- | -------------------------------
|Options outstanding at January 1, 2004                             |                   |                                
|Granted during 2004                                                |                   |                                
|Expired during 2004                                                |                   |                                
|Exercised during 2004                                              |                   |                                
|                                                                  
|Options outstanding and exercisable at December 31, 2004           |                   |                                
|                                                                  
|Weighted  average  fair value of options  granted  during the year |                   |                                
|ended December 31, 2004                                            |                   |                                
|                                                                  

| |                                                                                                                                     
| | ------------------------------------------------------------------------------------------------------------------------------------
| | 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

| |                                                                                                                                                                                                                                                                                                                                                                                                             
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | On June 30, 2004, the Company entered
into an agreement and plan of merger with Therapeutic Genetic, Inc. (hereinafter
TGI) a California corporation, whereby a subsidiary of the Company would
acquire the assets and liabilities of TGI. The Company issued 24,708,580 shares of common
stock and 24,708,580 common stock warrants in this acquisition under Internal Revenue Code
Section 368(a)(2)(D).
| |                                                                                                                                                                                                                                                                                                                                                                                                             

| |                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | This transaction had the effect of
reducing the Companys long-term debt and accrued interest liabilities by $7,504,274
with a corresponding increase in common stock, common stock warrants, and additional
paid-in-capital. In the transaction, a note in the amount of $7,504,274 owed to TGI from
the Company was cancelled.
| |                                                                                                                                                                                                                                                                                                                                 

22

---



# VIRAL GENETICS, INC.(A Development Stage Company)
        Notes to the Consolidated Financial StatementsDecember 31, 2004

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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  OTHER
INCOME

| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | In January 2003, the Company reached
an arms length distribution agreement with an unaffiliated party in relation to the
testing, distribution and marketing of its prospective HIV and AIDS treatment. Under the
agreement in 2003 the Company received approximately $250,000 as a non-refundable deposit.
In April 2003, the agreement was cancelled. The money received under the agreement was
non-refundable and is classified as other non-operating income (see Note 13).
| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  

# NOTE 13 
SUBSEQUENT EVENTS

| |                                                                                                                                                                                                                                                                                                                       
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 new
facility.
| |                                                                                                                                                                                                                                                                                                                       

23

---