Summary of VIRAL GENETICS INC /DE/

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

Plan of Operation

Over the next year we expect to focus on completing preclinical studies required to seek FDA approval for a clinical trial of VGV-1, while in parallel seeking a distribution and development partner in Africa to continue clinical development of VGV-1 in that region. In conjunction with those efforts, which are focused on the HIV/AIDS application of TNP, we are now planning a series of in vitro laboratory studies to examine the activity of the TNP peptides to determine their effects against not only the HIV virus, but other viruses, human immune system cells, bacteria, and various other pathogens.

Last year we announced the results of our human clinical trial of VGV-1 in South Africa. This study - the "TNP001 Study" - was authorized by the South African Medicines Control Council ("MCC") in February 2004. It was a multi-center, randomized, double-blind, placebo-controlled study of VGV-1 treated HIV-infected subjects with CD4+ cell counts of 250-500. We completed enrollment of 137 subjects. The primary endpoint for the study was the decrease in viral load as measured by PCR-RNA assay. Other endpoints include CD4+ cell counts, PBMC culture assays and certain immune markers. Patients received 16 intra-muscular injections over a 51-day period, and were followed up after treatment to day
240. The study was administered by Virtus Clinical Development Services, a leading South African contract research organization.

The results of the TNP001 Study showed statistically significant reductions in viral load (the amount of HIV in the blood) in some patients and only mild adverse events attributed to the drug. The study also indicates there may be a mechanism of action at work that is markedly different than existing HIV therapies. During the study, statistically significant reductions in viral load were seen in 22% of patients overall that were equivalent to a 70% decrease in the amount of virus in the blood at day 150 (approximately three months after treatment). Further, patients who began TNP001 with reduced immune function (CD4+ cell count below 300) did best on VGV-1. Of the patients that started the study with lower CD4+ counts, 36% had a 0.5 log (70%) or greater drop in viral load at day 150 and 25% had this result at day 240. CD4+ cells are a key element in the formation of an immune response to viruses and other foreign bodies. Reducing HIV viral load is the only known way to delay disease progression.

In summary, we view these results as confirming the biological activity and antiviral properties of VGV-1, its apparently higher degree of efficacy in sicker patients, and the lack of safety or toxicity issues associated with receiving it, while suggesting that the optimal dosing of the product has not yet been identified. We intend to focus on these areas - "dose optimization" and later-stage AIDS patients - going forward.

"Optimization" of the dose requires the precise manipulation of concentrations of the active ingredients and an understanding of the mechanism by which the ingredients create an antiviral or immune-modulating effect. Our

preclinical studies of the active components of TNP are an important aspect of this line of research, and our identification of the peptides is a crucial first step. The next steps will include confirming the peptides' identities using additional methods, as well as studying their interactions with the HIV virus and immune cells important in combating HIV infection. It is our goal to achieve a more complete and specific understanding of how the observed antiviral effect is caused, improve it by modifying the dose, and initiate US human clinical trials using the optimized regimen. We anticipate that this series of steps, excluding the clinical trial itself, would require 3-6 months to complete and approximately $500,000.

In March 2006 Viral Genetics, Inc., sold convertible debentures to a limited group of investors in the principal amount of $2,891,549 that accrue interest at the rate of 10% per annum payable quarterly in arrears beginning October 1, 2006 (the "New Debentures"). The principal amount of the New Debentures was convertible into our common stock at the option of the holders at the rate of $0.45 of principal per share. The New Debentures were to be repaid, at our election, in cash with a 5% premium or Viral Genetics common stock priced at the lower of $0.45 or 80% of the market price for our common stock over a term of 24 months beginning in October 2006. In connection with the purchase of the New Debentures the investors also acquired warrants to purchase a total of 6,570,242 common shares at an exercise price of $0.78 per share that expire at the end of March 2011 (the "Warrants"), and unit purchase warrants to purchase an additional $2.1 million in principal amount of New Debentures and additional Warrants to purchase 4.7 million shares of common stock (the "Unit Warrants").

The investors also acquired in March 2006 previously outstanding convertible debentures in the principal amount of $598,450 that accrued interest at the rate of 10% per annum (the "Old Debentures"). The principal amount of the Old Debentures was convertible into our common stock at the option of the holders at the rate of $0.18 of principal per share.

Viral Genetics filed a registration statement under the Securities Act of 1933 to permit the investors to resell the shares of common stock issuable under the New Debentures, Old Debentures, and Warrants, which was effective in August 2006. A total of 9,695,409 shares of common stock covered by the prospectus included in the registration statement have been issued under the New Debentures and Old Debentures to the investors.

In March 2007, the holders of $1,968,810 in principal amount and accrued interest of the New Debentures, $446,934 in principal amount and accrued interest of the Old Debentures, and 5,431,436 of the Warrants agreed to amend the terms of the instruments they hold to provide for the following:

- Change in the voluntary conversion price of the Old Debentures and the New Debentures, as well as the exercise price of the Warrants, to a fixed $0.08 per share.
- Removal of the monthly amortization payments from the New Debentures. All unpaid principal and accrued interest on these securities is due and payable by us on September 1, 2008.
- Immediate conversion of principal and interest on the Old Debentures and New Debentures at the new fixed price of $0.08 as follows:
Щ $21,096 of the Old Debentures for 263,711 shares of common stock Щ $284,138 of the New Debentures for 3,551,728 shares of common stock
- Immediate exercise of Warrants in exchange for cancellation of principal and interest on the Old Debentures and New Debentures at the new price as follows:
Щ $162,796 of the Old Debentures for 2,034,957 shares of common stock Щ $362,822 of the New Debentures for 4,535,285 shares of common stock
- The sum effect of the preceding four transactions is to reduce the balance we owe to the holders on the Old Debentures from $446,934 to $0, and to reduce the balance we owe to the holders on the New Debentures from $1,968,810 to $1,584,890. Therefore, in aggregate, $830,854 of principal and interest on the Old Debentures and the New Debentures has been exchanged or tendered for cancellation for a total of 10,385,681 shares of our common stock.
- Cancel their Unit Warrants in exchange for new common stock purchase warrants for the purchase of 5,431,436 shares at an exercise price of $0.15 per share that expire February 28, 2012.

The holders of $354,194 in principal amount and accrued interest of the New Debentures, $31,154 in principal amount and accrued interest of the Old Debentures, and 994,228 of the Warrants did not participate in the

restructuring modifications described above, but the practical effect of the transactions is to decrease the voluntary conversion price of the New Debentures and Old Debentures and exercise price of the Warrants they hold to $0.08 per share. Viral Genetics intends to make all future payments of principal and interest on debentures held by these persons in cash.

At December 31, 2006, we had $0 of current assets, current liabilities of $5,846,053, and long-term liabilities of $1,965,667. We estimate that we will need to fund approximately $750,000 of research and development costs in the United States and South Africa, and $750,000 of administrative expenses during 2007.