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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-KSB

(Mark One)

ý ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934

For the fiscal year ended March 31, 2002

OR

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For transition period from  to

Commission
file number 0-21846

AETHLON MEDICAL, INC.(Name of Small Business issuer in its charter)

|Nevada                                                         |  | 13-3632859                          
|-------------------------------------------------------------- |  | ------------------------------------
|(State or other jurisdiction of
incorporation or organization) |  | (I.R.S. Employer Identification No.)
|7825 Fay Avenue, Suite 200,
La Jolla, California               |  | 92037                               
|(Address of principal executive office)                        |  | (Zip Code)                          

Issuer's telephone number (858) 456-5777

Securities registered under Section 12(b) of the Exchange Act:

Title of each class

Name of each exchange
on which registeredNone

None


Securities registered under Section 12(g) of the Exchange Act:

Common Stock$.001 Par Value
(Title of Class)

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 ý        No o

Check
if there is no disclosure of delinquent filers pursuant to Item 405 of Regulation S-B contained in this form, 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. ý

Revenues
of the registrant for the fiscal year ended March 31, 2002 were $0.

The
aggregate market value of the Common Stock held by non-affiliates was approximately $3,146,316 based upon the closing price of the Common Stock, as reported by the NASDAQ
Over-the-Counter Bulletin Board ("OTCBB") on June 30, 2002.

The
number of shares of the Common Stock of the registrant outstanding as of June 30, 2002 was 5,360,821.

Transitional
Small Business Disclosure Format (check one):

Yes
o        No ý

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PART I

All statements, other than statements of historical fact, included in this Form 10-KSB are, or may be deemed to be, "forward-looking
statements" within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934 (the "Exchange
Act"). Such forward-looking statements involve assumptions, known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Aethlon
Medical, Inc. (the "Company") to be materially different from any future results, performance, or achievements expressed or implied by such forward-looking statements contained in this
Form 10-KSB. Such potential risks and uncertainties include, without limitation, FDA and other regulatory approval of the Company's products, patent protection on the Company's
proprietary technology, product liability exposure, uncertainty of market acceptance, competition, technological change, and other risk factors detailed herein and in other of the Company's filings
with the Securities and Exchange Commission. The forward-looking statements are made as of the date of this Form 10-KSB, and the Company assumes no obligation to update the
forward-looking statements or to update the reasons actual results could differ from those projected in such forward-looking statements.

ITEM 1. BUSINESS

General

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

Business Development/Acquisitions

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

Effective
January 1, 2000, the Company entered into an agreement under which an invention and related patent rights for a method of removing HIV and other viruses from the blood
using the Hemopurifier technology were assigned to the Company. This invention further expands our HIV/AIDS treatment portfolio and our follow-on HIV/AIDS product candidate,
the HIV-Hemopurifier, AEMD-61 and is based in part on this invention and related patent rights. In addition to certain royalty payments equal to 8.75% of net sales
of the patented product, the consideration for the acquired rights included the issuance of 25,000 shares of the Company's common stock to the inventors, 12,500 shares of which have been issued and
12,500 will be issued if and when the patent is granted.

On
January 10, 2000, the Company acquired all the outstanding common stock of Syngen Research, Inc. ("Syngen") in exchange for 65,000 shares of the Company's common stock
in order to employ Dr. Richard Tullis, the founder of Syngen. Dr. Tullis is a nationally recognized research scientist in the area of DNA synthesis and antisense. Syngen had no
significant assets, liabilities, or operations,

1

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and primarily served as the conduit for Dr. Tullis to perform research consulting services. As such, the acquisition has been accounted for as an acquisition of assets in the form of the
employment contract with Dr. Tullis and not as a business combination. Dr. Tullis was appointed to the Board of Directors of Aethlon Medical and was elected its Vice President for
Business Development. Effective June 1, 2001, Dr. Tullis was appointed Chief Scientific Officer of Aethlon Medical, replacing Dr. Clara Ambrus, who retired from this position.

On
April 6, 2000, the Company completed the acquisition of Cell Activation, Inc. ("Cell"). In accordance with the purchase agreement, the Company issued 99,152 shares of
restricted common stock and issued 50,148 options to purchase common stock in exchange for all of the outstanding common shares and options to purchase common stock of Cell. After the transaction,
Cell became a wholly-owned subsidiary of the Company. The acquisition was accounted for as a purchase. At March 31, 2001, management determined that goodwill recognized in the purchase of Cell
was impaired due to the temporary suspension of the operations by Cell, and, accordingly, treated the related goodwill as fully impaired.

Business of Issuer

Aethlon Medical is a development stage therapeutic device company focused on expanding the applications of its Hemopurifier platform technology, which is designed
to rapidly reduce the presence of viruses and other intoxicants in the blood. Aethlon Medical's core focus is on the development of therapeutic devices that treat HIV/AIDS, Hepatitis-C,
and other infectious diseases.

The Hemopurifier Device.The Hemopurifier device is a hollow-fiber cartridge containing an immobilized antidote
for removing toxic material from the blood. The device is used in extracorporeal circulation systems that are similar to those used in hemodialysis or apheresis systems.

The
Hemopurifier device is a long cylindrical cartridge containing a bundle of approximately 10,000 hollow fibers and an antidote or attractor compound. The antidote, which is present in
a proprietary form within the fibers, has a strong and specific affinity to remove a targeted toxin from the blood. When the patient's blood flows through the lumen of each of the fibers, molecules of
a certain size can travel through the pores of the fiber membrane and come in contact with the attractor compound. The toxic material is captured by the compound, and other molecules return through
the same pores to the lumen. The cartridge is based on a standard dialysis cartridge with minor modifications.

The
clinical advantages offered by the Hemopurifier device over present treatments are expected to be as follows:



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We
believe that the Hemopurifier device represents a significant advancement in the potential treatment of certain conditions ranging from chronic and life-threatening
illnesses to acute poisoning. Because the immobilized antidote in the Hemopurifier device binds the toxic material, thus extracting it safely from the blood, harmful agents in the blood can be removed
efficiently and without side effects, reducing treatment times. The potential results of these advantages are improved patient management and cost reduction for health care providers.

Clinical
testing of the Hemopurifier will require approval by the Food and Drug Administration ("FDA"). We intend to initiate the FDA approval process for our lead product candidate, the
HIV-Hemopurifier AEMD-45 within fiscal year 2003. We cannot predict how long it will take to obtain FDA approval or if FDA approval will be obtained.

The Infectious Disease Market

Aethlon Medical's focus is the development of new treatments that address the infectious disease marketplace. The Company's first product candidates target two
significant global issues, the treatment of HIV/AIDS, and Hepatitis-C (HCV), the most common blood-borne disease in the United States. Currently, there are no effective
long-term treatments for either of these viral diseases. Prescribed drugs often have severe side effects and both HIV and HCV mutate frequently, a factor that results in resistance to
currently available drug treatments.

The HIV/AIDS Market Opportunity

According to industry analysts, the size of the HIV market is expected to triple by 2007, with sales of antiretroviral drugs increasing from $5 billion in
2000 to over $13 billion by 2007.

In
the absence of therapeutic intervention, the vast majority of individuals infected with HIV ultimately develop AIDS, which has a mortality rate approaching 100%. Since AIDS was
discovered in 1981, there have been few breakthroughs in the effort to cure this progressive and fatal disease. According to the World Health Organization, 57 million people have become
infected with the AIDS virus and more than 21 million people have died since the epidemic began. In the year 2000, there were three million AIDS related deaths. 5.3 million of the
36 million infected with HIV in 2000 were new cases.

The Hepatitis-C (HCV) Market Opportunity

According to the Centers for Disease Control (CDC), over 200 million people worldwide are infected with the Hepatitis-C virus (HCV). HCV has
become the most common, chronic, blood-borne disease in the United States with nearly four million people infected. Chronic and progressive Hepatitis C, which represents 80-90% of
all cases, has significant morbidity and mortality rates, and is a leading cause of cirrhosis, end-stage liver disease, and liver cancer. End-stage liver disease caused by HCV
is now the most common indication for liver transplantation in this country. It is estimated that 60% of those infected with HCV are resistant to available treatments and much like HIV, HCV is known
to mutate frequently.

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The Aethlon Medical Product Pipeline

Aethlon Medical is developing a family of therapeutic devices that are effective in clearing targeted viruses and other intoxicants from the blood. These
Hemopurifier treatment applications are segmented into the three categories highlighted below:

Lead
Product Candidates

The
Company's lead product candidates are based on the following proprietary HIV-Hemopurifier treatments:



The
Company's business plan is to target its HIV-Hemopurifiers as important conjunctive therapies to enhance and extend the performance of established pharmaceutical treatment regimens and
as a "Salvage Therapy" for the growing population of HIV-infected, who as a result of resistance to available AIDS drugs, are left without treatment options. The Company also plans to
position AEMD-45 and AEMD-61 as first-line therapies for those waiting to initiate treatment with AIDS drugs as advised under new federal guidelines.

The
R&D Pipeline

New
product development is intended to reinforce Aethlon Medical's focus on treating epidemic level infectious diseases. The first products in the development pipeline include two therapeutic
cartridges for treating Hepatitis-C (HCV), the most common chronic blood-borne disease in the United States, and a third cartridge to treat individuals co-infected with both
HIV and HCV:



Currently,
over four million Americans are infected with HCV. Co-infection with HCV and HIV is a particular problem since the two diseases are known to exacerbate each other.
Today, almost 40% of HIV infected individuals are co-infected with HCV.

Developed
Products

Historically,
the original Hemopurifier treatment applications were developed to treat individuals burdened with heavy metal intoxicants. Products developed in this category include
treatments for iron overload, aluminum intoxication, lead poisoning, and cisplatin removal. The Company may license or sell these products as the business emphasis is now focused on opportunities
within the infectious disease marketplace.

Industry Classification

Aethlon Medical's therapeutic devices for treating infectious diseases have been classified by industry analysts and related publications to be "Immunotherapies"
that augment or mimic the immune systems response of clearing infectious virus, and as "Entry Inhibitors" that curb the re-infection process by physically removing infectious virus before
healthy cells are infected.

ImmunotherapyThe
"Immunotherapy" classification is a result of Aethlon Medical's ability to mimic the immune systems natural response of
generating antibodies to fight foreign antigens such as viruses. Antibodies are specifically created by the immune system to attach themselves to the antigen (virus) that stimulated the immune system,
forming an antigen-antibody complex to neutralize the virus. In the case of Aethlon Medical's treatment technology, antibodies against targeted viruses are immobilized within a dialysis cartridge that
has been modified to replicate the antigen-antibody

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complex generated by an immune response. As a result, an extracorporeal antigen-antibody complex is generated, and the physical elimination of infectious virus occurs without the
side-effects common in current AIDS drugs.

Entry
InhibitorAethlon Medical's treatment technology is also classified as an "Entry Inhibitor" since the re-infection process is
interrupted when viruses are removed from circulation before cells can be infected. As a result, the replication cycle is inhibited as infectious virus is denied entry into the cells that it seeks to
kill.

From
a therapeutic standpoint, entry inhibitors represent a departure from the traditional HIV drug action of inhibiting HIV replication within the cells that have already been infected.
The novel therapeutic mechanism offered by "Entry Inhibitors", combined with the high level of treatment resistance to currently approved drugs, positions "Entry Inhibitors" as perhaps the greatest
new hope for HIV-infected individuals to be able to manage their disease.

It
is additionally significant that Aethlon Medical's lead product, AEMD-45, is classified as a medical device versus the biologic drug classification. As a result, Aethlon
Medical's regulatory path to market
is anticipated to be more efficient and have dramatic cost advantages. AEMD-45 has other attributes that offer the potential to expedite the commercialization process as well. These
include:



Each
treatment cartridge is designed for a global network of dialysis machines that have already been approved to treat humans by the FDA and other regulatory authorities.

HIV/AIDS Treatment Applications

In pre-clinical testing, Aethlon Medical's lead product, AEMD-45, removes approximately 55% of HIV from human blood in three hours and in
excess of 85% in 12 hours.

The
AEMD-45 therapeutic device, like all product offerings from Aethlon Medical, is developed from an expansive platform technology known as the Hemopurifier,
which employs a proprietary method of modifying artificial kidneys (hemodialysis cartridges) to mimic the immune system's response to clear infectious virus from circulation before healthy cells can
be infected. AEMD-45 is designed to fill the urgent need for new treatments that are effective in reducing viral load, decrease the likelihood of treatment resistance, and treat without
the side effects of current AIDS drugs. Based on recent human blood studies, we believe that AEMD-45 serves as a promising new therapy against AIDS, and is well positioned to treat the
full spectrum of HIV-infected individuals in the following ways:



Conjunctive
Therapy

AEMD-45
and AEMD-61 are designed to delay disease progression when implemented in conjunction with established antiretroviral drugs. These drugs, known as
protease and reverse

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transcriptase inhibitors, represent the current standard in antiretroviral treatment. The primary drug action associated with these medications is to inhibit the ability of the virus to replicate
within the cells. These drugs are ineffective in the long term since they encourage the development of mutant viral strains that lead to drug resistance. As a conjunctive therapy, each
HIV-Hemopurifier treatment cartridge will enhance and prolong the performance of AIDS drugs by physically binding circulating HIV before it is able to infect new host cells,
and by extracting mutant strains of HIV that lead to drug resistance.

Salvage
Therapy

Today,
the HIV/AIDS treatment landscape is comprised of 18 drugs whose annual sales now exceed $5 billion. While this small arsenal is an indisputable advance over the early days
of the epidemic, a resistance to these drugs inevitably occurs in virtually all patients, even those that currently have undetectable viral loads and adhere to treatment regimens. In addition to
resistance, many of these medications have severe side effects that further diminish their effectiveness as a long-term treatment option. These factors combined with the evolution of new
HIV strains have increased the number of newly infected individuals who fail drug therapies. As a result, almost half of newly infected individuals in the U.S. and Europe now fail two or more regimens
of treatment. AEMD-45 and AEMD-61 will be targeted to be primary monotherapies for the growing population of patients who are either unresponsive to available drugs or become
resistant as a result of HIV mutation. Drug resistance is expected to increase from 28.5% in 2000 to 42% in 2005.

Federal
Guideline Compliant

Citing
dangerous side effects and issues of drug resistance, the federal government changed its recommended AIDS treatment policy on February 5, 2001, stating that
HIV-infected people should now allow for a further progression of the disease towards AIDS before initiating antiretroviral treatments. As a result, the prior recommendations of "hit
early, hit hard" with available drug regimens that were issued five years earlier have been discontinued. The new guidelines suggest that practitioners should now withhold treating
HIV-infected adults and adolescents with available drugs until their supply of T-helper cells is less than 350 per cubic millimeter of blood. AEMD-45 and
AEMD-61 are both positioned to become important first-line therapies for newly infected individuals to delay disease
progression and to delay the need to initiate treatment with AIDS drugs. The primary benefits of this treatment strategy include: a delay in the development of drug resistance; the avoidance of drug
related adverse effects; the preservation of drug options when HIV disease risk is highest; and finally, a definitive improvement in the quality of life.

Value
Added Services (Diagnostic Applications)

As
a result of the HIV-Hemopurifier's ability to effectively concentrate HIV and harmful viral proteins from the entire bloodstream, the detection sensitivity of current
diagnostic tests can be enhanced as much as 1000-fold. As a result, Aethlon Medical may contract with leading diagnostic organizations to offer physicians the following value-added
services:



Business Strategy

During fiscal year 2001, we realigned our research and development activities to address the urgent need for effective HIV/AIDS treatment methods, as well as for
treatment of other infectious diseases, such as Hepatitis C. Now, our efforts are directed to advancing our new lead product candidate, the HIV-Hemopurifier, which has shown promising
results in pre-clinical studies. It is our goal to become a

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significant medical device company, with an international business based on the treatment of infectious diseases with our Hemopurifier platform technology.

As
a result of this strategic realignment, we initiated the consolidation of all scientific and administrative functions into our San Diego facilities during the fourth quarter of fiscal
2001. This consolidation was completed during the first quarter of fiscal 2002 and our facilities in Buffalo, N.Y. were closed.

The
focus on infectious diseases represents a departure from our original efforts to develop niche market Hemopurifiers to treat heavy metal intoxicants. Products developed in this
category included
treatments for Iron Overload, Aluminum Intoxication, Lead Poisoning, and Cisplatin removal. We believe these products to be effective in removing intoxicants from blood. However, we are no longer
focused on the commercialization of these products since our available resources are engaged in the advancement of our HIV-Hemopurifier and the development of other infectious disease
Hemopurifiers. We are considering various scenarios for the heavy-metal Hemopurifier products, which may include licensing or selling products which are not related to the treatment of infectious
diseases.

We
intend to enter into partnerships or other business relationships with organizations that provide expertise in process and product design, manufacturing, and quality control to
complement the development of the Company's treatment technologies.

Clinical Strategy

Aethlon Medical has completed pre-clinical human blood studies of AEMD-45 and is engaged in testing of its follow-on antiviral
products. The Company is now recruiting physicians who are key opinion leaders in the field of AIDS treatment to assist in implementing AEMD-45 as an important new treatment against the
AIDS virus. We plan for these opinion leaders to work directly with leading nephrologists within the dialysis industry and to form an alliance of specialists that will help guide the Company through
the approval and marketing process.

Aethlon
Medical expects to initiate human clinical trials for AEMD-45 in the United States as a Class III medical device, which requires Pre-market
Approval (PMA) for sale in the United States. The approval process for medical devices is generally faster and less expensive than the regulatory process for drugs and involves significantly fewer
patients. The trials consist of a Phase I trial for safety (three to six months) and a Pivotal trial for efficacy (18 to 24 months).

In
order to expedite the clinical trial process, Aethlon Medical plans to run parallel trials in the United States and Europe. In Europe, the CE Mark approval process will require a
trial that demonstrates the safety of Aethlon Medical's treatment. During this time, the information obtained in the European Safety Trial will be communicated to the FDA to facilitate the approval
process in the United States. Once the Company has received a CE mark, sales in Europe, and potentially other countries, are expected to commence.

The
patient population for Aethlon Medical's initial United States and European clinical trials will be HIV-infected individuals that are classified as "Salvage Patients" due to a
combination of disease progression and resistance to available antiviral drugs. To expedite the trial process, Aethlon Medical will establish initial protocols for treating salvage patients that are
already receiving dialysis treatments for kidney failure. Currently, almost 10% of dialysis patients in major metropolitan areas are co-infected with HIV. Since these patients are already
undergoing dialysis, inclusion of the AEMD-45 therapeutic device during scheduled dialysis treatments is expected to present little difficulty.

Once
the clinical trial process is complete, Aethlon Medical plans to apply for pre-market approval to sell the devices to treat HIV-infected patients currently on dialysis.
At the same time, the Company will quickly seek to extend label indications to include treating non-dialysis patients through independent studies at hospitals and clinics. The Company also
expects to partner with major

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pharmaceutical companies to study the benefits of the Hemopurifier as a conjunctive therapy to extend the life and effectiveness of approved drug treatments. These partnerships are expected to be an
early source of revenue for the Company.

Any
resulting medical device or process will require approval by the U.S. Food and Drug Administration ("FDA"), and the Company has not yet begun efforts to obtain FDA approval on its
current lead product candidate, which may take several years. Since several of the Company's patents were issued in the 1980's, they are scheduled to expire in the near future. Thus, such patents may
expire before FDA approval, if any, is obtained.

Marketing and Sales

Aethlon Medical is uniquely positioned to develop a compelling sales and marketing campaign through leveraging each treatment application within two distinct
channels:



Initial
support from dialysis industry leaders will help to evolve a long-term strategy that allows Aethlon Medical to leverage the talents of established sales teams that can effectively
educate clinicians on the features and benefits of each therapeutic device. As a result, widespread branding of Aethlon Medical's treatments as an integral component of the treatment process may
result in new profit centers for the operators of dialysis centers.

Aethlon
Medical plans to employ a small commercial team, including marketing, sales, customer service and technical service professionals to directly support the efforts of its
pharmaceutical and dialysis industry partners.

The
marketing team will be responsible for all pre-launch activities including product definition and project management, transitioning to commercial activity, including
sales training, cooperative promotional programs, working with corporate partners' product management teams and managing all marketing associated with direct business. The anticipated focus of the
Aethlon Medical marketing team will be to support the sales and marketing efforts of each corporate partner. The Company does not plan to market directly to targeted patient populations.

ITEM 2. DESCRIPTION OF PROPERTY

The Company currently rents approximately 1,000 square feet of laboratory space in San Diego, California on a month-to-month basis at a
lease rate of $1,200 per month. The Company also leases approximately 1,200 square feet of executive office space in La Jolla, California at the rate of $3,200 per month on a
month-to-month lease for use as its principal executive offices.

ITEM 3. LEGAL PROCEEDINGS

There are no material pending legal proceedings, and the Company is not aware of any threatened legal proceedings to which the Company may be a party.

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

No matters were submitted to the shareholders for vote during the fourth quarter of fiscal 2002.

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PART II

ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

Limited Public Market for Shares of Common Stock

The Company's Common Stock is quoted on the NASDAQ Over-the-Counter Bulletin Board ("OTCBB"). The Company's trading symbol is "AEMD." The
Company's Common Stock has had a limited trading history, and trading has been limited and sporadic.

The
following table sets forth for the calendar period indicated the high and low quotations for the Common Stock as reported by the OTCBB. The prices represent quotations between
dealers, without adjustment for retail markup, mark down or commission, and do not necessarily represent actual transactions.

|            |      | High |       | Low
|----------- | ---- | ---- | ----- | ---
|            | 2002 |      |       |    
|2nd Quarter |      | $    | 1.95  |    
|1st Quarter |      | $    | 2.30  |    
|            | 2001 |      |       |    
|4th Quarter |      | $    | 3.60  |    
|3rd Quarter |      | $    | 3.50  |    
|2nd Quarter |      | $    | 3.50  |    
|1st Quarter |      | $    | 4.25  |    
|            | 2000 |      |       |    
|4th Quarter |      | $    | 6.53  |    
|3rd Quarter |      | $    | 7.00  |    
|2nd Quarter |      | $    | 9.00  |    
|1st Quarter |      | $    | 9.00  |    
|            | 1999 |      |       |    
|4th Quarter |      | $    | 10.00 |    
|3rd Quarter |      | $    | 8.75  |    
|2nd Quarter |      | $    | 8.50  |    
|1st Quarter |      | $    | 8.50  |    

There
are approximately 360 record holders of the Company's Common Stock at June 30, 2002.

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The
following table sets forth March 31, 2002 information on the Company's equity compensation plans (including the potential effect of debt instruments convertible into common
stock) in effect as of that date:

---

|                                                              |  | (a)                                                                                               |  | (b)                                                                         |  | (c)                                                                                                                                        
|------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------- |  | --------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------
|                                                             
|Plan category                                                 |  | Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights(1)(3) |  | Weighted-average
exercise price of
outstanding options,
warrants and rights |  | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a))
|                                                             
|Equity compensation plans approved by security holders        |  | 47,767                                                                                            |  | $3.04                                                                       |  | 452,233                                                                                                                                    
|                                                             
|Equity compensation plans not approved by security holders(2) |  | 3,468,203                                                                                         |  | 3.03                                                                        |  | N/A                                                                                                                                        
|                                                             

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

The following discussion and analysis should be read in conjunction with the consolidated Financial Statements and Notes thereto appearing elsewhere in this
report.

Results of Operations

Aethlon Medical is a development stage therapeutic device company that has not yet engaged in significant commercial activities. We are continuing to devote a
significant portion of our resources to the advancement of our research and development efforts and are developing new treatments for the removal of targeted viruses and other intoxicants from the
blood based on our proprietary Hemopurifier platform. Our main focus during fiscal 2002 was to further advance the HIV-Hemopurifier, AEMD-45. We completed
pre-clinical studies for AEMD-45 during the first half of fiscal 2002, demonstrating a 55% removal of HIV from whole human blood in three hours and an 85-100%
removal of HIV during the equivalent of one overnight treatment. See Item 1, "Business."

We
recorded a consolidated net loss of $3,995,910 or $(1.04) per share and $4,423,073 or $(1.59) per share for the years ended March 31, 2002 and 2001, respectively.

Consolidated
operating expenses for the year ended March 31, 2002 were $2,272,930 versus $2,991,907 in fiscal 2001. This decrease in operating expenses of $718,977or 24.0% is
largely attributable to the one-time impairment charge related to the Cell acquisition in fiscal 2001 and increased professional fees in fiscal 2002, which were partially offset by lower personnel
costs and rent as a result of the consolidation of our facilities earlier in 2001. Capital equipment expenditures were insignificant for fiscal 2002 and 2001.

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In
fiscal 2002, we incurred non-cash expenses in the amount of $562,000 related to options granted to a consultant. In fiscal 2001, we incurred non-cash expenses
in the amount of $482,000 related to options granted to our general counsel. Any proceeds from the sale of shares obtained through exercise of the options issued to general counsel in excess of the
exercise price will be applied to reduce any outstanding legal fees of our general counsel. These expenses represent a significant portion of the professional fees incurred during fiscal 2002 and
2001.

We
plan to continue our research and development activities related to our Hemopurifier platform technology, with particular emphasis on the advancement of our lead product
candidates for the treatment of HIV/AIDS.

We
will continue to carefully align our capital needs with the funding received and are pursuing various funding alternatives to support our business plan going forward. At the date of
this report, we do not have plans to purchase significant amounts of equipment or hire significant numbers of employees prior to successfully raising additional capital.

Liquidity and Capital Resources

The implementation of the Company's business plan is dependent upon its ability to raise equity capital.

During
the fiscal year ended March 31, 2001, we financed our research and development activities through the private placement of approximately $1,365,000 of notes bearing
interest at 12% per annum and convertible notes in the amount of $395,000 bearing interest at 8% per annum. During fiscal 2002, all of the 12% notes matured, increasing the interest to 15% per annum.

In
March 2002, the Company extended an offer to the 12% note holders and certain vendors to convert past due amounts into restricted common stock and warrants to purchase common
stock of the Company. During the year ended March 31, 2002, note holders and vendors representing liabilities in
the aggregate amount of approximately $1,020,000 have converted and approximately $238,000 in additional liabilities have been converted subsequent to year end. As of June 30, 2002,
approximately $422,500, the unconverted balance of the 12% notes were past due and we are seeking other financing arrangements to retire these notes.

During
the fourth quarter of fiscal year 2001, we entered into a Subscription Agreement under which we received gross proceeds of approximately $856,000, of which $712,000, net of
$44,000 in issuance costs, were received during the first half of fiscal year 2002. The proceeds were used in part to fund operating expenses as well as to reduce existing accounts payable and related
party liabilities.

During
September through December 2001, we issued convertible notes totaling $128,000 bearing interest at 10% per annum, with principal and interest becoming due six months after
issuance, to cover short-term capital needs. Of these convertible notes $113,000 have been converted into common stock at the conversion price of $1.25 per share.

Additional
funds in the aggregate amount of $200,000 were generated in January and February 2002, through the exercise of an option to purchase common stock of the Company by a
consultant.

On
March 18, 2002, the Company issued a promissory note to a stockholder in the amount of $50,000, bearing interest at 6.75% per annum and maturing on May 17, 2002.

We
expect to raise additional capital within the next six months to fund our research and development activities and anticipated operations.

11

---

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

Management
does not believe that inflation has had or is likely to have any material impact on the Company's limited operations.

At
the date of this report, we do not have plans to purchase significant amounts of equipment or hire significant numbers of employees prior to successfully raising additional capital.

ITEM 7. FINANCIAL STATEMENTS

The financial statements listed in the accompanying Index to Financial Statements are attached hereto and filed as a part of this Report under Item 13.

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

On May 1, 2001, the Company engaged Squar, Milner, Reehl & Williamson, LLP as its principal accountant, replacing McGladrey & Pullen, LLP who
had declined to stand for re-election. The registrant's Board of Directors has approved the decision to engage the new accountants. On May 1, 2001, we filed a
Form 8-K, which is incorporated herein by reference concerning the change in accountants.

The
reports of the principal accountant on the financial statements of the registrant for the fiscal years ended March 31, 2002 and 2001 were unqualified, with an emphasis
paragraph describing the uncertainties as to the Company's ability to continue as a going concern.

PART III

ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (a) OF THE EXCHANGE ACT

Compliance With Section 16 (a) of the Exchange Act

Section 16 (a) of the Securities Exchange Act of 1934 requires the Company's officers, directors, and persons who own more than 10% of a registered
class of the Company's equity securities to file reports of ownership and changes in ownership with the Securities and Exchange Commission (the "SEC") and Nasdaq. Officers, directors, and greater than
10% beneficial owners are required by SEC regulation to furnish the Company with copies of all Section 16 (a) forms they file. The Company believes that all filing requirements
applicable to its officers, directors, and greater than 10% beneficial owners were complied with.

12

---

Executive Officers, Directors and Key Employees

The names, ages and positions of the Company's directors and executive officers as of March 31, 2002 are listed below:

|Names                  |  | Title or Position                                     |  | Age
|---------------------- |  | ----------------------------------------------------- |  | ---
|James A. Joyce         |  | Chairman, President And Chief Executive Officer       |  | 40 
|Robert S. Stefanovich  |  | Vice President, Chief Financial Officer and Secretary |  | 37 
|Richard H. Tullis, PhD |  | Vice President, Chief Scientific Officer and Director |  | 57 
|Franklyn S. Barry, Jr. |  | Director                                              |  | 62 
|Edward G. Broenniman   |  | Director                                              |  | 65 

Effective
June 1, 2001, Mr. Joyce was appointed President and Chief Executive Officer of the Company, replacing Mr. Barry, who continues as a member of the board of
directors. Mr. Barry also serves as a consultant on strategic business issues.

Also
effective June 1, 2001, Dr. Tullis was appointed as the Company's Chief Scientific Officer, replacing Dr. Ambrus, who retired.

Effective
July 16, 2001, Mr. Stefanovich was appointed Vice President and Chief Financial Officer of the Company, replacing Mr. John Murray, who retired
February 28, 2001.

Resumes
of Management follow:

James
A. Joyce, Chairman, President and CEO

Mr.
Joyce has been the Chairman of the Board of the Company since March 1999. He has also been the President and CEO since June 2001. As the founder of Aethlon Medical,
Mr. Joyce has led the efforts that have resulted in the recent acquisitions of Hemex, Inc., Syngen Research, Inc., and Cell Activation, Inc. In February of 1993,
Mr. Joyce founded and was the Chief Executive Officer of James Joyce & Associates, an organization that provided management consulting and investment banking advisory services to CEO's
and CFO's of publicly traded companies. Previously, Mr. Joyce was Chief Executive Officer of Mission Labs, Inc., and a principal in charge of U.S. operations for London Zurich
Securities, Inc. Mr. Joyce is a graduate from the University of Maryland.

Robert
S. Stefanovich, Vice President, Chief Financial Officer and Secretary

Mr.
Stefanovich has been Vice President, Chief Financial Officer, and Secretary of the Company since July 2001. Mr. Stefanovich has held senior finance positions with both,
public and privately-held technology companies. Prior to his appointment as Chief Financial Officer of Aethlon Medical, he served as Vice President for Administration and Sector Controller
at Science Applications International Corporation (SAIC) and was the SEC Reporting Manager for Raychem Corporation (acquired by Tyco International Ltd.). Mr. Stefanovich has spent over
five years in public accounting and was member of the Software Advisory Group and Audit Manager with Price Waterhouse LLP's (now
PricewaterhouseCoopers) Hi-tech practice in San Jose, CA. Having lived and worked in Europe and Japan, he also brings extensive international experience to the Company.

Richard
H. Tullis, Ph.D., Vice President, Chief Scientific Officer

Dr.
Tullis has been Vice President and a director of the Company since January 2000 and Chief Scientific Officer since June 2001. Dr. Tullis has extensive
biotechnology management and research experience, and is the founder of Syngen Research, a wholly-owned subsidiary of Aethlon Medical, Inc. Previously, Dr. Tullis co-founded
Molecular Biosystems, Inc., a former NYSE company. At Molecular

13

---

Biosystems, Dr. Tullis was Director of Research and Development, Director of Oligonucleotide Hybridization, Senior Research Scientist and Member of the Board of Directors. In research,
Dr. Tullis developed and patented the first application of oligonucleotides to antisense antibiotics and developed new methods for the chemical synthesis of DNA via
methoxy-phosphorochloridites. Dr. Tullis also co-developed the first applications of covalently coupled DNA-enzyme conjugates using synthetic oligonucleotides during his
tenure at Molecular Biosystems. In 1985, Dr. Tullis founded, and served as President and CEO of Synthetic Genetics, Inc., a pioneer in custom DNA synthesis, which was sold to Molecular
Biology Resources in 1991. Dr. Tullis also served as interim-CEO of Genetic Vectors, Inc., which completed its IPO under his management, and was co-founder of DNA
Sciences, Inc., a company that was eventually acquired by Genetic Vectors. Dr Tullis received his Ph.D. in Biochemistry and Cell Biology from the University of California at San Diego, and has
done extensive post-doctoral work at UCSD, USC, and The Scripps Research Institute.

Franklyn
S. Barry, Jr.

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

Edward
G. Broenniman

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

Each
of the directors is serving for a term that extends to the next Annual Meeting of Shareholders of the Company. The Company's Board of Directors presently has an Audit Committee and
a Compensation Committee on each of which Messrs. Barry and Broenniman serve. Mr. Barry is Chairman of the Audit Committee, and Mr. Broenniman is Chairman of the Compensation
Committee.

ITEM 10. EXECUTIVE COMPENSATION

Incorporated by reference from our Proxy Statement, which we expect to be filed within 120 days from the close of our fiscal year 2002.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

Incorporated by reference from our Proxy Statement, which we expect to be filed within 120 days from the close of our fiscal year 2002.

14

---

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from our Proxy Statement, which we expect to be filed within 120 days from the close of our fiscal year 2002.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K



15

---



|3.1  | Articles of Incorporation and Bylaws of the Company (1)                                            
|---- | ---------------------------------------------------------------------------------------------------
|3.2  | Certificate of Amendment of Articles of Incorporation dated March 28, 2000 (2)                     
|10.1 | Employment Agreement between the Company and Franklyn S. Barry, Jr. dated April 1, 1999 (3)        
|10.2 | Employment Agreement between the Company and James A. Joyce dated April 1, 1999 (3)                
|10.3 | Agreement and Plan of Reorganization Between the Company and Aethlon, Inc. dated March 10, 1999 (4)
|10.4 | Agreement and Plan of Reorganization Between the Company and Hemex, Inc. dated March 10, 1999 (4)  
|10.5 | Agreement and Plan of Reorganization Between the Company and Syngen Research, Inc. (5)             
|10.6 | Agreement and Plan of Reorganization Between the Company and Cell Activation, Inc. (6)             

---



16

---





SIGNATURES

In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized, on the 16th day of July 2002.

| |  | By: | /s/JAMES A. JOYCEJames A. Joyce
Chairman, President & Chief Executive Officer           
| |  | --- | ----------------------------------------------------------------------------------------
| |  | By: | /s/ROBERT S. STEFANOVICHRobert S. Stefanovich
Vice President and Chief Financial Officer

In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates
indicated.

|Signature                                       |  | Title                 |  | Date         
|----------------------------------------------- |  | --------------------- |  | -------------
|                                                |  |                       |  |              
|/s/JAMES A. JOYCEJames A. Joyce                 |  | Chairman of the Board |  | July 16, 2002
|/s/FRANKLYN S. BARRY, JR.Franklyn S. Barry, Jr. |  | Director              |  | July 16, 2002
|/s/EDWARD G. BROENNIMANEdward G. Broenniman     |  | Director              |  | July 16, 2002
|/s/RICHARD H. TULLISRichard H. Tullis           |  | Director              |  | July 16, 2002

17

---

AETHLON MEDICAL, INC. AND SUBSIDIARIES  (A Development Stage Company)        CONSOLIDATED FINANCIAL STATEMENTS    
March 31, 2002 and 2001

---

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

|Independent Auditors' Report                     |  | F-1
|------------------------------------------------ |  | ---
|Consolidated Balance Sheets                      |  | F-2
|Consolidated Statements of Operations            |  | F-3
|Consolidated Statements of Stockholders' Deficit |  | F-4
|Consolidated Statements of Cash Flows            |  | F-5
|Notes to Consolidated Financial Statements       |  | F-6

---



INDEPENDENT AUDITORS' REPORT

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

We
have audited the accompanying consolidated balance sheets of Aethlon Medical, Inc. and Subsidiaries (the "Company"), a Development Stage Company, as of March 31, 2002
and 2001 and the related consolidated statements of operations, stockholders' deficit and cash flows for the years then ended and for the period from January 31, 1984 (Inception) to
March 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on
our audits.

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

In
our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Aethlon Medical, Inc. and Subsidiaries
as of March 31, 2002 and 2001 and the results of their operations and their cash flows for the years then ended and for the period from January 31, 1984 (Inception) to March 31,
2002, in conformity with accounting principles generally accepted in the United States.

The
accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company has reported a net loss of approximately
$13.2 million for the period from January 31, 1984 (Inception) through March 31, 2002. As discussed in Note 14 to the consolidated financial statements, a significant
amount of additional capital will be necessary to advance
the development of the Company's products to the point at which they may become commercially viable. These conditions raise substantial doubt about the Company's ability to continue as a going
concern. Management's plans regarding these matters are also described in Note 14. The accompanying consolidated financial statements do not include any adjustments that might result from the
outcome of this uncertainty.

/s/
Squar, Milner, Reehl & Williamson, LLP

July 12,
2002
Newport Beach, California

F-1

---



AETHLON MEDICAL, INC. AND SUBSIDIARIES  (A Development Stage Company)  CONSOLIDATED BALANCE SHEETS  March 31, 2002 and 2001

|                                      |                                                                                                                                                                        | 2002 |            | 2001        |  
|------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---- | ---------- | ----------- | -
|ASSETS                                |                                                                                                                                                                       
|Current Assets                        |                                                                                                                                                                        |      |            |             |  
|                                      | Cash                                                                                                                                                                   |      | $          | 10,667      |  
|                                      | Accounts receivable                                                                                                                                                    |      |            |            |  
|                                      | Prepaid expenses                                                                                                                                                       |      |            | 140,788     |  
|                                      |                                                                                                                                                                        |      |            |             |  
|                                      |                                                                                                                                                                        |      | 151,455    |             |  
|Furniture and Equipment, net          |                                                                                                                                                                        |      | 37,182     |             |  
|Deferred Financing Costs, net         |                                                                                                                                                                        |      |           |             |  
|Patents and Patents Pending, net      |                                                                                                                                                                        |      | 560,790    |             |  
|Employment Contract, net              |                                                                                                                                                                        |      | 222,156    |             |  
|Other Assets                          |                                                                                                                                                                        |      | 1,955      |             |  
|                                      |                                                                                                                                                                        |      |            |             |  
|                                      |                                                                                                                                                                        | $    | 973,538    |             | $
|                                      |                                                                                                                                                                        |      |            |             |  
|LIABILITIES AND STOCKHOLDERS' DEFICIT |                                                                                                                                                                       
|Current Liabilities                   |                                                                                                                                                                        |      |            |             |  
|                                      | Accounts payable and accrued liabilities                                                                                                                               |      | $          | 1,160,219   |  
|                                      | Due to related parties                                                                                                                                                 |      |            | 1,073,355   |  
|                                      | Notes payable, net of debt discount                                                                                                                                    |      |            | 572,500     |  
|                                      | Convertible notes payable                                                                                                                                              |      |            | 365,000     |  
|                                      |                                                                                                                                                                        |      |            |             |  
|                                      |                                                                                                                                                                        |      | 3,171,074  |             |  
|Convertible Notes Payable             |                                                                                                                                                                        |      |           |             |  
|Commitments and Contingencies         |                                                                                                                                                                        |      |            |             |  
|Stockholders' Deficit                 |                                                                                                                                                                        |      |            |             |  
|                                      | Common stock, par value $0.001 per share; 25,000,000 shares authorized; 5,170,697 and 2,877,152 shares issued and outstanding at March 31, 2002 and 2001, respectively |      |            | 5,171       |  
|                                      | Common stock subscribed                                                                                                                                                |      |            |            |  
|                                      | Additional paid-in capital                                                                                                                                             |      |            | 7,391,382   |  
|                                      | Stock options and warrants                                                                                                                                             |      |            | 3,571,310   |  
|                                      | Stock subscription receivable                                                                                                                                          |      |            |            |  
|                                      | Deficit accumulated during development stage                                                                                                                           |      |            | (13,165,399 | )
|                                      |                                                                                                                                                                        |      |            |             |  
|                                      |                                                                                                                                                                        |      | (2,197,536 | )           |  
|                                      |                                                                                                                                                                        |      |            |             |  
|                                      |                                                                                                                                                                        | $    | 973,538    |             | $
|                                      |                                                                                                                                                                        |      |            |             |  

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

F-2

---



AETHLON MEDICAL, INC. AND SUBSIDIARIES  (A Development Stage Company)  CONSOLIDATED STATEMENTS OF OPERATIONS  For the Years Ended March 31, 2002 and
2001 and  For the Period January 31, 1984 (Inception) Through March 31, 2002

|                                                     |                                  | 2002 |            | 2001      |   | January 31,
1984
(Inception)
Through
March 31,
2002 |          
|---------------------------------------------------- | -------------------------------- | ---- | ---------- | --------- | - | --------------------------------------------------- | ---------
|REVENUES                                             |                                  |      |            |           |   |                                                     |          
|                                                     | Grant income                     |      | $          |          |   | $                                                   |         
|                                                     | Subcontract income               |      |            |          |   |                                                     |         
|                                                     | Sale of research and development |      |            |          |   |                                                     |         
|                                                     |                                  |      |            |           |   |                                                     |          
|                                                     |                                  |      |           |           |   |                                                    |          
|                                                     |                                  |      |            |           |   |                                                     |          
|OPERATING EXPENSES                                   |                                  |      |            |           |   |                                                     |          
|                                                     | Professional fees                |      |            | 1,200,071 |   |                                                     | 894,581  
|                                                     | Personnel                        |      |            | 597,873   |   |                                                     | 700,415  
|                                                     | Rent                             |      |            | 81,601    |   |                                                     | 100,578  
|                                                     | Amortization of goodwill         |      |            |          |   |                                                     | 99,692   
|                                                     | Other amortization               |      |            | 180,877   |   |                                                     | 112,520  
|                                                     | Depreciation                     |      |            | 23,325    |   |                                                     | 16,206   
|                                                     | Impairment of goodwill           |      |            |          |   |                                                     | 897,227  
|                                                     | Other expenses                   |      |            | 189,183   |   |                                                     | 170,688  
|                                                     |                                  |      |            |           |   |                                                     |          
|                                                     |                                  |      | 2,272,930  |           |   | 2,991,907                                           |          
|                                                     |                                  |      |            |           |   |                                                     |          
|OTHER EXPENSE (INCOME)                               |                                  |      |            |           |   |                                                     |          
|                                                     | Interest and other debt expenses |      |            | 1,526,609 |   |                                                     | 1,452,146
|                                                     | Other charges                    |      |            | 211,758   |   |                                                     |         
|                                                     | Other income                     |      |            | (15,387   | ) |                                                     | (20,980  
|                                                     | Interest income                  |      |            |          |   |                                                     |         
|                                                     |                                  |      |            |           |   |                                                     |          
|                                                     |                                  |      | 1,722,980  |           |   | 1,431,166                                           |          
|                                                     |                                  |      |            |           |   |                                                     |          
|NET LOSS                                             |                                  | $    | (3,995,910 | )         | $ | (4,423,073                                          | )        
|                                                     |                                  |      |            |           |   |                                                     |          
|BASIC AND DILUTED LOSS PER COMMON SHARE              |                                  | $    | (1.04      | )         | $ | (1.59                                               | )        
|                                                     |                                  |      |            |           |   |                                                     |          
|WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING |                                  |      | 3,839,821  |           |   | 2,780,444                                           |          
|                                                     |                                  |      |            |           |   |                                                     |          

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

F-3

---



AETHLON MEDICAL, INC. AND SUBSIDIARIES  (A Development Stage Company)  CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT  For the Years Ended March 31,
2002 and 2001 and  For the Period January 31, 1984 (Inception) Through March 31, 2002

|                                                                                                                            |  |           |  |   |       |  |   |           |   | Deficit
Accumulated
during
Development
Stage |           |   |  
|--------------------------------------------------------------------------------------------------------------------------- |  | --------- |  | - | ----- |  | - | --------- | - | -------------------------------------------- | --------- | - | -
|
|
|
|BALANCE  January 31, 1984 (Inception)                                                                                      |  |          |  | $ |      |  | $ |          |   | $                                            |          |   | $
|Common stock issued for cash at $1 per share                                                                                |  | 22,000    |  |   | 22    |  |   | 26,502    |   |                                              |          |   |  
|Common stock issued for cash at $23 per share                                                                               |  | 1,100     |  |   | 1     |  |   | 24,999    |   |                                              |          |   |  
|Common stock issued for cash at $86 per share                                                                               |  | 700       |  |   | 1     |  |   | 59,999    |   |                                              |          |   |  
|Common stock issued for cash at $94 per share                                                                               |  | 160       |  |   | 1     |  |   | 14,999    |   |                                              |          |   |  
|Common stock issued for cash at $74 per share                                                                               |  | 540       |  |   | 1     |  |   | 39,999    |   |                                              |          |   |  
|Common stock issued for cash at $250 per share                                                                              |  | 4,678     |  |   | 5     |  |   | 1,169,495 |   |                                              |          |   |  
|Capital contributions                                                                                                       |  |          |  |   |      |  |   | 521,439   |   |                                              |          |   |  
|Common stock issued for compensation at $103 per share                                                                      |  | 2,600     |  |   | 3     |  |   | 267,403   |   |                                              |          |   |  
|Conversion of due to related parties to common stock at $101 per share                                                      |  | 1,120     |  |   | 1     |  |   | 113,574   |   |                                              |          |   |  
|Conversion of due to related parties to common stock at $250 per share                                                      |  | 1,741     |  |   | 2     |  |   | 435,092   |   |                                              |          |   |  
|Effect of reorganization                                                                                                    |  | 2,560,361 |  |   | 2,558 |  |   | (2,558    | ) |                                              |          |   |  
|Common stock issued in connection with employment contract at $8 per share                                                  |  | 65,000    |  |   | 65    |  |   | 519,935   |   |                                              |          |   |  
|Common stock issued in connection with the acquisition of patents at $8 per share                                           |  | 12,500    |  |   | 13    |  |   | 99,987    |   |                                              |          |   |  
|Warrants issued to note holders in connection with notes payable                                                            |  |          |  |   |      |  |   |          |   |                                              | 734,826   |   |  
|Warrants issued for services                                                                                                |  |          |  |   |      |  |   |          |   |                                              | 5,000     |   |  
|Net loss                                                                                                                    |  |          |  |   |      |  |   |          |   |                                              |          |   |  
|                                                                                                                            |  |           |  |   |       |  |   |           |   |                                              |           |   |  
|BALANCE  March 31, 2000                                                                                                    |  | 2,672,500 |  | $ | 2,673 |  | $ | 3,290,865 |   | $                                            | 739,826   |   | $
|Common stock and options issued in connection with acquisition of Cell Activation, Inc. at $7.20 per share                  |  | 99,152    |  |   | 99    |  |   | 713,795   |   |                                              | 353,973   |   |  
|Warrants issued to note holders in connection with notes payable                                                            |  |          |  |   |      |  |   |          |   |                                              | 218,779   |   |  
|Warrants issued to promoter in connection with notes payable                                                                |  |          |  |   |      |  |   |          |   |                                              | 298,319   |   |  
|Beneficial conversion feature of convertible notes payable                                                                  |  |          |  |   |      |  |   | 150,000   |   |                                              |          |   |  
|Warrants issued to promoter in connection with convertible notes payable                                                    |  |          |  |   |      |  |   |          |   |                                              | 299,106   |   |  
|Options issued to directors for services as board members                                                                   |  |          |  |   |      |  |   |          |   |                                              | 14,163    |   |  
|Options and warrants issued for services                                                                                    |  |          |  |   |      |  |   |          |   |                                              | 505,400   |   |  
|Common stock issued for services at $3 per share                                                                            |  | 5,500     |  |   | 5     |  |   | 16,495    |   |                                              |          |   |  
|Common stock issued for cash at $1 per share                                                                                |  | 100,000   |  |   | 100   |  |   | 99,900    |   |                                              |          |   |  
|Net loss                                                                                                                    |  |          |  |   |      |  |   |          |   |                                              |          |   |  
|                                                                                                                            |  |           |  |   |       |  |   |           |   |                                              |           |   |  
|BALANCE  March 31, 2001                                                                                                    |  | 2,877,152 |  | $ | 2,877 |  | $ | 4,271,055 |   | $                                            | 2,429,566 |   | $
|Common stock, warrants and options issued for accounts payable and accrued liabilities                                      |  | 21,750    |  |   | 22    |  |   | 135,353   |   |                                              | 108,000   |   |  
|Common stock issued for services at $2.65 per share                                                                         |  | 6,038     |  |   | 6     |  |   | 15,994    |   |                                              |          |   |  
|Common stock issued for cash at $1.00 per share, net of issuance costs of $41,540 paid to a related party                   |  | 730,804   |  |   | 731   |  |   | 688,533   |   |                                              |          |   |  
|Common stock issued for services at $2.75 per share                                                                         |  | 10,000    |  |   | 10    |  |   | 27,490    |   |                                              |          |   |  
|Common stock issued in connection with license agreement at $3.00 per share                                                 |  | 6,000     |  |   | 6     |  |   | 17,994    |   |                                              |          |   |  
|Common stock issued to holder of convertible notes payable at $3.00 per share                                               |  | 70,586    |  |   | 71    |  |   | 211,687   |   |                                              |          |   |  
|Options issued to directors for services as board members                                                                   |  |          |  |   |      |  |   |          |   |                                              | 7,459     |   |  
|Common stock issued for cash at $1.50 per share, net of issuance costs of $2,500                                            |  | 16,667    |  |   | 17    |  |   | 22,483    |   |                                              |          |   |  
|Beneficial conversion feature of convertible notes payable                                                                  |  |          |  |   |      |  |   | 185,000   |   |                                              |          |   |  
|Common stock issued for conversion of convertible notes payable and accrued interest at an average price of $1.24 per share |  | 134,165   |  |   | 134   |  |   | 166,352   |   |                                              |          |   |  
|Common stock issued for services at $2.72 per share                                                                         |  | 9,651     |  |   | 10    |  |   | 26,240    |   |                                              |          |   |  
|Options issued to consultant for services                                                                                   |  |          |  |   |      |  |   |          |   |                                              | 562,000   |   |  
|Common stock and warrants issued for services at $1.95 per share                                                            |  | 62,327    |  |   | 62    |  |   | 121,475   |   |                                              | 40,000    |   |  
|Common stock issued for services at $1.90 per share                                                                         |  | 9,198     |  |   | 9     |  |   | 17,491    |   |                                              |          |   |  
|Stock options exercised for cash                                                                                            |  | 400,000   |  |   | 400   |  |   | 199,600   |   |                                              |          |   |  
|Warrants issued to note holders for 90-day forebearance                                                                     |  |          |  |   |      |  |   |          |   |                                              | 118,000   |   |  
|Common stock and warrants issued to note holders and vendors in the debt-to-equity conversion program at $1.25 per share    |  | 816,359   |  |   | 816   |  |   | 1,284,635 |   |                                              | 339,000   |   |  
|Other warrant transactions                                                                                                  |  |          |  |   |      |  |   |          |   |                                              | (32,715   | ) |  
|Net loss                                                                                                                    |  |          |  |   |      |  |   |          |   |                                              |          |   |  
|                                                                                                                            |  |           |  |   |       |  |   |           |   |                                              |           |   |  
|BALANCE  March 31, 2002                                                                                                    |  | 5,170,697 |  | $ | 5,171 |  | $ | 7,391,382 |   | $                                            | 3,571,310 |   | $
|                                                                                                                            |  |           |  |   |       |  |   |           |   |                                              |           |   |  

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

F-4

---



AETHLON MEDICAL, INC. AND SUBSIDIARIES  (A Development Stage Company)  CONSOLIDATED STATEMENTS OF CASH FLOWS  For the Years Ended March 31, 2002 and
2001 and  For the Period January 31, 1984 (Inception) Through March 31, 2002

|                                                                                            |                                                            | 2002                                     |            | 2001      |         | January 31,
1984
(Inception)
Through
March 31,
2002 |          
|------------------------------------------------------------------------------------------- | ---------------------------------------------------------- | ---------------------------------------- | ---------- | --------- | ------- | --------------------------------------------------- | ---------
|CASH FLOWS FROM OPERATING ACTIVITIES                                                        |                                                            |                                          |            |           |         |                                                     |          
|Net loss                                                                                    |                                                            | $                                        | (3,995,910 | )         | $       | (4,423,073                                          | )        
|Adjustments to reconcile net loss to net cash used in operating activities:                 |                                                            |                                          |            |           |         |                                                     |          
|                                                                                            | Depreciation and amortization                              |                                          |            | 204,202   |         |                                                     | 228,418  
|                                                                                            | Gain on sale of furniture and equipment                    |                                          |            |          |         |                                                     | (13,065  
|                                                                                            | Interest and debt expenses related to warrants             |                                          |            | 1,232,124 |         |                                                     | 1,111,454
|                                                                                            | Common stock, warrants and options issued for services     |                                          |            | 734,121   |         |                                                     | 1,132,313
|                                                                                            | Beneficial conversion feature of convertible notes payable |                                          |            | 185,000   |         |                                                     | 150,000  
|                                                                                            | Impairment of goodwill                                     |                                          |            |          |         |                                                     | 897,227  
|                                                                                            | Deferred compensation forgiven                             |                                          |            |          |         |                                                     |         
|                                                                                            | Changes in operating assets and liabilities:               |                                          |            |           |         |                                                     |          
|                                                                                            |                                                            | Accounts receivable                      |            |           | 4,689   |                                                     |          
|                                                                                            |                                                            | Prepaid expenses                         |            |           | 13,851  |                                                     |          
|                                                                                            |                                                            | Other current assets                     |            |           |        |                                                     |          
|                                                                                            |                                                            | Other assets                             |            |           | (625    | )                                                   |          
|                                                                                            |                                                            | Accounts payable and accrued liabilities |            |           | 462,215 |                                                     |          
|                                                                                            |                                                            | Due to related parties                   |            |           | 152,902 |                                                     |          
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|Net cash used in operating activities                                                       |                                                            |                                          | (1,007,431 | )         |         | (800,667                                            | )        
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|CASH FLOWS FROM INVESTING ACTIVITIES                                                        |                                                            |                                          |            |           |         |                                                     |          
|Acquisition of furniture and equipment                                                      |                                                            |                                          | (30,804    | )         |         | (6,478                                              | )        
|Patents and patents pending                                                                 |                                                            |                                          | (46,920    | )         |         | (136,915                                            | )        
|Proceeds from sale of furniture and equipment                                               |                                                            |                                          |           |           |         | 17,065                                              |          
|Cash of acquired company                                                                    |                                                            |                                          |           |           |         | 2,286                                               |          
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|Net cash used in investing activities                                                       |                                                            |                                          | (77,724    | )         |         | (124,042                                            | )        
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|CASH FLOWS FROM FINANCING ACTIVITIES                                                        |                                                            |                                          |            |           |         |                                                     |          
|Proceeds from issuance of notes payable                                                     |                                                            |                                          | 178,000    |           |         | 707,500                                             |          
|Deferred financing costs                                                                    |                                                            |                                          |           |           |         | (93,750                                             | )        
|Proceeds from issuance of common stock                                                      |                                                            |                                          | 911,764    |           |         | 100,000                                             |          
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|Net cash provided by financing activities                                                   |                                                            |                                          | 1,089,764  |           |         | 713,750                                             |          
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|NET INCREASE (DECREASE) IN CASH                                                             |                                                            |                                          | 4,609      |           |         | (210,959                                            | )        
|CASH beginning of period                                                                   |                                                            |                                          | 6,058      |           |         | 217,017                                             |          
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|CASH end of period                                                                         |                                                            | $                                        | 10,667     |           | $       | 6,058                                               |          
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION                                            |                                                            |                                          |            |           |         |                                                     |          
|Cash paid for:                                                                              |                                                            |                                          |            |           |         |                                                     |          
|                                                                                            | Interest                                                   |                                          | $          | 87,734    |         | $                                                   | 152,185  
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|                                                                                            | Income taxes                                               |                                          | $          | 2,363     |         | $                                                   | 3,824    
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|Non-Cash Transactions                                                                       |                                                            |                                          |            |           |         |                                                     |          
|Debt converted to common stock                                                              |                                                            | $                                        | 1,000,500  |           | $       |                                                    |          
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|Issuance of common stock, warrants and options for accounts payable and accrued liabilities |                                                            | $                                        | 425,161    |           | $       |                                                    |          
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|Issuance of common stock in connection with license agreements                              |                                                            | $                                        | 18,000     |           | $       |                                                    |          
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|Net assets of entities acquired in exchange for equity securities                           |                                                            | $                                        |           |           | $       | 1,077,867                                           |          
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|Debt placement fees paid by issuance of warrants                                            |                                                            | $                                        |           |           | $       | 597,425                                             |          
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|Warrants issued to note holders in connection with notes payable                            |                                                            | $                                        |           |           | $       | 218,779                                             |          
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|Patent pending acquired for 12,500 shares of common stock                                   |                                                            | $                                        |           |           | $       |                                                    |          
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          
|Common stock issued for prepaid expenses                                                    |                                                            | $                                        | 161,537    |           | $       |                                                    |          
|                                                                                            |                                                            |                                          |            |           |         |                                                     |          

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

F-5

---



AETHLON MEDICAL, INC. AND SUBSIDIARIES  (A Development Stage Company)  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  March 31, 2002 and 2001

1.    NATURE OF BUSINESS

Aethlon Medical, Inc. (the "Company") engages in the research and development of a medical device known as the Hemopurifier that removes
harmful substances from the blood. The Company is in the development stage on the Hemopurifier and significant research and testing are still needed to reach commercial viability. Any resulting
medical device or process will require approval by the U.S. Food and Drug Administration ("FDA"), and the Company has not yet begun efforts to obtain FDA approval on its current lead product
candidate, which may take several years. Since many of the Company's patents were issued in the 1980's, they are scheduled to expire in the near future. Thus, such patents may expire before FDA
approval, if any, is obtained.

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

The
Company's common stock is quoted on the Over-the-Counter Bulletin Board of the National Association of Securities Dealers under the symbol "AEMD".

2.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The summary of significant accounting policies of the Company presented below is designed to assist the reader in understanding the Company's consolidated
financial statements. Such financial statements and related notes are the representations of Company management, who is responsible for their
integrity and objectivity. These accounting policies conform to GAAP in all material respects, and have been consistently applied in preparing the accompanying consolidated financial statements.

Principles of Consolidation

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

Use of Estimates

Management uses estimates and assumptions in preparing financial statements in accordance with GAAP. Such estimates and assumptions affect the reported amounts of
certain assets and liabilities, disclosures relating to any contingent assets and liabilities, and the reported amounts of certain expenses. Significant estimates include the estimated useful life of
the employment contract, realization of long lived asstes, valuation allowance of deferred taxes and valuation of certain equity instruments. Actual results could vary from the estimates used to
prepare the accompanying consolidated financial statements.

Fair Value of Financial Instruments

Statement of Financial Accounting Standards No. 107, "Disclosures about Fair Value of Financial
Instruments", requires the disclosure of the fair value, if reasonably obtainable, of the Company's financial instruments. Management believes that the carrying amounts of the
Company's financial instruments including its accounts receivable, accounts payable and accrued liabilities, notes payable and convertible notes payable approximate their fair value at
March 31, 2002 and 2001. It is not

F-6

---

practical to estimate the fair value of amounts due to related parties based on their related party nature.

Concentrations

Financial instruments that may subject the Company to credit risk principally consist of uninsured cash-in-bank balances. The Company
currently maintains substantially all of its cash with two major
financial institutions. At times, cash balances may be in excess of the amounts insured by the Federal Deposit Insurance Corporation.

Furniture and Equipment

Furniture and equipment are stated at cost. Major renewals and improvements are capitalized, while replacements, maintenance and repairs that do not significantly
improve or extend the useful life of the asset are expensed when incurred.

Furniture
and equipment are depreciated using the straight-line method over their estimated useful lives ranging from three to five years. Accumulated depreciation and
amortization approximated $166,000 and $143,000 at March 31, 2002 and 2001, respectively.

Patents and Patents Pending

The Company capitalizes the cost of patents and patents pending (some of which were acquired in the purchase of Cell; see Note 4) and amortizes such costs
over the shorter of the remaining legal life or their estimated economic life, upon issuance of the patent. Patents pending approximated $431,000 and $479,000 at March 31, 2002 and 2001,
respectively, of which $245,000 and $310,000 at March 31, 2002 and 2001, respectively, were acquired in the purchase of Cell. The unamortized cost of patents and patents pending is written off
when management determines there is no future benefit. Capitalized patent costs in the amount of approximately $5,000 were written off during the year ended March 31, 2002. No patent costs were
written off during the year ended March 31, 2001. Accumulated amortization of patents approximated $63,000 and $51,000 at March 31, 2002 and 2001, respectively. Patents include both
foreign and domestic patents and patents pending.

Goodwill

Management determined that the goodwill acquired in the purchase of Cell (see Note 4) was fully impaired at March 31, 2001 because the Company has
temporarily suspended the use of certain technology acquired from Cell. Accordingly, management recorded an impairment expense of approximately $900,000 during the fourth quarter of the year ended
March 31, 2001. Prior to such impairment, goodwill was amortized using the straight-line method over 10 years.

Impairment of Long-Lived Assets

The Company reviews the carrying values of its long-lived and identifiable intangible assets for possible impairment whenever events or changes in
circumstance indicate that the carrying amount of the assets may not be recoverable. If the cost basis of a long-lived asset is greater than the projected future undiscounted net cash
flows from such asset (excluding interest), an impairment loss is recognized. Impairment losses are calculated as the difference between the cost basis of an asset and its estimated fair value. Any
long-lived assets held for disposal are reported at the lower of their carrying amounts or estimated fair values less costs to sell. No impairment charges were recorded during the year
ended March 31, 2002. Other than the impairment of goodwill mentioned above, no impairment charges were recorded during the year ended March 31, 2001. The Company's long-lived
assets are stated at cost less accumulated depreciation and amortization.

F-7

---

Deferred Financing Costs

The Company incurred warrant costs in connection with the issuance of the debt discussed in Notes 6 and 7. Such costs, incurred during the year ended
March 31, 2001 approximated $805,000 and are amortized using the effective-yield method over the life of the related debt, ranging from one to two years. No such costs were incurred during the
year ended March 31, 2002. At March 31, 2002, such debt was either past due or payable in the short term. Since it was more likely than not that the outstanding debt was not to be paid
by the due date, the Company wrote off all remaining deferred financing costs associated with such debt. The write-off approximated $93,000 during the year ended March 31, 2002 and
is included in interest and other debt expenses in the Company's consolidated statements of operations. Accumulated amortization of deferred financing costs at March 31, 2001 approximated
$483,000.

Stock Purchase Warrants Issued with Notes Payable

The Company granted warrants in connection with the issuance of certain notes payable (see Note 6). Under Accounting Principles Board Opinion No. 14
("APB 14"), "Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants", the estimated value of such warrants represents a discount
from the face amount of the notes payable. Accordingly, the relative estimated fair value of the warrants has been recorded in the financial statements as a discount from the face amount of the notes.
The discount was amortized using the effective yield method over the respective lives of the related notes payable of one year. The discount was fully amortized at March 31, 2002 and
approximated $54,000 at March 31, 2001.

Beneficial Conversion Feature of Convertible Notes Payable

The convertible feature of certain notes payable (see Note 7) provides for a rate of conversion that is below market value. Such feature is normally
characterized as a "beneficial conversion feature". Pursuant to Emerging Issues Task Force Issue No. 98-5 ("EITF 98-5"),
"Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios" and Emerging Issues Task Force
Issue No. 00-27, "Application of EITF Issue No. 98-5 to Certain Convertible Instruments", the Company has
determined the value of such beneficial conversion feature ("BCF") to be approximately $150,000 and $128,000, for the 8% Convertible Notes and 10% Convertible Notes, respectively. Accordingly, the
relative fair value of the BCF has been recorded in the financial statements as a discount from the face amount of the notes. Such discount was expensed as interest upon issuance of the notes because
the notes were convertible upon issuance.

See
Notes 5 and 7 for additional BCF matters.

Stock-Based Compensation

The Company has implemented the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," and measures compensation expense for its stock-based compensation awards to employees and directors using
the intrinsic value method of accounting prescribed by Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock Issued to
Employees." The Company accounts for stock options and similar equity instruments issued to outside consultants using the fair value method of accounting prescribed by
SFAS 123. See Notes 7, 9 and 10 for additional information.

In
March 2000, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 44 ("FIN 44"), "Accounting for Certain Transactions
Involving Stock Compensation," an interpretation of APB 25. FIN 44 clarifies the application of APB 25 for (a) the definition of employee for purposes of applying APB
25, (b) the criteria for determining whether a plan qualifies as a non-compensatory plan, (c) the accounting consequence for various modifications to the terms of a
previously fixed stock option

F-8

---

or award, and (d) the accounting for an exchange of stock compensation awards in a business combination. FIN 44 is effective July 1, 2000, but certain provisions cover specific events
that occur after either December 15, 1998, or January 12, 2000.

Research and Development Expenses

The Company incurred approximately $337,000 and $530,000 of research and development expenses during the years ended March 31, 2002 and 2001, respectively,
which are included in operating expenses in the consolidated statements of operations.

Income Taxes

Using the liability method required by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes," the estimated tax effects of temporary differences between financial and income tax reporting are recorded in the period in which the events occur. Such differences
between the financial and tax bases of assets and liabilities result in future tax deductions or taxable income (see Note 11).

Deferred
income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the
amounts reported for income tax purposes, and (b) tax operating loss carryforwards. The Company records a valuation allowance for deferred income tax assets when, based on management's best
estimate of taxable income in the foreseeable future, it is more likely than not that some portion of the deferred income tax assets may not be realized.

Loss per Common Share

Loss per common share is based on the weighted average number of shares of common stock and potential common stock outstanding during the year in accordance with
Statement of Financial Accounting Standards No. 128,"Earnings per Share."

Securities
that could potentially dilute basic loss per share (prior to their conversion, exercise or redemption) were not included in the
diluted-loss-per-share computation because their effect is anti-dilutive. The total potential common shares that have not been included in such
computation (see Notes 7, 9 and 10) approximated 3,500,000 and 2,000,000 at March 31, 2002 and 2001, respectively.

Segment Reporting

The Company has adopted Statement of Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments of an
Enterprise and Related Information". SFAS 131 establishes standards
for the way public companies report information about operating segments and related disclosures about products and services, geographic areas and major customers in annual financial statements. The
Company operates entirely in one business segment in the United States.

Recent Accounting Pronouncements

Effective April 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), as amended. Since the Company does not presently engage in activities covered by SFAS 133, there was no
significant effect on the Company's consolidated financial statements for the year ended March 31, 2002.

In
July 2001, the FASB issued Statements No. 141, "Business Combinations" ("SFAS 141") and No. 142 "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 is effective for fiscal years beginning after June 30, 2001 and requires that all business combinations be accounted for by the

F-9

---

purchase method. SFAS 142 is effective for fiscal years beginning after December 15, 2001 and provides that all existing and newly acquired goodwill and certain intangible assets will
no longer be amortized but will be tested for impairment at least annually and written down only when impaired. Additionally, the FASB has recently issued Statements No. 143,
"Accounting for Asset Retirement Obligations" ("SFAS 143") and No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets" ("SFAS 144"). SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible
long-lived assets and the associated asset retirement costs, and is effective for financial statements issued for fiscal years beginning after June 15, 2002. SFAS 144 is
effective for financial statements issued for fiscal years beginning after December 15, 2001. Management does not expect that the requirements of such pronouncements will have a significant
impact on the Company's future financial statements.

Reclassifications

Certain reclassifications have been made to the 2001 financial statement presentation to correspond to the 2002 format.

3.    EMPLOYMENT CONTRACT

On January 10, 2000, the Company completed the acquisition of the assets of Syngen Research, Inc. ("Syngen"). In accordance with the purchase agreement,
the Company issued 65,000 shares of restricted common stock in exchange for all of the outstanding common shares of Syngen. The transaction was intended to qualify as a tax-free purchase
under Section 368 (a)(1)(b) of the 1986
Internal Revenue Code, as amended. Since Syngen had no significant assets, liabilities or operations, the Company has accounted for the transaction as an asset purchase for the employment of Syngen's
sole shareholder, Dr. Richard Tullis, and not as a business combination. Dr. Tullis, as part of the transaction executed a two-year employment contract with the Company to
perform research. Such employment contract is amortized over four years on a straight-line basis because management believes that more likely than not the employment agreement will be extended beyond
its expiration date of January 9, 2003. The compensation under such agreement was modified in June 2001 from $80,000 to $150,000 per year. Under the terms of the agreement, if
Dr. Tullis is terminated, he will receive a salary continuation payment in the amount of at least twelve months' base salary.

The
Company recorded approximately $520,000 for the employment contract based on the fair value of the Company's 65,000 shares of restricted common stock issued in the transaction. Such
value has been estimated at approximately $8.00 per share.

Accumulated
amortization of such employment contract approximated $286,000 and $117,000 at March 31, 2002 and 2001, respectively.

4.    ACQUISITION OF CELL ACTIVATION, INC.

On April 6, 2000, the Company completed the acquisition of Cell. In accordance with the purchase agreement, the Company issued 99,152 shares of restricted
common stock and 50,848 options to purchase common stock (see Note 10) in exchange for all of the outstanding common stock and options to purchase common stock of Cell. The transaction was
intended to qualify as a tax-free purchase under Section 368 (a)(1)(B) of the 1986 Internal Revenue Code, as amended. After the transaction, Cell became a wholly-owned subsidiary of
the Company.

The
Company has accounted for the acquisition of Cell using the purchase method of accounting. The total purchase consideration of approximately $1,100,000 was allocated as follows based
on the

F-10

---

estimated fair value of the net assets acquired as partially determined by an independent third-party valuation:

Goodwill (fully impaired at March 31, 2001)

$
997,000Patents and patents pending


202,000Other assets


5,000Liabilities


(126,000
)$
1,078,000


The
purchase price allocation set forth above is also based on an independent third-party valuation of the estimated fair value of the Company's restricted common stock issued in the
acquisition. Such value has been estimated at approximately $7.20 per share, aggregating approximately $714,000, considering restrictions on the sale of such stock. The estimated fair value of the
options granted in connection with the Cell acquisition were valued at approximately $354,000 using the Black-Scholes option pricing model, considering restrictions on the sale of underlying
restricted common stock. The Company also incurred acquisition costs of approximately $10,000.

There
are certain restrictions on the unregistered public sale or other transfer of the Company's common stock and stock options issued in the acquisitions of Cell and the employment
contract with Dr. Tullis. Such stock, generally referred to as "Rule 144 stock," was not registered under the Securities Act of 1933, as amended (the "Act"), in reliance upon an exemption from
its registration requirements. Such restrictions generally begin to phase out after a one-year holding period.

The
Company is currently in negotiations with independent third parties to purchase the remaining interests in certain patents acquired in connection with the Cell acquisition, where
Cell did not own a 100% interest.

Pro Forma Information

The pro forma information as though the Cell acquisition occurred on April 1, 2000 is not considered material to the accompanying financial statements.

5.    DEBT-TO-EQUITY CONVERSION PROGRAM

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

During
the year ended March 31, 2002, note holders and vendors representing liabilities in the aggregate amount of approximately $1,020,000 converted their debt in exchange for
816,359 shares of Common Stock and 408,180 warrants to purchase common stock. Such warrants were valued using the Black-Scholes option pricing model at approximately $339,000. Since the warrant
conversion rate was below estimated market value, BCF approximating $265,000 was recorded during the year ended March 31, 2002.

6.    NOTES PAYABLE

12% Notes

During the years ended March 31, 2001 and 2000, the Company entered into arrangements for the issuance of $1,365,000 of debt from private placement
offerings (the "12% Notes"). The 12% Notes bear interest at 12% per annum, interest payable quarterly, mature one year from the date of issuance,

F-11

---

and carry detachable warrants (see below). At March 31, 2002, all outstanding 12% Notes had matured, and interest on such notes for periods after maturity is accruing at the annual rate of
15%.

In
connection with the above issuance of notes payable, the Company issued 682,500 warrants to purchase common stock to the note holders at the rate of one warrant for every $2.00 of
debt. Such warrants have an exercise price of $5.00 per share, expire five years from the date of issuance, and were exercisable upon issuance. Such warrants were valued using the Black-Scholes option
pricing model at approximately $955,000 and represented a discount from the face amount of the notes payable.

Also,
in connection with the above issuance of notes payable, the Company paid commissions to promoters in the form of cash and warrants. During the years ended March 31, 2001 and
2000, the Company paid such promoters cash approximating $35,000 and $115,000, respectively, and issued 15,625 and 50,875 warrants, respectively, to purchase Company common stock. Such warrants have
the same terms as described above and were valued using the Black-Scholes option pricing model at approximately $300,000 and were included as deferred financing costs.

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

All
of the 12% Notes were past due and in default at March 31, 2002 and bear interest at 15% per annum until paid.

6.75% Promissory Note

On March 18, 2002, the Company issued a promissory note to a stockholder in the amount of $50,000, bearing interest at 6.75% per annum and maturing on
May 17, 2002. Such note was past due and in default as of July 12, 2002.

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

F-12

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7.    CONVERTIBLE NOTES PAYABLE

8% Convertible Notes

In November 2000, the Company issued convertible notes payable ("8% Convertible Notes") totaling $395,000, bearing interest at 8% per annum, with principal
and accrued interest due on November 1, 2002. The 8% Convertible Notes require no payment of principal or interest during the term and may be converted to common stock of the Company at any
time at the option of the holder. The number of common shares issuable upon conversion is equal to the total principal and unpaid interest as of the date of conversion, divided by the conversion
price. The conversion price per share was changed effective August 31, 2001 to the lesser of (a) 80% of the closing market price for the common stock; or (b) 70% of the average of
the three lowest closing market prices for the common stock for the 10 trading days prior to conversion. Such change resulted in additional BCF approximating $57,000 during the year ended
March 31, 2002.

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

In
connection with the issuance of the 8% Convertible Notes, the Company paid approximately $60,000 in cash and issued 128,925 warrants to purchase Company common stock to a promoter.
Such warrants expire in November 2005 and February 2006, and were exercisable upon issuance. Such warrants now have exercise prices between $2.48 and $2.50 per share (see below), expire
in November 2005, and were exercisable upon issuance. Such warrants were valued using the Black-Scholes option pricing model at approximately $300,000 and were included as deferred financing
costs.

The
8% Convertible Notes required the Company to file an effective registration statement by February 2001. The Company filed Form SB-2 with the Securities and
Exchange Commission in December 2000; however, such registration statement was never declared effective. Management intends to file a new registration statement when cash becomes
available to fund registration expenses.

In
exchange for a waiver of the requirement to file an effective registration statement through January 2002, the Company issued 70,586 shares of common stock to the holder of the
8% Convertible Notes and agreed to reduce the exercise price of 119,048 warrants from $3.575 to $2.50 per share. The adjustment recorded by the Company at March 31, 2002 to account for the
reduction of the warrant's exercise price is not material to the accompanying financial statements. The Company may incur additional charges in exchange for further waivers through the date of an
effective registration statement.

10% Convertible Notes

During September through November 2001, the Company issued convertible notes payable ("10% Convertible Notes") in the amount of $128,000 to various
investors, bearing interest at 10% per annum, with principal and accrued interest due six months from the date of issuance. The 10% Convertible Notes require no payment of principal or interest during
the term and may be converted to common stock of the Company at the conversion price of $1.25 per share at any time at the option of the holder. As of March 31, 2002, investors representing
notes in the amount of $113,000 converted their notes and accrued interest into 93,898 shares of common stock, leaving $15,000 and interest thereon due and outstanding.

F-13

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8.    STOCK TRANSACTIONS

Common Stock Subscription Agreement

On March 9, 2001, the Company entered into an agreement with an investor whereby the Company agreed to sell 950,000 shares of its restricted common stock,
with a minimum subscription of 800,000 shares at $1.00 per share to such investor on certain dates. The March 9, 2001 closing market price of the Company's common stock was $2.50 per share.
During March 2001, the Company issued 100,000 shares of common stock in exchange for $100,000 in cash under such agreement. During the year ended March 31, 2002, the Company issued
747,471 shares of common stock to the investors in exchange for approximately $712,000 in cash, net of issuance costs of approximately $44,000 under this agreement. No further subscriptions were made
under this agreement.

9.    WARRANTS

During the years ended March 31, 2002 and 2001, the Company issued 239,000 and 10,000 warrants, respectively, to purchase common stock in exchange for
services. Warrants issued during the year ended March 31, 2002 were measured using the Black-Scholes option pricing model or the estimated fair value of the services rendered if deemed more
reliably measurable than the Black-Scholes option pricing model for such transactions. Warrants issued during the year ended March 31, 2002 were valued using the Black-Scholes option pricing
model at $118,000, of which $78,000 were previously recorded as accounts payable and accrued liabilities in fiscal year 2001. Warrants issued during the year ended March 31, 2001 were valued
using the Black-Scholes option pricing model at approximately $23,000.

Other
warrant issuances are described in Notes 5, 6 and 7 in the consolidated financial statements.

A
summary of the aggregate warrant activity for the years ended March 31, 2002 and 2001 is presented below:

2002

2001Warrants outstanding  beginning of year

891,675

563,575Warrants issued

982,180

328,100Warrants expired



Warrants exercised



Warrants outstanding  end of year

1,873,855

891,675


Warrants
issued during the years ended March 31, 2002 and 2001 whose fair value has been estimated using the Black-Scholes stock option pricing model were based on the exercise
price per share, the market price of the Company's common stock, and the weighted average assumptions set forth below:

2002

2001Expected life

2.4 years

5 yearsEstimated volatility

56%

60%Risk-free interest rate

3.4%

6.1%Dividends

Zero

Zero


10.  OPTIONS

Stock Option Plan

In August 2000, the Company adopted the 2000 Stock Option Plan ("Stock Option Plan"), which was approved by its stockholders in September 2000. The
Stock Option Plan provides for the issuance

F-14

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

During
the year ended March 31, 2001, the Company granted 67,000 incentive options to various officers and employees pursuant to the Stock Option Plan to purchase shares of common
stock at an exercise price of $2.56 per share, which equaled the market price of the Company's common stock on the grant date. Such options expire 10 years from the grant date. Of the options
granted, 50% generally vest over a two year period and the remaining 50% generally vest over a three year period. Accelerated vesting for approximately 30,000 of the granted options is available based
on certain research and
development milestones, as defined in the Stock Option Plan. Certain of such options were forfeited during the years ended March 31, 2002 and 2001.

Options Issued in Connection with Acquisition of Cell Activation, Inc.

As further discussed in Note 4, in connection with the acquisition of Cell, the Company issued 50,848 options to purchase common stock at an exercise price
of $0.39 per share and expiring approximately seven years after the date of issuance. Such options had substantially the same terms as those previously issued by Cell to its shareholders prior to the
acquisition by the Company.

Non-Plan Issuances

In March 2002, the board of directors authorized the grant of non-qualified stock options to its Chief Executive Officer and Dr. Tullis
to purchase up to 250,000 shares of common stock each, at an exercise price of $1.90 per share (the fair market value at grant date). Awards are earned upon achievement of certain financial and/or
research and development milestones. Should the Company's Chief Executive Officer or Dr. Tullis leave his position with Aethlon Medical for any reason other than "For Cause" (as commonly
defined), each will be credited with no fewer than 50,000 option shares for each full year of employment from March 11, 2002. To the extent that such cumulative shares have not then been earned
by the achievement of specified milestones, option shares required to make up the difference will be awarded by the Board of Directors.

In
January 2002, the Company entered into a consulting agreement under which the consultant was granted an option to purchase up to 400,000 shares of common stock of the Company
at the exercise price of $0.50 per share, expiring in April 2002. On February 12, 2002, the consultant exercised all 400,000 options. Such options were valued at approximately $562,000,
using the Black-Scholes option pricing model and expensed during the year ended March 31, 2002.

In
November 2001, the Company issued 11,067 non-statutory options to purchase common stock to certain members of the Company's Board of Directors for their services as
directors at exercise prices ranging from $1.26 per share to $2.75 per share, expiring five years from the date of issuance and vesting on the grant date. The Company recorded compensation expense
under APB 25 of approximately $7,500 related to such options. Certain of such options were forfeited during the years ended March 31, 2002 and 2001.

In
July 2001, the Company granted its Chief Financial Officer non-qualified stock options to purchase up to 150,000 shares of common stock at an exercise price of
$2.25 per share (the fair market value at grant date), which vest ratably over three years. The options expire July 15, 2011.

In
October 2000, the Company issued 7,500 non-statutory options to purchase common stock to certain members of the Company's Board of Directors for their services as
directors at exercise prices

F-15

---

ranging from $3.75 per share to $5.28 per share, expiring five years from the date of issuance and vesting on the grant date. The Company recorded compensation expense under APB 25 of approximately
$14,000 related to such options. Certain of such options were forfeited during the years ended March 31, 2002 and 2001.

During
the year ended March 31, 2001, the Company approved the issuance to its legal counsel of 200,000 options to purchase common stock at an exercise price of $3.25 per share,
expiring approximately five years from date of issuance and vesting upon grant date. Under the terms of the agreement, any proceeds from the sale of common shares obtained through the exercise of such
options in excess of the exercise price will be applied to reduce any outstanding fees owed to legal counsel in the future. Since there can be no assurance that there will be outstanding legal fees in
the future, management recorded the fair value of the options as an expense of approximately $480,000, using the Black-Scholes option pricing model. No such options were exercised during the years
ended March 31, 2002 and 2001.

During
April 1999, the Company granted its then chief executive officer 412,500 options to purchase Company common stock exercisable at $3 per share, expiring five years from the
date of issuance and vesting on the grant date. Such options were accounted for under APB 25, with no resulting expense.

Stock Option Activity

A summary of the aggregate stock option activity for the years ended March 31, 2002 and 2001 is presented below:

|                                        |  | 2002      |   | 2001    |  
|--------------------------------------- |  | --------- | - | ------- | -
|Options outstanding  beginning of year |  | 710,848   |   | 412,500 |  
|Options granted                         |  | 1,076,067 |   | 325,348 |  
|Options forfeited                       |  | (10,800   | ) | (27,000 | )
|Options exercised                       |  | (400,000  | ) |        |  
|                                        |  |           |   |         |  
|Options outstanding  end of year       |  | 1,376,115 |   | 710,848 |  
|                                        |  |           |   |         |  

|                                                                                             |  | 2002 |         | 2001
|-------------------------------------------------------------------------------------------- |  | ---- | ------- | ----
|Weighted average exercise price of options outstanding at end of year                        |  | $    | 1.42    |     
|                                                                                             |  |      |         |     
|Weighted average grant-date fair value of options granted during the year                    |  | $    | 1.35    |     
|                                                                                             |  |      |         |     
|Exercisable options  end of year                                                            |  |      | 908,160 |     
|                                                                                             |  |      |         |     
|Weighted average remaining contractual life of options outstanding at end of year (in years) |  |      | 5.3     |     
|                                                                                             |  |      |         |     

Other Matters

Options issued during the years ended March 31, 2002 and 2001 that have been measured using the Black-Scholes stock option pricing model were based on the
exercise price per share, the market price of the Company's common stock, and the weighted average assumptions set forth below:

2002

2001Expected life

4.6 years

4.7 yearsEstimated volatility

58%

96%Risk-free interest rate

3.8%

5.7%Dividends

Zero

Zero


F-16

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Stock-Based Compensation and Other Expenses

As discussed in Note 2, compensatory stock options and similar equity instruments issued to non-employees are accounted for using the fair
value method of SFAS 123. The Company recognized compensation expense related to such equity instruments of approximately $570,000 and $505,000 for the years ended March 31, 2002 and
2001, respectively. The expenses incurred during the years ended March 31, 2002 and 2001 represent costs associated with services performed by non-employees.

Options
granted to employees and directors are accounted for using the intrinsic value method of APB 25. The expense recorded during the years ended March 31, 2002 and 2001
related to such options was not significant. Estimated compensation cost related to such options, had they been accounted for under the fair value method of SFAS 123, would have approximated
$870,000 and $140,000 for the years ended March 31, 2002 and 2001, respectively. If the fair value method of accounting had been applied
to such options, the Company's reported net loss and loss per share would have been as follows for the years ended March 31, 2002 and 2001:

(In thousands, except per
share data)2002

2001Net loss, as reported

$
(3,996
)
$
(4,423
)Net loss, pro forma

$
(4,234
)
$
(4,611
)Basic and diluted loss per common share, as reported

$
(1.04
)
$
(1.59
)Basic and diluted loss per common share, pro forma

$
(1.10
)
$
(1.66
)


The
above pro forma effects of applying SFAS 123 are not necessarily representative of the impact on the reported net income or loss for future years.

11.  INCOME TAXES

The Company has federal and California tax net operating loss carryforwards of approximately $4,000,000 and $1,000,0000, respectively, at March 31, 2002.
Such loss carryforwards principally expire in 2020, 2021 and 2022 for federal purposes and in 2008 for California purposes. The Company may have tax net operating loss carryforwards in other states.
Because the Company no longer operates in such states, the tax net operating loss carryforwards may not be realized.

The
Company's deferred tax asset approximated $3,330,000 and $2,430,000 at March 31, 2002 and 2001, respectively. Because there is no reasonable assurance that such asset will be
realized in future years, the Company has recorded a 100% valuation allowance against this deferred tax asset.

A
summary of the deferred tax asset and related valuation allowance for the years ended March 31, 2002 and 2001 follows:

Balance  March 31, 2000

$
1,825,000Deferred benefit


605,000Balance  March 31, 2001


2,430,000Deferred benefit


900,000Balance  March 31, 2002

$
3,330,000


F-17

---

The
components of the deferred tax asset are as follows at March 31, 2002 and 2001:

2002

2001Tax net operating loss carryforward

$
1,565,000

$
800,000Capitalized research and development


1,765,000


1,630,000Gross deferred tax asset


3,330,000


2,430,000Less valuation allowance


(3,330,000
)

(2,430,000
)Net deferred tax asset

$


$



The
income tax benefit, before valuation allowance, for the years ended March 31, 2002 and 2001 differs from the amount that would result from applying the federal statutory rate
to the pre-tax loss as follows:

2002

2001Expected tax benefit

$
1,360,000

$
1,500,000Equity instruments issued for services


(230,000
)

(220,000
)Interest and debt expenses related to warrants and BCF


(360,000
)

(430,000
)Impairment and amortization of goodwill





(340,000
)State income taxes and other


130,000


95,000Income tax benefit before valuation allowance

$
900,000

$
605,000


The
Company's income tax returns for the open years are subject to examination and adjustment by the applicable taxing authorities.

12.  RELATED PARTY TRANSACTIONS

Due to Related Parties

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

Royalty Agreement

Effective January 1, 2000, the Company entered into an agreement with a related party under which an invention and related patent rights for a method of
removing HIV and other viruses from the blood using the Hemopurifier were assigned to the Company by the inventors in exchange for (a) a royalty to be paid on future sales of the
patented product or process equal to 8.75% of net sales, as defined and (b) 12,500 shares of the Company's common stock. Upon the issuance of the first United States patent relating to the
invention, the Company is obligated to issue an additional 12,500 shares of common stock to the inventors. If the market price of the Company's common stock on the date the patent is issued is below
$8 per share, the number of shares to be issued will be that amount which equates to $100,000 of market value.

Other
related party transactions are disclosed elsewhere in these notes to consolidated financial statements.

F-18

---

13.  COMMITMENTS AND CONTINGENCIES

Registration Rights Agreements

The Company is obligated under various agreements to register its common stock, including the common stock underlying certain warrants and options. The Company is
subject to penalties for failure to register such securities, the amount of which could be material to the Company's financial condition, results of operations and cash flows. The Company filed a
registration statement on Form SB-2 with the Securities and Exchange Commission in December 2000 to register the necessary securities. However, such registration statement was never
declared effective. Management is currently unaware of any
potential claims related to the lack of registration and plans to file a revised registration statement as cash to fund registration expenses becomes available. See Note 7 for further
information.

Employment Contracts

In addition to the employment contract discussed in Note 3, the Company entered into employment agreements with its Chief Executive Officer and its Chief
Financial Officer effective April 1, 1999 and July 16, 2001, respectively. The agreements, which are cancelable by either party upon sixty days notice, will be in effect until the
respective employee retires or ceases to be employed by the Company. The Chairman of the Board and was appointed President and Chief Executive Officer effective June 1, 2001 upon which the base
annual salary was increased from $120,000 to $180,000. The Chief Financial Officer was employed with a minimum base annual salary of $130,000. Under the terms of the agreements, if the respective
employee is terminated he may become eligible to receive a salary continuation payment in the amount of at least twelve months' base salary.

Other

The Company rents laboratory space in San Diego, California and office space in La Jolla, California, both on a month-to-month basis for
approximately $5,000 per month. In May 2001, the Company completed transferring all scientific and administrative functions from its New York facility to its California locations.

14.  GOING CONCERN AND LIQUIDITY CONSIDERATIONS

The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction
of liabilities in the ordinary course of business. The Company has experienced a loss of approximately $13.2 million for the period from January 31, 1984 (Inception) through
March 31, 2002. The Company has not generated significant revenue or any profit from operations since inception. A substantial amount of additional capital will be necessary to advance the
development of the Company's products to the point at which they may become commercially viable. Such factors indicate that the Company may be unable to continue as a going concern for a reasonable
period of time. Management is in discussions with potential investors to pursue additional capital infusions into the Company, which management believes are necessary until such time that revenues are
generated to achieve profitability levels.

The
consolidated financial statements do not include any adjustments relating to the recoverability of assets that might be necessary should the Company be unable to continue as a going
concern. The Company's continuation as a going concern is dependent upon its ability to obtain additional financing to meet its obligations on a timely basis.

F-19

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15.  SUBSEQUENT EVENTS (Unaudited)

Convertible Notes Payable

On April 18, 2002, the Company issued a convertible note in the amount of $50,000 to an investor bearing interest at 8% per annum, with principal and
interest thereon due July 19, 2002. On May 3, 2002, the Company issued a convertible note in the amount of $30,000 to an investor bearing interest a 10% per annum, with principal and
interest thereon due June 2, 2002, and is now in default.

Both
notes may be converted to common stock of the Company at any time at the option of the respective holder. The conversion price is the lower rate of $1.25 per share or the offering
terms set for any private equity offering initiated during the term of these notes.

The
Company is seeking other financing arrangements to retire these notes, should the investors choose not to convert.

Other Notes Payable

On May 31, 2002, the Company issued notes to two investors in the total amount of $25,000, bearing interest at 10% per annum. Principal and interest
thereon became due June 9, 2002 and are now in default. The Company is seeking other financing arrangements to retire these notes.

Debt-to-Equity Conversion Program

Subsequent to March 31, 2002, approximately $238,000 in debt was converted into 190,200 shares of common stock and 95,100 warrants.

16.  SIGNIFICANT 4th QUARTER ADJUSTMENTS

The Company's unaudited financial statements included in its previously filed Form 10-QSB for the quarter ended December 31, 2001 did
not include an adjustment for additional consideration related to the issuance of common stock to a holder of convertible notes. Had the adjustment been recorded during such period, the Company's net
loss for the quarter ended December 31, 2001 would have totaled approximately $735,000 and basic and diluted loss per common share would have been approximately $0.20. Subject to discussion
with counsel, the Company may amend such filing to revise the financial statements that are materially affected by such matter.

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