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FORM 10-KSB

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549


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

For the fiscal year ending December 31, 2001

OR

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

Commission file number 0-26323

ADVANCED BIOTHERAPY, INC.
(Exact name of registrant as specified in its charter)

|                                                                        |  |                                             
|----------------------------------------------------------------------- |  | --------------------------------------------
|Delaware
(State or other jurisdiction of
incorporation or organization) |  | 51-0402415
(IRS Employer
Identification No.)

6355 Topanga Canyon Boulevard, Suite 510
Woodland Hills, California 91367
(Address of principal executive offices, including zip code.)

(818) 883-6716
(Registrants telephone number, including area code)

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

Securities registered pursuant to Section 12 (g) of the Act:     Common Stock

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 [X] NO [   ]

Check if no disclosure of delinquent filers pursuant to Item 405 of Regulation
S-B is contained herein, and no disclosure will be contained, to the best of
Registrants knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [   ]

State Issuers revenues for its most recent fiscal year.

December 31, 2001: $-0-



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TABLE OF CONTENTS



|           |                                                                                               |  |  |  |  |  |  | 
|---------- | --------------------------------------------------------------------------------------------- |  |  |  |  |  |  | 
|           | ITEM 1. BUSINESS                                                                             
|           | ITEM 2. DESCRIPTION OF PROPERTY                                                              
|           | ITEM 3. LEGAL PROCEEDINGS                                                                    
|PART II   
|           | ITEM 5. MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER MATTERS                 
|           | ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
|           | ITEM 7. FINANCIAL STATEMENTS                                                                 
|           | ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 
|PART III  
|           | ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS                         
|           | ITEM 10. EXECUTIVE COMPENSATION                                                              
|           | ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT                      
|           | ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS                                      
|PART IV   
|           | ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K                                                    
|SIGNATURES



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The aggregate market value of Registrants common stock held by non-affiliates
computed by reference to the average of the bid and asked price of such stock
on February 28, 2002 was $9,748,152. Excludes 14,451,749 shares of common
stock held by directors, executive officers and stockholders whose beneficial
ownership exceeds ten percent (10%) of the shares outstanding on February 28,
2002.

Issuers involved in bankruptcy proceedings during the past five years:

Not Applicable.

State the number of shares outstanding of each of the issuers classes of
common equity, as of the latest practicable date:

February 28, 2002  42,303,611 shares of Common Stock

Documents Incorporated by Reference:

None.




ITEM 1.      BUSINESS

GENERAL INTRODUCTION

Advanced Biotherapy, Inc. is a corporation organized and existing under
the laws of the State of Delaware, headquartered in Woodland Hills, California.
We are a biotechnology company developing therapeutics for a range of
autoimmune diseases based on an anti-cytokine platform technology. Cytokines
are soluble components of the immune system that are largely responsible for
regulating the immune response. When overproduced, as in certain autoimmune
diseases, interferons and cytokines can lead to immune system disturbance and
inflammation. This results in localized tissue damage and leads to the
pathology seen in autoimmune diseases (AD). The Company plans to develop drugs
designed to reduce the levels of certain cytokines. To date, our activities
have consisted primarily of research, development and non-United States
clinical trials. Such activities have resulted in accumulated losses at
December 31, 2001.

We plan to develop drugs through out-licensing arrangements that may
effectively treat a range of autoimmune diseases. Our technology is based upon
the work of Dr. Simon Skurkovich and Dr. Boris Skurkovich who first suggested
that autoimmune disease may be the result of augmented cytokine production
(Nature, Vol. 241, P 551-552, 1974). We have conducted a number of clinical
trials at major institutes of the Medical Academy of Sciences in Russia, in
which we have evaluated the efficacy of a series of polyclonal antibodies,
raised against a variety of cytokines, in autoimmune diseases such as
rheumatoid arthritis (RA), multiple sclerosis (MS) and acquired
immunodeficiency disease (AIDS).

In two randomized, placebo-controlled, double blind trials conducted in
Russia, we believe we have demonstrated efficacy of our anti-cytokine strategy
in both RA and MS. These studies have permitted us to determine which cytokines
are most active in the AD process, and therefore, which need to be reduced to
treat the disorder. With a five-





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day treatment course, statistically significant
and clinically relevant responses were obtained that persisted for as long as
one year after treatment termination in the MS studies and for one month in the
RA studies.

As of December 25, 2001, the Company has been issued United States Patent
No. 6,333,032 for the exclusive use of interferon-gamma (IFN-(gamma) antibodies
including humanized and fully human (as well as other antibody types) as a
monotherapy to treat five diseases of autoimmune etiology: Multiple Sclerosis,
Rheumatoid Arthritis, Juvenile Rheumatoid Arthritis, Psoriatic Arthritis and
Ankylosing Spondylitis. Management believes that this patent is a critical
milestone for the Company. The Company believes that its most recently issued
patent gives the Company patent protection for a new anti-cytokine approach to
treating different autoimmune diseases, including the foregoing five specific
diseases, principally as an injectable treatment. The Companys patented
treatment also uses various methods to neutralize or block specific
combinations of cytokines and their receptors. In managements opinion, the
Companys patented approach is broader in scope that certain other patented
treatments.

Prior to marketing the Companys development stage products, the Company
must obtain regulatory approval from the United States Food and Drug
Administration (FDA). The Company is not sufficiently funded to allow it to
complete the product development process, obtain FDA approval, and market its
products. However, the Company plans to seek additional financing through the
private sale of restricted securities to investors, enter into joint ventures
or licensing or similar arrangements with large pharmaceutical companies to
provide the funding necessary for additional activities. There can be no
assurance that the Company will enter into any such arrangements, obtain the
appropriate regulatory approvals, or develop, manufacture, market, or
distribute commercially viable products.

To date, the Companys activities have consisted primarily of research,
development and human clinical testing. Such activities have resulted in
accumulated deficit of $5,068,426 at December 31, 2001. The Company anticipates
that it will incur substantial losses in the foreseeable future as a result of
its continued product development. There are no assurances that the Company
will be successful in completing its product development, receive FDA approval,
implement manufacturing operations and commercially market its development
stage products.

The Company anticipates that it will incur substantial losses in the
foreseeable future as a result of its continued product development. There are
no assurances that the Company will be successful in completing its product
development, receive FDA approval, implement manufacturing operations and
commercially market its development stage products.

BUSINESS OBJECTIVE

The business strategy of the Company is twofold in nature and involves the
engagement of a corporate partner to assist in the clinical development of its
drug treatments for autoimmune disorders. This will involve, upon the
identification of such a partner, the filing of the necessary documents with
the FDA, conducting clinical trials and obtaining the necessary new drug
application regulatory approvals. The Company does





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not intend to market its
drug products if they are approved by the FDA, but will instead seek a
licensing and royalty arrangement with a corporate partner who will market the
product when and if it is approved.

The second element of the Companys business strategy is to seek out
merger and acquisition candidates that can either expand the Companys
technology base in the area of autoimmune disease therapeutics or bring
approved products into the Company that will generate recurring revenue.

The amount spent on research and development by the Company for the fiscal
years ended December 31, 2001, 2000 and 1999 was $133,747, $39,579 and
$156,280, respectively.

TECHNICAL BACKGROUND

The Companys main biotechnology platform involves the use of antibodies
directed against certain carefully selected cytokines. An antibody is a protein
that is secreted by cells in the blood and is part of the bodys natural
defense system against foreign invaders such as viruses or bacteria.
Antibodies seek out and selectively bind to their targets, triggering such
effects as neutralizing toxins and marshaling the immune system against
infectious microorganisms and cancer cells. The Company believes that its
development-stage antibody treatment removes or neutralizes certain interferons
and cytokines. These are soluble components of the immune system that are
largely responsible for regulating the immune response and inflammation. During
certain ADs, such as RA, MS and Type I diabetes, certain interferons (IFN) and
other cytokines are over produced by the human body which results in localized
damage to organs and tissues and constitutes the pathology of AD.

In particular, interferon-alpha (IFN-(alpha)) or interferon-gamma
(IFN-(gamma)) are known to trigger or exacerbate ADs in animals prone to AD,
and in patients who have had underlying autoimmune conditions or a
predisposition to them. In animal models of a number of human ADs, the
administration of antibodies to IFN-(alpha) or IFN-(gamma) halted or delayed
these diseases. This includes antibodies to IFN-(gamma) given to:

1.     New Zealand Black and White mice known to develop a severe AD similar
to systemic lupus erythematosus in humans.

2.     Lewis rats afflicted with actively-induced experimental AD of the
peripheral nervous system.

3.     NOD mice, an animal model of human Type I Diabetes.

4.     BB/Wor rats, a diabetes-prone strain, and CBA/J mice, a strain
susceptible to experimental autoimmune thyroiditis (EAT). In all cases, the
anti-IFN-y antibodies suppressed or reduced the disease.

The biological basis for which the immune system launches an immune
response directed against a self antigen is still considered unclear. Many of
the autoimmune diseases are, however, associated with identifiable antigens of
the Human Leukocyte





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Antigen (HLA) complex, specifically, the Class II proteins.
The cells which constitute the immune system are not confined to one location
or organ, so there is a need for them to communicate with each other in order
for the various components (mediator cells, phagocytic cells, T-cells and
B-cells) of the system to function in a coordinated manner. The agents, which
effect this communication, are the cytokines. Biochemically, the cytokines are
small proteins or polypeptides and include the interferons, IFN, (alpha, beta
and gamma), as well as the Interleukins (IL) and the Tumor Necrosis Factors
(TNF), that include TNF alpha (TNF-(alpha)) and TNF beta (TNF-(beta)).

The cytokines are divisible into the pro-inflammatory (IL-1, 2 and 12,
INF-(gamma), INF-(alpha), TNF-(alpha) and TNF-beta) and the anti-inflammatory
cytokines (IL-4, 5, 6, 10, 13 and IFN-Beta). Transforming growth factor
(TGF)-beta is also an anti-inflammatory cytokine.

There is substantial data in the literature documenting that upon immune
system activation, the cytokines spring into action in a coordinated manner
that can best be described as a pseudo-cascade. Each cytokine has a specific
role in the coordination of the immune response and in the inflammatory
process. Cytokine interactions with cells can result in cell proliferation,
suppression, or differentiation and may also result in the synthesis of other
cytokines by the target cell.

GAMMA INTERFERON (IFN-(gamma)- AS A THERAPEUTIC TARGET

The cytokine pseudo-cascade is initiated by gamma interferon (IFN-(gamma))
which is followed by the production of other inflammatory cytokines such as
TNF-(alpha) and IFN-(alpha) that exert effects on yet other cells which result
in the actual pathology of various ADs. The relevant cascade for the production
of killer T-Cells (TH-1 Line) is as follows:

IFN-(gamma)+IL1+antigen Killer T cell TNF-(alpha) + IFN-(gamma) +
IFN-(alpha) secretion

Simply sequestering TNF-(alpha), as do the drug products Enbrel® and
Remicade® for the treatment of RA, two products that are already on the market,
may not effectively deal with the overproduction of IFN-(alpha) and
IFN-(gamma), both of which are pro-inflammatory. Removing IFN-(gamma) would,
however, remove or lower all three inflammatory cytokines since IFN-(gamma) is
upstream in location to TNF-(alpha) in the cytokine cascade. IFN-(gamma) is
responsible for the activation of killer T-cells that produce many inflammatory
cytokines. It, therefore, is upstream to many of the other cytokines and its
reduction in AD may represent an effective therapeutic strategy. The Companys
drug development strategy therefore centers on the reduction of IFN-(gamma)
levels in AD patients.

A global effect on reducing the cytokine cascade may be possible by
removing or reducing IFN-(gamma). The Company believes that treatment by
TNF-(alpha) lowering drugs alone has little to no effect on the activation of
killer T-cells that produce many of the harmful cytokines. The Companys
product development is conceptually based on this immunological postulate.





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IFN-(gamma) also leads to the synthesis of MHC class II antigens in a
variety of cell types. Induction of these antigens is thought to be associated
with the autoimmune pathology in a number of diseases. The induction of
activated T-cells requires that these specific MHC class II antigens be
expressed, and this induction is a component of the resulting tissue
destruction and inflammation in autoimmune disorders. Reduction of IFN-(gamma)
would, therefore, be expected to inhibit activation of killer T-cells and,
therefore, reduce or avoid the autoimmune reaction.

In addition, a recent study has shown that IFN-(gamma) levels correlate
with the disability score in MS patients (Mult. Scler., Feb. 2000, Vol. 6, P.
19-23), and another study showed that sequestering of IFN-(gamma) in mice
prevented the onset of autoimmune Diabetes Mellitus (Gene Ther., May 1999, Vol.
6, P. 771-7). Both of these observations provide further support the central
role of IFN-(gamma) in the etiology of autoimmune diseases, and further suggest
that reducing the levels of this cytokine may have therapeutic benefit.

PRODUCT DEVELOPMENT PLAN

The process of the cytokine pseudo-cascade is extremely complex and not
fully understood, but it appears that this process results in the
overproduction of the inflammatory cytokines, IFN-(gamma) and TNF-(alpha), that
can contribute to the pathology of AD. The Company, and much of the immunology
community, agrees that the regulation of TNF-(alpha) and IFN-(gamma) presents
an opportunity for new drug development in a variety of autoimmune diseases.
Clearly the autoimmune diseases are associated with high levels of cytokines in
the blood, and there is now ample evidence that sequestration of certain
cytokines, such as TNF-(alpha) and IFN-(gamma), is associated with symptomatic
relief of autoimmune diseases such as RA, MS and Crohns disease. The two
products that are already on the market that target the reduction of
TNF-(alpha), Enbrel® and Remicade®, are, in the Companys opinion, not optimal
for the management of AD. The therapeutic proof of principle therefore already
exists for the usefulness of cytokine mediating strategies as therapeutic
interventions in autoimmune disease.

The Company believes that the existing cytokine mediating drugs only
represent the first approximation of the full potential of this therapeutic
strategy, and that enhanced efficacy may be obtained by targeting other
cytokines such as IFN-(gamma), which occupies a more upstream position in the
cytokine cascade than TNF-(alpha). The Company also believes that the systemic
administration of anti-cytokine biologically based drugs is not the ideal
strategy because of the development of neutralizing antibodies and the
potential for the development of hyperimmune sensitization. These issues are
becoming increasingly apparent with the biologically based products currently
on the market and constitute the rationale for the Companys anti-cytokine
extracorporeal device development program which will employ antibodies to both
IFN-(gamma) and TNF-(alpha) that are coupled to a solid phase matrix on a
filtration column. The patients blood is passed through the column and the
antibodies coupled to the column effect a removal of the targeted cytokines.
This treatment strategy has the advantage of avoiding completely the exposure
of the patient to any drug or foreign substance and in so doing removing any
toxicity issues in the drug development process. Toxic side effects are a major
reason drugs fail to be approved by the FDA.





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ADs probably represent one of the single largest disease classes,
comparable to the cardiovascular, central nervous system, and type II diabetes
markets. The major autoimmune diseases are RA, MS, Crohns disease, and type I
diabetes, but also include a host of other disorders, (See Table I). In
addition to the extensive list of diseases that have been demonstrated to be
autoimmune in character, there are numerous other large market indications that
have been suggested to have an autoimmune etiology. These include Alzheimers
disease, schizophrenia and others.

Table I
Major Autoimmune Diseases

|                               |  |                             
|------------------------------ |  | ----------------------------
|Addisons disease              |  | Hasimotos disease          
|Alopecia                       |  | Systemic lupus erythematosus
|Amyotrophic lateral sclerosis  |  | Male infertility            
|(Lou Gehrigs disease)         |  | Multiple sclerosis          
|Autoimmune diseases of the ear |  | Myasthenia Gravis           
|Autoimmune diseases of the eye |  | Psoriasis                   
|Autoimmune hepatitis           |  | Rheumatic fever             
|Corneal transplant rejection   |  | Rheumatoid arthritis        
|Crohns disease                |  | Sarcoidosis                 
|Diabetes (Type I)              |  | Scleroderma                 
|Epididymitis                   |  | Sjogrens syndrome          
|Glomerulonephritis             |  | Thyroiditis                 
|Graves disease                |  | Vasculitis                  
|Guillan-Barre syndrome         |  | Viteligo                    

Neurological Diseases With A Suspected Autoimmune Component

|                    |  |                    
|------------------- |  | -------------------
|Alzheimers Disease |  | Depression         
|Autism              |  | Parkinsons disease
|                    |  | Schizophrenia      

Current treatment of autoimmune diseases is inadequate and involves rather
primitive and global immunosuppression by using adrenal steroids, cytotoxic
agents, immunosuppressants, and antimitotics, all of which have substantial
toxicity associated with them due to their lack of specificity. Recently, the
cytokine strategy has emerged in the therapeutic arena in the form of
administering anti-inflammatory cytokines, such as Beta Interferon (IFN-(beta))
and specifically Betaseron® and Avonex® for treating MS. Also, two
anti-TNF-(alpha) products (Enbrel® and Remicade® have further demonstrated the
efficacy of the cytokine mediation therapeutic strategy. Although each of these
products is useful in treating ADs, they clearly only represent the first wave
of products based on this strategy and were conceived and developed at a time
when the knowledge of the cytokine cascade was far less understood than it is
today.

The now appreciated pivotal position of IFN-(gamma) in the cytokine
cascade, coupled with the clinical data generated in our studies, suggests that
the Anti-IFN-(gamma) therapeutic strategy may be superior to existing therapies
for both MS and RA,





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with regard to both efficacy and safety. The mission of the
Company is to develop these improved cytokine mediating therapeutic strategies
and bring them to market as new drugs.

CLINICAL STUDIES/RHEUMATOID ARTHRITIS (RA) AND PSORIATIC ARTHRITIS (PA)

In an effort to demonstrate clinical proof of principle that IFN-(gamma)
antibodies are well tolerated and show efficacy, two clinical trials were
sponsored in Russia with 67 patients with RA (62) and PA (5). An open-label
trial was conducted using both anti-IFN-(gamma) and anti-TNF-(alpha) antibodies
separately. Anti-IFN-(gamma) and anti-TNF-(alpha) both showed efficacy, but
patients receiving anti-IFN-(gamma) maintained a longer period of remission.
After this preliminary study, a double-blind, randomized, placebo-controlled
trial was conducted in RA patients. The patients received intramuscular
injections of antibodies to IFN-(gamma), TNF-(alpha), or placebo for 5
consecutive days as they did in the open-label trial. No other treatments were
administered. They were clinically assessed daily for 7 days, then weekly up to
the 28th day. Clinical, laboratory, and ultrasound indices were used to
evaluate treatment efficacy.

The results indicated that anti-IFN-(gamma) therapy provided rapid and
statistically significant reduction of joint pain, swelling, and inflammation.
The thickness of the inflamed synovial membrane assessed by ultrasound
decreased significantly only with anti-IFN-(gamma) (both by the 7th and the
28th days). Some patients receiving anti-IFN-(gamma) achieved remission of 4-60
months, and one receiving anti-TNF-(alpha), 7 months. The results of these
studies have been published in the peer-reviewed journals International
Journal of Immunotherapy(14:23-32, 1998) and Scandinavian Journal of
Rheumatology(30:203-207, August, 2001). Management believes that both studies
provide supportive proof in principle in humans that sequestering IFN-(gamma)
is a viable therapeutic strategy in RA.

CLINICAL STUDIES/MULTIPLE SCLEROSIS (MS)

The Company sponsored two trials in Russia of 83 MS patients on the use of
anti-cytokine therapy. The first was an open-label trial with patients with
secondary progressive MS. Following promising results in this trial, a
double-blind, placebo-controlled trial was conducted in a study design similar
to that used in RA. The study compared anti-IFN-(gamma) and anti-TNF-(alpha)
with placebo. Only patients with MS who received antibodies to IFN-(gamma)
showed statistically significant improvement compared to the placebo groupa
significant increase in the number of patients without confirmed disability
progression. Positive clinical changes in this group at six months were
supported by MRI data showing a decrease in the number of active enhancing
lesions. After 12 months of follow-up, the anti-IFN-(gamma) patients still
showed significant improvement relative to the placebo group on a number of
endpoints, including disease progression and the number of active MRI lesions.

Although preliminary in nature, both the RA and MS pilot clinical trial
results provide, in managements opinion, a proof-of-principle that
anti-IFN-(gamma) is a promising and perhaps superior therapeutic strategy for
both of these autoimmune disorders. It is reasonable to speculate that
longer-term treatments with anti-IFN-





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(gamma) could provide longer remission.
The results of this study have been reported in the peer-reviewed journal
Multiple Sclerosis(7 (5):277-284, October 2001).

CLINICAL STUDIES/CORNEAL TRANSPLANT REJECTION

In a clinical trial sponsored in Russia, 13 patients experiencing corneal
transplant rejection were administered anti-IFN-(gamma) antibodies in eye drop
form. Patients were chosen from those for whom standard treatment with
steroids, antibiotics, anti-inflammatory drugs, and vitamins produced no
improvement after rejection. In all patients prior to treatment, vision was
limited to distinguishing hand movement in front of the eyes. Standard
treatment was stopped, and the Companys antibodies were given at 2-3 drops
three times a day for 7-10 days. Patients were observed for 3-6 months. Two to
three days after the start of treatment, transplant transparency improved,
edema dropped, and visual acuity increased. At the end of the first week, the
transplants became almost fully transparent and inflammation of the patients
eyes (13 eyes) disappeared. Improvement was sustained for about 6 months in all
13 patients including 2 patients given re-treatment. All patients experienced
improvement in vision.

It is emphasized that polyclonal antibodies were used in all three
clinical trials for the purpose of establishing proof-of-principle.
Commercialization of a drug product will be in the form of fully-human or
humanized antibodies.

Subsequent to the completion of the trials for RA and MS, the Company was
issued patent No. 6,333,032 as more fully described under PATENT STATUS AND
PROTECTION OF PROPRIETARY TECHNOLOGY. A patent is also pending related to
corneal transplant rejection.

DRUG PRODUCT DEVELOPMENT

The Company intends to out-source product development and has identified
several companies that have suitable facilities for manufacturing large
quantities of antibodies. The raw materials are used as base components in a
number of drug products and are commercially available nationally and
internationally.

The Company has not entered into any drug development or manufacturing
agreement for antibodies and there is no assurance that any agreements will be
entered into in the future.

GOVERNMENT REGULATION

The Companys activities are subject to extensive federal, state, county
and local laws and regulations controlling the development, testing,
manufacture and distribution of medical treatments. The type of antibody-based
products described in the section entitled Product Development Plan above
will be subject to regulation as therapeutics or devices by the FDA, as well as
varying degrees of regulation by a number of foreign governmental agencies. To
comply with the FDA regulations regarding the manufacture and marketing of such
products, the Company would likely incur substantial costs relating to
laboratory and clinical testing of new products, and for the preparation and
filing of documents in the formats required by the FDA. There are no
assurances that the





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Company will receive FDA approval necessary to commercially
market its products, if any, and that if the Company is successful, it will not
encounter delays in bringing its new products to market as a result of being
required by the FDA to conduct and document additional investigations of
product safety and effectiveness.

FEDERAL DRUG ADMINISTRATION REGULATION

The FDA approved process for conducting clinical trials in the United
States consists of four steps that all new drugs, antibiotics and biologicals
must follow.

They are:



| | 1. |  | Investigational new drug application (IND)
| | -- |  | ------------------------------------------
|
| | 2. |  | Clinical trials                           
|
| | 3. |  | New drug application (review and approval)
|
| | 4. |  | Post-marketing surveys                    

On January 11, 1993, the FDA approved new procedures to accelerate the
approval of certain new drugs and biological products directed at serious or
life-threatening illnesses. These new procedures will expedite the approvals
for patients suffering from terminal illness when the drugs provide a
therapeutic advantage over existing treatments. The Company believes that the
products under consideration by the Company will fall under the FDA guidelines
for accelerated approval for drugs and biological products directed at serious
and life threatening disease because the Companys products are targeted as
potential treatments for RA and MS and are expected to be non-toxic in the
extracorporeal treatment paradigm.

The Company believes that the first step in the approval process, IND
approval, will take approximately 24 to 36 months. The Company will provide the
FDA with the results of comprehensive human clinical trials already conducted
outside the U.S.

Upon successful completion of the IND phase, the next step typically would
be to commence large-scale clinical trials with the Companys compounds.
Clinical trials are conducted in three phases, normally involving progressively
larger numbers of patients. The Company, in conjunction with its FDA consultant
and to-be-identified corporate partner, would plan to select key physicians and
hospitals to actively conduct these studies. Phase I clinical trials will be
concerned primarily with learning more about the safety of the drug, though
they may also provide some information about the safety of the drug and
information about effectiveness. Phase I testing is normally performed on
healthy volunteers although for drugs directed at HIV/AIDS and cancer, testing
on infected people is permitted. The test subjects are paid to submit to a
variety of tests to learn what happens to a drug in the human body; how it is
absorbed, metabolized and excreted, what effect it has on various organs and
tissues; and what side effects occur as the dosages are increased. The
principal objective is to determine the drugs toxicity. Phase I trials
generally involve 20-40 people at an estimated cost of $10,000 per patient,
taking three to six months to complete.

Assuming the results of Phase I testing present no toxic or unacceptable
safety problems, Phase II trials may begin. In many cases, Phase II trials may
commence before





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all the Phase I trials are completely evaluated if the disease
is life threatening and preliminary toxicity data in Phase I shows no toxic
side effects. In the case of clinical trials on drugs to treat life threatening
disease, Phase I and Phase II trials are sometimes combined to show initial
toxicity and efficacy in a shorter period of time. The primary objective of
this stage of clinical testing is designed to show whether the drug is
effective in treating the disease or condition for which it is intended, and to
establish the optimal dose level for pivotal efficacy phase III trials. Phase
II studies may take one or more years or longer and involve a few hundred
patients in randomized, controlled trials that also attempt to disclose
short-term side effects and risks in people whose health is impaired. A number
of patients with the disease or illness will receive the treatment while a
control group will receive a placebo. The cost per patient is estimated at
$10,000.

At the conclusion of Phase II trials, the FDA and the Company will have a
clear understanding of the short-term safety and effectiveness of the drugs and
their optimal dosage levels. Phase III clinical trials will generally begin
after the results of Phase II are evaluated. The objective of Phase III is to
develop information that will allow the drug to be marketed and used safely.
Phase III trials will involve hundreds, and sometimes thousands, of people with
the objective of expanding on the research.

Patient estimates for each phase of the clinical trial process are as
follows for both the MS and RA indications:

| |            |  |     | 
| | ---------- |  | --- | 
| | Phase I-   |  | 30  | 
| | Phase II-  |  | 200 | 
| | Phase III- |  | 500 | 

The third step that is necessary prior to marketing a new drug is the New
Drug Application (NDA) submission and approval for an injectable product that
is administered directly to a patient. In this step, all the information
generated by the clinical trials will be reviewed and if successful, the drug
will be approved for marketing.

The final step is the post-marketing surveillance or surveys of patients
being treated with the drug to determine its long-term effects. This has no
effect on the marketing of the drug unless highly toxic conditions arise. The
time required to complete the above procedures averages seven years, however,
there is no assurance that the Company will ever receive FDA approval of any of
its products.

The Companys clinical trials are at a very early stage and the Company
has not received approval from the FDA or any other governmental agency for the
manufacturing or marketing of any products under development. Consequently, the
commencement of manufacturing and marketing of any products in the U.S. is, in
all likelihood, a number of years away. The FDA may also require post-marketing
testing and surveillance to monitor the effects of approved products or place
conditions on any approvals that could restrict the commercial applications of
such products. Product approvals may be withdrawn if compliance with regulatory
standards is not maintained or if problems occur following initial marketing.
With respect to patented products or technologies, delays imposed by the
governmental approval process may materially reduce the period during which the
Company will have the exclusive right to exploit them.





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Upon contracting with a strategic partner, the Company anticipates that it
will take up to 60 months before an injectable product will be available for
FDA investigation and approval.

COMPETITION

The Company will encounter significant competition from firms currently
engaged in the biotechnology industries. The majority of these companies will
be substantially larger than the Company, and have substantially greater
resources and operating histories. The Company is aware of other competitors
seeking treatments for ADs such as MS and RA, however, the Company is not aware
of any competitors seeking to produce the same antibody-based products as the
Company.

PRODUCT LIABILITY EXPOSURE

The Company does not maintain any product liability insurance. Even if
the Company obtains product liability insurance, there is no assurance that
available amounts of coverage will be sufficient to adequately protect the
Company in the event of a successful product liability claim. Accordingly, if
litigation is initiated against the Company, the Company will have to pay all
costs associated with the litigation as well as any judgment rendered against
the Company. In the event a large judgment is entered against the Company, the
Company may not be able to pay the same and the Company could be forced to
cease operations. However, the Company believes that it would not be held
liable for injuries suffered by participants in its clinical trials because it
plans to require each participating patient to execute a waiver of claims as a
result of adverse reaction to the Companys products.

GLOSSARY OF TERMS

|                   |  |                                                                                                                                                                                                                                                                                                              
|------------------ |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Antibody           |  | A protein in the blood that is generated by B-lymphocytes or plasma
cells in reaction to foreign proteins or antigens. Antibodies neutralize
antigens and may result in immunity to the antigens.                                                                                                            
|                  
|Antigen            |  | substance (usually foreign) that induces the
formation of antibodies.                                                                                                                                                                                                                                        
|                  
|Autoimmune disease |  | A disease in which the body produces an immune
response to some constituent of its own tissue. Such
diseases include MS, RA, insulin dependent diabetes,
systemic lupus erythematosis, and AIDS.                                                                                                             
|                  
|Cytokine           |  | A soluble substance produced by cells of the immune
system to communicate with other immune system
cells. These include colony-stimulating factors,
interferons, interleukins, and tumor necrosis
factors. Cytokines can be either pro or
anti-inflammatory in nature. Also referred to as
soluble mediators.





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|                         |  |                                                                                                                                                                                                                                                                                                                                         
|------------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Extracorporeal Treatment |  | A treatment strategy where the blood of a patient
is passed through a device that is designed to
selectively remove a molecular component of the
blood, for example, IFN-(gamma) and/or TNF-(alpha)                                                                                                                                     
|                        
|Humanized antibody       |  | An antibody produced by generating human antibodies
with fully human protein sequences using genetically
engineered strains of mice in which mouse antibody
gene expression is suppressed and functionally
replaced with human antibody gene expression, while
leaving intact the rest of the mouse immune system.                      
|                        
|Ig (immunoglobulin)      |  | (IgA, IgD, IgE, IgG, and IgM) A group of serum
proteins representing antibodies. See Antibody.                                                                                                                                                                                                                                          
|                        
|Immune response          |  | The events that occur in humans and other vertebrate
animals when the body is invaded by foreign protein.
It is characterized by the production of antibodies
and may be stimulated by an infectious organism or
parasite (bacteria, yeast, fungi, protozoa, etc.),
transplanted material, vaccine, sperm or even the
hosts own tissue.
|                        
|Immunegenecity           |  | The study of genetic aspects of the type and
formation of immunoglobulins (antibodies)                                                                                                                                                                                                                                                  
|                        
|Immune System            |  | The cells and tissues that collectively recognize
and eliminate invading foreign substances like
microorganisms, parasites, and tumor cells from the
body.                                                                                                                                                                              
|                        
|Immunosuppressive        |  | Something that suppresses the immune system response.                                                                                                                                                                                                                                                                                   
|                        
|Interferon-gamma         |  | A glycoprotein inflammatory
cytokine induced in
different cell
sites and in
response to a
appropriate
stimulus.                                                                                                                                                                                                                         
|                        
|Lymphocyte               |  | A type of white blood cell arising from tissue of
the lymphoid systems. There are two types of
lymphocytes: B cells and T cells. These cells are
capable of being stimulated by an antigen to
produce a specific antibody to that antigen and
to proliferate to produce a population of such
antibody-producing cells.                  





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|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                      
|--------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Lymphokine                  |  | Any of a number of soluble physiologically active
factors produced by T lymphocytes in response to
specific antigens. Important in cell-mediated
immunity, lymphokines include interferon,
macrophage arming factor, lymphocyte inhibition
factor, macrophage inhibition factor, chemotactic
factor and various cytotoxic factors.                                                                   
|                           
|Macrophage                  |  | A motile white cell type found in vertebrate
tissue, including connective tissue, the spleen,
lymph nodes, liver, adrenal glands and
pituitary, as well as, in the endothelial lining
of blood vessels and the sinusoids of bone
marrow, and in the monocytes. They display
phagocytic activity and process antigens for
presentation to lymphocytes, which then prepare
antigen-specific antibodies.
|                           
|Pathogenic                  |  | Descriptive of a
substance or
organism that
produces a disease.                                                                                                                                                                                                                                                                                                                                      
|                           
|Placebo                     |  | An indifferent
substance in the
form of a medicine
given for the
suggestive effect.                                                                                                                                                                                                                                                                                                                  
|                           
|Polyclonal antibody         |  | An antibody produced in the normal immune
response to an antigen consisting of a number of
closely related, but not identical, proteins. The
variation in Polyclonal antibodies reflects the
fact that they are formed by a number of
different lymphocytes, in contrast to monoclonal
antibodies, which are formed by a clone of
identical cells                                                    
|                           
|Protein                     |  | Any group of
complex nitrogenous
organic compounds
of high molecular
weight that has
amino acids as
their basic
structural units.
Proteins are found
in all living
matter and are
required for the
growth and repair
of tissue.                                                                                                                                                                      
|                           
|T-Cell                      |  | A type
of lymphocyte that
matures in the
thymus gland. These
cells are
responsible for the
cellular immunity
processes, such as
direct cell binding
to an antigen, thus
destroying it. T
lymphocytes also
act as regulators
of the immune
response as helper T cells, or
suppressor T cells.                                                                                                         
|                           
|Tumor Necrosis Factor (TNF) |  | A substance that is
capable of killing
tumor cells and
eliciting
inflammatory
responses. It is
produced by host
monocytes and
macrophages and is
also referred to as
cachectin.                                                                                                                                                                                                                      





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PATENT STATUS AND PROTECTION OF PROPRIETARY TECHNOLOGY

As of December 25, 2001, the Company has been issued United States Patent
No. 6,333,032 for the exclusive use of interferon-gamma (IFN-(gamma))
antibodies including humanized and fully human (as well as other antibody
types) as a monotherapy to treat five diseases of autoimmune etiology:
Multiple Sclerosis, Rheumatoid Arthritis, Juvenile Rheumatoid Arthritis,
Psoriatic Arthritis and Ankylosing Spondylitis. Management believes that this
patent is a critical milestone for the Company. The Company believes that its
most recently issued patent gives the Company patent protection for a new
anti-cytokine approach to treating different autoimmune diseases, including the
foregoing five specific diseases principally as an injectable treatment. The
Companys patented treatment also uses various methods to neutralize or block
specific combinations of cytokines and their receptors. In managements
opinion, the Companys patented approach is broader in scope than certain other
patented treatments.

The Company also has been issued United States Patent Nos. 5,626,843 and
5,888,511, and Australia Patent No. 730498. The Company also has ten United
States utility patents pending filed between December 22, 1997, and February
24, 2000, which have now been consolidated into six (6) pending utility patent
applications. The Company also has two foreign applications pending in Europe
and Canada and one PCT application.

DEPENDENCE UPON KEY PERSONNEL

The Company relies greatly in its efforts on the services and expertise of
its key staff, such as the Chief Executive Officer, the Director of Research
and Development and other officers and directors. The operation and future
success of the Company would be adversely affected in the event that any of
them is incapacitated or the Company otherwise loses their services.

UNCERTAINTIES ASSOCIATED WITH RESEARCH AND DEVELOPMENT ACTIVITIES

The Company intends to continue its research and development activities on
its products and for the purpose of developing proprietary products. Research
and development activities, by their nature, preclude definitive statements as
to the time required and costs involved in reaching certain objectives. If
research and development requires more funding than anticipated, the Company
may have to reduce product development efforts or seek additional financing.
There can be no assurance that the Company would be able to secure any
necessary additional financing or that such financing would be available on
favorable terms.

MARKETING

Assuming the Company is able to obtain FDA approval of its products
currently in development, it intends to market the same through collaborative
relationships with other companies. It is the Companys intention that joint
venture partners will be selected on the basis of experience and the degree of
financial success they exhibit in the industry. There are no assurances that
the Company will obtain FDA approval for its products, and





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there are no
assurances that the Company will be successful in entering into agreements with
established multinational companies.

FACTORS THAT MAY AFFECT THE COMPANY

The Company operates in a rapidly changing environment that involves a
number of risk factors, many of which are beyond the Companys control. The
following discussion highlights some of these risk factors and others are
discussed elsewhere in this Form 10-KSB.

1.      Because Of Continuing Operating Losses, There Is A Need for Additional
Financing, Which If Not Successfully Met Will Likely Result In A Lack Of
Liquidity Which Could Adversely Affect The Company. For the fiscal year ended
December 31, 2001, we realized a net loss of $ 1,020,301 and expect such losses
to continue for the foreseeable future. Therefore, we believe that we will need
to raise additional capital during the next twelve months. If we are unable to
raise additional capital and/or generate a positive cash flow before our cash
is depleted, we will be required to curtail operations substantially. We are
seeking to obtain additional funds through public and private equity and debt
financings, collaborative or other arrangements with corporate partners,
acquisitions or mergers with companies with strong capital positions or cash
flow from product sales or from other sources. There is no assurance that we
will be able to obtain additional capital if required, or if capital is
available, to obtain it on terms favorable to us. We may suffer from a lack of
liquidity in the future that could impair our research and development efforts
and adversely affect our results of operations.

2.      There Can Be No Assurance That Any Products The Company Develops Will
Satisfy The Extensive And Rigorous Standards Set By The Various Governmental
Authorities Or Even If Satisfied, That Approvals Will Be Either Delayed Or
Restricted And Therefore Have A Material Adverse Effect On Commercialization Of
Our Products And Our Sales Revenues. Our products are in the development
stage, have not been subjected to clinical studies in the United States, have
limited clinical data based upon studies conducted in Russia, have not been
cleared for marketing by the FDA or foreign regulatory authorities, and cannot
be commercially distributed in the United States and/or in foreign markets
unless and until such clearance is obtained. Failure to obtain FDA clearance
would delay sales of our products and would materially affect our financial
condition.

The development, manufacture and sale of drug products are subject to
extensive and rigorous regulation by federal, state, local and foreign
governmental authorities. In particular, products for human health are subject
to substantial preclinical and clinical testing and other approval requirements
by the FDA and comparable foreign regulatory authorities. The process for
obtaining the required regulatory approvals from the FDA and other regulatory
authorities takes many years and is very expensive. There can be no assurance
that any product developed by us will prove to meet all of the applicable
standards to receive marketing approval. There can be no assurance that any
such approvals will be granted on a timely basis, if at all. Delays in and
costs of obtaining these approvals could adversely affect our ability to
commercialize our products, if any, and to generate sales revenues. If
regulatory approval of a product is obtained, such approval may involve
restrictions and limitations on the use of the product.





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3.      Our Research And Development And Marketing Efforts Are Dependent On
Corporate Collaborators And Other Third Parties Who May Not Devote Sufficient
Time, Resources And Attention To Our Programs, Which May Limit Our Efforts To
Successfully Develop And Market Potential Products. Because we have limited
resources, we anticipate entering into a number of collaboration agreements
with other companies. At present, however, we have no such agreements. These
agreements may be expected to call for our partners to control the supply of
bulk or formulated drugs for commercial use or for use in clinical trials;
design and execution of clinical studies; process of obtaining regulatory
approval to market the product; and/or marketing and selling of any approved
product.

In each of these areas, our partners may not support fully our research
and commercial interests since our program may compete for time, attention and
resources with the internal programs of our corporate collaborators. As such,
we cannot be sure that our corporate collaborators will share our perspectives
on the relative importance of our program, that they will commit sufficient
resources to our program to move it forward effectively, or that the program
will advance as rapidly as it might if we had retained complete control of all
research, development, regulatory and commercialization decisions. We also rely
on several of these collaborators and other third parties for the production of
compounds and the manufacture and supply of pharmaceutical products.
Additionally, we may find it necessary from time to time to seek new or
additional partners to assist us in commercializing our products. It is
uncertain whether we would be successful in establishing any such new or
additional relationships.

4.      The Results And Timing Of Our Research And Development Activities, Including
Future Clinical Trials Are Difficult To Predict, Subject To Future Setbacks
And, Ultimately, May Not Result In Any Pharmaceutical Products, Which May
Adversely Affect Our Business. Preclinical testing and clinical trials must
demonstrate that a product candidate is safe and efficacious. The results from
preclinical testing and early clinical trials may not be predictive of results
obtained in subsequent clinical trials, and we cannot be sure that these
clinical trials will demonstrate the safety and efficacy necessary to obtain
regulatory approval for any product candidates. A number of companies in the
biotechnology industries have suffered significant setbacks in advanced
clinical trials, even after obtaining promising results in earlier trials. In
addition, certain clinical trials are conducted with patients having the most
advanced stages of disease. During the course of treatment, these patients
often die or suffer other adverse medical effects for reasons that may not be
related to the pharmaceutical agent being tested. Such events can have a
negative impact on the statistical analysis of clinical trial results.

We cannot be sure that we will be permitted by regulatory authorities to
undertake clinical trials for any of our product candidates, or that if such
trials are conducted, any of our product candidates will prove to be safe and
efficacious or will receive regulatory approvals. Any delays in or termination
of these clinical trial efforts may have a material adverse effect on our
business.

The completion of clinical trials, if any, of our product candidates may
be delayed by many factors. One such factor is the rate of enrollment of
patients. Neither we nor our prospective collaborators can control the rate at
which patients present themselves for enrollment, and we cannot be sure that
the rate of patient enrollment will be consistent





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with our expectations or be
sufficient to enable clinical trials of our product candidates to be completed
in a timely manner or at all. Any significant delays in, or termination of,
clinical trials of our product candidates may have a material adverse effect on
our business.

5.      Manufacturing, Sales And Distribution Related Problems May Create
Disruptions That Could Result In A Reduction Of Product Sales Revenue And
Damage Commercial Prospects For Products We May Successfully Develop. Our
management has limited sales, distribution and marketing experience, and
therefore, if the necessary regulatory approvals are obtained, we intend to
market, distribute and sell our products, through a network of qualified
independent distributors, agents, and key strategic partners, none of which are
currently in place. There are no assurances that we can establish the necessary
relationships for marketing and selling products or that the network will
successfully implement an effective marketing and sales strategy. We expect to
rely on third parties to provide customer service activities and accept and
process returns. Although it is anticipated that we will employ a small number
of persons to coordinate and manage the activities undertaken by these third
parties, we have relatively limited experience in this regard. Any disruption
in these activities could impede our ability to sell our products and could
reduce sales revenues.

6.      Manufacturing Problems Would Materially Impair Our Competitive Position And
Our Possibility Of Achieving Profitability. We lack the facilities to
manufacture our products and do not have an adequate supply of product to begin
clinical studies in the United States. If we are unable to contract for
manufacturing capabilities on acceptable terms, it would result in the delay of
sales, which in turn could materially impair our competitive position, and our
possibility of achieving profitability.

7.      Uncertainty Relating To Favorable Third-Party Reimbursement May Have A
Material Adverse Effect On The Commercial Success Of Products We Develop. In
the United States, success in obtaining favorable third-party payment for a new
product depends greatly on the ability to present data which demonstrates
positive outcomes and reduced utilization of other products or services, as
well as cost data which shows that treatment costs using the new product are
equal to or less than what is currently covered for other products. Our failure
to present such clinical data would adversely affect our ability to obtain
favorable third-party reimbursement as well as the commercial success of our
products.

8.      Our Dependence On Products Could Have A Material Adverse Affect On The
Companys Financial Condition. We expect to derive a substantial majority of
our revenues from our proprietary development stage products through product
licensing and royalty fees. The life cycle of our products, if approved for
marketing, is difficult to estimate in terms of current and future
technological developments, competition, and other factors. Our failure to
successfully commercialize products or to realize significant revenues from the
products would have a material adverse effect on our financial condition. As
of the date hereof, we have not realized any revenues from the sale of
products.

9.      We May Not Be Able To Maintain Adequate Patent Protection Which Would Have
A Material Adverse Impact On Our Ability To Develop Commercial Products And A
Patent Application Appeal, If Not Successful, May Have A Material Adverse Impact On The





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Company. We have three issued United States patents and one
patent issued in Australia. Our success and ability to compete effectively
will depend, in part, on the strength of our patents and the ability to obtain
protection for our products, if any, in foreign markets. No assurance can be
given that any patents issued to us will not be challenged, invalidated, or
circumvented. Litigation, which could result in substantial cost to us, may
also be necessary to enforce any patents issued to us and/or determine the
scope and validity of other parties proprietary rights.

We have six United States utility patent applications pending. The United
States patent position of pharmaceutical companies involves many complex legal
and technical issues and has recently been the subject of much litigation.
There is no clear policy establishing the breadth of claims or the degree of
protection afforded under such patents. As a result, there can be no assurance
that any of our patent applications will be approved, except where claims under
an application have already been examined and allowed, nor that we will develop
additional proprietary products that are patentable. There can be no assurance
that any United States patents issued to us will provide us with any
competitive advantages or will not be challenged by third parties or that
patents issued to others will not have an adverse effect on our ability to
conduct our business. We could incur substantial costs in asserting our patent
rights and in defending patent infringement suits against us or our executives
relating to ownership of, or rights to, patents and other intellectual property
of third parties. Such disputes could substantially delay our drug development
or commercialization.

Furthermore, because until November 29, 2000, patent applications in the
United States were maintained in secrecy until issue, and are only published
now following certain rules, and because publication of discoveries in the
scientific and patent literature often lag behind actual discoveries, we cannot
be certain that we were the first chronologically to make the inventions
covered by each of our pending patent applications or that we were the first to
file patent applications for such inventions. In the event that a third party
has also filed a patent application for any of its inventions, we may have to
participate in interference proceedings declared by the United States Patent
and Trademark Office (PTO) to determine priority of the invention, which could
result in substantial cost to us, even if the eventual outcome is favorable to
us. In the event of an adverse decision as to priority of invention, we would
not be entitled to a patent on the invention at issue in the interference
proceeding. The PTO or a private party could also institute reexamination
proceedings involving us in connection with one or more of our patents, and
such proceedings could result in an adverse decision as to the validity or
scope of the patents. In addition, there can be no assurance that our patents
would be held valid by a court of law of competent jurisdiction. We could be
forced to either seek a license to intellectual property rights of others,
which may not be available to us on acceptable terms, if at all, or alter our
products or processes so that they no longer infringe on the proprietary rights
of others.

10. There Can Be No Assurance That We Can Successfully Compete Against Our
Competition, Some Of Whom Have Substantially Greater Capital Research And
Development Staff And Facilities Than The Company Or That Technological
Advances Will Not Render Our Products Less Competitive Or Obsolete. The
products that we are planning to develop may compete for market share with
alternate therapies. A number of companies are pursuing the development of
novel products which target the same diseases as we are targeting. Many of
these competitors have substantially greater capital resources,





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research and
development staffs and facilities than we do. They may develop and introduce
products and processes competitive with those of ours. They represent
significant long-term competition for us. For certain of our products, an
important factor in competition may be the timing of market introduction of
these competitive products. This timing will be based on the effectiveness
with which we or the competition can complete clinical trials and approval
processes and supply quantities of these products to market. Competition among
products approved for sale will be based on, among other things, efficacy,
safety, reliability, price, marketing capability and patent position.

FORWARD-LOOKING STATEMENTS

In addition to historical facts or statements of current condition, this
Annual Report on Form 10-KSB contains forward-looking statements.
Forward-looking statements provide our current expectations or forecasts of
future events. These may include statements regarding anticipated scientific
progress in our research programs, development of potential pharmaceutical
products, prospects for regulatory approval, manufacturing capabilities, market
prospects for our products, sales and earnings projections, and other
statements regarding matters that are not historical facts. Some of these
forward-looking statements may be identified by the use of words in the
statements such as anticipate, estimate, expect, project, intend,
plan, believe or other words and terms of similar meaning. Our performance
and results could differ materially from those reflected in these
forward-looking statements due to general financial, economic, regulatory and
political conditions affecting the biotechnology and pharmaceutical industries
as well as more specific risks and uncertainties such as those set forth above
and in this report. Given these risks and uncertainties, any or all of these
forward-looking statements may prove to be incorrect. Therefore, you should not
rely on any such forward-looking statements. Furthermore, we do not intend (and
we are not obligated) to update publicly any forward-looking statements. You
are advised, however, to consult any further disclosures we make on related
subjects in our reports to the Securities and Exchange Commission. Other
unanticipated occurrences besides those listed in this Form 10-KSB could also
adversely affect us.

EXECUTIVE OFFICES

Our executive offices are located at 6355 Topanga Canyon Boulevard,
Woodland Hills, California 91367, and our telephone number is (818) 883-6716.




ITEM 2.     DESCRIPTION OF PROPERTY

The Company receives the use of approximately 3,500 square feet of
commercial building space on a rent-free basis from a firm that is partially
owned by a director. The Company also receives the use of office space and
facilities on a rent-free basis from a firm owned by Edmond F. Buccellato. No
formal agreement memorializes these month-to-month arrangements.

The Company owns a nominal amount of lab equipment, office equipment and
furniture, all of which have been entirely or substantially written off as
depreciated assets.





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ITEM 3.     LEGAL PROCEEDINGS

The Company is not the subject of any pending legal proceeding; and to the
knowledge of management, no proceedings are presently contemplated against the
Company by any federal, state or local governmental agency.

Further, to the knowledge of management, no director or executive officer
is party to any action in which such director or executive officer has an
interest adverse to the Company.

ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

(a)       On December 13, 2001, the Company held its annual meeting of stockholders
(Annual Meeting).

(b)       A brief description of each matter voted upon at the Annual Meeting is set
forth below:

(1)     The stockholders elected eight directors to hold office until the next
annual meeting of the stockholders and until their respective successors are
elected and qualified, or until death, resignation or removal:

|                       |  |     |            |                    |  |  |        | 
|---------------------- |  | --- | ---------- | ------------------ |  |  | ------ | 
|Name of Director       |  | For |            | Withheld Authority
|                       |  |     |            |                   
|Simon Skurkovich, M.D. |  |     | 24,252,672 |                    |  |  | 67,283 | 
|Edmond Buccellato      |  |     | 24,251,872 |                    |  |  | 68,083 | 
|Boris Skurkovich, M.D. |  |     | 24,251,872 |                    |  |  | 68,083 | 
|Lawrence Loomis        |  |     | 24,252,272 |                    |  |  | 67,683 | 
|Leonard Millstein      |  |     | 24,252,272 |                    |  |  | 67,683 | 
|Alexander L. Cappello  |  |     | 24,252,572 |                    |  |  | 67,383 | 
|John M. Bendheim       |  |     | 24,252,572 |                    |  |  | 67,383 | 
|Thomas J. Pernice      |  |     | 24,252,572 |                    |  |  | 67,383 | 

(2)     The stockholders approved the adoption of the Advanced Biotherapy,
Inc. 2000 Omnibus Equity Incentive Plan.

|         |  |  |            | 
|-------- |  |  | ---------- | 
|For:     |  |  | 23,378,910 | 
|Against: |  |  | 873,510    | 
|Abstain: |  |  | 67,535     | 

(3)     The stockholders approved a reverse stock split in a range not to
exceed 1:10 provided such reverse stock split will not become effective unless
a significant transaction affecting the Company shall have occurred and the
Board of Directors makes a determination within three years of the Annual
Meeting that such reverse stock split is in the best interests of the
stockholders.

|         |  |  |            | 
|-------- |  |  | ---------- | 
|For:     |  |  | 23,378,910 | 
|Against: |  |  | 873,510    | 
|Abstain: |  |  | 67,535     | 





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PART II




ITEM 5.     MARKET FOR REGISTRANTS COMMON STOCK AND RELATED STOCKHOLDER
MATTERS

As of February 15, 2000, the Companys Common Stock was quoted again on
the Bulletin Board operated by the National Association of Securities Dealers,
Inc. (the Bulletin Board) under the symbol ADVB. The table shows the high
and low bid quotations of the Companys Common Stock during each of the four
quarters of the 2000 and 2001 fiscal years, and reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions:

|                           |  |          |      |         |  |   |      | 
|-------------------------- |  | -------- | ---- | ------- |  | - | ---- | 
|2000 Fiscal Quarter Ended: |  | High Bid |      | Low Bid
|                           |  |          |      |        
|March 31                   |  | $        | 2.63 |         |  | $ | 1.75 | 
|June 30                    |  | $        | 1.81 |         |  | $ | 0.44 | 
|September 30               |  | $        | 1.00 |         |  | $ | 0.50 | 
|December 31                |  | $        | 0.75 |         |  | $ | 0.20 | 
|                          
|2001 Fiscal Quarter Ended: |  |          |      |         |  |   |      | 
|                          
|March 31                   |  | $        | 0.53 |         |  | $ | 0.24 | 
|June 30                    |  | $        | 0.34 |         |  | $ | 0.20 | 
|September 30               |  | $        | 0.58 |         |  | $ | 0.16 | 
|December 31                |  | $        | 0.55 |         |  | $ | 0.21 | 

HOLDERS

As of February 28, 2002, the Company had approximately 1,550 holders of
record of its Common Stock. This number does not include those beneficial
owners whose securities are held in street name. The total number of record and
beneficial stockholders is estimated to be more than 3,500.

DIVIDENDS

The Company has never paid a cash dividend on its Common Stock and has no
present intention to declare or pay cash dividends on the Common Stock in the
foreseeable future. The Company intends to retain any earnings that it may
realize in the future to finance its operations. Future dividends, if any, will
depend on earnings, financing requirements and other factors, and the payment
of cash dividends, if any, will be at the sole discretion of the Board of
Directors.

SALE OF UNREGISTERED SECURITIES IN THE FOURTH QUARTER OF 2001

During the fourth quarter of 2001, pursuant to the Companys 2000 Omnibus
Equity Incentive Plan, the Company granted Mazier Partners LLC non-qualified
stock





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##### Table of Contents



options to purchase 250,000 shares of Common Stock, at $0.25 per share,
for consulting services related to pharmaceutical partnering candidates.






|ITEM 6. |  | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
|------- |  | -------------------------------------------------------------------------------------

The Company anticipates that its minimum cash requirements to continue as
a going concern for the next twelve months will be approximately $800,000, and
therefore, believes that it has inadequate cash to maintain operations during
that period. In order to meet the foregoing cash requirements, the Company will
have to raise additional capital or obtain a loan. There is no assurance,
however, that the Company will be able to raise additional capital or obtain a
loan. The Companys objective is to establish collaborative relationships with
one or more pharmaceutical or biotechnological companies that could result in
the generation of royalty payments to the Company. The Company is also seeking
out-licensing arrangements of its intellectual property that will generate
recurring revenue and cash flow. As of the date hereof, the Company has not
entered into any agreement with a pharmaceutical or biotechnological company,
or any such out-licensing arrangements. In the event the Company is unable to
generate its projected minimum cash requirements, management plans to curtail
operating expenses, including certain professional fees and employee
compensation.

The Companys development goal is to produce, or have produced, a series
of human or humanized antibody-based products through collaborations with other
biotechnology companies. The Company has identified several biotechnology
companies that can develop and manufacture such antibodies for the Company,
although no such development arrangements have been entered into by the
Company. Management believes that the availability of this technology will make
it possible to produce safer and more standardized antibodies for commencement
of human clinical trials, under FDA guidelines, in the United States.

The Company has no expected purchases or sales of significant equipment.

There are no expected significant changes in the number of employees of
the Company.

RESULTS OF OPERATIONS  FROM INCEPTION THROUGH DECEMBER 31, 2001.

The Company is considered to be in the development stage as defined in
Statement of Financial Accounting Standards No. 7. There have been no
operations since incorporation.

LIQUIDITY AND CAPITAL RESOURCES.

As of December 31, 2001, the Company had issued and outstanding 42,303,611
shares of its Common Stock. The Company is a development stage company. The
Company had $36,615 in cash as of December 31, 2001.

FISCAL 2001 COMPARED TO FISCAL 2000.





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##### Table of Contents



For the year ended December 31, 2001, the Company realized a net loss of
$1,020,301 and a loss from operations of $890,754, compared to net loss of
$653,270 and a loss from operations of $827,084 for the year ended December 31,
2000. The loss from operations for the current year is principally due to
increases in research and development of $94,168, directors fees of $29,080
related to the granting of stock options issued for services during the year,
depreciation and amortization of $25,657, insurance of $37,178 and rent of
$22,862 related the opening and subsequent closure of an executive office in
San Diego, California. These increases in expenses were offset by decreases in
professional fees of $35,534, salaries and benefits of $90,867 principally
related to the reduction in staff and decrease in the salary of the chief
executive officer, as well as a reduction in travel and entertainment expenses
of $23,020 and a decrease in office expenses of $12,014.

For the year ended December 31, 2000, the Company realized a net loss of
$653,270 and a loss from operations of $827,084, compared to net income of
$1,143,892 and a loss from operations of $334,278 for the year ended December
31, 1999. The loss from operations was principally due to a substantial
increase in outside expenses relating to general corporate, SEC and patent
legal costs, accounting, investment banking, investor relations, strategic
partnering and other contract services, as the Company became an SEC reporting
company, moved the listing of its Common Stock to the OTC Bulletin Board and
embarked on an investor relations program, reincorporated in Delaware, raised
additional capital, expanded its intellectual property portfolio and began an
active corporate partnering initiative. All of these activities also caused
salary, travel, entertainment, telephone and other office expenses to increase
substantially during the year. The operating loss was partially offset by total
other income of $173,814, principally as the result of an internal gain of
$157,520 on the sale of Common Stock by certain officers of the Company, as a
result of Section 16(b) of the Securities Exchange Act of 1934, which requires
insiders to disgorge short-swing profits. Total other income also benefited
from the forgiveness of $45,396 of accounts payable, resulting from the failure
of the vendors to pursue payment from the Company within the applicable statute
of limitations.

RESTATEMENT OF COMPANY FINANCIAL STATEMENTS

The Companys financial statements for the years ended December 31, 2000
and 1999, respectively, have been restated to reflect the correction of an
error in common stock outstanding and weighted average number of shares
outstanding as of December 31, 2000. Subsequent to December 31, 2001, it was
discovered that the Company mistakenly cancelled 850,000 shares of common stock
in 1999. Under the terms of a settlement agreement and mutual general release
and an escrow agreement each dated July 31, 1991 (collectively referred to as
settlement agreements) among the Company, Dr. Simon Skurkovich, a consultant
and certain other parties, the Company issued 850,000 shares in the name of the
consultant and placed into escrow. These shares were to be released to the
consultant upon performance of certain services that were to be provided by the
consultant no later than January 15, 1993. The settlement agreements also
stated that the 850,000 shares of common stock would be distributed to Dr.
Simon Skurkovich, if such services were not provided by the consultant. Such
services were not provided by the consultant, in whole or in part, and all
850,000 shares were cancelled by the Company in 1999. Instead of being
cancelled, however, the shares should have been





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##### Table of Contents



distributed to Dr. Simon
Skurkovich in 1999 pursuant to the settlement agreements. Therefore, the
shares are being reissued to Dr. Simon Skurkovich and are reflected in the
accompanying financial statements as if they were never cancelled.

Except for the historical information contained herein, the matters
discussed herein are by their nature forward-looking. Investors are cautioned
that forward-looking statements or projections made by the Company, including
those made in this document, are subject to risks and uncertainties that may
cause actual results to differ materially from those projected. Reference is
made in particular to forward-looking statements regarding product development,
capital sources, plan of operations and expenses. The Company operates in a
rapidly changing environment that involves a number of risks, some of which are
beyond the Companys control. Future operating results and the Companys stock
price may be affected by a number of factors, including, without limitation:
(i) availability of capital for research and development; (ii) availability of
capital for clinical trials; (iii) opportunities for joint ventures and
corporate partnering; (iv) opportunities for mergers and acquisitions to expand
the Companys biotechnology base or acquire revenue generating products; (v)
the results of preclinical and clinical trials; (vi) regulatory approvals of
product candidates, new indications and manufacturing facilities; (vii) health
care guidelines and policies relating to prospective Company products; (viii)
intellectual property matters (patents) and (ix) competition.




ITEM 7.      FINANCIAL STATEMENTS

The financial statements are included herewith and incorporated herein by
reference beginning with the Table of Contents on
Page F-1.



|ITEM 8. |  | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
|------- |  | ------------------------------------------------------------------------------------




There have been no disagreements with the Companys accountants, Williams
& Webster P.C., on accounting and financial disclosures during the Companys
two most recent fiscal years, i.e. January 1, 2000, through December 31, 2001,
and through the date hereof.




PART III




ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS

The following table sets forth the names and nature of all positions and
offices held by all directors and executive officers of the Company as of
February 28, 2002, and the period or periods during which each such director or
executive officer served in his or her respective positions.

|                       |  |     |    |               |  |                                                                       |  |               
|---------------------- |  | --- | -- | ------------- |  | --------------------------------------------------------------------- |  | --------------
|Name                   |  | Age |    | Position Held |  | Director Since                                                       
|                       |  |     |    |               |  |                                                                      
|Simon Skurkovich, M.D. |  |     | 78 |               |  | Chairman Emeritus, Director, and
Director of Research and Development |  | November, 1985
|Alexander L. Cappello  |  |     | 46 |               |  | Chairman of the Board, Director (1)(2)(3)                             |  | April, 2000   





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##### Table of Contents



|                       |  |     |    |               |  |                                                     |  |                 
|---------------------- |  | --- | -- | ------------- |  | --------------------------------------------------- |  | ----------------
|Name                   |  | Age |    | Position Held |  | Director Since                                     
|                       |  |     |    |               |  |                                                    
|Edmond F. Buccellato   |  |     | 57 |               |  | President and Chief Executive Officer,
Director (3) |  | November, 1995  
|Thomas J. Pernice      |  |     | 40 |               |  | Treasurer and Secretary, Director (1)(3)            |  | April 2001      
|William M. Finkelstein |  |     | 42 |               |  | Chief Financial Officer                             |  | (Not Applicable)
|Lawrence Loomis        |  |     | 58 |               |  | Director (2)                                        |  | December, 1986  
|Leonard Millstein      |  |     | 60 |               |  | Director (1)                                        |  | December, 1986  
|Boris Skurkovich, M.D. |  |     | 47 |               |  | Director (2)                                        |  | December, 1986  
|John M. Bendheim       |  |     | 48 |               |  | Director (1)(2)(3)                                  |  | June, 2000      



---

|(1) |  | Member of the Audit Committee of the Board of Directors.       
|--- |  | ---------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Member of the Compensation Committee of the Board of Directors.
|   
|   
|   
|   
|(3) |  | Member of the Executive Committee of the Board of Directors.   

TERM OF OFFICE

Each director serves for a term of one year or until his successor is duly
elected once qualified. The Companys officers are appointed by the Board of
Directors and hold office at the discretion of the Board.

BIOGRAPHICAL DESCRIPTIONS OF DIRECTORS AND OFFICERS

John M. Bendheim  Since June 2000, Mr. Bendheim has served as a member of
the Board of Directors. Mr. Bendheim is Chairman of the Cedars-Sinai Medical
Center Board of Governors in Los Angeles, California and President of Bendheim
Enterprises, Inc., a real estate investment holding company. He received his
B.S. degree in Business Administration in 1975 and his M.B.A. in 1976 from the
University of Southern California.

Edmond F. Buccellato  Since April 2001, Mr. Buccellato has served as
President and Chief Executive Officer. Mr. Buccellato served as President and
Chief Operating Officer of the Company from September 1, 2000 to December 12,
2000. Mr. Buccellato served as Chief Executive Officer and a member of the
Board of Directors from 1995 to August 31, 2000. He was co-founder, member of
the Board of Directors and Vice President of Finance of Phase Medical, Inc., an
infusion therapy company sold to Becton Dickinson in 1994. He also was
co-founder, member of the Board of Directors and Vice President of Finance of
Synergistic Systems, Inc., a company that became the largest medical billing
company in the western United States. He is also co-founder and member of the
Board of Directors of Polymer Safety, LLC, a manufacturer of synthetic medical
and industrial examination gloves and co-founder and member of the Board of
Directors of Physicians Choice LLC, a medical billing company. Mr. Buccellato
received his undergraduate degree From California State University at San
Diego, and his graduate degree from the University of Southern California.

Alexander L. Cappello  Since April 2001, Mr. Cappello has served as
Chairman of the Board. Since May 2000, Mr. Cappello has served as a member of
the Board of Directors. Mr. Cappello is Chairman and Chief Executive Officer of
Cappello Group, Inc., a merchant banking firm, facilitating equity and project
financing since 1975. Currently, he is a Member of the Board of Directors of
the following: Cappello Group, Inc., RAND Corporation (Center for Middle East
Public Policy), CytRx Corporation (NASDAQ),





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##### Table of Contents



Independent Colleges of Southern
California (ICSC), USC Marshall School of Business Entrepreneur Advisory
Council, USC Advancement Council, USC Marshall School of Business, Chairman of
Catholic Big Brothers of Los Angeles, Chairman of the International Board of
the Young Presidents Organization for 2003-2004. He received his B.S. Degree
in Finance (Order of the Palm) from the University of Southern California in
1977.

Formerly, Mr. Cappello was a Member of the Board of Directors of the
following; Koo Koo Roo, Inc. (NASDAQ), Arcus Data Security, Inc. (NASDAQ),
Maritime Bank of California (OTC), Executive Publications, Inc., and The
Joffrey Foundation.

Lawrence Loomis  Since 1986, Mr. Loomis has served as a member of the
Board of Directors. Mr. Loomis is President and majority shareholder of New
Horizons Diagnostics, Inc., a company that develops bacteriological screening
methods, monoclonal antibodies for detection of various infectious disease
agents, and rapid bacterial and viral assay kits. Prior to founding New
Horizons Diagnostics, Inc. in 1980, Mr. Loomis was in charge of the Immunology
Department for BBL, a division of Becton Dickinson. Mr. Loomis received his
undergraduate degree in Chemistry from New York University and his graduate
degree in Chemistry from City University.

Leonard Millstein  Since 1986, Mr. Millstein has served as a member of
the Board of Directors. Mr. Millstein received his MSCE and Ph.D. in Civil
Engineering from Moscow State Construction University in 1964 and 1974,
respectively. After immigrating to the United States in 1978, he held teaching
positions at Howard University in Washington D.C. and Johns Hopkins University
in Baltimore, Maryland. He has over 200 publications and is a member of the
American Concrete Institute and American Society of Civil Engineers. From 1981
to the present, he has been a CEO of Radcon Products, a company involved in
manufacturing of proprietary concrete sealants. From 1990 until the present, he
has been a Chairman of the Board of TTLTIC, a private consulting company.

Thomas J. Pernice  Since April 2001, Mr. Pernice has served as the
Treasurer and Secretary of the Company and as a member of the Board of
Directors. Mr. Pernice is a managing director of Cappello Group, Inc., a
merchant banking firm. Prior to joining the Cappello Group in January, 1999,
Mr. Pernice served as a senior corporate executive in government and industry
for more than 17 years. Most recently, he was Vice President, Public Affairs
and a corporate officer for Dole Food Co. Inc. (NYSE:DOL), reporting to the
chairman and CEO, David H. Murdock. He also served in similar capacities for
the conglomerate of publicly and privately held business interests of Murdock,
including the Castle & Cooke Inc. real estate company, formerly (NYSE:CCS), now
privately held. Prior to joining Dole Food Co., Mr. Pernice served in the
White House for more than seven years in various capacities for the Reagan and
Bush administrations. Mr. Pernice earned a bachelor of arts degree from the
University of Southern California in 1984 .

Boris Skurkovich, M.D.  Since 1986, Mr. Skurkovich has served as a member
of the Board of Directors, and from that same date until December 2000, he was
a Vice President of the Company. He completed a clinical and research
fellowship at the Maxwell Finland Laboratory for Infectious Diseases, Boston
City Hospital, Boston, Massachusetts, and presently is a professor at Brown
University Medical School. He has collaborated with his father, Simon, on the
development of the Companys treatment of





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##### Table of Contents



autoimmune diseases. Dr. Skurkovich
received his M.D. from the Moscow State Medical Institute.

Simon Skurkovich, M.D.  Since April 2001, Dr. Skurkovich has served as
Director of Research and Development. From 1985 until September 2000, Dr.
Skurkovich served as Chairman of the Board of Directors. He has previously been
granted five patents in Russia, and eight in the U.S. He is the creator of
immune preparations from human blood against antibiotic resistant bacteria that
saved thousands of lives in the Soviet Union and Eastern Europe. In Russia, he
was professor and Chief of the Immunology Laboratory of the Institute of
Hematology and Blood Transfusion and was awarded gold and silver medals for his
scientific discoveries. His laboratory was also awarded the nations highest
honor, the Lenin Prize, for his patented work. Dr. Skurkovich received an M.D.,
Ph.D. and a Doctorate in Medical Sciences (D.Sc.) from Pirogov State Medical
Institute in Moscow. He has written more than 200 articles for scientific
publications.

FAMILY RELATIONSHIPS

The only known family relationship between any directors is Simon
Skurkovich, father to Boris Skurkovich, and father-in-law to Leonard Millstein.

INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS

During the past five years, no present director or executive officer of
the Company has been the subject matter of any of the following legal
proceedings:

(a)  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;

(b)  any criminal convictions;

(c)  any order, judgment, or decree permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in any type of
business, securities or banking activities; and

(d)  any finding by a court, the SEC or the CFTC to have violated a federal
or state securities or commodities law.

Further, no such legal proceedings are known to be contemplated by
governmental authorities against any director or executive officer.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

A Form 5 was filed by Dr. Boris Skurkovich relating to his receipt of
gifts of shares of Common Stock from Dr. Simon Skurkovich and his subsequent
gifts of shares, which transactions otherwise were not timely reported. A Form
5 was required to be filed by Leonard Millstein relating to his receipt,
directly and indirectly, of gifts of shares of Common Stock from Dr. Simon
Skurkovich. A Form 5 was filed by each of Alexander L. Cappello and Thomas J.
Pernice reporting his respective acquisition of warrants and options by
assignment from Cappello Capital Corp., which transactions otherwise were not
timely reported.





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##### Table of Contents






ITEM 10. EXECUTIVE COMPENSATION

The following table sets forth the compensation paid by the Company since
January 1, 1999 through December 31, 2001, for the Chief Executive Officer of
the Company and each other executive officer of the Company who was paid more
than $100,000 during the year ended December 31, 2001 (the Named Executive
Officers):

|                                        |  |  |      |  |        |   |         |       |  |   |        | 
|--------------------------------------- |  |  | ---- |  | ------ | - | ------- | ----- |  | - | ------ | 
|Summary Compensation Table              |  |  |      |  |        |   |         |       |  |   |        | 
|Name and Position                       |  |  | Year |  | Salary |   |         | Bonus | 
|                                        |  |  |      |  |        |   |         |       | 
|Paul J. Marangos                        |  |  | 2001 |  |        | $ | 40,000  |       |  | $ | 0      | 
|Chief Executive Officer(1)              |  |  | 2000 |  |        | $ | 40,000  |       |  | $ | 25,000 | 
|Edmond F. Buccellato                    |  |  | 2001 |  |        | $ | 84,000  |       |  | $ | 0      | 
|Chief Executive Officer(2)              |  |  | 2000 |  |        | $ | 72,500  |       |  | $ | 0      | 
|                                        |  |  | 1999 |  |        | $ | 75,000  |       |  | $ | 0      | 
|Simon Skurkovich, M.D.                  |  |  | 2001 |  |        | $ | 80,000  |       |  | $ | 0      | 
|Director of Research and Development(3) |  |  | 2000 |  |        | $ | 30,000  |       |  | $ | 0      | 
|                                        |  |  | 1999 |  |        | $ | 100,000 |       |  | $ | 0      | 



---

(2)     Mr. Buccellato was the Chief Executive Officer of the Company prior to the
hiring of Dr. Marangos in August 2000. His salary for the year 2001 includes
compensation for transition services provided prior to April 2001. Since April
2001, Mr. Buccellato has served as President and Chief Executive Officer of the
Company.

(3)     Dr. Skurkovich is Director of Research and Development and was the Chairman
of the Board prior to August 2000.

There are no retirement, pension, or profit sharing plans for the benefit
of the Companys officers and directors. The Company has previously granted
non-qualified stock options and warrants for the benefit of officers and
directors. In December 2000, the Board of Directors of the Company approved the
2000 Omnibus Equity Incentive Plan (the OEI Plan) and reserved 4,000,000
shares of Common Stock to be issued thereunder, subject to annual increases
equal to the lesser of 2.5% of outstanding shares or 250,000 shares. Effective
January 1, 2002, the Company granted each director non-qualified options to
purchase 10,000 shares of Common Stock at $0.25 per share for Board services.
No other shares or options to purchase shares have been issued or granted to
any directors or officers under the OEI Plan to date.

OPTION/SAR GRANTS

None of the named executive officers received any grants of stock options,
whether or not in tandem with stock appreciation rights (SARs), or
freestanding SARs during the fiscal year ending December 31, 2001, in their
capacity as officers. During that





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##### Table of Contents



period however, Thomas J. Pernice received a
5-year warrant exercisable into 100,000 shares of Common Stock at $0.25 per
share for Board service.

None of the Named Executive Officers exercised any options or SARs during
the year. Set forth below are the December 31, 2001, fiscal year end Option/SAR
values:

|                       |  |                           |           |                |  |                  |      |            |  |                 |            | 
|---------------------- |  | ------------------------- | --------- | -------------- |  | ---------------- | ---- | ---------- |  | --------------- | ---------- | 
|                       |  |                           |           |                |  |                  |      |            |  | Value of       
|                       |  |                           |           |                |  |                  |      |            |  | unexercised    
|                       |  |                           |           |                |  |                  |      |            |  | in-the-money   
|                       |  |                           |           |                |  |                  |      |            |  | options/SARs at
|                       |  | Number of unexercised     |           |                |  |                  |      | FY-end ($)
|                       |  | options/SARs at FY-end(#) |           | Exercise Price |  | exercisable/    
|Name                   |  | exercisable/unexercisable |           | Per Share      |  | unexercisable(1)
|                       |  |                           |           |                |  |                 
|Edmond F. Buccellato   |  |                           | 50,000/0  |                |  | $                | 0.20 |            |  | $               | 6,500/$0   | 
|                       |  |                           | 50,000/0  |                |  | $                | 0.10 |            |  | $               | 11,500/$0  | 
|                       |  |                           | 105,453/0 |                |  | $                | 0.10 |            |  | $               | 24,254/$0  | 
|Simon Skurkovich, M.D. |  |                           | 300,000/0 |                |  | $                | 0.10 |            |  | $               | 69,000/$0  | 
|                       |  |                           | 623,000/0 |                |  | $                | 0.10 |            |  | $               | 143,290/$0 | 



---

|(1) |  | The dollar amounts calculated in this table use the closing bid on the
Common Stock of the Company on the last trading day in December 2001, which was
$0.33 per share.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------

THE OEI PLAN

The stockholders approved the OEI Plan at the Companys Annual
Stockholders Meeting on December 13, 2001. The purpose of the OEI Plan is to
promote the long-term success of the Company and the creation of stockholder
value by (a) encouraging employees, outside directors and consultants to focus
on critical long-term objectives, (b) encouraging the attraction and retention
of employees, outside directors and consultants with exceptional qualifications
and (c) linking employees, outside directors and consultants directly to
stockholder interests through increased stock ownership. The OEI Plan seeks to
achieve this purpose by providing for awards in the form of restricted shares,
stock units, incentive and nonstatutory stock options and stock appreciation
rights. The OEI Plan will be administered by the Board of Directors unless and
until the Board delegates administration to a committee.

The Board reserved 4,000,000 shares of Common Stock to be issued under the
OEI Plan, subject to annual increases equal to the lesser of 2.5% of
outstanding shares or 250,000 shares. No shares or options were issued or
granted to any director or officer under the OEI Plan during the fiscal year
ended December 31, 2001.

COMPENSATION OF DIRECTORS

Directors did not receive any cash compensation for serving as members of
the Board of Directors for the year ended December 31, 2001, but Board members
are eligible for awards under the OEI Plan. In addition, during the year ended
December 31, 2001, Thomas J. Pernice received a grant of warrants exercisable
into 100,000 shares of





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##### Table of Contents



Common Stock at $0.25 per share for Board service.
There are no other contractual arrangements for compensation with any member of
the Board of Directors.

During the fiscal year ended December 31, 2001, the Board of Directors
approved the extension for one-year of the then exercise period of certain
stock options previously granted to certain former employees, consultants and
strategic partners as well as the following directors:

|                       |  |            |         |            |  |       |         |                 |  |          |     |                |  |  |         |  |  |  |         | 
|---------------------- |  | ---------- | ------- | ---------- |  | ----- | ------- | --------------- |  | -------- | --- | -------------- |  |  | ------- |  |  |  | ------- | 
|                       |  | Number     |         |            |  |       |         | Exercise        |  | Original |     | New Expiration
|Optionee               |  | of Options |         | Grant Date |  | Price |         | Expiration Date |  | Date    
|                       |  |            |         |            |  |       |         |                 |  |         
|Boris Skurkovich, M.D. |  |            | 150,000 |            |  |       | 2/25/91 |                 |  |          | .20 |                |  |  | 2/25/01 |  |  |  | 2/25/02 | 
|Lawrence Loomis        |  |            | 175,000 |            |  |       | 2/25/91 |                 |  |          | .20 |                |  |  | 2/25/01 |  |  |  | 2/25/02 | 
|Leonard Millstein      |  |            | 125,000 |            |  |       | 2/25/91 |                 |  |          | .20 |                |  |  | 2/25/01 |  |  |  | 2/25/02 | 

All the stock options, which had been extended as described above, expired
on February 25, 2002, without having been exercised.




ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following table sets forth the Common Stock ownership, including
options to purchase stock, of each person known by the Company to be the
beneficial owner of five percent (5%) or more of the Companys Common Stock,
each director individually and all officers and directors of the Company as a
group as of February 28, 2002. Each person has sole voting and investment power
with respect to the shares of Common Stock shown, unless otherwise noted, and
all ownership is of record and beneficial. As of February 28, 2002, the Company
had 42,303,611 shares of Common Stock outstanding.

|                                                                   |  |                    |            |                     |  |  |       |  
|------------------------------------------------------------------ |  | ------------------ | ---------- | ------------------- |  |  | ----- | -
|                                                                   |  | Number of Shares   |            |                     |  | 
|Name and Address of Owner                                          |  | Beneficially Owned |            | Percentage of Total
|                                                                   |  |                    |            |                    
|Boris V. Skurkovich, M.D.                                          |  |                    | 5,0377,270 | (1)                 |  |  | 11.86 | %
|18 Blaisdell Ave
Pawtucket, RI 01860                               |  |                    |            |                     |  |  |       |  
|                                                                  
|Leonard Millstein and                                              |  |                    | 4,176,809  | (2)                 |  |  | 9.87  | %
|Ellen Millstein
1677 Calle Alta
La Jolla, CA 92037                 |  |                    |            |                     |  |  |       |  
|                                                                  
|Simon Skurkovich, M.D.                                             |  |                    | 2,876,770  | (3)                 |  |  | 6.65  | %
|802 Rollins Avenue
Rockville, MD 20852                             |  |                    |            |                     |  |  |       |  
|                                                                  
|Edmond F. Buccellato                                               |  |                    | 2,194,443  | (4)                 |  |  | 5.16  | %
|6355 Topanga Canyon Boulevard,
Suite 510|
Woodland Hills, CA 91367 |  |                    |            |                     |  |  |       |  
|                                                                  
|Alexander L. Cappello                                              |  |                    | 2,030,500  | (5)                 |  |  | 4.58  | %
|1299 Ocean Avenue
Suite 306
Santa Monica, CA 90401                 |  |                    |            |                     |  |  |       |  
|                                                                  
|Lawrence Loomis                                                    |  |                    | 1,535,000  | (6)                 |  |  | 3.63  | %
|9110 Red Branch Road
Columbia, MD 21045                            |  |                    |            |                     |  |  |       |  





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##### Table of Contents



|                                         |  |                    |           |                     |  |  |       |  
|---------------------------------------- |  | ------------------ | --------- | ------------------- |  |  | ----- | -
|                                         |  | Number of Shares   |           |                     |  | 
|Name and Address of Owner                |  | Beneficially Owned |           | Percentage of Total
|                                         |  |                    |           |                    
|Thomas J. Pernice                        |  |                    | 1,318,599 | (7)                 |  |  | 3.02  | %
|1299 Ocean Avenue, Suite 306             |  |                    |           |                     |  |  |       |  
|Santa Monica, CA 90401                   |  |                    |           |                     |  |  |       |  
|                                        
|John M. Bendheim                         |  |                    | 224,224   | (8)                 |  |  | *     |  
|2001 S. Barrington Street                |  |                    |           |                     |  |  |       |  
|Suite 100                                |  |                    |           |                     |  |  |       |  
|Los Angeles, CA 90025                    |  |                    |           |                     |  |  |       |  
|                                        
|All officers and directors as a group(9) |  |                    |           |                     |  |  | 41.05 | %



---

(1)     Shares held in the name of Boris Skurkovich include shares held in his name
(570,270), and shares held in the name of Carol Marjorie Dorros (2,085,000),
Samuel Skurkovich (1,101,000), and Samuel Aaron Skurkovich (1,121,000).
Includes options to purchase up to 100,000 shares of Common Stock at an
exercise price of $0.01 per share; options to purchase 50,000 shares of Common
Stock at an exercise price of $0.10 per share, and options to purchase up to
10,000 shares of Common Stock at an exercise price of $0.25 per share.

(2)     Leonard and Ellen Millstein are husband and wife. Shares held in their
names comprise shares held in his name (565,100), shares held in her name
(2,713,359); shares held in the name of William Millstein (888,350 shares) and
options to purchase up to 10,000 shares of Common Stock at an exercise price of
$0.25 per share. Mr. Millstein and Mrs. Millstein disclaim beneficial ownership
of the shares held in the others name and disclaim that they are part of any
group for SEC purposes.

(3)     Shares held in the name of Simon Skurkovich include options to purchase up
to 300,000 shares of Common Stock at an exercise price of $0.10 per share,
options to purchase up to 623,000 shares of Common Stock at an exercise price
of $0.10 per share, and options to purchase up to 10,000 shares of Common
Stock at an exercise price of $0.25 per share. Simon Skurkovich is the father
of Boris Skurkovich and Ellen Millstein but disclaims beneficial ownership of
the shares attributed to both of them and disclaims that the three of them are
part of a group for SEC purposes.

(4)     Shares held in the name of Edmond F. Buccellato comprise shares held in his
name (400,000), and shares held in the names of Edmond F. and Leana J.
Buccellato Living Trust (1,331,666 shares), Amy Buccellato (58,400 shares),
Matthew Buccellato (60,490 shares) and Buccellato & Finkelstein, Inc. (88,334).
Includes options to purchase up to 105,543 shares of Common Stock at an
exercise price of $0.10 per share, options to purchase up to 50,000 shares of
Common Stock at an exercise price of $0.10 per share, options to purchase up to
50,000 shares of Common Stock at an exercise price of $0.20 per share; options
to purchase up to 10,000 shares of Common Stock at an exercise price of $0.25
per share, as well as the right to acquire 40,000 shares of Common Stock upon
the conversion of $10,000 principal amount of the Companys Convertible
Subordinated Debt due September 30, 2004 (Convertible Debt).

(5)     Shares held in the name of Alexander L. Cappello include warrants held in
his name to purchase 100,000 shares of Common Stock at an exercise price of
$0.25 per share, warrants assigned by Cappello Capital Corp. (CCC) to the Alexander L. and Linda
Cappello \Family Trust (Family Trust) to purchase
1,598,216 shares of Common Stock at an exercise price of $0.15 per share, and
options to purchase up to 10,000 shares of Common Stock at an exercise price of
$0.25 per share. Also includes the right of the Family Trust to acquire
114,588 shares of Common Stock upon conversion of Convertible Debt, and the
right to acquire 207,696 shares of Common Stock upon exercise of an option to
purchase up to $51,924 principal amount of Convertible Debt at par and the
conversion of such Convertible Debt, which option CCC assigned to the Family
Trust.

(6)     Includes shares held in the names of Lawrence Loomis (1,325,000 shares) and
New Horizons Diagnostics, Inc. (200,000 shares), and options to purchase up to
10,000 shares of Common Stock at an exercise price of $0.25 per share.



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##### Table of Contents



(7)     Shares held in the name of Thomas J. Pernice include warrants to purchase
100,000 shares of Common Stock at an exercise price of $0.25 per share,
warrants assigned by CCC to purchase 1,042,443 shares of Common Stock at an
exercise price of $0.15 per share and options to purchase up to 10,000 shares
of Common Stock at an exercise price of $0.25 per share. Also, includes the
right to acquire 166,156 shares of Common Stock upon exercise of an option to
purchase up to $41,539 principal amount of Convertible Debt at par and the
conversion of such Convertible Debt, which option CCC assigned to him.

(8)     Shares held in the name of John M. Bendheim comprise warrants to purchase
100,000 shares of Common Stock at an exercise price of $0.25 per share, and the
right to acquire 114,224 shares of Common Stock upon conversion of Convertible
Debt held by a trust for the benefit of his minor child and options to purchase
up to 10,000 shares of Common Stock at an exercise price of $0.25 per share.

(9)     Includes 2,940,659 shares of Common Stock underlying warrants, 1,358,543
shares of Common Stock underlying options and 642,664 shares of Common Stock
underlying Convertible Debt.

*  Represents less than 1% of the outstanding Shares of Common Stock.




ITEM 12.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

In connection with issuance of bonus shares to various individuals
pursuant to the Companys Stock Bonus Plan adopted in January, 2000, as an
incentive for performance by eligible employees, the Company financed the $0.05
per share purchase price for the shares for Edmond F. Buccellato, Lawrence
Loomis and Boris Skurkovich, M.D. in the amounts of $75,000, $50,000 and
$75,000, respectively. The notes for these amounts mature on December 31, 2002,
and bear interest at 6.5% per annum. The Company also set off the $200,000
purchase obligation of Simon Skurkovich, M.D. against an obligation of the
Company to him for accrued but unpaid salary.

Alexander L. Cappello is the brother of Gerard K. Cappello, the sole
shareholder, president and chief executive officer of Cappello Capital Corp.
which was retained by the Company in January, 2000 to render financial advisory
and investment banking services and thereupon was granted warrants to purchase
4,685,135 shares of Common Stock at $0.15 per share. Such warrants have been
assigned in part to Alexander L. Cappello and Thomas J. Pernice, among others.
Cappello Capital Corp. raised $1,510,500 in Convertible Debt for the Company,
and was paid $124,981 in fees and expenses related thereto. The Company also
granted to CCC an option to purchase up to $151,050 principal amount of
Convertible Debt at par, which option has been assigned in part to Alexander L.
Cappello and Thomas J. Pernice, among others. Thomas J. Pernice is an officer
of Cappello Group, Inc.





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##### Table of Contents






PART IV




ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

EXHIBITS

|            |  |                                                                                                                                                                
|----------- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit No. |  | Description                                                                                                                                                    
|            |  |                                                                                                                                                                
|2.1         |  | Agreement of Merger dated as of July 14, 2000, between the Registrant, a
Delaware corporation, and Advanced Biotherapy Concepts, Inc., a Nevada
corporation.(1)
|3.1         |  | Certificate of Incorporation of Registrant.(2)                                                                                                                 
|3.2         |  | Bylaws of Registrant.(2)                                                                                                                                       
|4.1         |  | Form of Registrants Common Stock Certificate.(3)                                                                                                              
|10.1        |  | Form of Stock Bonus Plan.(4)                                                                                                                                   
|10.2        |  | Form of Common Stock Purchase Warrant in favor of Cappello Capital
Corporation.(5)                                                                             
|10.3        |  | Form of 2000 Omnibus Equity Incentive Plan.(6)                                                                                                                 
|10.4        |  | Form of Option Agreement.(6)                                                                                                                                   
|10.5        |  | Form of 10% Convertible Subordinated Debt Instrument.(7)                                                                                                       
|10.6        |  | Form of Convertible Subordinated Debt Purchase Agreement.(6)                                                                                                   
|10.7        |  | Form of Investor Rights Agreement.(6)                                                                                                                          



---

|(1) |  | Filed as Appendix A to Registrants Proxy Statement dated July 14, 2000,
and incorporated herein by reference.                 
|--- |  | -------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | Filed as an exhibit to Registrants Form 10-QSB for the quarter ended
September 30, 2000, and incorporated herein by reference.
|   
|   
|   
|   
|(3) |  | Filed as an exhibit to Registrants Form 10-SB filed on June 10, 1999,
and incorporated herein by reference.                   
|   
|   
|   
|   
|(4) |  | Filed as an exhibit to Registrants Form 10-KSB for the fiscal year ended
December, 1999.                                      





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##### Table of Contents



|(5) |  | Filed as an exhibit to Registrants Form 10-QSB for the quarter ended
March 31, 2000, and incorporated herein by reference.        
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(6) |  | Filed as an exhibit to Registrants Form 10-KSB for the fiscal year ended
December, 31, 2000, and incorporated herein by reference.
|   
|   
|   
|   
|(7) |  | Filed as an exhibit to Registrants Form 10-QSB for the quarter ended
June 30, 2000, and incorporated herein by reference.         

The financial statements are incorporated herein by reference from Exhibit
99.1, which begins with the Table of Contents on Page F-1.

REPORTS ON FORM 8-K

The Registrant filed a report on Form 8-K on December 13, 2001. The Form
8-K reported that the Registrant published a press release on December 13,
2001, which announced that the United States Patent and Trademark Office has
assigned U.S. Patent No. 6,333,032 to the Registrant for the exclusive use of
IFN-g antibodies  including humanized and fully human, as well as other
antibody types  to treat Multiple Sclerosis, Rheumatoid Arthritis, Juvenile
Rheumatoid Arthritis, Psoriatic Arthritis and Ankylosing Spondylitis.




SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on this
29th day of March, 2002.



| | Advanced Biotherapy, Inc.
(Registrant)
| | --------------------------------------



| | By: | /s/ Edmond F. Buccellato
President and Chief Executive Officer
| | --- | --------------------------------------------------------------

Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on this 29th day of March, 2002.





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##### Table of Contents



|               |  |                                                   |  |                                      
|-------------- |  | ------------------------------------------------- |  | -------------------------------------
|Date           |  | Signature                                         |  | Title                                
|               |  |                                                   |  |                                      
|              
|March
29, 2002 |  | /s/
Edmond F. Buccellato
Edmond F. Buccellato     |  | President and Chief Executive Officer
|              
|March
29, 2002 |  | /s/
John Bendheim
John Bendheim                   |  | Director                             
|              
|
|March
29, 2002 |  | /s/
Lawrence Loomis
Lawrence Loomis               |  | Director                             
|              
|March
29, 2002 |  | /s/ Leonard
Millstein
Leonard Millstein           |  | Director                             
|              
|March
29, 2002 |  | /s/ Boris
Skurkovich, M.D.
Boris Skurkovich, M.D. |  | Director                             
|              
|March
29, 2002 |  | /s/ Simon
Skurkovich, M.D.
Simon Skurkovich, M.D. |  | Director                             





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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(Formerly Advanced Biotherapy Concepts, Inc.)
(A Development Stage Enterprise)

December 31, 2001

CONTENTS

|                                            |  |  |     | 
|------------------------------------------- |  |  | --- | 
|Independent Auditors Report                |  |  | F-2 | 
|Financial Statements:                       |  |  |     | 
|Balance Sheets                              |  |  | F-3 | 
|Statements of Operations                    |  |  | F-4 | 
|Statement of Stockholders Equity (Deficit) |  |  | F-5 | 
|Statements of Cash Flows                    |  |  | F-6 | 
|Notes to Financial Statements               |  |  | F-7 | 

F-1



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##### Table of Contents



Board of Directors
Advanced Biotherapy, Inc.
Woodland Hills, CA

INDEPENDENT AUDITORS REPORT

We have audited the accompanying balance sheets of Advanced Biotherapy, Inc.
(formerly Advanced Biotherapy Concepts, Inc.) (a Delaware corporation) as of
December 31, 2001 and 2000, and the related statements of operations,
stockholders equity and cash flows for the years then ended and for the period
from December 2, 1985 (inception) through December 31, 2001. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Biotherapy, Inc. as
of December 31, 2001 and 2000, and the results of its operations and its cash
flows for the years then ended and for the period from December 2, 1985
(inception) through December 31, 2001, in conformity with accounting principles
generally accepted in the United States of America.

As discussed in Note 16 to the financial statements, an error resulting in the
understatement of previously reported common stock and weighted average number
of shares outstanding as of December 31, 1999, were discovered by management of
the Company subsequent to the current year. Accordingly, an adjustment has
been made to common stock and additional paid in capital as of December 31,
1999, to correct the error.

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has generated no revenue in the past years,
and has suffered recurring losses from operations resulting in an accumulated
deficit of $5,068,426 at December 31, 2001. These conditions raise substantial
doubt about the Companys ability to continue as a going concern. Managements
plans regarding this issue are also discussed in Note 2. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.

Williams & Webster, P.S.Certified Public Accountants
Spokane, Washington
February 26, 2002

F-2



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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(Formerly Advanced Biotherapy Concepts, Inc.)
(A Development Stage Enterprise)
BALANCE SHEETS

ASSETS

|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |            |            |   | 
|------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------ | --------- | ---------- | ------------ | - | ------------ | ---------- | ---------- | - | 
|                                                        |                                                                                                                                      |                                      |           |            | December 31, |   | December 31,
|                                                        |                                                                                                                                      |                                      |           |            | 2001         |   | 2000        
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |            | (Restated)
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|CURRENT ASSETS                                          |                                                                                                                                      |                                      |           |            |              |   |              |           
|Cash                                                    |                                                                                                                                      | $                                    | 36,615    |            |              | $ | 758,267      |           
|Notes receivable  related party                        |                                                                                                                                      |                                      | 246,619   |            |              |   | 246,619      |           
|Interest receivable  related party                     |                                                                                                                                      |                                      | 31,579    |            |              |   | 15,548       |           
|Deposits and prepaid expenses                           |                                                                                                                                      |                                      | 40,710    |            |              |   | 32,692       |           
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|                                                        |                                                                                                                                      | Total Current Assets                 |           |            | 355,523      |   |              |            | 1,053,126  |  
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|PROPERTY AND EQUIPMENT, net of accumulated depreciation |                                                                                                                                      |                                      | 4,888     |            |              |   | 10,287       |           
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|OTHER ASSETS                                            |                                                                                                                                      |                                      |           |            |              |   |              |           
|                                                        | Deferred loan origination fees, net of accumulated amortization                                                                      |                                      |           | 74,791     |              |   |              | 102,503    |           
|                                                        | Patents and patents pending, net of accumulated amortization                                                                         |                                      |           | 264,493    |              |   |              | 173,509    |           
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|                                                        |                                                                                                                                      | Total Other Assets                   |           |            | 339,284      |   |              |            | 276,012    |  
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|TOTAL ASSETS                                            |                                                                                                                                      | $                                    | 699,695   |            |              | $ | 1,339,425    |           
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|                                                       
|LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)         
|                                                       
|CURRENT LIABILITIES
Accounts payable                    |                                                                                                                                      | $                                    | 142,206   |            |              | $ | 46,609       |           
|Accounts payable  related party                        |                                                                                                                                      |                                      | 9,740     |            |              |   |             |           
|Accrued expenses  related party                        |                                                                                                                                      |                                      | 13,600    |            |              |   |             |           
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|                                                        |                                                                                                                                      | Total Current Liabilities            |           |            | 165,546      |   |              |            | 46,609     |  
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|LONG-TERM DEBT                                          |                                                                                                                                      |                                      |           |            |              |   |              |           
|Convertible notes payable                               |                                                                                                                                      |                                      | 1,314,301 |            |              |   | 1,560,169    |           
|Notes payable to related parties                        |                                                                                                                                      |                                      | 127,631   |            |              |   | 127,631      |           
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|                                                        |                                                                                                                                      | Total Long-Term Debt                 |           |            | 1,441,932    |   |              |            | 1,687,800  |  
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|                                                        |                                                                                                                                      | Total Liabilities                    |           |            | 1,607,478    |   |              |            | 1,734,409  |  
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|COMMITMENTS AND CONTINGENCIES                           |                                                                                                                                      |                                      |          |            |              |   |             |           
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|STOCKHOLDERS EQUITY (DEFICIT)                          |                                                                                                                                      |                                      |           |            |              |   |              |           
|                                                        | Preferred stock, par value $0.001; 20,000,000 shares authorized,
no shares issued and outstanding                                    |                                      |           |           |              |   |              |           |           
|                                                        | Common stock, par value $0.001; 100,000,000 shares authorized,
42,303,611 and 40,698,265 shares issued and outstanding, respectively |                                      |           | 42,303     |              |   |              | 40,698     |           
|                                                        | Additional paid-in capital                                                                                                           |                                      |           | 3,640,657  |              |   |              | 3,233,040  |           
|                                                        | Stock options and warrants                                                                                                           |                                      |           | 477,683    |              |   |              | 379,403    |           
|                                                        | Deficit accumulated during development stage                                                                                         |                                      |           | (5,068,426 | )            |   |              | (4,048,125 | )         
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|                                                        |                                                                                                                                      | Total Stockholders Equity (Deficit) |           |            | (907,783     | ) |              |            | (394,984   | )
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)    |                                                                                                                                      | $                                    | 699,695   |            |              | $ | 1,339,425    |           
|                                                        |                                                                                                                                      |                                      |           |            |              |   |              |           

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

F-3



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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(Formerly Advanced Biotherapy Concepts, Inc.)
(A Development Stage Enterprise)
STATEMENTS OF OPERATIONS

|                                                                             |                                         |                              |            |                          |          |                    |            |                   |         |   |            |                |           |  
|---------------------------------------------------------------------------- | --------------------------------------- | ---------------------------- | ---------- | ------------------------ | -------- | ------------------ | ---------- | ----------------- | ------- | - | ---------- | -------------- | --------- | -
|                                                                             |                                         |                              |            |                          |          |                    |            |                   |         |   |            | From Inception
|                                                                             |                                         |                              |            | Years Ended December 31, |          | (December 2, 1985)
|                                                                             |                                         |                              |            |                          |          | through           
|                                                                             |                                         |                              |            | 2001                     |          | 2000               |            | December 31, 2001
|                                                                             |                                         |                              |            |                          |          |                    |            |                  
|REVENUES                                                                     |                                         | $                            |           |                          |          | $                  |           |                   |         | $ | 89,947     |               
|                                                                             |                                         |                              |            |                          |          |                    |            |                   |         |   |            |               
|OPERATING EXPENSES                                                           |                                         |                              |            |                          |          |                    |            |                   |         |   |            |               
|                                                                             | Research and development                |                              |            | 133,747                  |          |                    |            | 39,579            |         |   |            | 2,278,372      |          
|                                                                             | Promotional fees                        |                              |            | 8,986                    |          |                    |            | 7,558             |         |   |            | 16,544         |          
|                                                                             | Professional fees                       |                              |            | 395,074                  |          |                    |            | 430,608           |         |   |            | 1,947,433      |          
|                                                                             | Directors fees                         |                              |            | 29,080                   |          |                    |            |                  |         |   |            | 29,080         |          
|                                                                             | Depreciation and amortization           |                              |            | 49,879                   |          |                    |            | 24,222            |         |   |            | 481,883        |          
|                                                                             | Salaries and benefits                   |                              |            | 83,746                   |          |                    |            | 174,613           |         |   |            | 1,009,860      |          
|                                                                             | Insurance                               |                              |            | 48,076                   |          |                    |            | 10,898            |         |   |            | 58,974         |          
|                                                                             | Shareholder relations and transfer fees |                              |            | 28,788                   |          |                    |            | 19,613            |         |   |            | 176,547        |          
|                                                                             | Rent                                    |                              |            | 33,962                   |          |                    |            | 11,100            |         |   |            | 156,116        |          
|                                                                             | Travel and entertainment                |                              |            | 37,796                   |          |                    |            | 60,816            |         |   |            | 99,156         |          
|                                                                             | Telephone and communications            |                              |            | 12,764                   |          |                    |            | 12,238            |         |   |            | 27,380         |          
|                                                                             | Office                                  |                              |            | 15,208                   |          |                    |            | 27,222            |         |   |            | 43,120         |          
|                                                                             | General and administrative              |                              |            | 13,648                   |          |                    |            | 8,617             |         |   |            | 581,646        |          
|                                                                             |                                         |                              |            |                          |          |                    |            |                   |         |   |            |               
|                                                                             |                                         | Total Operating Expenses     |            |                          | 890,754  |                    |            |                   | 827,084 |   |            |                | 6,906,111 |  
|                                                                             |                                         |                              |            |                          |          |                    |            |                   |         |   |            |               
|                                                                            
|Loss From Operations                                                         |                                         |                              | (890,754   | )                        |          |                    | (827,084   | )                 |         |   | (6,816,164 | )             
|                                                                            
|Other income (expense)                                                       |                                         |                              |            |                          |          |                    |            |                   |         |   |            |               
|                                                                             | Miscellaneous income                    |                              |            |                         |          |                    |            |                  |         |   |            | 22,000         |          
|                                                                             | Interest income                         |                              |            | 35,902                   |          |                    |            | 29,995            |         |   |            | 66,993         |          
|                                                                             | Internal gain on sale of securities     |                              |            |                         |          |                    |            | 157,520           |         |   |            | 157,520        |          
|                                                                             | Accounts payable forgiveness            |                              |            |                         |          |                    |            | 45,396            |         |   |            | 45,396         |          
|                                                                             | Loss on disposal of office equipment    |                              |            | (2,224                   | )        |                    |            |                  |         |   |            | (2,224         | )        
|                                                                             | Interest expense                        |                              |            | (163,225                 | )        |                    |            | (59,097           | )       |   |            | (589,384       | )        
|                                                                             |                                         |                              |            |                          |          |                    |            |                   |         |   |            |               
|                                                                             |                                         | Total Other Income (Expense) |            |                          | (129,547 | )                  |            |                   | 173,814 |   |            |                | (299,699  | )
|                                                                             |                                         |                              |            |                          |          |                    |            |                   |         |   |            |               
|Loss Before Income Taxes                                                     |                                         |                              | (1,020,301 | )                        |          |                    | (653,270   | )                 |         |   | (7,115,863 | )             
|Income Taxes                                                                 |                                         |                              |           |                          |          |                    |           |                   |         |   |           |               
|                                                                             |                                         |                              |            |                          |          |                    |            |                   |         |   |            |               
|Loss Before Extraordinary Item                                               |                                         |                              | (1,020,301 | )                        |          |                    | (653,270   | )                 |         |   | (7,115,863 | )             
|Extraordinary item, forgiveness of debt                                      |                                         |                              |           |                          |          |                    |           |                   |         |   | 2,047,437  |               
|                                                                             |                                         |                              |            |                          |          |                    |            |                   |         |   |            |               
|NET (LOSS)                                                                   |                                         | $                            | (1,020,301 | )                        |          | $                  | (653,270   | )                 |         | $ | (5,068,426 | )             
|                                                                             |                                         |                              |            |                          |          |                    |            |                   |         |   |            |               
|BASIC AND DILUTED NET (LOSS)
PER COMMON SHARE                                |                                         | $                            | (0.02      | )                        |          | $                  | (0.02      | )                 |         |   |            |               
|                                                                             |                                         |                              |            |                          |          |                    |            |                   |         |   |            |               
|WEIGHTED AVERAGE NUMBER OF
BASIC AND DILUTED COMMON STOCK
SHARES OUTSTANDING |                                         |                              | 40,885,351 |                          |          |                    | 40,128,866 |                   |         |   |            |               
|                                                                             |                                         |                              |            |                          |          |                    |            |                   |         |   |            |               

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

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(Formerly Advanced Biotherapy Concepts, Inc.)
(A Development Stage Enterprise)
STATEMENTS OF STOCKHOLDERS EQUITY (DEFICIT)

|                                                                                                              |  |              |            |            |  |         |        |               |  |          |           |        |  |             |         |             |  |   |         |  |  |   |            |  
|------------------------------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | ------- | ------ | ------------- |  | -------- | --------- | ------ |  | ----------- | ------- | ----------- |  | - | ------- |  |  | - | ---------- | -
|                                                                                                              |  |              |            |            |  |         |        |               |  |          |           |        |  |             |         | Deficit    
|                                                                                                              |  | Common Stock |            |            |  |         |        |               |  |          |           |        |  |             |         | Accumulated
|                                                                                                              |  |              |            | Additional |  |         |        |               |  | Stock    |           | During
|                                                                                                              |  |              |            |            |  |         |        |               |  | Paid-in  |           | Stock  |  | Options and |         | Development
|                                                                                                              |  | Shares       |            | Amount     |  | Capital |        | Subscriptions |  | Warrants |           | Stage 
|                                                                                                              |  |              |            |            |  |         |        |               |  |          |           |       
|Balance, December 31, 1999                                                                                    |  |              | 30,198,265 |            |  | $       | 30,198 |               |  | $        | 2,770,305 |        |  | $           | (32,500 | )           |  | $ | 210,738 |  |  | $ | (3,394,855 | )
|Correction of an error  common stock
reissued, which was cancelled in error
See Note 16                      |  |              | 850,000    |            |  |         | 850    |               |  |          | (850      | )      |  |             |        |             |  |   |        |  |  |   |           |  
|                                                                                                              |  |              |            |            |  |         |        |               |  |          |           |        |  |             |         |             |  |   |         |  |  |   |            |  
|Restated balance, December 31, 1999                                                                           |  |              | 31,048,265 |            |  |         | 31,048 |               |  |          | 2,769,455 |        |  |             | (32,500 | )           |  |   | 210,738 |  |  |   | (3,394,855 | )
|Contribution of capital by
shareholders in form of
foregone interest and rent                                 |  |              |           |            |  |         |       |               |  |          | 9,735     |        |  |             |        |             |  |   |        |  |  |   |           |  
|Stock subscriptions paid                                                                                      |  |              |           |            |  |         |       |               |  |          |          |        |  |             | 32,500  |             |  |   |        |  |  |   |           |  
|Stock issued as part of stock
bonus plan in exchange for loan
payable and notes receivable
at $0.05 per share |  |              | 9,200,000  |            |  |         | 9,200  |               |  |          | 450,800   |        |  |             |        |             |  |   |        |  |  |   |           |  
|Stock warrants issued in exchange
for services                                                                |  |              |           |            |  |         |       |               |  |          |          |        |  |             |        |             |  |   | 168,665 |  |  |   |           |  
|Stock issued for cash at $0.01 from
the exercise of options                                                   |  |              | 350,000    |            |  |         | 350    |               |  |          | 3,150     |        |  |             |        |             |  |   |        |  |  |   |           |  
|Stock adjustment                                                                                              |  |              | 100,000    |            |  |         | 100    |               |  |          | (100      | )      |  |             |        |             |  |   |        |  |  |   |           |  
|Net loss for the year ended
December 31, 2000                                                                 |  |              |           |            |  |         |       |               |  |          |          |        |  |             |        |             |  |   |        |  |  |   | (653,270   | )
|                                                                                                              |  |              |            |            |  |         |        |               |  |          |           |        |  |             |         |             |  |   |         |  |  |   |            |  
|Restated balance, December 31, 2000                                                                           |  |              | 40,698,265 |            |  |         | 40,698 |               |  |          | 3,233,040 |        |  |             |        |             |  |   | 379,403 |  |  |   | (4,048,125 | )
|Common stock issued in exchange
for convertible debt at $0.25 per
share                                       |  |              | 1,605,346  |            |  |         | 1,605  |               |  |          | 399,504   |        |  |             |        |             |  |   |        |  |  |   |           |  
|Contribution of capital by
shareholders in form of
foregone interest and rent                                 |  |              |           |            |  |         |       |               |  |          | 8,113     |        |  |             |        |             |  |   |        |  |  |   |           |  
|Stock warrants issued in exchange
for services                                                                |  |              |           |            |  |         |       |               |  |          |          |        |  |             |        |             |  |   | 23,280  |  |  |   |           |  
|Stock options issued in exchange
for services                                                                 |  |              |           |            |  |         |       |               |  |          |          |        |  |             |        |             |  |   | 75,000  |  |  |   |           |  
|Net loss for the year ended
December 31, 2001                                                                 |  |              |           |            |  |         |       |               |  |          |          |        |  |             |        |             |  |   |        |  |  |   | (1,020,301 | )
|                                                                                                              |  |              |            |            |  |         |        |               |  |          |           |        |  |             |         |             |  |   |         |  |  |   |            |  
|Balance, December 31, 2001                                                                                    |  |              | 42,303,611 |            |  | $       | 42,303 |               |  | $        | 3,640,657 |        |  | $           |        |             |  | $ | 477,683 |  |  | $ | (5,068,426 | )
|                                                                                                              |  |              |            |            |  |         |        |               |  |          |           |        |  |             |         |             |  |   |         |  |  |   |            |  

Summary of required information
regarding stock issuances can be found in note 9.

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

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(Formerly Advanced Biotherapy Concepts, Inc.)
(A Development Stage Enterprise)
STATEMENTS OF CASH FLOWS

|                                                                        |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |                |           |  
|----------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------------- | ---------- | ------------------------ | ------- | ------------------ | --------- | ----------------- | -------- | - | ---------- | -------------- | --------- | -
|                                                                        |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            | From Inception
|                                                                        |                                                                     |                                             |            | Years Ended December 31, |         | (December 2, 1985)
|                                                                        |                                                                     |                                             |            |                          |         | through           
|                                                                        |                                                                     |                                             |            | 2001                     |         | 2000               |           | December 31, 2001
|                                                                        |                                                                     |                                             |            |                          |         |                    |           |                  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                   |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |               
|Net (loss)                                                              |                                                                     | $                                           | (1,020,301 | )                        |         | $                  | (653,270  | )                 |          | $ | (5,068,426 | )             
|                                                                        | Extraordinary gain                                                  |                                             |            |                         |         |                    |           |                  |          |   |            | (2,047,437     | )        
|Adjustments to reconcile net loss to cash
used in operating activities: |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |               
|                                                                        | Depreciation and amortization                                       |                                             |            | 49,879                   |         |                    |           | 24,222            |          |   |            | 481,883        |          
|                                                                        | Loss on disposal of equipment                                       |                                             |            | 2,224                    |         |                    |           |                  |          |   |            | 2,224          |          
|                                                                        | Investment income                                                   |                                             |            |                         |         |                    |           | (157,520          | )        |   |            | (157,520       | )        
|                                                                        | Expenses paid through issuance
of common stock                      |                                             |            |                         |         |                    |           |                  |          |   |            | 231,340        |          
|                                                                        | Expenses paid through issuance
of common stock warrants and options |                                             |            | 98,280                   |         |                    |           | 168,665           |          |   |            | 266,945        |          
|                                                                        | Interest expense accrued to convertible
debt                        |                                             |            | 155,242                  |         |                    |           | 49,669            |          |   |            | 204,911        |          
|                                                                        | Expenses paid through contribution
of additional paid-in capital    |                                             |            | 8,113                    |         |                    |           | 9,735             |          |   |            | 45,946         |          
|                                                                        | Organization costs                                                  |                                             |            |                         |         |                    |           |                  |          |   |            | (9,220         | )        
|                                                                        | Decrease (increase) in:                                             |                                             |            |                          |         |                    |           |                   |          |   |            |                |          
|                                                                        |                                                                     | Deposits and prepaid expenses               |            |                          | (8,018  | )                  |           |                   | (32,692  | ) |            |                | (40,710   | )
|                                                                        |                                                                     | Interest receivable                         |            |                          | (16,031 | )                  |           |                   | (15,548  | ) |            |                | (31,579   | )
|                                                                        |                                                                     | Deferred loan origination cost              |            |                          |        |                    |           |                   | (113,288 | ) |            |                | (113,288  | )
|                                                                        | Increase (decrease) in:                                             |                                             |            |                          |         |                    |           |                   |          |   |            |                |          
|                                                                        |                                                                     | Accounts payable                            |            |                          | 118,937 |                    |           |                   | (47,325  | ) |            |                | 165,546   |  
|                                                                        |                                                                     | Accounts and notes payable, related parties |            |                          |        |                    |           |                   | (129,445 | ) |            |                | 127,631   |  
|                                                                        |                                                                     | Payroll and payroll taxes payable           |            |                          |        |                    |           |                   |         |   |            |                | 2,046,353 |  
|                                                                        |                                                                     | Accrued interest                            |            |                          |        |                    |           |                   |         |   |            |                | 9,962     |  
|                                                                        |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |               
|Net cash used in operating activities                                   |                                                                     |                                             | (611,675   | )                        |         |                    | (896,797  | )                 |          |   | (3,885,439 | )             
|CASH FLOWS FROM INVESTING ACTIVITIES:                                   |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |               
|                                                                        | Purchase of fixed assets                                            |                                             |            |                         |         |                    |           | (11,030           | )        |   |            | (48,003        | )        
|                                                                        | Internal gain on sale of securities                                 |                                             |            |                         |         |                    |           | 157,520           |          |   |            | 157,520        |          
|                                                                        | Acquisition of patents                                              |                                             |            | (109,977                 | )       |                    |           | (72,884           | )        |   |            | (361,098       | )        
|                                                                        |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |               
|Net cash provided by (used in) investing activities                     |                                                                     |                                             | (109,977   | )                        |         |                    | 73,606    |                   |          |   | (251,581   | )             
|CASH FLOWS FROM FINANCING ACTIVITIES:                                   |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |               
|                                                                        | Proceeds from issuance of common stock                              |                                             |            |                         |         |                    |           | 36,000            |          |   |            | 2,449,754      |          
|                                                                        | Proceeds from convertible notes                                     |                                             |            |                         |         |                    |           | 1,510,500         |          |   |            | 1,510,500      |          
|                                                                        | Proceeds from notes payable                                         |                                             |            |                         |         |                    |           | 100,000           |          |   |            | 388,508        |          
|                                                                        | Payments on notes payable                                           |                                             |            |                         |         |                    |           | (100,000          | )        |   |            | (175,127       | )        
|                                                                        |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |               
|Net cash provided by financing activities                               |                                                                     |                                             |           |                          |         |                    | 1,546,500 |                   |          |   | 4,173,635  |               
|                                                                        |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |               
|Net increase (decrease) in cash                                         |                                                                     |                                             | (721,652   | )                        |         |                    | 723,309   |                   |          |   | 36,615     |               
|Cash, beginning                                                         |                                                                     |                                             | 758,267    |                          |         |                    | 34,958    |                   |          |   |           |               
|                                                                        |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |               
|Cash, ending                                                            |                                                                     | $                                           | 36,615     |                          |         | $                  | 758,267   |                   |          | $ | 36,615     |               
|                                                                        |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |               
|SUPPLEMENTAL CASH FLOW DISCLOSURES:                                     |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |               
|                                                                        | Interest expense paid                                               |                                             | $          |                         |         |                    | $         | 984               |          |   | $          | 339,927        |          
|                                                                        |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |               
|                                                                        | Income taxes paid                                                   |                                             | $          |                         |         |                    | $         |                  |          |   | $          |               |          
|                                                                        |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |               
|NON-CASH FINANCING AND INVESTING ACTIVITIES:                            |                                                                     |                                             |            |                          |         |                    |           |                   |          |   |            |               
|                                                                        | Common stock issued in exchange for
professional fees and expenses  |                                             | $          |                         |         |                    | $         |                  |          |   | $          | 340,869        |          
|                                                                        | Contributed expenses                                                |                                             | $          | 8,113                    |         |                    | $         | 9,735             |          |   | $          | 45,946         |          
|                                                                        | Common stock issued for a loan payable                              |                                             | $          |                         |         |                    | $         | 213,381           |          |   | $          | 213,381        |          
|                                                                        | Common stock issued for notes receivable                            |                                             | $          |                         |         |                    | $         | 246,619           |          |   | $          | 246,619        |          
|                                                                        | Options issued for services                                         |                                             | $          | 75,000                   |         |                    | $         |                  |          |   | $          | 75,000         |          
|                                                                        | Warrants issued for services                                        |                                             | $          | 23,280                   |         |                    | $         | 168,665           |          |   | $          | 191,945        |          
|                                                                        | Accrued interest paid by convertible debt                           |                                             | $          | 155,242                  |         |                    | $         | 49,669            |          |   | $          | 204,911        |          
|                                                                        | Common stock issued for convertible debt                            |                                             | $          | 401,109                  |         |                    | $         |                  |          |   | $          | 401,109        |          

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

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 1  ORGANIZATION AND DESCRIPTION OF BUSINESS

Advanced Biotherapy, Inc. (formerly Advanced Biotherapy Concepts, Inc.) was
originally incorporated December 2, 1985 under the laws of the State of Nevada.
The Company is involved in the research and development of the treatment of
autoimmune diseases in humans, most notably, multiple sclerosis and rheumatoid
arthritis. The Company conducts its research in Maryland. The Companys
fiscal year-end is December 31. The Company is a development stage enterprise.

On July 14, 2000, the Company incorporated a wholly owned subsidiary, Advanced
Biotherapy, Inc. in the state of Delaware. On September 1, 2000, the Company
merged with its wholly owned subsidiary, effectively changing its name to
Advanced Biotherapy, Inc. (hereinafter the Company) and its domicile to
Delaware.

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

This summary of significant accounting policies of Advanced Biotherapy, Inc. is
presented to assist in understanding the Companys financial statements. The
financial statements and notes are representations of the Companys management,
which is responsible for their integrity and objectivity. These accounting
policies conform to accounting principles generally accepted in the United
States of America, and have been consistently applied in the preparation of the
financial statements.

Development Stage Activities

The Company has been in the development stage since its formation in 1985 and
has not realized any significant revenues from its planned operations. It is
primarily engaged in the research and development of the treatment of
autoimmune diseases in humans, most notably, multiple sclerosis and rheumatoid
arthritis.

Going Concern

The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern.

As shown in the accompanying financial statements, the Company incurred a net
loss of $1,020,301 for the year ended December 31, 2001. At December 31, 2001,
the Company has an accumulated deficit during the development stage of
$5,068,426. The future of the Company is dependent upon future profitable
operations from the commercial success of its medical research and development
of products to combat diseases of the human immune system. Management has
established plans designed to increase the capitalization of the Company and is
actively seeking additional capital that will provide funds needed to fund the
research and development and therefore the internal growth of the Company in
order to fully implement its business plans. For the twelve-month period
subsequent to December 31, 2001, the Company anticipates that its minimum cash
requirements to continue as a going concern will be less than $800,000. The
anticipated source of funds may be the issuance for cash of additional debt
and/or equity instruments. In addition, management is actively seeking a
collaborative relationship with either a pharmaceutical or biotechnology
company. If successful, cash requirements may be met through royalty or
licensing fees. The financial statements do not include any adjustments
relating to the recoverability and classification of recorded assets, or the
amounts and classification of liabilities that might be necessary in the event
the Company cannot continue in existence.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounting Method

The Companys financial statements are prepared using the accrual method of
accounting.

Accounting Pronouncements

In September 2000, the FASB issued SFAS No. 140 Accounting for Transfers and
Servicing of Financial Assets and Extinguishment of Liabilities. This
statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities and also
provides consistent standards for distinguishing transfers of financial assets
that are sales from transfers that are secured borrowings. SFAS No. 140 is
effective for recognition and reclassification of collateral and for
disclosures relating to securitization transactions and collateral for fiscal
years ending after December 15, 2000, and is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after March 31, 2001. The Company believes that the adoption of this standard
will not have a material effect on the Companys results of operations or
financial position.

In June 2001, the FASB issued SFAS No. 141, Business Combinations and SFAS
No. 142, Goodwill and Other Intangible Assets. SFAS No. 141 provides for the
elimination of the pooling-of-interests method of accounting for business
combinations with an acquisition date of July 1, 2001 or later. SFAS No. 142
prohibits the amortization of goodwill and other intangible assets with
indefinite lives and requires periodic reassessment of the underlying value of
such assets for impairment. SFAS No. 142 is effective for fiscal years
beginning after December 15, 2001. An early adoption provision exists for
companies with fiscal years beginning after March 15, 2001. On October 1, 2001,
the Company adopted SFAS No. 142. Application of the nonamortization provision
of SFAS No. 142 does not result in an increase in net income in fiscal 2001.
The Company does not have assets with indeterminate lives.

In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 143, Accounting for Asset Retirement
Obligations (SFAS No. 143). SFAS No. 143 establishes guidelines related to
the retirement of tangible long-lived assets of the Company and the associated
retirement costs. This statement requires that the fair value of a liability
for an asset retirement obligation be recognized in the period in which it is
incurred if a reasonable estimate of fair value can be made. The associated
asset retirement costs are capitalized as part of the carrying amount of the
long-lived assets. This statement is effective for financial statements issued
for the fiscal years beginning after June 15, 2002 and with earlier application
encouraged. The Company adopted SFAS No. 143 and does not believe that the
adoption will have a material impact on the financial statements of the Company
at December 31, 2001.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounting Pronouncements (Continued)

In October 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS No. 144). SFAS 144 replaces SFAS 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of. This new standard establishes a single accounting model
for long-lived assets to be disposed of by sale, including discontinued
operations. Statement 144 requires that these long-lived assets be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or discontinued operations. This statement is
effective beginning for fiscal years after December 15, 2001, with earlier
application encouraged. The Company adopted SFAS 144 and does not believe that
the adoption will have a material impact on the financial statements of the
Company at December 31, 2001.

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

Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation (SFAS No. 123), defines a fair value-based method
of accounting for stock options and other equity instruments. The Company has
adopted this method, which measures compensation costs based on the estimated
fair value of the award and recognizes that cost over the service period.

Cash and Cash Equivalents

For purposes of the statement of cash flows, the Company considers all bank
accounts, certificates of deposit, money market accounts and short-term debt
securities purchased with a maturity of three months or less to be cash
equivalents.

Provision for Taxes

Income taxes are provided based upon the liability method of accounting
pursuant to SFAS No. 109 Accounting for Income Taxes. Under this approach,
deferred income taxes are recorded to reflect the tax consequences on future
years of differences between the tax basis of assets and liabilities and their
financial reporting amounts at each year end. A valuation allowance is
recorded against deferred tax assets if management does not believe the Company
has met the more likely than not standard imposed by SFAS No. 109 to allow
recognition of such an asset.

At December 31, 2001, the Company had net deferred tax assets of approximately
$1,100,000, principally arising from net operating loss carryforwards for
income tax purposes. As management of the Company cannot determine that it is
more likely than not that the Company will realize the benefit of the net
deferred tax asset, a valuation allowance equal to the net deferred tax asset
has been established.

At December 31, 2001, the Companys net operating loss carryforwards amount to
approximately $4,400,000, which expires in the years 2002 through 2021. At
December 31, 2001, approximately $288,000 of net operating losses expired.
Approximately $878,000 of net operating losses will expire on December 31,
2002.

F-9



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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Use of Estimates

The process of preparing financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions regarding certain types of assets, liabilities,
revenues, and expenses. Such estimates primarily relate to unsettled
transactions and events as of the date of the financial statements.
Accordingly, upon settlement, actual results may differ from estimated amounts.

Reclassifications

Certain amounts from prior periods have been reclassified to conform with the
current period presentation. These reclassifications have resulted in no
changes to the Companys accumulated deficit or net losses presented.

Promotional Fees

Promotional fees are charged to operations in the year incurred. Promotional
fees amounted to $8,986 and $7,558 for the year ended December 31, 2001 and
2000, respectively.

Research and Development Costs

Costs of research and development are expensed as incurred.

Compensated Absences

Employees of the Company are entitled to paid vacation, paid sick days and
personal days off, depending on job classification, length of service, and
other factors. It is impracticable to estimate the amount of compensation for
future absences, and, accordingly, no liability has been recorded in the
accompanying financial statements. The Companys policy is to recognize the
costs of compensated absences when actually paid to employees.

Revenue Recognition

Upon entering into license agreements with other companies, revenue will be
recognized when fees are received. Prior to 1994, revenues were recognized
when fees for services related to research activities were received.

Deferred Loan Origination Fees

During the year ended December 31, 2000, the Company entered into convertible
subordinated debt, which required the payment of loan origination fees. See
Note 14. These loan origination fees, which totaled $74,791, net of
accumulated amortization at December 31, 2001, are amortized over the life of
the related debt. During the year ended December 31, 2001, the Company
recorded amortization expense in the amount of $27,712 related to these fees.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Derivative Instruments

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

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

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

At December 31, 2001, the Company has not engaged in any transactions that
would be considered derivative instruments or hedging activities.

Fair Value of Financial Instruments

The carrying amounts for cash, deposits, prepaid expenses, receivables,
accounts payable, loans and notes payable, accrued liabilities, and convertible
debt approximate their fair value.

NOTE 3  PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is provided using the
straight-line method over the estimated useful lives of the assets.

The following is a summary of property, equipment and accumulated depreciation
at December 31, 2001:

|                       |  |      |        |              |  |             |        | 
|---------------------- |  | ---- | ------ | ------------ |  | ----------- | ------ | 
|                       |  |      |        |              |  | Accumulated
|                       |  | Cost |        | Depreciation
|                       |  |      |        |             
|Lab equipment          |  | $    | 27,582 |              |  | $           | 27,582 | 
|Office equipment       |  |      | 12,874 |              |  |             | 7,986  | 
|Furniture and fixtures |  |      | 1,302  |              |  |             | 1,302  | 
|                       |  |      |        |              |  |             |        | 
|                       |  | $    | 41,758 |              |  | $           | 36,870 | 
|                       |  |      |        |              |  |             |        | 

Depreciation expense for the year ended December 31, 2001 and 2000 was $3,174
and $743, respectively.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 4  INVESTMENTS

The Companys investments in debt securities that are intended to be held for
an indefinite period, yet not to maturity, are classified as
available-for-sale. Available-for-sale securities are recorded at fair value
under investments in other assets on the balance sheet with the change in fair
value during the period excluded from earnings and recorded net of tax as a
component of other comprehensive income. During the year ended December 31,
2001, the Company liquidated its investment in a single corporate bond at no
gain or loss.

NOTE 5  INTANGIBLE ASSETS

Patents and Patents Pending

Costs relating to the development and approval of patents, other than research
and development costs, which are expensed, are capitalized and amortized using
the straight-line method over seventeen years. The Companys patents relate to
the treatment of autoimmune diseases.

The following is a summary of the costs of patents and patents pending at
December 31, 2001:

|                           |  |      |         |              |  |             |         |   |  |   |         | 
|-------------------------- |  | ---- | ------- | ------------ |  | ----------- | ------- | - |  | - | ------- | 
|                           |  |      |         |              |  | Accumulated |         |   |  |  
|                           |  | Cost |         | Amortization |  | Net Amount 
|                           |  |      |         |              |  |            
|Balance, December 31, 1999 |  | $    | 178,236 |              |  | $           | (64,917 | ) |  | $ | 113,319 | 
|2000 Activity              |  |      | 72,884  |              |  |             | (12,694 | ) |  |   | 60,190  | 
|                           |  |      |         |              |  |             |         |   |  |   |         | 
|Balance, December 31, 2000 |  |      | 251,120 |              |  |             | (77,611 | ) |  |   | 173,509 | 
|2001 Activity              |  |      | 109,977 |              |  |             | (18,993 | ) |  |   | 90,984  | 
|                           |  |      |         |              |  |             |         |   |  |   |         | 
|Balance, December 31, 2001 |  | $    | 361,097 |              |  | $           | (96,604 | ) |  | $ | 264,493 | 
|                           |  |      |         |              |  |             |         |   |  |   |         | 

NOTE 6  RELATED PARTY TRANSACTIONS

Current Transactions

The Company has notes receivable in the amount of $246,619 from shareholders of
the Company in connection with a payment plan for the purchase of Company
stock. The notes accrue interest at a rate of 6.5% per annum and are payable
on December 31, 2002.

Notes payable to related parties consist of notes payable to the former
chairman and principal shareholder. During 2000, $85,750 of the notes was used
to offset a bonus stock sale. The note has no specific due date, is currently
uncollateralized, and is non-interest bearing, however, interest is calculated
at the applicable federal rate each quarter. The calculated interest of $7,213
was recorded as interest expense and contributed capital in the accompanying
financial statements.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 6  RELATED PARTY TRANSACTIONS (Continued)

Transactions in 1999

The Companys former chairman and principal shareholder has advanced funds to
pay a significant portion of the Companys expenses since 1989. At December
31, 1999, the cumulative amounts owed to him for expenses amount to $257,076.
Even though he was not charging interest to the Company, interest was
calculated at the applicable federal rate of 5.59% at December 31, 1999. This
interest was recorded as interest expense and contributed capital in the
accompanying financial statements. During 2000, the Company paid part of this
note and the balance was used to offset a bonus stock sale to the chairman. At
December 31, 1998, the amounts owing for accrued salary was $1,146,000. During
1999, additional salary was accrued in the amount of $100,000. At December 31,
1999, in accordance with an agreement with other employee/shareholders of the
Company, he received options to purchase 623,000 shares of common stock at
$0.10 per share. The value of these options, in the amount of $155,750, was
used to reduce his accrued salary. See Note 11. In 1999, he forgave the
balance of accrued salary of $1,090,250 along with accrued interest of $9,962.
This is recorded in the financial statements as a component of extraordinary
income in 1999.

At December 31, 1999, the Company owed its then secretary/treasurer $13,381 for
expenses paid in previous years and recorded in notes payable. During 2000,
this note was used as partial payment for a bonus stock purchase by the
secretary/treasurer. At December 31, 1998, the Company also owed this employee
$184,000 in unpaid salary recorded as salary payable. During 1999, additional
salary in the amount of $45,000 was accrued for this employee. At December 31,
1999, in accordance with an agreement with other employee/shareholders of the
Company, she received options to purchase 114,500 shares of common stock at
$0.10 per share. The value of these options, in the amount of $28,625, was
used to reduce the accrued salary of this employee/shareholder. See Note 11.
In 1999, she forgave the balance of accrued salary in the amount of $200,375.
This is recorded in the financial statements as a component of extraordinary
income in 1999.

At December 31, 1998, the then president of the Company was owed $171,360 in
accrued salary. During 1999, a portion of this liability was paid. Also
during 1999, additional salary in the amount of $75,000 was accrued. At
December 31, 1999, in accordance with an agreement with other
employee/shareholders of the Company, he received options to purchase 105,453
shares of common stock at $0.10 per share. The value of these options in the
amount of $26,363 was used to reduce the accrued salary of the president. See
Note 11. In 1999, he forgave the balance of accrued salary in the amount of
$181,622. This is recorded in the financial statements as a component of
extraordinary income in 1999.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 6  RELATED PARTY TRANSACTIONS (Continued)

Transactions Involving Leased Space

During 2000, the Company received the use of approximately 3,500 square feet of
commercial building space on a rent-free basis from a firm owned by one of the
Companys directors. The utilization of the facility in this manner was
mutually beneficial to the Company and the owner of this otherwise empty
facility. No formal agreement memorialized this month-to-month arrangement.
The value of the use of the facility was approximately $150 per month, and was
recorded in the financial statements as rent expense and contributed capital.

During 2000, the Company leased office space from a company owned in part by a
shareholder. The minimum base lease payment was $4,800 annually. This lease
was terminated effective December 31, 2000. See Note 15.

NOTE 7  INTERNAL GAIN ON SALE OF SECURITIES

During the year ending December 31, 2000, officers of the Company sold stock at
a gain shortly after purchasing stock through a stock bonus plan. In
compliance with the Securities and Exchange Rule 16b, the stockholders remitted
the gain to the Company. The gain amounted to $157,520 and is reflected in the
income statement as internal gain on sale of securities.

NOTE 8  CONCENTRATIONS

The Company maintains cash in a money market account at a bank in California.
The funds on deposit are not insured by the FDIC, and therefore, a total of
$36,615 is at risk on December 31, 2001.

NOTE 9  COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL

Information regarding the number of shares issued and consideration received is
as follows:

|                              |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           | 
|----------------------------- |  | ------------ | ---- | ------ |  | ------ | ---------- | ------- |  | - | ------ | ---------- |  | - | --------- | 
|                              |  | Common Stock |      |        |  |        |            |         |  |  
|                              |  |              |      |        |  |        |            |         |  |  
|                              |  | Average      |      |        |  |        |            |         |  |   |        | Additional
|                              |  | price        |      |        |  |        |            |         |  |   |        | Paid-in   
|                              |  | per share    |      | Shares |  | Amount |            | Capital
|                              |  |              |      |        |  |        |            |        
|Common stock issued for cash: |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           | 
|1985                          |  | $            | .50  |        |  |        | 100,000    |         |  | $ | 100    |            |  | $ | 49,900    | 
|1986                          |  |              | 1.00 |        |  |        | 639,500    |         |  |   | 640    |            |  |   | 678,861   | 
|1987                          |  |              | 1.00 |        |  |        | 850,500    |         |  |   | 850    |            |  |   | 759,650   | 
|1988                          |  |              | 1.00 |        |  |        | 25,000     |         |  |   | 25     |            |  |   | 24,975    | 
|1993                          |  |              | .25  |        |  |        | 2,402,000  |         |  |   | 2,402  |            |  |   | 475,900   | 
|1995                          |  |              | .05  |        |  |        | 1,000,000  |         |  |   | 1,000  |            |  |   | 49,000    | 
|1996                          |  |              | .05  |        |  |        | 520,000    |         |  |   | 520    |            |  |   | 25,480    | 
|1997                          |  |              | .09  |        |  |        | 1,800,500  |         |  |   | 1,801  |            |  |   | 153,749   | 
|1998                          |  |              | .10  |        |  |        | 305,000    |         |  |   | 305    |            |  |   | 30,195    | 
|1999                          |  |              | .05  |        |  |        | 3,158,000  |         |  |   | 3,158  |            |  |   | 151,993   | 
|                              |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           | 
|                              |  |              |      |        |  |        | 10,800,500 |         |  | $ | 10,801 |            |  | $ | 2,399,703 | 
|                              |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           | 

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 9  COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (Continued)

|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|-------------------------------------------------------------------------------- |  | ------------ | ---- | ------ |  | ------ | ---------- | ------- |  | - | ------ | ---------- |  | - | ------- | -
|                                                                                 |  | Common Stock |      |        |  |        |            |         |  |  
|                                                                                 |  |              |      |        |  |        |            |         |  |  
|                                                                                 |  | Average      |      |        |  |        |            |         |  |   |        | Additional
|                                                                                 |  | price        |      |        |  |        |            |         |  |   |        | Paid-in   
|                                                                                 |  | per share    |      | Shares |  | Amount |            | Capital
|                                                                                 |  |              |      |        |  |        |            |        
|Common stock issued for patents assigned:                                        |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|1984                                                                             |  | $            | .01  |        |  |        | 550,000    |         |  | $ | 5,500  |            |  | $ |        |  
|1985, adjustment to reflect change in
number and par value of shares
outstanding |  |              |     |        |  |        | 2,750,000  |         |  |   | (2,200 | )          |  |   | 2,200   |  
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|                                                                                 |  |              |      |        |  |        | 3,300,000  |         |  |   | 3,300  |            |  |   | 2,200   |  
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|Common stock issued for acquisitions:                                            |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|1985                                                                             |  |              | .01  |        |  |        | 13,333,500 |         |  |   | 13,334 |            |  |   | (41,112 | )
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|Common stock issued for note receivable:                                         |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|1986                                                                             |  |              | 1.00 |        |  |        | 10,000     |         |  |   | 10     |            |  |   | 9,990   |  
|2000                                                                             |  |              | .05  |        |  |        | 4,932,380  |         |  |   | 4,932  |            |  |   | 241,687 |  
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|                                                                                 |  |              |      |        |  |        | 4,942,380  |         |  |   | 4,942  |            |  |   | 251,677 |  
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|Contribution of additional paid-in capital:                                      |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|1991                                                                             |  |              |     |        |  |        |           |         |  |   |       |            |  |   | 35,825  |  
|1999                                                                             |  |              |     |        |  |        |           |         |  |   |       |            |  |   | 28,098  |  
|2000                                                                             |  |              |     |        |  |        |           |         |  |   |       |            |  |   | 9,735   |  
|2001                                                                             |  |              |     |        |  |        |           |         |  |   |       |            |  |   | 8,113   |  
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|                                                                                 |  |              |      |        |  |        |           |         |  |   |       |            |  |   | 81,771  |  
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|Stock subscriptions:                                                             |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|1999                                                                             |  |              | .05  |        |  |        | 650,000    |         |  |   | 650    |            |  |   | 31,850  |  
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|Cancellation of escrowed shares in 1999                                          |  |              | .001 |        |  |        | (850,000   | )       |  |   | (850   | )          |  |   | 850     |  
|Reissued escrowed shares cancelled in
error:                                     |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|2001- See Note 16                                                                |  |              | .001 |        |  |        | 850,000    |         |  |   | 850    |            |  |   | (850    | )
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|                                                                                 |  |              |      |        |  |        |           |         |  |   |       |            |  |   |        |  
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|Common stock issued for services (1):                                            |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|1988                                                                             |  |              | .50  |        |  |        | 25,000     |         |  |   | 25     |            |  |   | 12,475  |  
|1989                                                                             |  |              | .38  |        |  |        | 25,000     |         |  |   | 25     |            |  |   | 9,475   |  
|1990                                                                             |  |              | .66  |        |  |        | 37,375     |         |  |   | 37     |            |  |   | 24,635  |  
|1991                                                                             |  |              | .51  |        |  |        | 159,500    |         |  |   | 160    |            |  |   | 81,010  |  
|1992                                                                             |  |              | .75  |        |  |        | 62,500     |         |  |   | 62     |            |  |   | 46,563  |  
|1993                                                                             |  |              | .25  |        |  |        | 120,000    |         |  |   | 120    |            |  |   | 29,880  |  
|1996                                                                             |  |              | .05  |        |  |        | 308,500    |         |  |   | 308    |            |  |   | 13,832  |  
|1997                                                                             |  |              | .05  |        |  |        | 155,500    |         |  |   | 155    |            |  |   | 7,619   |  
|1999                                                                             |  |              | .05  |        |  |        | 99,190     |         |  |   | 99     |            |  |   | 4,860   |  
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  
|                                                                                 |  |              |      |        |  |        | 992,565    |         |  | $ | 991    |            |  | $ | 230,349 |  
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |         |  

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 9  COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (Continued)

|                                                             |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|------------------------------------------------------------ |  | ------------ | ---- | ------ |  | ------ | ---------- | ------- |  | - | ------ | ---------- |  | - | --------- | -
|                                                             |  | Common Stock |      |        |  |        |            |         |  |  
|                                                             |  |              |      |        |  |        |            |         |  |  
|                                                             |  | Average      |      |        |  |        |            |         |  |   |        | Additional
|                                                             |  | price        |      |        |  |        |            |         |  |   |        | Paid-in   
|                                                             |  | per share    |      | Shares |  | Amount |            | Capital
|                                                             |  |              |      |        |  |        |            |        
|Common stock issued to replace unrecorded
certificates:      |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|1988                                                         |  | $            | .001 |        |  |        | 1,200      |         |  | $ | 1      |            |  | $ | (1        | )
|1992                                                         |  |              | .001 |        |  |        | 500        |         |  |   | 1      |            |  |   | (1        | )
|2000                                                         |  |              | .001 |        |  |        | 100,000    |         |  |   | 100    |            |  |   | (100      | )
|                                                             |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|                                                             |  |              |      |        |  |        | 101,700    |         |  |   | 102    |            |  |   | (102      | )
|                                                             |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|Common stock issued for forgiveness of
accounts payable (1): |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|1990                                                         |  |              | .50  |        |  |        | 25,000     |         |  |   | 25     |            |  |   | 12,475    |  
|1996                                                         |  |              | .05  |        |  |        | 150,000    |         |  |   | 150    |            |  |   | 7,350     |  
|                                                             |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|                                                             |  |              |      |        |  |        | 175,000    |         |  |   | 175    |            |  |   | 19,825    |  
|                                                             |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|Common stock issued in payment of notes
payable (1):         |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|1993                                                         |  |              | .25  |        |  |        | 200,000    |         |  |   | 200    |            |  |   | 49,800    |  
|2000                                                         |  |              | .05  |        |  |        | 1,714,995  |         |  |   | 1,715  |            |  |   | 84,035    |  
|                                                             |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|                                                             |  |              |      |        |  |        | 1,914,995  |         |  |   | 1,915  |            |  |   | 133,835   |  
|                                                             |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|Common stock issued in payment of loans
payable (1):         |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|2000                                                         |  |              | .05  |        |  |        | 2,552,625  |         |  |   | 2,553  |            |  |   | 125,078   |  
|                                                             |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|Common stock issued for commissions (1):                     |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|1993                                                         |  |              | .001 |        |  |        | 1,260,000  |         |  |   | 1,260  |            |  |   |          |  
|                                                             |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|Common stock issued for convertible debt:                    |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|2001                                                         |  |              | .25  |        |  |        | 1,605,346  |         |  |   | 1,605  |            |  |   | 399,504   |  
|                                                             |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|Stock options exercised:                                     |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|1997                                                         |  |              | .01  |        |  |        | 325,000    |         |  |   | 325    |            |  |   | 2,929     |  
|2000                                                         |  |              | .01  |        |  |        | 350,000    |         |  |   | 350    |            |  |   | 3,150     |  
|                                                             |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|                                                             |  |              |      |        |  |        | 675,000    |         |  |   | 675    |            |  |   | 6,079     |  
|                                                             |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|Total                                                        |  |              |      |        |  |        | 42,303,611 |         |  | $ | 42,303 |            |  | $ | 3,640,657 |  
|                                                             |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  



---

|(1) |  | Per share amounts determined by information deemed most reliable based on
circumstances of each case: trading price at time of issuance or value of
services received.
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 9  COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (Continued)

Effective with the merger of Advanced Biotherapy Concepts, Inc. into its wholly
owned subsidiary, each issued and outstanding share of Advanced Biotherapy
Concepts, Inc. common stock was converted automatically into one share of
$0.001 par value common stock of Advanced Biotherapy, Inc.

Stock Bonus Plan

On January 11, 2000, the Company issued 9,200,000 shares of common stock to
certain key officers and directors under a stock bonus plan, subject to various
restrictions. The plans purpose is to keep personnel of experience and
ability in the employ of the Company and to compensate them for their
contributions to the growth of the Company, thereby inducing them to continue
to make such contributions in the future. Such stock bonuses were issued at
the weighted average price at which the Company had been selling shares of
stock out of authorized but yet unissued common stock to third parties during
the six months immediately preceding the issuance of the bonus shares, or
$0.05.

Omnibus Equity Incentive Plan

During December 2000, the board of directors of the Company approved an Equity
Incentive Plan. A maximum of 4,000,000 shares of common stock will be
available for the incentive plan with annual increases equal to the lesser of
2.5% of outstanding shares or 250,000 shares.

NOTE 10  PREFERRED STOCK

With the merger into its Delaware subsidiary, the Company has authorized
20,000,000 shares of $0.001 par value preferred stock authorized. As of
December 31, 2001, the Company has not issued any of its preferred stock.

NOTE 11  STOCK OPTIONS AND ISSUANCE COMMITMENTS

On February 25, 1991, the Corporation granted non-statutory options to purchase
stock to members of its board of directors, officers, and outside consultants.
These options offer a total of 860,000 shares at a price of $0.20 per share
with an exercise period of February 25, 1991 to February 25, 2001. The
expiration date of these options was extended to February 25, 2002. Additional
options were issued effective February 1, 1993, for a total of 250,000 shares
at a price of $0.01 per share, with an exercise period of February 1, 1993 to
February 1, 2003. During 1995, options for 50,000 shares were granted at $0.20
per share, which expire in 2005. Also in 1995, options for 350,000 shares were
granted at $0.01 per share, expiring in 2005. During 1996, options for 525,000
shares were granted at $0.10 per share, which expire in 2006. The shares
purchased will be restricted and, therefore, may not be transferred without
registration under applicable federal and state securities laws.

F-17



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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 11  STOCK OPTIONS AND ISSUANCE COMMITMENTS (Continued)

Stock options granted to a director of the Company for 325,000 shares at a
price of $0.01 were exercised in 1997. On December 31, 1999, three officers of
the Company received 842,953 stock options in partial payment of accrued
salaries in the amount of $210,738. In addition the same three officers
forgave the balance of their accrued salaries and interest in the amount of
$1,482,209. See Note 6. In accordance with Statement of Financial Accounting
Standard No. 123, the fair value of the options was estimated using the Black
Scholes Option Price Calculation. The following assumptions were made to value
the stock options: strike price at $0.10, risk free interest rate of 5%,
expected life of 5 years, and expected volatility of 30% and no dividends are
expected to be paid. At December 31, 1999, the Company recorded $210,738
($0.25 per option) to reduce accrued wages for the value of these options based
upon these Black Scholes assumptions. These stock options are exercisable
immediately, and expire on December 31, 2005. See Note 6. During the year
ended December 31, 2001, no options were exercised and for the year ended
December 31, 2000, 350,000 options were exercised at $0.01 per share.

During November 2001, the Company issued stock options to purchase 250,000
shares of the Companys stock at $0.25 per share to a consultant. The options
are exercisable immediately and expire on November 15, 2011. The options have
piggyback registration rights to be effective in the next SEC registration
statement. See Note 15. In accordance with Statement of Financial Accounting
Standard No. 123, the fair value of the options was estimated using the Black
Scholes Option Price Calculation. The following assumptions were made to value
the stock options: strike price at $0.25, risk free interest rate of 5%,
expected life of 10 years, and expected volatility of 38% and no dividends are
expected to be paid. At November 15, 2001, the Company recorded $75,000 ($0.30
per option) to professional fees for the value of these options based upon
these Black Scholes assumptions.

Following is a summary of the status of the options during the years ended
December 31, 2000 and 2001:

|                                                       |  |                  |           |                |  |          |     | 
|------------------------------------------------------ |  | ---------------- | --------- | -------------- |  | -------- | --- | 
|                                                       |  |                  |           |                |  | Weighted
|                                                       |  |                  |           |                |  | Average 
|                                                       |  | Number of Shares |           | Exercise Price
|                                                       |  |                  |           |               
|Outstanding at January 1, 2000                         |  |                  | 2,877,953 |                |  | $        | .10 | 
|Granted                                                |  |                  |          |                |  |          |    | 
|Exercised                                              |  |                  | (350,000  | )              |  |          | .01 | 
|Forfeited                                              |  |                  |          |                |  |          |    | 
|                                                       |  |                  |           |                |  |          |     | 
|Outstanding at December 31, 2000                       |  |                  | 2,527,953 |                |  |          | .11 | 
|Granted                                                |  |                  | 250,000   |                |  |          | .25 | 
|Exercised                                              |  |                  |          |                |  |          |    | 
|Forfeited                                              |  |                  |          |                |  |          |    | 
|                                                       |  |                  |           |                |  |          |     | 
|Outstanding at December 31, 2001                       |  |                  | 2,777,953 |                |  |          | .14 | 
|                                                       |  |                  |           |                |  |          |     | 
|Options exercisable at December 31, 2001               |  |                  | 2,777,953 |                |  | $        | .14 | 
|                                                       |  |                  |           |                |  |          |     | 
|Weighted average fair value of options
granted in 2001 |  |                  |           |                |  | $        | .30 | 
|                                                       |  |                  |           |                |  |          |     | 

During January 2001, the Company enacted an Equity Incentive Plan for the
issuance of stock options to employees, outside directors and consultants.

F-18



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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 12  INCOME (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing the net income (loss)
by the weighted average number of shares outstanding during the period. The
weighted average number of shares is calculated by taking the number of shares
outstanding and weighting them by the amount of time that they were
outstanding. Diluted earnings (loss) per share is computed by dividing the net
income (loss) adjusted for interest expense on convertible debt by the weighted
average number of basic shares outstanding increased by the number of shares
that would be outstanding assuming conversion of the stock options, warrants,
and convertible debt. Diluted net loss per share is the same as basic net loss
per share as inclusion of the common stock equivalents would be antidilutive.
All effective dilutions are reflected in the accompanying statements of
operations.

Required earnings per share information related to extraordinary income is as
follows:

|                                       |                     |  |              |   |              |  |                   |   |  |  |                    |      | 
|-------------------------------------- | ------------------- |  | ------------ | - | ------------ |  | ----------------- | - |  |  | ------------------ | ---- | 
|                                       |                     |  |              |   |              |  |                   |   |  |  | From Inception    
|                                       |                     |  |              |   |              |  |                   |   |  |  | (December 2, 1985)
|                                       |                     |  | December 31, |   | December 31, |  | through          
|                                       |                     |  | 2001         |   | 2000         |  | December 31, 2001
|                                       |                     |  |              |   |              |  |                  
|Earnings per share                     |                     |  |              |   |              |  |                   |   |  |  |                    |     
|                                       | Extraordinary gains |  | $            |  |              |  | $                 |  |  |  | $                  | 0.09 | 
|Earnings per share  assuming dilution |                     |  |              |   |              |  |                   |   |  |  |                    |     
|                                       | Extraordinary gains |  | $            |  |              |  | $                 |  |  |  | $                  | 0.09 | 

NOTE 13  NON-CASH COMMITMENT AND WARRANTS

During the year ended December 31, 2001, the Company issued to four directors
of the Company warrants to purchase up to 100,000 shares of common stock with
an exercise price of $0.25 per share. The warrants expire between May 2005 and
April 2006. In accordance with Statement of Financial Accounting Standards No.
123, the fair value of the warrants was estimated using the Black Scholes
Option Price Calculation. The following assumptions were made to value the
warrants: strike price at $0.25, risk free interest rate of 5%, expected life
of 5 years, and expected volatility of 38%. During the year ended December 31,
2001, the Company recorded $23,280 as directors fees for these warrants.

On January 19, 2000, the Company engaged an investment banking firm and, as
partial compensation for its services, issued warrants to purchase up to
4,685,135 shares of the Companys common stock with an exercise price of $0.15
per share. The warrants are exercisable for ten years. In accordance with
Statement of Financial Accounting Standards No. 123, the fair value of the
warrants was estimated using the Black Scholes Option Price Calculation. The
following assumptions were made to value the warrants: strike price at $0.15,
risk free interest rate of 6.2%, expected life of 10 years, and expected
volatility of 30%. During the year ended December 31, 2000, the Company
recorded $168,665 as consulting fees for the aforementioned investment banking
firm services. A cash-less exercise may be used for all warrant transactions.
No fees are payable to the investment advisor in connection with the exercise
of the warrants, which contain full, unconditional piggy-back registration
rights without any holdback obligations.

At December 31, 2001, the total of the Companys exercisable warrants is
5,085,135. The average exercise price of the warrants at December 31, 2001 is
$0.16 per share.

F-19



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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 14  CONVERTIBLE DEBT

During the year ended December 31, 2000, the Company sold in a private
placement to accredited investors $1,510,500 of convertible subordinated debt
due and payable September 30, 2004. The debt bears interest at the rate of 10%
per annum and is payable semi-annually in cash or additional convertible
subordinated debt. The unpaid accrued interest at December 31, 2001, June 30,
2001 and December 31, 2000 of $77,979, $77,262 and $49,669, respectively, was
converted to additional convertible debt.

This debt is convertible into shares of Company common stock at a conversion
price equal to $0.25 per share, subject to certain anti-dilution provisions.
The Company offered the convertible subordinated debt pursuant to Section 4(2)
of the Securities Act of 1933, as amended, and Rule 506 of Regulation D,
promulgated under the Securities Act. In connection with the placement of the
debt, the Company paid a loan origination fee of $113,288 to its financial
advisor, in addition to the granting of an option to purchase an equivalent
principal amount of convertible subordinated debt at the face amount thereof
over a period of ten years. The aforementioned fee is currently included in
other assets and is being amortized over the term of the debt. Amortization
for the year ended December 31, 2001 was $27,712.

During the last two months of 2001, a total of $355,000 original debt and
$46,109 of accrued and converted interest was converted into 1,605,346 shares
of common stock at $0.25 per share.

NOTE 15  COMMITMENTS AND CONTINGENCIES

Consulting Contract

During July 2000, the Company signed a contract with a consultant to provide
information on possible partnering companies to divest or license certain
rights to its technologies or products. The contract called for the payment of
a $5,000 monthly retainer. This contract could be cancelled with a 60 day
written notice. On January 24, 2001, the contract was modified to waive the
termination notice, and was terminated effective February 1, 2001.
Subsequently, in November 2001, the Company renegotiated this contract and
signed a new six-month contract to provide information on possible partnering
companies to divest or license certain rights to its technologies or products.
The contract calls for the issuance of a stock option to purchase 250,000
shares of the Companys stock at $0.25 per share, exercisable for ten years.
The option has piggyback registration rights to be effective in the next SEC
registration statement. See Note 11. The Company also agreed to pay a success
fee based on a percentage of the transaction value of any divestiture or
license brought about by this contract. In addition, if the success fee is
earned by the consultant, the Company will issue a warrant to the consultant to
purchase 100,000 shares of common stock at a 10% discount of fair market value.

Office Lease

The Company leased office space from a related party during 2000 at a minimum
annual rate of $4,800. This lease was terminated effective December 31, 2000.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(FORMERLY ADVANCED BIOTHERAPY CONCEPTS, INC.)
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2001

NOTE 15  COMMITMENTS AND CONTINGENCIES (Continued)

Office Lease (Continued)

During January 2001, the Company signed an office lease agreement for three
years beginning March 1, 2001. The lease called for monthly rental payments of
$3,600 plus its portion of operating expenses with an annual escalation clause
of 4%. The lease required a $15,580 deposit. Effective June 28, 2001, the
Company cancelled this lease and has received a refund of the deposit. The
cost of such cancellation included the payment of rent for the months of July
and August 2001 in the amount of $7,200, and the payment of a brokers
commission of approximately $6,700.

NOTE 16  CORRECTION OF AN ERROR

The Companys financial statements for the years ended December 31, 2000 and
1999, have been restated to reflect the correction of an error in common stock
outstanding and weighted average number of shares outstanding as of December
31, 2000 and 1999. Subsequent to December 31, 2001, it was discovered that the
Company mistakenly cancelled 850,000 shares of common stock in 1999. Under the
terms of a settlement agreement and mutual general release and an escrow
agreement each dated July 31, 1991 (collectively referred to as settlement
agreements) among the Company, a shareholder, a consultant and certain other
parties, the Company issued 850,000 shares in the name of the consultant and
placed into escrow. These shares were to be released to the consultant upon
performance of certain services that were to be provided by the consultant no
later than January 15, 1993. The settlement agreements also stated that the
850,000 shares of common stock would be distributed back to the original
shareholder, if such services were not provided by the consultant. Such
services were not provided by the consultant, in whole or in part, and all
850,000 shares were cancelled by the Company in 1999. Instead of being
cancelled, however, the shares should have been distributed to the original
shareholder in 1999 pursuant to the settlement agreements. Therefore, the
shares are being reissued to the original shareholder and are reflected in the
accompanying financial statements as if they were never cancelled.

The effect of this restatement is as follows for the year ended December 31,
2000:

|                                            |  |               |            |             |  |   |            |  
|------------------------------------------- |  | ------------- | ---------- | ----------- |  | - | ---------- | -
|                                            |  | As Previously |            |             |  |  
|                                            |  | Reported      |            | As Restated
|                                            |  |               |            |            
|Common shares outstanding                   |  |               | 39,848,265 |             |  |   | 40,698,265 |  
|Common stock, par value                     |  | $             | 39,848     |             |  | $ | 40,698     |  
|Additional paid-in capital                  |  | $             | 3,233,890  |             |  | $ | 3,233,040  |  
|Weighted average shares outstanding         |  |               | 39,278,866 |             |  |   | 40,128,866 |  
|Basic and diluted net loss per common share |  | $             | (0.02      | )           |  | $ | (0.02      | )

NOTE 17  SUBSEQUENT EVENTS

Effective January 1, 2002, the Company authorized the issuance of a total of
80,000 stock options to its board of directors for services rendered during the
year ended December 31, 2001. An accrued expense was recorded in the amount of
$13,600 as the value of the services and is reflected in the financial
statements.

F-21