UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-QSB/A

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from                      to                     

MEDICAL DISCOVERIES, INC.

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

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

1388 S. Foothill Drive, #266, Salt Lake City, Utah 84108

(Address of principal executive offices)

(801) 582-9583

(Issuer’s telephone number, including area code)

N/A

(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: As of November 10, 2005, there were 107,679,724 shares of the issuer’s Common Stock and 42,000 shares of the issuer’s Series A Preferred Stock outstanding.

Transitional Small Business Disclosure Format (check one): Yes o No þ

 

 

Explanatory Note

The purpose of this amendment on Form 10-QSB/A to the Quarterly Report on Form 10-QSB of Medical Discoveries, Inc. for the three and nine months ended September 30, 2005 is to restate our interim consolidated financial statements for the period ended September 30, 2005 and related disclosures as of and for the period ended September 30, 2005. Generally, no attempt has been made in this Form 10-QSB/A to modify or update other disclosures presented in the original report on Form 10-QSB except as required to reflect the effects of the restatement. The Form 10-QSB/A generally does not reflect events occurring after the filing of the Form 10-QSB or modify or update those disclosures, including the exhibits to the Form 10-QSB, affected by subsequent events. Information not affected by the restatement is unchanged and reflects the disclosures made at the time of the original filing of the form 10-QSB on November 14, 2005. Accordingly, this Form 10-QSB/A should be read in conjunction with our filings made with the Securities and Exchange Commission subsequent to the filing of the original Form 10-QSB, including any amendment to those filings. The following items have been amended as a result of the restatement:

Part I — Item 1. Financial Statements

Part I — Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Part II — Item 6. Exhibits

The purpose of the restatement is to give effect to EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to and Potentially Settled in a Company’s Own Stock,” pursuant to which we have reclassified as liabilities our outstanding warrants.

For convenience and ease of reference, we are filing our quarterly report in its entirely with the applicable changes.

 

TABLE OF CONTENTS

PART I FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS			3
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			11
ITEM 3. CONTROLS AND PROCEDURES			14
PART II OTHER INFORMATION
ITEM 6. EXHIBITS			15
SIGNATURES			17
INDEX TO EXHIBITS			18
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I
FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The following financial statements are filed with this report:

Condensed Consolidated Balance Sheets as of September 30, 2005, (unaudited) and December 31, 2004 (audited)

Condensed Consolidated Statements of Operations for the nine-month periods ended September 30, 2005 (unaudited), September 30, 2004 (unaudited), three-month periods ended September 30, 2005 (unaudited), September 30, 2004 (unaudited) and from inception of the development stage on November 20, 1991 through September 30, 2005 (unaudited)

Condensed Consolidated Statements of Cash Flows for the nine-month periods ended September 30, 2005 (unaudited), September 30, 2004 (unaudited), and from inception of the development stage on November 20, 1991 through September 30, 2005 (unaudited)

Notes to Unaudited Condensed Consolidated Financial Statements

MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Balance Sheets
(Unaudited)

		September 30,				December 31,
		2005				2004
		(Restated)
ASSETS
CURRENT ASSETS
Cash		$	1,256,939			$	1,455,397
Deposits			—				51,100
Total Current Assets			1,256,939				1,506,497
Note receivable			301,450
Property and Equipment, Net			73,432				—
TOTAL ASSETS		$	1,631,821			$	1,506,497
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable		$	2,658,393			$	2,448,454
Accrued interest payable			230,298				415,262
Notes payable			56,000				336,717
Convertible notes payable			193,200				193,200
Research and development obligation			602,900				—
Financial instrument			3,369,545				—
Total Current Liabilities			7,110,336				3,393,633
TOTAL LIABILITIES			7,110,336				3,393,633
STOCKHOLDERS’ DEFICIT
Preferred stock, Series A, convertible; no par value; 50,000 shares authorized; 42,000 and 12,000 shares issued and outstanding, respectively; (aggregate liquidation preference of $4,200,000 and $1,200,000, respectively)			523,334				523,334
Common stock, no par value; 250,000 shares authorized; 107,629,724 and 105,653,335 shares issued and outstanding, respectively			15,219,333				14,918,657
Additional paid-in capital			988,670				3,424,383
Deficit accumulated prior to the development stage			(1,399,577	)			(1,399,577	)
Deficit accumulated during the development stage			(20,810,275	)			(19,353,933	)
Total Stockholders’ Deficit			(5,478,515	)			(1,887,136	)
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT		$	1,631,821			$	1,506,497

MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Operations
(Unaudited)

																		From Inception
																		of the
																		Development Stage
		For the Three								For the Nine								on November 20, 1991
		Months Ended								Months Ended								Through
		September 30,								September 30,								September 30,
		2005				2004				2005				2004				2005
		(Restated)								(Restated)								(Restated)
REVENUES		$	—			$	—			$	—			$	—			$	157,044
COST OF GOODS SOLD			—				—				—				—				14,564
GROSS PROFIT			—				—				—				—				142,480
OPERATING EXPENSES
General and administrative			557,713				250,819				1,446,034				2,667,782				16,623,004
Research and development			364,335				191,506				2,034,841				362,484				5,583,579
Inventory write-down			—				—				—				—				96,859
Impairment loss			—				—				—				—				9,709
License fees			—				—				—				—				1,001,500
Total Expenses			922,048				442,325				3,480,875				3,030,266				23,314,651
LOSS FROM OPERATIONS			(922,048	)			(442,325	)			(3,480,875	)			(3,030,266	)			(23,172,171	)
OTHER INCOME (EXPENSES)
Unrealized gain (loss) on financial instrument			(200,673	)			—				1,790,242				—				1,790,242
Interest income			2,674				854				17,584				3,980				47,155
Interest expense			(7,591	)			(27,497	)			(30,726	)			(114,221	)			(1,148,163	)
Foreign currency transaction gain (loss)			(9,720	)			—				51,080				—				51,080
Gain on forgiveness of debt			—				—				196,353				—				1,431,889
Other income			—				39				—				759				881,892
Total Other Income (Expenses)			(215,310	)			(26,604	)			(2,024,533	)			(109,482	)			3,054,095
NET LOSS			(1,137,358	)			(468,929	)			(1,456,342	)			(3,139,748	)			(20,118,076	)
Preferred stock dividend from beneficial conversion feature			—				—				—				—				(692,199	)
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS		$	(1,137,358	)		$	(468,929	)		$	(1,456,342	)		$	(3,139,748	)		$	(20,810,275	)
BASIC AND DILUTED LOSS PER COMMON SHARE		$	(0.01	)		$	(0.00	)		$	(0.01	)		$	(0.03	)
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING			107,760,835				96,482,603				107,282,554				89,667,882

MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows
(Unaudited)

										From Inception
										of the
		For the Nine								Development Stage
		Months Ended								on November 20, 1991
		September 30,								Through September 30,
		2005				2004				2005
		(Restated)								(Restated)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(1,456,342	)		$	(3,139,748	)		$	(20,118,076	)
Adjustments to reconcile net loss to net cash used by operating activities:
Foreign currency transaction gain			(51,080	)			—				(51,080	)
Gain on debt restructuring			(196,353	)			—				(1,431,889	)
Common stock issued for services, expenses, and litigation			18,750				66,500				4,286,467
Commitment for research and development obligation			665,700				—				665,700
Depreciation			4,613				—				104,884
Reduction of escrow receivable from research and development			—				—				272,700
Unrealized gain on financial instrument			(1,790,242	)			—				(1,790,242	)
Stock options and warrants granted for services			—				1,675,000				4,811,253
Reduction of legal costs							—				(130,000	)
Write-off of subscriptions receivable			—				—				112,500
Impairment loss on assets			—				—				9,709
Loss on disposal of equipment			—				—				30,364
Write-off of accounts receivable			51,100				—				245,065
Note payable issued for litigation			—				—				385,000
Changes in operating assets and liabilities:
Increase in accounts receivable			—				—				(7,529	)
Decrease in prepaid expenses			—				11,331				—
Decrease in deferred charges			—				12,077				—
Increase in accounts payable			209,939				264,288				2,502,484
Increase in accrued expenses			30,672				37,905				630,381
Net Cash Used by Operating Activities			(2,513,243	)			(1,072,647	)			(9,472,309	)
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in deposits			—				—				(51,100	)
Purchase of equipment			(78,045	)			—				(210,229	)
Issuance of note receivable			(313,170	)			—				(313,170	)
Payments received on note receivable			—				—				130,000
Net Cash Used by Investing Activities			(391,215	)			—				(444,499	)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock, preferred stock and warrants for cash			3,006,000				1,352,886				10,033,845
Contributed equity			—				—				131,374
Proceeds from notes payable			—				—				1,336,613
Payments on notes payable			(300,000	)			(270,000	)			(801,287	)
Proceeds from convertible notes payable			—				—				571,702
Payments on convertible notes payable			—				—				(98,500	)
Net Cash Provided by Financing Activities			2,706,000				1,082,886				11,173,747
NET INCREASE IN CASH			(198,458	)			10,239				1,256,939
CASH AT BEGINNING OF PERIOD			1,455,397				424,216				—
CASH AT END OF PERIOD		$	1,256,939			$	434,455			$	1,256,939

MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Condensed Consolidated Statements of Cash Flows (Continued)
(Unaudited)

		For the Nine
		Months Ended
		September 30,
		2005				2004
SUPPLIMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Initial valuation of financial instrument		$	6,279,829			$	—
Retirement of notes payable with common stock		$	—			$	175,000

See notes to condensed consolidated financial statements.

MEDICAL DISCOVERIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Unaudited Condensed Consolidated Financial Statements

Note 1 — Basis of Presentation

Unaudited Interim Condensed Consolidated Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these financial statements have been included. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s 2004 Annual Report on Form 10-KSB for the year ended December 31, 2004, as filed with the Securities and Exchange Commission. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

Loss Per Common Share

Loss per share is computed by dividing net loss applicable to common shareholders by the weighted-average number of shares outstanding. Potential common shares from convertible preferred stock, convertible notes payable, convertible preferred stock, warrants and stock options have not been included as they are anti-dilutive.

Stock Based Compensation

The Company accounts for its stock options under Accounting Principles Board (APB) Opinion No. 25 using the intrinsic value method. The Company has elected not to adopt the provisions of Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based Compensation (FAS 123). In accordance with Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based Compensation — Transition and Disclosure, pro-forma net income, stock-based compensation expense, and earnings per share using the fair value method are stated as follows:

		Three Months Ended Sep. 30,								Nine Months Ended Sep. 30,
		2005				2004				2005				2004
Net loss applicable to common shareholders, as reported		$	(1,137,358	)		$	(468,929	)		$	(1,456,342	)		$	(3,139,748	)
Add: Stock-based employee compensation expense included in reported net loss			—				—				—				1,577,000
Deduct: Total stock based employee compensation expense determined under fair value based method for all awards			—				—				—				(1,916,768	)
Pro forma net loss applicable to common shareholders		$	(1,137,358	)		$	(468,929	)		$	(1,456,342	)		$	(3,479,516	)
Basic and diluted loss per share, as reported		$	(0.01	)		$	(0.00	)		$	(0.01	)		$	(0.03	)
Basic and diluted loss per share, pro forma		$	(0.01	)		$	(0.00	)		$	(0.01	)		$	(0.04	)

Assumptions used to calculate the fair value of stock options granted as if the Company had adopted FAS 123 were as follows:

		2005				2004
Expected dividend yield			N/A				—
Risk free interest rate			N/A				3.8	%
Expected volatility			N/A				220	%
Expected life			N/A			7		years
Weighted average fair value per share			N/A			$	0.10

Note 2 — Restatement of Financial Statements

The Company’s previously issued condensed consolidated financial statements as of September 30, 2005 and for the three and nine months ended September 30, 2005 have been restated to record the accounting of the warrants resulting from the issuance of the Series A Convertible Preferred Stock entered into in October 2004 and March 2005 (See Note 4). These warrants, and all other warrants previously issued by the Company, were measured at their fair value and are reflected as a liability on the financial statements. The excess of the fair value of the warrants over the net proceeds received is recognized as an unrealized loss on financial instrument. The reclassification of previously issued warrants to a liability was recognized as a decrease to equity. The Company also remeasured the fair value of the warrants as of September 30, 2005 with the difference being recorded on the income statement as a change in financial instrument. As a result of this restatement, the Company recorded $3,369,545 of additional current liability related to the fair value of the warrants, with a reduction of $5,159,787 in equity along with additional other income of $1,790,242 recorded as unrealized gain on financial instrument as of and for the nine months ended September 30, 2005.

The following table summarizes the effect of the restatement and reclassification adjustments on the financial statements as of September 30, 2005 and for the three and nine months ended September 30, 2005:

		As Previously				Effect of
		Stated				Restatement				As Restated
For the Three Months Ended September 30, 2005
Operating Expenses		$	922,048			$	—			$	922,048
Unrealized loss on Financial instrument			—				(200,673	)			(200,673	)
Net loss			(936,685	)			(200,673	)			(1,137,358	)
Basic and diluted loss per common share			(0.01	)			—				(0.01	)
Net loss applicable to common shareholders			(936,685	)			(200,673	)			(1,137,358	)

		As Previously				Effect of
		Stated				Restatement				As Restated
For the Nine Months Ended September 30, 2005
Operating expenses		$	3,480,875			$	—			$	3,480,875
Unrealized gain on financial instrument			—				1,790,242				1,790,242
Net loss			(3,246,584	)			1,790,242				(1,456,342	)
Preferred stock dividend from beneficial conversion feature			(1,264,409	)			1,264,409				—
Net loss applicable to common shareholders			(4,510,993	)			3,054,651				(1,456,342	)
Basic and diluted loss per common share			(0.04	)			0.03				(0.01	)

		As Previously				Effect of
		Stated				Restatement				As Restated
From Inception of the Development Stage on November 20, 1991 through September 30, 2005
Revenues		$	157,044			$	—			$	157,044
Cost of goods sold			14,564				—				14,564
Operating expenses			23,314,651				—				23,314,651
Unrealized gain on financial instrument			—				1,790,242				1,790,242
Net loss			(21,908,318	)			1,790,242				(20,118,076	)
Preferred stock dividend from beneficial I conversion feature			(1,956,608	)			1,264,409				(692,199	)
Net loss applicable to common shareholders			(23,864,926	)			3,054,651				(20,810,275	)

		As Previously				Effect of
		Stated				Restatement				As Restated
September 30, 2005
Total current liabilities		$	3,740,791			$	3,369,545			$	7,110,336 1
Total liabilities			3,740,791				3,369,545				7,110,336 1
Preferred stock			1,570,109				(1,046,775	)			523,334
Common stock			15,283,407				(64,074	)			5,219,333
Additional paid-in capital			6,302,017				(5,313,347	)			988,670
Deficit accumulated during the development stage			(23,864,926	)			3,054,651				(20,810,275	)
Total stockholders’ equity (deficit)			(2,108,970	)			(3,369,545	)			(5,478,515	)

Note 3 — Going Concern Considerations

The Company’s recurring losses from development-stage activities in current and prior years raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or amounts and classifications of liabilities that may result from the possible inability of the Company to continue as a going concern. The Company is attempting to raise additional capital to fund research and development costs until it is able to consistently generate revenues and sustain profitable operations. However, there can be no assurance that these plans will be successful.

Note 4 — Issuance of Common Stock, Preferred Stock, Warrants and Financial Instrument

Common Stock

During the nine months ended September 30, 2005, the Company issued 2,026,389 shares of restricted common stock, 104,167 of which were issued for services valued at $18,750 and 1,922,222 of which were issued for cash totaling $346,000. In connection with the sales for cash, the Company also issued warrants to purchase 1,922,222 shares of restricted common stock at $0.18 per share, expiring 3 years from the date of issuance.

Preferred Stock and Warrants

During the nine months ended September 30, 2005, the Company issued 30,000 shares of Series A Convertible Preferred Stock and warrants to purchase 22,877,478 shares of common stock for a total offering price of $3.0 million. The Company incurred $340,000 of offering costs and issued to the placement agent warrants to purchase 1,220,132 shares of common stock exercisable at $0.1967 per share which are exercisable for a period of three years.

Each share of Preferred Stock entitles the holder to convert the share of Preferred Stock into the number of shares of common stock resulting from multiplying $100 by the conversion price. The conversion price is 75% of the average of the three lowest intra-day trading prices for the Company’s common stock during the 10 trading days immediately preceding the conversion date. The conversion price may not exceed $0.1967. The warrants are subject to equitable adjustment in connection with a stock split, stock dividend or similar transaction. The warrants entitle the holder to purchase up to 22,877,478 shares of common stock of the Company at $0.1967 per share. The warrants expire three years after the date of issuance.

The Series A Convertible Preferred Stock has no voting rights. In the event of liquidation, the holders are entitled to a liquidating distribution of $100 per share. The Company also entered into a Registration Rights Agreement with the investors requiring the Company to use its “best efforts” to timely file a registration statement with the Securities and Exchange Commission registering the shares of common stock issuable upon conversion of the Preferred Stock and exercise of the warrants. There are no significant liquidation damages in the event the Company is unable to file its registration statement.

The conversion feature of the Series A Convertible Preferred Stock has more of the attributes of an equity instrument than a liability instrument, and thus is not considered a derivative. However, the Company is unable to guarantee that there will be enough shares of stock to settle other “freestanding instruments.” Accordingly, the warrants attached to the convertible preferred stock were measured at their fair value and classified as liability in the financial statements. The fair value of the warrants was $3,844,116 on the date of issuance computed using the Black Scholes model with the following assumptions: volatility of 170%, risk-free interest rate of 3.9%, and an expected life of three years. The fair value of the warrants exceeded the proceeds received by $1,184,116, which was recorded as an expense on the statement of operations. Due to the fact that the value of the warrants exceeded the proceeds received, no value was assigned to the preferred stock.

Financial Instrument

As noted above, all warrants and options outstanding on March 11, 2005 (with the exception of stock options issued to employees) were measured at their fair value and reclassified as a liability in the financial statements. There were 16,215,100 warrants issued prior to March 11, 2005 with a fair value of $2,435,713. The value of the warrants was computed using the Black Scholes model with the following assumptions: volatility of 170%, risk-free interest rate of 3.9%, and an expected life of three years. As a result of the reclassification, stockholders’ equity was decreased by the fair value of the liability.

Subsequent to March 11, 2005, 611,110 warrants were issued as part of common stock offerings of 611,110 shares. The warrants had a fair value of $64,074 and are classified as a liability on the financial statements. The value of the warrants was computed using the Black Scholes model with the following assumptions: volatility of 159%, risk-free interest rate of 3.8%, and an expected life of three years. The proceeds received from this issuance exceeded the value of the warrants by $45,926, which was attributed to the common stock.

The Company adjusted to market value the outstanding warrants as of September 30, 2005. The fair value of the financial instrument was $3,369,545. The Company used the Black-Scholes model in calculating fair value with the following assumptions: volatility of 153%, risk free interest rate of 4.2% and an expected life of two years. The changes in fair market value have been recorded as adjustments in the line “Unrealized loss on financial instrument” in the financial statements.

Note 5 — Other Significant Events

SaveCream Asset Purchase

On March 16, 2005, the Company completed the purchase of the intellectual property assets (the “Assets”) of Savetherapeutics AG, a German corporation in liquidation in Hamburg, Germany (“SaveT”). The Assets consist primarily of patents, patent applications, pre-clinical study data and clinical trial data concerning SaveCream, SaveT’s developmental-stage topical aromatase inhibitor treatment for breast cancer. SaveCream never generated revenues for SaveT. The Company’s analysis as to whether the intellectual property purchased constituted a business resulted in the conclusion that no such business had been acquired.

The purchase price of the Assets was negotiated to be €2,350,000 (approximately $2.8 million under current exchange rates), payable as follows: €500,000 at closing, €500,000 (approximately $665,700 on the date of transaction, $602,900 using the September 30, 2005 exchange rates) upon conclusion of certain pending transfers of patent and patent application rights from SaveT’s inventors to the Company, and the remaining €1,350,000 (approximately $1.62 million at current exchange rates) upon successful commercialization of the Assets. The Company’s source of funds for the acquisition was a $3 million investment in the Company’s Series A Preferred Stock by an unrelated third party, as described in Note 3.

SaveT inventors have yet to assign the patent and application rights to the Company, management has deemed the assignment of the rights to be reasonably likely because the inventors are contractually bound to execute and deliver the assignments; therefore, the Company has recorded the second €500,000 payment as a current liability in these financial statements. At present it is undeterminable whether the intellectual property will ever be commercialized; therefore, the final €1,350,000 under this acquisition has not been accrued as a liability as of September 30, 2005. The Company determined the intellectual property purchased should be expensed as research and development costs

Formation of MDI Oncology, Inc.

On March 22, 2005, the Company formed MDI Oncology, Inc., a Delaware Corporation, as a wholly-owned subsidiary for the purpose of acquiring and operating the assets and associated business ventures associated with the SaveCream purchase.

Settlement of Debt

On April 1, 2005, the Company negotiated a settlement regarding notes payable totaling $280,717 and accrued interest of $215,636, by payment of $300,000 in cash. The Company recognized a gain on settlement of debt totaling $196,353.

Transactions with Shareholder

On July 15, 2005, the Company entered into an agreement to grant a shareholder a non-interest bearing loan in the amount of €500,000 (approximately $603,000 under current exchange rates) in exchange for the transfer of certain patents in relation to Savetherapeutics AG, and the performance of certain research activities. The loan is payable as follows, €100,000 upon closing, €150,000 after signature of consent to the transfer of patents, and €250,000 after performance and acceptance of certain research activities. As of September 30, 2005, the amount of the loan was €250,000 (approximately $301,000 under current exchange rates). Settlement of the loan shall take place by offsetting against profit claims, which accrue to the shareholder from his stake in the Company.

Subsequent to the transfer of the industrial property rights and applications, the Company shall grant to the aforementioned shareholder a 6% stake in MDI Oncology, Inc and to assign to him 6% of the shares. The Company deemed these shares to have no value because it is a start-up company, and its success is contingent on several different factors. The Company also entered into an employment contract with the shareholder for a period of 24 months. The shareholder will receive a fee of €120,000 per annum (approximately $145,000 using current exchange rates.)

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

The purpose of this section is to discuss and analyze our condensed consolidated financial condition, liquidity and capital resources, and results of operations. This analysis should be read in conjunction with the condensed consolidated financial statements and notes thereto at pages 3 through 11 and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-KSB for the year ended December 31, 2004 (the “2004 10-KSB”).

This section contains certain forward-looking statements that involve risks and uncertainties, including statements regarding our plans, objectives, goals, strategies and financial performance. Our actual results could differ materially from the results anticipated in these forward-looking statements as a result of factors set forth under “Cautionary Statement for Forward-Looking Information and Factors Affecting Future Results” below and elsewhere in this report.

Overview

We are a developmental-stage bio-pharmaceutical company engaged in the research, validation, development and ultimate commercialization of two drugs: MDI-P and SaveCream. MDI-P is an anti-infective drug that we believe will be a safe and effective treatment for bacterial infections, viral infections and fungal infections. We further believe that MDI-P will be a safe and effective treatment for cystic fibrosis. SaveCream is a breast cancer medication that is applied topically to reduce breast cancer tumors. Both of these drugs are still in development and have not been approved by the U. S. Food and Drug Administration (FDA).

Our initial target indications for MDI-P are cystic fibrosis and HIV. We have filed an Investigational New Drug application (IND) with the FDA seeking permission to begin Phase I human clinical trials of MDI-P as a treatment for cystic fibrosis. The FDA has responded to our IND and we are hopeful that we can satisfactorily answer the FDA’s questions and satisfy the FDA’s follow-up requests for further animal testing, resulting in the FDA approving the application. If the FDA approves that IND, we will begin human trials at St. Luke’s Regional Medical Center in Boise, Idaho using a protocol designed by Dr. Henry Thompson. If our Phase I IND for cystic fibrosis is successful, we intend to file an IND for Phase I testing of MDI-P as a treatment for HIV at Harvard School of Medicine using a protocol designed by Dr. Bruce Dezube. We also expect to add additional indications for the use of MDI-P in the future as we further our preclinical development.

We recently purchased SaveCream from a German biotechnology company. In a European Union study of SaveCream used by over 100 women diagnosed with breast cancer, a significant number of those women experienced a significant tumor reduction. This preliminary study showed an average reduction in tumor size of fifty percent in two weeks. If these preliminary results are realized in further clinical testing, this compound may be a useful neoadjuvant therapy for reducing tumor size, increasing the potential for breast-saving surgery in place of mastectomy. We are in the process of developing a global commercialization strategy for SaveCream.

Recent Events

SaveCream Asset Transfer. We are in the process of developing a commercialization plan for SaveCream and of integrating the SaveCream assets into MDI. Specifically, we are working to complete the transfer of patents and patent applications to MDI’s subsidiary designated for developing SaveCream. As we previously reported, at the time we purchased SaveCream and the other intellectual property assets from Savetherapeutics A.G. (SaveT), SaveT had not yet obtained and filed with the appropriate patent offices assignments from SaveCream’s two inventors of the rights to the underlying inventions. Each of those inventors has at least twice agreed with SaveT to assign such rights and is contractually bound to do so. The fact that SaveT never followed through and filed the assignment appears to be a mere oversight. One of the inventors, Alfred Schmidt, has refused to cooperate to correct that oversight. We may need to initiate litigation against Mr. Schmidt to extinguish his rights as a co-inventor. We have entered into an agreement with the other inventor, Heinrich Wieland, pursuant to which he has provided us with the applicable assignments, which we are in the process of filing with the appropriate patent offices. Should we be unsuccessful in terminating Mr. Schmidt’s rights, he will remain a co-owner with us of the patent rights. As a co-owner we would have the right to commercialize the inventions, but that right would not be exclusive. Without exclusive rights to the inventions underlying SaveCream, their value to us is much lower than it otherwise would be.

Cystic Fibrosis IND. We are continuing to prosecute our IND for cystic fibrosis with the FDA. At the FDA’s request, we have conducted a large animal model study intended to establish pharmacological safety with relation to cardio and central nervous system toxicity as well as genotoxicity for this IND. Should the FDA find the results of that study sufficient, we could start Phase I clinical trials on cystic fibrosis in Q1 of 2006, subject to FDA approval.

Results of Operations

Revenues and Gross Profit — We did not book any revenue for the three or nine-month periods ended September 30, 2005. As we continue to pursue preclinical and clinical testing of our pharmaceuticals, we may not book significant revenues in the near future.

Operating Expenses and Operating Loss — We incurred $364,335 in research and development expenses for the quarter ended September 30, 2005. We incurred $191,506 in research and development expenses for the same period of 2004. Our general and administrative expenses were $557,713 during the quarter ended September 30, 2005, as compared to $250,819 during the quarter ended September 30, 2004. As a result of the foregoing, we sustained an operating loss of $922,048 for the quarter ended September 30, 2005, as compared with an operating loss of $442,325 for the same period of 2004.

For the nine months ended September 30, 2005 we incurred $2,034,841 in research and development expenses, $1,345,000 of which related to our acquiring the patents and patent rights relating to SaveCream. We incurred $362,484 in research and development expenses for the same period of 2004. Our general and administrative expenses were $1,446,034 during the first nine months of 2005, as compared to $2,667,782 during the nine-month period ended September 30, 2004, resulting in operating losses of $3,480,875 through September 30, 2005 and $3,030,266 for the same period of 2004.

Other Income/Expense and Net Loss — We booked $2,674 in interest income and incurred interest expenses of $7,591 for the quarter ended September 30, 2005, as compared with interest income of $854 and $27,497 in interest expenses for the same period of 2004. During the quarter ended September 30, 2005, we also booked a foreign currency loss of $9,720. We had no foreign currency risk in 2004. In addition, we recorded $200,673 as unrealized gain on financial instrument to record the accounting of warrants resulting from the issuance of the Series A Convertible Preferred Stock entered into in October 2004 and March 2005. In sum, our net loss applicable to common shareholders for the third quarter of 2005 was $1,137,358 or a loss of $0.01 per fully diluted share. For the quarter ended September 30, 2004 we incurred a net loss applicable to common shareholders of $468,929, making a loss of less than $0.01 per fully diluted share.

For the nine months ended September 30, 2005, we booked $17,584 in interest income and incurred interest expense of $30,726, as compared with $3,980 of interest income and $114,221 of interest expense for the comparable period of 2004. In addition, we recorded $1,790,242 as unrealized gain on financial instrument to record the accounting of warrants resulting from the issuance of the Series A Convertible Preferred Stock entered into in October 2004 and March 2005. There was no such dividend recognized during the first nine months of 2004. During the nine months ended September 30, 2005, we also booked a foreign currency gain of $51,080. We had no foreign currency risk in 2004. Our net loss applicable to common shareholders for the first nine months of 2005 was $1,456,342 or $0.01 per fully diluted share. Our net loss for the first nine months of 2004 was $3,139,748 or $0.03 per fully diluted share.

Future Expectations — We may operate at a loss for several more years while we continue to research, gain regulatory approval of, and commercialize our technologies. We will spend more in the remainder of the 2005 fiscal year in research and development expenses than we did over the prior year as we continue to implement our commercialization strategy. Similarly, we expect our general and administrative expenses to continue to increase for the remainder of 2005 as we continue to expand the scope of our operations. As a result, we expect to sustain a greater net loss in 2005 than we have in recent years.

As of September 30, 2005, we had $1,256,939 in cash and had a working capital deficit of $5,853,397. Since our inception, we have financed our operations primarily through private sales of equity and the issuance of convertible and non-convertible notes. We continue to require significant supplementary funding to continue to develop, research, and seek regulatory approval of our technologies. We do not currently generate any cash from operations and have no credit facilities in place or available. Currently, we are funding operations through private issuances of equity.

We have entered into fixed price contracts for all of the research services we expect will be required in connection with our cystic fibrosis IND to meet the FDA’s request for additional preclinical information and for Phase I testing. We have budgeted for these costs and believe we have sufficient funds to initiate this testing, however we may need to raise additional capital to complete all of the necessary testing. Much of the preclinical testing requested by the FDA has been completed with positive results. Our contracts for the additional outstanding testing require completion of this work by December 31, 2005. In the interim, we are preparing a submission of the existing data to the FDA in hopes of being permitted to proceed with Phase I testing pending the outcome of the remaining preclinical work. We anticipate that we may be able to start Phase I clinical trials on cystic fibrosis as early as Q1 of 2006.

If our Phase I IND for cystic fibrosis is successful, we intend to file an IND for Phase I testing of MDI-P as a treatment for HIV at Harvard School of Medicine using a protocol designed by Dr. Bruce Dezube. We believe we have insufficient capital to file our IND for HIV. In addition, once an IND application for HIV is submitted, and assuming it is approved, we will need additional capital to initiate Phase I clinical trials.

While our ability to obtain financing may improve in the event an IND application is approved and we enter the clinic, we cannot give assurances that we will have access to the significant capital required to take a drug through regulatory approvals and to market. We may seek a partner in the global pharmaceutical industry to help us co-develop, license, or even purchase some or all of our technologies.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as defined in Item 303(c) of Regulation S-B.

Cautionary Statement for Forward Looking Information

Certain information set forth in this report contains “forward-looking statements” within the meaning of federal securities laws. Forward looking statements include statements concerning our plans, objectives, goals, strategies, future events, future revenues or performance, capital expenditures, and financing needs and other information that is not historical information. When used in this report, the words “estimates,” “expects,” “anticipates,” “forecasts,” “plans,” “intends,” “believes” and variations of such words or similar expressions are intended to identify forward-looking statements. Additional forward-looking statements may be made by us from time to time. All such subsequent forward-looking statements, whether written or oral and whether made by us or on our behalf, are also expressly qualified by these cautionary statements.

Our forward-looking statements are based upon our current expectations and various assumptions. Our expectations, beliefs and projections are expressed in good faith and are believed by us to have a reasonable basis, including without limitation, our examination of historical operating trends, data contained in our records and other data available from third parties, but there can be no assurance that our expectations, beliefs and projections will result or

be achieved or accomplished. Our forward-looking statements apply only as of the date made. We undertake no obligation to publicly update or revise forward-looking statements which may be made to reflect events or circumstances after the date made or to reflect the occurrence of unanticipated events.

There are a number of risks and uncertainties that could cause actual results to differ materially from those set forth in, contemplated by or underlying the forward-looking statements contained in this report. Those risks and uncertainties include, but are not limited to, our lack of significant operating revenues and lack of profit to date, our need for substantial and immediate additional capital, the fact that we may dilute existing shareholders through additional stock issuances, the extensive governmental regulation to which we are subject, the fact that our technologies remain unproven, the intense competition we face from other companies and other products, and our reliance upon potentially inadequate intellectual property. Those risks and certain other uncertainties are discussed in more detail in the 2004 10-KSB. There may also be other factors, including those discussed elsewhere in this report, that may cause our actual results to differ from the forward-looking statements. Any forward-looking statements made by us or on our behalf should be considered in light of these factors.

ITEM 3. CONTROLS AND PROCEDURES

(a) Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of March 27, 2006. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective as of March 27, 2006.

(b) There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the evaluation referenced in paragraph (a) above.

PART II
OTHER INFORMATION

ITEM 6. EXHIBITS

The following documents are furnished as exhibits to this Form 10-QSB/A. Exhibits marked with an asterisk are filed herewith. The remainder of the exhibits previously have been filed with the Commission and are incorporated herein by reference.

Number		Exhibit
2.1		Sale and Purchase Agreement between Attorney Hinnerk-Joachim Müller as liquidator of Savetherapeutics AG i.L. and Medical Discoveries, Inc. regarding the purchase of the essential assets of Savetherapeutics AG i.L. (filed as Exhibit 2.1 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004, and incorporated herein by reference).
3.1		Amended and Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994, and incorporated herein by reference).
3.2		Amended Bylaws of the Company (filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994, and incorporated herein by reference).
4.1		Registration Rights Agreement dated October 18, 2004 among Monarch Pointe Fund, Ltd., Mercator Advisory Group, LLC and Medical Discoveries, Inc. (filed as Exhibit 4.1 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004, and incorporated herein by reference).
4.2		Registration Rights Agreement dated December 3, 2004 among Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, Mercator Advisory Group, LLC and Medical Discoveries, Inc. (filed as Exhibit 4.2 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004, and incorporated herein by reference).
4.3		Certificate of Designations of Preferences and Rights of Series A Convertible Preferred Stock of Medical Discoveries, Inc. (filed as Exhibit 4.1 to Registration Statement No. 333-121635 filed on Form SB-2 on December 23, 2004, and incorporated herein by reference).
4.4		Amendment to Certificate of Designations of Preferences and Rights of Series A Convertible Preferred Stock of Medical Discoveries, Inc. (filed as Exhibit 4.2 to Registration Statement No. 333-121635 filed on Form SB-2 on December 23, 2004, and incorporated herein by reference).
10.1		2002 Stock Incentive Plan adopted by the Board of Directors as of July 11, 2002 (filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2002, and incorporated herein by reference).
10.2		Subscription Agreement dated October 18, 2004 among Monarch Pointe Fund, Ltd., Mercator Advisory Group, LLC, and Medical Discoveries, Inc. (filed as Exhibit 10.2 to Amendment No. 2 to Registration Statement No. 333-121635 filed on form SB-2 on June 2, 2005, and incorporated herein by reference).
10.3		Subscription Agreement dated December 3, 2004 among Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, Mercator Advisory Group, LLC, and Medical Discoveries, Inc. (filed as Exhibit 10.3 to Amendment No. 2 to Registration Statement No.

Number		Exhibit
		333-121635 filed on form SB-2 on June 2, 2005, and incorporated herein by reference).
10.4		Employment Agreement dated March 1, 2005 between Medical Discoveries, Inc. and Judy M. Robinett. (filed as Exhibit 10.4 to Amendment No. 3 to Registration Statement No. 333-121635 filed on Form SB-2 on October 13, 2005, and incorporated herein by reference).
21		Subsidiaries.†
31.1		Rule 13a-14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2		Rule 13a-14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

		MEDICAL DISCOVERIES, INC.
		/s/ Judy M. Robinett
		Judy M. Robinett
		President and Chief Executive Officer
Date: March 28, 2006

INDEX TO EXHIBITS

Number		Exhibit
2.1		Sale and Purchase Agreement between Attorney Hinnerk-Joachim Müller as liquidator of Savetherapeutics AG i.L. and Medical Discoveries, Inc. regarding the purchase of the essential assets of Savetherapeutics AG i.L. (filed as Exhibit 2.1 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004, and incorporated herein by reference).
3.1		Amended and Restated Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994, and incorporated herein by reference).
3.2		Amended Bylaws of the Company (filed as Exhibit 3.2 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994, and incorporated herein by reference).
4.1		Registration Rights Agreement dated October 18, 2004 among Monarch Pointe Fund, Ltd., Mercator Advisory Group, LLC and Medical Discoveries, Inc. (filed as Exhibit 4.1 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004, and incorporated herein by reference).
4.2		Registration Rights Agreement dated December 3, 2004 among Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, Mercator Advisory Group, LLC and Medical Discoveries, Inc. (filed as Exhibit 4.2 to the Company’s Annual Report on Form 10-KSB for the fiscal year ended December 31, 2004, and incorporated herein by reference).
4.3		Certificate of Designations of Preferences and Rights of Series A Convertible Preferred Stock of Medical Discoveries, Inc. (filed as Exhibit 4.1 to Registration Statement No. 333-121635 filed on Form SB-2 on December 23, 2004, and incorporated herein by reference).
4.4		Amendment to Certificate of Designations of Preferences and Rights of Series A Convertible Preferred Stock of Medical Discoveries, Inc. (filed as Exhibit 4.2 to Registration Statement No. 333-121635 filed on Form SB-2 on December 23, 2004, and incorporated herein by reference).
10.1		2002 Stock Incentive Plan adopted by the Board of Directors as of July 11, 2002 (filed as Exhibit 10.5 to the Company’s Quarterly Report on Form 10-QSB for the quarter ended June 30, 2002, and incorporated herein by reference).
10.2		Subscription Agreement dated October 18, 2004 among Monarch Pointe Fund, Ltd., Mercator Advisory Group, LLC, and Medical Discoveries, Inc. (filed as Exhibit 10.2 to Amendment No. 2 to Registration Statement No. 333-121635 filed on form SB-2 on June 2, 2005, and incorporated herein by reference).
10.3		Subscription Agreement dated December 3, 2004 among Mercator Momentum Fund, LP, Mercator Momentum Fund III, LP, Mercator Advisory Group, LLC, and Medical Discoveries, Inc. (filed as Exhibit 10.3 to Amendment No. 2 to Registration Statement No. 333-121635 filed on form SB-2 on June 2, 2005, and incorporated herein by reference).
10.4		Employment Agreement dated March 1, 2005 between Medical Discoveries, Inc. and Judy M. Robinett. (filed as Exhibit 10.4 to Amendment No. 3 to Registration Statement No. 333-121635 filed on Form SB-2 on October 13, 2005, and incorporated herein by reference).
21		Subsidiaries.†

Number		Exhibit
31.1		Rule 13a-14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
31.2		Rule 13a-14(a) Certification, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*