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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-KSB

|   |  |                                                                                             
|-- |  | --------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)

    OF THE SECURITIES EXCHANGE ACT OF 1934   
|  
|   |  | For the fiscal year ending December 31,
    2002                                            
|  
|or
|  
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 0-26323



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Advanced Biotherapy, Inc.

(Exact name of Registrant as specified in its
charter)


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

6355 Topanga Canyon Boulevard,
Suite 510

Woodland Hills, California 91367


(Address of principal executive offices,
including zip code.)


Registrants telephone number, including
area code:

(818) 883-6716


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 þ          No o

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.     o

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

December 31,
2002:                     $-0-

The aggregate market value of Registrants
common stock held by non-affiliates computed by reference to the
average of the high and low price of such stock on
February 28, 2003, was $4,746,606, which market value
excludes 14,161,502 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, 2003.

As of February 28, 2003, the Registrant had
outstanding 43,827,793 shares of common stock.

Documents Incorporated by Reference:

None.



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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 (ADs). 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 or
co-development 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 certain skin diseases.

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-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. More recently, we conducted an
open-label trial using antibodies to gamma interferon to treat
13 patients who were rejecting their corneas after
transplantation. In all cases, we were able to halt rejection in
all patients with our investigational biological drug. The
results of the studies have been published in the peer-reviewed
journals Multiple Sclerosis, Scandinavian
Journal of Rheumatology, the American Journal of
Opthalmology, and the journal, Medical
Hypothesis.

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 this
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. The
Company has also been issued United States Patent
No. 6,534,059 for the use of antibodies to gamma interferon
(IFN-g) to treat corneal transplant rejection.

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.

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To date, the Companys activities have
consisted primarily of research, development and human clinical
testing. Such activities have resulted in accumulated deficit of
$6,592,961 at December 31, 2002. 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 involves the engagement of, or licensing to, 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 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 amount spent on research and development by
the Company for the fiscal years ended December 31, 2002,
2001 and 2000 was $313,597, $133,747, and $39,579, 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 autoimmune
diseases (ADs), such as RA, MS, Type I diabetes and certain
skin diseases, 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 ADs.

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 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.

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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.

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.

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, Psoriasis and Crohns disease. The therapeutic
proof of principle therefore already exists for the usefulness
of cytokine mediating strategies as therapeutic interventions in
autoimmune disease.

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.

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Table I

Major Autoimmune Diseases


|                               |  |                             
|------------------------------ |  | ----------------------------
|Addisons disease              |  | Hasimotos disease          
|Alopecia Areata                |  | 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                 
|Epidermolysis Bullosa          |  | Sjogrens syndrome          
|Epididymitis                   |  | Thyroiditis                 
|Glomerulonephritis             |  | Vasculitis                  
|Graves disease                |  | Viteligo                    
|Guillan-Barre syndrome         |  |                             

Neurological Diseases With A Suspected
Autoimmune Component

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

Many current treatments of autoimmune diseases
are inadequate and involve 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
Rebif®, 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 only represent the
first generation 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 MS, RA, Psoriasis, Crohns Diseases
and corneal transplant rejection. 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.

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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-(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. The results of this study have been
reported in the peer-reviewed journal American Journal of
Ophthalmology (v.133, 829-830).

It is emphasized that polyclonal antibodies were
used in all three clinical trials only and solely 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 United States Patent
No. 6,333,032 and, subsequent to the completion of the
trials for Corneal Transplant rejection, the Company was issued
United States Patent No. 6,534,059 as more fully described
under Patent Status and Protection of Proprietary
Technology.

Drug Product Development

The Company intends to co-develop product
development and manufacturing and has identified several
companies that have suitable facilities for manufacturing large
quantities of antibodies. We are also considering the
out-licensing of certain indications protected under our patents.

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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 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.

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 all the Phase I trials are completely

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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.

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.

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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.                          
|                   
|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.
|                   
|Immune System       |  | The cells and tissues that collectively recognize
    and eliminate invading foreign substances like microorganisms,
    parasites, and tumor cells from the body.                                                                                                                                                                                          
|                   
|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                                                                                                                                                   

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|                            |  |                                                                                                                                                                                                                                                                                                                                                                                                                              
|--------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                            |  | produce a specific antibody to that antigen and
    to proliferate to produce a population of such
    antibody-producing cells.                                                                                                                                                                                                                                                                                             
|                           
|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.                                                                                                                                                                                                                                  

Patent Status and Protection of Proprietary
Technology

The Company has been issued United States Patent
No. 6,333,032 for the use of interferon-gamma (IFN-(gamma))
antibodies 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 this
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. In
addition, the Company was recently issued United States Patent
No. 6,534,059 covering the use of interferon gamma
antibodies for treatment of corneal transplant rejection. 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 seven United States
utility patents pending filed

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between December 22, 1997, and March, 2003.
The Company also has two foreign applications pending in Europe
and Canada and two PCT applications.


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

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.

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 risks, uncertainties and
assumptions that could affect the outcome of the forward-looking
statements in this Form 10-KSB, and other risks 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

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | Company. For the fiscal year ended
    December 31, 2002, we realized a net loss of $1,524,535 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.



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

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 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 Conducting Clinical Trials. 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 the manufacturing of antibodies for clinical trial purposes.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

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| |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 Company. We have four
    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 seven 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, 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 because prior to
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. 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, 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.

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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

During the year ended December 31, 2002, the
Company received 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 director Lawrence Loomis. As of
January 1, 2003, the Company began paying $5,110 in rent on
a month-to-month basis. During the year ended December 31,
2002, the Company also received the use of office space and
facilities on a rent-free basis from a firm owned by Edmond F.
Buccellato. As of January 1, 2003, the Company began paying
$700 in rent on a month-to-month basis. 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.

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

On December 12, 2002, the Company held its
annual meeting of stockholders (Annual Meeting).

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



| |                                                                                                                                                                                                                                          
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1)     The stockholders
    elected nine 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
|                        |  |     |            |                   
|John M. Bendheim        |  |     | 22,587,772 |                    |  |  | 1,666,700 | 
|Edmond Buccellato       |  |     | 22,589,572 |                    |  |  | 1,666,900 | 
|Alexander L. Cappello   |  |     | 22,378,938 |                    |  |  | 1,877,534 | 
|Richard P. Kiphart      |  |     | 22,494,472 |                    |  |  | 1,762,000 | 
|Lawrence Loomis         |  |     | 22,494,772 |                    |  |  | 1,761,700 | 
|Leonard Millstein, Ph.D |  |     | 22,589,472 |                    |  |  | 1,667,000 | 
|Thomas J. Pernice       |  |     | 22,581,672 |                    |  |  | 1,666,700 | 
|Boris Skurkovich, M.D.  |  |     | 22,589,072 |                    |  |  | 1,667,900 | 
|Simon Skurkovich, M.D.  |  |     | 22,588,772 |                    |  |  | 1,667,700 | 



| |                                                                                                                                                                                                                    
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (2)     The stockholders
    approved an amendment to the Companys Certificate of
    Incorporation to increase the authorized number of shares of
    Common Stock from 100,000,000 shares to 200,000,000 shares.

|         |  |  |            | 
|-------- |  |  | ---------- | 
|For:     |  |  | 21,683,729 | 
|Against: |  |  | 2,518,120  | 
|Abstain: |  |  | 62,723     | 

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PART II

Item 5.Market
for Registrants Common Stock and Related Stockholder
Matters

The Companys Common Stock is quoted on the
OTC Bulletin Board operated by the National Association of
Securities Dealers, Inc. (the Bulletin Board) under
the symbol ADVB. The table below shows the high and
low bid quotations of the Companys Common Stock during
each of the four quarters of the 2001 and 2002 calendar years,
and reflects inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual
transactions. The quotation information has been obtained from
Commodity Systems, Inc., available through Yahoo!Finance.

|                           |              |          |   |         |  |  |   |      | 
|-------------------------- | ------------ | -------- | - | ------- |  |  | - | ---- | 
|                           |              | High Bid |   | Low Bid
|                           |              |          |   |        
|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 | 
|2002 Fiscal Quarter Ended: |              |          |   |         |  |  |   |     
|                           | March 31     |          | $ | 0.38    |  |  | $ | 0.18 | 
|                           | June 30      |          | $ | 0.65    |  |  | $ | 0.25 | 
|                           | September 30 |          | $ | 0.37    |  |  | $ | 0.21 | 
|                           | December 31  |          | $ | 0.27    |  |  | $ | 0.14 | 

Holders

As of February 28, 2003, the Company had
approximately 1568 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 3700.

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 2002

During the quarter ended December 31, 2002,
the Company sold the principal amount of $500,000 of its
Subordinated Convertible Pay-In-Kind Notes due June 6, 2006
(2002 Convertible Notes Due 2006) in a private
placement to an accredited investor, paid in cash. Those 2002
Convertible Notes Due 2006 bear interest at the rate of 12.5%
per annum payable semi-annually in cash or additional 2002
Convertible Notes Due 2006. The 2002 Convertible Notes Due 2006
are convertible into shares of Company Common Stock at a
conversion price per share equal to twenty-five cents ($0.25),
subject to certain anti-dilution provisions. The 2002
Convertible Notes Due 2006 are to be paid ratably with the
Companys Subordinated Convertible Debt due
September 30, 2004, the Companys Subordinated
Convertible Pay-In-Kind Notes due September 30, 2004, and
the Companys Subordinated Convertible Pay-In-Kind Notes
due June 6, 2006 (which bear interest at 11% per annum).
The holders of 2002 Convertible Notes Due 2006 are entitled to
certain piggyback registration rights.

The Company offered the 2002 Convertible Notes
Due 2006 pursuant to Section 4(2) of the Securities Act of
1933, as amended, and Rule 506 of Regulation D. The
proceeds from the placement of 2002 Convertible Notes Due 2006
will be used for working capital, including salaries of
management, scientific

15



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##### Table of Contents



development costs and patent application legal
costs, preclinical trial costs, Phase I Investigational New
Drug Applications for two specific autoimmune diseases,
including related clinical studies, and to pursue certain
collaborative relationships with other biotechnology or
pharmaceutical companies.


Effective as of December 31, 2002, pursuant
to the Companys 2000 Omnibus Equity Incentive Plan, the
Company granted its directors non-qualified stock options to
purchase an aggregate 180,000 shares of Common Stock, at
$0.21 per share, for services. See ITEM 10. EXECUTIVE
COMPENSATION for additional information.

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 less than $1,500,000, 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, 2002

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, 2002, the Company had
issued and outstanding 43,601,327 shares of its Common Stock.
The Company is a development stage company. The Company had
$3,031,081 in cash as of December 31, 2002.

Fiscal 2002 Compared to Fiscal 2001

For the year ended December 31, 2002, the
Company realized a net loss of $1,524,535 compared to a net loss
of $1,020,301 for the year ended December 31, 2001. The
Company had increases in expenses over the year ended
December 31, 2001, consisting primarily of the following:
increased research and development expenses in the amount of
$179,850, increased expenditures in the aggregate amount of
$40,903 for professional fees primarily related to amendments to
its registration statement and other regulatory filing
requirements with the Securities and Exchange Commission and
other corporate matters, increased interest expense in the
amount of $215,546 related to the Companys convertible
subordinated debt and subordinated convertible pay-in-kind
notes, increased depreciation and amortization in the amount of
$27,426, increased travel expenses in the amount of $36,181
related to business development and other Company matters,

16



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##### Table of Contents



increased salaries and benefits in the amount of
$14,872, increased general and administrative expenses in the
amount of $29,414, increased Directors fees of $8,720,
decreased rent of $33,962, decreased telephone and
communications of $8,624 and decreased office expenses in the
amount of $3,109.


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.

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. 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 distributed to Dr. Simon Skurkovich
in 1999 pursuant to the settlement agreements. Therefore, the
shares were 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. See
ITEM 1. BUSINESS FACTORS THAT AFFECT THE
COMPANY.

Item 7.Financial
Statements

The financial statements are included herewith
and incorporated herein by reference beginning with Page F-1.

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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, 2001, through
December 31, 2002, 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, 2003,
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.   |  |     | 80 |               |  | Chairman Emeritus, Director, and Director of
    Research and Development     |  | November, 1985
|Edmond F. Buccellato     |  |     | 57 |               |  | Chairman of the Board, President and Chief
    Executive Officer, Director(3) |  | November, 1995
|Thomas J. Pernice        |  |     | 41 |               |  | Treasurer and Secretary, Director(2)(3)                                       |  | April, 2001   
|William M. Finkelstein   |  |     | 43 |               |  | Chief Financial Officer (non-director)                                        |  | April, 2001   
|Lawrence Loomis          |  |     | 58 |               |  | Director(2)(3)                                                                |  | December, 1986
|Leonard Millstein, Ph.D. |  |     | 60 |               |  | Director(2)                                                                   |  | December, 1986
|Boris Skurkovich, M.D.   |  |     | 48 |               |  | Director(2)                                                                   |  | December, 1986
|Alexander L. Cappello    |  |     | 47 |               |  | Director(1)(3)                                                                |  | April, 2000   
|John M. Bendheim         |  |     | 49 |               |  | Director(1)(3)                                                                |  | June, 2000    
|Richard P. Kiphart       |  |     | 61 |               |  | Director(1)(2)                                                                |  | June, 2002    



---



|    |                                                                    
|--- | -------------------------------------------------------------------
|(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 October, 2002,
Mr. Buccellato has served as Chairman of the Board, and since April
2001, he 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, and he served as
Chief Executive Officer from 1995 to August 31, 2000. He has
served as a member of the Board of Directors since 1995. 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 was also 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

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medical and industrial examination gloves and
co-founder and member of the Board of Directors of
Physicians Choice LLC, a medical billing company.
He is a shareholder of Buccellato & Finkelstein, a public accountancy
firm. 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 May 2000,
Mr. Cappello has served as a member of the Board of
Directors. Mr. Cappello also served as Chairman of the
Board from April 2001, through October, 2002. Mr. Cappello
is Chairman and Chief Executive Officer of Cappello Group, Inc.,
a merchant banking firm specializing in principal transactions,
corporate finance, institutional equity placements for public
companies, project finance and merger and acquisitions services
since 1975. He also serves as Chairman of the International
Board of the Young Presidents Organization for 2003-2004.
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),
Independent Colleges of Southern California (ICSC), USC Marshall
School of Business, Greif Center for Entrepreneurial Studies,
USC Advancement Council, Trustee Friends of Florence (Florence
Italy), Chairman Emeritus of Catholic Big Brothers of Los
Angeles. 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.

Richard P.
Kiphart Since June, 2002,
Mr. Kiphart has served as a member of the Board of
Directors. He currently serves as Chairman of the Board of
Concord EFS Inc. and a member of the Board of Directors of Photo
Control Inc. Mr. Kiphart is the Head of Corporate Finance
for the Investment Firm of William Blair & Company,
L.L.C. Mr. Kiphart has been with William Blair for over
36 years. Mr. Kiphart received his B.A. from Dartmouth
College and his M.B.A. from Harvard Business School.

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 President of Modena Holding Corporation, a
financial consulting services company, and most recently, was also a managing director of Cappello Group, Inc.,
a merchant banking firm, from January 1999 to July 2002. Prior to
joining the Cappello Group, 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 .

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

Simon
Skurkovich, M.D.
Founder of Advanced Biotherapy, Inc., serves as Director of
Research and Development. From 1985 until September 2000,
Dr. Skurkovich served as Chairman of the Board of
Directors. 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 240 articles for scientific publications. In 1974, he
published in the journal Nature a new explanation for the
pathogenesis and treatment of autoimmune diseases, which has
been the basis for successful clinical trials and is now well
accepted around the world.

William M. Finkelstein. Since April, 2001,
Mr. Finkelstein has served as Chief Financial Officer. For
the past eight years, he has been a shareholder of Buccellato
& Finkelstein, Inc., a public accountancy firm.
Mr. Finkelstein received his undergraduate degree in
Accounting from the University of Houston in 1982 and became
licensed as a certified public accountant in 1984. He is a
member of the American Institute of Certified Public Accounts,
and the California Society of Certified Public Accountants.

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 Boris Skurkovich, M.D.
relating to his gifts of shares of Common Stock, which
transactions otherwise were not timely reported. A Form 5
was filed by Leonard Millstein, Ph.D. relating to the sale of
shares of Common Stock by his minor son, which transactions were
otherwise not timely reported. A Form 5 was filed by John
Bendheim and Alexander Cappello regarding the payment of accrued
interest on Company convertible subordinated debt in the form of
additional convertible subordinated debt, which transactions
otherwise were not timely reported due to filing difficulties at
the Companys financial printer.

20



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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, 2000 through
December 31, 2002, for the Chief Executive Officer of the
Company and the Companys other executive officers who were
compensated during the year ended December 31, 2002 (the
Named Executive Officers):

Summary Compensation Table

|                            |                         |      |      |        |  |       |         |              |  |            |   |              |  |         |        |              |  |   |   |  |  |   |       |       |  |   |   |   |  |   |   |   | 
|--------------------------- | ----------------------- | ---- | ---- | ------ |  | ----- | ------- | ------------ |  | ---------- | - | ------------ |  | ------- | ------ | ------------ |  | - | - |  |  | - | ----- | ----- |  | - | - | - |  | - | - | - | 
|                            |                         |      |      |        |  |       |         |              |  | Restricted |   | Securities   |  |         |        |             
|                            |                         |      |      |        |  |       |         | Other Annual |  | Stock      |   | Underlying   |  | LTIP    |        | All Other   
|                            |                         |      |      | Salary |  | Bonus |         | Compensation |  | Award(s)   |   | Options/SARs |  | Payouts |        | Compensation
|Name and Principal Position |                         | Year |      | ($)    |  | ($)   |         | ($)          |  | ($)        |   | (#)          |  | ($)     |        | ($)         
|                            |                         |      |      |        |  |       |         |              |  |            |   |              |  |         |        |             
|Edmond F. Buccellato        |                         |      | 2002 |        |  | $     | 154,500 |              |  | $          | 0 |              |  | $       | 0      |              |  | $ | 0 |  |  | $ | 3,800 |       |  | $ | 0 |   |  | $ | 0 |  
|                            | Chief Executive Officer |      |      | 2001   |  |       | $       | 84,000       |  |            | $ | 0            |  |         | $      | 0            |  |   |   |  |  |   | $     | 2,150 |  |   | $ | 0 |  |   | $ | 0 | 
|                            | (1)(4)(6)               |      |      | 2000   |  |       | $       | 72,500       |  |            | $ | 0            |  |         | $      | 0            |  |   |   |  |  |   | $     | 0     |  |   | $ | 0 |  |   | $ | 0 | 
|Paul J. Marangos            |                         |      | 2001 |        |  | $     | 35,000  |              |  | $          | 0 |              |  | $       | 10,000 |              |  | $ | 0 |  |  | $ | 7,800 |       |  | $ | 0 |   |  | $ | 0 |  
|                            | Chief Executive Officer |      |      | 2000   |  |       | $       | 40,000       |  |            | $ | 25,000       |  |         | $      | 0            |  |   |   |  |  |   | $     | 0     |  |   | $ | 0 |  |   | $ | 0 | 
|                            | (2)(5)                  |      |      |        |  |       |         |              |  |            |   |              |  |         |        |              |  |   |   |  |  |   |       |       |  |   |   |   |  |   |   |   | 
|Simon Skurkovich            |                         |      | 2002 |        |  | $     | 131,500 |              |  | $          | 0 |              |  | $       | 0      |              |  | $ | 0 |  |  | $ | 3,800 |       |  | $ | 0 |   |  | $ | 0 |  
|                            | Chairman Emeritus,      |      |      | 2001   |  |       | $       | 60,000       |  |            | $ | 0            |  |         | $      | 0            |  |   |   |  |  |   | $     | 2,150 |  |   | $ | 0 |  |   | $ | 0 | 
|                            | Director of Research &  |      |      | 2000   |  |       | $       | 30,000       |  |            | $ | 0            |  |         | $      | 0            |  |   |   |  |  |   | $     | 0     |  |   | $ | 0 |  |   | $ | 0 | 
|                            | Development(3)(4)(6)    |      |      |        |  |       |         |              |  |            |   |              |  |         |        |              |  |   |   |  |  |   |       |       |  |   |   |   |  |   |   |   | 



---



|    |                                                                                                                                                                                                                                                                                                                                                             
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Mr. Buccellato was the Chief Executive
    Officer of the Company prior to the hiring of Dr. Marangos.
    Since April, 2001, Mr. Buccellato has served as President
    and Chief Executive Officer of the Company.                                                                                                                                        
|   
|(2) | Dr. Marangos joined the Company in August
    2000 at an annual salary of $120,000. In addition, he was paid a
    signing bonus of $25,000. In April, 2001, Dr. Marangos
    resigned as an officer and employee of the Company.                                                                                                                           
|   
|(3) | Dr. Skurkovich also served as the Chairman
    of the Board prior to August, 2000.                                                                                                                                                                                                                                                                          
|   
|(4) | During January, 2003, the Company granted stock
    options to purchase 20,000 shares of the Companys Common
    Stock at $0.21 per share to each director for services rendered
    during the year ended December 31, 2002. The fair value of
    the stock options was estimated at $3,800 per director using the
    Black Scholes option price method.
|   
|(5) | During May, 2001, the Company issued to
    Dr. Marangos warrants to purchase 100,000 shares of the
    Companys Common Stock at $0.25 per share for his service
    on the Board of Directors. The warrants expire in May, 2005. The
    fair value of the warrants was estimated at $7,800 using the
    Black Scholes option price method.              
|   
|(6) | During the first six months of 2002, Edmond
    Buccellato and Simon Skurkovich, M.D. were compensated as
    contract consultants at the annual rate of $120,000 and $80,000,
    respectively, and effective July 1, 2002, their salaries
    were set at $180,000, respectively.                                                                         

During fiscal year 2002, William M. Finkelstein
did not receive any compensation directly from the Company,
although the Company paid to Buccellato & Finkelstein, Inc.,
the sum of $16,014 for accounting services and tax preparation.
Mr. Finkelstein and Mr. Buccellato are shareholders of
Buccellato & Finkelstein, Inc.

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.

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

21



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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.


Effective January 1, 2003, the Company
granted each director non-qualified options to purchase 20,000
shares of Common Stock at an exercise price of $0.21 per share
for Board services rendered during the year ended
December 1, 2002. During the quarter ending March 31,
2003, the Company granted additional options to purchase an
aggregate 3,950,000 shares of Common Stock at an exercise price
of $0.16 per share to certain directors and officers under the
OEI Plan, which options vest in three equal installments
commencing February 7, 2004.

Option/ SAR Grants to Executive
Officers

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, 2002, in their
capacity as officers, however, as described above, during that
period Mr. Buccellato and Simon Skurkovich, M.D., were each
granted stock options to purchase 10,000 shares of Common Stock
for Board services, during the year ended December 31, 2001.

None of the Named Executive Officers exercised
any options or SARs during the 2002 fiscal year.

The information concerning individual grants of
stock options (whether or not in tandem with SARs) and
freestanding SARs, including options and SARs that subsequently
have been transferred) made during the fiscal year ended
December 31, 2002 to each of the Named Executive Officer is
provided in tabular format below:

Option/ SAR Grants in Last Fiscal Year
(2002)

(Individual Grants)


|                       |  |              |        |                  |  |             |    |                 |  |   |      |  |  |                  
|---------------------- |  | ------------ | ------ | ---------------- |  | ----------- | -- | --------------- |  | - | ---- |  |  | -----------------
|                       |  | Number of    |        | Percent of Total |  |             |    |                
|                       |  | Securities   |        | Options/SARs     |  |             |    |                
|                       |  | Underlying   |        | Granted To       |  | Exercise of |    |                
|                       |  | Options/SARs |        | Employees in     |  | Base Price  |    |                
|Name                   |  | Granted(#)   |        | Fiscal Year      |  | ($/Sh)      |    | Expiration Date
|                       |  |              |        |                  |  |             |    |                
|Edmond F. Buccellato   |  |              | 10,000 |                  |  |             | (1 | )               |  | $ | 0.25 |  |  | December 31, 2011
|Simon Skurkovich, M.D. |  |              | 10,000 |                  |  |             | (1 | )               |  | $ | 0.25 |  |  | December 31, 2011



---



|    |                                                                                                                                                                                                           
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | Options to purchase 10,000 shares of Common Stock
    were granted to all directors for services rendered during
    fiscal year 2001. No other options were granted to employees in
    fiscal year 2002.

During January, 2003, the Company granted stock
options to purchase 20,000 shares of the Companys Common
Stock at $0.21 per share to each director, including Edmond F.
Buccellato and Simon Skurkovich, M.D., as described in the
Summary Compensation table above, for directorship services
rendered during the year ended December 31, 2002.

22



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##### Table of Contents



Aggregated Options/ SAR Exercises in Fiscal
Year

Ended December 31, 2002 and
December 31, 2002


Option/ SAR Values


|                  |  |                 |   |                   |  |                              |   |                              |  |  |         |  |  |   |            | 
|----------------- |  | --------------- | - | ----------------- |  | ---------------------------- | - | ---------------------------- |  |  | ------- |  |  | - | ---------- | 
|                  |  |                 |   |                   |  | Number of Unexercised        |   | Value of Unexercised        
|                  |  |                 |   |                   |  | Securities Underlying        |   | In-The-Money                
|                  |  |                 |   |                   |  | Options/SARs                 |   | Options/SARs                
|                  |  | Shares Acquired |   |                   |  | at FY-End(#)                 |   | At FY-End($)                
|Name              |  | on Exercise(#)  |   | Value Realized($) |  | Exercisable/Unexercisable(1) |   | Exercisable/Unexercisable(2)
|                  |  |                 |   |                   |  |                              |   |                             
|Simon Skurkovich  |  |                 | 0 |                   |  | $                            | 0 |                              |  |  | 300,000 |  |  | $ | 84,000.00  | 
|                  |  |                 |   |                   |  |                              |   |                              |  |  | 623,000 |  |  | $ | 174,400.00 | 
|                  |  |                 |   |                   |  |                              |   |                              |  |  | 10,000  |  |  | $ | 1,300.00   | 
|Edmond Buccellato |  |                 | 0 |                   |  | $                            | 0 |                              |  |  | 105,543 |  |  | $ | 29,552.00  | 
|                  |  |                 |   |                   |  |                              |   |                              |  |  | 50,000  |  |  | $ | 14,000.00  | 
|                  |  |                 |   |                   |  |                              |   |                              |  |  | 50,000  |  |  | $ | 9,000.00   | 
|                  |  |                 |   |                   |  |                              |   |                              |  |  | 10,000  |  |  | $ | 1,300.00   | 



---



|    |                                                                                                                                                                    
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | All options were exercisable as of
    December 31, 2002                                                                                                           
|   
|(2) | Determined on the basis of the share closing
    price of $0.21 on December 31, 2002, as published by
    Commodity Systems, Inc., available through Yahoo!Finance.

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, 2002, but Board members were granted
stock options under the OEI Plan as described above. There are
no other contractual arrangements for compensation with any
member of the Board of Directors.



|         |                                                                                                       
|-------- | ------------------------------------------------------------------------------------------------------
|Item 11. | Security Ownership of Certain Beneficial
    Owners and Management and Related Stockholder
    Matters

Equity Compensation Plan Information As of
December 31, 2002

|                                                                  |  |                         |         |                      |  |                           |      |  |  |  |           |    
|----------------------------------------------------------------- |  | ----------------------- | ------- | -------------------- |  | ------------------------- | ---- |  |  |  | --------- | ---
|                                                                  |  |                         |         |                      |  | Number of securities     
|                                                                  |  |                         |         |                      |  | remaining available for  
|                                                                  |  | Number of securities to |         | Weighted-average     |  | future issuance under    
|                                                                  |  | be issued upon exercise |         | exercise price of    |  | equity compensation plans
|                                                                  |  | of outstanding options, |         | outstanding options, |  | (excluding securities    
|                                                                  |  | warrants and rights     |         | warrants and rights  |  | reflected in column (a)  
|                                                                  |  |                         |         |                      |  |                          
|                                                                  |  | (a)                     |         | (b)                  |  | (c)                      
|                                                                  |  |                         |         |                      |  |                          
|Equity compensation plans approved by security
    holders        |  |                         | 440,000 | (1)                  |  | $                         | 0.25 |  |  |  | 4,060,000 | (1)
|Equity compensation plans not approved by
    security holders(2) |  |                         |         |                      |  |                           |      |  |  |  | 800,000   | (3)



---



|    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(1) | This figure excludes stock options granted by the
    Company during January, 2003, to each director, to purchase
    20,000 shares of the Companys Common Stock at $0.21 per
    share (aggregate 180,000 stock options), including Edmond F.
    Buccellato and Simon Skurkovich, M.D., as described in the
    Summary Compensation Table above, for directorship services
    rendered during the year ended December 31, 2002.                                                                                                                                                                                      
|   
|(2) | Stock Bonus Plan                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|   
|(3) | This figure excludes 1,603,787 shares of the
    Companys Common Stock repurchased by the Company as of
    February 26, 2003, from an officer and two directors, in
    satisfaction of outstanding notes receivable, issued by the
    three individuals in consideration for shares issued to them
    under the Stock Bonus Plan on January 11, 2000. Such notes
    were due and payable on December 31, 2002, and could not be
    extended under provisions of federal legislation known as the
    Sarbanes-Oxley Act of 2002. These shares are now available for
    future issuance under the Stock Bonus Plan.

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##### Table of Contents



Equity Compensation and Long-term Incentive
Plan Awards

The Company adopted a Stock Bonus Plan
(Stock Bonus Plan) in January 2000 and reserved
10,000,000 shares of Common Stock to be issued thereunder, of
which 9,200,000 shares have been granted as of December 31,
2002. In December 2000, the Board of Directors approved the
Companys 2000 Omnibus Equity Incentive Plan (OEI
Plan) and reserved 4,000,000 shares of Common Stock to be
issued thereunder to employees, consultants and directors,
subject to annual increases equal to the lesser of 2.5% of the
then outstanding shares of Common Stock or 250,000 shares. As of
December 31, 2002, no shares have been granted under the
OEI Plan. As of December 31, 2002, options to purchase
approximately 440,000 shares have been granted under the OEI,
and during the quarter ending March 31, 2003, additional
options have been granted under the OEI Plan. Prior to January,
2001, the Company granted other stock options and warrants to
purchase Company Common Stock which were not granted pursuant to
any equity compensation plan

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, 2003, the Company had
43,827,793 shares of Common Stock outstanding.

|                                          |                             |                    |            |                     |  |  |       |   | 
|----------------------------------------- | --------------------------- | ------------------ | ---------- | ------------------- |  |  | ----- | - | 
|                                          |                             | Number of Shares   |            |                    
|Name and Address of Owner                 |                             | Beneficially Owned |            | Percentage of Total
|                                          |                             |                    |            |                    
|Richard P. Kiphart                        |                             |                    | 12,829,832 | (1)                 |  |  | 22.64 | %
|                                          | 222 W. Adams St.            |                    |            |                     |  |  |       |   | 
|                                          | Chicago, IL 60606           |                    |            |                     |  |  |       |   | 
|Boris Skurkovich, M.D.                    |                             |                    | 6,240,599  | (2)                 |  |  | 14.23 | %
|                                          | 18 Blaisdell Ave            |                    |            |                     |  |  |       |   | 
|                                          | Pawtucket, RI 01860         |                    |            |                     |  |  |       |   | 
|Leonard Millstein and Ellen Millstein     |                             |                    | 4,096,709  | (3)                 |  |  | 9.34  | %
|                                          | 1677 Calle Alta             |                    |            |                     |  |  |       |   | 
|                                          | La Jolla, CA 92037          |                    |            |                     |  |  |       |   | 
|Simon Skurkovich, M.D.                    |                             |                    | 2,421,770  | (4)                 |  |  | 5.41  | %
|                                          | 802 Rollins Avenue          |                    |            |                     |  |  |       |   | 
|                                          | Rockville, MD 20852         |                    |            |                     |  |  |       |   | 
|Alexander L. Cappello                     |                             |                    | 2,062,244  | (5)                 |  |  | 4.49  | %
|                                          | 100 Wilshire Boulevard      |                    |            |                     |  |  |       |   | 
|                                          | Suite 1200                  |                    |            |                     |  |  |       |   | 
|                                          | Santa Monica, CA 90401      |                    |            |                     |  |  |       |   | 
|Edmond F. Buccellato                      |                             |                    | 1,636,638  | (6)                 |  |  | 3.70  | %
|                                          | 6355 Topanga Canyon         |                    |            |                     |  |  |       |   | 
|                                          | Boulevard, Suite 510        |                    |            |                     |  |  |       |   | 
|                                          | Woodland Hills, CA 91367    |                    |            |                     |  |  |       |   | 
|Thomas J. Pernice                         |                             |                    | 1,338,599  | (7)                 |  |  | 2.96  | %
|                                          | 837 Chautauqua Blvd         |                    |            |                     |  |  |       |   | 
|                                          | Pacific Palisades, CA 90272 |                    |            |                     |  |  |       |   | 
|Lawrence Loomis                           |                             |                    | 1,154,053  | (8)                 |  |  | 2.63  | %
|                                          | 9110 Red Branch Road        |                    |            |                     |  |  |       |   | 
|                                          | Columbia, MD 21045          |                    |            |                     |  |  |       |   | 
|John M. Bendheim                          |                             |                    | 255,936    | (9)                 |  |  | *     |  
|                                          | 361 N. Canon Drive          |                    |            |                     |  |  |       |   | 
|                                          | Beverly Hills, CA 90210     |                    |            |                     |  |  |       |   | 
|All officers and directors as a group(10) |                             |                    | 32,048,680 |                     |  |  | 51.93 | %

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---



| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (1) | Shares held in the name of Richard P. Kiphart
    include the right to acquire 2,156,708 shares, upon the
    conversion of $539,177 principal amount of the Companys
    2002 Subordinated Convertible Pay-In-Kind Notes due
    September 30, 2004 (2002 Convertible Notes Due
    2004) and the right to acquire 10,653,124 shares, upon the
    conversion of $2,663,281 principal amount of the Companys
    2002 Subordinated Convertible Pay-In-Kind Notes Due June 1,
    2006 (2002 Convertible Notes Due 2006), and options
    to purchase up to 20,000 shares of Common Stock at an exercise
    price of $0.21 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|
| | (2) | Shares held in the name of Boris Skurkovich
    include shares held in his name (1,404,829), and shares held in
    the name of Carol Marjorie Dorros (1,935,000), and Samuel Aaron
    Skurkovich (2,880,770), options to purchase up to 10,000 shares
    of Common Stock at an exercise price of $0.25 per share, and
    options to purchase up to 20,000 shares of Common Stock at an
    exercise price of $0.21 per share.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (3) | Leonard and Ellen Millstein are husband and wife.
    Shares held in their names comprise shares held in his name
    (615,100), shares held in her name (2,763,359); shares held in
    the name of William Millstein (688,250 shares), options to
    purchase up to 10,000 shares of Common Stock at an exercise
    price of $0.25 per share, and options to purchase up to 20,000
    shares of Common Stock at an exercise price of $0.21 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|
| | (4) | 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, options to purchase up to 10,000 shares of Common
    Stock at an exercise price of $0.25 per share, and options to
    purchase up to 20,000 shares of Common Stock at an exercise
    price of $0.21 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.                                                                                                                                                                                                                                                                                                                                                                     
|
| | (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, options to purchase up to
    10,000 shares of Common Stock at an exercise price of $0.25 per
    share, and options to purchase up to 20,000 shares of Common
    Stock at an exercise price of $0.21 per share. Also includes the
    right of the Family Trust to acquire 126,332 shares of Common
    Stock upon conversion of Companys Convertible Subordinated
    Debt due September 30, 2004 (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) | Shares held in the name of Edmond F. Buccellato
    comprise shares held in the names of Edmond F. and Leana J.
    Buccellato Living Trust (1,130,245 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, options to purchase up to
    20,000 shares of Common Stock at an exercise price of $0.21 per
    share, and the right to acquire 122,024 shares of Common Stock
    upon the conversion of $30,506 principal amount of the
    Companys 2002 Convertible Notes Due 2004.                                                                                                                                      
|
| | (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, options to purchase up to 10,000
    shares of Common Stock at an exercise price of $0.25 per share,
    and options to purchase up to 20,000 shares of Common Stock at
    an exercise price of $0.21 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.                                                                                                                                                                                                                                                                                                                                         

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| |     |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (8) | Includes shares held in the names of Lawrence
    Loomis (924,053 shares) and New Horizons Diagnostics, Inc.
    (200,000 shares), options to purchase up to 10,000 shares of
    Common Stock at an exercise price of $0.25 per share, and
    options to purchase up to 20,000 shares of Common Stock at an
    exercise price of $0.21 per share.                                                                                                                                                                               
|
| | (9) | 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
    125,936 shares of Common Stock upon conversion of Convertible
    Debt held by a trust for the benefit of his minor child, options
    to purchase up to 10,000 shares of Common Stock at an exercise
    price of $0.25 per share, and options to purchase up to 20,000
    shares of Common Stock at an exercise price of $0.21 per share.



|     |                                                                                                                                                                                                  
|---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(10) | Includes 2,940,659 shares of Common Stock
    underlying warrants, 1,388,543 shares of Common Stock underlying
    options and 13,557,976 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

The Company is currently indebted to Simon
Skurkovich, M.D., the Companys Chairman Emeritus of the
Board of Directors, and Director of Research and Development, in
the amount of $127,631.

During fiscal year 2002, the Company paid $23,855
to Boris Skurkovich, M.D. for consulting services and
out-of-pocket expenses, and paid $71,131 to New Horizons
Diagnostics, Inc., of which Director Lawrence Loomis is the
majority shareholder, for productions of monoclonal antibodies.
During the fiscal year 2002, the Company paid a $60,000 fee in
cash to Lawrence Loomis in connection with the placement of
$3,000,000 principal amount of the Companys Subordinated
Convertible Pay-In-Kind Notes to Director Richard Kiphart.
Mr. Loomis has personally guaranteed the repayment by the
Company of approximately $500,000 principal amount of such
Convertible Notes held by Mr. Kiphart.

During fiscal year 2002, the Company received the
use of approximately 3,500 square feet of commercial building
space on a rent-free basis from a company owned by Lawrence
Loomis. As of January 1, 2003, the Company began paying
$5,110 in rent on a month-to-month basis. During fiscal year
2002, the Company received use of office space on a rent-free
basis from Buccellato & Finkelstein, Inc., of which Edmond
F. Buccellato is a shareholder. As of January 1, 2003, the
Company began paying $700 in rent on a month-to-month basis.
During fiscal year 2002, the Company paid to Buccellato &
Finkelstein, Inc., the sum of $16,014 for accounting services
and tax preparation.

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 to certain individuals,
including Alexander L. Cappello. Cappello Capital Corp. raised
$1,510,500 in convertible subordinated debt for the Company, was
paid $124,981 in fees and expenses related thereto, and was
granted an option to purchase $151,050 principal amount of
Convertible Debt at par, which option has been assigned to
certain individuals including Alexander L. Cappello. Thomas J.
Pernice was formerly a managing director of Cappello Group,
Inc., a merchant banking firm, which is owned by Alexander L.
Cappello. Mr. Pernice was assigned a portion of the
foregoing warrants and options.

John M. Bendheim, Edmond F. Buccellato and
Alexander L. Cappello each beneficially own the Companys
Convertible Debt or Convertible Notes, upon which the Company is
indebted to such individuals.

As of December 31, 2002, the following
directors and officers were indebted to the Company in the
principal amount, together with accrued interest, set forth
opposite such persons name, in connection with the grant
of shares of Common Stock pursuant to the Companys Stock
Bonus Plan:

|                       |  |   |        | 
|---------------------- |  | - | ------ | 
|Edmond F. Buccellato   |  | $ | 89,478 | 
|Boris Skurkovich, M.D. |  | $ | 89,478 | 
|Lawrence Loomis        |  | $ | 59,652 | 

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The same three directors each issued a promissory
note dated as of January 11, 2000, in favor of the Company
evidencing such obligations, which notes, until paid, accrued
interest at a rate of 6.5% per annum and matured on
December 31, 2002. The notes, as of December 31, 2002,
were in default. Effective July 30, 2002, the new federal
laws, known as the Sarbanes-Oxley Act of 2002
(Sarbanes-Oxley Act) prohibit a public company,
among other matters, to extend or maintain a loan to any
director or officer of the company, including the extension of
loans then existing on July 30, 2002, subject to certain
exceptions inapplicable to the Company. The Company was not in
compliance with the Sarbanes-Oxley Act on December 31,
2002, because the three directors were in default of their notes
and the Sarbanes-Oxley Act prohibited the extension of such
notes. As of February 26, 2003, the Company repurchased an
aggregate 1,603,787 shares of the Companys Common Stock
from these three directors, in satisfaction of the outstanding
notes principal together with accrued interest, because these
notes could not be extended under the Sarbanes-Oxley Act. These
shares had been previously issued under the Stock Bonus Plan on
January 11, 2000, and are now available for future issuance
under the Stock Bonus Plan.

27



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|          |                                     
|--------- | ------------------------------------
|Item  13. | Exhibits and Reports on
    Form 8-K

|        |       |             |  |                                                                                                                                                                                                                                                                                            
|------- | ----- | ----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Exhibit |       |            
|Number  |       | 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. Filed
    as Appendix A to Registrants Proxy Statement dated
    July 14, 2000, and incorporated herein by reference.
|        | 3.1   |             |  | Certificate of Incorporation of Registrant. Filed
    as an exhibit to Registrants 10-QSB for the quarter ended
    September 30, 2000, and incorporated herein by reference.                                                                                                             
|        | 3.2   |             |  | Bylaws of Registrant. Filed as an exhibit to
    Registrants 10-QSB for the quarter ended
    September 30, 2000, and incorporated herein by reference.                                                                                                                                   
|        | 3.3   |             |  | Certificate of Amendment of Certificate of
    Incorporation of Registrant filed December 26, 2002, in the
    office of the Delaware Secretary of State.                                                                                                                                  
|        | 4.1   |             |  | Form of Registrants Common Stock
    Certificate. Filed as an exhibit to Registrants
    Form 10-QSB filed on June 10, 1999, and incorporated
    herein by reference.                                                                                                                   
|        | 4.2   |             |  | Form of 2002 Subordinated Convertible Pay-In-Kind
    Note due June 1, 2006, dated November 14, 2002.                                                                                                                                                                                      
|        | 10.1  |             |  | Form of Stock Bonus Plan. Filed as an exhibit to
    Registrants Form 10-KSB for the fiscal year ended
    December, 1999. Filed as an exhibit to Registrants
    Form 10-KSB for the fiscal year ended December, 1999.                                                                  
|        | 10.2  |             |  | Form of Common Stock Purchase Warrant in favor of
    Cappello Capital Corporation. Filed as an exhibit to 2000, and
    Registrants Form 10-QSB for the quarter ended
    March 31, incorporated herein by reference.                                                                    
|        | 10.3  |             |  | Form of 2000 Omnibus Equity Incentive Plan. Filed
    as an exhibit to Registrants Form 10-KSB for the
    fiscal year ended December 31, 2000, and incorporated
    herein by reference.                                                                                                 
|        | 10.4  |             |  | Form of Option Agreement. Filed as an exhibit to
    Registrants Form 10-KSB for the fiscal year ended
    December 31, 2000, and incorporated herein by reference.                                                                                                                       
|        | 10.5  |             |  | Form of 10% Convertible Subordinated Debt
    Instrument. Filed as an exhibit to Registrants
    Form 10-QSB for the quarter ended June 30, 2000, and
    incorporated herein by reference.                                                                                               
|        | 10.6  |             |  | Form of Convertible Subordinated Debt Purchase
    Agreement. Filed as an exhibit to Registrants
    Form 10-KSB for the fiscal year ended December 31,
    2000, and incorporated herein by reference.                                                                                   
|        | 10.7  |             |  | Form of Investor Rights Agreement. Filed as an
    exhibit to Registrants Form 10-KSB for the fiscal
    year ended December 31, 2000, and incorporated herein by
    reference.                                                                                                          
|        | 10.8  |             |  | Form of 2002 Subordinated Convertible Pay-In-Kind
    Note due September 30, 2004. Filed as an exhibit to
    Registrants Form 10-QSB for the quarter ended
    March 31, 2002, and incorporated herein by reference.                                                                     
|        | 10.9  |             |  | Form of Investor Rights Agreement dated as of
    April 15, 2002. Filed as an exhibit to Registrants
    Form 10-QSB for the quarter ended March 31, 2002, and
    incorporated herein by reference.                                                                                      
|        | 10.10 |             |  | Form of 2002 Subordinated Convertible Pay-In-Kind
    Note due June 1, 2006. Filed as an exhibit to
    Registrants Form 10-QSB for the quarter ended
    September 30, 2002, and incorporated herein by reference.                                                                       
|        | 10.11 |             |  | Form of Investor Rights Agreement dated as of
    June 1, 2002. Filed as an exhibit to Registrants
    Form 10-QSB/ A for the quarter ended June 30, 2002,
    and incorporated by reference herein.                                                                                      
|        | 99.1  |             |  | Certification of Chief Executive Officer Pursuant
    to 18 U.S.C. Section 1350.                                                                                                                                                                                                           
|        | 99.2  |             |  | Certification of Chief Financial Officer Pursuant
    to 18 U.S. C. Section 1350.                                                                                                                                                                                                          

The financial statements are incorporated herein
by reference and begin with Page F-1.

The following financial statements are included herein:

|                                            |  |    
|------------------------------------------- |  | ---
|Independent Auditors Report                |  | F-1
|Financial Statements:                       |  |    
|Balance Sheets                              |  | F-2
|Statements of Operations                    |  | F-3
|Statement of Stockholders Equity (Deficit) |  | F-4
|Statements of Cash Flows                    |  | F-5
|Notes to Financial Statements               |  | F-6

28



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##### Table of Contents



Reports on Form 8-K

The Registrant filed the following reports on
Form 8-K during the quarter ended December 31, 2002:



| |                                                                                                                                                                                                                                                                                                                                                                                 
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 1.     November 26,
    2002. The Form 8-K reported that the Registrant has a
    patent application pending for the exclusive use of any form of
    antibody to gamma interferon (IFN-g) for the treatment of
    Pemphigus Vulgaris.                                                                                                                                         
|
| | 2.     December 2,
    2002. The Form 8-K reported that the Registrant closed the
    private placement of its 2002 Subordinated Convertible
    Pay-In-Kind Notes, and has reported its financial results for
    the nine months ended September 30, 2002.                                                                                                                    
|
| | 3.     December 3,
    2002. The Form 8-K reported that the Registrant received a
    Notice of Allowance from the United States Patent and Trademark
    Office for a utility patent for the use of any form of antibody
    to gamma interferon to treat corneal transplant rejection.                                                                                        
|
| | 4.     December 9,
    2002. The Form 8-K reported that the Registrant met with
    the United States Food and Drug Administration (FDA) and
    discussed the pathway and additional efforts needed to submit an
    Investigational New Drug Application to conduct Phase I clinical
    trials to treat corneal transplant rejection with antibodies to
    gamma interferon.



|         |                        
|-------- | -----------------------
|ITEM 14. | Controls and Procedures

In accordance with Item 307 of
Regulation S-B promulgated under the Securities Act of
1933, as amended, and within 90 days of the date of this
Annual Report on Form 10-KSB, the Chief Executive Officer
and Chief Financial Officer of the Company (the Certifying
Officers) have conducted evaluations of the Companys
disclosure controls and procedures. As defined under Sections
13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934,
as amended (the Exchange Act), the term
disclosure controls and procedures means controls
and other procedures of an issuer that are designed to ensure
that information required to be disclosed by the issuer in the
reports that it files or submits under the Exchange Act is
recorded, processed, summarized and reported, within the time
periods specified in the Commissions rules and forms.
Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information
required to be disclosed by an issuer in the reports that it
files or submits under the Exchange Act is accumulated and
communicated to the issuers management, including its
principal executive officer or officers and principal financial
officer or officers, or persons performing similar functions, as
appropriate to allow timely decisions regarding required
disclosure. The Certifying Officers have reviewed the
Companys disclosure controls and procedures and have
concluded that those disclosure controls and procedures are
effective in causing information to be recorded, processed,
summarized and reported within the time periods specified in the
Commissions rules and forms and communicated to management
of the Company to allow timely decisions regarding the
Companys public disclosures. In compliance with
Section 302 of the Sarbanes-Oaxley Act of 2002, (18 U.S.C.
1350), each of the Certifying Officers executed an
Officers Certification included in this Annual Report on
Form 10-KSB.

As of the date of this Annual Report on
Form 10-KSB, there have not been any significant changes in
the Companys internal controls or in other factors that
could significantly affect these internal controls subsequent to
the date of the Certifying Officers evaluation.

29



---



##### Table of Contents



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
26th day of March, 2003.



| |                          
| | -------------------------
| | 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 26th day of March, 2003.

|                                                      |  |                                                                          |  |               
|----------------------------------------------------- |  | ------------------------------------------------------------------------ |  | --------------
|Signature                                             |  | Title                                                                    |  | Date          
|                                                      |  |                                                                          |  |               
|                                                     
|/s/ EDMOND F. BUCCELLATOEdmond F. Buccellato          |  | President and Chief Executive Officer                                    |  | March 26, 2003
|                                                     
|/s/ WILLIAM M. FINKELSTEINWilliam M. Finkelstein      |  | Chief Financial Officer (Principal Financial and
    Accounting Officer) |  | March 26, 2003
|                                                     
|/s/ ALEXANDER L. CAPPELLO
    Alexander L. Cappello   |  | Director                                                                 |  | March 26, 2003
|                                                     
|/s/ RICHARD P. KIPHART
    Richard P. Kiphart         |  | Director                                                                 |  | March 26, 2003
|                                                     
|/s/ LAWRENCE LOOMISLawrence Loomis                    |  | Director                                                                 |  | March 26, 2003
|                                                     
|/s/ THOMAS J. PERNICEThomas J. Pernice                |  | Director                                                                 |  | March 26, 2003
|                                                     
|/s/ BORIS SKURKOVICH, M.D.Boris Skurkovich, M.D.      |  | Director                                                                 |  | March 26, 2003
|                                                     
|/s/ SIMON SKURKOVICH, M.D.
    Simon Skurkovich, M.D. |  | Director                                                                 |  | March 26, 2003

30



---



##### Table of Contents



Certification by Edmond F. Buccellato,
President and Chief Executive Officer

of


Advanced Biotherapy, Inc.


I, Edmond F. Buccellato, certify that:

1.     I have reviewed
this annual report on Form 10-KSB of Advanced Biotherapy,
Inc.;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the Registrant as of, and for, the
periods presented in this annual report;

4.     The
Registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the Registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    Registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    Registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5.     The
Registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
Registrants auditors and the audit committee of
Registrants board of directors (or persons performing the
equivalent functions);



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the Registrants ability to record, process,
    summarize and report financial data and have identified for the
    Registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the Registrants internal controls; and                                                                                                                                                    

6.     The
Registrants other certifying officers and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.



| |                                          
| | -----------------------------------------
| | /s/ EDMOND F. BUCCELLATO                 
| |                                          
| | Edmond F. Buccellato                     
| | President and Chief Executive
    Officer

Date: March 26, 2003

31



---



##### Table of Contents



Certification by William M. Finkelstein, Chief
Financial Officer

of


Advanced Biotherapy, Inc.


I, William M. Finkelstein, certify that:

1.     I have reviewed
this annual report on Form 10-KSB of Advanced Biotherapy,
Inc.;

2.     Based on my
knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the
circumstances under which such statements were made, not
misleading with respect to the period covered by this annual
report;

3.     Based on my
knowledge, the financial statements, and other financial
information included in this annual report, fairly present in
all material respects the financial condition, results of
operations and cash flows of the Registrant as of, and for, the
periods presented in this annual report;

4.     The
Registrants other certifying officers and I are
responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-14 and
15d-14) for the Registrant and have:



| |                                                                                                                                                                                                                                                                                                                
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and
    procedures to ensure that material information relating to the
    Registrant, including its consolidated subsidiaries, is made
    known to us by others within those entities, particularly during
    the period in which this annual report is being prepared;
|
| | b) evaluated the effectiveness of the
    Registrants disclosure controls and procedures as of a
    date within 90 days prior to the filing date of this annual
    report (the Evaluation Date); and                                                                                                      
|
| | c) presented in this annual report our
    conclusions about the effectiveness of the disclosure controls
    and procedures based on our evaluation as of the Evaluation Date;                                                                                                                                

5.     The
Registrants other certifying officers and I have
disclosed, based on our most recent evaluation, to the
Registrants auditors and the audit committee of
Registrants board of directors (or persons performing the
equivalent functions);



| |                                                                                                                                                                                                                                                                                                                      
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the
    design or operation of internal controls which could adversely
    affect the Registrants ability to record, process,
    summarize and report financial data and have identified for the
    Registrants auditors any material weaknesses in internal
    controls; and
|
| | b) any fraud, whether or not material, that
    involves management or other employees who have a significant
    role in the Registrants internal controls; and                                                                                                                                                    

6.     The
Registrants other certifying officers and I have indicated
in this annual report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions
with regard to significant deficiencies and material weaknesses.



| |                           
| | --------------------------
| | /s/ WILLIAM M. FINKELSTEIN
| |                           
| | William M. Finkelstein    
| | Chief Financial Officer   

Date: March 26, 2003

32



---

TABLE OF CONTENTS



|                              |                                             |  |  |  |  |  |  | 
|----------------------------- | ------------------------------------------- |  |  |  |  |  |  | 
|INDEPENDENT AUDITORS REPORT 
|                              | BALANCE SHEETS                             
|                              | STATEMENTS OF OPERATIONS                   
|                              | STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)
|                              | STATEMENTS OF CASH FLOWS                   
|NOTES TO FINANCIAL STATEMENTS
|EXHIBIT 3.3                  
|EXHIBIT 4.2                  
|EXHIBIT 99.1                 
|EXHIBIT 99.2                 



---



##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(A Development Stage Enterprise)

December 31, 2002

CONTENTS

|                                            |  |    
|------------------------------------------- |  | ---
|Independent Auditors Report                |  | F-1
|Financial Statements:                       |  |    
|Balance Sheets                              |  | F-2
|Statements of Operations                    |  | F-3
|Statement of Stockholders Equity (Deficit) |  | F-4
|Statements of Cash Flows                    |  | F-5
|Notes to Financial Statements               |  | F-6





---



##### 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. (a
Delaware corporation and development stage enterprise) as of December 31, 2002
and 2001, and the related statements of operations, stockholders equity
(deficit) and cash flows for the years then ended and for the period from
December 2, 1985 (inception) through December 31, 2002. These financial
statements are the responsibility of the Companys management. Our
responsibility is to express an opinion on these financial statements based on
our audit.

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

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Advanced Biotherapy, Inc. as
of December 31, 2002 and 2001 and the results of its operations, stockholders
equity (deficit) and cash flows for the years then ended and for the period
from December 2, 1985 (inception) through December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America.

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 $6,592,961 at December 31, 2002. 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 25, 2003

F-1



---



##### Table of Contents






ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
BALANCE SHEETS

ASSETS

|                                                        |  |                                                                 |                      |   |              |           |              |   |         |         | 
|------------------------------------------------------- |  | --------------------------------------------------------------- | -------------------- | - | ------------ | --------- | ------------ | - | ------- | ------- | 
|                                                        |  |                                                                 |                      |   | December 31, |           | December 31,
|                                                        |  |                                                                 |                      |   | 2002         |           | 2001        
|                                                        |  |                                                                 |                      |   |              |           |             
|CURRENT ASSETS                                          |  |                                                                 |                      |   |              |           |              |  
|                                                        |  | Cash                                                            |                      | $ | 31,081       |           |              | $ | 36,615  |        
|                                                        |  | Marketable securities                                           |                      |   | 3,000,000    |           |              |   |        |        
|                                                        |  | Notes receivable - related parties                              |                      |   | 246,619      |           |              |   | 246,619 |        
|                                                        |  | Interest receivable - related parties                           |                      |   | 47,609       |           |              |   | 31,579  |        
|                                                        |  | Deposits and prepaid expenses                                   |                      |   | 54,882       |           |              |   | 40,710  |        
|                                                        |  |                                                                 |                      |   |              |           |              |  
|                                                        |  |                                                                 | Total Current Assets |   |              | 3,380,191 |              |   |         | 355,523 | 
|                                                        |  |                                                                 |                      |   |              |           |              |  
|PROPERTY AND EQUIPMENT, net of accumulated depreciation |  |                                                                 | 16,414               |   |              |           | 4,888        |  
|                                                        |  |                                                                 |                      |   |              |           |              |  
|OTHER ASSETS                                            |  |                                                                 |                      |   |              |           |              |  
|                                                        |  | Deferred loan origination fees, net of accumulated amortization |                      |   | 128,910      |           |              |   | 74,791  |        
|                                                        |  | Patents and patents pending, net of accumulated amortization    |                      |   | 365,713      |           |              |   | 264,493 |        
|                                                        |  |                                                                 |                      |   |              |           |              |  
|                                                        |  |                                                                 | Total Other Assets   |   |              | 494,623   |              |   |         | 339,284 | 
|                                                        |  |                                                                 |                      |   |              |           |              |  
|TOTAL ASSETS                                            |  | $                                                               | 3,891,228            |   |              | $         | 699,695      |  
|                                                        |  |                                                                 |                      |   |              |           |              |  

LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT)

|                                                     |  |                                                                                                                                      |                                      |   |            |            |         |   |            |           |  
|---------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------ | ------------------------------------ | - | ---------- | ---------- | ------- | - | ---------- | --------- | -
|CURRENT LIABILITIES                                  |  |                                                                                                                                      |                                      |   |            |            |         |  
|                                                     |  | Accounts payable                                                                                                                     |                                      | $ | 113,457    |            |         | $ | 142,206    |          
|                                                     |  | Accounts payable - related parties                                                                                                   |                                      |   | 14,174     |            |         |   | 9,740      |          
|                                                     |  | Accrued expenses - related parties                                                                                                   |                                      |   | 63,367     |            |         |   | 13,600     |          
|                                                     |  |                                                                                                                                      |                                      |   |            |            |         |   |            |          
|                                                     |  |                                                                                                                                      | Total Current Liabilities            |   |            | 190,998    |         |   |            | 165,546   |  
|                                                     |  |                                                                                                                                      |                                      |   |            |            |         |  
|LONG-TERM DEBT                                       |  |                                                                                                                                      |                                      |   |            |            |         |  
|                                                     |  | Convertible notes payable                                                                                                            |                                      |   | 5,604,010  |            |         |   | 1,314,301  |          
|                                                     |  | Notes payable to related parties                                                                                                     |                                      |   | 127,631    |            |         |   | 127,631    |          
|                                                     |  |                                                                                                                                      |                                      |   |            |            |         |  
|                                                     |  |                                                                                                                                      | Total Long-Term Debt                 |   |            | 5,731,641  |         |   |            | 1,441,932 |  
|                                                     |  |                                                                                                                                      |                                      |   |            |            |         |  
|                                                     |  |                                                                                                                                      | Total Liabilities                    |   |            | 5,922,639  |         |   |            | 1,607,478 |  
|                                                     |  |                                                                                                                                      |                                      |   |            |            |         |  
|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; 200,000,000 shares authorized,
43,601,317 and 42,303,611 shares issued and outstanding, respectively |                                      |   | 43,600     |            |         |   | 42,303     |          
|                                                     |  | Additional paid-in capital                                                                                                           |                                      |   | 3,937,923  |            |         |   | 3,640,657  |          
|                                                     |  | Stock options and warrants                                                                                                           |                                      |   | 580,027    |            |         |   | 477,683    |          
|                                                     |  | Deficit accumulated during development stage                                                                                         |                                      |   | (6,592,961 | )          |         |   | (5,068,426 | )        
|                                                     |  |                                                                                                                                      |                                      |   |            |            |         |  
|                                                     |  |                                                                                                                                      | Total Stockholders Equity (Deficit) |   |            | (2,031,411 | )       |   |            | (907,783  | )
|                                                     |  |                                                                                                                                      |                                      |   |            |            |         |  
|TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) |  | $                                                                                                                                    | 3,891,228                            |   |            | $          | 699,695 |  
|                                                     |  |                                                                                                                                      |                                      |   |            |            |         |  

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

F-2



---



##### Table of Contents






ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF OPERATIONS

|                                                                             |                  |                                         |                              |       |                         |           |                    |       |                   |          |            |   |                |           | 
|---------------------------------------------------------------------------- | ---------------- | --------------------------------------- | ---------------------------- | ----- | ----------------------- | --------- | ------------------ | ----- | ----------------- | -------- | ---------- | - | -------------- | --------- | 
|                                                                             |                  |                                         |                              |       |                         |           |                    |       |                   |          |            |   | From Inception
|                                                                             |                  |                                         |                              |       | Year Ended December 31, |           | (December 2, 1985)
|                                                                             |                  |                                         |                              |       |                         |           | through           
|                                                                             |                  |                                         |                              |       | 2002                    |           | 2001               |       | December 31, 2002
|                                                                             |                  |                                         |                              |       |                         |           |                    |       |                  
|REVENUES                                                                     |                  | $                                       |                             |       |                         | $         |                   |       |                   | $        | 89,947     |  
|                                                                             |                  |                                         |                              |       |                         |           |                    |       |                   |          |            |  
|OPERATING EXPENSES                                                           |                  |                                         |                              |       |                         |           |                    |       |                   |          |            |  
|                                                                             |                  | Research and development                |                              |       | 313,597                 |           |                    |       | 133,747           |          |            |   | 2,591,969      |          
|                                                                             |                  | Promotional fees                        |                              |       | 9,624                   |           |                    |       | 8,986             |          |            |   | 26,168         |          
|                                                                             |                  | Professional fees                       |                              |       | 435,977                 |           |                    |       | 395,074           |          |            |   | 2,383,410      |          
|                                                                             |                  | Directors fees                         |                              |       | 37,800                  |           |                    |       | 29,080            |          |            |   | 66,880         |          
|                                                                             |                  | Depreciation and amortization           |                              |       | 77,305                  |           |                    |       | 49,879            |          |            |   | 559,188        |          
|                                                                             |                  | Salaries and benefits                   |                              |       | 98,618                  |           |                    |       | 83,746            |          |            |   | 1,108,478      |          
|                                                                             |                  | Insurance                               |                              |       | 57,787                  |           |                    |       | 48,076            |          |            |   | 116,761        |          
|                                                                             |                  | Shareholder relations and transfer fees |                              |       | 26,946                  |           |                    |       | 28,788            |          |            |   | 203,493        |          
|                                                                             |                  | Rent                                    |                              |       |                        |           |                    |       | 33,962            |          |            |   | 156,116        |          
|                                                                             |                  | Travel and entertainment                |                              |       | 73,977                  |           |                    |       | 37,796            |          |            |   | 173,133        |          
|                                                                             |                  | Telephone and communications            |                              |       | 4,140                   |           |                    |       | 12,764            |          |            |   | 31,520         |          
|                                                                             |                  | Office                                  |                              |       | 12,099                  |           |                    |       | 15,208            |          |            |   | 55,219         |          
|                                                                             |                  | General and administrative              |                              |       | 43,062                  |           |                    |       | 13,648            |          |            |   | 624,708        |          
|                                                                             |                  |                                         |                              |       |                         |           |                    |       |                   |          |            |  
|                                                                             |                  |                                         | Total Operating Expenses     |       |                         | 1,190,932 |                    |       |                   | 890,754  |            |   |                | 8,097,043 | 
|                                                                             |                  |                                         |                              |       |                         |           |                    |       |                   |          |            |  
|Loss From Operations                                                         |                  |                                         | (1,190,932                   | )     |                         |           | (890,754           | )     |                   |          | (8,007,096 | )
|OTHER INCOME (EXPENSE)                                                       |                  |                                         |                              |       |                         |           |                    |       |                   |          |            |  
|                                                                             |                  | Miscellaneous income                    |                              |       |                        |           |                    |       |                  |          |            |   | 22,000         |          
|                                                                             |                  | Interest and dividend income            |                              |       | 45,168                  |           |                    |       | 35,902            |          |            |   | 112,161        |          
|                                                                             |                  | Internal gain on sale of securities     |                              |       |                        |           |                    |       |                  |          |            |   | 157,520        |          
|                                                                             |                  | Forgiveness of debt                     |                              |       |                        |           |                    |       |                  |          |            |   | 2,047,437      |          
|                                                                             |                  | Forgiveness of payables                 |                              |       |                        |           |                    |       |                  |          |            |   | 45,396         |          
|                                                                             |                  | Loss on disposal of office equipment    |                              |       |                        |           |                    |       | (2,224            | )        |            |   | (2,224         | )        
|                                                                             |                  | Interest expense                        |                              |       | (378,771                | )         |                    |       | (163,225          | )        |            |   | (968,155       | )        
|                                                                             |                  |                                         |                              |       |                         |           |                    |       |                   |          |            |  
|                                                                             |                  |                                         | Total Other Income (Expense) |       |                         | (333,603  | )                  |       |                   | (129,547 | )          |   |                | 1,414,135 | 
|                                                                             |                  |                                         |                              |       |                         |           |                    |       |                   |          |            |  
|Loss Before Income Taxes                                                     |                  |                                         | (1,524,535                   | )     |                         |           | (1,020,301         | )     |                   |          | (6,592,961 | )
|Income Taxes                                                                 |                  |                                         |                             |       |                         |           |                   |       |                   |          |           |  
|                                                                             |                  |                                         |                              |       |                         |           |                    |       |                   |          |            |  
|NET LOSS                                                                     |                  | $                                       | (1,524,535                   | )     |                         | $         | (1,020,301         | )     |                   | $        | (6,592,961 | )
|                                                                             |                  |                                         |                              |       |                         |           |                    |       |                   |          |            |  
|BASIC AND DILUTED NET LOSS                                                   |                  |                                         |                              |       |                         |           |                    |       |                   |          |            |  
|                                                                             | PER COMMON SHARE |                                         | $                            | (0.04 | )                       |           | $                  | (0.02 | )                 |          |            |   |               
|                                                                             |                  |                                         |                              |       |                         |           |                    |       |                   |          |            |  
|WEIGHTED AVERAGE NUMBER OF
BASIC AND DILUTED COMMON STOCK
SHARES OUTSTANDING |                  |                                         | 43,175,909                   |       |                         |           | 40,885,351         |       |                   |          |            |  
|                                                                             |                  |                                         |                              |       |                         |           |                    |       |                   |          |            |  

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

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ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENT OF STOCKHOLDERS EQUITY (DEFICIT)

|                                                                                          |  |              |            |            |  |         |        |          |  |               |           |             |  |             |         |        |  |         |            |   |  |   |            |  
|----------------------------------------------------------------------------------------- |  | ------------ | ---------- | ---------- |  | ------- | ------ | -------- |  | ------------- | --------- | ----------- |  | ----------- | ------- | ------ |  | ------- | ---------- | - |  | - | ---------- | -
|                                                                                          |  |              |            |            |  |         |        |          |  |               |           |             |  |             |         |        |  | Deficit |            |   |  |  
|                                                                                          |  | Common Stock |            |            |  |         |        |          |  |               |           | Accumulated |  | Total      
|                                                                                          |  |              |            | Additional |  | Stock   |        | During   |  | Stockholders
|                                                                                          |  |              |            |            |  |         |        |          |  | Paid-in       |           | Options and |  | Development |         | Equity
|                                                                                          |  | Shares       |            | Amount     |  | Capital |        | Warrants |  | Stage         |           | (Deficit)  
|                                                                                          |  |              |            |            |  |         |        |          |  |               |           |            
|Balance, December 31, 2000                                                                |  |              | 40,698,265 |            |  | $       | 40,698 |          |  | $             | 3,233,040 |             |  | $           | 379,403 |        |  | $       | (4,048,125 | ) |  | $ | (394,984   | )
|Common stock issued in exchange
for convertible debt at $0.25 per share                   |  |              | 1,605,346  |            |  |         | 1,605  |          |  |               | 399,504   |             |  |             |        |        |  |         |           |   |  |   | 401,109    |  
|Contribution of capital by shareholders
in form of foregone interest and rent             |  |              |           |            |  |         |       |          |  |               | 8,113     |             |  |             |        |        |  |         |           |   |  |   | 8,113      |  
|Stock warrants issued at $0.06 per warrant
in exchange for services                       |  |              |           |            |  |         |       |          |  |               |          |             |  |             | 23,280  |        |  |         |           |   |  |   | 23,280     |  
|Stock options issued at $0.30 per option
in exchange for services                         |  |              |           |            |  |         |       |          |  |               |          |             |  |             | 75,000  |        |  |         |           |   |  |   | 75,000     |  
|Net loss for the year ended
December 31, 2001                                             |  |              |           |            |  |         |       |          |  |               |          |             |  |             |        |        |  |         | (1,020,301 | ) |  |   | (1,020,301 | )
|                                                                                          |  |              |            |            |  |         |        |          |  |               |           |             |  |             |         |        |  |         |            |   |  |   |            |  
|Balance, December 31, 2001                                                                |  |              | 42,303,611 |            |  |         | 42,303 |          |  |               | 3,640,657 |             |  |             | 477,683 |        |  |         | (5,068,426 | ) |  |   | (907,783   | )
|Contribution of capital by shareholders in
form of foregone interest                      |  |              |           |            |  |         |       |          |  |               | 5,635     |             |  |             |        |        |  |         |           |   |  |   | 5,635      |  
|Common stock issued in exchange
for convertible debt at $0.25 per share                   |  |              | 1,147,706  |            |  |         | 1,147  |          |  |               | 285,781   |             |  |             |        |        |  |         |           |   |  |   | 286,928    |  
|Stock issued for cash at an average price of
$0.04 per share from the exercise of options |  |              | 150,000    |            |  |         | 150    |          |  |               | 5,850     |             |  |             |        |        |  |         |           |   |  |   | 6,000      |  
|Stock warrants issued at $0.23 per warrant
in exchange for services                       |  |              |           |            |  |         |       |          |  |               |          |             |  |             | 54,344  |        |  |         |           |   |  |   | 54,344     |  
|Stock options issued at $0.25 per option
in exchange for services                         |  |              |           |            |  |         |       |          |  |               |          |             |  |             | 48,000  |        |  |         |           |   |  |   | 48,000     |  
|Net loss for the year ended
December 31, 2002                                             |  |              |           |            |  |         |       |          |  |               |          |             |  |             |        |        |  |         | (1,524,535 | ) |  |   | (1,524,535 | )
|                                                                                          |  |              |            |            |  |         |        |          |  |               |           |             |  |             |         |        |  |         |            |   |  |   |            |  
|Balance, December 31, 2002                                                                |  |              | 43,601,317 |            |  | $       | 43,600 |          |  | $             | 3,937,923 |             |  | $           | 580,027 |        |  | $       | (6,592,961 | ) |  | $ | (2,031,411 | )
|                                                                                          |  |              |            |            |  |         |        |          |  |               |           |             |  |             |         |        |  |         |            |   |  |   |            |  

Summary of required information regarding stock issuances can be found in Note 8.

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

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##### Table of Contents






ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF CASH FLOWS

|                                                                        |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            |                |            |  
|----------------------------------------------------------------------- | ------------------------------------------------------------------- | ------------------------------------------- | ---------- | ----------------------- | ---------- | ------------------ | ---------- | ----------------- | ------- | - | ---------- | -------------- | ---------- | -
|                                                                        |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            | From Inception
|                                                                        |                                                                     |                                             |            | Year Ended December 31, |            | (December 2, 1985)
|                                                                        |                                                                     |                                             |            |                         |            | through           
|                                                                        |                                                                     |                                             |            | 2002                    |            | 2001               |            | December 31, 2002
|                                                                        |                                                                     |                                             |            |                         |            |                    |            |                  
|CASH FLOWS FROM OPERATING ACTIVITIES:                                   |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            |               
|Net loss                                                                |                                                                     | $                                           | (1,524,535 | )                       |            | $                  | (1,020,301 | )                 |         | $ | (6,592,961 | )             
|Adjustments to reconcile net loss to cash
used in operating activities: |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            |               
|                                                                        | Depreciation and amortization                                       |                                             |            | 77,305                  |            |                    |            | 49,879            |         |   |            | 559,188        |           
|                                                                        | Loss on disposal of equipment                                       |                                             |            |                        |            |                    |            | 2,224             |         |   |            | 2,224          |           
|                                                                        | Investment income                                                   |                                             |            |                        |            |                    |            |                  |         |   |            | (157,520       | )         
|                                                                        | Expenses paid through issuance
of common stock                      |                                             |            |                        |            |                    |            |                  |         |   |            | 231,340        |           
|                                                                        | Expenses paid through issuance
of common stock warrants and options |                                             |            | 102,344                 |            |                    |            | 98,280            |         |   |            | 369,289        |           
|                                                                        | Accrued interest paid by convertible debt                           |                                             |            | 373,136                 |            |                    |            | 155,242           |         |   |            | 578,047        |           
|                                                                        | Expenses paid through contribution
of additional paid-in capital    |                                             |            | 5,635                   |            |                    |            | 8,113             |         |   |            | 51,581         |           
|                                                                        | Organization costs                                                  |                                             |            |                        |            |                    |            |                  |         |   |            | (9,220         | )         
|                                                                        | Decrease (increase) in:                                             |                                             |            |                         |            |                    |            |                   |         |   |            |                |           
|                                                                        |                                                                     | Marketable securities                       |            |                         | (3,000,000 | )                  |            |                   |        |   |            |                | (3,000,000 | )
|                                                                        |                                                                     | Deposits and prepaid expenses               |            |                         | (14,172    | )                  |            |                   | (8,018  | ) |            |                | (54,882    | )
|                                                                        |                                                                     | Interest receivable                         |            |                         | (16,030    | )                  |            |                   | (16,031 | ) |            |                | (47,609    | )
|                                                                        |                                                                     | Deferred loan origination cost              |            |                         | (101,895   | )                  |            |                   |        |   |            |                | (215,183   | )
|                                                                        | Increase (decrease) in:                                             |                                             |            |                         |            |                    |            |                   |         |   |            |                |           
|                                                                        |                                                                     | Accounts payable                            |            |                         | 25,452     |                    |            |                   | 118,937 |   |            |                | 190,998    |  
|                                                                        |                                                                     | Accounts and notes payable,
related parties |            |                         |           |                    |            |                   |        |   |            |                | 127,631    |  
|                                                                        |                                                                     | Payroll and payroll taxes payable           |            |                         |           |                    |            |                   |        |   |            |                | 8,878      |  
|                                                                        |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            |               
|Net cash used in operating activities                                   |                                                                     |                                             | (4,072,760 | )                       |            |                    | (611,675   | )                 |         |   | (7,958,199 | )             
|                                                                        |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            |               
|CASH FLOWS FROM INVESTING ACTIVITIES:                                   |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            |               
|                                                                        | Purchase of fixed assets                                            |                                             |            | (15,270                 | )          |                    |            |                  |         |   |            | (63,273        | )         
|                                                                        | Internal gain on sale of securities                                 |                                             |            |                        |            |                    |            |                  |         |   |            | 157,520        |           
|                                                                        | Acquisition of patents                                              |                                             |            | (127,004                | )          |                    |            | (109,977          | )       |   |            | (488,102       | )         
|                                                                        |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            |               
|Net cash used in investing activities                                   |                                                                     |                                             | (142,274   | )                       |            |                    | (109,977   | )                 |         |   | (393,855   | )             
|                                                                        |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            |               
|CASH FLOWS FROM FINANCING ACTIVITIES:                                   |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            |               
|                                                                        | Proceeds from issuance of common stock                              |                                             |            | 6,000                   |            |                    |            |                  |         |   |            | 2,455,754      |           
|                                                                        | Proceeds from convertible notes                                     |                                             |            | 4,203,500               |            |                    |            |                  |         |   |            | 5,714,000      |           
|                                                                        | Proceeds from notes payable                                         |                                             |            |                        |            |                    |            |                  |         |   |            | 388,508        |           
|                                                                        | Payments on notes payable                                           |                                             |            |                        |            |                    |            |                  |         |   |            | (175,127       | )         
|                                                                        |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            |               
|Net cash provided by financing activities                               |                                                                     |                                             | 4,209,500  |                         |            |                    |           |                   |         |   | 8,383,135  |               
|                                                                        |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            |               
|Net increase (decrease) in cash                                         |                                                                     |                                             | (5,534     | )                       |            |                    | (721,652   | )                 |         |   | 31,081     |               
|Cash, beginning                                                         |                                                                     |                                             | 36,615     |                         |            |                    | 758,267    |                   |         |   |           |               
|                                                                        |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            |               
|Cash, ending                                                            |                                                                     | $                                           | 31,081     |                         |            | $                  | 36,615     |                   |         | $ | 31,081     |               
|                                                                        |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            |               
|SUPPLEMENTAL CASH FLOW DISCLOSURES:                                     |                                                                     |                                             |            |                         |            |                    |            |                   |         |   |            |               
|                                                                        | Interest expense paid                                               |                                             | $          |                        |            |                    | $          |                  |         |   | $          | 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                                                |                                             | $          | 5,635                   |            |                    | $          | 8,113             |         |   | $          | 51,581         |           
|                                                                        | Common stock issued for a loan payable                              |                                             | $          |                        |            |                    | $          |                  |         |   | $          | 213,381        |           
|                                                                        | Common stock issued for notes receivable                            |                                             | $          |                        |            |                    | $          |                  |         |   | $          | 246,619        |           
|                                                                        | Options issued for services                                         |                                             | $          | 48,000                  |            |                    | $          | 75,000            |         |   | $          | 123,000        |           
|                                                                        | Warrants issued for services                                        |                                             | $          | 54,344                  |            |                    | $          | 23,280            |         |   | $          | 246,289        |           
|                                                                        | Accrued interest paid by convertible debt                           |                                             | $          | 373,136                 |            |                    | $          | 155,242           |         |   | $          | 578,047        |           
|                                                                        | Common stock issued for convertible debt                            |                                             | $          | 286,928                 |            |                    | $          | 401,109           |         |   | $          | 688,037        |           

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

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##### Table of Contents






ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 1  ORGANIZATION AND DESCRIPTION OF BUSINESS

Advanced Biotherapy, 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.

For the year ended December 31, 2002, the Company incurred a net loss of
$1,524,535 and had an accumulated deficit during the development stage of
$6,592,961 for the period then ended. Although the Company raised over $4.2
million in convertible debt during the year ended December 31, 2002 to fund
research and development costs and operations, it does not have a source of
revenues to continue its operations, research and development costs or to
service its debt at maturity beyond such funding. For the twelve-month period
subsequent to December 31, 2002, the Company anticipates that its minimum cash
requirements to continue as a going concern will be less than $1,500,000, and
therefore, believes that it has adequate resources to maintain operations
during that period. 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s goal is to actively seek a collaborative relationship with either
a pharmaceutical or biotechnology company. If successful, future cash
requirements may be met through licensing fees and royalties. 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.

Accounting Method

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

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ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Recent Accounting Pronouncements

In December 2002, the Financial Accounting Standards Board issued Statement No.
148 (SFAS No. 148) on Accounting for
Stock-Based Compensation  Transition and
Disclosure. This statement provides alternative methods of transition for
companies that choose to switch to the fair value method of accounting for
stock options. SFAS No. 148 also makes changes in the disclosure requirements
for stock-based compensation, regardless of which method of accounting is
chosen. Under the new standard, companies must report certain types of
information more prominently and in a more understandable format in the
footnotes to the financial statements, and this information must be included in
interim as well as annual financial statements. The Company has complied with
the disclosure requirements of SFAS No. 148 in these financial statements.

In October 2002, the Financial Accounting Standards Board issued Statement No.
147 (SFAS No. 147) on Acquisitions of Certain Financial Institutions. This
statement provides guidance on the accounting for the acquisition of a
financial institution. The Companys adoption of this standard does not have
an effect on its financial statements.

In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 146, Accounting for Costs Associated with
Exit or Disposal Activities (SFAS No. 146). SFAS No. 146 addresses
significant issues regarding the recognition, measurement, and reporting of
costs associated with exit and disposal activities, including restructuring
activities. SFAS No. 146 also addresses recognition of certain costs related
to terminating a contract that is not a capital lease, costs to consolidate
facilities or relocate employees, and termination benefits provided to
employees that are involuntarily terminated under the terms of a one-time
benefit arrangement that is not an ongoing benefit arrangement or an individual
deferred-compensation contract. SFAS No. 146 is effective for activities after
December 31, 2002. There has been no impact on the Companys financial
position or results of operations from adopting SFAS No. 146.

In April 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 145, Rescission of SFAS Statements No. 44,
4 and 64, Amendment of SFAS Statement No. 13, and Technical Corrections (SFAS
No. 145), which updates, clarifies and simplifies existing accounting
pronouncements. SFAS No. 4, which required all gains and losses from the
extinguishment of debt to be aggregated and, if material, classified as an
extraordinary item, net of related tax effect was rescinded. As a result, SFAS
No. 64, which amended SFAS No. 4, was rescinded, as it was no longer necessary.
SFAS No. 44, Accounting for Intangible Assets of Motor Carriers, established
the accounting requirements for the effects of transition to the provisions of
the Motor Carrier Act of 1980. Since the transition has been completed, SFAS
No. 44 is no longer necessary and has been rescinded. SFAS No. 145 amended
SFAS No. 13 to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. The Company adopted SFAS No. 145, and as a result, has
reclassified a total of $2,047,437 in debt forgiveness to other income from the
previous classification as extraordinary income. The other provisions of this
standard did not have an effect on the financial statements of the Company.

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ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounting for Long-Lived Assets

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). This standard establishes a
single accounting model for long-lived assets to be disposed of by sale,
including discontinued operations. SFAS No. 144 requires that these long-lived
assets be measured at the lower of carrying amount or fair value less cost to
sell, whether reported in continuing operations or discontinued operations.
The Company does not believe any adjustments are needed to the carrying value
of its assets at December 31, 2002.

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.

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.

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, 2002, the Company had net deferred tax assets of approximately
$1,160,000, 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, 2002, the Companys net operating loss carryforwards amount to
approximately $4,660,000, which expire in the years 2003 through 2023. At
December 31, 2002, approximately $878,000 of net operating losses expired.
Approximately $195,000 of net operating losses will expire on December 31,
2003.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 2  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 $9,624 and $8,986 for the year ended December 31, 2002 and
2001, 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.

Fair Value of Financial Instruments

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

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 12. These loan origination fees, which totaled $47,079, net of
accumulated amortization at December 31, 2002, are amortized over the life of
the related debt. During the year ended December 31, 2002, the Company
recorded amortization expense in the amount of $27,712 related to these fees.

During the year ended December 31, 2002, the Company entered into convertible
subordinated debt, which required the payment of loan origination fees. See
Note 12. These loan origination fees, which totaled $81,831, net of
accumulated amortization at December 31, 2002, are amortized over the life of
the related debt. During the year ended December 31, 2002, the Company
recorded amortization expense in the amount of $20,064 related to these fees.

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
statement of operations as internal gain on sale of securities.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

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, 2002, the Company has not engaged in any transactions that
would be considered derivative instruments or hedging activities.

Earnings (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 (1,957,953 shares),
warrants (5,324,535 shares), and convertible debt (22,416,456 shares). Diluted
net loss per share is the same as basic net loss per share as inclusion of the
common stock equivalents would be antidilutive.

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 of three to
five years.

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ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 3  PROPERTY AND EQUIPMENT (Continued)

The following is a summary of property, equipment and accumulated depreciation
at December 31, 2002 and 2001:

|                       |  |      |        |              |  |             |        |              |  |   |        |             |  |   |        | 
|---------------------- |  | ---- | ------ | ------------ |  | ----------- | ------ | ------------ |  | - | ------ | ----------- |  | - | ------ | 
|                       |  | 2002 |        | 2001        
|                       |  |      |        |             
|                       |  |      |        |              |  | Accumulated |        |              |  |   |        | Accumulated
|                       |  | Cost |        | Depreciation |  | Cost        |        | Depreciation
|                       |  |      |        |              |  |             |        |             
|Lab equipment          |  | $    | 27,582 |              |  | $           | 27,582 |              |  | $ | 27,582 |             |  | $ | 27,582 | 
|Office equipment       |  |      | 18,062 |              |  |             | 11,073 |              |  |   | 12,874 |             |  |   | 7,986  | 
|Furniture and
fixtures |  |      | 11,384 |              |  |             | 1,959  |              |  |   | 1,302  |             |  |   | 1,302  | 
|                       |  |      |        |              |  |             |        |              |  |   |        |             |  |   |        | 
|                       |  | $    | 57,028 |              |  | $           | 40,614 |              |  | $ | 41,758 |             |  | $ | 36,870 | 
|                       |  |      |        |              |  |             |        |              |  |   |        |             |  |   |        | 

Depreciation expense for the years ended December 31, 2002 and 2001 was $3,744
and $3,174, respectively.

NOTE 4  INVESTMENTS

Marketable Securities

The Companys investments in equity securities that are intended to be held for
a short period are classified as trading securities. These securities are
recorded at fair value as current assets on the balance sheet under the caption
of marketable securities. The change in fair value of those securities is
included in earnings during the period presented. In the year ended December
31, 2002, there was no change in the fair market value of the securities. See
Note 7.

Available-for-Sale Securities

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 and has not had available-for-sale securities since that
transaction.

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.

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ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 5  INTANGIBLE ASSETS (Continued)

The following is a summary of the costs of patents and patents pending at
December 31, 2002:

|                           |  |      |         |              |  |             |          |     |  |   |         | 
|-------------------------- |  | ---- | ------- | ------------ |  | ----------- | -------- | --- |  | - | ------- | 
|                           |  |      |         |              |  | Accumulated |          | Net
|                           |  | Cost |         | Amortization |  | Amount     
|                           |  |      |         |              |  |            
|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 | 
|2002 Activity              |  |      | 127,005 |              |  |             | (25,785  | )   |  |   | 101,220 | 
|                           |  |      |         |              |  |             |          |     |  |   |         | 
|Balance, December 31, 2002 |  | $    | 488,102 |              |  | $           | (122,389 | )   |  | $ | 365,713 | 
|                           |  |      |         |              |  |             |          |     |  |   |         | 

NOTE 6  RELATED PARTY TRANSACTIONS

Current Transactions

During the year ended December 31, 2002, the Company sold a total of $28,000 in
subordinated convertible pay-in-kind note to the Companys chief executive
officer. See Note 12.

During the year ended December 31, 2002, the Company paid $60,000 to a director
in connection with the sale of subordinated debt. See Note 12.

The Company has notes receivable in the aggregate amount of $246,619 from
directors and 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 matured on December 31, 2002. As of the date of these financial
statements, these notes receivable had not been collected and as a result are
in default. The Company was not in compliance with the Sarbanes-Oxley Act on
December 31, 2002 due to three directors being in default on their notes
receivable. Subsequent to year-end, notes in the amount of $46,619 to
non-director shareholders were extended. See Note 15 for the subsequent
disposition of notes from directors.

The notes payable to related parties consist of notes payable to the Companys
former chairman and principal shareholder. 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 $5,635 was recorded in 2002 as interest expense and contributed
capital in the accompanying financial statements.

Transactions in 1999

The Companys former chairman and principal shareholder 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 were $257,076. Although
he was not charging interest to the Company, interest was calculated at the
applicable federal rate of 5.59% at December 31, 1999 and 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 were $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 10. 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 forgiveness of debt.

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ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 6  RELATED PARTY TRANSACTIONS (Continued)

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 10.
In 1999, she forgave the balance of accrued salary in the amount of $200,375.
This is recorded in the financial statements as forgiveness of debt.

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 10. In 1999, he forgave the balance of accrued salary in the amount of
$181,622. This is recorded in the financial statements as forgiveness of debt.

NOTE 7  CONCENTRATIONS

Bank Accounts

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
$31,081 is at risk on December 31, 2002.

The Companys marketable securities investment consists of auction rate
preferred money market alternatives that rolls every seven days at the then
market interest rate. This investment is not insured, and therefore, a total
of $3,000,000 is at risk as of December 31, 2002. See Note 4.

NOTE 8  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 per    |      |        |  |        |           |         |  |   |       | Paid-in   
|                              |  | 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  | 

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 8  COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (Continued)

|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|-------------------------------------------------------------------------------- |  | ------------ | ---- | ------ |  | ------ | ---------- | ------- |  | - | ------ | ---------- |  | - | --------- | -
|                                                                                 |  | Common Stock |      |        |  |       
|                                                                                 |  |              |      |        |  |       
|                                                                                 |  | Average      |      |        |  |        |            |         |  |   |        | Additional
|                                                                                 |  | price per    |      |        |  |        |            |         |  |   |        | Paid-in   
|                                                                                 |  | share        |      | Shares |  | Amount |            | Capital
|                                                                                 |  |              |      |        |  |        |            |        
|Common stock issued for cash (continued):                                        |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|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 |  
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|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     |  
|2002                                                                             |  |              |     |        |  |        |           |         |  |   |       |            |  |   | 5,635     |  
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|                                                                                 |  |              |      |        |  |        |           |         |  |   |       |            |  |   | 87,406    |  
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|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 14                                                                |  |              | .001 |        |  |        | 850,000    |         |  |   | 850    |            |  |   | (850      | )
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  
|                                                                                 |  |              |      |        |  |        |           |         |  |   |       |            |  |   |          |  
|                                                                                 |  |              |      |        |  |        |            |         |  |   |        |            |  |   |           |  

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE
8  COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (Continued)

|                                                             |  |              |  |        |  |        |      |         |  |  |           |            |  |   |       |  |  |   |         |  
|------------------------------------------------------------ |  | ------------ |  | ------ |  | ------ | ---- | ------- |  |  | --------- | ---------- |  | - | ----- |  |  | - | ------- | -
|                                                             |  | Common Stock |  |        |  |       
|                                                             |  |              |  |        |  |       
|                                                             |  | Average      |  |        |  |        |      |         |  |  |           | Additional
|                                                             |  | price per    |  |        |  |        |      |         |  |  |           | Paid-in   
|                                                             |  | share        |  | Shares |  | Amount |      | Capital
|                                                             |  |              |  |        |  |        |      |        
|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 |  
|                                                             |  |              |  |        |  |        |      |         |  |  |           |            |  |   |       |  |  |   |         |  
|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 |  
|2002                                                         |  |              |  |        |  |        | .25  |         |  |  | 1,147,706 |            |  |   | 1,147 |  |  |   | 285,781 |  
|                                                             |  |              |  |        |  |        |      |         |  |  |           |            |  |   |       |  |  |   |         |  
|                                                             |  |              |  |        |  |        |      |         |  |  | 2,753,052 |            |  |   | 2,752 |  |  |   | 685,285 |  
|                                                             |  |              |  |        |  |        |      |         |  |  |           |            |  |   |       |  |  |   |         |  

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 8  COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL (Continued)

|                         |  |              |  |        |  |        |     |         |  |  |            |            |  |   |        |  |  |   |           | 
|------------------------ |  | ------------ |  | ------ |  | ------ | --- | ------- |  |  | ---------- | ---------- |  | - | ------ |  |  | - | --------- | 
|                         |  | Common Stock |  |        |  |       
|                         |  |              |  |        |  |       
|                         |  | Average      |  |        |  |        |     |         |  |  |            | Additional
|                         |  | price per    |  |        |  |        |     |         |  |  |            | Paid-in   
|                         |  | share        |  | Shares |  | Amount |     | Capital
|                         |  |              |  |        |  |        |     |        
|Stock options exercised: |  |              |  |        |  |        |     |         |  |  |            |            |  |   |        |  |  |   |           | 
|1997                     |  | $            |  |        |  |        | .01 |         |  |  | 325,000    |            |  | $ | 325    |  |  | $ | 2,929     | 
|2000                     |  |              |  |        |  |        | .01 |         |  |  | 350,000    |            |  |   | 350    |  |  |   | 3,150     | 
|2002                     |  |              |  |        |  |        | .04 |         |  |  | 150,000    |            |  |   | 150    |  |  |   | 5,850     | 
|                         |  |              |  |        |  |        |     |         |  |  |            |            |  |   |        |  |  |   |           | 
|                         |  |              |  |        |  |        |     |         |  |  | 825,000    |            |  |   | 825    |  |  |   | 11,929    | 
|                         |  |              |  |        |  |        |     |         |  |  |            |            |  |   |        |  |  |   |           | 
|Total                    |  |              |  |        |  |        |     |         |  |  | 43,601,317 |            |  | $ | 43,600 |  |  | $ | 3,937,923 | 
|                         |  |              |  |        |  |        |     |         |  |  |            |            |  |   |        |  |  |   |           | 



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

Effective with the merger in September 2000 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.

Effective December 26, 2002, the Company amended its articles of incorporation
to increase its authorize common stock to 200,000,000 shares.

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
per share. See Note 15 for subsequent repurchase of a portion of these shares
by the Company. At December 31, 2002, a total of 800,000 shares are available
under this plan.

Omnibus Equity Incentive Plan

During December 2000, the board of directors of the Company approved an Equity
Incentive Plan, which was approved by the stockholders in December 2001. 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. At December 31, 2002, there are 4,060,000 shares available
under this plan.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 9  PREFERRED STOCK

With the merger into its Delaware subsidiary, the Company has authorized
20,000,000 shares of $0.001 par value preferred stock. As of December 31,
2002, the Company has not issued any preferred stock.

NOTE 10  STOCK OPTIONS AND ISSUANCE COMMITMENTS

On February 25, 1991, the Company granted nonstatutory 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 at which
time all the options expired. 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 2002, options to
purchase 100,000 shares of common stock were exercised. During 1995, options
for 50,000 shares were granted at $0.20 per share, which expire in 2005. Also
in 1995, five-year options for 350,000 shares were granted at $0.01 per share,
which were exercised during 2000. During 1996, options for 525,000 shares were
granted at $0.10 per share, which expire in 2006. During 2002, options for
50,000 shares of common stock were exercised. The shares purchased under the
Companys option grants will be restricted and, therefore, may not be
transferred without registration under applicable federal and state securities
laws.

On December 31, 1999, three officers of the Company received options to
purchase 842,953 shares of common stock 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.

Omnibus Equity Incentive Plan

In 2000, the Company approved an Omnibus Equity Incentive Plan, which was
approved by the stockholders in December 2001. A maximum of 4,000,000 shares
of common stock and stock options will be available for the incentive plan with
annual increases equal to the lesser of 2.5% of outstanding shares or 250,000
shares. At December 31, 2002, there are 4,060,000 shares available under this
plan.

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 13. 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) of expense to professional fees for the value of these options
based upon these Black Scholes assumptions.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 10  STOCK OPTIONS AND ISSUANCE COMMITMENTS (Continued)

During January 2002, the Company issued stock options to purchase 80,000 shares
of the Companys stock at $0.25 per share to its board of directors for
services rendered during the year ended December 31, 2001. The options are
exercisable immediately and expire on December 31, 2011. 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% with no dividends expected to be paid. The Company recorded
a total of $17,200 ($0.215 per option) of expense for the value of these
options based upon these Black Scholes assumptions.

Also during the year ended December 31, 2002, the Company issued stock options
to purchase a total of 110,000 shares of the Companys stock at $0.25 per share
for services. The options are exercisable immediately and expire between July
28, 2007 and April 15, 2011. The options have piggyback registration rights to
be effective in the Companys next SEC registration statement. 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 lives of 5 to 9 years, and
expected volatility of 98% and no dividends are expected to be paid. The
Company recorded a total expense of $30,800 (an average of $0.28 per option) as
professional fees for the value of the options based upon these Black Scholes
assumptions.

The following is a summary of the Companys equity compensation plans:

|                                                              |  |                            |         |                     |  |                       |      |  |  |                         |           | 
|------------------------------------------------------------- |  | -------------------------- | ------- | ------------------- |  | --------------------- | ---- |  |  | ----------------------- | --------- | 
|                                                              |  |                            |         |                     |  |                       |      |  |  | Number of securities   
|                                                              |  |                            |         |                     |  |                       |      |  |  | remaining available for
|                                                              |  | Number of securities to be |         | Weighted-average    |  | future issuance under
|                                                              |  | issued upon exercise       |         | exercise price of   |  | equity compensation  
|Plan                                                          |  | of outstanding options     |         | outstanding options |  | plans                
|                                                              |  |                            |         |                     |  |                      
|Equity
compensation
plan approved by
security holders (1)     |  |                            | 440,000 |                     |  | $                     | 0.25 |  |  |                         | 4,060,000 | 
|Equity
compensation
plan not approved
by security holders
(2) |  |                            |        |                     |  |                       |     |  |  |                         | 800,000   | 
|                                                              |  |                            |         |                     |  |                       |      |  |  |                         |           | 
|Total                                                         |  |                            | 440,000 |                     |  |                       |      |  |  |                         | 4,860,000 | 
|                                                              |  |                            |         |                     |  |                       |      |  |  |                         |           | 



|(1) |  | Omnibus Equity Incentive Plan       
|--- |  | ------------------------------------
|(2) |  | Stock Bonus Plan. See Note 8 and 15.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 10  STOCK OPTIONS AND ISSUANCE COMMITMENTS (Continued)

Following is a summary of the status of the options during the years ended
December 31, 2002 and 2001:

|                                                       |  |                  |           |       |  |                  |      | 
|------------------------------------------------------ |  | ---------------- | --------- | ----- |  | ---------------- | ---- | 
|                                                       |  |                  |           |       |  | Weighted        
|                                                       |  |                  |           |       |  | Average Exercise
|                                                       |  | Number of Shares |           | Price
|                                                       |  |                  |           |      
|Outstanding at January 1, 2001                         |  |                  | 2,527,953 |       |  | $                | 0.11 | 
|Granted                                                |  |                  | 250,000   |       |  |                  | 0.25 | 
|Exercised                                              |  |                  |          |       |  |                  |     | 
|Forfeited                                              |  |                  |          |       |  |                  |     | 
|                                                       |  |                  |           |       |  |                  |      | 
|Outstanding at December 31, 2001                       |  |                  | 2,777,953 |       |  |                  | 0.14 | 
|Granted                                                |  |                  | 190,000   |       |  |                  | 0.25 | 
|Exercised                                              |  |                  | (150,000  | )     |  |                  | 0.04 | 
|Forfeited                                              |  |                  | (860,000  | )     |  |                  | 0.20 | 
|                                                       |  |                  |           |       |  |                  |      | 
|Outstanding at December 31, 2002                       |  |                  | 1,957,953 |       |  |                  | 0.13 | 
|                                                       |  |                  |           |       |  |                  |      | 
|Options exercisable at December 31, 2002               |  |                  | 1,957,953 |       |  | $                | 0.13 | 
|                                                       |  |                  |           |       |  |                  |      | 
|Weighted average fair value of options
granted in 2002 |  |                  |           |       |  | $                | 0.25 | 
|                                                       |  |                  |           |       |  |                  |      | 

Summarized information about stock options outstanding and exercisable at
December 31, 2002 is as follows:

|               |  |                             |           |                  |  |                  |      |  |  |   |      | 
|-------------- |  | --------------------------- | --------- | ---------------- |  | ---------------- | ---- |  |  | - | ---- | 
|               |  | Outstanding and Exercisable
|               |  |                            
|Exercise Price |  | Number of                   |           | Weighted Average |  | Weighted Average
|Range          |  | Shares                      |           | Remaining Life   |  | Exercise Price  
|               |  |                             |           |                  |  |                 
|$0.01 - $0.25  |  |                             | 1,957,953 |                  |  |                  | 4.03 |  |  | $ | 0.13 | 

NOTE 11  NON-CASH COMMITMENT AND WARRANTS

During the year ended December 31, 2002, the Company issued warrants to two
advisors to purchase 239,400 shares of common stock in connection with the sale
of subordinated convertible pay-in-kind notes. The warrants are exercisable
for ten years and have an exercise price of $0.25 per share. 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 10 years, and expected
volatility of 98% with no dividends expected to be paid. During the year ended
December 31, 2002, the Company recorded $54,344 ($0.23 per warrant) as
professional fees for the aforementioned services. A cash-less exercise may be
used for all warrant transactions.

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% with no dividends expected to be
paid. During the year ended December 31, 2001, the Company recorded $23,280
($0.23 per warrant) as directors fees for these warrants.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 11  NON-CASH COMMITMENT AND WARRANTS (Continued)

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% with no dividends expected to be paid. During the year ended
December 31, 2000, the Company recorded $168,665 ($0.04 per warrant) 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, 2002, the total of the Companys outstanding exercisable
warrants is 5,324,535. The average exercise price of the warrants at December
31, 2002 is $0.16 per share.

NOTE 12  CONVERTIBLE DEBT

2000 Convertible Notes

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 to date of $310,826 has been
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 the financial advisor 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, 2002 was $27,712.

During the year ended December 31, 2001, a total of $355,000 original debt and
$46,109 of accrued interest and previously converted interest was converted
into 1,605,346 shares of common stock at $0.25 per share. During the year
ended December 31, 2002, a total of $245,000 original debt and $41,928 of
accrued interest and previously converted interest was converted into 1,147,706
shares of common stock at $0.25 per share.

At December 31, 2002, the remaining 2000 notes, including converted accrued
interest, may be converted into a total of 4,573,160 shares of common stock.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 12  CONVERTIBLE DEBT (Continued)

2002 Convertible Notes due September 30, 2004

During the year ended December 31, 2002, the Company sold in a private
placement to accredited investors 2002 Subordinated Convertible Pay-in-kind
Notes due September 30, 2004 (2002-2004 convertible notes) in the principal
amount of $1,148,500 in cash. A Company director personally guaranteed a total
of $500,000 worth of this debt offering. The 2002-2004 convertible notes bear
interest at the rate of 11% per annum payable semi-annually in cash or
additional 2002-2004 convertible notes. The unpaid accrued interest to date of
$83,896 has been 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 $41,895 to two advisors,
together with a warrant to acquire 239,400 shares of common stock at $0.25 per
share. Amortization of the loan origination fee for the year ended December
31, 2002 was $11,314.

At December 31, 2002, the remaining 2002-2004 notes, including converted
accrued interest, may be converted into a total of 4,929,584 shares of common
stock.

2002 Convertible Notes due June 1, 2006

During the year ended December 31, 2002, the Company sold in a private
placement to accredited investors 2002 Subordinated Convertible Pay-in-kind
Notes due June 1, 2006 (2002-2006 convertible notes) in the principal amount
of $3,055,000 in cash. The interest rate of the 2002-2006 convertible notes is
11% per annum for $2,555,000 of the debt, and 12.5% per annum for $500,000 of
the debt, payable semi-annually in cash or additional 2002-2006 convertible
notes. The unpaid accrued interest to date of $173,428 has been 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 related party a loan origination fee of $60,000.
Amortization of the loan origination fee for the year ended December 31, 2002
was $8,750.

At December 31, 2002, the remaining 2002-2006 notes, including converted
accrued interest, could be converted into a total of 12,913,712 shares of
common stock.

2002 Convertible Notes

The proceeds from the two aforementioned placements of 2002 convertible notes
will be used to satisfy outstanding payables and to pay operating costs,
scientific development costs and patent application legal costs, and to pursue
certain collaborative relationships with other biotechnology or pharmaceutical
companies.

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##### Table of Contents



ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 13  COMMITMENTS AND CONTINGENCIES

Consulting Contract

During November 2001, the Company signed a six-month 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
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 10. 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

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.

Contract

During June 2002, the Company entered into a cooperative agreement with the
Department of Energys (DOE) Pacific Northwest National Laboratory (PNNL) for
Research and Development. According to this agreement, the Company will be
responsible for up to 50% of the costs associated with the research and
development, principally represented by non-cash in-kind contributions of
approximately $480,000 over a period of two years. In return, DOE, has granted
the Company a non-exclusive, non-transferable, royalty-free, field-of-use
license to any inventions PNNL derives under the agreement. The Company also
has a first option to negotiate for greater rights, such as exclusive,
transferable, domestic and foreign marketing and development rights. If the
Company obtains the right to sublicense, the sublicenses must be
royalty-bearing, and, subject to negotiation, the Company will pay a reasonable
royalty to PNNL, which will share prospective royalties with a Russian research
facility, upon commercialization, if any, of the resulting research.

NOTE 14  RESTATEMENT OF SHARES

During the quarter ended March 31, 2002, 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 both
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 these shares
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. However, instead of
being cancelled, the shares should have been returned to the original
shareholder in 1999 pursuant to the settlement agreements. Therefore, the
shares were reissued to the original shareholder and are reflected in the
accompanying financial statements as if they were never cancelled.

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ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 15  SUBSEQUENT EVENTS

Related Party Agreements

Subsequent to the date of these financial statements, the company entered a
verbal agreement to pay approximately $4,000 a month to Buccellato &
Finkelstein, Inc., a firm owned by the Companys Chief Executive Officer and
Chief Financial Officer, for rent, monthly accounting and tax preparation
services, and employee benefits.

The company also entered into a verbal agreement for research and development
laboratory space from New Horizons Diagnostics, Inc., owned by a director, at a
monthly cost of $6,110. The Company also reimburses New Horizons Diagnostics,
Inc. for research and development services at a monthly cost of approximately
$12,000.

Issuance of Stock

Subsequent to the date of these financial statements, a total of $15,000 of
original debt and $4,119 of accrued interest and previously converted interest
was converted into 76,476 shares of common stock at $0.25 per share. In
addition, 150,000 shares of common stock were issued upon the exercise of stock
options at $0.01 per share for a total of $1,500 in cash.

Return of Common Stock-Notes Receivable

On February 7, 2003, the board of directors unanimously approved the repurchase
of approximately 1,603,787 shares of common stock from an officer and two
directors to the Company in satisfaction of outstanding notes receivable and
accrued interest. Such notes were due and payable on December 31, 2002 and
could not be extended under provisions of federal legislation known as the
Sarbanes-Oxley Act. These shares had been previously issued to them under the
Stock Bonus Plan on January 11, 2000,

Issuance of Options

Subsequent to the date of these financial statements, the Company authorized
the issuance of a total of 180,000 stock options to its board of directors for
services rendered during the year ended December 31, 2002. An accrued expense
was recorded in the amount of $34,200 as the value of the services and is
reflected in the financial statements.

On August 24, 2000, the shareholders approved the Companys 2000 Omnibus Equity
Incentive Plan. The purpose of the plan is to promote the long-term success of
the Company and the creation of stockholder value by encouraging employees,
outside directors and consultants to focus on critical long-range objectives,
encouraging the attraction and retention of such with exceptional
qualifications and linking them directly to stockholder interests through
increased stock ownership. The plan seeks to achieve this purpose by providing
for awards in the form of restricted shares, stock units, options (which may
constitute incentive stock options or non-statutory stock options) and stock
appreciation rights (SARs). The aggregate number of options, SARs, stock
units and restricted shares awarded under the plan were initially 4,000,000
common shares plus an annual increase of the lesser of two and one-half percent
of the total number of common shares then outstanding or 250,000 common shares.
Subsequent to the date of the financial statements, the disinterested members
of the board of directors approved the issuance of 4,100,000 stock options to
certain key employees, directors and consultants. These seven-year options
vest over a period of three years, with the first one-third of such options
vesting in 2004, the next one-third in 2005 and the remaining one-third vesting
in 2006 at an exercise price of $0.16 per share.

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ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
December 31, 2002

NOTE 15  SUBSEQUENT EVENTS (Continued)

Issuance of Warrants

Subsequent to the date of these financial statements, the Company authorized
the issuance of warrants to purchase a total of 100,000 shares of common stock
to two outside consultants for services rendered subsequent to December 31,
2002. These warrants have an exercise price of $0.16 per share, vest over a
period of three years and expire in seven-years.

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