Edgar Filing: AETHLON MEDICAL INC

As filed with the Securities and Exchange Commission on November 24, 2004
Commission File No. 333-117203
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 3

FORM SB-2/A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933

AETHLON MEDICAL, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)

NEVADA 13-3632859
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) 3826 IDENTIFICATION NO.)
(PRIMARY STANDARD INDUSTRIAL
CLASSIFICATION CODE NUMBER)

JAMES A. JOYCE
CHIEF EXECUTIVE OFFICER
3030 BUNKER HILL STREET, SUITE 4000
SAN DIEGO, CALIFORNIA 92109
(858) 459-7800

(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES) (NAME, ADDRESS, INCLUDING ZIP CODE,
AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE OF PROCESS)

Copies to

NIMISH PATEL, ESQ.
PETER HOGAN, ESQ.
RICHARDSON & PATEL LLP
10900 WILSHIRE BOULEVARD, SUITE 500
LOS ANGELES, CALIFORNIA 90024
TELEPHONE (310) 208-1182

Approximate date of proposed sale to public: From time to time after the
effective date of this registration statement.

If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]

If this form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]

If this Form is a post effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]

If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering: [ ]

If delivery of this prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]

CALCULATION OF REGISTRATION FEE

PROPOSED
MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT OFFERING PRICE FEE
==============================================================================================================================

Common shares 1,186,364 $ 0.57 (1) $ 676,227 $ 85.68

Common shares underlying fixed-priced warrants 1,754,545 (2) $ 0.57 (1) $ 1,000,091 $ 126.71

Common shares issued or issuable to Fusion
Capital Fund II, LLC 8,608,139 (3) $ 0.57 (1) $ 4,906,639 $ 621.67
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Total 11,549,048 $ 6,582,957 $ 834.06
==============================================================================================================================

(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) of Regulation C as of the close of the market
on November 19, 2004, based upon the average of the high and low prices
for that date.

(2) Common shares issuable upon the exercise of common share purchase
warrants of registrant with an exercise price of $0.76.
(3) Includes (i) 468,604 shares of common stock issued to Fusion Capital
and (ii) 8,139,535 Common shares issuable to Fusion Capital Fund II,
LLC under a common stock purchase agreement.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.

PRELIMINARY PROSPECTUS SUBJECT TO COMPLETION, DATED NOVEMBER 24, 2004

THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED.
WE MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT
SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER
OR SALE IS NOT PERMITTED.

PROSPECTUS

AETHLON MEDICAL, INC.

Up to 11,549,048 Shares of Common Stock

This prospectus relates to the sale of up to 11,549,048 shares
of our common stock. Up to 9,176,320 shares of our common stock are
being offered hereby by Fusion Capital Fund II, LLC, a selling
shareholder under this prospectus. Up to 2,372,728 shares of our common
stock are being offered by other selling shareholders. The prices at
which the selling shareholders may sell the shares will be determined
by the prevailing market price for the shares or in negotiated
transactions. We will not receive proceeds from the sale of our shares
by the selling shareholders.

Our common stock is quoted on the NASDAQ Over-the-Counter
Bulletin Board under the symbol "AEMD." On November 19, 2004, the last
reported sale price for our common stock as reported on the NASDAQ
Over-the-Counter Bulletin Board was $0.60 per share.

INVESTING IN THE COMMON STOCK INVOLVES CERTAIN RISKS. SEE "RISK
FACTORS" BEGINNING ON PAGE 3 FOR A DISCUSSION OF THESE RISKS.

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Fusion Capital Fund II, a selling shareholder, is an "underwriter"
within the meaning of the Securities Act of 1933, as amended.

--------------------

NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.

The date of this Prospectus is ________.

TABLE OF CONTENTS
PAGE
----

PROSPECTUS SUMMARY 3
RISK FACTORS 5
USE OF PROCEEDS 23
THE FUSION TRANSACTION 23
No Variable Priced Financings 27
DESCRIPTION OF BUSINESS 28
DESCRIPTION OF PROPERTIES 41
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 41
EXECUTIVE COMPENSATION 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 50
LEGAL PROCEEDINGS 58
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 58
CERTAIN RELATIONSHIPS AND CERTAIN TRANSACTIONS 60
DESCRIPTION OF SECURITIES 61
EQUITY COMPENSATION PLANS 62
MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS 64
SELLING SHAREHOLDERS 64
PLAN OF DISTRIBUTION 67
CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 68
TRANSFER AGENT 68
LEGAL MATTERS 68
EXPERTS 68
DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES
ACT LIABILITIES 69
REPORTS TO SECURITY HOLDERS 69
WHERE YOU CAN FIND MORE INFORMATION 70

-i-

PROSPECTUS SUMMARY

This summary highlights important information about our company and
business. Because it is a summary, it may not contain all of the information
that is important to you. To understand this offering fully, you should read
this entire prospectus and the financial statements and related notes included
in this prospectus carefully,, including the "Risk Factors" section. Unless the
context requires otherwise, "WE," "US," "OUR", " and the "COMPANY" and similar
terms collectively refer to Aethlon Medical, Inc. and our subsidiaries.

THE COMPANY

As of November 18, 2004, we had issued and outstanding 14,186,932
common shares, and common share purchase options and warrants entitling the
holders to purchase up to 5,846,942 common shares. We are a Nevada corporation.
Our principal executive offices are located at 3030 Bunker Hill Street, Suite
4000, San Diego, California 92109. Our telephone number is (858) 459-7800. The
address of our website is www.aethlonmedical.com. Information on our website is
not a part of this prospectus.

THE OFFERING

This prospectus relates to the offer and sale by some of our
shareholders during the period in which the registration statement containing
this prospectus is effective of up to 11,549,048 common shares. 9,176,320 shares
of our common stock are being offered hereby by Fusion Capital Fund II, LLC,
also referred to throughout this prospectus as Fusion Capital, a selling
shareholder under this prospectus, including up to 568,181 shares issuable under
common share purchase warrants. On May 20, 2004, we entered into a common stock
purchase agreement with Fusion Capital pursuant to which Fusion Capital has
purchased $250,000 of our common stock and has agreed to purchase, on each
trading day, at least $10,000 of our common stock up to an aggregate, under
certain conditions, of $6,000,000 in addition to the $250,000 already purchased
by Fusion Capital. Fusion Capital would not be obligated to purchase $10,000 of
our common stock on each trading day if (1) we elect not to sell our shares to
Fusion Capital on such a date, (2) if an event of default occurs or (3) where
the price of our common stock is below $0.25 per share. At our discretion, we
may elect to sell more or less of our common stock to Fusion Capital than the
minimum daily amount. The number of shares ultimately offered for sale by Fusion
Capital is dependent upon the number of shares purchased by Fusion Capital under
the common stock purchase agreement. Up to 2,372,728 shares of our common
shares, including up to 1,186,364 shares issuable under common share purchase
warrants, are being offered by other selling shareholders. As of November 18,
2004, there were 14,184,932 common shares outstanding. If the shares offered by
this prospectus were outstanding as of November 18, 2004, such shares would
represent approximately 44.9% of the total common stock outstanding on that
date.

-3-

As of November 18, 2004, Fusion Capital owns 1,036,785 shares of our
common stock, representing 7.31% of the 14,186,932 common shares outstanding.
Fusion Capital's would beneficially own 10.94% if their warrants were included
in the calculation, however, their contractual ownership limitations prohibit
Fusion Capital, together with its affiliates, from beneficially owning more that
9.9% of our common stock. Fusion Capital may not purchase shares of our common
stock under the common stock purchase agreement if Fusion Capital, together with
its affiliates, would beneficially own more than 9.9% of our common stock
outstanding at the time of the purchase by Fusion Capital. However, even though
Fusion Capital may not receive additional shares of our common stock in the
event that the 9.9% limitation is ever reached, Fusion Capital is still
obligated to pay to us $10,000 on each trading day, unless the common stock
purchase agreement is suspended, an event of default occurs or the agreement is
terminated. Under these circumstances, Fusion Capital would be issued additional
shares in the future should its ownership subsequently become less than the
9.9%. Fusion Capital would have no right to receive such shares until its
ownership subsequently becomes less that the 9.9%. The number of shares to be
issued to Fusion Capital would be calculated using the price of the daily
purchase amount on the date we elect to sell our shares to Fusion Capital. There
are no penalties owed under such circumstances. Fusion Capital has the right at
any time to sell any shares purchased under the common stock purchase agreement
which would allow it to avoid the 9.9% limitation. Therefore, we do not believe
that Fusion Capital will ever reach the 9.9% limitation. Fusion Capital would
not be obligated to purchase $10,000 of our common stock on each trading day if
(1) we elect not to sell our shares to Fusion Capital on such date, (2) if
shares of our common stock are trading at lower than $0.25 on such date or (3)
if an event of default occurs.

The common shares offered under this prospectus may be sold by the
selling shareholders on the public market, in negotiated transactions with a
broker-dealer or market maker as principal or agent, or in privately negotiated
transactions not involving a broker or dealer. Information regarding the selling
shareholders, the common shares they are offering to sell under this prospectus,
and the times and manner in which they may offer and sell those shares is
provided in the sections of this prospectus captioned "SELLING SHAREHOLDERS" and
"PLAN OF DISTRIBUTION". We will not receive any of the proceeds from those
sales. Should the selling shareholders in their discretion exercise any of the
common share purchase warrants underlying the common shares offered under this
prospectus, we would, however, receive the exercise price for those warrants.
The registration of common shares pursuant to this prospectus does not
necessarily mean that any of those shares will ultimately be offered or sold by
the selling shareholders.

SUMMARY FINANCIAL DATA

The following tables summarize the consolidated statements of operations and
balance sheet data for our company.

SIX MONTHS ENDED YEARS ENDED
CONSOLIDATED STATEMENTS OF OPERATIONS DATA: September 30, (UNAUDITED) MARCH 31,
---------------------------------------------------------------
2004 2003 2004 2003
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Revenue $0 $0 $0 $0
Gross profit $0 $0 0 0
Net loss $0 $0 (1,518,798) (2,361,116)
Preferred stock dividends N/A N/A N/A N/A
Net loss attributed to common shareholders (829,945) (705,322) (1,518,798) (2,361,116)
Loss per common share, basic and diluted ($0.06) ($0.09) ($0.19) ($0.43)
Weighted average common shares outstanding, basic and
diluted 12,906,408 7,536,108 8,181,612 5,553,196

September 30,
2004 MARCH 31,
CONSOLIDATED BALANCE SHEET DATA: (UNAUDITED) 2004
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Current assets $ 20,953 $7,201
Total assets 311,125 281,661
Total current liabilities 3,613,735 3,936,838
Total stockholders' deficit (3,302,610) (3,655,177)
Total liabilities and stockholders' deficit $311,125 $281,661

-4-

RISK FACTORS

An investment in our common shares involves a high degree of risk and
is subject to many uncertainties. These risks and uncertainties may adversely
affect our business, operating results and financial condition. In such an
event, the trading price for our common shares could decline substantially, and
you could lose all or part of your investment. In order to attain an
appreciation for these risks and uncertainties, you should read this prospectus
in its entirety and consider all of the information and advisements contained in
this prospectus, including the following risk factors and uncertainties.

RISKS RELATING TO OUR BUSINESS

WE HAVE A LIMITED OPERATING HISTORY WITH SIGNIFICANT LOSSES AND EXPECT
LOSSES TO CONTINUE FOR THE FORESEEABLE FUTURE.

We have yet to establish any history of profitable operations. We have
not had any revenues for the past three years. We have incurred annual operating
losses of $995,549, $1,871,385 and $2,272,930, respectively, during the past
three fiscal years of operation and an operating loss of $1,020,319 in the six
months ended September 30, 2004. As a result, at March 31, 2004, we had an
accumulated deficit of $17,045,313. We have incurred net losses from continuing
operations of $1,518,798 and $2,361,116 for the fiscal years ending March 31,
2004 and 2003 and $829,945 and $705,322 for the six months ended September 30,
2004 and 2003. As a result, at September 30, 2004, we had an accumulated deficit
of $17,875,258. Our revenues have not been sufficient to sustain our operations.
We expect that our revenues will not be sufficient to sustain our operations for
the foreseeable future. Our profitability will require the successful
commercialization of our Hemopurifier(TM) technology. No assurances can be given
when or if this will occur or that we will ever be profitable.

WE HAVE RECEIVED AN OPINION FROM OUR AUDITORS REGARDING OUR ABILITY TO
CONTINUE AS A GOING CONCERN

Our independent auditors noted in their report accompanying our
financial statements for our fiscal year ended March 31, 2004 that we had net
losses since our inception, had a working capital deficit and that a significant
amount of additional capital, approximately $5,000,000 as estimated by
management, will be necessary to advance the development of our products to the
point at which we may become commercially viable and stated that those
conditions raised substantial doubt about our ability to continue as a going
concern. Note 1 to our financial statements addressed management's plans to
address these matters. We cannot assure you that our business plans will be
successful in addressing these issues. This opinion about our ability to
continue as a going concern could affect our ability to obtain additional
financing at favorable terms, if at all, as such an opinion may cause investors
to lose faith in our long term prospects. If we cannot successfully continue as
a going concern, our shareholders may lose their entire investment in our common
shares.

WE WILL REQUIRE ADDITIONAL FINANCING TO SUSTAIN OUR OPERATIONS AND
WITHOUT IT WE WILL NOT BE ABLE TO CONTINUE OPERATIONS.

At March 31, 2004 and September 30, 2004, we had a working capital
deficit of approximately $3,930,000 and $3,593,000, respectively. The
independent auditors' report for the year ended March 31, 2004, includes an
explanatory paragraph stating that our recurring losses from operations and
working capital deficiency raise substantial doubt about our ability to continue
as a going concern. We have a net operating cash flow deficit of $704,405 for
the six months ended September 30, 2004, a net operating cash flow deficit of
$542,056 for the year ended March 31, 2004, a net operating cash flow deficit of
$514,503 for the year ended March 31, 2003 and for the year ended March 31,
2002, a net operating cash flow deficit of $1,007,431. We do not currently have
sufficient financial resources to fund our operations or those of our
subsidiaries. Therefore, we need additional funds to continue these operations.

We have the right to receive $10,000 per trading day under the
agreement with Fusion Capital unless our stock price equals or exceeds $1.00, in
which case the daily amount may be increased under certain conditions as the
price of our common stock increases. Fusion Capital shall not have the right or
the obligation to purchase any shares of our common stock on any trading days
that the market price of our common stock is less than $0.25. Since we are

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initially registering only 7,431,819 shares for sale by Fusion Capital pursuant
to this Prospectus (excluding the warrant to purchase 568,181 shares of common
stock, the 568,181 shares of common stock already purchased by Fusion Capital
and the 608,139 shares of common stock issuable to Fusion Capital as commitment
shares), the market price of our common stock to Fusion Capital will have to
average at least $.81 per share for us to receive, in addition to the $250,000
we have already received from Fusion Capital, the maximum proceeds of $6,250,000
without registering additional shares of common stock. Assuming a purchase price
of $0.60 per share (the closing market price of our common stock on November 19,
2004) and the purchase by Fusion Capital of the full 7,431,819 shares under the
common stock purchase agreement, proceeds to us would only be $4,459,091 in
addition to the $250,000 we've already received unless we choose to register
more than 7,431,819 shares, which we have the right, but not the obligation, to
do.

The extent we rely on Fusion Capital as a source of funding will depend
on a number of factors including, the prevailing market price of our common
stock and the extent to which we are able to secure working capital from other
sources, such as through the commercialization or licensing of our
Hemopurifier(TM) technology. If obtaining sufficient financing from Fusion
Capital were to prove prohibitively expensive and if we are unable to
commercialize and sell our Hemopurifier(TM) technology, we will need to secure
another source of funding in order to satisfy our working capital needs. Even if
we are able to access the full $6,000,000 under the common stock purchase
agreement with Fusion Capital (in addition to the $250,000 we have already
received), we may still need additional capital to fully implement our business,
operating and development plans. Should the financing we require to sustain our
working capital needs be unavailable or prohibitively expensive when we require
it, the consequences would be a material adverse effect on our business,
operating results, financial condition and prospects.

WE MAY FAIL TO OBTAIN GOVERNMENT CONTRACTS TO DEVELOP OUR
HEMOPURIFIER(TM) TECHNOLOGY FOR BIODEFENSE APPLICATIONS.

The U.S. Government has undertaken commitments to help secure improved
countermeasures against bioterrorism. We have submitted two Small Business
Innovative Research (SBIR) grant proposals, one in 2002 and the other in April
2004, with the National Institutes of Health that relate to the use of our
Hemopurifier(TM) as a countermeasure treatment against certain biological
weapons and anticipate submitting further proposals on U.S. Government
contracts. The first proposal in 2002 was reviewed but not scored. We expanded
the proposal, submitted the proposal in 2004 and it was again reviewed but not
scored. We intend to revise and resubmit the proposal in December 2004. We have
not had any material discussions with the National Institutes of Health.
According to the National Institutes of Health, approximately half of all
proposals are not given a score. Proposals that are not scored are not eligible
for funding. Proposals which are reviewed and scored may or may not be funded.
The majority of SBIR proposals are therefore not funded. Delays in the review
process come from several sources. There are only three SBIR application periods
each year (April 1, August 1 and December 1). Since the review process takes
four to six months to complete, two granting periods typically pass for each
revision and response. For applications that are funded, an additional delay of
six months is expected. We therefore should expect a response to the next
proposal in May of 2005 and with approval, funding would be possible as early as
December 2005.

The Hemopurifier(TM) has not been approved for use by any government agency, nor

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have we received any contracts to purchase the Hemopurifier(TM). Since
inception, we have not generated revenues from the sale of any product based on
our Hemopurifier(TM) technology platform. The process of obtaining government
contracts is lengthy and uncertain and we must compete for each contract.
Accordingly, we cannot be certain that we will be awarded any future government
contracts utilizing our Hemopurifier(TM) platform technology. If the U.S.
Government makes significant future contract awards to our competitors our
business will be harmed.

IF THE U.S. GOVERNMENT FAILS TO PURCHASE SUFFICIENT QUANTITIES OF ANY
FUTURE BIODEFENSE CANDIDATE UTILIZING OUR HEMOPURIFIER(TM) PLATFORM TECHNOLOGY,
WE MAY BE UNABLE TO GENERATE SUFFICIENT REVENUES TO CONTINUE OPERATIONS.

We cannot be certain of the timing or availability of any future
funding from the U.S. Government, and substantial delays or cancellations of
funding could result from protests or challenges from third parties once such
funding is obtained. If we develop products utilizing our Hemopurifier(TM)
platform technology that are approved by the U.S. Food and Drug Administration
(the "FDA"), but the U.S. Government does not place sufficient orders for these
products, our future business will be harmed.

U.S. GOVERNMENT AGENCIES HAVE SPECIAL CONTRACTING REQUIREMENTS, WHICH
CREATE ADDITIONAL RISKS.

Our business plan to provide biodefense product candidates and
HIV-Hemopurifier(TM) candidates may involve contracts with the U.S. Government.
U.S. Government contracts typically contain unfavorable termination provisions
and are subject to audit and modification by the government at its sole
discretion, which subjects us to additional risks. These risks include the
ability of the U.S. Government to unilaterally:

o suspend or prevent us for a period of time from receiving new
contracts or extending existing contracts based on violations
or suspected violations of laws or regulations;

o audit and object to our contract-related costs and fees,
including allocated indirect costs;

o control and potentially prohibit the export of our products;
and

o change certain terms and conditions in our contracts.

If we were to become a U.S. Government contractor, we would be required
to comply with applicable laws, regulations and standards relating to our
accounting practices and would be subject to periodic audits and reviews. As
part of any such audit or review, the U.S. Government may review the adequacy
of, and our compliance with, our internal control systems and policies,
including those relating to our purchasing, property, estimating, compensation
and management information systems. Based on the results of its audits, the U.S.
Government may adjust our contract-related costs and fees, including allocated
indirect costs. In addition, if an audit or review uncovers any improper or
illegal activity, we would possibly be subject to civil and criminal penalties
and administrative sanctions, including termination of our contracts, forfeiture
of profits, suspension of payments, fines and suspension or prohibition from
doing business with the U.S. Government. We could also suffer serious harm to
our reputation if allegations of impropriety were made against us. Although
adjustments arising from government audits and reviews have not seriously harmed
our business in the past, future audits and reviews could cause adverse effects.
In addition, under U.S. Government purchasing regulations, some of our costs,
including most financing costs, amortization of intangible assets, portions of
our research and development costs, and some marketing expenses, would possibly
not be reimbursable or allowed under such contracts. Further, as a U.S.
Government contractor, we would be subject to an increased risk of
investigations, criminal prosecution, civil fraud, whistleblower lawsuits and
other legal actions and liabilities to which purely private sector companies are
not.

-8-

WE WILL FACE INTENSE COMPETITION FROM COMPANIES THAT HAVE GREATER
FINANCIAL, PERSONNEL AND RESEARCH AND DEVELOPMENT RESOURCES THAN OURS. THESE
COMPETITIVE FORCES MAY IMPACT OUR PROJECTED GROWTH AND ABILITY TO GENERATE
REVENUES AND PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE
VALUE OF YOUR INVESTMENT.

Our competitors are developing vaccine candidates, which could compete
with the Hemopurifier(TM) product candidates we are developing. Our commercial
opportunities will be reduced or eliminated if our competitors develop and
market products for any of the diseases that we target that:

o are more effective;

o have fewer or less severe adverse side effects;

o are better tolerated;

o are more adaptable to various modes of dosing;

o are easier to administer; or

o are less expensive than the products or product candidates we
are developing.

Even if we are successful in developing effective Hemopurifier(TM)
products, and obtain FDA and other regulatory approvals necessary for
commercializing them, our products may not compete effectively with other
successful products. Researchers are continually learning more about diseases,
which may lead to new technologies for treatment. Our competitors may succeed in
developing and marketing products either that are more effective than those that
we may develop, alone or with our collaborators, or that are marketed before any
products we develop are marketed.

The Congress' recent passage of the $5.6 billion Project BioShield
Bill, a comprehensive effort to develop and make available modern, effective
drugs and vaccines to protect against attack by biological and chemical weapons
or other dangerous pathogens, may encourage competitors to develop their own
product candidates. We cannot predict the decisions that will be made in the
future by the various government agencies as a result of such legislation.

Our competitors include fully integrated pharmaceutical companies and
biotechnology companies as well as universities and public and private research
institutions. Many of the organizations competing with us, have substantially
greater capital resources, larger research and development staffs and
facilities, greater experience in product development and in obtaining
regulatory approvals, and greater marketing capabilities than we do.

The market for medical devices is intensely competitive. Many of our
potential competitors have longer operating histories, greater name recognition,
more employees, and significantly greater financial, technical, marketing,
public relations, and distribution resources than we have. This intense
competitive environment may require us to make changes in our products, pricing,
licensing, services or marketing to develop, maintain and extend our current
technology. Price concessions or the emergence of other pricing or distribution
strategies of competitors may diminish our revenues (if any), adversely impact
our margins or lead to a reduction in our market share (if any), any of which
may harm our business.

WE HAVE LIMITED MANUFACTURING EXPERIENCE.

To achieve the levels of production necessary to commercialize our
Hemopurifier(TM) products, we will need secure manufacturing agreements with
manufacturers which comply with good manufacturing practices standards and other
standards prescribed by various federal, state and local regulatory agencies in
the U.S. and any other country of use.

-9-

We have limited experience manufacturing products for testing purposes
and no experience manufacturing products for large scale commercial purposes. We
will likely outsource the manufacture of our Hemopurifier(TM) products to third
parties operating FDA-certified facilities. To date, we have manufactured
devices on a small scale for testing purposes. There can be no assurance that
manufacturing and control problems will not arise as we attempt to commercialize
our products or that such manufacturing can be completed in a timely manner or
at a commercially reasonable cost. Any failure to surmount such problems could
delay or prevent commercialization of our products and would have a material
adverse effect on us.

OUR HEMOPURIFER(TM) TECHNOLOGY MAY BECOME OBSOLETE.

Our Hemopurifier(TM) products may be made unmarketable by new
scientific or technological developments where new treatment modalities are
introduced that are more efficacious and/or more economical than our
Hemopurifier(TM) products. The Homeland Security industry is growing rapidly
with many competitors trying to develop products or vaccines to protect against
infectious disease. Any one of our competitors could develop a more effective
product which would render our technology obsolete.

OUR USE OF HAZARDOUS MATERIALS, CHEMICALS AND VIRUSES REQUIRE US TO
COMPLY WITH REGULATORY REQUIREMENTS AND EXPOSES US TO POTENTIAL LIABILITIES.

Our research and development involves the controlled use of hazardous
materials, chemicals and viruses. The primary hazardous materials include
chemicals needed to construct the Hemopurifier(TM) cartridges and HIV and
Hepatitis C infected plasma samples used in preclinical test of the
Hemopurifier(TM). All other chemicals are fully inventoried and reported to the
appropriate authorities, such as the fire department, who inspect the facility
on a regular basis. We are subject to federal, state, local and foreign laws
governing the use, manufacture, storage, handling and disposal of such
materials. Although we believe that our safety procedures for the use,
manufacture, storage, handling and disposal of such materials comply with the
standards prescribed by federal, state, local and foreign regulations, we cannot
completely eliminate the risk of accidental contamination or injury from these
materials. We have had no incidents or problems involving hazardous chemicals or
biological samples. In the event of such an accident, we could be held liable
for significant damages or fines. We currently do not carry insurance to protect
us from these damages. In addition, we may be required to incur significant
costs to comply with regulatory requirements in the future.

WE ARE DEPENDENT FOR OUR SUCCESS ON A FEW KEY EXECUTIVE OFFICERS. OUR
INABILITY TO RETAIN THOSE OFFICERS WOULD IMPEDE OUR BUSINESS PLAN AND GROWTH
STRATEGIES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF
YOUR INVESTMENT.

Our success depends to a critical extent on the continued services of
our Chief Executive Officer, James A. Joyce, our Chief Financial Officer, Edward
C. Hall and our Chief Science Officer, Richard H. Tullis. Were we to lose one or
more of these key executive officers, we would be forced to expend significant
time and money in the pursuit of a replacement, which would result in both a
delay in the implementation of our business plan and the diversion of limited
working capital. The loss of Dr. Tullis would harm the clinical development of
our products due to his unique experience with the Hemopurifier(TM) technology.
The loss of Dr. Tullis and/or Mr. Joyce would be detrimental to our growth as
they possess unique knowledge of our business model and infectious disease which
would be difficult to replace within the biotechnology field. We can give you no
assurance that we can find satisfactory replacements for these key executive
officers at all, or on terms that are not unduly expensive or burdensome to our

-10-

company. Although Mr. Joyce and Mr. Tullis have signed employment agreements
providing for their continued service to our company, these agreements will not
preclude them from leaving our company. Mr. Hall is a part-time employee and his
employment is severable by either party upon 30-days notice. We do not currently
carry key man life insurance policies on any of our key executive officers which
would assist us in recouping our costs in the event of the loss of those
officers.

OUR INABILITY TO ATTRACT AND RETAIN QUALIFIED PERSONNEL COULD IMPEDE
OUR ABILITY TO GENERATE REVENUES AND PROFITS AND TO OTHERWISE IMPLEMENT OUR
BUSINESS PLAN AND GROWTH STRATEGIES, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR
BUSINESS AND COULD ADVERSELY AFFECT THE VALUE OF YOUR INVESTMENT.

We currently have an extremely small staff comprised of seven full time
employees consisting of our Chief Executive Officer, our Chief Science Officer,
our Director of Administrative Services, a research scientist, a research
associate, a senior bioengineer and a lab manager, as well as other personnel
employed on a contract basis. Although we believe that these employees, together
with the consultants currently engaged by our company, will be able to handle
most of our additional administrative, research and development and business
development in the near term, we will nevertheless be required over the
longer-term to hire highly skilled managerial, scientific and administrative
personnel to fully implement our business plan and growth strategies. Due to the
specialized scientific nature of our business, we are highly dependent upon our
ability to attract and retain qualified scientific, technical and managerial
personal. Competition for these individuals, especially in San Diego where many
bio-technology companies are located, is intense and we may not be able to
attract, assimilate or retain additional highly qualified personnel in the
future. We cannot assure you that we will be able to engage the services of such
qualified personnel at competitive prices or at all, particularly given the
risks of employment attributable to our limited financial resources and lack of
an established track record.

WE PLAN TO GROW VERY RAPIDLY, WHICH WILL PLACE STRAINS ON OUR
MANAGEMENT TEAM AND OTHER COMPANY RESOURCES TO BOTH IMPLEMENT MORE SOPHISTICATED
MANAGERIAL, OPERATIONAL AND FINANCIAL SYSTEMS, PROCEDURES AND CONTROLS AND TO
TRAIN AND MANAGE THE PERSONNEL NECESSARY TO IMPLEMENT THOSE FUNCTIONS. OUR
INABILITY TO MANAGE OUR GROWTH COULD IMPEDE OUR ABILITY TO GENERATE REVENUES AND
PROFITS AND TO OTHERWISE IMPLEMENT OUR BUSINESS PLAN AND GROWTH STRATEGIES,
WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF YOUR
INVESTMENT.

We will need to significantly expand our operations to implement our
longer-term business plan and growth strategies. We will also be required to
manage multiple relationships with various strategic partners, technology
licensors, customers, manufacturers and suppliers, consultants and other third
parties. This expansion and these expanded relationships will require us to
significantly improve or replace our existing managerial, operational and
financial systems, procedures and controls; to improve the coordination between
our various corporate functions; and to manage, train, motivate and maintain a
growing employee base. The time and costs to effectuate these steps may place a
significant strain on our management personnel, systems and resources,
particularly given the limited amount of financial resources and skilled
employees that may be available at the time. We cannot assure you that we will
institute, in a timely manner or at all, the improvements to our managerial,
operational and financial systems, procedures and controls necessary to support
our anticipated increased levels of operations and to coordinate our various
corporate functions, or that we will be able to properly manage, train, motivate
and retain our anticipated increased employee base.

-11-

WE MAY HAVE DIFFICULTY IN ATTRACTING AND RETAINING MANAGEMENT AND
OUTSIDE INDEPENDENT MEMBERS TO OUR BOARD OF DIRECTORS AS A RESULT OF THEIR
CONCERNS RELATING TO THEIR INCREASED PERSONAL EXPOSURE TO LAWSUITS AND
SHAREHOLDER CLAIMS BY VIRTUE OF HOLDING THESE POSITIONS IN A PUBLICLY-HELD
COMPANY

The directors and management of publicly traded corporations are
increasingly concerned with the extent of their personal exposure to lawsuits
and shareholder claims, as well as governmental and creditor claims which may be
made against them, particularly in view of recent changes in securities laws
imposing additional duties, obligations and liabilities on management and
directors. Due to these perceived risks, directors and management are also
becoming increasingly concerned with the availability of directors and officers
liability insurance to pay on a timely basis the costs incurred in defending
such claims. We currently do not carry directors and officers liability
insurance. Directors and officers liability insurance has recently become much
more expensive and difficult to obtain. If we are unable to obtain directors and
officers liability insurance at affordable rates or at all, it may become
increasingly more difficult to attract and retain qualified outside directors to
serve on our board of directors. We may lose potential independent board members
and management candidates to other companies in the biotechnology field that
have directors and officers liability insurance to insure them from liability or
to biotechnology companies that have revenues or have received greater funding
to date which can offer greater compensation packages. The fees of directors are
also rising in response to their increased duties, obligations and liabilities
as well as increased exposure to such risks. As a company with a limited
operating history and limited resources, we will have a more difficult time
attracting and retaining management and outside independent directors than a
more established company due to these enhanced duties, obligations and
liabilities.

IF WE FAIL TO COMPLY WITH EXTENSIVE REGULATIONS OF DOMESTIC AND FOREIGN
REGULATORY AUTHORITIES, THE COMMERCIALIZATION OF OUR PRODUCT CANDIDATES COULD BE
PREVENTED OR DELAYED.

Our pathogen filtration devices, or Hemopurifier(TM) products, are
subject to extensive government regulations related to development, testing,
manufacturing and commercialization in the United States and other countries.
The determination of when and whether a product is ready for large scale
purchase and potential use will be made by the government through consultation
with a number of governmental agencies, including the FDA, the National
Institutes of Health, the Centers for Disease Control and Prevention and the
Department of Homeland Security. Our product candidates are in the pre-clinical
and clinical stages of development and have not received required regulatory
approval from the FDA to be commercially marketed and sold. The process of
obtaining and complying with FDA and other governmental regulatory approvals and
regulations is costly, time consuming, uncertain and subject to unanticipated
delays. Such regulatory approval (if any) and product development requires
several years. Despite the time and expense exerted, regulatory approval is
never guaranteed. We also are subject to the following risks and obligations,
among others.

o The FDA may refuse to approve an application if they believe
that applicable regulatory criteria are not satisfied.

o The FDA may require additional testing for safety and
effectiveness.

o The FDA may interpret data from pre-clinical testing and
clinical trials in different ways than we interpret them.

o If regulatory approval of a product is granted, the approval
may be limited to specific indications or limited with respect
to its distribution.

-12-

o The FDA may change their approval policies and/or adopt new
regulations.

Failure to comply with these or other regulatory requirements of the
FDA may subject us to administrative or judicially imposed sanctions, including:

o warning letters;

o civil penalties;

o criminal penalties;

o injunctions;

o product seizure or detention;

o product recalls; and

o total or partial suspension of productions.

DELAYS IN SUCCESSFULLY COMPLETING OUR CLINICAL TRIALS COULD JEOPARDIZE
OUR ABILITY TO OBTAIN REGULATORY APPROVAL OR MARKET OUR HEMOPURIFIER(TM) PRODUCT
CANDIDATES ON A TIMELY BASIS.

Our business prospects will depend on our ability to complete clinical
trials, obtain satisfactory results, obtain required regulatory approvals and
successfully commercialize our Hemopurifier(TM) product candidates. Completion
of our clinical trials, announcement of results of the trials and our ability to
obtain regulatory approvals could be delayed for a variety of reasons,
including:

o serious adverse events related to our vaccine candidates;

o unsatisfactory results of any clinical trial;

o the failure of our principal third-party investigators to
perform our clinical trials on our anticipated schedules;
and/or

o different interpretations of our pre-clinical and clinical
data, which could initially lead to inconclusive results.

Our development costs will increase if we have material delays in any
clinical trial or if we need to perform more or larger clinical trials than
planned. If the delays are significant, or if any of our Hemopurifier(TM)
product candidates do not prove to be safe or effective or do not receive
required regulatory approvals, our financial results and the commercial
prospects for our product candidates will be harmed. Furthermore, our inability
to complete our clinical trials in a timely manner could jeopardize our ability
to obtain regulatory approval.

THE INDEPENDENT CLINICAL INVESTIGATORS THAT WE RELY UPON TO CONDUCT OUR
CLINICAL TRIALS MAY NOT BE DILIGENT, CAREFUL OR TIMELY, AND MAY MAKE MISTAKES,
IN THE CONDUCT OF OUR CLINICAL TRIALS.

We depend on independent clinical investigators to conduct our clinical
trials. The investigators are not our employees, and we cannot control the
amount or timing of resources that they devote to our product development
programs. If independent investigators fail to devote sufficient time and
resources to our product development programs, or if their performance is
substandard, it may delay FDA approval of our vaccine candidates. These
independent investigators may also have relationships with other commercial
entities, some of which may compete with us. If these independent investigators
assist our competitors at our expense, it could harm our competitive position.

-13-

THE APPROVAL REQUIREMENTS FOR MEDICAL PRODUCTS USED TO FIGHT
BIOTERRORISM ARE STILL EVOLVING, AND WE CANNOT BE CERTAIN THAT ANY PRODUCTS WE
DEVELOP, IF EFFECTIVE, WOULD MEET THESE REQUIREMENTS.

We are developing product candidates based upon current governmental
policies regulating these medical countermeasure treatments. For instance, we
intend to pursue FDA approval of our proprietary pathogen filtration devices to
treat infectious agents under requirements published by the FDA that allow the
FDA to approve certain vaccines used to reduce or prevent the toxicity of
chemical, biological, radiological or nuclear substances based on human clinical
data to demonstrate safety and immune response, and evidence of effectiveness
derived from appropriate animal studies and any additional supporting data. Our
business is subject to substantial risk because these policies may change
suddenly and unpredictably and in ways that could impair our ability to obtain
regulatory approval of these products, and we cannot guarantee that the FDA will
approve our proprietary pathogen filtration devices.

OUR PRODUCT DEVELOPMENT EFFORTS MAY NOT YIELD MARKETABLE PRODUCTS DUE
TO RESULTS OF STUDIES OR TRIALS, FAILURE TO ACHIEVE REGULATORY APPROVALS OR
MARKET ACCEPTANCE, PROPRIETARY RIGHTS OF OTHERS OR MANUFACTURING ISSUES.

Our success depends on our ability to successfully develop and obtain
regulatory approval to market new filtration devices. We expect that a
significant portion of the research that we will conduct will involve new and
unproven technologies. Development of a product requires substantial technical,
financial and human resources even if the product is not successfully completed.

Our previously planned products have not become marketable products due
in part to our transition in 2001 from a focus on utilizing our Hemopurifier(TM)
technology on treating harmful metals to treating infectious diseases prior to
our having completed the FDA approval process. Our transition was made in order
to focus on larger markets with an urgent need for new treatment and too take
advantage of the sense of greater sense of urgency surrounding acute and chronic
infectious diseases. Prior to initiating the development of infectious disease
Hemopurifiers(TM), we successfully completed an FDA approved Phase I human
safety trial of a Hemopurifier(TM) to treat aluminum and iron intoxication.
Since changing the focus to infectious disease research, we have not initiated
an FDA approved human clinical trial as the development of the technology is
still continuing and will require both significant capital and scientific
resources. Our pending products face similar challenges of obtaining successful
clinical trials in route to gaining FDA approval prior to commercialization.
Additionally, our limited financial resources hinder the speed of our product
development due to personal constraints.

Our potential products may appear to be promising at various stages of
development yet fail to reach the market for a number of reasons, including the:

o lack of adequate quality or sufficient prevention benefit, or
unacceptable safety during pre-clinical studies or clinical
trials;

o failure to receive necessary regulatory approvals;

o existence of proprietary rights of third parties; and/or

o inability to develop manufacturing methods that are efficient,
cost-effective and capable of meeting stringent regulatory
standards.

-14-

POLITICAL OR SOCIAL FACTORS MAY DELAY OR IMPAIR OUR ABILITY TO MARKET
OUR PRODUCTS.

Products developed to treat diseases caused by or to combat the threat
of bioterrorism will be subject to changing political and social environments.
The political and social responses to bioterrorism have been highly charged and
unpredictable. Political or social pressures may delay or cause resistance to
bringing our products to market or limit pricing of our products, which would
harm our business. Bioterrorism has become the focus of political debates
especially with the upcoming presidential elections, both in terms of how to
approach bioterrorism and the amount funding the government should provide for
any programs involving homeland protection. Government funding for products on
bioterrorism could be reduced which would hinder our ability to obtain
governmental grants.

OUR INABILITY TO PROTECT OUR INTELLECTUAL PROPERTY RIGHTS COULD
NEGATIVELY IMPACT OUR PROJECTED GROWTH AND ABILITY TO GENERATE REVENUES AND
PROFITS, WHICH WOULD HAVE A NEGATIVE IMPACT ON OUR BUSINESS AND THE VALUE OF
YOUR INVESTMENT.

We rely on a combination of patent, patent pending, copyright,
trademark and trade secret laws, proprietary rights agreements and
non-disclosure agreements to protect our intellectual properties. We cannot give
you any assurance that these measures will prove to be effective in protecting
our intellectual properties.

In the case of patents, we cannot give you any assurance that our
existing patents will not be invalidated, that any patents that we currently or
prospectively apply for will be granted, or that any of these patents will
ultimately provide significant commercial benefits. Further, competing companies
may circumvent any patents that we may hold by developing products which closely
emulate but do not infringe our patents. While we intend to seek patent
protection for our products in selected foreign countries, those patents may not
receive the same degree of protection as they would in the United States. We can
give you no assurance that we will be able to successfully defend our patents
and proprietary rights in any action we may file for patent infringement.
Similarly, we cannot give you any assurance that we will not be required to
defend against litigation involving the patents or proprietary rights of others,
or that we will be able to obtain licenses for these rights. Legal and
accounting costs relating to prosecuting or defending patent infringement
litigation may be substantial. Since many of our patents were issued in the
1980's, they may expire before FDA approval, if any, is obtained. However, we
believe that certain patent applications filed and/or other patents issued more
recently will help to protect the proprietary nature of the Hemopurifier
treatment technology.

The Hemopurifier(TM) is protected by seven issued patents, in the
United States, Europe and Japan, six of which we own and one which we own the
exclusive license. Three additional patent applications deal with treatments for
virus infection and manufacturing methods, two of which we own and one which we
own the exclusive license.

We also rely on proprietary designs, technologies, processes and
know-how not eligible for patent protection. We cannot give you any assurance
that our competitors will not independently develop the same or superior
designs, technologies, processes and know-how.

While we have and will continue to enter into proprietary rights
agreements with our employees and third parties giving us proprietary rights to
certain technology developed by those employees or parties while engaged by our
company, we can give you no assurance that courts of competent jurisdiction will
enforce those agreements.

-15-

THE PATENTS WE OWN COMPRISE A MAJORITY OF OUR ASSETS WHICH COULD LIMIT
OUR FINANCIAL VIABILITY.

The Hemopurifier(TM) is protected by seven issued patents, in the
United States, Europe and Japan, six of which we own and one which we own the
exclusive license. These patents comprise a majority of our assets. At September
30, 2004, our patents comprised 77.8% of our fixed assets, and 72.5% of all
assets. If our existing patents are invalidated or if they fail to provide
significant commercial benefits, it will severely hurt our financial condition
as a majority of our assets would lose their value. Further, since our patents
are written down over the course of their term until they expire, our assets
comprised of patents will continually be written down until they lose value
altogether.

LEGISLATIVE ACTIONS AND POTENTIAL NEW ACCOUNTING PRONOUNCEMENTS ARE
LIKELY TO IMPACT OUR FUTURE FINANCIAL POSITION AND RESULTS OF OPERATIONS.

There have been regulatory changes, including the Sarbanes-Oxley Act of
2002, and there may potentially be new accounting pronouncements or additional
regulatory rulings which will have an impact on our future financial position
and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes
as well as proposed legislative initiatives following the Enron bankruptcy have
increased our general and administrative costs as we have incurred increased
legal and accounting fees to comply with such rule changes. Further, proposed
initiatives are expected to result in changes in certain accounting rules,
including legislative and other proposals to account for employee stock options
as a compensation expense. These and other potential changes could materially
increase the expenses we report under generally accepted accounting principles,
and adversely affect our operating results.

OUR PRODUCTS MAY BE SUBJECT TO RECALL OR PRODUCT LIABILITY CLAIMS.

Our Hemopurifier(TM) products may be used in connection with medical
procedures in which it is important that those products function with precision
and accuracy. If our products do not function as designed, or are designed
improperly, we may be forced by regulatory agencies to withdraw such products
from the market. In addition, if medical personnel or their patients suffer
injury as a result of any failure of our products to function as designed, or an
inappropriate design, we may be subject to lawsuits seeking significant
compensatory and punitive damages. The risk of product liability claims, product
recalls and associated adverse publicity is inherent in the testing,
manufacturing, marketing and sale of medical products. We do not have clinical
trial liability insurance coverage. There can be no assurance that future
insurance coverage will to be adequate or available. We may not be able to
secure product liability insurance coverage on acceptable terms or at reasonable
costs when needed. Any product recall or lawsuit seeking significant monetary
damages may have a material affect on our business and financial condition. Any
liability for mandatory damages could exceed the amount of our coverage.
Moreover, a product recall could generate substantial negative publicity about
our products and business and inhibit or prevent commercialization of other
future product candidates.

RISKS RELATING TO AN INVESTMENT IN OUR SECURITIES

TO DATE, WE HAVE NOT PAID ANY CASH DIVIDENDS AND NO CASH DIVIDENDS WILL
BE PAID IN THE FORESEEABLE FUTURE.

We do not anticipate paying cash dividends on our common shares in the
foreseeable future, and we cannot assure an investor that funds will be legally
available to pay dividends, or that even if the funds are legally available,
that the dividends will be paid.

THE APPLICATION OF THE "PENNY STOCK" RULES COULD ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON SHARES AND INCREASE YOUR TRANSACTION COSTS TO SELL
THOSE SHARES.

-16-

As long as the trading price of our common shares is below $5 per
share, the open-market trading of our common shares will be subject to the
"penny stock" rules. The "penny stock" rules impose additional sales practice
requirements on broker-dealers who sell securities to persons other than
established customers and accredited investors (generally those with assets in
excess of $1,000,000 or annual income exceeding $200,000 or $300,000 together
with their spouse). For transactions covered by these rules, the broker-dealer
must make a special suitability determination for the purchase of securities and
have received the purchaser's written consent to the transaction before the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the broker-dealer must deliver, before the transaction, a disclosure
schedule prescribed by the SEC relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. These additional burdens
imposed on broker-dealers may restrict the ability or decrease the willingness
of broker-dealers to sell our common shares, and may result in decreased
liquidity for our common shares and increased transaction costs for sales and
purchases of our common shares as compared to other securities.

OUR COMMON SHARES ARE THINLY TRADED, SO YOU MAY BE UNABLE TO SELL AT OR
NEAR ASK PRICES OR AT ALL IF YOU NEED TO SELL YOUR SHARES TO RAISE MONEY OR
OTHERWISE DESIRE TO LIQUIDATE YOUR SHARES.

Our common shares have historically been sporadically or
"thinly-traded" on the OTCBB, meaning that the number of persons interested in
purchasing our common shares at or near ask prices at any given time may be
relatively small or non-existent. As of November 19, 2004, our average trading
volume per day for the past three months was approximately 39,909 shares a day
with a high of 629,317 shares traded and a low of zero shares traded. This
situation is attributable to a number of factors, including the fact that we are
a small company which is relatively unknown to stock analysts, stock brokers,
institutional investors and others in the investment community that generate or
influence sales volume, and that even if we came to the attention of such
persons, they tend to be risk-averse and would be reluctant to follow an
unproven company such as ours or purchase or recommend the purchase of our
shares until such time as we became more seasoned and viable. As a consequence,
there may be periods of several days or more when trading activity in our shares
is minimal or non-existent, as compared to a seasoned issuer which has a large
and steady volume of trading activity that will generally support continuous
sales without an adverse effect on share price. We cannot give you any assurance
that a broader or more active public trading market for our common shares will
develop or be sustained, or that current trading levels will be sustained.

Fusion Capital's purchase of $10,000 of our common stock each trading
day could cause our common stock price to decline due to the additional shares
available in the market, particularly in light of the relatively thin trading
volume of our common stock. Using the closing price on November 19, 2004, of
$0.60 as an example, Fusion Capital would be issued approximately 16,666 shares
each trading day if we elected to have them purchase the daily purchase amount,
whereas our average trading volume for the prior three months is 39,909 per day.
The market price of our common stock could decline given our minimal average
trading volume compared to the number of shares potentially issuable to Fusion
Capital and the voting power and value of your investment would be subject to
continual dilution if Fusion Capital purchases the shares and resells those
shares into the market, although there is no obligation for Fusion Capital to
sell such shares. Any adverse affect on the market price of our common stock
would increase the number of shares issuable to Fusion Capital each trading day
which would increase the dilution of your investment. Although we have the right
to reduce or suspend Fusion Capital purchases at any time, our financial

-17-

condition at the time may require us to waive our right to suspend purchases
even if there is a decline in the market price. Additionally, up to 2,372,728
shares of our common stock are being offered in this prospectus by other selling
shareholders. Sales of large amount of these shares in the public market could
substantially depress the prevailing market prices for our shares, especially
with our thin trading volume as there would be difficulty for the market to
absorb the sale of such shares without an adverse effect on the share price. If
that were to happen, the value of your investment could decline substantially.

Contractual 9.9% beneficial ownership limitations prohibit Fusion
Capital, together with its affiliates, from beneficially owning more than 9.9%
of our outstanding common stock. This 9.9% limitation does not prevent Fusion
Capital from purchasing shares of our common stock and then reselling those
shares in stages over time where Fusion Capital and its affiliates do not, at
any given time, beneficially own shares in excess of the 9.9% limitation.
Consequently, these limitations will not necessarily prevent substantial
dilution of the voting power and value of your investment.

WE MAY NOT HAVE ENOUGH AUTHORIZED SHARES.

Our Articles of Incorporation currently authorize the Board of
Directors to issue up to 25,000,000 shares of common stock. As of November 18,
2004, we have 14,186,932 shares of common stock outstanding and common share
purchase options and warrants entitling the holders to purchase up to 5,846,942
common shares at a weighted average exercise price of $2.02 per share. There are
no promissory notes of the company outstanding that convert to common shares of
the company. Under our agreement with Fusion Capital, we are registering
7,431,819 shares of our common stock for the daily purchases by Fusion Capital.
If Fusion Capital were to purchase all 7,431,819 shares and holders exercised
all of the common share purchase options and warrants, we would exceed the
number of shares we are authorized to issue. Accordingly, prior to the time we
amend our Articles of Incorporation to increase our authorized capital stock,
either we would not be able to fully utilize the daily purchase amounts
available under the Fusion Capital financing or we would be unable to issue the
common shares underlying common share purchase options or warrants which may be
exercised. The decision to utilize all or any portion of the daily purchase
amount under the Fusion Capital financing is at the company's sole option.
However, we would need to amend our Articles of Incorporation to increase the
authorized number of shares of common stock of the company in order to fully
utilize the daily purchase amounts available under the Fusion Capital financing
and issue all of the shares of common stock underlying currently exercisable
common share purchase options and warrants. Any delay in amending our Articles
of Incorporation could harm our business by preventing us from utilizing the
daily purchase amounts available under the Fusion Capital financing in full,
raising capital from the issuance of our common stock or delaying the payment of
services via issuance of our common stock.

THE MARKET PRICE FOR OUR COMMON SHARES IS PARTICULARLY VOLATILE GIVEN
OUR STATUS AS A RELATIVELY UNKNOWN COMPANY WITH A SMALL AND THINLY-TRADED PUBLIC
FLOAT, LIMITED OPERATING HISTORY AND LACK OF REVENUES WHICH COULD LEAD TO WIDE
FLUCTUATIONS IN OUR SHARE PRICE. THE PRICE AT WHICH YOU PURCHASE OUR COMMON
SHARES MAY NOT BE INDICATIVE OF THE PRICE THAT WILL PREVAIL IN THE TRADING
MARKET. YOU MAY BE UNABLE TO SELL YOUR COMMON SHARES AT OR ABOVE YOUR PURCHASE
PRICE, WHICH MAY RESULT IN SUBSTANTIAL LOSSES TO YOU.

The market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the indefinite
future. In fact, during the 52-week period ended November 19, 2004, the high and
low sale prices of a share of our common stock were $4.25 and $0.37,

-18-

respectively. The volatility in our share price is attributable to a number of
factors. First, as noted above, our common shares are sporadically and/or thinly
traded. As a consequence of this lack of liquidity, the trading of relatively
small quantities of shares by our shareholders may disproportionately influence
the price of those shares in either direction. The price for our shares could,
for example, decline precipitously in the event that a large number of our
common shares are sold on the market without commensurate demand, as compared to
a seasoned issuer which could better absorb those sales without adverse impact
on its share price. Secondly, we are a speculative or "risky" investment due to
our limited operating history and lack of revenues or profits to date, and
uncertainty of future market acceptance for our potential products. As a
consequence of this enhanced risk, more risk-adverse investors may, under the
fear of losing all or most of their investment in the event of negative news or
lack of progress, be more inclined to sell their shares on the market more
quickly and at greater discounts than would be the case with the stock of a
seasoned issuer. The following factors may add to the volatility in the price of
our common shares: actual or anticipated variations in our quarterly or annual
operating results; acceptance of our proprietary technology as viable method of
augmenting the immune response of clearing viruses and toxins from human blood;
government regulations, announcements of significant acquisitions, strategic
partnerships or joint ventures; our capital commitments; and additions or
departures of our key personnel. Many of these factors are beyond our control
and may decrease the market price of our common shares, regardless of our
operating performance. We cannot make any predictions or projections as to what
the prevailing market price for our common shares will be at any time, including
as to whether our common shares will sustain their current market prices, or as
to what effect that the sale of shares or the availability of common shares for
sale at any time will have on the prevailing market price.

Shareholders should be aware that, according to SEC Release No.
34-29093, the market for penny stocks has suffered in recent years from patterns
of fraud and abuse. Such patterns include (1) control of the market for the
security by one or a few broker-dealers that are often related to the promoter
or issuer; (2) manipulation of prices through prearranged matching of purchases
and sales and false and misleading press releases; (3) boiler room practices
involving high-pressure sales tactics and unrealistic price projections by
inexperienced sales persons; (4) excessive and undisclosed bid-ask differential
and markups by selling broker-dealers; and (5) the wholesale dumping of the same
securities by promoters and broker-dealers after prices have been manipulated to
a desired level, along with the resulting inevitable collapse of those prices
and with consequent investor losses. Our management is aware of the abuses that
have occurred historically in the penny stock market. Although we do not expect
to be in a position to dictate the behavior of the market or of broker-dealers
who participate in the market, management will strive within the confines of
practical limitations to prevent the described patterns from being established
with respect to our securities. The occurrence of these patterns or practices
could increase the volatility of our share price.

VOLATILITY IN OUR COMMON SHARE PRICE MAY SUBJECT US TO SECURITIES
LITIGATION.

The market for our common shares is characterized by significant price
volatility when compared to seasoned issuers, and we expect that our share price
will continue to be more volatile than a seasoned issuer for the indefinite
future. In the past, plaintiffs have often initiated securities class action
litigation against a company following periods of volatility in the market price
of its securities. We may in the future be the target of similar litigation.
Securities litigation could result in substantial costs and liabilities and
could divert management's attention and resources.

-19-

OUR OFFICERS AND DIRECTORS OWN OR CONTROL APPROXIMATELY 21% (EXCLUDING
ALL OPTIONS AND WARRANTS EXERCISABLE WITHIN 60 DAYS OF NOVEMBER 18, 2004) OF OUR
OUTSTANDING COMMON SHARES, WHICH MAY LIMIT THE ABILITY OF YOURSELF OR OTHER
SHAREHOLDERS, WHETHER ACTING INDIVIDUALLY OR TOGETHER, TO PROPOSE OR DIRECT THE
MANAGEMENT OR OVERALL DIRECTION OF OUR COMPANY. ADDITIONALLY, THIS CONCENTRATION
OF OWNERSHIP COULD DISCOURAGE OR PREVENT A POTENTIAL TAKEOVER OF OUR COMPANY
THAT MIGHT OTHERWISE RESULT IN YOU RECEIVING A PREMIUM OVER THE MARKET PRICE FOR
YOUR COMMON SHARES.

As of November 18, 2004, our officers and directors beneficially own or
control approximately 21% (excluding all options and warrants exercisable within
60 days of November 18, 2004) of our outstanding common shares. These persons
will have the ability to control substantially all matters submitted to our
shareholders for approval and to control our management and affairs, including
extraordinary transactions such as mergers and other changes of corporate
control, and going private transactions.

A LARGE NUMBER OF COMMON SHARES ARE ISSUABLE UPON EXERCISE OF
OUTSTANDING COMMON SHARE PURCHASE OPTIONS, WARRANTS AND CONVERTIBLE PROMISSORY
NOTES. THE EXERCISE OR CONVERSION OF THESE SECURITIES COULD RESULT IN THE
SUBSTANTIAL DILUTION OF YOUR INVESTMENT IN TERMS OF YOUR PERCENTAGE OWNERSHIP IN
THE COMPANY AS WELL AS THE BOOK VALUE OF YOUR COMMON SHARES. THE SALE OF A LARGE
AMOUNT OF COMMON SHARES RECEIVED UPON EXERCISE OF THESE OPTIONS OR WARRANTS ON
THE PUBLIC MARKET TO FINANCE THE EXERCISE PRICE OR TO PAY ASSOCIATED INCOME
TAXES, OR THE PERCEPTION THAT SUCH SALES COULD OCCUR, COULD SUBSTANTIALLY
DEPRESS THE PREVAILING MARKET PRICES FOR OUR SHARES.

As of November 18, 2004, there are outstanding non-variable priced
common share purchase options and warrants entitling the holders to purchase
5,846,942 common shares at a weighted average exercise price of $2.02 per share.
There are no shares underlying promissory notes convertible into common stock.
The exercise price for all of the aforesaid warrants, may be less than your cost
to acquire our common shares. In the event of the exercise of these securities,
you could suffer substantial dilution of your investment in terms of your
percentage ownership in the company as well as the book value of your common
shares. In addition, the holders of the common share purchase options or
warrants may sell common shares in tandem with their exercise of those options
or warrants to finance that exercise, or may resell the shares purchased in
order to cover any income tax liabilities that may arise from their exercise of
the options or warrants.

OUR ISSUANCE OF ADDITIONAL COMMON SHARES, OR OPTIONS OR WARRANTS TO
PURCHASE THOSE SHARES, WOULD DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING
RIGHTS.

We are entitled under our certificate of incorporation to issue up to
25,000,000 shares of common stock. After taking into consideration our
outstanding common stock at November 18, 2004, we will be entitled to issue up
to 10,813,068 additional common shares. Our board may generally issue shares of
common stock, or options or warrants to purchase those shares, without further
approval by our shareholders based upon such factors as our board of directors
may deem relevant at that time. It is likely that we will be required to issue a
large amount of additional securities to raise capital to further our
development. It is also likely that we will be required to issue a large amount

-20-

of additional securities to directors, officers, employees and consultants as
compensatory grants in connection with their services, both in the form of
stand-alone grants or under our stock plans. We cannot give you any assurance
that we will not issue additional shares of common stock, or options or warrants
to purchase those shares, under circumstances we may deem appropriate at the
time.

OUR ISSUANCE OF ADDITIONAL COMMON SHARES IN EXCHANGE FOR SERVICES OR TO
REPAY DEBT, WOULD DILUTE YOUR PROPORTIONATE OWNERSHIP AND VOTING RIGHTS AND
COULD HAVE A NEGATIVE IMPACT ON THE MARKET PRICE OF OUR COMMON STOCK.

Our board may generally issue shares of common stock to pay for debt or
services, without further approval by our shareholders based upon such factors
as our board of directors may deem relevant at that time. For the past three
years and for the six months ended September 30, 2004, we issued a total of
2,051,497 shares for debt to reduce our obligations. The average price discount
of common stock issued for debt in this period, weighted by the number of shares
issued for debt in such period was 32.9%, 32%, 47.4% and 53.4% for the years
ended 2002, 2003, 2004 and the six months ended September 30, 2004,
respectively. For the past three years and for the six months ended September
30, 2004, we issued a total of 2,155,601 shares in payment for services. The
average price discount of common stock issued for services for services in this
period, weighted by the number of shares issued for services in such period was
43.9%, 55.4%, 46.3% and 41.4% for the years ended 2002, 2003, 2004 and the six
months ended September 30, 2004, respectively. It is likely that we will issue
additional securities to pay for services and reduce debt in the future. We
cannot give you any assurance that we will not issue additional shares of common
stock under circumstances we may deem appropriate at the time.

THE SALE OF OUR COMMON STOCK TO FUSION CAPITAL MAY CAUSE DILUTION AND
THE SALE OF THE SHARES OF COMMON STOCK ACQUIRED BY FUSION CAPITAL COULD CAUSE
THE PRICE OF OUR COMMON STOCK TO DECLINE.

The purchase price for the common stock to be issued to Fusion Capital
pursuant to the common stock purchase agreement will fluctuate based on the
price of our common stock. All shares in this offering are freely tradable.
Fusion Capital may sell none, some or all of the shares of common stock
purchased from us at any time. We expect that the shares offered by this
prospectus will be sold over a period of up to 30 months from the date of this
prospectus. Depending upon market liquidity at the time, a sale of shares under
this offering at any given time could cause the trading price of our common
stock to decline. The sale of a substantial number of shares of our common stock
under this offering, or anticipation of such sales, could make it more difficult
for us to sell equity or equity-related securities in the future at a time and
at a price that we might otherwise wish to effect sales.

THE ELIMINATION OF MONETARY LIABILITY AGAINST OUR DIRECTORS, OFFICERS
AND EMPLOYEES UNDER OUR CERTIFICATE OF INCORPORATION AND THE EXISTENCE OF
INDEMNIFICATION RIGHTS TO OUR DIRECTORS, OFFICERS AND EMPLOYEES MAY RESULT IN
SUBSTANTIAL EXPENDITURES BY OUR COMPANY AND MAY DISCOURAGE LAWSUITS AGAINST OUR
DIRECTORS, OFFICERS AND EMPLOYEES.

Our certificate of incorporation contains provisions which eliminate
the liability of our directors for monetary damages to our company and
shareholders. Our bylaws also require us to indemnify our officers and
directors. We may also have contractual indemnification obligations under our
agreements with our directors, officers and employees. The foregoing
indemnification obligations could result in our company incurring substantial
expenditures to cover the cost of settlement or damage awards against directors,

-21-

officers and employees, which we may be unable to recoup. These provisions and
resultant costs may also discourage our company from bringing a lawsuit against
directors, officers and employees for breaches of their fiduciary duties, and
may similarly discourage the filing of derivative litigation by our shareholders
against our directors, officers and employees even though such actions, if
successful, might otherwise benefit our company and shareholders.

ANTI-TAKEOVER PROVISIONS MAY IMPEDE THE ACQUISITION OF OUR COMPANY.

Certain provisions of the Nevada General Corporation Law have
anti-takeover effects and may inhibit a non-negotiated merger or other business
combination. These provisions are intended to encourage any person interested in
acquiring us to negotiate with, and to obtain the approval of, our Board of
Directors in connection with such a transaction. However, certain of these
provisions may discourage a future acquisition of us, including an acquisition
in which the shareholders might otherwise receive a premium for their shares. As
a result, shareholders who might desire to participate in such a transaction may
not have the opportunity to do so.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

In this prospectus we make a number of statements, referred to as
"FORWARD-LOOKING STATEMENTS" within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act"), and Section 21E of the
Securities Exchange Act of 1934 (the "Exchange Act"), which are intended to
convey our expectations or predictions regarding the occurrence of possible
future events or the existence of trends and factors that may impact our future
plans and operating results. The safe harbor for forward-looking statements
provided by the Private Securities Litigation Reform Act of 1995 does not apply
to us. We note, however, that these forward-looking statements are derived, in
part, from various assumptions and analyses we have made in the context of our
current business plan and information currently available to us and in light of
our experience and perceptions of historical trends, current conditions and
expected future developments and other factors we believe to be appropriate in
the circumstances. You can generally identify forward-looking statements through
words and phrases such as "SEEK", "ANTICIPATE", "BELIEVE", "ESTIMATE", "EXPECT",
"INTEND", "PLAN", "BUDGET", "PROJECT", "MAY BE", "MAY CONTINUE", "MAY LIKELY
RESULT", and similar expressions. When reading any forward looking statement you
should remain mindful that all forward-looking statements are inherently
uncertain as they are based on current expectations and assumptions concerning
future events or future performance of our company, and that actual results or
developments may vary substantially from those expected as expressed in or
implied by that statement for a number of reasons or factors, including those
relating to:

o whether or not markets for our products develop and, if they
do develop, the pace at which they develop;

o our ability to attract and retain the qualified personnel to
implement our growth strategies,

o our ability to obtain approval from the Food and Drug
Administration for our products;

o our ability to protect the patents on our proprietary
technology;

o our ability to fund our short-term and long-term financing
needs;

o changes in our business plan and corporate strategies; and

o other risks and uncertainties discussed in greater detail in
the sections of this prospectus, including those captioned
"RISK FACTORS" and "MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS".

-22-

Each forward-looking statement should be read in context with, and with
an understanding of, the various other disclosures concerning our company and
our business made elsewhere in this prospectus as well as other pubic reports
filed with the United States Securities and Exchange Commission (the "SEC"). You
should not place undue reliance on any forward-looking statement as a prediction
of actual results or developments. We are not obligated to update or revise any
forward-looking statement contained in this prospectus to reflect new events or
circumstances unless and to the extent required by applicable law.

USE OF PROCEEDS

This prospectus relates to shares of our common stock that may be
offered and sold from time to time by selling shareholders. We will receive no
proceeds from the sale of shares of common stock in this offering. However, we
may receive up to $6,000,000 in proceeds from the sale of our common stock to
Fusion Capital under a common stock purchase agreement in addition to the
$673,000 of proceeds we already received in connection with the common stock
already purchased by Fusion Capital and other accredited investors. We will use
the $673,000 of proceeds from Fusion Capital and the other accredited investors
for working capital purposes and no more than 20% of the such net proceeds for
the satisfaction of any portion of our debt (other than payment of trade
payables in the ordinary course of our business and prior practices), to redeem
any of our equity or equity-equivalent securities or to settle any outstanding
litigation (currently there is no outstanding litigation). Proceeds resulting
from the sale of shares to Fusion Capital will be utilized to initiate human and
animal studies of our Hemopurifier(TM) applications to treat HIV, Hepatitis-C
and pathogens that may be targeted as biological warfare candidates and costs
associated with the FDA approval process which we estimate to be approximately
$5,001,465 through the end of 2005 as well as for working capital and general
corporate purposes. The Company may use part of of the proceeds to pay certain
debts if the Company is unable to convert such debt into equity. If we were to
receive less than $1 million in proceeds from the sale of our common stock to
Fusion Capital, we estimate we will use approximately 90% of such funds for
working capital and research and development, with the remaining 10% to be used
for the repayment of debt. If we were to receive more than $1 million in
proceeds from the sale of our common stock to Fusion Capital, we estimate we
will use approximately 80% of such funds for working capital and research and
development, with the remaining 20% to be used for the repayment of debt. Should
any selling shareholder acquire the shares to be sold by exercising common share
purchase warrants, we would receive the proceeds from the exercise price. In
such an event we anticipate we would use the proceeds of such exercise for
working capital and general corporate purposes.

THE FUSION TRANSACTION
----------------------

GENERAL

On May 20, 2004, we entered into a common stock purchase agreement with
Fusion Capital Fund II, LLC pursuant to which we sold to Fusion Capital, and
Fusion Capital beneficially owns, 568,181 shares of our common stock and
warrants to purchase 568,181 shares of our common stock for aggregate
consideration of $250,000. The warrants have an exercise price of $0.76 and are
exercisable for five years from the date of the agreement. Under the common
stock purchase agreement, Fusion Capital also agreed to purchase on each trading
day during the term of the agreement, $10,000 of our common stock or an
aggregate of $6.0 million in addition to the $250,000 already purchased by
Fusion Capital. The $6.0 million of common stock is to be purchased over a 30

-23-

month period. The purchase price of the shares of common stock will be equal to
a price based upon the future market price of the common stock without any fixed
discount to the market price. Fusion Capital does not have the right or the
obligation to purchase shares of our common stock in the event that the price of
our common stock is less than $0.25. We will not be able to begin selling the
$6.0 million of common stock to Fusion Capital until such shares have been
registered on an effective registration statement under the Securities Act of
1933.

We have authorized the sale and issuance of 7,431,819 shares of our
common stock to Fusion Capital under the common stock purchase agreement of
which we are registering 7,431,819 common shares (exclusive of the 568,181
shares of common stock already purchased by Fusion Capital, the warrant grant to
Fusion Capital to purchase 568,181 shares of common stock and the 608,139 shares
of common stock issuable to Fusion Capital as a commitment fee). We estimate
that the maximum number of shares we will sell to Fusion Capital under the
common stock purchase agreement will be 7,431,819 shares (exclusive of the
568,181 shares of common stock already purchased by Fusion Capital, the warrant
grant to Fusion Capital to purchase 568,181 shares of common stock and the
608,139 shares of common stock issuable to Fusion Capital as a commitment fee)
assuming Fusion Capital purchases all $6.0 million of common stock in addition
to the $250,000 already purchased.

PURCHASE OF SHARES UNDER THE COMMON STOCK PURCHASE AGREEMENT

Under the common stock purchase agreement, on each trading day Fusion
Capital is obligated to purchase a specified dollar amount of our common stock.
Subject to our right to suspend such purchases at any time, and our right to
terminate the agreement with Fusion Capital at any time, each as described
below, Fusion Capital shall purchase on each trading day during the term of the
agreement $10,000 of our common stock. Fusion Capital does not commence making
any purchase until after the registration statement is declared effective. This
daily purchase amount may be decreased by us at any time. We also have the right
to increase the daily purchase amount at any time, provided however, we may not
increase the daily purchase amount above $10,000 unless our stock price is above
$1.00 per share for five consecutive trading days. The purchase price per share
is equal to the lesser of:

o the lowest sale price of our common stock on the purchase
date; or

o the average of the three (3) lowest closing sale prices of our
common stock during the twelve (12) consecutive trading days
prior to the date of a purchase by Fusion Capital.

The purchase price will be adjusted for any reorganization,
recapitalization, non-cash dividend, stock split, or other similar transaction
occurring during the trading days in which the closing sale price is used to
compute the purchase price. Fusion Capital may not purchase shares of our common
stock under the common stock purchase agreement if Fusion Capital, together with
its affiliates, would beneficially own more than 9.9% of our common stock
outstanding at the time of the purchase by Fusion Capital. However, even though
Fusion Capital may not receive additional shares of our common stock in the
event that the 9.9% limitation is ever reached, Fusion Capital is still
obligated to pay to us $10,000 on each trading day, unless the common stock
purchase agreement is suspended, an event of default occurs or the agreement is
terminated. Under these circumstances, Fusion Capital would be issued additional
shares in the future should its ownership subsequently become less than the
9.9%. Fusion Capital would have no right to receive such shares until its
ownership subsequently becomes less that the 9.9%. The number of shares to be
issued to Fusion Capital would be calculated using the price of the daily
purchase amount on the date we elect to sell our shares to Fusion Capital. There
are no penalties owed under such circumstances. Fusion Capital has the right at
any time to sell any shares purchased under the common stock purchase agreement
which would allow it to avoid the 9.9% limitation. Therefore, we do not believe
that Fusion Capital will ever reach the 9.9% limitation.

-24-

The following table sets forth the amount of proceeds we would receive
from Fusion Capital from the sale of shares of our common stock offered by this
prospectus at varying purchase prices in addition to the $250,000 already
received from Fusion Capital:

PERCENTAGE OUTSTANDING PROCEEDS FROM THE SALE OF
ASSUMED NUMBER OF SHARES TO BE AFTER GIVING EFFECT TO THE SHARES TO FUSION CAPITAL UNDER
AVERAGE ISSUED IF FULL ISSUANCE TO FUSION THE COMMON STOCK PURCHASE
PURCHASE PRICE PURCHASE CAPITAL(1) AGREEMENT
-------------- -------- ---------- ---------

$0.25 7,431,819 33.4% $1,857,955
$0.60(2) 7,431,819 33.4% $4,459,091
$1.00 6,000,000 28.9% $6,000,000
$1.50 4,000,000 21.3% $6,000,000
$2.00 3,000,000 16.9% $6,000,000
$5.00 1,200,000 7.5% $6,000,000

--------------------
(1) Based on 14,186,932 shares outstanding as of November 18, 2004.
Includes the number of shares issuable at the corresponding assumed
purchase price set forth in the adjacent column and the 608,139 shares
issuable to Fusion Capital as commitment shares.
(2) Closing sale price of our common stock on November 19, 2004.

We estimate that we will issue no more than 7,431,819 shares (exclusive
of the 568,181 shares of common stock already purchased by Fusion Capital, the
warrant grant to Fusion Capital to purchase 568,181 shares of common stock and
the 608,139 shares of common stock issuable to Fusion Capital as a commitment
fee) to Fusion Capital under the common stock purchase agreement. We have the
right to terminate the agreement without any payment or liability to Fusion
Capital at any time, including in the event that more than 7,431,819 shares
(exclusive of the 568,181 shares of common stock already purchased by Fusion
Capital, the warrant grant to Fusion Capital to purchase 568,181 shares of
common stock and the 608,139 shares of common stock issuable to Fusion Capital
as a commitment fee) are issuable to Fusion Capital under the common stock
purchase agreement.

MINIMUM PURCHASE PRICE

We have the right to set a minimum purchase price ("floor price") at
any time. Currently, the floor price is $0.75. We can increase or decrease the
floor price at any time upon one trading day prior notice to Fusion Capital.
However, the floor price cannot be less than $0.25. Fusion Capital shall not
have the right nor the obligation to purchase any shares of our common stock in
the event that the purchase price is less than the then applicable floor price.

OUR RIGHT TO SUSPEND

We have the unconditional right to suspend purchases at any time for
any reason effective upon one trading day's notice. Any suspension would remain
in effect until our revocation of the suspension. To the extent we need to use
the cash proceeds of the sales of common stock under the common stock purchase
agreement for working capital or other business purposes, we do not intend to
restrict purchases under the common stock purchase agreement.

-25-

OUR RIGHT TO INCREASE AND DECREASE THE DAILY PURCHASE AMOUNT

Under the common stock purchase agreement Fusion Capital has agreed to
purchase on each trading day during the 30 month term of the agreement, at least
$10,000 of our common stock or an aggregate of $6.0 million in addition to the
$250,000 previously purchased by Fusion Capital under the common stock purchase
agreement. We have the unconditional right to decrease the daily amount to be
purchased by Fusion Capital at any time for any reason effective upon one
trading day's notice. At our discretion, we may elect to sell more of our common
stock to Fusion Capital than the minimum daily amount.

We also have the right to increase the daily purchase amount as the
market price of our common stock increases. Specifically, for every $0.25
increase in Threshold Price above $0.75, we shall have the right to increase the
daily purchase amount by up to an additional $2,500. For example, if the
Threshold Price is $1.50 we would have the right to increase the daily purchase
amount up to an aggregate of $17,500. The "Threshold Price" is the lowest sale
price of our common stock during the five trading days immediately preceding our
notice to Fusion Capital to increase the daily purchase amount. If at any time
during any trading day the sale price of our common stock is below the Threshold
Price, the applicable increase in the daily purchase amount will be void.

OUR TERMINATION RIGHTS

We have the unconditional right at any time after the commencement of
sales of our common stock to Fusion Capital, excluding the $250,000 already
sold, for any reason to give notice to Fusion Capital terminating the common
stock purchase agreement. Such notice shall be effective one trading day after
Fusion Capital receives such notice.

EFFECT OF PERFORMANCE OF THE COMMON STOCK PURCHASE AGREEMENT ON OUR
SHAREHOLDERS

All shares registered in this offering will be freely tradable. It is
anticipated that shares registered in this offering will be sold over a period
of up to 30 months from the date of this prospectus. The sale of a significant
amount of shares registered in this offering at any given time could cause the
trading price of our common stock to decline and to be highly volatile. Fusion
Capital may ultimately purchase all of the shares of common stock issuable under
the common stock purchase agreement, and it may sell some, none or all of the
shares of common stock it acquires upon purchase. Therefore, the purchases under
the common stock purchase agreement may result in substantial dilution to the
interests of other holders of our common stock. However, we have the right at
any time for any reason to: (1) reduce the daily purchase amount, (2) suspend
purchases of the common stock by Fusion Capital and (3) terminate the common
stock purchase agreement

NO SHORT-SELLING OR HEDGING BY FUSION CAPITAL

Fusion Capital has agreed that neither it nor any of its affiliates
shall engage in any direct or indirect short-selling or hedging of our common
stock during any time prior to the termination of the common stock purchase
agreement.

EVENTS OF DEFAULT

Generally, Fusion Capital may terminate the common stock purchase
agreement without any liability or payment to us upon the occurrence of any of
the following events of default:

-26-

o the effectiveness of the registration statement of which this
prospectus is a part of lapses for any reason (including,
without limitation, the issuance of a stop order) or is
unavailable to Fusion Capital for sale of our common stock
offered hereby and such lapse or unavailability continues for
a period of ten (10) consecutive trading days or for more than
an aggregate of thirty (30) trading days in any 365-day
period;

o suspension by our principal market of our common stock from
trading for a period of three consecutive trading days;

o the de-listing of our common stock from our principal market
provided our common stock is not immediately thereafter
trading on the NASDAQ National Market, the NASDAQ National
SmallCap Market, the New York Stock Exchange or the American
Stock Exchange;

o the transfer agent`s failure for five trading days to issue to
Fusion Capital shares of our common stock which Fusion Capital
is entitled to under the common stock purchase agreement;

o any material breach of the representations or warranties or
covenants contained in the common stock purchase agreement or
any related agreements which has or which could have a
material adverse affect on us subject to a cure period of ten
trading days;

o a default by us of any payment obligation in excess of $1.0
million; or

o any participation or threatened participation in insolvency or
bankruptcy proceedings by or against us.

COMMITMENT SHARES ISSUED TO FUSION CAPITAL

Under the terms of the common stock purchase agreement Fusion Capital
has received 418,604 shares of our common stock as a commitment fee. In
connection with each purchase of our common stock by Fusion Capital, we will
issue up to 139,535 shares of common stock to Fusion Capital as an additional
commitment fee. These commitment shares are issued to Fusion Capital as a fee
for its purchase commitment made under the common stock purchase agreement.
These additional shares will be issued pro rata based on the proportion that a
dollar amount purchased by Fusion bears to the $6.0 million amount under the
purchase agreement with Fusion Capital. Unless an event of default occurs, these
shares must be held by Fusion Capital until 30 months from the date of the
common stock purchase agreement or the date the common stock purchase agreement
is terminated.

NO VARIABLE PRICED FINANCINGS

Until the termination of the common stock purchase agreement, we have
agreed not to issue, or enter into any agreement with respect to the issuance
of, any variable priced equity or variable priced equity-like securities unless
we have obtained Fusion Capital's prior written consent.

-27-

DESCRIPTION OF BUSINESS

GENERAL

Aethlon Medical, Inc. ("Aethlon Medical", "We" or the "Company"),
formerly Bishop Equities, Inc. ("Bishop"), was incorporated in Nevada in April
1991 to provide a public vehicle for participation in a business transaction
through a merger with or acquisition of a private company. In March 1993, we
successfully offered our common stock at $6.00 per share through an initial
public offering. In March 1999, Bishop began doing business as "Aethlon Medical,
Inc." In March 2000, the Company's Articles of Incorporation were amended to
formally change the name of the Company from "Bishop Equities, Inc." to "Aethlon
Medical, Inc."

BUSINESS DEVELOPMENT/ACQUISITIONS

On March 10, 1999, (1) Aethlon, Inc., a California corporation
("Aethlon"), (2) Hemex, Inc., a Delaware corporation ("Hemex"), the accounting
predecessor to the Company, and (3) Bishop, a publicly traded "shell" company,
completed an Agreement and Plan of Reorganization (the "Plan") structured to
result in Bishop's acquisition of all of the outstanding common shares of
Aethlon and Hemex (the "Reorganization"). The Reorganization was intended to
qualify as a tax-free transaction under Section 368 (a)(1)(B) of the 1986
Internal Revenue Code, as amended. Under the Plan's terms, Bishop issued 733,500
and 1,350,000 shares of its common stock to the common stock shareholders of
Aethlon and Hemex, respectively, such that Bishop then owned 100% of each
company.

Effective January 1, 2000, we entered into an agreement with Dr. Julian
Ambrus, the son of Dr. Clara Ambrus who was the original founder of Hemex, Inc.
Under this agreement, an invention and related patent rights for a method of
removing HIV and other viruses from the blood were assigned to us. This
invention further expands the established blood filtration patents already owned
by us. In addition to certain royalty payments equal to 8.75% of net sales of
the patented product, the consideration for the acquired rights included the
additional issuance of shares of our common stock to the inventors upon the
issuance of the patent. The term of the agreement expires on the expiration date
of the patents or any patent applications filed in connection with the
invention. There have been no sales of the patented product as of October 20,
2004. We initially issued 12,500 shares of restricted common stock to the
inventors upon the execution of the agreement. On March 4, 2003, the related
patent was issued and we issued 196,078 shares of restricted common stock to the
inventors.

On January 10, 2000, we acquired all the outstanding common stock of
Syngen Research, Inc. ("Syngen") in exchange for 65,000 shares of our restricted
common stock in order to establish research facilities in San Diego, California,
as well as employ Dr. Richard Tullis, the founder of Syngen. Dr. Tullis is a
recognized research scientist in the area of DNA synthesis and antisense. Syngen
had no significant assets, liabilities, or operations, and primarily served as
the entity through which Dr. Tullis performed research consulting services. As
such, the acquisition has been accounted for as an acquisition of assets in the
form of an employment contract with Dr. Tullis and not as a business
combination. Dr. Tullis was appointed to the Board of Directors of Aethlon
Medical and was elected its Vice President for Business Development. Effective
June 1, 2001, Dr. Tullis was appointed Chief Science Officer of Aethlon Medical,
replacing Dr. Clara Ambrus, who retired from the Company.

On April 6, 2000, we completed the acquisition of Cell Activation, Inc.
("Cell"). In accordance with the purchase agreement, we issued 99,152 shares of
restricted common stock and issued 50,148 options to purchase common stock in
exchange for all of the outstanding common shares and options to purchase common
stock of Cell. After the transaction, Cell became our wholly-owned subsidiary.

-28-

The acquisition was accounted for as a purchase. At March 31, 2001, management
determined that goodwill recognized in the purchase of Cell was impaired due to
the permanent suspension of operations by Cell, and, accordingly, treated the
related goodwill as fully impaired.

BUSINESS OF ISSUER

We are a development stage therapeutic device company focused on
expanding the applications of our Hemopurifier (TM) platform technology, which
is designed to rapidly reduce the presence of infectious viruses and other
toxins from human blood. In this regard, our core focus is the development of
therapeutic devices that treat HIV/AIDS, Hepatitis-C, and pathogens targeted as
potential biological warfare agents. To date, the Company has conducted and
published studies that measured the ability of the Hemopurifier(TM) to capture
HIV, Hepatitis-C, and gp120, which is a HIV surface protein that destroys immune
cells. All of the studies were conducted in Aethlon Medical laboratory
facilities under the supervision of Dr. Richard Tullis, the Company's Chief
Science Officer. The cost of materials required to perform each study did not
exceed $100,000. Each of the studies encompassed the filling of hollow-fiber
dialysis cartridges with antibodies that have been coupled to agarose beads and
then sealed within the cartridge. As a result, the coupled antibodies surround
the hollow-fibers, which have pores between 200-500 nanometers in size. Infected
human blood was then circulated through the cartridge and data was obtained to
measure the amount of the targeted pathogen that diffused through the fiber
pores and was captured by the immobilized antibodies. In pre-clinical testing,
we have published that our HIV-Hemopurifier removed 55% of HIV from human blood
in three hours and in excess of 85% of HIV in twelve hours. Additionally, the
HIV-Hemopurifier captured 90% of gp120, a toxic protein that depletes human
immune cells, during a one-hour pre-clinical blood study. We have also published
pre-clinical blood studies of our HCV-Hemopurifier(TM), which documented the
ability to capture 58% of the Hepatitis-C virus from infected blood in two
hours. We are currently conducting but have not published studies related to the
capture of other pathogens with the Hemopurifier(TM) including the capture of
pathogens with the Hemopurifier(TM) relating biological weapons which we are
currently seeking to commercialize. Our potential customers may not accept our
interpretation of results from our test sites until our customers repeat the
tests and independently verify the tests. Since inception, our only source of
revenue has been grants from certain agencies of the Federal Government,
subcontract revenue and sale of research and development. From the date of our
inception through 1999, we received a total of $1,424,012 in grant income. No
grant revenues have been received after 1999. Since then, from time to time, we
have applied for, but have not been awarded, any such grants. Since our current
focus is to develop, test and obtain approval of our products, we do not expect
to obtain subcontract revenue, nor do we expect to sell our research and
development expertise. Any future income derived from grant submissions is
likely to be the primary source of revenues until such time that our
Hemopurifier(TM) has been approved for sale in the marketplace.

The Hemopurifier(TM)

The HemopurifierTM is an expansive platform technology that converges
the established scientific principles of affinity chromatography (method of
selective capture of proteins, sugars, fats and organic compounds) and
hemodialysis (artificial kidneys) as a means to augment the natural immune
response of clearing infectious viruses and toxins from the blood before cells
and organs can be infected. The therapeutic goal of each Hemopurifier(TM)
application is to improve patient survival rates by reducing viral load and
preserving the immune function. We feel that the Hemopurifier will enhance and
prolong the benefit of current infectious disease drug therapies, and fill the
void for patients who inevitably become resistant to drug therapies. The
Hemopurifier(TM) is also being positioned to treat patients that might become
infected by a biological agent with no established drug or vaccine treatment.

-29-

Traditionally, hemodialysis has been used to remove urea and other
small metabolic toxins that build up in the blood of patients with acute or
chronic kidney failure. Acute renal failure is generally handled in the
intensive care unit using continuous renal replacement therapy (CRRT) while
chronic renal is treated using intermittent, thrice-weekly hemodialysis (IHD) in
a stand-alone dialysis clinic.

While there are several variations of technique, a catheter is most
often the primary method utilized to gain access to the blood, which is then
pumped through a hollow-fiber hemodialysis cartridge. Within the cartridge,
toxic salts, urea and excess water pass through small pores in the walls of the
hollow-fibers and are removed. Proteins and blood cells that are too large to
pass through the membrane are retained. The purified blood is then returned back
into circulation.

There are two issues in kidney dialysis as it is practiced today that
limit its application to a wide array of toxins and pathogens. Both issues are
related to the separation membranes. First, hemodialysis cartridges
non-selectively remove substances of a particular size from the blood. Thus in
addition to removing toxins, the dialyzer may also remove important substances
that the body would prefer to retain. Second, many important toxins are too
large pass through the dialysis membrane and are therefore not removed even when
it would be desirable.

We have solved these problems by designing a Hemopurifier(TM) cartridge
which has pores large enough to let the largest toxins pass through (i.e.
particles as large as whole viruses), yet selective enough to remove only the
targeted toxins. We employ the established principals of hollow-fiber dialysis
cartridges, but with pores large enough to allow for circulating infectious
virus and toxins to separate from the blood and diffuse through the fibers so
that it may be captured by binding agents or antibodies that surround the
fibers. Since the blood serves as a transport mechanism for viruses to infect
cells and organs, the Hemopurifier(TM) disrupts the viral infection cycle.
Materials such as antibodies, which bind only to their corresponding antigen,
provide selectivity, while the use of a sealed cartridge allows the process to
use large pore sizes that are normally incompatible with kidney dialysis.

The Hemopurifier(TM) platform technology is based on the immobilization
of antibodies or binding agents against infectious disease within hemodialysis
cartridges that traditionally have been established for use in treating kidney
failure. The typical cartridge is a clear plastic cylinder, approximately twelve
inches long and one and one-half inch in diameter. Sealed within the cartridge
are up to 10,000 hollow micro-fibers through which the blood flows during
treatment. The walls of each fiber are porous so that pathogens can diffuse out
of the blood to be captured by the antibodies or binding agents that surround
each of the fibers. The size of the fiber pores allows for the diffusion and
capture of pathogens up to 500 nanometers in size.

The binding antibodies or other selective agents are chemically bound
to the surface of glass or plastic beads located on the outside of the
hollow-fibers. This effectively prevents the active materials from entering the
bloodstream. Viruses and toxins in the blood diffuse or are transported through
the pores in the hollow-fibers and become trapped by the immobilized antibody.

In this way, materials of very large sizes are allowed enter the
cartridge while non-toxic materials of similar size readily leave and re-enter
the bloodstream. Blood cells and platelets, which are too large to enter the
membrane, remain in the hollow-fiber and are returned to the patient.
Importantly, the Hemopurifier(TM) cartridge does not require the development of
any new equipment. The cartridge fits directly onto the global infrastructure of
dialysis machines already located in hospitals and clinics.

-30-

Each Hemopurifier(TM) application is designed to be useful in clearing
infectious viruses and toxins from the entire blood stream before cells and
organs become infected. Science terminology defines this technique as a method
to inhibit pathogens from entering cells and organs, which is more commonly
known as "Entry Inhibitor" treatment. Traditionally, a vast majority of
infectious disease treatments have been drug-based therapies whose action has
been to inhibit or slow down the replication of viruses in cells that have
already been infected.

Infectious Disease

The current treatment for viral illnesses include vaccines and
antiviral drugs. Vaccines have been the most successful in curing viral diseases
(e.g. polio and smallpox). Unfortunately, newly emerging pathogens (e.g. SARS),
highly mutable RNA viruses (e.g., HIV and Hepatitis C virus) and exotic viruses
that might be used in terrorist attacks often do not have vaccine treatments.

Similarly, antiviral drugs are often useful in controlling viral infections.
However, there do not seem to be any general, broad-spectrum antiviral agents
similar to penicillin for bacteria and viruses capable of rapidly developing
drug resistant mutations. In addition, it generally takes years and millions of
dollars to develop vaccine and drug candidates that may or may not be approved
by the FDA.

Our Hemopurifier(TM) technology represents a new approach to treating
viral diseases. The treatment is designed to work with current treatments to
remove infectious virus, toxic viral proteins and injurious immunological
mediators directly from the blood of the patient. By removing circulating virus
and toxins from the blood that are captured by the Hemopurifier(TM), the
Hemopurifier(TM) cartridge prevents virus and toxins from infecting unaffected
tissues and cells. Scientifically, this action is known as a "Fusion Inhibitor"
since the ability for the virus to enter or fuse with host cells or organs is
inhibited.

The Hemopurifier(TM) is positioned as a therapeutic device that can be
rapidly developed to treat genetically engineered and drug and vaccine resistant
biowarfare agents. We recently demonstrated the ability to rapidly build and
test new antibody cartridges upon the receipt on an antibody against HIV which
was previously untested for its utility as an agent to be immobilized within the
Hemopurifier(TM) treatment cartridge. The process included the attachment of the
antibody to agarose beads to create an affinity or binding solution that was
immobilized within the hollow-fiber treatment cartridge as means to capture HIV
as it diffused through the fibers. Human blood infected with HIV was then
circulated through the cartridge to measure the ability of the Hemopurifier(TM)
to capture HIV over a range of time periods. Human blood infected with HIV was
also circulated through a control cartridge without immobilized antibodies as a
means to document an improved ability to capture infectious virus when the
immobilized antibody was utilized in the treatment cartridge. Upon completion of
the circulation of infected blood, diagnostic studies were implemented to verify
the viral capture rate of the Hemopurfier(TM) with and without the immobilized
antibody. The data was then provided in a confidential report to the antibody
manufacturer within ten days of the original receipt of the antibody in our
labs.

We have submitted proposals to the NIH regarding the use of the
Hemopurifier(TM) as a potential treatment for patients infected with HIV and
Hepatitis-C. We also plan to submit other proposals to the NIH related to the
use of the Hemopurifier(TM) as a countermeasure against biological weapons. We
will make these submissions upon the completion of animal studies that suggest a
potential relevance of the Hemopurifier(TM) as a treatment for pathogens
considered to be the greatest threat as biological weapons. Additionally, we
will seek beneficial relationships with other agencies and organizations upon
the publication of animal studies related to the potential use of the

-31-

Hemopurifier(TM) against biological weapon candidates. In this regard, we are
developing a standard Hemopurifier(TM) to be utilized within the established
infrastructure of dialysis machines, as well as Hemopurifiers(TM) that are
designed to be wearable treatment cartridges. The initial application of the
wearable cartridge relies on the blood pressure of the infected patient to drive
the circulation of blood into the cartridge without the need for a pumping
device such as a dialysis machine. Future generations of the Hemopurifier(TM)
may involve the convergence of miniature cartridges with portable wearable pumps
as a means to increase virus and toxin clearance through continuous blood
circulation over extended periods time.

Biological Weapons

On January 29, 2004, we announced that we are developing treatments to
combat infectious agents that may be used in biological warfare and terrorism.
This expands our intent to treat infectious diseases beyond HIV/AIDS and
Hepatitis-C. We are working to design Hemopurifiers(TM) that can be rapidly
deployed by armed forces as wearable post-exposure treatments on the
battlefield, as well as dialysis-based treatments for civilian populations. We
are focusing our bio-defense strategy on treating "Category A" agents, which are
considered by the Centers for Disease Control (CDC) to be the worst bioterror
threats. These agents include the viruses that cause Smallpox, hemorrhagic
fevers such as Ebola and Marburg, the Anthrax bacteria, and Botulinum toxin
which is a gangrene toxin. Each treatment device will be based on the same
proprietary HemopurifierTM filtration technology that is utilized in advancing
our HIV/AIDS, and Hepatitis-C treatments. We have not yet published any data
related to the treatment of any "Category A" agent. We are currently conducting
but have not published studies related to the capture of pathogens relating to
biological weapons which we are currently seeking to commercialize.

Viral and bacterial illnesses have always been with us and have
sometimes been used as weapons. In recent times, some nations have refined and
weaponized several pathogens for use in warfare. Although there are specific
differences between bioweapons grade organisms in the way they are transmitted
or how they are designed to kill, nearly all result in sepsis.

Sepsis is essentially a dysregulation of the immune system, often
described as a septic shock. Microbial invasion sets off an immunological chain
reaction mediated by proteins produced by cells and tissues. Over expression of
these protein immunological mediators "confuses" the immune system, ultimately
resulting in major organ failure and death. Hemodialysis has been used for many
years as a treatment in septic shock, which is generally acknowledged to be
beneficial. Unfortunately, the technique is limited in the size of the toxins is
can remove and inherently non-selective, making it less than completely
effective.

Perhaps just as important is the speed with which new treatment options
can be developed. Each new bioweapon comes without a corresponding treatment.
Typical biowarfare pathogens have been genetically engineered to contain genes
that make them resistant to available drugs and vaccines. This presents a
substantial problem since the development of new drugs or vaccines usually takes
several years. However, our Hemopurifier(TM), when targeted to the new pathogen
can often be constructed within a matter of a few months. All that is required
is the existence of an antibody or binding protein that selectively adheres to
the surface of the target pathogen or toxin. In this regard, our
Hemopurifier(TM) is positioned as a rapid response countermeasure against
untreatable pathogens that are released as biowarfare agents.

-32-

On March 4, 2004, we announced that we entered into a cooperative
agreement with the National Center for Biodefense (NCBD) at George Mason
University in Manassas, Virginia. The purpose of the agreement is to broaden
scientific resources, and jointly pursue business and funding opportunities
within the federal government. Under the terms of the agreement, each party will
contribute to the preparation of proposals. One party will be designated as
having the primary responsibility for the preparation of all technical and
non-technical aspects of the proposal including but not limited to (i) marketing
and promotional effort, (ii) proposal content, assembly and production, (iii)
liaison with government customer personnel, and (iv) oral discussions and
negotiations, if held. The party designated as the subcontractor shall
contribute to the preparation of the proposal to the extent necessary to assure
the inclusion of a thorough and accurate description of its responsibilities to
the proposed project. We will each bear our own expenses for our own performance
of proposal and related work under the cooperative agreement. There are
proprietary data provisions which prohibit George Mason University and us from
using certain information other than in the submission of proposals to
government agencies or reports that must be submitted in connection with George
Mason University's performance. The duration of the agreement last until
earliest of the following events to occur:

a) The failure or inability of either party to provide the
support for the preparation of identified proposal
opportunities.
b) Mutual consent of the parties to terminate the agreement.
c) Lapse of 24 months from the effective date of this agreement
without award of a contract to support one or more projects

unless procurement is still open.
d) The indictment, suspension, or debarment by the federal
government of either party.
e) A receiver, trustee in bankruptcy or other custodian of the
property or assets of a party hereto is appointed, or if
either party hereto commits an act of bankruptcy or is
adjudicated bankrupt or insolvent.
f) During the term of the agreement, it is determined that either
party may be ineligible for award due to a conflict of
interest.

Manufacturing

We plan to manufacture a small number of cartridges sufficient to
complete clinical trials in our current facilities. Ultimately we will outsource
cartridge manufacturing to a GMP/ISO9001 compliant contract manufacturer.
Hemopurifiers(TM) to treat pathogens that are bioweapons candidates will be sold
directly to the U.S. military and the federal government. Sale of Hemopurifiers
to treat HIV and Hepatitis C will be directed through organizations with
established distribution channels.

Treatment Classification

Our treatments for infectious diseases are classified as
"Immunotherapies" that augment or mimic the immune system's response of clearing
infectious viruses, and as "Entry Inhibitors" that curb the re-infection process
by physically removing infectious viruses before healthy cells are infected.

Immunotherapy - The "Immunotherapy" classification is a result of our
ability to mimic the immune system's natural response of generating antibodies
to fight foreign invaders such as viruses. Antibodies are specifically created
by the immune system to attach themselves to the antigens (chemical compounds
which cause antibodies to be produced e.g. proteins and other component parts of
viruses), forming an antigen-antibody complex which neutralizes the invader. The
neutralized antigens are then physically removed from the bloodstream by organs
such as the liver.

-33-

Our treatment technology uses a hemodialysis cartridge (e.g. artificial
kidney or plasmapheresis cartridge) modified to contain immobilized antibodies
targeted against specific viruses. Plasmapheresis cartridges are utilized to
separate blood plasma from blood cells in treating various diseases. Viruses in
the blood are captured inside the cartridge through the formation of an
antigen-antibody complex, physically removing the virus from circulation. As a
result, the physical elimination of infectious virus occurs without the
side-effects common in drug therapy.

Entry Inhibitor - Our treatment technology is also classified as an
"Entry Inhibitor" since the re-infection process is interrupted when viruses are
removed from circulation before cells can be infected. As a result, the
replication cycle is inhibited as infectious virus is denied entry into the
cells that it seeks to kill. From a therapeutic standpoint, entry inhibitors
represent a departure from the traditional drug action of inhibiting viral
replication within the cells that have already been infected. The novel
therapeutic mechanism offered by "Entry Inhibitors", combined with the high
level of treatment resistance to currently approved drugs, positions "Entry
Inhibitors" as an important new treatment strategy to assist HIV/AIDS and
Hepatitis-C infected individuals in managing their disease.

Heavy Metal Treatments

Historically, the original Hemopurifier(TM) treatment applications were
developed to treat individuals burdened with heavy metal intoxicants. Products
developed in this category include treatments for iron overload, aluminum
intoxication, lead poisoning, and cisplatin removal. Cisplatin is a platinum
compound used to treat cancers but can be toxic in large amounts. The plan to
commercialize the iron and aluminum applications of the Hemopurifier(TM) were
discontinued when our research and development activities were realigned. In
fiscal year 2001, we realigned our research and development activities from
developing Hemopurifiers(TM) to treat harmful metals to developing
Hemopurifiers(TM) for the treatment of HIV/AIDS and Hepatitis-C. Additionally,
our management changed as the board of directors appointed Mr. Joyce to replace
Mr. Barry as the President and CEO in June of 2001. We are not currently
pursuing the commercialization of these products as it is focused on developing
infectious disease related Hemopurifiers(TM).

Research and Development

In fiscal year 2001, we realigned our research and development
activities from developing Hemopurifiers(TM) to treat harmful metals to
developing Hemopurifiers(TM) for the treatment of HIV/AIDS and Hepatitis-C. As a
result of this strategic realignment, we initiated the consolidation of all
scientific and administrative functions into our San Diego facilities during the
fourth quarter of fiscal year 2001. This consolidation was completed during the
first quarter of fiscal year 2002 and our facilities in Buffalo, N.Y. were
closed. In 2004, we expanded our research effort to include the development of
Hemopurifiers(TM) as countermeasures against biological weapons.

The cost of research and development, all of which has been charged to
operations, amounted to approximately $400,000 over the last two fiscal years.

Patents

Effective January 1, 2000, we entered into an agreement with a related
party under which an invention and related patent rights for a method of
removing HIV and other viruses from the blood using the Hemopurifier(TM) were
assigned to us by the inventors in exchange for a royalty to be paid on future
sales of the patented product or process and shares of our common stock. On
March 4, 2003, the related patent was issued and we issued 196,078 shares of
restricted common stock. The Hemopurifier(TM) is protected by seven issued
patents in the United States, Europe and Japan. Three additional patent
applications deal with treatments for virus infection and manufacturing methods.
The following is a list of patents and patent applications we currently hold.
Patent Issuance #7 below, and application #9 are exclusively licensed to us.

-34-

ISSUED PATENTS:

1. Ambrus CA and Horvath C (1986) Removing heavy metal ions from
blood. USA No. 4,612,122 (Issued September 16, 1986).
2. Ambrus CA and Horvath C (1986) Removing heavy metal ions from
blood. Europe No. 0,073,888 (Issued April 23, 1986).
3. Ambrus CA and Horvath C (1986) Removing heavy metal ions from
blood. Japan No: 110,047/82 (Issued June 7, 1994).
4. Ambrus CA and Horvath C (1987) Blood purification. US Patent
No. 4,714,556 (Issued December 22, 1987)
5. Ambrus CA and Horvath C (1988) Blood purification. US Patent
No. 4,787,974 (Issued November 29, 1988)
6. Ambrus CA and Stadler A (2000) Process for immobilizing a
chelator on silica device containing immobilized chelator and
use thereof. US Patent 6,071,412 (June 6, 2000).
7. Ambrus JL and Scamurra D (2003) Method for removing HIV and
other viruses from blood. US Patent 6,528,057 (issued March 4,
2003);

PATENT APPLICATIONS:

8. Ambrus CA and Stadler A (2000) Process for immobilizing a
chelator on silica device containing immobilized chelator and
use thereof. International Application PCT/US99/17125
9. Ambrus JL and Scamurra D (2003) Method for removing HIV and
other viruses from blood. International Application
PCT/US99/19448 (filed August 30, 1999)
10. Tullis, R.H. (2003) Lectin affinity hemodialysis method for
removal of HIV other viruses from blood. US Patent
Application, filed January 3, 2003.

The issued patents cover a range of applications of the
Hemopurifier(TM) and variations thereof. The initial applications
(Ambrus and Horvath, 1986 and related issues) refer to methods and
constructions for removing heavy metals from blood. The U.S. patent
will expire on September 16, 2006. The Japanese patent will expire on
June 7, 2011. The European patent expired on April 23rd of 2003.

Ambrus and Horvath (1987 and 1988) refer to methods and constructions
for using modified hollow-fiber dialysis devices for removing
antigenically reactive substances from blood (e.g. antibodies,
antigens, toxins and pathogens such as bacteria or viruses). These
patents will expire on March 13, 2005 and October 22, 2007,
respectively.

Ambrus and Stadler (2000) refers to improved methods for attaching
chelators to glass beads (silica) in order to more efficiently remove
heavy metals (e.g. iron, lead and aluminum). This patent will expire on
July 27, 2018. Ambrus and Scammura (2003) is a patent that speaks to
the removal of viruses and viral fragments from the blood of infected
patients using a modified hollow-fiber dialysis device. This patent
will expire in March 5, 2019. The European application is ongoing.

Tullis R.H. (2003) is a patent application that covers the use of
lectins as an improved means of removing HIV and other viruses from blood.
Lectins are naturally occurring proteins that bind sugars and complex
carbohydrates to form stable complexes. Lectins derived from plants, also known
as plant antibodies, are immobilized within the Hemopurifier(TM) because of
their known ability to selectively bind to HIV and other envelope viruses with
sugar-based surfaces. This patent is not yet issued.

-35-

Any resulting medical device or process will require approval by the
FDA, and have not yet begun efforts to obtain FDA approval on any infectious
disease related Hemopurifier(TM). Since many of our patents were issued in the
1980's, they may expire before FDA approval, if any, is obtained. However, we do
not believe that the near term expiration of certain patents will have an
adverse material effect on our operations as we believe that certain patents
applications filed and/or other patents issued more recently will help to
protect the proprietary nature of the Hemopurifier(TM) treatment technology.
Additionally, we intend to file new patents as improvements, modifications, or
applications of our Hemopurifier(TM) technology occur.

INDUSTRY

The industry for treating infectious disease is extremely competitive,
and companies developing new treatment procedures are faced with severe
regulatory challenges. In this regard, only a very small percentage of companies
that are developing new treatments will actually obtain approval from the FDA to
market their treatments in the United States. Currently, the market for treating
HIV/AIDS & Hepatitis-C (HCV) is comprised of drugs designed to reduce viral load
by inhibiting viral replication or by inhibiting viruses from infecting healthy
cells. Unfortunately, these drugs are toxic, they are expensive to develop, and
inevitably, infected patients will develop viral strains that become resistant
to drug treatment. As a result, patients are left without treatment options.

COMPETITION

We are advancing our Hemopurifier(TM) technology as a treatment to
enhance and prolong current drug therapies by removing the viral strains that
cause drug resistance. The Hemopurifier(TM) is also designed to prolong life for
infected patients who have become drug resistant and have no other treatment
options. Therefore, we do not believe that the Hemopurifier(TM) competes with
the current drug therapy treatment standard. However, if the industry considered
the Hemopurifier(TM) to be a potential replacement for drug therapy, then the
marketplace for the Hemopurifier(TM) would be extremely competitive. We are also
pursuing the development of Hemopurifiers(TM) to be utilized as treatment
countermeasures against biological weapons. In this regard, we are targeting the
treatment of pathogens, which are microbial organisms that cause disease, in
which current treatments are either limited or do not exist. We believe that we
are the sole developer of viral filtration systems (Hemopurifiers(TM)) to treat
HIV-AIDS, Hepatitis-C, and Biological weapons. However, we face competition from
the producers of the following alternative treatment options for the biodefense
industry.

Antibiotics and Anti-Viral Drugs

Antibiotics are the most immediately available first line of therapy
for bacterial infections. Unfortunately, bacteria, previously controlled through
the application of antibiotics, are developing widespread resistance to
available treatments. Several bacteria have become completely resistant to many
existing antibiotics and developing new antibiotics is a long, time consuming
process. In addition, treatment with antibiotics poses problems such as being
available in sufficient quantities, uncertainty of which antibiotics are
appropriate to use, efficacy against the particular organism, adverse reactions,
and, timely initiation of therapy and completion of treatment regimens.

For viral infections, specific drugs can be effective, but there are no
drugs that are effective against the broad-spectrum of known pathogenic viruses.
At present, only a few antiviral drugs are available to treat the multitude of
viruses that may be used as biological weapons. For example, Ribavirin is the
treatment of choice for certain hemorrhagic fever viral infections, but has no
current application to Ebola and Marburg infections. Some newer antiviral drugs
have shown significant promise in animal models, and limited case reports in
humans are encouraging. The lack of broad-spectrum antivirals takes on added
significance in light of the ability of many viruses to rapidly develop
resistance.

-36-

Current efforts to define the genetic details of normal and pathogenic
agents on a molecular level promise the hope of new points of attack. Genomic
analysis of the viral pathogen and the animal model response to infection
provide valuable information enabling the development of novel treatment and
prevention strategies. However, even the rapid elucidation of the genetic
structure of a specific pathogen does not provide sufficient information to
design an effective cure. For example, while SARS has been known of for more
than a year and several strains have had their complete genetic sequence
determined, no effective treatment has yet emerged.

One promising approach in drug development has been the advent of
combinatorial chemistry, which provides the ability to rapidly synthesize huge
libraries of related compounds, many of which have never been seen before.
However, the real roadblock to progress is the need to laboriously screen each
new compound for efficacy in fighting a particular disease. In that sense,
combinatorial drugs confront the same problem as the traditional method of
screening of plant and animal extracts for active compounds that block viral or
bacterial replication.

Thus while science can radically increase the number of drug
candidates, the slow step will always be showing that they are both effective
and safe. Even effective new drugs represent an irresistible selective pressure
on natural and un-natural pathogens to develop resistance, something at which
they are clearly very efficient.

Vaccines:

Historically, the most effective tool in controlling infections has
been vaccines. Polio, measles, mumps and many other viral illnesses are now
controllable and smallpox has been eradicated from nature. Licensed vaccines for
hemorrhagic fever viruses are limited to yellow fever (though others are in the
trial phase of approval). Promising vaccines are being tested for some of the
other diseases, but research is hampered by the need to conduct the studies in
secure laboratories.

There are other problems with relying on vaccines as our primary
protection against a biological weapons attack. While vaccination may be an
effective prophylaxis in a military setting, it would not work for civilian
populations for several reasons:

o For vaccination to be effective, the target populate must be
known and limited. Expense and logistical challenges would
make it virtually impossible to vaccinate the entire
population of the United States against even a single agent.

o The agent used would have to be known prior to its deployment.
With the exception of the smallpox vaccine, vaccination is of
no use post-exposure to a pathogen.

o Even if every person in the United States could be vaccinated,
it would be impossible to vaccinate him or her against every
agent for which a vaccine is available.

o Even if a vaccine is available, it would only be useful if the
agent involved has not been genetically altered so that it is
drug or vaccine resistant.

Vaccines that are both efficacious and safe are notoriously difficult
to develop. History has shown that developing vaccines can be a slow process and
may not even be possible for highly mutable pathogens like HIV and Hepatitis C.
Moreover, current vaccine strategies often carry significant risk for
complications. For example, smallpox vaccine, which uses attenuated strains of a
live virus, can occasionally cause illness or death by infection from the very
organism that usually provides protection.

-37-

In terms of a bioterrorist attack, anthrax vaccine can serve as an
example of our capability in treating a well recognized threat. Only one anthrax
vaccine, licensed in 1970, is available. This vaccine, produced by the Bioport
Corporation, consists of a membrane-sterilized culture filtrate of an avirulent,
non-encapsulated strain of anthrax. The data in support of the license consisted
of a single field study. The vaccine efficacy was 92.5% effective in this small
trial. In December 1985, 15 years after the vaccine was licensed, the FDA's
advisory panel reviewed the efficacy of the anthrax vaccine but did not respond
to the effectiveness of the current vaccine to inhalational exposure anthrax
infection.

The shortcomings of the current vaccine have spurred studies of new
anthrax vaccine products. The new vaccines include protective antigen-based
vaccines, e.g., purified protein from B. ANTHRACIS culture or live-attenuated
spore vaccine. One of the immune correlates of protection of anthrax vaccines is
likely to be the antibody response to protective antigen. However, the
quantitative relation of anti-protective antigen antibody to protection has not
been established in humans. The relationship between neutralization of
protective antigen and the lethal effects of anthrax is currently being
investigated by the Department of Defense.

Because of the difficulties associated with classic vaccine
development, new methods for generating vaccines are being researched.
Recombinant DNA technology combined with combinatorial biochemistry is now being
employed in an attempt to rapidly identify and develop vaccine candidates and
passive immunotherapies. In the phage display system, cloned viral or bacterial
proteins, or even cloned antibodies, are individually displayed on the surface
of bacterial viruses. Phage proteins can be rapidly screened to find out which
ones are the most immunologically reactive. Directed evolution can then be used
to make even more effective antigenic materials. Even better, the best of these
are already in a form that can be used to produce enough of the material to test
in animals.

The principal drawback to the system is the need to use fermentation
techniques to produce sufficient quantities of purified material, uncontaminated
by the organisms used to produce them. The amount of material required to
inoculate a sizeable population requires large fermentation systems, which are
expensive to set up and already in short supply. The restriction on medical
fermentation capacity is already so severe that many companies have had to delay
offering approved products to the public.

GOVERNMENT REGULATION

Our activities and products are significantly regulated by a number of
governmental entities, including the FDA in the United States. These entities
regulate, among other things, the manufacture, testing, safety, effectiveness,
labeling, documentation, advertising and sale of our future commercial products.
We must obtain regulatory approval for a product in all of these areas before we
can commercialize the product. Product development within this regulatory
framework takes a number of years and involves the expenditure of substantial
resources. Many products that initially appear promising ultimately do not reach
the market because they are found to be unsafe or ineffective when tested. Our
inability to commercialize a product would significantly impair our ability to
earn future revenues.

In the United States, vaccines and immunotherapeutics for human use are
subject to FDA approval as "biologics" under the Public Health Service Act and
"drugs" under the Federal Food, Drug and Cosmetic Act. The steps required before
a new product can be commercialized include: pre-clinical studies in animals,
clinical trials in humans to determine safety and efficacy and FDA approval of
the product for commercial sale.

-38-

One of the main problems facing the FDA is and has been the need to
ensure public safety while at the same time preventing unsafe treatments from
reaching the public. The balance between these competing pressures has resulted
in a long and deliberate process for approving new treatments, which is not
responsive to the urgent need for new treatments presented in the era of
bioterrorism. For most drugs, the principal research and development phases
takes one to three years before a drug is even submitted to FDA for testing. The
clinical research program takes two to 10 years, depending on the agent and
clinical indication. The marketing application review period requires an average
of one year. Once a product is approved for market, long-term post-marketing
surveillance, inspections, and product testing must be performed to ensure the
quality, safety, and efficacy of the product, as well as appropriate product
labeling.

Many biological warfare defense products pose difficult problems with
regard to obtaining clinical efficacy data. For deadly infectious agents and
toxins, human efficacy trials cannot ethically be performed, as such studies
would involve exposing healthy human volunteers to a lethal or permanently
disabling agent without proven therapy and field trials. In most cases, field
trials are not feasible because pockets of natural exposure do not exist.

Additionally, data obtained at any stage of testing is susceptible to
varying interpretations, which could delay, limit or prevent regulatory
approval. Moreover, during the regulatory process, new or changed drug approval
policies may cause unanticipated delays or rejection of our product. We may not
obtain necessary regulatory approvals within a reasonable period of time, if at
all, or avoid delays or other problems in testing our products. Moreover, even
if we received regulatory approval for a product, the approval may require
limitations on use, which could restrict the size of the potential market for
the product.

A product's safety and effectiveness in one test is not necessarily
indicative of its safety and effectiveness in another test. Moreover, we may not
discover all potential problems with a product even after completing testing on
it. Some of our products and technologies have undergone only pre-clinical
testing. As a result, we do not know whether they are safe or effective for
humans. Also, regulatory authorities may decide, contrary to our findings, that
a product is unsafe or not as effective in actual use as its test results
indicated. This could prevent the product's widespread use, require its
withdrawal from the market and/or expose us to liability.

The FDA has proposed standards in approving new treatments to counter
chemical and biological weapons based solely on animal tests that predict
efficacy in humans. Some scientific considerations for animal studies include
the toxic agent's pathophysiologic mechanism, how the test treatment prevents
toxicity and the validity of the clinical endpoint in humans. In addition, data
showing that treatment safety in humans is required.

The FDA requires that the manufacturing facility that produces a
licensed product meet specified standards, undergo an inspection and obtain an
establishment license prior to commercial marketing. Subsequent discovery of
previously unknown problems with a product or its manufacturing process may
result in restrictions on the product or the manufacturer, including withdrawal
of the product from the market. Failure to comply with the applicable regulatory
requirements can result in fines, suspensions of regulatory approvals, product
recalls, operating restrictions and criminal prosecution.

For therapeutic products, these mechanisms include expedited review and
fast-track development, as well as accelerated approval and priority review of
marketing applications. For licensure, a biological warfare defense product must
have an acceptable quality, safety, efficacy, and potency profile. Likewise, the
product must have acceptable stability characteristics and be produced in

-39-

compliance with current good manufacturing practices. Product safety will still
be evaluated in healthy human volunteers at doses and routes of administration
anticipated in field use. The net result is that a complete review of the
marketing application for a priority product can be accomplished in as little as
six months. FDA also requires that product recipients be given follow-up after
treatment to affirm product safety and efficacy.

We have completed preclinical studies that demonstrate the removal of
HIV and Hepatitis C virus from infected human blood. We are now in the process
of developing our manufacturing protocols and seeking to obtain regulatory
approval from the FDA to initiate clinical trials. The following outline
references an anticipated clinical path required to obtain market clearance from
the FDA so that we can begin sales of the Hemopurifier(TM) within the United
States.

FOR HIV AND HEPATITIS C VIRUS TREATMENT

o ANIMAL SAFETY TRIALS - COMPLETE JULY 1, 2005
o IDE SUBMISSION AND FDA APPROVAL FOR HUMAN SAFETY TRIAL - NOVEMBER 1,
2005
o HUMAN SAFETY TRIAL - 90-120 DAYS - COMPLETE FEBRUARY 1, 2006
o FDA MARKET CLEARANCE - COMPLETE JULY 1, 2006

FOR BIODEFENSE APPLICATIONS

o ANIMAL TRIALS - COMPLETE APRIL 1, 2005
o IDE SUBMISSION AND FDA APPROVAL FOR HUMAN SAFETY TRIAL - JULY, 2005
o HUMAN SAFETY TRIAL - 90-120 DAYS - COMPLETE NOVEMBER 1, 2005
o FDA MARKET CLEARANCE - COMPLETE APRIL 15, 2006

WE HAVE ESTIMATED THE DIRECT COSTS FOR PERFORMING THE PROPOSED SUBMISSIONS AND
CLINICAL TESTS ON THE TIMETABLE GIVEN ABOVE AT $5,001,465 THROUGH THE END OF
CALENDAR 2005

TIMELINES FOR TREATMENT DEVELOPMENT

The table below projects suggested timelines for the generation and
testing of the current targets and a plan for larger pathogenic bacteria. Such
timeline does not included the FDA approval process outlined above. The
timelines presuppose the development of a working relationship with government
or private agencies capable of handling biowarfare agents.

-40-

BIOWARFARE AGENT DEVELOPMENT TIMELINES
-----------------------------------------------------------------------------------------------------------------------
PROCESS 2 MONTHS 4 MONTHS 6 MONTHS 8 MONTHS 10 MONTHS 12 MONTHS
-----------------------------------------------------------------------------------------------------------------------

OBTAIN TOXINS Anthrax toxins
Botulinum toxin

OBTAIN/GROW CULTURES Smallpox purified virus
Ebola (Reston) purified virus

ISOLATE VIRUS STOCKS
Marburg - purified virus
Plague surface proteins
Tularemia surface proteins

DEVELOP/OBTAIN ANTIBODIES Anthrax toxins Antisera
Botulinum toxin antiserum
Smallpox surface proteins
Plague surface proteins MAb
Tularemia surface proteins
Develop Hemofiltration

BUILD/TEST HEMOPURIFIER polymer
Anthrax (Antisera) - guinea pigs
Botulinum toxin (Antiserum) - guinea pigs, dogs
Ebola (Reston) - lectin capture - guinea pigs, monkeys
Marburg - lectin capture - guinea pigs
Smallpox - antibody capture, monkey
Plague - antibody capture, guinea pig
Tularemia - rabbit

STRATEGIC ISSUES

The strategic issues Aethlon faces in implementing a biodefense program
include:

o Complete manufacturing agreements that allow for mass
deployment of Hemopurifier cartridges.

o Partnering with the Department of Defense, The National
Institutes of Health, and other government agencies as a means
to fund product development.

o Partnering with existing biocontainment facilities such as
Fort Detrick and the Centers for Disease Control or
independent biocontainment facilities such as those available
at the University of California at Davis to perform the animal
studies in BSL-4 maximum containment.

-41-

Because we may market our products abroad, we will be subject to
varying foreign regulatory requirements. Although international efforts are
being made to harmonize these requirements, applications must currently be made
in each country. The data necessary and the review time varies significantly
from one country to another. Approval by the FDA does not ensure approval by the
regulatory bodies of other countries. Any future collaborators will also be
subject to all of the above-described regulations in connection with the
commercialization of products utilizing our technology.

PRODUCT LIABILITY

The risk of product liability claims, product recalls and associated
adverse publicity is inherent in the testing, manufacturing, marketing and sale
of medical products. We do not have clinical trial liability insurance coverage.
There can be no assurance that future insurance coverage will to be adequate or
available. We may not be able to secure product liability insurance coverage on
acceptable terms or at reasonable costs when needed. Any liability for mandatory
damages could exceed the amount of our coverage. A successful product liability
claim against us could require us to pay a substantial monetary award. Moreover,
a product recall could generate substantial negative publicity about our
products and business and inhibit or prevent commercialization of other future
product candidates.

SUBSIDIARIES

We have four dormant wholly-owned subsidiaries, Aethlon, Inc., Cell
Activation, Inc., Syngen Research, Inc., and Hemex, Inc.

EMPLOYEES

At November 18, 2004, we had seven full-time employees, comprised of
our Chief Executive Officer, our Chief Science Officer, our Director of
Administrative Services, a research scientist, a research associate, our senior
bioengineer and a lab manager. We utilize, whenever appropriate, contract and
part time professionals in order to conserve cash and resources. We believe our
employee relations are good. None of our employees is represented by a
collective bargaining unit.

DESCRIPTION OF PROPERTIES

We currently rent approximately 3,200 square feet of executive office
space and laboratory space at 3030 Bunker Hill Street, Suite 4000, San Diego,
California 92109 at the rate of $7,520 per month rent, plus approximately $5,000
per month in maintenance and other fees on a lease that expires on July 12,
2006.

DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

The names, ages and positions of our directors and executive officers
as of November 18, 2004 are listed below:

-41-

NAMES TITLE OR POSITION AGE
---------------------------------------------------------------------------------

James A. Joyce (1) Chairman, President, Chief Executive 43
Officer and Secretary

Richard H. Tullis, PhD (2) Vice President, Chief Science Officer 59
and Director

Edward C. Hall (3) Vice President, Chief Financial Officer 63

Franklyn S. Barry, Jr. Director 64

Edward G. Broenniman Director 68

Calvin M. Leung (4) Director 67

(1) Effective June 1, 2001, Mr. Joyce was appointed our President and
Chief Executive Officer, replacing Mr. Barry, who continues as a member of the
board of directors. Mr. Barry also served as a consultant to us on strategic
business issues from June 1, 2001 to May 31, 2003.

(2) Effective June 1, 2001, Dr. Tullis was appointed as our Chief
Science Officer, replacing Dr. Clara M. Ambrus, who retired.

(3) Effective August 14, 2002, Mr. Hall was elected our Vice President
and Chief Financial Officer, replacing Robert S. Stefanovich, who resigned July
26, 2002.

(4) Effective June 30, 2003, Mr. Leung was elected to our board of
directors.

Resumes of Management:

James A. Joyce, Chairman, President and CEO
-------------------------------------------

Mr. Joyce is the founder of Aethlon Medical, and has been the Chairman
of the Board and Secretary since March 1999. On June 1, 2001, our Board of
Directors appointed Mr. Joyce with the additional roles of President and CEO. In
1992, Mr. Joyce founded and was the sole shareholder in James Joyce &
Associates, an organization that provided management consulting and corporate
finance advisory services to CEOs and CFOs of publicly traded companies.
Previously, from 1989 to 1991, Mr. Joyce was Chairman and Chief Executive
Officer of Mission Labs, Inc. Prior to that Mr. Joyce was a principal in charge
of U.S. operations for London Zurich Securities, Inc. Mr. Joyce is a graduate
from the University of Maryland.

Edward C. Hall, Vice President, Chief Financial Officer
-------------------------------------------------------

Mr. Hall has been Vice President, Chief Financial Officer of the
Company since August 2002, on a part-time basis. Mr. Hall spends time as CFO as
required by the needs of the Company's business, which have increased in the
last year. Currently, the time that Mr. Hall spends on our business ranges from
several hours to several days per week, depending on the fluctuating financial
management requirements of the business. Mr. Hall has held senior financial
executive positions with both public and privately-held life sciences and
technology companies for over 25 years. In the last five years, prior to his
appointment as Chief Financial Officer of Aethlon Medical, he served as Vice
President and Chief Financial Officer of three companies: Chromagen, Inc, a
private biotech tools company which develops proteomic and genomic assays for
use in drug discovery; Cytel Corporation, a public biotech company and developer
of anti-inflammatory drugs and Medical Device Technologies, a public medical
device company. Mr. Hall is also Vice President, Chief Financial Officer of
Alliance Pharmaceutical Corp., a public research-based pharmaceutical
development company, and he is a Partner of Tatum CFO Partners, LLP.

-42-

Richard H. Tullis, Ph.D., Vice President, Chief Science Officer
---------------------------------------------------------------

Dr. Tullis has been Vice President and a director of the Company since
January 2000 and Chief Science Officer since June 2001. Dr. Tullis has extensive
biotechnology management and research experience, and is the founder of Syngen
Research, a wholly-owned subsidiary of Aethlon Medical, Inc. Previously, Dr.
Tullis co-founded Molecular Biosystems, Inc., a former NYSE company. At
Molecular Biosystems, Dr. Tullis was Director of Oligonucleotide Hybridization,
Senior Research Scientist and Member of the Board of Directors. In research, Dr.
Tullis developed and patented the first application of oligonucleotides to
antisense antibiotics and developed new methods for the chemical synthesis of
DNA via methoxy- hosphorochloridites. Dr. Tullis also co-developed the first
applications of covalently coupled DNA-enzyme conjugates using synthetic
oligonucleotides during his tenure at Molecular Biosystems. In 1985, Dr. Tullis
founded, and served as President and CEO of Synthetic Genetics, Inc., a pioneer
in custom DNA synthesis, which was sold to Molecular Biology Resources in 1991.
Dr. Tullis also served as interim-CEO of Genetic Vectors, Inc., which completed
its IPO under his management, and was co-founder of DNA Sciences, Inc., a
company that was eventually acquired by Genetic Vectors. Dr. Tullis received his
Ph.D. in Biochemistry and Cell Biology from the University of California at San
Diego, and has done extensive post-doctoral work at UCSD, USC, and the
University of Hawaii.

Franklyn S. Barry, Jr.
----------------------

Mr. Barry has over 25 years of experience in managing and building
companies. He was President and Chief Executive Officer of Hemex from April 1997
through May 31, 2001 and our President and CEO from March 10, 1999 to May 31,
2001. He became a director of Aethlon Medical on March 10, 1999. From 1994 to
April 1997, Mr. Barry was a private consultant. Included among his prior
experiences are tenures as President of Fisher-Price and as co-founder and CEO
of Software Distribution Services, which today operates as Ingram Micro-D, an
international distributor of personal computer products. Mr. Barry serves on the
Board of Directors of Merchants Mutual Insurance Company.

Edward G. Broenniman
--------------------

Mr. Broenniman became a director of Aethlon Medical on March 10, 1999.
Mr. Broenniman has 30 years of management and executive experience with
high-tech, privately-held growth firms where he has served as a CEO, COO, or
corporate advisor, using his expertise to focus management on increasing
profitability and stockholder value. He is the Managing Director of The Piedmont
Group, LLC, a venture advisory firm. Mr. Broenniman recently served on the Board
of Directors of publicly-traded QuesTech (acquired by CACI International), and
currently serves on the Boards of four privately-held firms. His nonprofit
Boards are the Dingman Center for Entrepreneurship's Board of Advisors at the
University of Maryland, the National Association of Corporate Directors,
National Capital Chapter and the Board of the Association for Corporate Growth,
National Capital Chapter.

Calvin M. Leung
---------------

Mr. Leung became a director of Aethlon Medical on June 30, 2003. He is
the President of Mandarin Investment Corporation, specializing in investment,
development and management of mobile home and recreational vehicle parks in
California, Arizona and the Midwest since 1975. He has syndicated a number of
land and housing developments in the western United States.

Mr. Leung, born in Hong Kong, received his advanced education in the
United States where he was awarded a doctorate degree in psychology specializing
in experimental research. He taught at the university level for several years.

-43-

Our Board of Directors has the responsibility for establishing broad
corporate policies and for overseeing our overall performance. Members of the
Board are kept informed of our business activities through discussions with the
President and other officers, by reviewing analyses and reports sent to them,
and by participating in Board and committee meetings. Our bylaws provide that
each of the directors serves for a term that extends to the next Annual Meeting
of Shareholders of the Company. Our Board of Directors presently has an Audit
Committee and a Compensation Committee on each of which Messrs. Barry,
Broenniman and Leung serve. Mr. Barry is Chairman of the Audit Committee, and
Mr. Broenniman is Chairman of the Compensation Committee.

Non-employee Board members are accruing stock options and cash
compensation according to the plan approved in August 2000. Employee directors
receive no compensation.

FAMILY RELATIONSHIPS.

There are no family relationships between or among the directors,
executive officers or persons nominated or charged by us to become directors or
executive officers

There are no arrangements or understandings between any two or more of
our directors or executive officers. There is no arrangement or understanding
between any of our directors or executive officers and any other person pursuant
to which any director or officer was or is to be selected as a director or
officer, and there is no arrangement, plan or understanding as to whether
non-management shareholders will exercise their voting rights to continue to
elect the current board of directors. There are also no arrangements, agreements
or understanding between non-management shareholders that may directly or
indirectly participate in or influence the management of our affairs.

REGULATORY AND CLINICAL ADVISOR

Kenneth R. Michael, Pharm.D. R.A.C.
-----------------------------------

Dr. Michael is the President of KRM Associates LLC, a regulatory and
clinical affairs consulting organization. He is the former VP of Regulatory
Affairs and Quality Assurance at Siemens Medical Systems, and he is the founder,
past President and Chairman of The Regulatory Affairs Professional Society. He
is also the founder of the San Diego Regulatory Affairs Network.

SCIENCE ADVISORY BOARD

Each person listed below is a current member of our Science Advisory
Board. The role of the Science Advisory Board is to provide scientific guidance
related to the development of our Hemopurifier(TM) technology. Unlike the
members of our board of directors, the Science Advisory Board members are not
involved in the management or operations of our company. Members of the Science
Advisory Board are paid $500 per day for services rendered either on-site or at
a mutually agreeable location.

Jean-Claude Chermann, Ph.D.
---------------------------

Dr. Chermann is a pioneer in the study of retroviruses, and was the
principal investigator of the research team that collaborated in the first
isolation and characterization of HIV at the Pasteur Institute in 1983. Dr.
Chermann was also the Director of Research of INSERM (French National Institute
of Health and Medical Research) and also held the position of Director of
Research of Unit INSERM U322 on "Retrovirus and Associated Diseases" from 1989
until June 2001 when he accepted his current role as Chief Scientific Director
of Urrma Biopharma based in Montreal, Canada, and Research & Development
Director of URRMA R&D, based in Aubagne, France.

-44-

We entered into a consulting agreement with Dr. Chermann on October 1,
2002 with services to be provided on a month-to-month basis at a rate of $3,500
per month. As per the agreement, Dr. Chermann provides us with up to 20 hours of
scientific advisory services that are specifically related to the development of
our HIV-Hemopurifier(TM). Either party may terminate the agreement with thirty
days advance notice.

Larry Cowgill, D.V.M., Ph.D.
----------------------------

Dr. Cowgill is a Professor in the Department of Medicine and
Epidemiology at the School of Veterinary Medicine, University of
California--Davis and has nearly 30 years of experience as a clinical instructor
in small animal internal medicine, nephrology and hemodialysis. He currently
Heads the Companion Animal Hemodialysis Units at the Veterinary Medical Teaching
Hospital at UC Davis and the UC Veterinary Medical Center-San Diego. Dr. Cowgill
is also Associate Dean for Southern California Clinical Programs and is
Co-Director of the University of California Veterinary Medical Center-San Diego.
Prior to his appointment at the University of California, he was a National
Institutes of Health (NIH) Special Research Fellow at the University of
Pennsylvania School of Veterinary Medicine and at the Renal Electrolyte Section
at the University of Pennsylvania School of Medicine, where he conducted
research in basic renal physiology and clinical nephrology. Dr. Cowgill received
his D.V.M. from the University of California--Davis School of Veterinary
Medicine and his Ph.D. in Comparative Medical Sciences from the University of
Pennsylvania, where he also completed his internship and Residency training in
Small Animal Internal Medicine. He became a Diplomat of the American College of
Veterinary Internal Medicine in 1977. Dr. Cowgill has published extensively in
the area of veterinary nephrology and has established a Clinical Fellowship in
Renal Medicine and Hemodialysis, which is the first of its kind in veterinary
Medicine.

Pedro Cuatrecasas, M.D.
-----------------------

Dr. Cuatrecasas was President of the Pharmaceutical Research Division
of Parke-Davis Co., and Corporate Vice President for Warner Lambert Company from
1989 until his retirement in 1997. From 1986 to 1989, he served as SVP and
Director of Glaxo Inc. For the prior ten years, he was VP/R&D and Director, of
the Burroughs Wellcome Company. During his career in pharmaceutical research, he
was involved in the discovery, development and marketing registration of more
than 40 novel medicines. Dr. Cuatrecasas is widely recognized for the invention
and development of affinity chromatography which is a method for the selective
capture of proteins, sugars, fats and inorganic compounds. He is a member of the
National Academy of Sciences, The Institute of Medicine, and the American
Academy of Arts & Sciences, and he has authored more than 400 original
publications.

Nathan W. Levin, M.D.
---------------------

Dr. Levin is recognized as a leading authority within the hemodialysis
industry. He is the Medical and Research Director of the Renal Research
Institute, LLC, a joint venture between Fresenius Medical Care - North America
and Beth Israel Medical Center, New York. Dr. Levin also serves as Professor of
Clinical Medicine at the Albert Einstein College of Medicine.

-45-

Raveendran (Ravi) Pottathil, Ph.D.
----------------------------------

Dr. Pottathil was the Section Manager for Retroviruses (focus on HIV
and HCV) and Tumor markers and PCR diagnostics at Hoffman La Roche from 1985 to
1992. He then co-founded Specialty Biosystems, Inc, a venture of Specialty Labs,
one of the largest independent reference laboratories in California. Dr.
Pottathil has also advised the World Health Organization's Sexually Transmitted
Diseases and Global Vaccination Program. Dr. Pottathil has worked with Dr.
Robert Huebner of the NIH in immunology and virology at The Jackson Laboratory,
and with Drs. David Lang and Wolfgang Joklik at Duke University on interferons,
anti-tumor RNAs and antigenic suppression of tumorigenic retroviruses. Academic
positions include: Assistant Professor at the University of Maryland School of
Medicine; Associate Professor at the City of Hope Medical Center in Duarte,
California where he published extensively with Dr. Pedro Cuatrecasas (one of
developers of affinity chromatography); and Adjunct Professor in Cellular and
Molecular Biology at Down State Medical Center and Rutgers University. As a
virologist and molecular biologist, Dr. Pottathil has over 40 refereed
publications to his credit and has been a Director of OncQuest, Inc., GeneQuest,
Inc., Specialty Laboratories Asia in Singapore and Specialty Ranbaxy in India.
Currently, Dr. Pottathil is the President of AccuDx, Inc. a pharmaceutical
diagnostics company he founded in 1996.

Claudio Ronco, M.D.
-------------------

Dr. Ronco is the Director of the Dialysis and Renal Transplantation
Programs of St. Bartolo Hospital in Vicenza, Italy. He has published 17 books on
nephrology and dialysis and has written or co-authored over 350 scientific
articles. Dr. Ronco also serves on the editorial board of 12 scientific
journals, is a director of three international scientific societies, and is
recognized as being instrumental in the introduction of continuous
hemofiltration and high flux dialysis in Europe.

Ken Alibek, M.D., Ph.D., D.Sc.
------------------------------

Dr. Alibek is the Executive Director of Education at the National
Center for Biodefense at George Mason University (GMU), and is a Distinguished
Professor at GMU as well. Dr. Alibek specializes in medical and scientific
research dedicated to developing new forms of protection against biological
weapons and other infectious diseases.

Formerly, Dr. Alibek was a Soviet Army Colonel, and served as First
Deputy Chief of the civilian branch of the Soviet Union's biological weapons
program until he defected to the United States in 1992 and subsequently served
as a consultant to numerous U.S. government agencies in the areas of medical
microbiology, biological weapons defense, and biological weapons
nonproliferation. Dr. Alibek has worked with the National Institutes of Health,
testified extensively before the U.S. Congress on nonproliferation of biological
weapons and is the author of Biohazard: The Chilling True Story of the Largest
Covert Biological Weapons Program in the World--Told from Inside by the Man Who
Ran It, published by Random House Books. He holds numerous patents, is widely
published in science journals, and has provided over 300 lectures and
presentations to military and civilian universities, as well as foreign
governments. The December 2003 issue of the Acumen Journal of Life Sciences
named Dr. Alibek as one of top five biological warfare experts in the nation.

We entered into a consulting agreement with Dr. Alibek on October 27,
2004 with services to be provided for a one year term. As per the agreement, Dr.
Alibek provides us with up to 24 hours per month of scientific advisory services
in connection with advancing the development of the Hemopurifier(TM) technology
as a potential countermeasure against pathogens targeted as biological weapons.
As consideration for the services to be provided, we shall compensate Dr. Alibek
with a four year option to purchase up to 80,000 shares of our common stock at
an exercise price of $0.53 per share.

-46-

Charles Bailey, Ph.D.
---------------------

Dr. Bailey is the former commander of the U.S. Army Medical Research
Institute of Infectious Diseases (USAMRIID). Dr. Bailey has 25 years U.S. Army
experience in R&D and management in infectious diseases and biological warfare
defense. As an officer of the Defense Intelligence Agency, Dr. Bailey wrote
extensively on foreign biological warfare capabilities. Dr. Bailey is currently
the Executive Director for Research & International Relations at the National
Center for Biodefense at George Mason University (GMU), and is a Distinguished
Professor of Biology at GMU as well. The Acumen Journal of Life Sciences named
Dr. Bailey as one of the top five biological warfare experts in the nation.

We entered into a consulting agreement with Dr. Bailey on October 27,
2004 with services to be provided for a one year term. As per the agreement, Dr.
Bailey provides us with up to 24 hours per month of scientific advisory services
in connection with advancing the development of the Hemopurifier(TM) technology
as a potential countermeasure against pathogens targeted as biological weapons.
As consideration for the services to be provided, we shall compensate Dr. Bailey
with a four year option to purchase up to 80,000 shares of our common stock at
an exercise price of $0.53 per share.

Members of the Scientific Advisory Board do not receive any
compensation for service on the Board.

INVOLVEMENT IN LEGAL PROCEEDINGS.

To the best of our knowledge, during the past five years, none of the
following occurred with respect to a present or former director or executive
officer of the Company: (1) any bankruptcy petition filed by or against any
business of which such person was a general partner or executive officer either
at the time of the bankruptcy or within two years prior to that time; (2) any
conviction in a criminal proceeding or being subject to a pending criminal
proceeding (excluding traffic violations and other minor offenses); (3) being
subject to any order, judgment or decree, not subsequently reversed, suspended
or vacated, of any court of any competent jurisdiction, permanently or
temporarily enjoining, barring, suspending or otherwise limiting his involvement
in any type of business, securities or banking activities; and (4) being found
by a court of competent jurisdiction (in a civil action), the SEC or the
Commodities Futures Trading Commission to have violated a federal or state
securities or commodities law, and the judgment has not been reversed, suspended
or vacated.

CODE OF ETHICS.

Our Board of Directors is in the process of preparing a code of ethics
which would apply to all of our officers, directors and employees.

EXECUTIVE COMPENSATION

The following table sets forth compensation received for the fiscal
years ended March 31, 2002 through 2004 by our Chief Executive Officer and all
other executive officers.

LONG TERM COMPENSATION
--------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------- ------------------------ ----------
SECURITIES LONG ALL
UNDERLYING TERM OTHER
NAMED EXECUTIVE OFFICER AND RESTRICTED OPTIONS INCENTIVE COMP-
PRINCIPAL POSITION YEAR SALARY(1) BONUS OTHER STOCK & SARS PLAN ENSATION
------ ------------ ------- ---------- ------------ ----------- ---------- ----------

James A. Joyce 2004 $180,000 $-- $ -- $ -- -- $ -- $ --
PRESIDENT AND CHIEF 2003 180,000 -- -- -- -- -- --
EXECUTIVE OFFICER 2002 180,000 -- -- -- 250,000 -- --

Richard H. Tullis, Ph.D. 2004 $150,000 $-- $ -- $ -- -- $ -- $ --
VICE PRESIDENT AND CHIEF 2003 150,000 -- -- -- 250,000 -- --
SCIENCE OFFICER 2002 150,000 -- -- -- 30,000 -- --

Edward C. Hall (2) 2004 28,530(2) $-- $ -- $ -- -- $ -- $ --
VICE PRESIDENT, CHIEF 2003 25,000 -- -- -- -- -- --
FINANCIAL OFFICER 2002 N/A -- -- -- -- -- --

-47-

----------

(1) The remuneration described in the above table does not include our
cost of benefits furnished to the named executive officers, including premiums
for health insurance and other personal benefits provided to such individuals
that are extended to all of our employees in connection with their employment.
Perquisites and other personal benefits, securities, or property received by an
executive officer are either the lesser of $50,000 or 10% of the total salary
and bonus reported for each named executive officer, except as otherwise
disclosed.

(2) Mr. Hall became a part-time employee and was elected our Chief
Financial Officer on August 14, 2002. He is compensated on an hourly basis, a
portion of which, amounting to $5,706 in fiscal 2004, is paid to Tatum CFO
Partners, LLP , of which he is a partner. Tatum CFO Partners, LLP is paid a
resource fee for making available its intellectual capital to Mr. Hall as CFO of
the Company, including its on-line contact network and its proprietary financial
data base.

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS GRANT TABLE

The following table provides certain information with respect to
individual grants during the last fiscal year to each of our named executive
officers of common share purchase options or stock appreciation rights ("SARs")
relating to our common shares:

COMMON SHARES AS PERCENTAGE OF
UNDERLYING GRANT OF GRANTS TO ALL EXERCISE OR
NAMED EXECUTIVE OFFICER OPTIONS OR SARS EMPLOYEES BASE PRICE EXPIRATION DATE
----------------------------- ------------------------ -------------------- ------------------ ------------------------

James A. Joyce,
CHAIRMAN, PRESIDENT AND CEO 0 N/A N/A N/A

Richard H. Tullis, Ph.D,
VICE PRESIDENT, CHIEF
SCIENCE OFFICER 0 N/A N/A N/A

Edward C. Hall
VICE PRESIDENT, CHIEF
FINANCIAL OFFICER 0 N/A N/A N/A

STOCK OPTIONS AND STOCK APPRECIATION RIGHTS EXERCISE AND VALUATION TABLE

The following table sets forth the number of common stock options, both
exercisable and unexercisable, held by each of our Named Executive Officers and
the value of any in-the-money options at November 18, 2004, utilizing a value of
$0.60 per share, the closing price of the Company's common stock on the OTCBB on
November 19, 2004:

-48-

---------------------------------------------
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED IN-THE-MONEY
SHARES OPTIONS/SARS OPTIONS/SARS
ACQUIRED VALUE (EXERCISABLE/ (EXERCISABLE/
NAMED EXECUTIVE OFFICER ON EXERCISE REALIZED UNEXERCISABLE) UNEXERCISABLE)
-------------------------------------- ---------------- -------------- ----------------------- ----------------------

James A. Joyce -- -- 250,000 / 0 $0 / $0

Richard H. Tullis -- -- 280,000 / 0 $0 / $0

Edward C. Hall -- -- N/A N/A

EMPLOYMENT AGREEMENTS

We entered into an employment agreement with Mr. Joyce effective April
1, 1999. Effective June 1, 2001, Mr. Joyce was appointed President and Chief
Executive Officer and his base annual salary was increased from $120,000 to
$180,000. Under the terms of the agreement, his employment continues at a salary
of $180,000 per year for successive one year periods, unless given notice of
termination 60 days prior to the anniversary of his employment agreement.

We entered into an employment agreement with Dr. Tullis effective
January 10, 2000. Effective June 1, 2001, Dr. Tullis was appointed our Chief
Science Officer of the Company. His compensation under the agreement was
modified in June 2001 from $80,000 to $150,000 per year. Under the terms of the
agreement, his employment continues at a salary of $150,000 per year for
successive one-year periods, unless given notice of termination 60 days prior to
the anniversary of his employment agreement. Dr. Tullis was granted 250,000
stock options to purchase our common stock in connection the completing certain
milestones, such as the initiation and completion of certain clinical trials,
the submission of proposals to the FDA and the filing of a patent application.

Both Mr. Joyce's and Dr. Tullis' agreements provide for medical
insurance and disability benefits, one year of severance pay if their employment
is terminated by us without cause or due to change in our control before the
expiration of their agreements, and allow for bonus compensation and stock
option grants as determined by our Board of Directors. Both agreements also
contain restrictive covenants preventing competition with us and the use of
confidential business information, except in connection with the performance of
their duties for the Company, for a period of two years following the
termination of their employment with us.

Effective August 14, 2002, Mr. Hall was elected our Vice President and
Chief Financial Officer. His employment is subject to 30 days' notice, with no
severance pay provisions, in accordance with his employment agreement. He
receives no medical or other benefits from us.

STOCK OPTION GRANTS

Our 2000 Stock Option Plan (the "Plan"), adopted by us in August 2000,
provides for the grant of incentive stock options ("ISOs") to full-time
employees (who may also be Directors) and nonstatutory stock options ("NSOs") to
non-employee Directors, consultants, customers, vendors or providers of
significant services. The exercise price of any ISO may not be less than the
fair market value of our Common Stock on the date of grant or, in the case of an
optionee who owns more than 10% of the total combined voting power of all
classes of our outstanding stock, not be less than 110% of the fair market value
on the date of grant. The exercise price, in the case of any NSO, must not be
less than 75% of the fair market value of our Common Stock on the date of grant.
The amount available under the Plan is 500,000 options.

At November 18, 2004, we had granted 47,500 options under the Plan,
with 452,500 available for future issuance. We issued the remaining 1,966,415
options (of which 637,800 have been exercised or cancelled) outside the Plan.

-49-

At November 18, 2004, we had outstanding options to purchase 1,376,115
shares of Common Stock. See "Security Ownership of Certain Beneficial Owners and
Management."

OUTSTANDING STOCK PURCHASE WARRANTS

Common Stock purchase warrants

At November 18, 2004, we had outstanding a total of 4,470,827 warrants,
exercisable at prices between $0.25 - 6.50 per share and with expiration dates
from 2004 - 2007.

See "Security Ownership of Certain Beneficial Owners and Management."

MANAGEMENT'S DISCUSSION AND ANALYSIS

OR PLAN OF OPERATION

The following discussion of our consolidated financial condition and
results of operations should be read in conjunction with our consolidated
financial statements and their explanatory notes appearing elsewhere in this
prospectus.

Certain statements contained herein that are not related to historical
results, including, without limitation, statements regarding the Company's
business strategy and objectives, future financial position, expectations about
pending litigation and estimated cost savings, are forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Securities Exchange Act") and
involve risks and uncertainties. Although we believe that the assumptions on
which these forward-looking statements are based are reasonable, there can be no
assurance that such assumptions will prove to be accurate and actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, but are not
limited to, regulatory policies, competition from other similar businesses, and
market and general economic factors. All forward-looking statements contained in
this prospectus are qualified in their entirety by this statement.

PLAN OF OPERATION

We are a development stage therapeutic device company that has not yet
engaged in significant commercial activities. The primary focus of our resources
is the advancement of our proprietary Hemopurifier(TM) platform treatment
technology, which is designed to rapidly reduce the presence of infectious
viruses and toxins in human blood. Our main focus during fiscal year 2004 was to
prepare our HIV-Hemopurifier(TM) to treat HIV/AIDS, and our HCV-Hemopurifier(TM)
to treat Hepatitis-C for human clinical trials. We are also working to advance
pathogen filtration devices to treat infectious agents that may be used in
biological warfare and terrorism. See "DESCRIPTION OF BUSINESS" above.

We plan to continue our research and development activities related to
our Hemopurifier(TM) platform technology, with particular emphasis on the
advancement of our lead product candidates for the treatment of HIV/AIDS. We
plan to continue our pre-clinical trials for both our HIV/AIDS Hemopurifier(TM)
products as well as for our biodefense Hemopurifier(TM) products. We plan to
start small human clinical trials for HIV patients in fiscal year 2005. We also
plan to implement a regulatory strategy for the use of our Hemopurifier(TM) for
biodefense treatments in fiscal year 2005 pursuant to a recent rule implemented
by the FDA for medical countermeasures to weapons of mass destruction. Under
this rule, in situations where it is deemed unethical to conduct efficacy
studies in humans, a treatment can be reviewed for approval on the basis of
efficacy in the most relevant animal species and safety data in humans.

We expect to add additional employees in the next twelve months, as
required to support our increased research and development effort that will
include expanding our goal beyond treating infectious diseases HIV/AIDS and
Hepatitis-C and new applications to combat infectious agents that may be used in
biological warfare and terrorism. This will involve designing Hemopurifier(TM)
products that can be rapidly deployed by armed forces as wearable post-exposure

-50-

treatments on the battlefield, as well as dialysis-based treatments for civilian
populations. This will entail developing the new treatment device based on the
same proprietary Hemopurifier(TM) filtration technology that is utilized in
advancing our HIV/AIDS, and Hepatitis-C treatments. An important part of this
will include our cooperative agreement with the National Center for Biodefense
at George Mason University to jointly pursue business and funding opportunities
within the federal government.

Accordingly, due to this increase in activity during the next twelve
months, we anticipate increasing our spending on research and development during
the next twelve months. Additionally, associated with our anticipated increase
in research and development expenditures, we anticipate purchasing significant
amounts of equipment and tenant improvements, during this period to support our
laboratory and testing operations.

Our operations to date have consumed substantial capital without
generating revenues, and we will continue to require substantial and increasing
capital funds to conduct necessary research and development and pre-clinical and
clinical testing of our Hemopurifier(TM) products, as well as market any of
those products that receive regulatory approval. We do not expect to generate
revenue from operations for the foreseeable future, and our ability to meet our
cash obligations as they become due and payable is expected to depend for at
least the next several years on our ability to sell securities, borrow funds or
a combination thereof. Our future capital requirements will depend upon many
factors, including progress with pre-clinical testing and clinical trials, the
number and breadth of our programs, the time and costs involved in preparing,
filing, prosecuting, maintaining and enforcing patent claims and other
proprietary rights, the time and costs involved in obtaining regulatory
approvals, competing technological and market developments, as well as our
ability to establish collaborative arrangements, effective commercialization,
marketing activities and other arrangements. We expect to continue to incur
increasing negative cash flows and net losses for the foreseeable future.

RESULTS OF OPERATIONS

THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE THREE MONTHS
ENDED SEPTEMBER 30, 2003

Operating Expenses

Consolidated operating expenses were $561,947 for the three months
ended September 30, 2004, versus $265,136 for the comparable period ended
September 30, 2003. This increase of 112% in operating expenses is principally
attributable to increased professional fees and payroll and related expenses due
to increased legal and accounting expenses associated with increased financing
and investor relations activities and increased administrative and laboratory
staff.

Net Loss

We recorded a consolidated net loss of $348,605 and $287,130 for the
quarters ended September 30, 2004 and 2003, respectively. The increase in net
loss of 21.4% was primarily attributable to increased operating expenses, offset
partially by a reversal of approximately $228,000 in over-accrued interest
expense.

Basic and diluted loss per common share were ($0.03) for the three
month period ended September 30, 2004 compared to ($0.04) for the same period
ended September 30, 2003. This reduction in loss per share was primarily
attributable to the greater number of common shares outstanding during the three
month period ended September 30, 2004, as compared to the three month period
ended September 30, 2003, partially offset by the increased net loss for the
three month period ended September 30, 2004, as compared to the three month
period ended September 30, 2003.

SIX MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THE SIX MONTHS ENDED
SEPTEMBER 30, 2003

-51-

Operating Expenses

Consolidated operating expenses were $1,020,319 for the six months
ended September 30, 2004, versus $501,827 for the comparable period ended
September 30, 2003. This increase of 103% in operating expenses is principally
attributable to increased professional fees and payroll and related expenses due
to increased legal and accounting expenses associated with increased financing
and investor relations activities and increased administrative and laboratory
staff.

Net Loss

We recorded a consolidated net loss of $829,945 and $705,322 for the
six-month periods ended September 30, 2004 and 2003, respectively. The increase
in net loss of 17.7% was primarily attributable to increased operating expenses,
offset partially by a reversal of approximately $228,000 in over-accrued
interest expense in the quarter ended September 30, 2004.

Basic and diluted loss per common share were ($0.06) for the six month
period ended September 30, 2004 compared to ($0.09) for the same period ended
September 30, 2003. This reduction in loss per share was primarily attributable
to the greater number of common shares outstanding during the three month period
ended September 30, 2004, as compared to the three month period ended September
30, 2003, partially offset by the increased net loss for the three month period
ended September 30, 2004, as compared to the three month period ended September
30, 2003.

LIQUIDITY AND CAPITAL RESOURCES

Our cash position at September 30, 2004 was $4,429 compared to $1,619,
at March 31, 2004, representing an increase of $2,810, due to the substantially
complete use of funds for operations in this period from funds received from the
private sale of common stock for cash to Fusion Capital and other accredited
individual investors in May.

During the six months ended September 30, 2004, operating activities
used net cash of $704,405. We received $748,000 from the issuance of common
stock and repaid convertible notes totaling $22,500.

During the six month period ended September 30, 2004, net cash used in
operating activities primarily consisted of net loss of $829,945. Net loss was
offset principally by depreciation of $17,623 plus the fair market value of
common stock of $221,143 in payment for services, $38,369 in interest due to
conversion of notes payable less a reduction in accounts payable and other
liabilities of $162,384, primarily attributable to a reversal of approximately
$228,000 in over-accrued interest expense in the quarter ended September 30,
2004, plus net changes in other operating assets and liabilities of $10,789.

An increase in working capital during the six months in the amount of
$336,855, reduced our negative working capital position to ($3,592,782) at
September 30, 2004 as compared to a negative working capital of ($3,929,637) at
March 31, 2004.

YEARS ENDED MARCH 31, 2004 AND MARCH 31, 2003

We recorded a consolidated net loss of ($1,518,798) or ($0.19) per
common share and $2,361,116 or ($0.43) per common share for the fiscal years
ended March 31, 2004 and 2003, respectively.

Our consolidated operating expenses for fiscal 2004 were $995,549
versus $1,871,385 for fiscal year 2003. This decrease in operating expenses of
$875,836 or 46.8% is largely attributable to a reduction in our professional
fees by $321,162, or 48.6%, principally due to lower investor relations fees,
lower patent royalty fees, and lower legal, accounting, technical and other
professional services; lower payroll by $132,231, or 24%, principally due to
fewer full time executive and administrative personnel and lower general and
administrative expenses in the amount of $88,245, or 27% due to lower insurance
and warrant costs all totaling $641,532, and the absence of the patent
impairment charge of $234,304 incurred in fiscal year 2003. Our capital
equipment expenditures were insignificant in fiscal years 2003 and 2004.

-52-

In fiscal year 2003, we incurred non-cash expenses in the amount of
$234,304 related to the impairment of the carrying value of patents pending. We
capitalized the cost of patents and patents pending, some of which were
acquired, and amortized such costs over the shorter of the remaining legal life
or their estimated economic life, upon issuance of the patent. We write off
unamortized cost of patents and patents pending when we determine there is no
future economic benefit.

In fiscal year 2003, we also incurred non-cash expenses in the amount
of $114,000 related to options granted to a consultant. These expenses
represented a significant portion of the professional fees that we incurred
during fiscal year 2003.

Our current plan of operation is to fund our anticipated increased
research and development activities and operations for the near future through
the common stock purchase agreement with Fusion Capital in May 2004, whereby
Fusion Capital has committed to buy up to an additional $6,000,000 of our common
stock over a 30-month period, commencing, at our election, after the SEC has
declared effective a registration statement covering such shares. However, no
assurance can be given that we will receive any additional funds under our
agreement with Fusion Capital. Based on our projections of additional employees
for operations and to complete research, development and testing associated with
our Hemopurifier(TM) products, we anticipate that these funds will satisfy our
cash requirements, including this anticipated increase in operations, in excess
of the next twelve months. However, due to market conditions, and to assure
availability of funding for operations in the long term, we may arrange for
additional funding, subject to acceptable terms, during the next twelve months.

Notes and Convertible Notes

At March 31, 2004, there were two convertible notes outstanding. One in
the amount of $125,000 is the remaining amount of notes outstanding under our
agreements with the noteholder totaling $395,000, due November 2002. The
noteholder has not exercised his rights to accelerate the notes and has made
several conversions of principal amount of debt to stock, in accordance with the
terms of the agreement. The noteholder converted $225,000 in principal amount,
plus accrued interest, to stock in March 2004. The noteholder converted the
remaining $125,000 in principal amount, plus accrued interest, to stock in
September 2004. The second convertible note outstanding at March 31, 2004 in the
amount of $50,000 was converted to stock in June 2004.

At March 31, 2004, there was $500,000 in principal amount of notes
outstanding with fifteen noteholders. This was comprised of our 12% one year
notes, in the principal amount of $335,000 due between August 2000 and September
2001. The notes have no acceleration provisions. We increased the interest to
15% in FY 2002. Our 10% six-month notes, in the principal amount of $15,000 were
due May 2001. The notes have no acceleration provisions. One two-month note in
the amount of $150,000, due June 25, 2003, currently bears interest at 18%. The
note's conversion rights have expired and it has no acceleration provisions.
Notes in amounts of $12,500 and $10,000 were repaid in June and July 2004,
respectively.

Securities Issued for Services

We have issued securities in payment of services to reduce our
obligations to avoid using our cash resources. In the six months ended September
30, 2004, we issued 968,545 restricted common shares consisting of 468,604
restricted common shares for commitment and financing fees associated with our
private placement of stock and $6 million commitment from Fusion Capital;
418,869 restricted common shares for legal fees associated with the related
private placement and SB2 registration statement, corporate SEC filings and
general corporate matters; 57,079 restricted common shares for employment
placement fees; and 23,393 restricted common shares for investor relations and
technical advice all totaling approximately $427,000. The average price discount
of common stock issued for services in this period, weighted by the number of
shares issued for services in this period, was 41.4%. In fiscal year 2004, we
issued 335,714 restricted common shares consisting of 200,185 restricted common
shares in payment of investor relations, consulting and services for investor
research report on the Company and investor relations programs and investor
meetings; 73,529 restricted common shares in payment of corporate legal services
related to SEC filings, issuance of securities and general corporate matters;
and 62,000 restricted common shares for consulting for biodefense marketing, and
technical analytical services, all totaling approximately $154,000. The average
price discount of common stock issued for services in this period, weighted by
the number of shares issued for services in this period, was 46.3%. In 2003, we
issued 726,378 shares of restricted common shares consisting of 400,000
restricted common shares in payment of business development consulting services;
196,078 restricted common shares for a patent royalty payment on the
Hemopurifier(TM); 69,231 restricted common shares for strategic planning

-53-

and financial modeling consulting services; 41,869 restricted common shares for
technical consulting associated with the Hemex Hemopurifier(TM); and 18,200
restricted common shares for technical laboratory, and financial valuation
consulting services, all totaling approximately $421,000. The average price
premium of common stock issued for services in this period, weighted by the
number of shares issued for services in this period was 54%. In 2002, we issued
124,964 restricted common shares consisting of 91,577 restricted common shares
in payment of financial consulting services and investment banking services
associated with raising capital; 21,349 restricted common shares for financial
and investor relations consulting services and financial media and radio media
communication and presentation consulting services; 12,038 restricted common
share for scientific consulting services and services related to the acquisition
of Cell Activation subsidiary, all totaling approximately $510,000. The average
price discount of common stock issued for services in this period, weighted by
the number of shares issued for services in this period, was 43.9%. We plan to
continue this practice in the future. The amount of our outstanding liabilities
that we are able to convert to stock will depend on our ability to negotiate
reasonable settlements with the respective service providers, our stock price
and market conditions. The following is a summary of the securities issued for
services and the types of services provided.

SHARES ISSUED FOR SERVICES PROVIDED

SIX MONTHS ENDED SEPTEMBER 30, 2004 Weighted
Shares issued Average discount of
Description of Services Provided $ amount for services Shares from market
-------------------------------- -------- ------------ ------------------

$427,000 968,545 41.4%
Financing fees
-Commitment and financing fees
for private placement of stock
and $6M commitment
Legal fees
-SEC filings
-Private placement and SB2
registration statement documentation
-General corporate matters
Employment placement fees
-Hiring new employees
Investor relations
-Investor relations consulting
-Investor relations programs

FISCAL YEAR ENDED MARCH 31, 2004 Weighted
Shares issued Average discount of
Description of Services Provided $ amount for services Shares from market
-------------------------------- -------- ------------ ------------------

$154,000 335,714 46.3%
Legal fees
-SEC filings
-Private placement and issuance of securities
registration statement documentation
-General corporate matters
Marketing
Consulting for biodefense marketing
Investor relations advice
-Preparation of research report on the Company
-Investor relations consulting
-Investor relations programs
-Arranging investor meetings
Technical services
-Technical analytical services

-54-

FISCAL YEAR ENDED MARCH 31, 2003 Weighted
Shares issued Average discount of
Description of Services Provided $ amount for services Shares from market
-------------------------------- -------- ------------ ------------------

$421,000 726,378 54%
Business and financial services
-Strategic planning and financial modeling consulting services
-Financial valuation consulting services
Marketing and business development
-Business development consulting services
Investor relations
-Investor relations consulting
-Investor relations programs
-Arranging investor meetings
Technical services
-Patent royalty payment on the Hemopurifier(TM)
-Technical consulting associated with the Hemex Hemopurifier(TM)
-Technical consulting and laboratory services

FISCAL YEAR ENDED MARCH 31, 2002 Weighted
Shares issued Average discount of
Description of Services Provided $ amount for services Shares from market
-------------------------------- -------- ------------ ------------------

$510,000 124,964 43.9%

Business and financial services
-Investment banking services associated with raising capital
-Financial consulting services
-Services related to the acquisition of Cell Activation subsidiary
Marketing and business development
-Business development consulting services
Investor relations
-Investor relations consulting services
-Financial media and radio media communication and presentation
consulting services
Technical services
-Scientific consulting services related to the acquisition of Cell
Activation subsidiary

Securities Issued for Debt

We have also issued securities for debt to reduce our obligations to
avoid using our cash resources. In the six months ended September 30, 2004, we
issued 593,149 shares for two notes. The price discount of common stock issued
for debt in this period, weighted by number of shares issued for conversion of
debt in this period, was 53.4%. In fiscal year 2004, we issued 813,365 shares of
stock for debt. The average price discount of common stock issued for debt in
this period, weighted by number of shares issued for conversion of debt in this
period, was 47.4 %. The percentage excludes shares issued in one transaction
determined by formula from a preexisting agreement. In fiscal year 2003, we
issued 509,055 shares of stock for debt. The average price premium of common
stock issued for debt in this period, weighted by number of shares issued for
conversion of debt in this period, was 32%. In fiscal year 2002, we issued
135,928 shares of stock for debt. The average price discount of common stock
issued for debt in this period, weighted by number of shares issued for
conversion of debt in this period, was 32.9%. The percentage excludes shares
issued in one transaction determined by formula from a preexisting agreement.

-55-

Prospects for Debt Conversion

We seek, where possible, to convert our debt and accounts payable to
stock and/or warrants in order to reduce our cash liabilities. Our success at
accomplishing this depends on several factors including market conditions,
investor acceptance and other factors, including our business prospects.

GOING CONCERN

Our independent registered public accounting firm has stated in their
audit report on our March 31, 2004 consolidated financial statements, that we
have a working capital deficiency and a significant deficiency accumulated
during the development stage. These conditions, among others, raise substantial
doubt about our ability to continue as a going concern.

CRITICAL ACCOUNTING POLICIES

The preparation of financial statements and related disclosures in
conformity with accounting principles generally accepted in the United States of
America requires us to make judgments, assumptions and estimates that affect the
amounts reported in the consolidated financial statements and the accompanying
notes. The amounts of assets and liabilities reported on our balance sheet and
the amounts of revenues and expenses reported for each of our fiscal periods are
affected by estimates and assumptions, which are used for, but not limited to,
the accounting for the issuance of various equity instruments and convertible
notes payable. Actual results could differ from these estimates. The following
critical accounting policies are significantly affected by judgments,
assumptions and estimates used in the preparation of the consolidated financial
statements:

ACCOUNTING FOR TRANSACTIONS INVOLVING STOCK COMPENSATION

Financial Accounting Standards Board ("FASB") Interpretation No. 44
("FIN 44"), "ACCOUNTING FOR CERTAIN TRANSACTIONS INVOLVING STOCK COMPENSATION,
AN INTERPRETATION OF APB 25" clarifies the application of APB 25 for (a) the
definition of employee for purposes of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a noncompensatory plan, (c) the
accounting consequence for various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
compensation awards in a business combination. FIN 44 is effective July 1, 2000,
but certain provisions cover specific events that occur after either December
15, 1998, or January 12, 2000.

Under Accounting Principles Board Opinion No. 25, "ACCOUNTING FOR STOCK
ISSUED TO EMPLOYEES," compensation expense is the excess, if any, of the
estimated fair value of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. Compensation expense,
if any, is recognized over the applicable service period, which is usually the
vesting period.

Statement of Financial Accounting Standards ("SFAS") 123, "ACCOUNTING
FOR STOCK-BASED COMPENSATION," if fully adopted, changes the method of
accounting for employee stock-based compensation plans to the fair value based
method. For stock options and warrants, fair value is estimated using an option
pricing model that takes into account the stock price at the grant date, the
exercise price, the expected life of the option or warrant, stock volatility and
the annual rate of quarterly dividends. Compensation expense, if any, is
recognized over the applicable service period, which is usually the vesting
period. The adoption of the accounting methodology of SFAS 123 is optional and
we have elected to continue accounting for stock-based compensation issued to
employees using APB 25; however, pro forma disclosures, as we adopted the cost
recognition requirement under SFAS 123, are required to be presented.

-56-

SFAS 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123," was issued in December 2002
and is effective for fiscal years ending after December 15, 2002. SFAS 148
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.

STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE

We granted warrants in connection with the issuance of certain notes
payable. Under Accounting Principles Board Opinion No. 14, "ACCOUNTING FOR
CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE WARRANTS," the relative
estimated fair value of such warrants represents a discount from the face amount
of the notes payable.

BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE

The convertible feature of certain notes payable provides for a rate of
conversion that is below market value. Such feature is normally characterized as
a "beneficial conversion feature" ("BCF"). Pursuant to Emerging Issues Task
Force Issue No. 98-5 ("EITF Issue No. 98-5"), "ACCOUNTING FOR CONVERTIBLE
SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY ADJUSTABLE
CONVERSION RATIO" and Emerging Issues Task Force Issue No. 00-27, "APPLICATION
OF EITF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS," the estimated fair
value of the BCF is recorded in the consolidated financial statements as a
discount from the face amount of the notes. Such discounts are amortized to
interest expense over the term of the notes.

IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

SFAS 144, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR
LONG-LIVED ASSETS TO BE DISPOSED OF" addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. SFAS 144 requires
that long-lived assets be reviewed for impairment whenever events or changes in
circumstances indicate that their carrying amounts may not be recoverable. If
the cost basis of a long-lived asset is greater than the projected future
undiscounted net cash flows from such asset (excluding interest), an impairment
loss is recognized. Impairment losses are calculated as the difference between
the cost basis of an asset and its estimated fair value. SFAS 144 also requires
companies to separately report discontinued operations and extends that
reporting requirement to a component of an entity that either has been disposed
of (by sale, abandonment or in a distribution to owners) or is classified as
held for sale. Assets to be disposed of are reported at the lower of the
carrying amount or the estimated fair value less costs to sell. The Company
adopted SFAS 144 on January 1, 2002. The provisions of this pronouncement
relating to assets held for disposal generally are required to be applied
prospectively after the adoption date to newly initiated commitments to sell or
otherwise dispose of such asset, as defined, by management. As a result,
management cannot determine the potential effects that adoption of SFAS 144 will
have on the Company's financial statements with respect to future disposal
decisions, if any. Management believes that no impairment exists at September
30, 2004.

-57-

INCOME TAXES

Under SFAS 109, "ACCOUNTING FOR INCOME TAXES," deferred tax assets and
liabilities are recognized for the future tax consequences attributable to the
difference between the consolidated financial statements and their respective
tax basis. Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts reported for income tax purposes, and (b) tax
credit carryforwards. The Company records a valuation allowance for deferred tax
assets when, based on management's best estimate of taxable income (if any) in
the foreseeable future, it is more likely than not that some portion of the
deferred tax assets may not be realized.

OFF-BALANCE SHEET ARRANGEMENTS

We have not entered into any off-balance sheet arrangements that have
or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources and would be
considered material to investors.

LEGAL PROCEEDINGS

We may be involved from time to time in various claims, lawsuits,
disputes with third parties or breach of contract actions incidental to the
normal course of business operations. We are currently not involved in any such
litigation or any pending legal proceedings that management believes could have
a material adverse effect on the our financial position or results of
operations.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth selected information, computed as of
November 18, 2004, about the amount of shares of common stock beneficially owned
by: each of our "EXECUTIVE OFFICERS" (defined as our President, Secretary, Chief
Financial Officer or Treasurer, any vice-president in charge of a principal
business function, such as sales, administration or finance, or any other person
who performs similar policy making functions for our company); each of our
directors; each person known to us to own beneficially more than 5% of any class
of our securities; and the group comprised of our current directors and
executive officers.

Except as otherwise noted in the footnotes below, the entity,
individual Director or Executive Officer has sole voting and investment power
over such securities.

-58-

-----------------------------
COMMON
(VOTING)
-----------------------------
NAME AND ADDRESS OF BENEFICIAL OWNERS (1) (2) AMOUNT %(3)
------------------------------------------------- -------------- --------------
Calvin M. Leung (5)(6)(7)

P.O. Box 2366 2,112,643 14.8%
Costa Mesa, CA 92628

Rod Tompkins (6) 1,500,000 10.6%
420 Douglas
Wayne, NE 68787

Fusion Capital Fund II, LLC (6)(8) 1,604,966 9.9%
222 Merchandise Mart Plaza, Suite 9-112
Chicago, IL 60654

James A. Joyce (4)(5)(6)(9) 850,000 5.9%

Franklyn S. Barry, Jr. (5)(10) 418,593 2.9%

Richard H. Tullis (4)(5)(11) 335,000 2.3%

Edward G. Broenniman (5)(12) 261,374 1.8%

Edward C. Hall(4) 0 *

Directors and executive officers, as a group 3,977,610 26.1%
(6 members)

-------------
* Less than one percent.

(1) Beneficial ownership is determined in accordance with Rule 13d-3 under
the Securities Exchange Act and is generally determined by voting power
and/or investment power with respect to securities. Except as indicated
by footnote and subject to community property laws where applicable,
the Company believes the persons named in the table above have sole
voting and investment power with respect to all shares of Common Stock
shown as beneficially owned by them. Unless otherwise indicated, the
address of each shareholder is 3030 Bunker Hill Street, Suite 4000, San
Diego, CA 92109.

(2) A person is deemed to be the beneficial owners of securities that can
be acquired by such person within 60 days from November 16, 2004 upon
the exercise of warrants or options. Each beneficial owner's percentage
ownership is determined by assuming that options and warrants that are
held by such person (but not those held by any other person) and that
are exercisable within 60 days from November 16, 2004 have been
exercised.
(3) Assumes 14,186,932 shares of Common Stock outstanding at November 18,
2004.
(4) Executive officer.
(5) Director.

(6) More-than-5% shareholder.
(7) Includes all shares owned by members of Mr. Leung's family and entities
he controls plus 10,000 warrants at $3.00, expiring on January 1, 2006
and 66,000 warrants at $0.25, expiring on November 11, 2004 and January
25, 2005.

-59-

(8) Includes 568,181 warrants to purchase common stock at $0.76 per share,
expiring on the third anniversary of the date of an effective
registration statement, the initial filing of which was on July 7,
2004. Pursuant to the terms of the warrant, Fusion Capital is not
entitled to exercise the warrants to the extent such exercise would
cause the aggregate number of shares of common stock beneficially owned
by the Fusion Capital to exceed 9.9% of the outstanding shares of the
common stock following such exercise.
(9) Includes 250,000 stock options exercisable at $1.90 per share.
(10) Includes options to purchase 412,500 shares at $3.00.
(11) Includes 250,000 stock options exercisable at $1.90 per share and
30,000 stock options exercisable at $2.56 per share. (12) Includes
53,885 shares owned by Mr. Broenniman's wife and his options to
purchase 3,000 shares at $1.78 and 2,500 shares at $3.75.

CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS

Franklyn S. Barry, Jr., a director and shareholder of Aethlon Medical,
was engaged as a consultant to Aethlon Medical on strategic and business issues
from June 1, 2001 to May 31, 2003 and was paid $60,000 per year providing
advisory services to management on strategic and business issues. Mr. Barry had
been our original President and Chief Executive Officer and served in such
capacities until 2001. When Mr. Barry stepped down as our President and Chief
Executive Officer was owed severance equal to one year salary. The consulting
agreement was in lieu of immediate payment to spread the payment of the course
of the agreement and to ensure that Mr. Barry provided transition consultation
to Mr. Joyce on company practices and maintained and manage relationships with
certain employees and vendors. See "Directors, Executive Officers, Promoters and
Control Persons"" and "Security Ownership of Certain Beneficial Owners and
Management."

Calvin M. Leung, a director and shareholder of the Aethlon Medical, was
previously engaged as a consultant to Aethlon Medical providing as needed
business advisory services to management, including business development
services and introductions to potential investors and merger candidates, and he
and his affiliates have invested a total of approximately $939,500 in the
Company to date, through equity and convertible debt securities. $448,000 was
invested via convertible promissory notes from November 2001 through May 2002.
The notes accrued interest at rates ranging from 6.75% to 12% per annum. Mr.
Leung invested $300,000 via the exercise of stock options received while our
consultant for which he received 600,000 shares of restricted common stock. Mr.
Leung and his affiliates also invested during 2003 a total of $146,500 in cash
for 586,000 shares of our restricted common stock. Finally, Mr. Leung and his
affiliates invested approximately $45,000 from September 2003 to February 2004
via the exercise of warrants that resulted in the issuance of 180,000 shares of
our restricted common stock. Mr. Leung worked as our consultant from January 7,
2001 to January 7, 2003. We do not expect Mr. Leung to provide consulting
services now that he is a member of our board of directors. He currently owns
2,036,643 common shares and 316,000 warrants to purchase common stock at prices
between $0.25 to $3.00 per share. (See "Security Ownership of Certain Beneficial
Owners and Management.")

Certain of our officers and other related parties have advanced us
funds, agreed to defer compensation or paid expenses on our behalf to cover
short-term working capital deficiencies in the aggregate amount of approximately
$1.7 million. Of this amount, we owe Mr. Barry a total of approximately $300,800
for deferred salary and consulting fees from pre-merger in 1999 through May 2003
and approximately $21,000 from accrued medical benefits. We owe approximately
$69,000 to James Joyce and Associates, a company founded by our current Chief
Executive Officer, for deferred consulting fees on services provided prior to
our merger in 1999. We previously repaid Mr. Barry a total of $20,000 in cash.

-60-

Additionally, we owe John Murray, our former Chief Financial Officer, a total of
approximately $25,000 for deferred salary and medical benefits for services
rendered from September 2000 through May 2001. We owe Robert S. Stefanovich, a
former Chief Financial Officer, a total of approximately $91,000 for deferred
salary, vacation and medical benefits for services rendered from July 2001 until
July 2002. Additionally, we owe Dr. Clara Ambrus, the founder of Hemex, Inc.,
approximately $190,500 for services rendered from pre-merger in 1999 through
March 2002. We owe Edward Broenniman, a board member, and Linda Broenniman, his
wife, an aggregate of approximately $119,000 for services rendered prior to our
merger in 1999 and approximately $75,000 for unpaid expenses and advances to
Hemex, Inc. prior to the merger with Aethlon Media. Mr. Broenniman was repaid a
total of $10,000 in July 2004 against this debt. We owe approximately $34,500 to
directors for deferred directors' fees. Finally, the remaining approximately
$775,000 is accrued payroll for employees. These non interest-bearing
liabilities have been included as due to related parties in the accompanying
financial statements.

Effective January 1, 2000, we entered into an agreement with Dr. Julian
Ambrus, the son of Dr. Clara Ambrus who was the original founder of Hemex, Inc.
Under this agreement, an invention and related patent rights for a method of
removing HIV and other viruses from the blood using the Hemopurifier(TM) were
assigned to us by the inventors in exchange for (a) a royalty to be paid on
future sales of the patented product or process equal to 8.75% of net sales, as
defined and (b) 12,500 shares of our restricted common stock. Upon the issuance
of the first United States patent relating to the invention, we were obligated
to issue an additional 12,500 shares of common stock to the inventors. If the
market price of our restricted common stock on the date the patent was issued
was below $8 per share, the number of shares to be issued was that amount which
equates to $100,000 of market value. On March 4, 2003, the related patent was
issued and as a result, we issued 196,078 shares of our restricted common stock.
Such shares were recorded at par value since the original patent acquisition
purchase transaction had been measured at $100,000 and recorded as "patents" in
the March 2000 consolidated balance sheet. The 196,078 shares merely satisfied a
contingent obligation under the original purchase agreement.

We believe that the related party transactions above, due to their
related party nature, are not necessarily on terms that would have been obtained
from unaffiliated third parties.

DESCRIPTION OF SECURITIES

GENERAL

Our authorized capital consists of 25,000,000 shares of common stock,
par value $.001 per share (these shares are referred to in this prospectus as
"COMMON SHARES"). As of November 18, 2004, there were issued and outstanding
14,186,932 common shares.

COMMON SHARES

Our common shareholders are entitled to one vote per share on all
matters to be voted upon by those shareholders. Upon the liquidation,
dissolution, or winding up of our Company, our common shareholders will be
entitled to share ratably in all of the assets which are legally available for
distribution, after payment of all debts and other liabilities. Our common
shareholders have no preemptive, subscription, redemption or conversion rights.
All of our currently outstanding common shares are, and all of our common shares
offered for sale under this prospectus will be, validly issued, fully paid and
non-assessable.

-61-

OPTIONS AND WARRANTS CONVERTIBLE INTO COMMON SHARES

As of November 18, 2004, there were outstanding common share purchase
options or warrants entitling the holders to purchase up to 5,842,942 common
shares at a weighted average exercise price of $2.02 per share.

In conjunction with the private placement of common stock in May 2004,
we issued 793,181 three-year warrants to purchase common stock at $0.76 to
accredited investors.

In fiscal year 2004, in conjunction with common stock, we issued
1,226,000 one-year warrants to purchase common stock at $0.25 and 225,000
one-year warrants to purchase common stock between $0.30 and $1.125 per share to
accredited investors. In conjunction with conversion of debt, we issued 762,064
one-year warrants to purchase common stock at $0.25 and 40,784 one-year warrants
to purchase common stock between $0.42 and $0.65 per share to accredited
investors.

In fiscal year 2003, in conjunction with a debt financing, we issued
580,000 five-year warrants to purchase common stock at $0.25 to the noteholder.
In conjunction with conversion of debt, we issued 712,830 one-year warrants to
purchase common at $0.25 to existing noteholders. In conjunction with conversion
of debt and accounts payable, we issued 75,061 three-year warrants to purchase
common stock at $2.00 per share.

In fiscal year 2002, in conjunction with extension and conversion of
debt, we issued 743,180 three-year warrants to purchase common stock at $2.00 to
existing noteholders. In conjunction with accounts payable, we issued 235,000
three-year warrants expiring from three to five years to purchase common stock
at $2.75 and 6.50 per share.

Generally, our warrants are exercisable for a one-year term and can be
exercised in exchange for cash.

EQUITY COMPENSATION PLANS

SUMMARY EQUITY COMPENSATION PLAN DATA

The following table sets forth information compiled on an aggregate
basis as of November 18, 2004 with respect to the various equity compensation
plans, including stand-alone compensation arrangements, under which we have
granted or are authorized to issue equity securities to employees or
non-employees in exchange for consideration in the form of goods or services:

NUMBER OF
SECURITIES NUMBER OF SECURITIES
TO BE WEIGHTED- REMAINING AVAILABLE FOR
ISSUED UPON AVERAGE FUTURE ISSUANCE UNDER
EXERCISE OF EXERCISE PRICE EQUITY COMPENSATION PLANS
OUTSTANDING OF OUTSTANDING (EXCLUDING SECURITIES TO
OPTIONS, OPTIONS, BE ISSUED UPON EXERCISE
WARRANTS WARRANTS OF OUTSTANDING OPTIONS,
PLAN CATEGORY OR RIGHTS(1)(2) AND RIGHTS WARRANTS AND RIGHTS) (3)
-------------------------------------------------- ----------------- ----------------- ---------------------------

Equity compensation plans approved
by shareholders: 47,500 $ 2.75 452,500

Equity compensation plans not
approved by shareholders(1): 5,121,809 $ 2.29 N/A
----------------- ----------------- ---------------------------

Total 5,169,309 $ 2.32 452,500
-------------------------------------------------- ----------------- ----------------- ---------------------------

-62-

(1) The description of the material terms of non-plan issuances of equity
instruments is discussed in Notes 4 through 7 to the accompanying
consolidated financial statements.
(2) Net of equity instruments forfeited, exercised or expired.
(3) This column does not include 926,475 shares of common stock that remain
to be issued under the 2003 Consultant Stock Plan.

DESCRIPTION OF EQUITY COMPENSATION PLANS

2000 STOCK OPTION PLAN

Our 2000 Stock Option Plan (the "Plan"), adopted by the Company in
August 2000, provides for the grant of incentive stock options ("ISOs") to
full-time employees (who may also be Directors) and nonstatutory stock options
("NSOs") to non-employee Directors, consultants, customers, vendors or providers
of significant services. The exercise price of any ISO may not be less than the
fair market value of the Common Stock on the date of grant or, in the case of an
optionee who owns more than 10% of the total combined voting power of all
classes of our outstanding stock, not be less than 110% of the fair market value
on the date of grant. The exercise price, in the case of any NSO, must not be
less than 75% of the fair market value of the Common Stock on the date of grant.
The amount reserved under the Plan is 500,000 options. At November 18, 2004,
47,500 options had been granted under the Plan, with 452,500 available for
future issuance.

2003 CONSULTANT STOCK PLAN

Our 2003 Consultant Stock Plan (the "Stock Plan"), adopted by the
Company in August 2003, advances the our interests by helping us obtain and
retain the services of persons providing consulting services upon whose
judgment, initiative, efforts and/or services we are substantially dependent, by
offering to or providing those persons with incentives or inducements affording
such persons an opportunity to become owners of our capital stock. Consultants
or advisors are eligible to receive grants under the plan program only if they
are natural persons providing bona fide consulting services to us, with the
exception of any services they may render in connection with the offer and sale
of our securities in a capital-raising transaction, or which may directly or
indirectly promote or maintain a market for our securities.

We reserved a total of 1,000,000 common shares for issuance under the
Stock Plan. The Stock Plan provides for the grants of common stock. No awards
may be issued after the ten year anniversary of the date we adopted the Stock
Plan, the termination date for the plan.

On March 29, 2004, we filed with the SEC a registration statement on
Form S-8 for the purpose of registering 1,000,000 common shares issuable under
the Stock Plan under the Securities Act of 1933.

STAND-ALONE GRANTS

From time to time our board of directors grants common share purchase
options or warrants to selected directors, officers, employees, consultants and
advisors in payment of goods or services provided by such persons on a
stand-alone basis outside of any of our formal stock plans. The terms of these
grants are individually negotiated.

-63-

MARKET FOR COMMON EQUITY AND RELATED SHAREHOLDER MATTERS

DESCRIPTION OF MARKET

Our common shares are currently quoted on the OTCBB under the symbol
"AEMD." Our Common Stock has had a limited and sporadic trading history. The
following table sets forth the quarterly high and low bid prices for our common
shares on the OTCBB for the periods indicated. The prices set forth below
represent inter-dealer quotations, without retail markup, markdown or commission
and may not be reflective of actual transactions.

BID PRICE
-----------------------------
PERIOD HIGH LOW
--------------------------------------------- -------------- --------------

2004:

Third Quarter $ 0.95 $ 0.44
Second Quarter 1.80 0.48
First Quarter 4.25 0.37

2003:

Fourth Quarter 0.55 0.36
Third Quarter 1.01 0.25
Second Quarter 0.60 0.20
First Quarter 0.56 0.15

2002:

Fourth Quarter 0.85 0.15
Third Quarter 1.05 0.65
Second Quarter 1.95 0.55
First Quarter 2.30 1.15

There are approximately 800 record holders of our Common Stock at
November 18, 2004. The number of registered shareholders includes an estimate of
the number of beneficial owners of common shares held in street name. The
transfer agent and registrar for our common stock is Computershare Trust
Company, located in Denver, Colorado.

DIVIDEND POLICY

We have never paid any cash dividends on our common shares, and we do
not anticipate that we will pay any dividends with respect to those securities
in the foreseeable future. Our current business plan is to retain any future
earnings to finance the expansion and development of our business. Any future
determination to pay cash dividends will be at the discretion of our board of
directors, and will be dependent upon our financial condition, results of
operations, capital requirements and other factors as our board may deem
relevant at that time.

SELLING SHAREHOLDERS

The following table sets forth the total number of common shares
beneficially owned by each of the selling shareholders as of November 18, 2004,
the total number of common shares they may sell under this prospectus, and the
number of common shares they will own thereafter assuming no other acquisitions
or dispositions of common shares. The number and percentage of shares
beneficially owned before and after the sales is determined in accordance with

-64-

Rule 13d-3 and 13d-5 of the Securities Exchange Act, and the information is not
necessarily indicative of beneficial ownership for any other purpose. See
footnote (1) to this table. We believe that each individual or entity named has
sole investment and voting power with respect to the securities indicated as
beneficially owned by them, subject to community property laws, where
applicable, except where otherwise noted.

The selling shareholders are under no obligation to sell all or any
portion of the common shares offered for sale under this prospectus.
Accordingly, no estimate can be given as to the amount or percentage of our
common shares that will ultimately be held by the selling shareholders upon
termination of sales pursuant to this prospectus.

The total number of common shares sold under this prospectus may be
adjusted to reflect stock dividends, stock distributions, splits, combinations
or recapitalizations.

Unless otherwise stated below, to our knowledge no selling shareholder
nor any of affiliate of such shareholder has held any position or office with,
been employed by or otherwise has had any material relationship with us or our
affiliates during the three years prior to the date of this prospectus. To our
knowledge, no selling shareholder is a broker-dealer or an affiliate of a
broker-dealer within the meaning of Rule 405.

COMMON SHARES
OWNED COMMON SHARES
BEFORE SALES (1) COMMON OWNED
---------------------------------- SHARES AFTER SALES (2)
UNDERLYING OFFERED --------------------
SELLING SHAREHOLDER NUMBER WARRANTS FOR SALE(3) NUMBER %
----------------------------------------- ------------------ --------------- -------------------- ----------- --------

Mark Abdou 45,455 45,455 90,910 0 0%

Addison Adams 45,455 45,455 90,910 0 0%

AS Capital Partners, LLC(4) 113,636 113,636 227,272 0 0%

Fusion Capital Fund II, LLC (5) 1,036,785(6) 568,181 1,604,966(6) 0 0%

Jud Hogan 25,000 25,000 50,000 0 0%

Peter Hogan 22,613 11,364 33,977 0 0%

Ryan Hong 11,364(8) 11,364 22,728 0 0%

L'Vrocha Equities (7) 113,636 113,636 227,272 0 0%

Marketwise Trading, Inc.(8) 272,727 272,727 545,454 0 0%

MF Investsments, LLC (9) 56,818 56,818 113,636 0 0%

Benjamin Padnos 50,000 50,000 100,000 0 0%

Pension Financial Services f/b/o Greg Suess(10) 22,727 22,727 45,454 0 0%

RP Capital, LLP (11) 113,636 113,636 227,272 0 0%

Richardson & Patel, LLP (12) 213,750 225,000 438,750 0 0%

Linda Sharkus 22,727 22,727 45,454 0 0%

Sima Yakory 56,818 56,818 113,636 0 0%

------------
* Less than one percent

-65-

(1) Pursuant to Rules 13d-3 and 13d-5 of the Securities Exchange Act,
beneficial ownership includes any common shares as to which a
shareholder has sole or shared voting power or investment power, and
also any common shares which the shareholder has the right to acquire
within 60 days. There were 14,186,932 common shares outstanding as of
the applicable date.
(2) Assumes the sale of all common shares offered under this prospectus.
(3) Includes all shares underlying warrants.
(4) Michael Coughlin holds investment control of AS Capital Partners, LLC.
(5) Steven G. Martin and Joshua B. Scheinfeld, the principals of Fusion
Capital Fund II, LLC, are deemed to be beneficial owners of all of the
shares of common stock owned by Fusion Capital Fund II, LLC. Messrs.
Martin and Scheinfeld have shared voting and disposition power over the
shares being offered under this prospectus.
(6) As of the date hereof, 1,036,785 shares of our common stock and
warrants to purchase 568,181 shares of our common stock have been
acquired by Fusion Capital Fund II, LLC under a common stock purchase
agreement. Fusion Capital may acquire up to an additional 7,571,354
under the common stock purchase agreement. Percentage of outstanding
shares is based on 14,186,932 shares of common stock outstanding at
November 18, 2004 together with such additional 7,571,354 shares of
common stock that may be acquired by Fusion Capital from us under the
common stock purchase agreement after the date hereof. Fusion Capital
may not purchase shares of our common stock under the common stock
purchase agreement if Fusion Capital, together with its affiliates,
would beneficially own more than 9.9% of our common stock outstanding
at the time of the purchase by Fusion Capital. However, even though
Fusion Capital may not receive additional shares of our common stock in
the event that the 9.9% limitation is ever reached, Fusion Capital is
still obligated to pay to us $10,000 on each trading day, unless the
common stock purchase agreement is suspended, an event of default
occurs or the agreement is terminated. Under these circumstances,
Fusion Capital would have the right to acquire additional shares in the
future should its ownership subsequently become less than 9.9%. Fusion
Capital has the right at any time to sell any shares purchased under
the common stock purchase agreement which would allow it to avoid the
9.9% limitation. Therefore, we do not believe that Fusion Capital will
ever reach the 9.9% limitation. This number does not include 568,181
common shares issuable upon the exercise of common share purchase
warrants.
(7) Henry Good is the controlling person of L'Vrocha Equities.
(8) Rachel Gershan is the owner and controlling person of Marketwise
Trading, Inc.
(9) Messrs. Russell Fine and David Marshall are the controlling persons of
MF Investments, LLC.
(10) Greg Suess is the beneficial owner of the common stock.
(11) Erick E. Richardson and Nimish Patel, the principals of RP Capital,
LLP, are deemed to be beneficial owners of all of the shares of common
stock owned by RP Capital, LLP.
(12) Messrs. Erick Richardson and Nimish Patel are the controlling persons
of Richardson & Patel LLP, which is the Company's securities counsel.

-66-

PLAN OF DISTRIBUTION

The common stock offered by this prospectus is being offered by Fusion
Capital Fund II, LLC and other selling shareholders. The common stock may be
sold or distributed from time to time by the selling shareholders directly to
one or more purchasers or through brokers, dealers, or underwriters who may act
solely as agents at market prices prevailing at the time of sale, at prices
related to the prevailing market prices, at negotiated prices, or at fixed
prices, which may be changed. The sale of the common stock offered by this
Prospectus may be effected in one or more of the following methods:

o ordinary brokers' transactions;

o transactions involving cross or block trades;

o through brokers, dealers, or underwriters who may act solely
as agents

o "at the market" into an existing market for the common stock;

o in other ways not involving market makers or established
trading markets, including direct sales to purchasers or sales
effected through agents;

o in privately negotiated transactions; or

o any combination of the foregoing.

In order to comply with the securities laws of certain states, if
applicable, the shares may be sold only through registered or licensed brokers
or dealers. In addition, in certain states, the shares may not be sold unless
they have been registered or qualified for sale in the state or an exemption
from the registration or qualification requirement is available and complied
with.

Brokers, dealers, underwriters, or agents participating in the
distribution of the shares as agents may receive compensation in the form of
commissions, discounts, or concessions from the selling shareholder and/or
purchasers of the common stock for whom the broker-dealers may act as agent. The
compensation paid to a particular broker-dealer may be less than or in excess of
customary commissions.

Fusion Capital is an "underwriter" within the meaning of the Securities
Act.

Neither we nor Fusion Capital nor the other selling shareholders can
presently estimate the amount of compensation that any agent will receive. We
know of no existing arrangements between Fusion Capital or the other selling
shareholders, any other shareholder, broker, dealer, underwriter, or agent
relating to the sale or distribution of the shares offered by this Prospectus.
At the time a particular offer of shares is made, a prospectus supplement, if
required, will be distributed that will set forth the names of any agents,
underwriters, or dealers and any compensation from the selling shareholders and
any other required information.

We will pay all of the expenses incident to the registration, offering,
and sale of the shares to the public other than commissions or discounts of
underwriters, broker-dealers, or agents. We have also agreed to indemnify Fusion
Capital, the other selling shareholders and related persons against specified
liabilities, including liabilities under the Securities Act.

-67-

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers, and controlling persons, we
have been advised that in the opinion of the SEC this indemnification is against
public policy as expressed in the Securities Act and is therefore,
unenforceable.

Fusion Capital and its affiliates have agreed not to engage in any
direct or indirect short selling or hedging of our common stock during the term
of the common stock purchase agreement.

We have advised Fusion Capital and the other selling shareholders that
while it is engaged in a distribution of the shares included in this Prospectus
it is required to comply with Regulation M promulgated under the Securities
Exchange Act. With certain exceptions, Regulation M precludes the selling
stockholder, any affiliated purchasers, and any broker-dealer or other person
who participates in the distribution from bidding for or purchasing, or
attempting to induce any person to bid for or purchase any security which is the
subject of the distribution until the entire distribution is complete.
Regulation M also prohibits any bids or purchases made in order to stabilize the
price of a security in connection with the distribution of that security. All of
the foregoing may affect the marketability of the shares offered by this
prospectus.

This offering will terminate on the date that all shares offered by
this Prospectus have been sold by Fusion Capital and the other selling
shareholders.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE

The report of Squar, Milner, Reehl & Williamson, LLP on our financial
statements as of and for the years ended March 31, 2004, March 31, 2003 and
March 31, 2002 did not contain an adverse opinion, or a disclaimer of opinion.

TRANSFER AGENT

The transfer agent for our common shares is Computershare Trust
Company, Inc., 350 Indiana Street, Suite 800, Golden, Colorado 80401. We act as
our own transfer agent with regard to our outstanding common share purchase
options and warrants.

LEGAL MATTERS

The validity of the issuance of the common shares to be sold by the
selling shareholders under this prospectus and common share purchase options and
warrants was passed upon for our company by Richardson & Patel LLP. As of
November 18, 2004, Richardson & Patel LLP owns 213,750 common shares and a
warrant to purchase 225,000 shares with an exercise price of $0.76, all of which
are being registered for sale under this prospectus. The shares and warrant were
issued to Richardson & Patel LLP as payment for services rendered in connection
with the representation of Aethlon Medical in our financings and this
registration statement. Additionally, Erick E. Richardson and Nimish Patel, the
principals of Richardson & Patel LLP own 113,636 common shares and a warrant to
purchase 113,636 shares with an exercise price of $0.76 through RP Capital, LLP,
all of which are being registered for sale under this prospectus.

EXPERTS

Our financial statements for the years ended March 31, 2003 and 2004,
in this prospectus have been audited by Squar, Milner, Reehl & Williamson, LLP,
a registered independent public accounting firm, to the extent set forth in
their report, and are set forth in this prospectus in reliance upon such report
given upon their authority as experts in auditing and accounting.

-68-

DISCLOSURE OF COMMISSION POSITION OF INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES

Our Articles of Incorporation permit us to limit the liability of our
directors to the fullest extent permitted under Section 78.037 of the Nevada
General Corporation Law. As permitted by Section 78.037 of the Nevada General
Corporation Law, our Bylaws and Articles of Incorporation also include
provisions that eliminate the personal liability of each of its officers and
directors for any obligations arising out of any acts or conduct of such officer
or director performed for or on behalf of the Company. To the fullest extent
allowed by Section 78.751 of the Nevada General Corporation Law, we will defend,
indemnify and hold harmless its directors or officers from and against any and
all claims, judgments and liabilities to which each director or officer becomes
subject to in connection with the performance of his or her duties and will
reimburse each such director or officer for all legal and other expenses
reasonably incurred in connection with any such claim of liability. However, we
will not indemnify any officer or director against, or reimburse for, any
expense incurred in connection with any claim or liability arising out of the
officer's or director's own negligence or misconduct in the performance of duty.

The provisions of our Bylaws and Articles of Incorporation regarding
indemnification are not exclusive of any other right we have to indemnify or
reimburse our officers or directors in any proper case, even if not specifically
provided for in our Articles of Incorporation or Bylaws.

We believe that the indemnity provisions contained in our bylaws and
the limitation of liability provisions contained in our certificate of
incorporation are necessary to attract and retain qualified persons for these
positions. No pending material litigation or proceeding involving our directors,
executive officers, employees or other agents as to which indemnification is
being sought exists, and we are not aware of any pending or threatened material
litigation that may result in claims for indemnification by any of our directors
or executive officers.

REPORTS TO SECURITY HOLDERS

We file annual and quarterly reports with the SEC. In addition, we file
additional reports for matters such as material developments or changes. Our
executive officers, directors and beneficial owners of 10% or more of our common
shares also file reports relative to the acquisition or disposition of our
common shares or acquisition, disposition or exercise of our common share
purchase options or warrants. These filings are a matter of public record and
any person may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site at
http://www.sec.gov that contains reports, proxy and information statements, and
other information regarding issuers, including us, that file electronically with
the SEC. We are not required to deliver an annual report with this prospectus,
nor will we do so. However, you may obtain a copy of our annual report, or any
of our other public filings, by contacting the Company or from the SEC as
mentioned above.

-69-

WHERE YOU CAN FIND MORE INFORMATION

We are subject to the informational requirements of the Securities
Exchange Act and must file reports, proxy statements and other information with
the SEC. The reports, information statements and other information we file with
the Commission can be inspected and copied at the Commission Public Reference
Room, 450 Fifth Street, N.W. Washington, D.C. 20549. You may obtain information
on the operation of the Public Reference Room by calling the SEC at (800)
SEC-0330. The Commission also maintains a Web site (http://www.sec.gov) that
contains reports, proxy, and information statements and other information
regarding registrants, like us, which file electronically with the Commission.
Our headquarters are located at 3030 Bunker Hill Street, Suite 4000, San Diego,
CA 92109. Our phone number at that address is (858) 459-7800. Our Web site is
maintained at http://www.aethlonmedical.com.

This prospectus constitutes a part of a registration statement on Form
SB-2 filed by us with the Commission under the Securities Act of 1933. As
permitted by the rules and regulations of the Commission, this prospectus omits
certain information that is contained in the registration statement. We refer
you to the registration statement and related exhibits for further information
with respect to us and the securities offered. Statements contained in the
prospectus concerning the content of any documents filed as an exhibit to the
registration statement (or otherwise filed with the Commission) are not
necessarily complete. In each instance you may refer to the copy of the filed
document. Each statement is qualified in its entirety by such reference.

No person is authorized to give you any information or make any
representation other than those contained or incorporated by reference in this
prospectus. Any such information or representation must not be relied upon as
having been authorized. Neither the delivery of this prospectus nor any sale
made hereunder shall, under any circumstances, create any implication that there
has been no change in our affairs since the date of the prospectus.

(A DEVELOPMENT STAGE COMPANY)

INDEX TO FINANCIAL STATEMENTS

CONSOLIDATED FINANCIAL STATEMENTS

YEAR ENDED MARCH 31, 2004

Report of Independent Registered Public Accounting Firm................... F-1

Consolidated Balance Sheet ................................................ F-2

Consolidated Statements of Operations ..................................... F-3

Consolidated Statements of Stockholders' Deficit........................... F-4

Consolidated Statements of Cash Flows ..................................... F-8

Notes to Consolidated Financial Statements................................. F-9

CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SIX MONTHS ENDED SEPTEMBER 30, 2004

Condensed Consolidated Balance Sheet (Unaudited) .......................... F-28

Condensed Consolidated Statements of Operations (Unaudited) ............... F-29

Condensed Consolidated Statements of Cash Flows (Unaudited)................ F-30

Notes to the Condensed Consolidated Financial Statements................... F-31

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders Aethlon Medical, Inc. and
Subsidiaries

We have audited the accompanying consolidated balance sheet of Aethlon Medical,
Inc. and Subsidiaries (the "Company"), a development stage company, as of March
31, 2004 and the related consolidated statements of operations, stockholders'
deficit and cash flows for each of the years in the two-year period then ended
and for the period from January 31, 1984 (Inception) to March 31, 2004. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.

We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Aethlon Medical,
Inc. and Subsidiaries as of March 31, 2004 and the results of their operations
and their cash flows for the each of the years in the two-year period then ended
and for the period from January 31, 1984 (Inception) to March 31, 2004, in
conformity with U.S. generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. At March 31, 2004, the
Company has negative working capital of approximately $3,930,000 and a deficit
accumulated during the development stage of approximately $17,045,000. As
discussed in Note 1 to the consolidated financial statements, a significant
amount of additional capital will be necessary to advance the development of the
Company's products to the point at which they may become commercially viable.
These conditions, among others, raise substantial doubt about the Company's
ability to continue as a going concern. Management's plans regarding these
matters are also described in Note 1. The accompanying consolidated financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

As more fully described in Note 13, management has recently determined that
$100,000 assigned to certain common stock issued in March 2003 related to the
acquisition of a patent was inadvertently expensed. Accordingly, the March 31,
2003 consolidated balance sheet has been restated to report such amount as a
charge to additional paid-in capital. In addition, the accompanying consolidated
statement of operations for the year then ended has been restated to reduce the
fiscal 2003 net loss by $100,000 ($0.01 per common share).

/S/ SQUAR, MILNER, REEHL & WILLIAMSON, LLP
MAY 18, 2004 (except for the fifth paragraph
of this report and the last paragraph of Note 12,
as to which the date is August 31, 2004)

NEWPORT BEACH, CALIFORNIA

F-1

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET (AS RESTATED)
March 31, 2004

ASSETS

CURRENT ASSETS

Cash $ 1,619
Prepaid expenses 5,582
-------------

TOTAL CURRENT ASSETS 7,201
-------------

Property and equipment, net 16,741
Patents, net 237,314
Other assets 20,405
-------------

TOTAL NONCURRENT ASSETS 274,460
-------------

TOTAL ASSETS $ 281,661
=============

LIABILITIES AND STOCKHOLDERS' DEFICIT

CURRENT LIABILITIES

Accounts payable and accrued liabilities $ 1,588,381
Due to related parties 1,673,457
Notes payable 500,000
Convertible notes payable 175,000
-------------

TOTAL CURRENT LIABILITIES 3,936,838
-------------

COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS' DEFICIT

Common stock, par value of $0.001, 25,000,000 shares
authorized; 10,649,329 issued and outstanding 10,649
Additional paid in capital (as restated) 13,379,487
Deficit accumulated during the
development stage (as restated) (17,045,313)
-------------

TOTAL STOCKHOLDERS' DEFICIT (3,655,177)
-------------

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 281,661
=============
SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

F-2

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS (As Restated)
For the Years Ended March 31, 2004 and 2003 and For the
Period January 31,1984 (Inception) Through March 31, 2004
------------------------------------------------------------------------------------------

January 31, 1984
(Inception) Through
2004 2003 March 31, 2004
------------- ------------- -------------

Grant income $ -- $ -- $ 1,424,012
Subcontract income -- -- 73,746
Sale of research and development -- -- 35,810
------------- ------------- -------------
-- -- 1,533,568
OPERATING EXPENSES
Professional fees 339,787 660,949 3,666,626
Payroll and related 417,486 549,611 5,570,510
General and administrative 238,276 326,521 3,482,441
Impairment of intangible assets -- 334,304 1,231,531
------------- ------------- -------------
995,549 1,871,385 13,951,108
------------- ------------- -------------
OPERATING LOSS (995,549) (1,871,385) (12,417,540)

OTHER (INCOME) EXPENSE
Interest expense 523,249 489,731 4,507,581
Interest income -- -- (17,415)
Other -- -- 137,607
------------- ------------- -------------
523,249 489,731 4,627,773
------------- ------------- -------------
NET LOSS $ (1,518,798) $ (2,361,116) $(17,045,313)
============= ============= =============
Basic and diluted loss
per common share $ (0.19) $ (0.43)
============= =============
Weighted average number of common
shares outstanding 8,181,612 5,553,196
============= =============

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-3

DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING TOTAL
---------------------------- PAID IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE DEFICIT
------------- ------------- ------------- ------------- -------------

Balance, January 31, 1984 (Inception) -- $ -- $ -- $ -- $ --

Common stock issued for cash
at $1 per share 22,000 22 26,502 -- 26,524

Common stock issued for cash
at $23 per share 1,100 1 24,999 -- 25,000

Common stock issued for cash
at $86 per share 700 1 59,999 -- 60,000

Common stock issued for cash
at $94 per share 160 1 14,999 -- 15,000

Common stock issued for cash
at $74 per share 540 1 39,999 -- 40,000

Common stock issued for cash
at $250 per share 4,678 5 1,169,495 -- 1,169,500

Capital contributions -- -- 521,439 -- 521,439

Common stock issued for
compensation at $103 per share 2,600 3 267,403 -- 267,406

Conversion of due to related
parties to common stock at
$101 per share 1,120 1 113,574 -- 113,575

Conversion of due to related
parties to common stock at
$250 per share 1,741 2 435,092 -- 435,094

Effect of reorganization 2,560,361 2,558 (2,558) -- --

Common stock issued in connection
with employment contract at
$8 per share 65,000 65 519,935 -- 520,000

Common stock issued in connection
with the acquisition of patents
at $8 per share 12,500 13 99,987 -- 100,000

Warrants issued to note holders
in connection with notes payable -- -- 734,826 -- 734,826

Warrantes issued for services -- -- 5,000 -- 5,000

Net loss -- -- -- (4,746,416) (4,746,416)
------------- ------------- ------------- ------------- -------------
BALANCE, MARCH 31, 2000 2,672,500 2,673 4,030,691 (4,746,416) (713,052)

Common stock and options issued
in connection with acquisition of
Cell Activation, Inc. at $7.20
per share 99,152 99 1,067,768 -- 1,067,867

Warrants issued to note holders in
connection with notes payable -- -- 218,779 -- 218,779

Warrants issued to promoter in
connection with notes payable -- -- 298,319 -- 298,319

Beneficial conversion feature of
convertible notes payable -- -- 150,000 -- 150,000

Warrants issued to promoter in
connection with convertible notes
payable -- -- 299,106 -- 299,106

Options issued to directors for
services as board members -- -- 14,163 -- 14,163

Options and warrants issued
for services -- -- 505,400 -- 505,400

Common stock issued for services
at $3 per share 5,500 5 16,495 -- 16,500

Common stock issued for cash
at $1 per share 100,000 100 99,900 -- 100,000

Net loss -- -- -- (4,423,073) (4,423,073)
------------- ------------- ------------- ------------- -------------
BALANCE, MARCH 31, 2001 2,877,152 $ 2,877 $ 6,700,621 $ (9,169,489) $ (2,465,991)

continued

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-4

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(As Restated) For the Years Ended March 31, 2004 and 2003 and
For the Period January 31, 1984 (Inception) Through March 31, 2004 (continued)
------------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING TOTAL
---------------------------- PAID IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE DEFICIT
------------- ------------- ------------- ------------- -------------
BALANCE, MARCH 31, 2001 2,877,152 $ 2,877 $ 6,700,621 $ (9,169,489) $ (2,465,991)

Common stock, warrants and
options issued for accounts
payable and accrued liabilities 21,750 22 243,353 -- 243,375

Common stock issued for services
at $2.65 per share 6,038 6 15,994 -- 16,000

Common stock issued for cash at
$1.00 per share, net of issuance
costs of $41,540 paid to a
related party 730,804 731 688,533 -- 689,264

Common stock issued for services
at $2.75 per share 10,000 10 27,490 -- 27,500

Common stock issued in connection
with license agreement at $3.00
per share 6,000 6 17,994 -- 18,000

Common stock issued to holder of
convertible notes payable at
$3.00 per share 70,586 71 211,687 -- 211,758

Options issued to directors for
services as board members -- -- 7,459 -- 7,459

Common stock issued for cash at
$1.50 per share, net of issuance
costs of $2,500 16,667 17 22,483 -- 22,500

Beneficial conversion feature of
convertible notes payable -- -- 185,000 -- 185,000

Common stock issued for conversion
of convertible notes payable and
accrued interest at an average price
of $1.24 per share 134,165 134 166,352 -- 166,486

Common stock issued for services at
$2.72 per share 9,651 10 26,240 -- 26,250

Options issued to consultant for
services -- -- 562,000 -- 562,000

Common stock and warrants for
services at $1.95 per share 62,327 62 161,475 -- 161,537

Common stock issued for services at
$1.90 per share 9,198 9 17,491 -- 17,500

Stock options exercised for cash 400,000 400 199,600 -- 200,000

Warrants issued to note holders for
90-day forebearance -- -- 118,000 -- 118,000

Common stock and warrants issued to
note holders and vendors in the
debt-to-equity conversion program
at $1.25 per share 816,359 816 1,623,635 -- 1,624,451

Other warrant transactions -- -- (32,715) -- (32,715)

Net loss -- -- -- (3,995,910) (3,995,910)
------------- ------------- ------------- ------------- -------------
BALANCE - MARCH 31, 2002 5,170,697 $ 5,171 $ 10,962,692 $(13,165,399) $ (2,197,536)

continued

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-5

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(As Restated) For the Years Ended March 31, 2004 and 2003 and
For the Period January 31, 1984 (Inception) Through March 31, 2004 (continued)
------------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING TOTAL
---------------------------- PAID IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE DEFICIT
------------- ------------- ------------- ------------- -------------
BALANCE - MARCH 31, 2002 5,170,697 $ 5,171 $ 10,962,692 $(13,165,399) $ (2,197,536)

Proceeds from the issuance of
common stock at $0.50 per share
in connection with the exercise
of options 200,000 200 99,800 -- 100,000

Interest expense related to
beneficial conversion feature -- -- 150,000 -- 150,000

Pro-rata fair value assigned to warrants
issued in connection with
conversion of accounts payable -- -- 71,000 -- 71,000

Pro-rata fair value assigned to warrants
issued in connection with note payable -- -- 30,000 -- 30,000

Issuance of common stock at $1.25
per share in connection with the
conversion of accounts payable 150,124 150 187,505 -- 187,655

Issuance of common stock at $1.25
per share in connection with the
conversion of notes payable 420,000 420 104,580 -- 105,000

Estimated fair value of
options issued for service -- -- 114,000 -- 114,000

Issuance of common stock at $0.25
per share for cash 461,600 462 114,938 -- 115,400

Issuance of common stock at $0.26
per share for cash 19,230 19 4,981 -- 5,000

Issuance of common stock at $1.25
per share for cash 8,000 8 9,992 -- 10,000

Issuance of common stock at $0.65
per share for services 69,231 69 44,931 -- 45,000

Issuance of common stock at $0.51
per share for services 196,078 196 (196) -- --

Net loss (As Restated) -- -- -- (2,361,116) (2,461,116)
------------- ------------- ------------- ------------- -------------
BALANCE - MARCH 31, 2003 (As Restated) 6,694,960 $ 6,695 $ 11,894,223 $(15,526,515) $ (3,625,597)

continued

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-6

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
(As Restated) For the Years Ended March 31, 2004 and 2003 and
For the Period January 31, 1984 (Inception) Through March 31, 2004 (continued)
------------------------------------------------------------------------------------------------------------------------
DEFICIT
ACCUMULATED
COMMON STOCK ADDITIONAL DURING TOTAL
---------------------------- PAID IN DEVELOPMENT STOCKHOLDERS'
SHARES AMOUNT CAPITAL STAGE DEFICIT
------------- ------------- ------------- ------------- -------------
BALANCE - MARCH 31, 2003 (As Restated) 6,694,960 6,695 11,894,223 (15,526,515) (3,625,597)

Proceeds from the issuance of
common stock at $0.25 per share
in connection with the exercise
of warrants 540,000 540 134,460 -- 135,000

Issuance of common stock at $0.25
per share in connection with the
conversion of notes payable,
including interest of $15,099 300,397 300 74,799 -- 75,099

Issuance of common stock at $0.35
per share in connection with the
conversion of notes payable,
including interest of $59,827 813,790 814 284,013 -- 284,827

Issuance of common stock at $0.50
per share in connection with the
conversion of notes payable,
including interest of $509 11,017 11 5,498 -- 5,509

Issuance of common stock at $0.42
per share in connection with the
conversion of notes payable,
including interest of $696 13,725 14 5,682 -- 5,696

Issuance of common stock at $0.65
per share in connection with the
conversion of notes payable,
including interest of $5,088 27,059 27 17,561 -- 17,588

Issuance of common stock at $0.25
per share in connection with the
conversion of notes payable,
including interest of $15,416 461,667 462 114,954 -- 115,416

Issuance of common stock at $0.25
per share for cash 1,226,000 1,226 305,274 -- 306,500

Issuance of common stock at $0.30
per share for cash 180,000 180 53,820 -- 54,000

Issuance of common stock at $0.525
per share for cash 40,000 40 20,960 -- 21,000

Issuance of common stock at $1.125
per share for cash 5,000 5 5,620 -- 5,625

Issuance of common stock at $0.25
per share for services 10,000 10 2,490 -- 2,500

Issuance of common stock at $0.34
per share for services 73,529 73 24,927 -- 25,000

Issuance of common stock at $0.40
per share for services 62,000 62 24,763 -- 24,825

Issuance of common stock at $0.45
per share for services 185,185 185 83,148 -- 83,333

Issuance of common stock at $0.50
per share for services 5,000 5 2,495 -- 2,500

Interest expense related to beneficial
conversion feature -- -- 324,800 -- 324,800

Net loss (As Restated) -- -- -- (1,518,798) (1,518,798)
------------- ------------- ------------- ------------- -------------
BALANCE - MARCH 31, 2004 (As Restated) 10,649,329 $ 10,649 $ 13,379,487 $(17,045,313) $ (3,655,177)
============= ============= ============= ============= =============

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-7

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(As Restated) For the Years Ended March 31, 2004 and 2003 and
For the Period January 31, 1984 (Inception) Through March 31, 2004
--------------------------------------------------------------------------------------------------------
January 31, 1984
(Inception)
Through
2004 2003 March 31, 2004
------------- ------------- --------------

Cash flows from operating activities:
Net loss $ (1,518,798) $ (2,361,116) $(17,045,313)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 127,000 159,783 909,915
Gain of sale of property and equipment -- -- (13,065)
Estimated fair value of warrants issued
in connection with accounts
payable and debt -- 101,000 2,715,736
Estimated fair value of common stock,
warrants and options issued for services 138,158 159,000 2,168,592
Beneficial conversion feature of convertible
notes payable 324,800 150,000 809,800
Impairment of patents and patents pending -- 334,304 334,304
Impairment of goodwill -- -- 897,227
Deferred compensation forgiven -- -- 217,223
Changes in operating assets and liabilities:
Prepaid expenses 4,728 130,478 155,955
Other assets (14,800) (3,650) (20,405)
Accounts payable and accrued liabilities 138,398 474,054 1,772,671
Due to related parties 258,458 341,644 1,673,457
------------- ------------- -------------

Net cash used in operating activities (542,056) (514,503) (5,423,903)
------------- ------------- -------------

Cash flows from investing activities:
Purchases of property and equipment (4,782) (1,198) (214,166)
Patents and patents pending -- (49,034) (352,833)
Proceeds from the sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
------------- ------------- -------------
Net cash used in investing activities (4,782) (50,232) (539,206)
------------- ------------- -------------

Cash flows from financing activities:
Proceeds from the issuance of notes payable -- 65,000 1,480,000
Principal repayments of notes payable (180,000) (10,000) (190,000)
Proceeds from the issuance of convertible
notes payable 200,000 275,000 998,000
Proceeds from the issuance of common stock 522,125 230,400 3,676,728
------------- ------------- -------------

Net cash provided by financing activities 542,125 560,400 5,964,728
------------- ------------- -------------

Net (decrease) increase in cash (4,713) (4,335) 1,619

Cash at beginning of period 6,332 10,667 --
------------- ------------- -------------

Cash at end of period $ 1,619 $ 6,332 $ 1,619
============= ============= =============

Supplemental disclosure of cash flow information -
Cash paid during the period for:
Interest $ 13,000 $ 13,000 $ 220,492
============= ============= =============
Income taxes $ 1,180 $ 1,180 $ 13,346
============= ============= =============

Supplement schedule of noncash investing activities:

Debt converted to common stock $ 407,500 $ 205,000 $ 2,048,094
============= ============= =============
Issuance of common stock, warrants and options for
accounts payable $ -- $ 87,655 $ 512,816
============= ============= =============
Issuance of common stock in connection with
license agreements $ -- $ -- $ 18,000
============= ============= =============
Net assets of entities acquired in exchange
for equity securities $ -- $ -- $ 1,597,867
============= ============= =============
Debt placement fees paid by issuance of warrants $ -- $ -- $ 843,538
============= ============= =============
Patent pending acquired for 12,500 shares of
common stock $ -- $ -- $ 100,000
============= ============= =============
Common stock issued for prepaid expenses $ -- $ -- $ 161,537
============= ============= =============

SEE ACCOMPANYING NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.

F-8

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

ORGANIZATION

Aethlon Medical, Inc. ("Aethlon") engages in the research and development of a
medical device known as the Hemopurifier(TM) that removes harmful substances
from the blood. Aethlon is in the development stage on the Hemopurifier(TM) and
significant research and testing are still needed to reach commercial viability.
Any resulting medical device or process will require approval by the U.S. Food
and Drug Administration ("FDA"), and Aethlon has not yet begun efforts to obtain
any FDA approval, which may take several years. Since many of Aethlon's patents
were issued in the 1980's, they are scheduled to expire in the near future.
Thus, such patents may expire before FDA approval, if any, is obtained. However,
the Company believes that certain patent applications and/or other patents
issued more recently will help protect the proprietary nature of the
Hemopurifier(TM) treatment technology.

Aethlon is classified as a development stage enterprise under accounting
principles generally accepted in the United States of America ("GAAP"), and has
not generated revenues from its planned principal operations.

Aethlon's common stock is quoted on the Over-the-Counter Bulletin Board
administered by the National Association of Securities Dealers ("OTCBB") under
the symbol "AEMD."

PRINCIPLES OF CONSOLIDATION

The accompanying consolidated financial statements include the accounts of
Aethlon Medical, Inc. and its inactive legal wholly-owned subsidiaries Aethlon,
Inc., Hemex, Inc., Syngen Research, Inc. and Cell Activation, Inc. (hereinafter
collectively referred to as the "Company"). All significant intercompany
balances and transactions have been eliminated in consolidation.

GOING CONCERN

The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern, which contemplates, among other
things, the realization of assets and satisfaction of liabilities in the
ordinary course of business. The Company has negative working capital of
approximately $3,930,000 and a deficit accumulated during the development stage
of approximately $17,045,000 at March 31, 2004, which among other matters, raise
substantial doubt about its ability to continue as a going concern. A
significant amount of additional capital will be necessary to advance the
development of the Company's products to the point at which they may become
commercially viable. The Company intends to fund operations through debt and/or
equity financing arrangements, which management believes may be insufficient to
fund its capital expenditures, working capital and other cash requirements
(consisting of accounts payable, accrued liabilities, amounts due to related
parties and amounts due under various notes payable) for the fiscal year ending
March 31, 2005. Therefore, the Company will be required to seek additional funds
to finance its long-term operations.

The Company is currently addressing its liquidity issue by continually seeking
investment capital through the public markets, specifically, through private
placement of common stock and a common stock purchase agreement with an investor
which has committed to buy up to an additional $6,000,000 of the Company's
common stock over a 30-month period, commencing, at the Company's election, if
and after the Securities Exchange Commission (the "SEC") declares effective a
registration statement covering such shares. However, no assurance can be given
that the Company will receive any additional funds under such agreement and
there is no guarantee that these strategies will enable the Company to meet its
obligations for the foreseeable future. The successful outcome of future
activities cannot be determined at this time and there is no assurance that if
achieved, the Company will have sufficient funds to execute its intended
business plan or generate positive operating results.

The consolidated financial statements do not include any adjustments related to
recoverability and classification of asset carrying amounts or the amount and
classification of liabilities that might result should the Company be unable to
continue as a going concern.

F-9

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

RISKS AND UNCERTAINTIES

The Company operates in an industry that is subject to intense competition,
government regulation and rapid technological change. The Company's operations
are subject to significant risk and uncertainties including financial,
operational, technological, regulatory and other risks associated with a
development stage company, including the potential risk of business failure.

USE OF ESTIMATES

The Company prepares its consolidated financial statements in conformity with
GAAP, which require management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and reported amounts of
revenues and expenses during the reporting period. Significant estimates made by
management include, among others, realization of long-lived assets. Actual
results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Statement of Financial Accounting Standards ("SFAS") No. 107, "DISCLOSURES ABOUT
FAIR VALUE OF FINANCIAL INSTRUMENTS," requires disclosure of fair value
information about financial instruments when it is practicable to estimate that
value. The carrying amount of the Company's cash, accounts payable, accrued
liabilities and notes payable approximates their estimated fair values due to
the short-term maturities of those financial instruments. The fair values of
amounts due to related parties are not determinable as these transactions are
with related parties and were not necessarily consummated at arm's length. .

CONCENTRATIONS OF CREDIT RISKS

Cash is maintained at various financial institutions. The Federal Deposit
Insurance Corporation ("FDIC") insures accounts at each institution for up to
$100,000. At times, cash may be in excess of the FDIC insurance limit. The
Company had no amounts exceeding this limit at March 31, 2004.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the related assets,
which range from two to five years. Repairs and maintenance are charged to
expense as incurred while improvements are capitalized. Upon the sale or
retirement of property and equipment, the accounts are relieved of the cost and
the related accumulated depreciation with any gain or loss included in the
statements of operations.

INCOME TAXES

Under SFAS 109, "ACCOUNTING FOR INCOME TAXES," deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the consolidated financial statements and their respective
tax basis. Deferred income taxes reflect the net tax effects of (a) temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts reported for income tax purposes, and (b) tax
credit carryforwards. The Company records a valuation allowance for deferred tax
assets when, based on management's best estimate of taxable income in the
foreseeable future, it is more likely than not that some portion of the deferred
income tax assets may not be realized.

F-10

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

LONG-LIVED ASSETS

SFAS 144, "ACCOUNTING FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED
ASSETS TO BE DISPOSED OF," addresses financial accounting and reporting for the
impairment or disposal of long-lived assets. SFAS 144 requires that long-lived
assets be reviewed for impairment whenever events or changes in circumstances
indicate that their carrying amounts may not be recoverable. If the cost basis
of a long-lived asset is greater than the projected future undiscounted net cash
flows from such asset, an impairment loss is recognized.

Impairment losses are calculated as the difference between the cost basis of an
asset and its estimated fair value. SFAS 144 also requires companies to
separately report discontinued operations and extends that reporting requirement
to a component of an entity that either has been disposed of (by sale,
abandonment or in a distribution to owners) or is classified as held for sale.
Assets to be disposed of are reported at the lower of the carrying amount or the
estimated fair value less costs to sell. The Company adopted SFAS 144 on January
1, 2002. The provisions of this pronouncement relating to assets held for
disposal generally are required to be applied prospectively after the adoption
date to newly initiated commitments to sell or dispose of such assets, (as
defined), by management. As a result, management cannot determine the potential
effects that adoption of SFAS 144 will have on the Company's financial
statements with respect to future disposal decisions, if any. Management
believes no impairment exists at March 31, 2004.

EARNINGS PER SHARE

Under SFAS 128, "EARNINGS PER SHARE," basic earnings per share is computed by
dividing net income available to common stockholders by the weighted average
number of common shares assumed to be outstanding during the period of
computation. Diluted earnings per share is computed similar to basic earnings
per share except that the denominator is increased to include the number of
additional common shares that would have been outstanding if the potential
common shares had been issued and if the additional common shares were dilutive
(If the Company had net income in each of the years ended March 31, 2004 and
2003, approximately 2,500,000 and 2,900,000 shares would have been considered
additional common stock equivalents, respectively, based on the treasury stock
method). As the Company had net losses for the period presented, basic and
diluted loss per share are the same, as any additional common stock equivalents
would be antidilutive.

SEGMENTS

SFAS 131, "DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION,"
changes the way public companies report information about segments of their
business in their annual financial statements and requires them to report
selected segment information in their quarterly reports issued to shareholders.
It also requires entity-wide disclosures about the products and services an
entity provides, the foreign countries in which it holds significant assets and
how the Company reports revenues and its major customers. The Company currently
operates in one segment, as disclosed in the accompanying consolidated
statements of operations.

F-11

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

STOCK BASED COMPENSATION

The Company accounts for stock-based compensation issued to employees using the
intrinsic value based method as prescribed by Accounting Principles Board
Opinion No. 25 ("APB 25"), "Accounting for Stock issued to Employees." Under the
intrinsic value based method, compensation expense is the excess, if any, of the
estimated fair value of the stock at the grant date or other measurement date
over the amount an employee must pay to acquire the stock. Compensation expense,
if any, is recognized over the applicable service period, which is usually the
vesting period.

SFAS 123, "Accounting for Stock-Based Compensation," if fully adopted, changes
the method of accounting for employee stock-based compensation plans to the fair
value based method. For stock options and warrants, fair value is estimated
using an option pricing model that takes into account the stock price at the
measurement date, the exercise price, the expected life of the option or
warrant, stock volatility and the annual rate of quarterly dividends.
Compensation expense, if any, is recognized over the applicable service period,
which is usually the vesting period.

The adoption of the accounting methodology of SFAS 123 is optional and the
Company has elected to continue accounting for stock-based compensation issued
to employees using APB 25; however, pro forma disclosures, as if the Company had
adopted the cost recognition requirement under SFAS 123, are required to be
presented (see below). For stock-based compensation issued to non-employees, the
Company uses the fair value method of accounting under the provisions of SFAS
123.

Financial Accounting Standards Board ("FASB") Interpretation ("FIN") No. 44,
"Accounting for Certain Transactions Involving Stock Compensation, an
Interpretation of APB 25" clarifies the application of APB 25 for (a) the
definition of employee for purpose of applying APB 25, (b) the criteria for
determining whether a plan qualifies as a non compensatory plan, (c) the
accounting consequence for various modifications to the terms of a previously
fixed stock option or award and (d) the accounting for an exchange of stock
compensation awards in a business combination. Management believes that the
Company accounts for transactions involving stock-based employee compensation in
accordance with FIN 44.

SFAS 148, "Accounting for Stock-Based Compensation - Transition and Disclosure,
an amendment of FASB Statement No. 123," provides alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results.

At March 31, 2004, the Company has one stock-based employee compensation plan
(the "Plan"), which is described more fully in Note 8. The Company accounts for
the Plan under the recognition and measurement principles of APB 25, and related
interpretation. No stock-based employee compensation cost is recognized in net
loss. Stock options granted under the Plan have exercise prices equal to or
greater than the estimated fair value of the underlying common stock on the
dates of grant. The following table illustrates the effect on net loss and loss
per common share (as restated for fiscal 2003 - see Note 13) if the Company had
applied the fair value recognition provisions of SFAS 123 to stock-based
employee compensation.

F-12

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

STOCK BASED COMPENSATION (continued)

YEAR ENDED MARCH 31,
----------------------------
2004 2003
------------ ------------

Net loss available to common stockholders, as reported $ 1,518,798 $ 2,361,116
Pro forma compensation expense 6,000 9,000
------------ ------------
Pro forma net loss available to common stockholders $ 1,524,798 $ 2,370,116
============ ============
Loss per common share, as reported
Basic and diluted $ (0.19) $ (0.43)

Loss per common share, pro forma
Basic and diluted $ (0.19) $ (0.45)

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS

SFAS No. 146, "Accounting for Costs Associated with Exit and Disposal
Activities," was issued in June 2002 and is effective for exit and disposal
activities initiated after December 31, 2002. The Company is complying with SFAS
No. 146.

SFAS No. 147 relates exclusively to certain financial institutions, and thus
does not apply to the Company.

In November 2002, the FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." FIN No. 45 clarifies that a guarantor is required to
recognize, at the inception of a guarantee, a liability for the estimated fair
value of the obligation undertaken in issuing the guarantee. The initial
recognition and measurement provisions of FIN No. 45 are applicable on a
prospective basis to guarantees issued or modified after December 31, 2002,
while the disclosure requirements became applicable in 2002. The Company is
complying with the disclosure requirements of FIN No. 45. The other requirements
of this pronouncement did not materially affect the Company's consolidated
financial statements.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities, an Interpretation of ARB 51." The primary objectives of FIN No. 46 are
to provide guidance on the identification of entities for which control is
achieved through means other than voting rights (variable interest entities or
"VIEs") and how to determine when and which business enterprise should
consolidate the VIE. This new model for consolidation applies to an entity for
which either: (1) the equity investors do not have a controlling financial
interest; or (2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, FIN No. 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. As amended in December 2003, the effective
dates of FIN No. 46 for public entities that are small business issuers, as
defined ("SBIs"), are as follows: (a) For interests in special-purpose entities
("SPEs": periods ended after December 15, 2003; and (b) For all other VIEs:
periods ending after December 15, 2004. The December 2003 amendment of FIN No.
46 also includes transition provisions that govern how an SBI which previously
adopted the pronouncement (as it was originally issued) must account for
consolidated VIEs. The Company has determined that it does not have any variable
interest in any SPEs, and is presently evaluating the other effects of FIN No.
46 (as amended) on its consolidated financial statements.

F-13

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

SIGNIFICANT RECENT ACCOUNTING PRONOUNCEMENTS (CONTINUED)

In April 2003, the FASB issued SFAS No. 149, "Amendments of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments, including certain
derivative instruments embedded in other contracts and for hedging activities
under SFAS No. 133. This pronouncement is effective for contracts entered into
or modified after June 30, 2003 (with certain exceptions), and for hedging
relationships designated after June 30, 2003. The adoption of SFAS No. 149 did
not have a material impact on the Company's consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
establishes standards for how a company classifies and measures certain
financial instruments with characteristics of both liabilities and equity, and
is effective for public companies as follows: (i) in November 2003, the FASB
issued FASB Staff Position ("FSP") FAS 150-03 ("FSP 150-3"), which defers
indefinitely (a) the measurement and classification guidance of SFAS No. 150 for
all mandatorily redeemable non-controlling interests in (and issued by)
limited-life consolidated subsidiaries, and (b) SFAS No. 150's measurement
guidance for other types of mandatorily redeemable non-controlling interests,
provided they were created before November 5, 2003; (ii) for financial
instruments entered into or modified after May 31, 2003 that are outside the
scope of FSP 150-3; and (iii) otherwise, at the beginning of the first interim
period beginning after June 15, 2003. The Company adopted SFAS No. 150 on the
aforementioned effective dates. The adoption of this pronouncement did not have
a material impact on the Company's results of operations or financial condition.

Other recent accounting pronouncements are discussed elsewhere in these notes to
the consolidated financial statements.

Other recent accounting pronouncements issued by the FASB (including its
Emerging Issues Task Force), the American Institute of Certified Public
Accountants, and the SEC did not or are not believed by management to have a
material impact on the Company's present or future consolidated financial
statements.

PATENTS

The Company capitalizes the cost of patents and patents pending, some of which
were acquired, and amortizes such costs over the shorter of the remaining legal
life or their estimated economic life, upon issuance of the patent.

STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE

The Company granted warrants in connection with the issuance of certain notes
payable (see Notes 5 and 6). Under Accounting Principles Board Opinion No. 14,
"ACCOUNTING FOR CONVERTIBLE DEBT AND DEBT ISSUED WITH STOCK PURCHASE WARRANTS,"
the estimated fair value of such warrants represents a discount from the face
amount of the notes payable. Accordingly, the relative estimated fair value of
the warrants has been recorded in the financial statements as a discount from
the face amount of the notes. The discount is amortized using the effective
yield method over the respective lives of the related notes payable.

F-14

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE

The convertible feature of certain notes payable (see Notes 6 and 7) provides
for a rate of conversion that is below market value. Such feature is normally
characterized as a "beneficial conversion feature" ("BCF"). Pursuant to Emerging
Issues Task Force Issue No. 98-5 ("EITF Issue No. 98-5"), "ACCOUNTING FOR
CONVERTIBLE SECURITIES WITH BENEFICIAL CONVERSION FEATURES OR CONTINGENTLY
ADJUSTABLE CONVERSION RATIO" and Emerging Issues Task Force Issue No. 00-27,
"APPLICATION OF EITF ISSUE NO. 98-5 TO CERTAIN CONVERTIBLE INSTRUMENTS," the
Company has determined the fair value of such BCF to be approximately $325,000
and $450,000 for the years ended March 31, 2004 and 2003, respectively.
Accordingly, the relative estimated fair value of the BCF has been recorded in
the consolidated financial statements as a discount from the face amount of the
notes. Such discounts were amortized to interest expense in accordance with the
related conversion feature.

RESEARCH AND DEVELOPMENT EXPENSES

The Company incurred approximately $200,000 of research and development expenses
during each of the two years ended March 31, 2004 and 2003, which are included
in operating expenses in the accompanying consolidated statements of operations.

RECLASSIFICATIONS

Certain reclassifications have been made to the 2003 financial statement
presentation to correspond to the 2004 format.

2. PROPERTY AND EQUIPMENT

Property and equipment consist of the following at March 31, 2004:

Furniture and office equipment $ 209,003
Accumulated depreciation (192,262)
---------------

$ 16,741
===============

Depreciation expense for the years ended March 31, 2004 and 2003 approximated
$8,000 and $18,000, respectively.

3. OTHER ASSETS

Other assets consist of approximately $2,000 of deposits and approximately
$18,000 of advances to employees.

4. EMPLOYMENT CONTRACT

On January 10, 2000, the Company completed the acquisition of the assets of
Syngen Research, Inc. ("Syngen"). As part of the transaction, the Company
executed a two-year employment contract, which was subsequently amended to
increase the term to four years, with Syngen's sole shareholder to perform
research. The cost associated with this employment contract was amortized over
four years on a straight-line basis and was fully amortized as of March 31,
2004.

5. DEBT-TO-EQUITY CONVERSION PROGRAM

In March 2002, for a limited time, the Company extended an offer to certain note
holders and vendors to convert past due amounts into restricted common stock and
warrants to purchase common stock of the Company. The offer entailed the
conversion of liabilities at a rate of one share and one-half of a warrant for
every $1.25 converted. The warrants have an exercise price of $2.00 per share
and expired three years from the date of issuance.

During the years ended March 31, 2003 and 2002, note holders and vendors
representing liabilities of approximately $188,000 and $1,020,000 converted
their debt in exchange for 150,124 and 816,359 shares of common stock and 75,061
and 408,180 warrants to purchase common stock, respectively. Such warrants were
valued using the Black-Scholes option pricing model based on their estimated pro
rata fair value of approximately $71,000 and $339,000. The warrant conversion
rate was below estimated fair value for warrants issued during the fiscal year
ended March 31, 2002; therefore a BCF approximating $265,000 was recorded during
the year ended March 31, 2002.

Such debt-to-equity conversion program was terminated at March 31, 2003.

F-15

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

6. NOTES PAYABLE

12% AND 15% NOTES

From August 1999 through September 2000, the Company entered into arrangements
for the issuance of notes payable from private placement offerings (the "12%
Notes") in the original aggregate amount of $422,500. The 12% Notes bore annual
interest at 12% (15% after maturity), required interest to be paid quarterly,
matured one year from the date of issuance, and carried detachable warrants. Of
such $422,500, at March 31, 2004, $335,000 were delinquent, in default, and bore
interest at 15% (the "15% Notes"), $37,500 had been converted to Company common
stock, and $50,000 had been repaid by the Company in cash.

The $37,500 conversion to common stock represented two noteholders and took
place during the year ended March 31, 2004. One noteholder converted $12,500 of
notes including interest of $5,088 for 27,059 shares of common stock and 27,059
warrants to purchase shares of common stock at $0.65 per share (see Note 8).
These warrants were valued using the Black Scholes option pricing model; the
relative fair value was insignificant and was charged to interest expense upon
grant. The second noteholder converted an aggregate of $25,000 of notes
including interest of $9,766 for 139,063 shares of common stock and 139,063
warrants to purchase shares of common stock at $0.25 per share (see Note 8).
These warrants were valued using the Black Scholes option pricing model; the
relative fair value was insignificant and charged to interest expense upon
grant. A beneficial conversion feature approximating $37,500 was recorded during
the year ended March 31, 2004 related to the conversion of these two notes.

In January 2002, the Company issued warrants to purchase common stock in
exchange for an additional ninety days to become current with all past due
interest payments related to $422,500 in 12% Notes.

All of the outstanding $335,000 of 15% Notes were past due and in default at
March 31, 2004 and interest payable approximated $138,000 as of such date.
Management's plans to satisfy the remaining outstanding balance on these notes
include converting the notes to common stock at market value or repayment with
available funds.

The total outstanding balance of the 15% Notes at March 31, 2004 was $335,000,
which is included in notes payable in the accompanying consolidated balance
sheet. The remaining $165,000 in notes payable in the accompanying consolidated
balance sheet is comprised of the $150,000 9% Convertible Note (see Note 7), and
two 10% Convertible Notes (see Note 7) totaling $15,000, all of which were no
longer convertible as of March 31, 2004.

10% NOTES

In December 2002, an existing noteholder increased its advances to the Company
by $40,000 to a total of $140,000. In consideration, the Company granted the
noteholder warrants (see Note 8), cancelled the noteholder's existing $100,000
of convertible debt and replaced it with a secured $140,000 note payable. A BCF
approximating $30,000 was recorded in connection with the issuance of the
$140,000 note. The new note was paid by the Company in accordance with its terms
and as a result, there was no outstanding balance at March 31, 2004.

6.75% NOTES

On March 18, 2002, the Company issued a promissory note to a stockholder in the
amount of $50,000, bearing interest at 6.75% per annum and maturing in May 2002.
Such note was converted in March 2003 (see Note 8).

In May 2002, the Company issued notes payable totaling $25,000, bearing interest
at 6.75% per annum, maturing in July 2002. The notes were converted into shares
of the Company's common stock in March 2003 (see Note 8).

There were no amounts owed under the 6.75% Notes at March 31, 2004.

The Company is currently seeking other financing arrangements to retire all past
due notes payable.

F-16

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

7. CONVERTIBLE NOTES PAYABLE

8% CONVERTIBLE NOTE

In November 2000, the Company issued convertible notes payable ("8% Convertible
Notes") with original issue amounts totaling $395,000, bearing interest at 8%
per annum, with principal and accrued interest due on November 1, 2002. The 8%
Convertible Notes require no payment of principal or interest during the term
and may be converted to common stock of the Company at any time at the option of
the holder. The number of common shares issuable upon conversion is equal to the
total principal and unpaid interest as of the date of conversion, divided by the
conversion price. The conversion price per common share was changed effective
August 31, 2001 to the lesser of (a) 80% of the closing market price for the
common stock; or (b) 70% of the average of the three lowest closing market
prices for the common stock for the ten trading days prior to conversion. Such
change resulted in additional BCF approximating $57,000 during the year ended
March 31, 2002.

During fiscal year 2002, the holder converted principal and accrued interest of
approximately $49,000 into 40,267 shares of common stock, leaving principal of
$350,000 and interest thereon due and outstanding. The average conversion price
was approximately $1.22 per common share.

The 8% Convertible Notes required the Company to file an effective registration
statement by February 2001. The Company filed a Form SB-2 with the SEC in
December 2000; however, such registration statement was never declared effective
and was subsequently abandoned. However, as the underlying securities are no
longer restricted under Rule 144 of the Securities Act of 1933, the Company no
longer plans on filing a registration statement in connection with this
transaction. The Company accrued and expensed penalties approximating $150,000
at March 31, 2004 in connection with not filing an effective registration
statement. The Company does not believe it will incur any additional charges and
is in the process of renegotiating all penalties that have been recorded to
date.

In March 2004, the noteholder converted $225,000 of principal and accrued
interest in the amount of $59,827 into 813,790 shares of common stock.

At March 31, 2004, there was one outstanding 8% Convertible Note with a balance
of $125,000, which is included in convertible notes payable in the accompanying
consolidated balance sheets. Interest payable on such note totaled $17,143 at
March 31, 2004.

9% CONVERTIBLE NOTE

In April 2003, the Company issued a convertible note in the amount of $150,000
("9% Convertible Note"), bearing interest at 9% per annum, with principal and
interest due in June 2003, which is in default. The 9% Convertible Note required
no payment of principal or interest during the term and was convertible into
common stock of the Company at the conversion price of $0.25 per share through
June 2003 at the option of the shareholder. The Company has recorded a BCF of
$150,000 in connection with the issuance of the note and amortized such amount
to interest expense upon issuance based on the related conversion feature. As
this note is no longer convertible, the outstanding balance totaling $150,000
has been recorded as notes payable in the accompanying consolidated balance
sheet. Therefore, there were no remaining 9% Convertible Notes outstanding as of
March 31, 2004.

F-17

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

7. CONVERTIBLE NOTES PAYABLE (continued)

10% CONVERTIBLE NOTES

From time to time, the Company issued convertible notes payable ("10%
Convertible Notes") to various investors, bearing interest at 10% per annum,
with principal and interest due six months from the date of issuance. The 10%
Convertible Notes require no payment of principal or interest during the term
and may be converted to common stock of the Company at the conversion price of
$0.50 per share at any time at the option of the noteholder. The total amount of
the original notes issued was $275,000.

In April 2002, the Company issued a 10% Convertible Note in the amount of
$50,000. The conversion price of this note was $1.25 at the time of issuance,
but in August 2002, the Company reduced the conversion price to $0.50.

During the year ended March 31, 2003, the Company issued additional 10%
Convertible Notes totaling $225,000, of which $30,000 was converted into
restricted common stock (see Note 8).

In November 2003, a noteholder converted $5,000 of principal and accrued
interest of $509 for 11,017 shares of common stock.

In December 2003, a noteholder converted $100,000 of principal and accrued
interest of $15,416 for 461,667 shares of common stock and 461,667 warrants to
purchase common stock at $0.25 per share (see Note 8). These warrants were
valued using the Black Scholes option pricing model; the relative pro-rata fair
value was insignificant and was charged to interest expense upon grant.

In January 2004, two noteholders converted $35,000 of principal and accrued
interest of $5,333 for 161,334 shares of common stock and 161,334 warrants to
purchase common stock at $0.25 per share (see Note 8). These warrants were
valued using the Black Scholes option pricing model; the relative pro-rata fair
value was insignificant and was charged to interest expense upon grant.

In March 2004, the Company borrowed $50,000 under a non-interest bearing
convertible note payable, which was due in April 2004. In June 2004, the note
was converted into common stock of the Company at $0.44 per share, in connection
with the Company's private placement (see Note 12).

In March 2004, a noteholder converted $5,000 of principal and accrued interest
of $696 for 13,725 shares of common stock and 13,725 warrants to purchase common
stock at $0.42 per share (see Note 8). These warrants were valued using the
Black Scholes option pricing model, the relative pro-rata fair value was
insignificant, and charged to interest expense upon grant.

A BCF approximating $137,000 and $150,000 was recorded during each of the years
ended March 31, 2004 and 2003, respectively related to the issuance of 10%
Convertible Notes.

All of the 10% Convertible Notes, except the $50,000 borrowed in March 2004,
were past due and in default at March 31, 2004. As two of these notes were no
longer convertible at March, 31, 2004, the outstanding balances totaling $15,000
are included in notes payable in the accompanying consolidated balance sheet
(see Note 6). At March 31, 2004, interest payable on these notes totaled $4,125.
At March 31, 2004, there was one remaining outstanding 10% Convertible Note with
a balance of $50,000 and interest payable totaling $2,083. Management's plans to
satisfy the remaining outstanding balance on this note include converting the
note to common stock at market value or repayment with available funds.

At March 31, 2004 convertible notes payable in the accompanying consolidated
balance sheet totaling $175,000 is comprised of the only remaining 8%
Convertible Note and the only remaining 10% Convertible Note with outstanding
balances totaling $125,000 and $50,000, respectively (see above).

F-18

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

8. EQUITY TRANSACTIONS

COMMON STOCK

During the year ended March 31, 2003, the Company issued 150,124 shares of
restricted common stock in connection with the conversion of amounts owed to
certain vendors and noteholders approximating $188,000 (see Note 5).

During the year ended March 31, 2003, the Company issued 200,000 shares of
restricted common stock for cash totaling $100,000 in connection with the
exercise of warrants.

During the year ended March 31, 2003, the Company issued 461,600 shares of
restricted common stock at $0.25 per share for cash totaling $115,400. In
connection with the issuance of certain shares, the Company granted the
stockholders warrants to purchase common stock of the Company at $0.25 per
share. The warrants vested immediately and expire through March 2004 (see
below).

During the year ended March 31, 2003, the Company issued 19,230 shares of
restricted common stock at $0.26 per share for cash totaling $5,000.

During the year ended March 31, 2003, the Company issued 8,000 shares of
restricted common stock at $1.25 for cash totaling $10,000.

During the year ended March 31, 2003, the Company issued 420,000 shares of
restricted common stock in connection with the conversion of $75,000 of 6.75%
Notes payable and $30,000 of 10% Convertible Notes (see Notes 5 and 6).

During the year ended March 31, 2003, the Company issued 69,231 shares of
restricted common stock for consulting services valued at $45,000 (estimated
based on the market price on the date of issue) and recorded such amount as
professional fees in the accompanying consolidated financial statements.

During the year ended March 31, 2003, the Company issued 196,078 shares of
restricted common stock in connection with the acquisition of a patent in 2000
(see Notes 9 and 13). Such shares were recorded at par value since the original
patent acquisition purchase transaction had been measured at $100,000 and
recorded as "patents" in the March 2000 consolidated balance sheet. The 196,078
shares merely satisfied a contingent obligation under the original purchase
agreement.

During the year ended March 31, 2004, the Company issued 540,000 shares of
restricted common stock for cash totaling $135,000 in connection with the
exercise of warrants at $0.25 per share.

During the year ended March 31, 2004, the Company issued 1,226,000 shares of
restricted common stock at $0.25 per share for cash totaling $306,500. In
connection with the issuance of common stock, the Company granted the
stockholders warrants to purchase 1,226,000 shares of common stock. The warrants
vested upon grant and expire through January 2005.

During the year ended March 31, 2004, the Company issued 180,000 shares of
restricted common stock at $0.30 per share for cash totaling $54,000. In
connection with the issuance of common stock, the Company granted the
stockholders warrants to purchase 180,000 shares of common stock. The warrants
vested upon grant and expire through March 2005.

F-19

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

8. EQUITY TRANSACTIONS (continued)

COMMON STOCK (CONTINUED)

During the year ended March 31, 2004, the Company issued 40,000 shares of
restricted common stock at $0.525 per share for cash totaling $21,000. In
connection with the issuance of common stock, the Company granted the
stockholders warrants to purchase 40,000 shares of common stock. The warrants
vested upon grant and expire through March 2005.

During the year ended March 31, 2004, the Company issued 5,000 shares of
restricted common stock at $1.125 per share for cash totaling $5,625. In
connection with the issuance of common stock, the Company granted the
stockholders warrants to purchase 5,000 shares of common stock. The warrants
vested upon grant and expire through March 2005.

During the year ended March 31, 2004, the Company issued 10,000 shares of
restricted common stock at $0.25 for services valued at $2,500.

During the year ended March 31, 2004, the Company issued 73,529 shares of
restricted common stock at $0.34 for services valued at $25,000.

During the year ended March 31, 2004, the Company issued 62,000 shares of
restricted common stock at $0.40 for services valued at $24,825.

During the year ended March 31, 2004, the Company issued 185,185 shares of
restricted common stock at $0.45 for services valued at $83,333.

During the year ended March 31, 2004, the Company issued 5,000 shares of
restricted common stock at $0.50 for services valued at $2,500.

During the year ended March 31, 2004, noteholders converted $504,135 of
principal and interest into 1,627,655 shares of common stock (see Notes 6 and 7)
and warrants to purchase 802,848 shares of common stock ( see "Warrants" below).

WARRANTS

In January 2002, the Company issued 335,000 warrants to purchase common stock in
exchange for an additional ninety days to become current on all past due
interest payments (see Note 6). The warrants have an exercise price of $2.00 per
share, vest immediately, and expired twelve months from the date of issuance.
Such warrants were valued using the Black-Scholes option pricing model at
approximately $118,000, and were recorded as interest expense.

During the year ended March 31, 2002, the Company granted 239,000 warrants for
services and the satisfaction of certain liabilities. The warrants have exercise
prices ranging from $2.75 through $6.50 per common share, vested immediately and
are exercisable through January 2007. The warrants were valued at $118,000, of
which $78,000 was recorded as accounts payable and accrued liabilities in fiscal
year 2001.

In August 2002, the Company granted warrants to purchase 52,000 shares of the
Company's restricted common stock at an exercise price of $0.25 per share in
connection with equity fund raising activities. These warrants vested upon grant
and were exercisable through March 2004. As such warrants were issued in
connection with equity fund raising activities, there was no expense recorded in
the accompanying consolidated financial statements.

F-20

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

8. EQUITY TRANSACTIONS (continued)

WARRANTS (CONTINUED)

In December 2002, the Company issued 580,000 warrants to purchase common stock
for $0.25 per share, which are exercisable through December 2007 and vested upon
grant. The warrants were issued in connection with a short-term secured note
payable (see Note 6). In accordance with GAAP, the proceeds of the financing
have been allocated to the debt and the warrants based on their relative
estimated fair values. Accordingly, a discount of $30,000 has been recorded as a
reduction of the debt balance and the off-setting credit has been reported as
additional paid-in capital. The debt discount was amortized to interest expense
in the year ended March 31, 2003 in accordance with the short-term nature of the
note payable.

During the year ended March 31, 2003, the Company granted 240,830 warrants to
investors in connection with the purchase of common stock. The warrants have an
exercise price of $0.25 per share, vest immediately and were exercisable through
March 2004. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.

During the year ended March 31, 2003, the Company granted 75,061 warrants to
certain vendors in connection with the conversion of amounts owed by the Company
into common stock. The warrants were valued at $71,000 (estimated based on the
relative fair values as determined by the Black Scholes option pricing model
pursuant to SFAS 123), have exercise prices of $2.00, vest immediately and are
exercisable through June 2005.

In March 2003, the Company issued 420,000 warrants to purchase common stock for
$0.25 per share, which were exercisable through March 2004 and vested upon
grant. The warrants were issued in connection with the conversion of notes
payable (see Notes 6 and 7). These warrants were valued using the Black Scholes
option pricing model; the relative pro-rata estimated fair value was
insignificant; and was charged to interest expense upon grant.

During the year ended March 31, 2004, the Company granted 1,226,000 warrants to
investors in connection with the purchase of common stock. The warrants have an
exercise price of $0.25 per share, vest immediately and are exercisable through
March 2005. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.

During the year ended March 31, 2004, the Company granted 180,000 warrants to
investors in connection with the purchase of common stock. The warrants have an
exercise price of $0.30 per share, vest immediately and are exercisable through
March 2005. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.

During the year ended March 31, 2004, the Company granted 40,000 warrants to
investors in connection with the purchase of common stock. The warrants have an
exercise price of $0.525 per share, vest immediately and are exercisable through
March 2005. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.

During the year ended March 31, 2004, the Company granted 5,000 warrants to
investors in connection with the purchase of common stock. The warrants have an
exercise price of $1.125 per share, vest immediately and are exercisable through
March 2005. As the warrants were issued in connection with equity financing, no
expense has been recorded in the accompanying consolidated financial statements.

As noted under "Common Stock" above, 540,000 of the warrants granted to
investors in connection with the purchase of common stock during the year ended
March 31, 2004 were exercised.

F-21

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

8. EQUITY TRANSACTIONS (continued)

WARRANTS (CONTINUED)

During the year ended March 31, 2004, the Company issued 762,064 warrants to
purchase common stock for $0.25 per share, which are exercisable through March
2005 and vested upon grant. The warrants were issued in connection with the
conversion of notes payable (see Notes 6 and 7). These warrants were valued
using the Black Scholes option pricing model; the relative pro-rata estimated
fair value was insignificant and was charged to interest expense upon grant.

In the year ended March 31, 2004, the Company issued 13,725 warrants to purchase
common stock for $0.42 per share, which are exercisable through March 2005 and
vested upon grant. The warrants were issued in connection with the conversion of
notes payable (see Notes 6 and 7). These warrants were valued using the Black
Scholes option pricing model; the relative pro-rata estimated fair value was
insignificant and was charged to interest expense upon grant.

In the year ended March 31, 2004, the Company issued 27,059 warrants to purchase
common stock for $0.65 per share, which vested upon grant and expire through
March 2005. The warrants were issued in connection with the conversion of notes
payable (see Notes 6 and 7). These warrants were valued using the Black Scholes
option pricing model; the relative pro-rata fair estimated value was
insignificant and was charged to interest expense upon grant.

A summary of the aggregate warrant activity for the years ended March 31, 2004
and 2003 is presented below:

Year Ended March 31,
-----------------------------------------------------
2004 2003
------------------------- -------------------------
Weighted Weighted
Average Exercise Average Exercise
Warrants Price Warrants Price
----------- ----------- ----------- -----------

Outstanding, beginning of year 2,906,746 $ 2.29 1,873,855 $ 3.65
Granted 2,253,848 0.29 1,367,891 0.35
Exercised (540,000) 0.25 -- --
Cancelled/Forfeited (847,400) 0.25 (335,000) (2.00)
----------- ----------- ----------- -----------

Outstanding, end of year 3,793,194 $ 2.22 2,906,746 $ 2.29
=========== =========== =========== ===========

Exercisable, end of year 3,793,194 $ 2.22 2,906,746 $ 2.29
=========== =========== =========== ===========

Weighted average estimated fair
value of warrants granted $ 0.40 $ 0.38
=========== ===========

The following outlines the significant assumptions used to estimate the fair
value information presented utilizing the Black-Scholes option pricing model:

Years Ended March 31,
2004 2003
----------- -----------
Risk free interest rate 2.50% 3.50%
Average expected life 3 years 2.5 years
Expected volatility 365% 210%
Expected dividends None None

F-22

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

8. EQUITY TRANSACTIONS (continued)

WARRANTS (CONTINUED)

The detail of the warrants outstanding and exercisable as of March 31, 2004 is
as follows:

Warrants Outstanding Warrants Exercisable
--------------------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Outstanding Price
-------------- ------------- ---------- --------------- ----------

$0.25 1,913,494 1.7 $ 0.25 1,913,494 $ 0.25
$0.30 - $1.13 265,784 0.7 $ 0.39 265,784 $ 0.39
$2.00 - $4.00 711,166 1.3 $ 2.33 711,166 $ 2.33
$5.00 - $6.50 902,750 1.0 $ 5.25 902,750 $ 5.25
-------------- ---------------
3,793,194 3,793,194
============== ===============

OPTIONS

In August 2000, the Company adopted the 2000 Stock Option Plan ("Stock Option
Plan"), which was approved by its stockholders in September 2000. The Stock
Option Plan provides for the issuance of up to 500,000 options to purchase
shares of common stock. Such options can be incentive options or nonstatutory
options, and may be granted to employees, directors and consultants. The Stock
Option Plan has limits as to the eligibility of those stockholders who own more
than 10% of Company stock, as defined. The options granted pursuant to the Stock
Option Plan may have exercise prices of no less than 100% of fair market value
of the Company's common stock at the date of grant (incentive options), or no
less than 75% of fair market value of such stock at the date of grant
(nonstatutory).

In March 2002, the board of directors granted the Company's Chief Executive
Officer ("CEO") and Dr. Tullis non-qualified stock options to purchase up to
250,000 shares of common stock each, at an exercise price of $1.90 per share
(the estimated fair value at grant date) and expire March 2012. Awards are
earned upon achievement of certain financial and/or research and development
milestones.

In January 2002, the Company granted 400,000 stock options to a consultant for
services rendered valued at $562,000 (estimated based on the Black Scholes
option pricing model pursuant to SFAS 123) in connection with a consulting
agreement. In July 2002, the Company extended the original agreement by six
months to expire July 2003 and granted an additional 200,000 stock options
valued at $114,000 (estimated based on the Black Scholes option pricing model
pursuant to SFAS 123). All 600,000 options have been exercised as of March 31,
2003. The stock options had an exercise price of $0.50, and vested on the grant
dates.

F-23

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

8. EQUITY TRANSACTIONS (continued)

OPTIONS (CONTINUED)

The following is a status of the stock options outstanding at March 31, 2004 and
the changes during the two years then ended:

Year Ended March 31,
-----------------------------------------------------
2004 2003
------------------------- -------------------------
Weighted Weighted
Average Exercise Average Exercise
Options Price Options Price
----------- ----------- ----------- -----------

Outstanding, beginning of year 1,376,115 $ 2.49 1,376,115 $ 2.49
Granted -- 200,000 0.50
Exercised -- (200,000) (0.50)
Cancelled/Forfeited -- -- --
----------- ----------- ----------- -----------

Outstanding, end of year 1,376,115 $ 2.49 1,376,115 $ 2.49
=========== =========== =========== ===========

Exercisable, end of year 1,363,615 $ 2.51 1,283,530 $ 2.50
=========== =========== =========== ===========

Weighted average estimated fair
value of options granted -- $ 0.57
=========== ===========

The following outlines the significant assumptions used to estimate the fair
value information presented utilizing the Black-Scholes option pricing model for
the year ended March 31, 2003 (there were no issuances in fiscal 2004):

Risk free interest rate 3.50
Average expected life 3 years
Expected volatility 210%
Expected dividends None

The detail of the options outstanding and exercisable as of March 31, 2004 is as
follows:

Options Outstanding Options Exercisable
------------------------------------------ --------------------------
Weighted Weighted Weighted
Average Average Average
Number Remaining Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Outstanding Price
--------------- ------------- ------------ ------------- ----------
$0.39 50,848 4.7 years $ 0.39 50,848 $ 0.39
$1.78 - $2.00 515,267 8.9 years 1.90 515,267 1.90
$2.25 - $3.00 602,500 4.3 years 2.78 590,000 2.78
$3.25 - $3.75 207,500 2.9 years 3.27 207,500 3.27
------------ -------------
1,376,115 1,363,615
============ =============

F-24

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

9. RELATED PARTY TRANSACTIONS

DUE TO RELATED PARTIES

Certain officers of the Company and other related parties have advanced the
Company funds, agreed to defer compensation and/or paid expenses on behalf of
the Company to cover working capital deficiencies. These non interest-bearing
liabilities have been included as due to related parties in the accompanying
consolidated financial statements.

ROYALTY AGREEMENT AND PATENT ACQUISITION

Effective January 1, 2000, the Company entered into an agreement with Dr. Julian
Ambrus, the son of Dr. Clara Ambrus, who was the original founder of Hemex, Inc.
under which an invention and related patent rights for a method of removing HIV
and other viruses from the blood using the Hemopurifier(TM) were assigned to the
Company by the inventors in exchange for (a) a royalty to be paid on future
sales of the patented product or process equal to 8.75% of net sales, as defined
and (b) 12,500 shares of the Company's common stock. Upon the issuance of the
first United States patent relating to the invention, the Company was obligated
to issue additional shares of common stock to the inventors. If the market price
of the Company's common stock on the date the patent is issued was below $8 per
share, the number of shares to be issued was that amount which equates to
$100,000 of market value. On March 4, 2003, the related patent was issued and
therefore the Company issued 196,078 shares of common stock recorded at par
value since the transaction was measured and reported as "patents" in fiscal
2000 for $100,000. (see Notes 8 and 13)

Other related party transactions are disclosed elsewhere in these notes to
consolidated financial statements. (see Notes 4,6,8, and 11)

10. INCOME TAX PROVISION

Income tax expense for the years ended March 31, 2004 and 2003 differed from the
amounts computed by applying the U.S. Federal income tax rate of 34 percent to
the loss from continuing operations before provision for income taxes as a
result of the following:

2004 2003
----------- -----------
Computed "expected" tax benefit $ (516,000) $ (837,000)

Reduction in income taxes resulting from:
Equity instruments issued for services -- 39,000
Interest for warrants and BCF 94,000 85,000
Change in deferred tax assets valuation allowance 583,000 897,000
State and local income taxes,
net of federal benefit (134,000) (162,000)
Other (27,000) (22,000)
----------- -----------
$ -- $ --
=========== ===========

F-25

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

10. INCOME TAX PROVISION (continued)

The tax effects of temporary differences that give rise to significant portions
of deferred tax assets at March 31, 2004 are presented below:

Deferred tax assets:
Capitalized research and development $ 1,833,000
Net operating loss carryforwards 2,977,000
-------------
Total gross deferred tax assets 4,810,000

Less valuation allowance (4,810,000)
-------------
Net deferred tax assets $ --
=============

The valuation allowance for deferred tax assets from continuing operations as of
March 31, 2004 and 2003 was $4,810,000 and $4,227,000, respectively.

As of March 31, 2004, the Company had tax net operating loss carryforwards of
approximately $8,000,000 and $3,000,000 available to offset future taxable
Federal and state income, respectively. The carryforward amounts expire in
various years through 2024.

Due to the change in ownership provisions of the Tax Reform Act of 1986, net
operating loss carryforwards for Federal income tax reporting purposes are
subject to annual limitations. Should a change in ownership occur, net operating
loss carryforwards may be limited as to use in future years.

11. COMMITMENTS AND CONTINGENCIES

REGISTRATION RIGHTS AGREEMENTS

The Company is obligated under various agreements to register its common stock,
including the common stock underlying certain warrants and options. The Company
is subject to penalties for failure to register such securities, the amount of
which could be material to the Company's financial condition, results of
operations and cash flows. The Company filed a registration statement on Form
SB-2 with the SEC in December 2000 to register the necessary securities.
However, such registration statement was never declared effective and
subsequently abandoned. Management is currently unaware of any claims related to
the lack of registration. However, as the underlying securities are no longer
restricted under Rule 144 of the Securities Act of 1933, the Company no longer
plans on filing a registration statement in connection with this transaction.

EMPLOYMENT CONTRACTS

In addition to the employment contract discussed in Note 3, the Company entered
into an employment agreement with its Chairman of the Board effective April 1,
1999. The agreement, which is cancelable by either party upon sixty days notice,
will be in effect until the employee retires or ceases to be employed by the
Company. The Chairman of the Board was appointed President and Chief Executive
Officer ("CEO") effective June 1, 2001 upon which the base annual salary was
increased from $120,000 to $180,000. The CEO is eligible for an annual bonus at
the discretion of the Board of Directors, of which nil was earned during each of
the years ended March 31, 2004 and 2003, respectively. Under the terms of the
agreement, if the employee is terminated he may become eligible to receive a
salary continuation payment in the amount of at least twelve months' base
salary.

F-26

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2004

12. SUBSEQUENT EVENTS (unaudited)

In June 2004, the Company completed a $673,000 private placement of common stock
with accredited investors, including Fusion Capital Fund II, LLC, a
Chicago-based investor. In connection with the private placement, the Company
entered into a common stock purchase agreement with Fusion Capital, whereby
Fusion Capital has committed to buy up to an additional $6,000,000 of the
Company's common stock over a 30-month period, commencing, at the Company's
election, after the SEC has declared effective a registration statement covering
such shares. The funds the Company has received in connection with this
financing, together with any additional funds the Company may receive from
Fusion Capital under the common stock purchase agreement, will be used to fund
the Company's research and development activities and anticipated operations for
the future. The Company has issued 1,529,545 shares of common stock and
1,529,545 warrants to purchase common stock at $0.76 per share, which vested
upon grant and are exercisable through May 2007, for the funds the Company has
received in connection with this financing.

Subsequent to March 31, 2004, the Company issued 242,143 shares of restricted
common stock at prices ranging from $0.44 to $1.75 per share for services
approximating $129,000.

Subsequent to March 31, 2004, the Company issued 500,000 shares of restricted
common stock for cash totaling $125,000 in connection with the exercise of
warrants at $0.25 per share.

13. PATENTS

GENERAL

Patents include both foreign and domestic patents. There were no patents or
patents pending acquired during the years ended March 31, 2004 and 2003.
Approximately $147,000 of patents pending were approved during fiscal 2003
(excluding the patent discussed in the following paragraph) and there were no
patents pending at March 31, 2004 or 2003. The unamortized cost of patents and
patents pending is written off when management determines there is no future
benefit. During the years ended March 31, 2004 and 2003, zero and $334,000 of
capitalized patent costs were written off, respectively. At March 31, 2004, the
gross carrying amount of patents and the related accumulated amortization
approximated $345,000 and $108,000, respectively. Amortization of patents and
patents pending approximated $29,000 and $15,000 during the years ended March
31, 2004 and 2003, respectively. Amortization expense on patents is estimated to
be approximately $23,000 per year for the next five fiscal years. The weighted
average amortization period for patents was approximately 15 years at March 31,
2004.

RESTATEMENT

In August 2004, management determined that it had inadvertently recorded an
additional $100,000 of expense in March 2003 related to the 196,078 shares
issued in connection with the Company's acquisition of a patent (see Note 8).
The March 31, 2004 consolidated balance sheet and statement of operations for
the year ended March 31, 2003 have been restated accordingly. Such restatement
reduced fiscal 2003 professional fees and net loss by $100,000 ($0.01) per
common share) with a corresponding reduction to the previously reported
accumulated deficit at March 31, 2004.

F-27

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEET

September 30,
2004
(Unaudited)
-------------
ASSETS
Current assets
Cash $ 4,429
Prepaid expenses 16,524
-------------
20,953

Property and equipment, net 29,098
Patents and patents pending, net 225,619
Other assets 35,455
-------------

$ 311,125
=============

LIABILITIES AND STOCKHOLDERS' DEFICIT

Current Liabilities
Accounts payable and accrued
liabilities $ 1,425,997
Due to related parties 1,710,238
Notes payable 477,500
-------------
3,613,735

Commitments and Contingencies

Stockholders' Deficit
Common stock,par value $0.001 per
share; 25,000,000 shares authorized;
14,126,932 shares issued
and outstanding 14,127
Additional paid-in capital 14,558,521
Deficit accumulated during
development stage (17,875,258)
-------------
(3,302,610)
-------------
$ 311,125
=============

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

F-28

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended September 30, 2004 and 2003 and For
the Period January 31, 1984 (Inception) Through September 30, 2004
(Unaudited)

January 31, 1984
Three Months Three Months Six Months Six Months (Inception)
Ended Ended Ended Ended through
September 30, September 30, September 30, September 30, September 30,
2004 2003 2004 2003 2004
------------- ------------- ------------- ------------- -------------

REVENUES
Grant income $ -- $ -- $ -- $ -- $ 1,424,012
Subcontract income -- -- -- -- 73,746
Sale of research
and development -- -- -- -- 35,810
------------- ------------- ------------- ------------- -------------
-- -- -- -- 1,533,568

EXPENSES

Professional fees 251,831 80,932 466,952 136,164 4,133,578
Payroll and related 200,912 107,478 384,455 210,131 5,954,965
General and administrative 109,204 76,726 168,912 155,532 3,651,353
Impairment -- -- -- -- 1,231,531
------------- ------------- ------------- ------------- -------------
561,947 265,136 1,020,319 501,827 14,971,427

OPERATING LOSS (561,947) (265,136) (1,020,319) (501,827) (13,437,859)

OTHER EXPENSE (INCOME)
Interest and other
debt expenses (213,342) 21,994 (190,374) 203,495 4,317,207
Interest income -- -- -- -- (17,415)
Other -- -- -- -- 137,607
------------- ------------- ------------- ------------- -------------
(213,342) 21,994 (190,374) 203,495 4,437,399
------------- ------------- ------------- ------------- -------------

NET LOSS $ (348,605) $ (287,130) $ (829,945) $ (705,322) $ (17,875,258)
============= ============= ============= ============= =============
BASIC AND DILUTED LOSS PER
COMMON SHARE $ (0.03) $ (0.04) $ (0.06) $ (0.09)
============= ============= ============= =============
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 13,604,294 7,753,547 12,906,408 7,536,108
============= ============= ============= =============

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

F-29

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended September 30, 2004 and 2003 and For the
Period January 31, 1984 (Inception) Through September 30, 2004

(Unaudited)

January 31, 1984
Six Months Six Months (Inception)
Ended Ended Through
September 30, September 30, September 30,
2004 2003 2004
------------- ------------- -------------

CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (829,945) $ (705,322) $(17,875,258)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 17,623 78,993 927,538
Gain on sale of property and equipment -- -- (13,065)
Fair market value of warrants issued in connection with
accounts payable and debt -- -- 2,715,736
Fair market value of common stock, warrants and
options issued for services and interest 259,512 22,500 2,428,104
Beneficial conversion feature of convertible
notes payable -- 150,000 809,800
Impairment of patents pending -- -- 334,304
Impairment of goodwill -- -- 897,227
Deferred compensation forgiven -- -- 217,223
Changes in operating assets and liabilities:
Prepaid expenses (10,942) (1,909) 145,013
Other assets (15,050) -- (35,455)
Accounts payable and accrued liabilities (162,384) 29,093 1,610,287
Due to related parties 36,781 118,909 1,710,238
------------- ------------- -------------
Net cash used in operating activities (704,405) (307,736) (6,128,308)

CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property and equipment (18,285) (2,659) (232,451)
Acquisition of patents and patents pending -- -- (352,833)
Proceeds from sale of property and equipment -- -- 17,065
Cash of acquired company -- -- 10,728
------------- ------------- -------------

Net cash used in investing activities (18,285) (2,659) (557,491)

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

F-30

(Unaudited)

January 31,1984
Six Months Six Months (Inception)
Ended Ended Through
September 30, September 30, September 30,
2004 2003 2004
------------ ------------ ------------

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of notes payable $ -- $ -- $ 1,480,000
Principal payments on notes payable (22,500) (160,000) (212,500)
Net proceeds from issuance of convertible
notes payable -- 150,000 998,000
Net proceeds from issuance of common stock 748,000 315,000 4,424,728
------------ ------------ ------------

Net cash provided by financing activities 725,500 305,000 6,690,228
------------ ------------ ------------

NET (DECREASE) INCREASE IN CASH 2,810 (5,395) 4,429
CASH - beginning of period 1,619 6,332 --
------------ ------------ ------------

CASH - end of period $ 4,429 $ 937 $ 4,429
============ ============ ============

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

F-31

AETHLON MEDICAL, INC. AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004

NOTE 1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

The Company is in the development stage on the Hemopurifier(TM) and significant
research and testing are still needed to reach commercial viability. Any
resulting medical device or process will require approval by the U.S. Food and
Drug Administration ("FDA"), and the Company has not yet begun efforts to obtain
FDA approval on its current lead product candidate, which may take several
years. Since many of the Company's patents were issued in the 1980's, they are
scheduled to expire in the near future. Thus, such patents may expire before FDA
approval, if any, is obtained.

The Company is classified as a development stage enterprise under accounting
principles generally accepted in the United States ("GAAP"), and has not
generated revenues from its principal operations.

The Company's common stock is quoted on the Over-the-Counter Bulletin Board of
the National Association of Securities Dealers under the symbol "AEMD".

The accompanying unaudited condensed consolidated financial statements of
Aethlon Medical, Inc. (the "Company") have been prepared in accordance with GAAP
for interim financial information. Accordingly, they do not include all of the
information and footnotes required by GAAP for complete financial statements. In
the opinion of management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation have been included.
Operating results for the three-month period ended September 30, 2004 are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2005.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies of the Company presented below is
designed to assist the reader in understanding the Company's consolidated
financial statements. Such financial statements and related notes are the
representations of Company management, who is responsible for their integrity
and objectivity. These accounting policies conform to GAAP in all material
respects, and have been consistently applied in preparing the accompanying
condensed consolidated financial statements.

F-33

PRINCIPLES OF CONSOLIDATION
---------------------------

The accompanying condensed consolidated financial statements include the
accounts of Aethlon Medical, Inc. and its legal wholly-owned subsidiaries
Aethlon, Inc., Hemex, Inc. and Cell Activation, Inc. ("Cell") (collectively
hereinafter referred to as the "Company"). All significant intercompany balances
and transactions have been eliminated in consolidation.

STOCK BASED COMPENSATION
------------------------

At September 30, 2004, the Company has two stock-based employee compensation
plans. The Company accounts for those plans under the recognition and
measurement principles of Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" ("APB 25"), and related
Interpretations.

No stock-based employee compensation cost is reflected in net loss, as all
options granted under those plans had an exercise price equal to the market
value of the underlying common stock on the date of grant. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," as
Amended, to stock-based employee compensation.

Six Months Ended
September 30,
2004 2003
------------ ------------
Net loss:
As reported $ (829,945) $ (705,322)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards -- (26,000)
------------ ------------
Pro forma $ (829,945) $ (731,322)
============ ============

Basic and diluted net loss per share:
As reported $ (0.06) $ (0.09)
============ ===========
Pro forma $ (0.06) $ (0.10)
============ ============

LOSS PER COMMON SHARE
---------------------

Loss per common share is based on the weighted average number of shares of
common stock and common stock equivalents outstanding during the year in
accordance with Statement of Financial Accounting Standards No. 128, "Earnings
per Share."

Securities that could potentially dilute basic loss per share (prior to their
conversion, exercise or redemption) were not included in the
diluted-loss-per-share computation because their effect is anti-dilutive.

F-34

CRITICAL ACCOUNTING POLICIES

ACCOUNTING FOR TRANSACTIONS INVOLVING STOCK COMPENSATION

SFAS 148, "ACCOUNTING FOR STOCK-BASED COMPENSATION - TRANSITION AND
DISCLOSURE, AN AMENDMENT OF FASB STATEMENT NO. 123,"
provides alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, this Statement amends the disclosure requirements of SFAS 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.

F-35

STOCK PURCHASE WARRANTS ISSUED WITH NOTES PAYABLE

BENEFICIAL CONVERSION FEATURE OF CONVERTIBLE NOTES PAYABLE

IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS

INCOME TAXES

F-36

OFF-BALANCE SHEET ARRANGEMENTS

RECLASSIFICATIONS
-----------------

Certain reclassifications have been made to the September 30, 2003 financial
statement presentation to correspond to the September 30, 2004 format.

NOTE 3. CONVERTIBLE PROMISSORY NOTES

In May 2004, a $50,000 10% convertible note was converted at $0.44 per share for
113,636 shares by an accredited individual investor.

In June 2004, the Company repaid a $12,500 10% convertible note, including
accrued interest to an accredited individual investor.

In July 2004, the Company repaid a $10,000 10% convertible note, including
accrued interest, to an accredited individual investor.

The Company is currently in default on approximately $477,500 of amounts owed
under various notes payable and accrued liabilities. The Company is continually
reviewing other financing arrangements to retire all past due notes.

In September 2004, we issued 479,513 shares of restricted common stock to LH
Financial (Esquire Trade and Finance), an accredited institutional investor, in
conjunction with the conversion of $125,000 in principal amount of notes plus
accrued interest at $0.34 per share in accordance with their convertibel note
agreement.

NOTE 4. GOING CONCERN AND LIQUIDITY CONSIDERATIONS

The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the ordinary course of business. The Company has
experienced a loss of approximately $17.9 million for the period from January
31, 1984 (Inception) through September 30, 2004. The Company has not generated
significant revenue or any profit from operations since inception. A substantial
amount of additional capital will be necessary to advance the development of the
Company's products to the point at which they may become commercially viable.
Our current plan of operation is to fund our anticipated increased research and
development activities and operations for the near future through the $673,000
private placement of common stock and the common stock purchase agreement with
Fusion Capital Fund II, LLC in May 2004, whereby Fusion Capital has committed to
purchase up to an additional $6,000,000 of our common stock over a 30-month
period, commencing, at our election, after the Securities and Exchange
Commission has declared effective a registration statement covering such shares.

However, no assurance can be given that we will receive any additional funds
under our agreement with Fusion Capital. Based on our projections of additional
employees for operations and to complete research, development and testing
associated with our Hemopurifier(TM) products, we anticipate that these funds
will satisfy our cash requirements, including this anticipated increase in
operations, in excess of the next twelve months. However, due to market
conditions, and to assure availability of funding for operations in the long
term, we may arrange for additional funding, subject to acceptable terms, during
the next twelve months.

F-37

The condensed consolidated financial statements do not include any adjustments
relating to the recoverability of assets that might be necessary should the
Company be unable to continue as a going concern. The Company's continuation as
a going concern is dependent upon its ability to obtain additional financing as
may be required, and generate sufficient revenue and operating cash flow to meet
its obligations on a timely basis.

NOTE 5. COMMITMENTS AND CONTINGENCIES

REGISTRATION RIGHTS AGREEMENTS
------------------------------

In June 2004, the Company completed a $673,000 private placement of common stock
with accredited investors, including Fusion Capital Fund II, LLC, a
Chicago-based investor. In connection with the private placement, the Company
entered into a common stock purchase agreement with Fusion Capital, whereby
Fusion Capital has committed to purchase up to an additional $6,000,000 of the
Company's common stock over a 30-month period, commencing, at the Company's
election, after the SEC has declared effective a registration statement covering
such shares. The funds the Company has received in connection with this
financing, together with any additional funds the Company may receive from
Fusion Capital under the common stock purchase agreement, will be used to fund
the Company's research and development activities and anticipated operations for
the future. An Amended registration statement on Form SB-2 was filed with the
SEC on October 28, 2004. The registration statement is currently under review by
the SEC, but management estimates that the registration statement should be
effective by December 2004.

NOTE 6. COMMON STOCK and WARRANT TRANSACTIONS

In April 2004, the Company issued 17,143 shares at $1.75 per share to an
accredited individual investor for investor relations services in the amount of
$30,000.

In April 2004, the Company issued 50,000 shares of restricted common stock at
$0.44 per share to Fusion Capital Fund II, LLC, an accredited institutional
investor, for a financing commitment to provide $6,000,000 under a registered
private placement. In connection with the $6,000,000 financing the Company paid
a fee to Fusion Capital in the amount of 418,604 shares to purchase common stock
of the Company at $0.44 per share.

In May 2004, the Company issued 568,181 shares of restricted common stock to
Fusion Capital at $0.44 per share for cash totaling $250,000. As the shares were
issued in connection with an equity financing, no related expense was recorded
in the condensed consolidated financial statements.

In May 2004, the Company issued 847,727 shares of restricted common stock to 14
accredited individual investors at $0.44 per share for cash totaling $373,000.

F-38

In May 2004, the Company issued 1,529,545 warrants to purchase common stock at
$0.76 per share, which vested upon grant and are exercisable through May 2007,
for the funds the Company received in connection with the Fusion Capital and
accredited individual investor financing in May.

In May 2004, the Company issued 225,000 shares at $0.44 per share to legal
counsel for legal services in the amount of approximately $99,000.

In July 2004, the Company issued 10,715 shares of restricted
common stock at $0.70 per share to an
accredited individual for employee placement services in the amount of $7,500.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.

In July 2004, the Company issued 6,850 shares of restricted
common stock at $0.73 per share to an
accredited individual for investor relations services in the amount of $5,000.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.

In August 2004, the Company issued 46,364 shares of restricted
common stock at $0.55 per share to an
accredited individual for employee placement services in the amount of $25,500.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.

In August 2004, the Company issued 165,492 and 28,377 shares of restricted
common stock at $0.25 and $0.45 per share, respectively to our legal counsel for
legal services in the amounts of approximately $41,400 and $12,800,
respectively. This transaction was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.

In August 2004, we issued 7,000 one-year warrants to purchase common stock at
$0.55 per share to an accredited corporate entity in conjunction with a $6,000
fee for investor and public relations services. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.

In September 2004, we issued 479,513 shares of restricted common stock to LH
Financial (Esquire Trade and Finance), an accredited institutional investor, in
conjunction with the conversion of $125,000 in principal amount of notes, plus
accrued interest, at $0.34 per share, in accordance with their convertible note
agreement. This transaction was exempt from registration pursuant to Regulation
D promulgated under the Securities Act of 1933.

NOTE 7. SUBSEQUENT EVENTS

In October 2004, the Company issued two $40,000 10% one-year notes plus 160,000
three-year warrants to purchase restricted common stock at $0.50 per share and
88,888 three-year warrants to purchase restricted common stock at $0.90 per
share to two accredited individual investors for cash in the total amount of
$80,000. This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.

In October 2004, the Company issued a $50,000 10% one-year note plus 100,000
three-year warrants to purchase restricted common stock at $0.50 per share and
55,555 three-year warrants to purchase restricted common stock at $0.90 per
share to an accredited individual investor for cash in the amount of $50,000.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.

F-39

In November 2004, the Company issued 60,000 shares of restricted common stock to
an accredited individual investor in connection with the exercise of 60,000
warrants at $0.25 per share for consideration of a $15,000 reduction in the
principal amount of a 10% one year note. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.

F-40

PART II

INDEMNIFICATION OF DIRECTORS AND OFFICERS

-70-

Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, we have been informed that, in the opinion of the
SEC, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
us is against public policy as expressed hereby in the Securities Act and we
will be governed by the final adjudication of such issue.

OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The following table sets forth the estimated costs and expenses which
we expect to incur with respect to the offering and sale or distribution of
common shares under this registration statement. We have agreed to pay all of
these expenses.

SEC registration fee $ 834.06

Financial printer fees to EDGARize and print registration statement 750.00*

Transfer Agent Fees, including Printing and Engraving Stock
Certificates 1,000.00*

Legal fees and expenses 50,000.00*

Blue Sky Fees and Expenses 2,000.00*

Accounting fees and expenses 20,000.00*

Miscellaneous 1,500.00*
--------------------------------------------------------------------------------
Total $76,084.06
--------------------------------------------------------------------------------
* estimated

RECENT SALES OF UNREGISTERED SECURITIES

We have sold or issued the following securities not registered under
the Securities Act in reliance upon the exemption from registration pursuant to
Section 4(2) of the Securities Act or Regulation D of the Securities Act during
the three year period ending on the date of filing of this registration
statement. Except as stated below, no underwriting discounts or commissions were
payable with respect to any of the following transactions.

-71-

SIX MONTHS ENDED SEPTEMBER 30, 2004

COMMON STOCK AND WARRANTS

In April 2004, the Company issued 500,000 shares of restricted common
stock to an accredited individual investor in connection with the exercise of
warrants at $0.25 per share for cash totaling $125,000. This transaction was
exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.

In April 2004, the Company issued 17,143 shares at $1.75 per share to
an accredited individual investor for investor relations services in the amount
of $30,000. This transaction was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.

In April 2004, the Company issued 50,000 shares of restricted common
stock to Fusion Capital Fund II, LLC, a accredited institutional investor, for a
financing commitment to provide $6,000,000 under a registered private placement.
In connection with the $6,000,000 financing the Company paid a fee to Fusion
Capital in the amount of 418,604 shares of common stock. This transaction was
exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.

In May 2004, the Company issued 225,000 shares of common stock at $0.44
per share and 225,000 warrants to purchase our common stock at a price of $0.76
per share to legal counsel for legal services in the amount of approximately
$99,000. This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.

In May 2004, a $50,000 10% convertible note was converted at $0.44 per
share for 113,636 shares of common stock and 113,636 warrants to purchase our
common stock at a price of $0.76 per share. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.

In May 2004, we issued fourteen accredited investors 1,529,545 shares
of restricted stock at a price of $0.44 per share for cash totaling $673,000. In
connection with the issuance of these shares, we granted the stockholders
1,529,545 warrants to purchase our common stock at a price of $0.76 per share.
The warrants vested immediately and expire on fifth anniversary from the date of
a registration statement covering the common stock underlying such warrants is
declared effective. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.

In July 2004, we issued 10,715 shares of restricted common stock at
$0.70 per share to an accredited individual for employee placement services in
the amount of $7,500. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.

In July 2004, we issued 6,850 shares of restricted common stock at
$0.73 per share to an accredited individual for consulting services on
opportunities for our Hemopurifier(TM) within the biodefense marketplace in the
amount of $5,000. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.

In August 2004, we issued 46,364 shares of restricted common stock at
$0.55 per share to an accredited individual for employee placement services in
the amount of $25,500. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.

-72-

In August 2004, we issued 7,000 one-year warrants to purchase common
stock at $0.55 per share to an accredited corporate entity in conjunction with a
$6,000 fee for investor and public relations services. This transaction was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

In September 2004, we issued 479,513 shares of restricted common stock
to LH Financial (Esquire Trade and Finance), an accredited investor, in
conjunction with the conversion of $125,000 in principal amount of notes, plus
accrued interest, at $0.34 per share, in accordance with their convertible note
agreement. This transaction was exempt from registration pursuant to Regulation
D promulgated under the Securities Act of 1933.

FISCAL YEAR ENDED MARCH 31, 2004

CONVERTIBLE NOTES PAYABLE

In April 2003, we issued a 9% convertible note in the amount of
$150,000 issued to Ms. Jill Brodersen, an accredited individual investor. The
note was convertible at $0.25 until June 30, 2003, at which time the conversion
feature expired. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.

In March 2004, we issued a 10% convertible note to RP Capital, LLC, an
accredited investor, in the amount of $50,000 for cash. The note was due on
April 30, 2004 and converted at $0.44 per share in May 2004. This transaction
was exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.

COMMON STOCK AND WARRANTS

In April 2003, we issued 600,000 shares of restricted common stock at a
price of $0.25 per share for cash totaling $150,000 to Mr. Rod Tompkins, an
accredited individual investor. In connection with the issuance of these shares,
we granted Mr. Tompkins 600,000 warrants to purchase our common stock at $0.25
per share. The warrants vested immediately and expire in April 2005. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.

In May 2003, we issued 40,000 shares of restricted common stock at a
price of $0.25 per share for cash totaling $10,000 to entities controlled by Mr.
Calvin Leung, et al, an accredited individual investor. Mr. Leung is a director
of Aethlon Medical, Inc. In connection with the issuance of these shares, we
granted the entities 40,000 warrants to purchase our common stock at $0.25 per
share. The warrants vested immediately and expired in May 2004. This transaction
was exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.

In May 2003, we issued 10,000 shares of restricted common stock at a
price of $0.25 per share in exchange for investor relations for communications
services valued at $2,500 to Comprehensive Communications, an accredited
corporate investor. This transaction was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933.

-73-

In July 2003, we issued 380,000 shares of restricted common stock at
prices between $0.25-0.30 per share for cash totaling $100,000. 100,000 shares
of restricted common stock were issued to Mr. John D. Garber, an accredited
individual investor, for $30,000 and 280,000 shares of restricted common stock
were issued to entities controlled by Calvin Leung, et al, an accredited
individual investor, for $70,000. Mr. Leung is a director of Aethlon Medical,
Inc. In connection with the issuance of these shares, we granted these
stockholders a total of 380,000 warrants to purchase our common stock at amounts
and prices equal to their shares and purchase prices herein. The warrants vested
immediately and expire in July 2004. These transactions were exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.

In September 2003, we issued 160,000 shares of restricted common stock
at a price of $0.25 per share for cash totaling $40,000 to Mr. Rod Tompkins, an
accredited individual investor. In connection with the issuance of these shares,
we granted Mr. Topkins 160,000 warrants to purchase our common stock at a price
of $0.25 per share. The warrants vested immediately and expired in September
2004. This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.

In September 2003, we issued 60,000 shares of restricted common stock
for cash totaling $15,000 to entities controlled by Mr. Calvin Leung, an
accredited individual investor, in connection with the exercise of 60,000
warrants to purchase our common stock at $0.25 per share. Mr. Leung is a
director of Aethlon Medical, Inc. This transaction was exempt from registration
pursuant to Regulation D promulgated under the Securities Act of 1933.

In October 2003, we issued 80,000 shares of restricted common stock for
cash totaling $20,000 to Mr. Rod Tompkins, an accredited individual investor, in
connection with the exercise of 80,000 warrants to purchase our common stock at
$0.25 per share. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.

In November 2003, we issued 100,000 shares of restricted common stock
at a price of $0.25 per share for cash totaling $25,000. 60,000 shares of
restricted common stock were sold to Mr. Phillip Ward, an accredited individual
investor, and 40,000 were sold to entities controlled by Mr. Calvin Leung, an
accredited individual investor. Mr. Leung is a director of Aethlon Medical, Inc.
In connection with the issuance of these shares, we granted the stockholders
100,000 warrants to purchase our common stock at a price of $0.25 per share. The
warrants vested immediately and expire in November 2004. This transaction was
exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.

In November 2003, we issued 11,017 shares of restricted common stock at
a price of $0.50 per share to Mr. Paul Hastings, an accredited individual
investor in connection with the conversion of $5,000 of notes payable plus
accrued interest. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.

In November 2003, we issued 100,000 shares of restricted common stock
for cash totaling $25,000, in connection with the exercise of 100,000 warrants
to purchase our common stock at $0.25 per share. Mr. John D. Garber, an
accredited individual investor, exercised 60,000 of the warrants and an entity
controlled by Mr. Calvin Leung, an accredited individual investor, exercised
40,000 warrants. Mr. Leung is a director of Aethlon Medical, Inc. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.

-74-

In December 2003, we issued 20,000 shares of restricted common stock at
a price of $0.25 per share for cash totaling $5,000 to two accredited investors.
In connection with the issuance of these shares, we granted the stockholders
20,000 warrants to purchase our common stock at a price of $0.25 per share. The
warrants vested immediately and expire in December 2004. This transaction was
exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.

In December 2003, we issued 461,667 shares of restricted common stock
at a price of $0.25 per share and 461,667 warrants to purchase our common stock
at an exercise price of $0.25 per share, to Provident Life Sciences Sector Fund,
LP, an institutional investor, in connection with the conversion of $100,000 of
convertible notes payable plus accrued interest. The warrants vested immediately
and are exercisable through December 2004. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.

In December 2003, we issued 120,000 shares of restricted common stock
for cash totaling $30,000, in connection with the exercise of 120,000 warrants
to purchase our common stock at $0.25 per share. Mr. John D. Garber, an
accredited individual investor, exercised 40,000 of the warrants and Mr. Rod
Tompkins, an accredited individual investor, exercised 80,000 of the warrants.
This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.

In January 2004, we issued 26,000 shares of restricted common stock at
a price of $0.25 per share for cash totaling $6,500 three entities controlled by
Mr. Calvin Leung, an accredited investor. Mr. Leung is a director of Aethlon
Medical, Inc. In connection with the issuance of these shares, we granted the
entities 26,000 warrants to purchase our common stock at a price of $0.25 per
share. The warrants vested immediately and expire in January 2005. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.

In January 2004, we issued 161,334 shares of restricted common stock at
a price of $0.25 per share and 161,334 warrants to purchase our common stock at
an exercise price of $0.25 per share, in connection with the conversion of
$35,000 of notes payable plus accrued interest to Mr. Rob Edward, who held
$30,000 in notes and Ms. Linda Price, who held $5,000 in notes, both accredited
individual investors. The warrants vested immediately and are exercisable
through January 2005. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.

In January 2004, we issued 62,000 shares of restricted common stock at
a price of $0.40 per share for services valued at approximately $25,000. 50,000
shares of restricted common stock were issued to executives of Innovative Health
Solutions who provided consulting on biodefense marketing and 12,000 shares of
restricted common stock were issued to Ms. Deborah Porter, a consultant who
provided consulting on technical solutions. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.

In February 2004, we issued 100,000 shares of restricted common stock
for cash totaling $25,000, in connection with the exercise of 100,000 warrants
to purchase our common stock at $0.25 per share. Mr. Rod Tompkins, an accredited
individual investor, exercised 60,000 of the warrants and an entity controlled
by Mr. Calvin Leung, an accredited investor, exercised 40,000 of the warrants.
Mr. Leung is a director of Aethlon Medical, Inc. This transaction was exempt
from registration pursuant to Regulation D promulgated under the Securities Act
of 1933.

-75-

In February 2004, we issued 139,063 shares of restricted common stock
at a price of $0.25 per share and 139,063 warrants to purchase our common stock
at an exercise price of $0.25 per share, in connection with the conversion of
$25,000 of notes payable plus accrued interest to Mr. Robb Newman, an accredited
individual investor. The warrants vested immediately and are exercisable through
February 2005. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.

In February 2004, we issued 190,185 shares of restricted common stock
at prices between $0.45 -$0.50 per share for services value at approximately
$105,000. 185,185 shares were issued to executives of The Research Works, Inc,
who provided research report and investor relations consulting and 5,000 shares
were issued to Ms. Cherry Kau, a consultant, for investor relations conference
services. This transaction was exempt from registration pursuant to Section 4(2)
of the Securities Act of 1933.

In March 2004, we issued 125,000 shares of restricted common stock at
prices between $0.30 -$1.125 per share to Mr. Phillip Ward 80,000 shares at
$0.30, Mr. Lance Hall 40,000 shares at $0.525, Mr. Jonathan LeBaron 5,000 shares
at $1.125, all accredited individual investors for cash totaling approximately
$51,000. In connection with the issuance of these shares, we granted the
stockholders 125,000 warrants, equal in amount and price to their shares, to
purchase our common stock at prices between $0.30 - $1.125 per share. The
warrants vested immediately and expire in March 2005. This transaction was
exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.

In March 2004, we issued 80,000 shares of restricted common stock for
cash totaling $20,000, in connection with the exercise of 80,000 warrants to
purchase our common stock at $0.25 per share, to Mr. Rod Tompkins, an accredited
individual investor. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.

In March 2004, we issued 854,574 shares of restricted common stock at
prices between $0.35-$0.65 per share in connection with the conversion of
$242,500 of notes payable plus accrued interest. 813,790 of the shares of
restricted common stock were issued to LH Financial (Esquire Trade and Finance),
an accredited institutional investor, in conjunction with the conversion of
$225,000 in principal amount of notes, plus accrued interest, at $0.35 per
share, in accordance with their convertible note agreement. 27,059 shares of
restricted common stock were issued to Mr. Robert B. Martin for conversion of
$12,500 of convertible notes, plus accrued interest at $0.65 per share and
13,725 shares of restricted shares of common stock were issued at $0.42 per
share to Ms. Pamella Fine for conversion of $5,000 of convertible notes, plus
accrued interest. We issued 40,784 warrants to purchase our common stock at
exercise prices ranging from $0.42 (13,725 to Ms. Fine) to $0.65 (27,059 to Mr.
Martin) per share. These warrants vested immediately and are exercisable through
March 2005. This transaction was exempt from registration pursuant to Regulation
D promulgated under the Securities Act of 1933.

In March 2004, we issued 73,529 shares of restricted common stock at a
price of $0.34 per share for legal services valued at approximately $25,000 to
Richardson and Patel, LLP, our corporate counsel. This transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933.

FISCAL YEAR ENDED MARCH 31, 2003:

CONVERTIBLE NOTES PAYABLE

On April 18, 2002, we issued a convertible note in the amount of
$50,000 to Provident Life Sciences Sector Fund, LP, an institutional investor,
bearing interest at 8% per annum, with principal and interest thereon due July
19, 2002. This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.

-76-

On May 3, 2002, we issued a convertible note in the amount of $30,000
to an entity controlled by Calvin Leung, an accredited investor bearing interest
at 10% per annum, with principal and interest thereon due June 2, 2002. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.

On May 31, 2002, we issued notes to two entities controlled by Calvin
Leung, an accredited investor, in the total amount of $25,000, bearing interest
at 10% per annum. Principal and interest thereon became due June 9, 2002. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.

The notes may be converted into our common stock at any time at the
option of the respective holder. The conversion price is the lower rate of $1.25
per share or the offering terms set for any private equity offering initiated
during the term of these notes. A beneficial conversion feature approximating
$80,000 was recorded during the quarter ended June 30, 2002. This transaction
was exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.

On July 2, 2002, we issued a convertible note in the amount of $50,000
to Novus Capital, LLC, an institutional investor bearing interest at 10% per
annum, with principal and interest thereon due January 3, 2003. On August 9,
2002, we issued an additional convertible note in the amount of $50,000 to Novus
Capital, LLC bearing interest a 10% per annum, with principal and interest
thereon due February 10, 2003. On August 15, 2002, we issued a convertible note
Provident Life Sciences Sector Fund, LP, an institutional in the amount of
$50,000 to an investor bearing interest a 10% per annum, with principal and
interest thereon due February 16, 2003. All three notes may be converted into
our common stock at any time at the option of the respective holder at the
conversion price of $0.50 per share. A beneficial conversion feature
approximating $150,000 was recorded during the quarter ended September 30, 2002.
These transactions were exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.

During the quarter ended December 31, 2002, we issued five convertible
notes totaling $45,000 to accredited investors Mr. Rob Edward $30,000 and $5,000
each from Ms. Pamella Fine, Ms. Linda Price and Mr. Paul Hastings, with the
right of these noteholders to convert to common stock at a conversion price of
$0.50 per share. These transactions were exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.

During the quarter ended December 31, 2002, Novus Capital, LLC, an
existing noteholder increased its advances to us by $40,000 to a total of
$140,000. In consideration, we granted them a warrant to purchase 580,000 shares
of common stock at a price of $0.25 per share and a security interest in certain
of our assets. The new note bears interest at 10% per annum, with principal and
interest thereon due April 30, 2003. A beneficial conversion feature
approximating $15,700 was recorded during the quarter ended December 31, 2002.
In accordance with GAAP, the proceeds of the financing have been allocated to
the debt and the warrants based on their relative fair values. Accordingly, a
discount of $30,000 has been recorded as a reduction of the debt balance and the
offsetting credit has been recorded as additional paid-in capital. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.

-77-

COMMON STOCK AND WARRANTS

In March 2002, we extended an offer to certain note holders and vendors
to convert past due amounts into restricted common stock and warrants to
purchase our common stock. The offer entailed the conversion of liabilities at a
conversion of one share and one-half of a warrant for every $1.25 converted. The
warrants have an exercise price of $2.00 per share and expire three years from
the date of issuance. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.

In January 2002, we entered into a consulting agreement with Mr. Calvin
Leung under which was granted an option to purchase up to 400,000 shares of our
restricted common stock at the exercise price of $0.50 per share, expiring in
January 2003. On February 12, 2002, Mr. Leung exercised all 400,000 options. Mr.
Leung was not at the time, but is currently a director of Aethlon. Such options
were valued at approximately $562,000, using the Black-Scholes option pricing
model. In July 2002, we extended the original agreement by six months to expire
July 2003. As a result of extending the agreement, Mr. Leung received an
additional option to purchase up to 200,000 shares of our restricted common
stock at the exercise price of $0.50 per share valued at $114,000 (estimated
based on the Black Scholes option pricing model pursuant to SFAS 123). Mr. Leung
is a director of Aethlon Medical, Inc. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.

During the quarter ended September 30, 2002, we issued 148,000 shares
of restricted common stock to entities controlled by Mr. Leung, an accredited
individual investor, in exchange for $74,000 in cash under such consulting
agreement. This transaction was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.

In October 2002, we issued 52,000 shares of restricted common stock in
connection with the exercise by entities controlled by Mr. Leung of options at a
price of $2.00 per share for cash totaling $26,000. This transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933.

During the quarter ended June 30, 2002, accredited note holders and
vendors representing liabilities in the aggregate amounts of approximately
$187,655 converted their debt in exchange for 150,124 shares of our restricted
common stock and 75,061 warrants to purchase common stock at $1.25 per share.
Converting accredited noteholders were the Accetta Family Trust, $25,000
principal amount, plus accrued interest, Mr. Richard Tullis, father of Richard
H. Tullis, our Chief Science Officer and director, $25,000 principal amount,
plus accrued interest, Ms. Patricia Bradford, $25,000 principal amount, plus
accrued interest, Mr. John W. La Husen, $25,000 principal amount, plus accrued
interest and vendors Accudx, $20,000 for technical consulting and lab services,
Cronkite & Kissell, LLC, $4,000 for valuation services for financial reporting,
and Generico, Inc., approximately $52,000 for services as technical consulting
services. The warrants were valued using the Black-Scholes option pricing model
at approximately $71,000 for the quarter ended June 30, 2002. This transaction
was exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.

In November 2002, we issued 69,231 shares of restricted common stock
for consulting services valued at $45,000 at a price of $0.65 per share to James
Mazepink for corporate strategic and computer modeling services. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.

During the quarter ended March 31, 2003, we issued 420,000 shares of
restricted common stock at $0.25 per share in connection with the conversion of
$75,000 of 12% convertible notes and $30,000 of 10% convertible notes to Mr.
Leung, an accredited individual investor and the entities controlled by him. Mr.
Leung is a director of Aethlon Medical, Inc. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.

-78-

During the quarter ended March 31, 2003, we issued 461,600 shares of
our restricted common stock at $0.25 per share for cash totaling $115,400 to
John D. and Clare Garber, accredited individual investors 100,000 shares, Mr.
Jeffrey Robinson, an accredited individual investor, 80,000 shares, Mr. Rob
Edwards, an accredited individual investor, 41,600, and entities controlled by
Mr. Calvin Leung, an accredited individual investor, 240,000 shares. In
connection with the issuance of these shares, we granted the stockholders
warrants to purchase our common stock at $0.25 per share. The warrants vested
immediately and expired through March 2004. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.

During the quarter ended March 31, 2003, we issued 19,230 shares of
restricted common stock at $0.26 per share for cash totaling $5,000 to Ms. Lisa
Caswell, an accredited individual investor. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.

During the quarter ended March 31, 2003, we issued 8,000 shares of
restricted common stock at $1.25 for cash totaling $10,000 to Mr. Art Milstein,
an accredited individual investor. This transaction was exempt from registration
pursuant to Regulation D promulgated under the Securities Act of 1933.

In March 2003, we issued 196,078 shares of our restricted common stock
in connection with a patent royalty agreement to Julie Ambrose and David
Schmura. The shares were valued at $100,000. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.

OPTIONS AND WARRANTS

In July 2002, we extended a consulting agreement to Mr. Calvin Leung,
an accredited individual investor and granted an additional 200,000 stock
options valued at $114,000 (estimated based on the Black Scholes option pricing
model pursuant to SFAS 123). Mr. Leung was not at the time, but is currently is
a director of Aethlon Medical, Inc. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.

During the year ended March 31, 2003, we granted 240,830 warrants to
accredited investors as follows: Lisa Caswell 19,230 warrants, Rob Edward 41,600
warrants, Jeffrey Robinson 80,000 warrants and John Garber 100,000 warrants in
connection with the purchase of our common stock. The warrants have an exercise
price of $0.25 per share, vest immediately and were exercisable through March
2004. This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.

In December 2002, we issued 580,000 warrants to Novus Capital, LLC, an
institutional investor, to purchase our restricted common stock for $0.25 per
share, which are exercisable through December 2004 and vested upon grant. The
warrants were issued in connection with a short-term secured note payable. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.

In March 2003, we issued 420,000 warrants to Mr. Calvin Leung, an
accredited individual investor, and entities controlled by him, to purchase our
restricted common stock for $0.25 per share, which were exercisable through
March 2004 and vested upon grant. The warrants were issued in connection with
the conversion of notes payable. This transaction was exempt from registration
pursuant to Regulation D promulgated under the Securities Act of 1933.

-79-

During the year ended March 31, 2003, associated with common stock
issued, we granted 75,061 warrants to purchase our common stock in the following
amounts, to accredited investor noteholders: Accetta Family Trust 11,210
warrants, Patricia Bradford 11,379 warrants, Richard Tullis 10,488 warrants and
John LaHusen 11,450 warrants and vendors Accudx 8,000 warrants for technical
consulting and lab services, Cronike and Kissell 1,600 warrants for valuation
services for financial reporting and Generico 20,934 warrants for technical
consulting services. The warrants were valued at $71,000 (estimated based on the
relative fair values as determined by the Black Scholes option pricing model
pursuant to SFAS 123), have exercise prices of $2.00, vest immediately and are
exercisable through June 2005. This transaction was exempt from registration
pursuant to Section 4(2) of the Securities Act of 1933.

FISCAL YEAR ENDED MARCH 31, 2002:

CONVERTIBLE NOTES PAYABLE

In October 2001, we issued a convertible note in the amount of $25,000
to Mr. Merlin Corbin, an accredited investor, bearing interest at 10% per annum,
with principal and accrued interest due April 2002 and a conversion price of
$1.25 per share. The value of the beneficial conversion feature for this
convertible note was estimated to be approximately $25,000. This transaction was
exempt from registration pursuant to Regulation D promulgated under the
Securities Act of 1933.

In October 2001, we issued additional convertible notes totaling
$70,000 bearing interest at 10% per annum, with principal and accrued interest
due April 2002, to the following accredited investors: Mr. Merlin Corbin
$12,500, Dr. Paul Day $12,500, Martin and Lisa Drake $5,000, Mr. John Garber
$25,000, Mr. Ali Mirnizam $5,000 and Jeffrey and Elizabeth Dalton $10,000. The
convertible notes may be converted to our common stock at the conversion price
per share of $1.25. This transaction was exempt from registration pursuant to
Regulation D promulgated under the Securities Act of 1933.

In November and December 2001, we issued additional convertible notes
totaling $3348,000, bearing interest at 10% per annum, with principal and
accrued interest due April 2002 to the following accredited investors: an entity
controlled by Mr. Calvin Leung $18,000, Mr. Elwin Law $5,000, Mr. Gabriel
Wheeler $5,000 and Mr. Baharak Parvin $5,000. The convertible note could be
converted to our common stock at the conversion price per share of $1.25. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.

On March 18, 2002, we issued a promissory note to Mr. Calvin Leung, an
accredited investor and a stockholder in the amount of $50,000, bearing interest
at 6.75% per annum and maturing on May 17, 2002. This transaction was exempt
from registration pursuant to Regulation D promulgated under the Securities Act
of 1933.

COMMON STOCK AND WARRANTS

During the quarter ended June 30, 2001, we issued 21,750 shares of
restricted common stock and 48,000 warrants and options in payment for $243,375
accounts payable and accrued liabilities for financial consulting services to
Catalyst Group, financial media relations, 2,500 shares and 16,750 warrants and
Mr. Scott Cooper, financial consulting, who received 19,250 shares and 31,250
warrants with an exercise price of $5.00 per share, expiring in four years. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.

During the quarter ended June 30, 2001, we issued 6,038 shares of
restricted common stock to Ms. Beverly Ann Cormier in exchange for providing
payment for scientific consulting services valued at $16,000. This transaction
was exempt from registration pursuant to Section 4(2) of the Securities Act of
1933.

During the quarter ended June 30, 2001, we issued 730,804 shares of
restricted common stock (480,804 to Accelerated Technologies Fund, LLC and
250,000 to Agave, Ltd) to two institutional investors in exchange for $689,264.
This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.

-80-

During the quarter ended September 30, 2001, we issued 10,000 shares of
restricted common stock to Carter Barnard PLC, in payment for financial
consulting services valued at $27,500. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.

During the quarter ended September 30, 2001, we issued 6,000 shares of
restricted common stock in exchange of payment for scientific advisory services
related to the acquisition of shares of Cell Activation, payment for services
valued at $18,000 to Shellwater and Co., 5,475 shares and Mr.
Gert-Schmid-Schoenbaum, 524 shares, respectively. This transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933.

During the quarter ended September 30, 2001, we issued 70,586 shares of
restricted common stock at $3.00 per share to Esquire Trade and Finance, Inc.
(LH Financial), an institutional investor, the holder of $211,758 convertible
notes. This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.

During the quarter ended September 30, 2001, we issued 16,667 shares of
restricted common stock to Robert and Shelly Millsap, accredited individual
investors, for $20,000 cash, net of issuance costs of $2,500, at $1.50 per
share. This transaction was exempt from registration pursuant to Regulation D
promulgated under the Securities Act of 1933.

During the quarter ended December 31, 2001, 8% convertible notes in the
aggregate amount of $20,000 and accrued interest of $1,604 were converted by
Esquire Trade and Finance (LH Financial), an institutional investor, into 10,288
shares of common stock. This transaction was exempt from registration pursuant
to Regulation D promulgated under the Securities Act of 1933.

During the quarter ended December 31, 2001, we issued 9,651 shares of
restricted common stock in payment for investor relations services and radio
media presentation consulting valued at $26,250, with 5,800 shares to Windows to
Wall Street and 3,861 shares to Charlotte Given. This transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933.

In January 2002, we entered into a consulting agreement with Mr. Calvin
Leung under which he was granted an option to purchase up to 400,000 shares of
our restricted common stock at the exercise price of $0.50 per share, expiring
in April 2002. Funds in the aggregate amount of $200,000 were generated in
January and February 2002, through the exercise by Mr. Leung of this option to
purchase 400,000 shares our common stock. Mr. Leung was not at the time, but is
now a director of Aethlon Medical, Inc. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.

During the quarter ended March 31, 2002, we issued 123,877 shares of
our restricted common stock to certain accredited individual noteholders for the
conversion of their convertible notes payable and accrued interest in the
aggregate amount of $144,882 at an average price of $1.24 per share. This
transaction was exempt from registration pursuant to Regulation D promulgated
under the Securities Act of 1933.

During the quarter ended March 31, 2002, we issued in the aggregate
62,327 shares of restricted common stock and 74,000 warrants to the following:
Mr. Barry Migliorini, 18,443 shares of restricted common stock and 18,500
warrants with an exercise price of $4.00 per share, Mr. Dreux Valenti, 14,275
shares of restricted common stock and 18,500 warrants with an exercise price of
$4.00 per share and National Capital, LLC, 29,609 shares of restricted common
stock and 37,000 warrants at $4.00 per share, in payment for services related to
investment banking valued at $161,537. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.

During the quarter ended March 31, 2002, we issued 9,198 shares of
restricted common stock in payment for services valued at $17,500 to Ms.
Charlotte Given for radio media presentation consulting. This transaction was
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933.

During the quarter ended March 31, 2002, 10% convertible notes in the
aggregate amount of $15,000 and accrued interest of $64 were converted into
12,051 shares of common stock at $1.25 per share. Mr. Gabriel Wheeler, Mr.
Baharak Parvin and Mr. Ali Mirnizam, each accredited investors, each held a note
in the principal amount of $5,000. This transaction was exempt from registration
pursuant to Regulation D promulgated under the Securities Act of 1933.

-81-

During the quarter ended March 31, 2002, we issued 804,308 shares of
our restricted common stock and 408,180 warrants to purchase common stock to
certain accredited individual noteholders for the conversion of their
convertible notes payable and accrued interest in the aggregate amount of
$1,609,387 at $1.25 per share. The warrants were valued using the Black-Scholes
option pricing model at approximately $339,000. Since the warrant conversion
rate was below estimated market value, BCF approximating $265,000 was recorded
during the year ended March 31, 2002. This transaction was exempt from
registration pursuant to Regulation D promulgated under the Securities Act of
1933.

OPTIONS AND WARRANTS

In May 2001, we issued 150,000 warrants to Ms. Dian Griesel, an
executive of Investor Relations Group to purchase our restricted common stock in
exchange for investor relations consulting services valued at approximately
$74,000. The warrants have an exercise price of $6.50 per share, vest
immediately and expire in September 11, 2005. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933.

In July 2001, we granted our then Chief Financial Officer options to
purchase up to 150,000 shares of common stock at an exercise price of $2.25 per
share, which vest ratably over three years and expire July 15, 2011. This
transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.

In September 2001, we granted an aggregate 15,000 options, 7,500 each
to Mr. Bruce Haglund and Mr. Alton Burkhalter to purchase our restricted common
stock for services provided related to legal fees and the satisfaction of
certain liabilities. The options have exercise prices of $2.00, vested
immediately and are exercisable through July 2008. This transaction was exempt
from registration pursuant to Section 4(2) of the Securities Act of 1933.

In October 2001, we issued 15,000 warrants to Griffin Securities to
purchase our restricted common stock in exchange for services provided pursuant
to an investment banking contract valued at $7,500. The warrants have an
exercise price of $2.75 per share, vested immediately and expire in May 2006.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.

In November 2001, we granted 15,667 stock options to outside directors
(Mr. Frank Barry 1,867, Mr. Robert Lambrix 5,200, Mr. John Penhume 5,600, and
Mr. Edward Broenniman 3,000) to purchase our restricted common stock for board
of director services. The options have exercise prices ranging from $1.78
through $5.80, vested immediately and are exercisable through November 2011.
This transaction was exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933.

In January 2002, we issued 335,000 warrants to existing 12% noteholders
to purchase our restricted common stock in exchange for an additional ninety
days to become compliant with all past due interest payments. The warrants have
an exercise price of $2.00 per share, vest immediately, and expired twelve
months from the date of issuance. This transaction was exempt from registration
pursuant to Regulation D promulgated under the Securities Act of 1933.

In March 2002, the board of directors granted our Chief Executive
Officer James A Joyce and our Chief Science Officer, Dr. Richard H. Tullis
non-qualified stock options to purchase up to 250,000 shares of our common stock
each, at an exercise price of $1.90 per share and expire in March 2012. Awards
are earned upon achievement of certain financial and/or research and development
milestones. This transaction was exempt from registration pursuant to Section
4(2) of the Securities Act of 1933.

-82-

EXHIBITS

3.1 Articles of Incorporation of Aethlon Medical, Inc. (1)

3.2 Bylaws of Aethlon Medical, Inc. (1)

3.3 Certificate of Amendment of Articles of Incorporation dated March 28,
2000 (2)

5.0 Legal opinion by Richardson & Patel LLP (10)

10.1 Employment Agreement between Aethlon Medical, Inc. and Franklyn S.
Barry, Jr. dated April 1, 1999 (3)

10.2 Employment Agreement between Aethlon Medical, Inc. and James A. Joyce
dated April 1, 1999 (3)

10.3 Agreement and Plan of Reorganization Between Aethlon Medical, Inc. and
Aethlon, Inc. dated March 10, 1999 (4)

10.4 Agreement and Plan of Reorganization Between Aethlon Medical, Inc. and
Hemex, Inc. dated March 10, 1999 (4)

10.5 Agreement and Plan of Reorganization Between Aethlon Medical, Inc. and
Syngen Research, Inc. (5)

10.6 Agreement and Plan of Reorganization Between Aethlon Medical, Inc. and
Cell Activation, Inc. (6)

10.7 Common Stock Purchase Agreement between Aethlon Medical, Inc. and
Fusion Capital Fund II, LLC. (7)

10.8 Registration Rights Agreement between Aethlon Medical, Inc. and Fusion
Capital Fund II, LLC. (7)

10.9 Form of Securities Purchase Agreement for Private Placement closing on
June 7, 2004 (7)

10.10 Form of Common Stock Purchase Warrant for Private Placement closing on
June 7, 2004 (7)

10.11 Form of Registration Rights Agreement for Private Placement closing on
June 7, 2004 (7)

10.12 2003 Consultant Stock Plan (8)

10.13 Lease by and between Aethlon Medical, Inc. and San Diego Science Center
(9)

10.14 Consulting Agreement by and between Aethlon Medical, Inc. and
Jean-Claude Chermann, PhD (9)

10.15 Consulting Agreement by and between Aethlon Medical, Inc. and Franklyn
S. Barry, Jr. (9)

10.16 Patent License Agreement by and amongst Aethlon Medical, Inc., Hemex,
Inc., Dr. Julian L. Ambrus and Dr. David O. Scamurra (9)

10.17 Employment Agreement by and between Aethlon Medical, Inc. and Dr.
Richard H. Tullis (9)

10.18 Employment Agreement by and between Aethlon Medical, Inc. and Edward C.
Hall (9)

10.19 Cooperative Agreement by and between Aethlon Medical, Inc. and George
Mason University (10)

10.20 Consulting Agreement by and between Aethlon Medical, Inc. and Dr.
Charles Bailey*

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10.21 Consulting Agreement by and between Aethlon Medical, Inc. and Dr. Ken
Alibek*

21 List of subsidiaries (11)

23.1 Consent of Independent Registered Public Accounting Firm (Squar,
Milner, Reehl & Williamson, LLP) *

* Filed herewith

(1) Filed with the Company's Registration Statement on Form SB-2 dated
December 18, 2000 and incorporated by reference.
(2) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 2000 and incorporated by reference.
(3) Filed with the Company's Annual Report on Form 10-KSB for the year
ended March 31, 1999 and incorporated by reference.
(4) Filed with the Company's Current Report on Form 8-K dated March 10,
1999 and incorporated by reference.
(5) Filed with the Company's Current Report on Form 8-K dated January 10,
2000 and incorporated by reference.
(6) Filed with the Company's Current Report on Form 8-K dated April 10,
2000 and incorporated by reference.
(7) Filed with the Company's Current Report on Form 8-K dated June 7, 2004
and incorporated by reference.
(8) Incorporated by reference from our Registration Statement on Form S-8
(File No. 333-114017) filed on March 29, 2004.
(9) Filed with the Company's Annual Report on Form 10-KSB/A for the year
ended March 31, 2004 and incorporated by reference.
(10) Filed with the Company's Amendment No.2 to Registration Statement on
Form SB-2 filed on October 28, 2004.
(11) Filed with the Company's Registration Statement on Form SB-2 filed on
July 7, 2004.

UNDERTAKINGS.

We hereby undertake to:

1. File, during any period in which we offer or sell securities, a
post-effective amendment to this registration statement to:

(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;

(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in
the information in the registration statement; and
notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered)
and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of
prospectus filed with the SEC under Rule 424(b) if, in the
aggregate, the changes in the volume and price represent no
more than a 20% change in the maximum aggregate offering price
set forth in the "Calculation of Registration Fee" table on
the face page of the effective registration statement; or

(iii) Include any additional or changed material information on the
plan of distribution.

2. For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.

3. File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.

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4. For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant under Rule 424(b)(1) or (4) or 497(h) under
the Securities Act as part of this registration statement as of the time it was
declared effective.

5. For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to our directors, officers and
controlling persons under the foregoing provisions or otherwise, we have been
advised that in the opinion of the SEC such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable. If a
claim for indemnification against such liabilities (other than our payment of
expenses incurred or paid by any of our directors, officers or controlling
persons in the successful defense of any action, suit, or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, we will, unless in the opinion of our counsel the
matter has been settled by a controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by us is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.

SIGNATURES

In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing this Pre-Effective Amendment No.3 on Form SB-2
Registration Statement and authorized this Pre-Effective Amendment No. 3 on Form
SB-2 Registration Statement to be signed on its behalf by the undersigned, in
the City of San Diego, State of California on November 17, 2004.

AETHLON MEDICAL, INC.

By: /s/ James A. Joyce
-------------------------------------
James A. Joyce
Chief Executive Officer and President
(principal executive officer)

In accordance with the requirements of the Securities Act of 1933, this
Pre-Effective Amendment No. 3 on Form SB-2 Registration Statement was signed by
the following persons in the capacities and on the dates stated:

By: /s/ James A. Joyce President, Chief Executive Officer and Chairman November 17, 2004
-------------------------------- (principal executive officer)
James A. Joyce

By: /s/ Edward C. Hall Chief Financial Officer and Vice-President November 17, 2004
-------------------------------- (principal accounting and financial officer)
Edward C. Hall

By: /s/ Richard H. Tullis Chief Science Officer and Director November 17, 2004
--------------------------------
Richard H. Tullis
By: /s/ Franklyn S. Barry, Jr. Director November 17, 2004
--------------------------------
Franklyn S. Barry, Jr.
By: /s/ Edward Broenniman Director November 17, 2004
--------------------------------
Edward Broenniman
By: /s/ Calvin M. Leung Director November 17, 2004
--------------------------------
Calvin M. Leung

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