Advanced Biotherapy Inc., Form 10-QSB

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A

(Mark One)

[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for
the period ended June 30, 2002

[ ] Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for
the transition period from _____________ to _______________

Commission file number 0-26323

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


Delaware (State of jurisdiction of incorporation or organization)		95-4066865 (IRS Employer Identification No.)

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

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

Indicate by mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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.

[X] YES [ ] NO

As of June 30, 2002, the Registrant had 43,553,483 shares of common stock, $0.001 par value, outstanding.

The purpose of this amendment is to correct errors the Company discovered in certain comparisons made between quarterly periods in Management’s Discussion and Analysis of Financial Condition and Results of Operations presented in the Company’s Quarterly Report on Form 10-QSB for the second quarter ended June 30, 2002, filed August 13, 2002 (“Original Filing”). All other items in the Original Filing not expressly changed herein shall be as set forth in the Original Filing, including, without limitation, the financial statements presented in the Original Filing.

The following is a summary of the errors discovered by the Company:

        a.    The Company’s net loss for the three months ended June 30, 2002, was $389,942 rather than $383,616;

        b.    The increase in professional fees over the comparable quarter ended June 30, 2001, of $90,941 includes the sum of $60,000 paid to a director, and such $60,000 was incorrectly described as a separate Company expense in addition to its inclusion in professional fees;

        c.    The Company’s net loss for the six months ended June 30, 2002, was $566,145 rather than $559,819;

        d.    The increase in interest expense over the comparable six months ended June 30, 2001, was $25,435 rather than $75,543;

        e.    The increase in depreciation and amortization over the comparable six months ended June 30, 2001, was $6,272 rather than $17,977.

All information in this amendment on Form 10-QSB/A and the Original Filing is subject to updating and supplementing as provided in the Company’s periodic reports filed with the Securities and Exchange Commission subsequent to the date of such reports.

TABLE OF CONTENTS


PART I
	ITEM 1. FINANCIAL STATEMENTS
ACCOUNTANT’S REVIEW REPORT
		BALANCE SHEETS
		STATEMENTS OF OPERATIONS
		STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)
		STATEMENTS OF CASH FLOWS
		NOTES TO FINANCIAL STATEMENTS
	ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Part II
	Item 2.
	Item 6. Exhibits and Reports on Form 8-K.
Signatures
Exhibit 4.1
Exhibit 10.10
Exhibit 10.11
Exhibit 99.1

TABLE OF CONTENTS


ITEM			PAGE


PART I.

1.	Financial Statements

	a.	Accountant’s Review Report	1

	b.	Balance Sheets — June 30, 2002 (unaudited) and December 31, 2001	2

	c.	Statements of Operations — Three Months Ended June 30, 2002, June 30, 2001, Six Months Ended June 30, 2002, June 30, 2001 and from Inception through June 30, 2002	3

	d.	Statements of Stockholders’ Equity (Deficit)	4

	e.	Statement’s of Cash Flows — Six Months Ended June 30, 2002, June 30, 2001 and from Inception through June 30, 2002.	5

	f.	Notes to Financial Statements	6-23

2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		24

PART II.

2.	Changes in Securities		26

6.	Exhibits and Reports on Form 8-K		27

ADVANCED BIOTHERAPY, INC.
(A Development Stage Enterprise)
REVIEWED FINANCIAL STATEMENTS
June 30, 2002

WILLIAMS & WEBSTER PS
Certified Public Accountants
Bank of America Financial Center
W 601 Riverside, Suite 1940
Spokane, WA 99201
(509) 838-5111

PART I

ITEM 1. FINANCIAL STATEMENTS

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

ACCOUNTANT’S REVIEW REPORT

We have reviewed the accompanying balance sheet of Advanced Biotherapy, Inc., (a development stage company) as of June 30, 2002, and the related statements of operations, stockholders’ equity (deficit), and cash flows for the six months ended June 30, 2002 and 2001 and for the period from December 2, 1985 (inception) to June 30, 2002. All information included in these financial statements is the representation of the management of Advanced Biotherapy, Inc.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements in order for them to be in conformity with accounting principles generally accepted in the United States of America.

The financial statements for the year ended December 31, 2001 were audited by us and we expressed an unqualified opinion on it in our report dated February 26, 2002. We have not performed any auditing procedures since that date.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the Company has generated little revenue in the past years, and has suffered recurring losses from operations resulting in an accumulated deficit of $5,634,571 at June 30, 2002. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding this issue are also discussed in Note 2. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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

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

ASSETS


				June 30,
				2002			December 31,
				(unaudited)			2001

CURRENT ASSETS
	Cash			$	1,210,646		$	36,615
	Marketable securities				2,000,000			—
	Notes receivable — related party				246,619			246,619
	Interest receivable — related party				39,594			31,579
	Deposits and prepaid expenses				13,219			40,710

		Total Current Assets			3,510,078			355,523

PROPERTY AND EQUIPMENT, net of accumulated depreciation					3,548			4,888

OTHER ASSETS
	Deferred loan origination fees, net of accumulated amortization				98,054			74,791
	Patents and patents pending, net of accumulated amortization				317,079			264,493

		Total Other Assets			415,133			339,284

TOTAL ASSETS				$	3,928,759		$	699,695

			LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
	Accounts payable			$	138,302		$	142,206
	Accounts payable — related party				—			9,740
	Accrued expenses — related party				1,905			13,600

		Total Current Liabilities			140,207			165,546

LONG-TERM DEBT
Convertible notes payable					4,808,334			1,314,301
Notes payable to related parties					127,631			127,631

		Total Long-Term Debt			4,935,965			1,441,932

		Total Liabilities			5,076,172			1,607,478

COMMITMENTS AND CONTINGENCIES					—			—

STOCKHOLDERS’ EQUITY (DEFICIT)
	Preferred stock, par value $0.001; 20,000,000 shares authorized, no shares issued and outstanding				—			—
	Common stock, par value $0.001; 100,000,000 shares authorized, 43,553,483 and 42,303,611 shares issued and outstanding, respectively				43,552			42,303
	Additional paid-in capital				3,923,423			3,640,657
	Stock options and warrants				520,183			477,683
	Deficit accumulated during development stage				(5,634,571	)		(5,068,426	)

		Total Stockholders’ Equity (Deficit)			(1,147,413	)		(907,783	)

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)				$	3,928,759		$	699,695

See accompanying notes and accountant’s review report.

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


															From Inception
															(December 2, 1985)
			Three Months Ended June 30,						Six Months Ended June 30,						through
			2002			2001			2002			2001			June 30, 2002
			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)

REVENUES			$	—		$	—		$	—		$	—		$	89,947

OPERATING EXPENSES
	Research and development			51,916			39,479			81,978			66,408			2,360,350
	Promotional fees			8,839			(375	)		9,079			625			25,623
	Professional fees			192,243			101,752			263,627			179,380			2,211,060
	Directors’ fees			—			—			—			—			29,080
	Depreciation and amortization			17,032			12,037			29,851			23,579			511,734
	Salaries and benefits			—			11,576			—			84,185			1,009,860
	Insurance			13,219			11,500			26,438			23,959			85,412
	Shareholder relations and transfer fees			3,000			5,070			7,000			10,421			183,547
	Rent			—			18,943			—			27,979			156,116
	Travel and entertainment			23,755			7,965			30,271			22,998			129,427
	Telephone and communications			1,037			3,914			1,659			10,852			29,039
	Office			2,178			3,845			3,288			12,291			46,408
	General and administrative			10,450			8,494			16,691			14,032			598,337

		Total Operating Expenses		323,669			224,200			469,882			476,709			7,375,993

Loss From Operations				(323,669	)		(224,200	)		(469,882	)		(476,709	)		(7,286,046	)
Other Income (Expense)
	Miscellaneous income			—			—			—			—			22,000
	Interest and dividend income			6,225			7,885			10,284			21,013			77,277
	Internal gain on sale of securities			—			—			—			—			157,520
	Accounts payable forgiveness			—			—			—			—			45,396
	Loss on disposal of office equipment			—			(2,224	)		—			(2,224	)		(2,224	)
	Interest expense			(72,498	)		(40,801	)		(106,547	)		(81,112	)		(695,931	)

		Total Other Income (Expense)		(66,273	)		(35,140	)		(96,263	)		(62,323	)		(395,962	)

Loss Before Income Taxes				(389,942	)		(259,340	)		(566,145	)		(539,032	)		(7,682,008	)
Income Taxes				—			—			—			—			—

Loss Before Extraordinary Item				(389,942	)		(259,340	)		(566,145	)		(539,032	)		(7,682,008	)
Extraordinary item, forgiveness of debt				—			—			—			—			2,047,437

NET LOSS			$	(389,942	)	$	(259,340	)	$	(566,145	)	$	(539,032	)	$	(5,634,571	)

BASIC AND DILUTED NET LOSS PER COMMON SHARE			$	(0.01	)	$	(0.01	)	$	(0.01	)	$	(0.01	)

WEIGHTED AVERAGE NUMBER OF BASIC AND DILUTED COMMON STOCK SHARES OUTSTANDING				43,126,819			40,698,265			42,747,678			40,698,265

See accompanying notes and accountant’s review report.

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)


									Deficit
									Accumulated
	Common Stock				Additional		Stock		During
					Paid-in		Options and		Development
	Shares		Amount		Capital		Warrants		Stage

Balance, December 31, 2000		40,698,265	$	40,698	$	3,233,040	$	379,403	$	(4,048,125	)
Common stock issued in exchange for convertible debt at $0.25 per share		1,605,346		1,605		399,504		—		—
Contribution of capital by shareholders in form of foregone interest and rent		—		—		8,113		—		—
Stock warrants issued in exchange for services		—		—		—		23,280		—
Stock options issued in exchange for services		—		—		—		75,000		—
Net loss for the year ended December 31, 2001		—		—		—		—		(1,020,301	)

Balance, December 31, 2001		42,303,611		42,303		3,640,657		477,683		(5,068,426	)
Contribution of capital by shareholders in form of foregone interest		—		—		3,046		—		—
Common stock issued in exchange for convertible debt at $0.25 per share		1,099,872		1,099		273,870		—		—
Stock issued for cash at an average price of $0.04 per share from the exercise of options		150,000		150		5,850		—		—
Stock options issued in exchange for services		—		—		—		42,500		—
Net loss for the six months ended June 30, 2002		—		—		—		—		(566,145	)

Balance, June 30, 2002 (Unaudited)		43,553,483	$	43,552	$	3,923,423	$	520,183	$	(5,634,571	)

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

See accompanying notes are accountant’s review report.

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


									From Inception
									(December 2, 1985)
			Six Months Ended June 30,						through
			2002			2001			June 30, 2002
			(Unaudited)			(Unaudited)			(Unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)			$	(566,145	)	$	(539,032	)	$	(5,634,571	)
	Extraordinary gain			—			—			(2,047,437	)
Adjustments to reconcile net loss to cash used in operating activities:
	Depreciation and amortization			29,851			23,579			511,734
	Loss on disposal of equipment			—			2,224			2,224
	Investment income			—			—			(157,520	)
	Expenses paid through issuance of common stock			—			—			231,340
	Expenses paid through issuance of common stock warrants and options			42,500			7,800			309,445
	Interest expense accrued to convertible debt			103,501			77,262			308,412
	Expenses paid through contribution of additional paid-in capital			3,046			4,750			48,992
	Organization costs			—			—			(9,220	)
	Decrease (increase) in:
		Deposits and prepaid expenses		27,491			6,215			(13,219	)
		Interest receivable		(8,015	)		(13,556	)		(39,594	)
		Deferred loan origination cost		(40,845	)		—			(154,133	)
	Increase (decrease) in:
		Accounts payable		(25,339	)		38,652			140,207
		Accounts and notes payable, related parties		—			—			127,631
		Payroll and payroll taxes payable		—			—			2,046,353
		Accrued interest		—			—			9,962

Net cash used in operating activities				(433,955	)		(392,106	)		(4,319,394	)

CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of fixed assets			—			—			(48,003	)
	Internal gain on sale of securities			—			—			157,520
	Purchase of investments			(2,000,000	)		(250,432	)		(2,000,000	)
	Acquisition of patents			(63,514	)		(61,801	)		(424,612	)

Net cash used in investing activities				(2,063,514	)		(312,233	)		(2,315,095	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from issuance of common stock			6,000			—			2,455,754
	Proceeds from convertible notes			3,665,500			—			5,176,000
	Proceeds from notes payable			—			—			388,508
	Payments on notes payable			—			—			(175,127	)

Net cash provided by financing activities				3,671,500			—			7,845,135

Net increase (decrease) in cash				1,174,031			(704,339	)		1,210,646
Cash, beginning				36,615			758,267			—

Cash, ending			$	1,210,646		$	53,928		$	1,210,646

SUPPLEMENTAL CASH FLOW DISCLOSURES:
	Interest expense paid		$	—		$	—		$	339,927

	Income taxes paid		$	—		$	—		$	—

NON-CASH FINANCING AND INVESTING ACTIVITIES:
	Common stock issued in exchange for professional fees and expenses		$	—		$	—		$	340,869
	Contributed expenses		$	3,046		$	4,750		$	48,992
	Common stock issued for a loan payable		$	—		$	—		$	213,381
	Common stock issued for notes receivable		$	—		$	—		$	246,619
	Options issued for services		$	42,500		$	—		$	117,500
	Warrants issued for services		$	—		$	7,800		$	191,945
	Accrued interest paid by convertible debt		$	103,501		$	77,262		$	308,412
	Common stock issued for convertible debt		$	274,969		$	—		$	676,078

See accompanying notes and accountant’s review report.

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

NOTE 1 — ORGANIZATION AND DESCRIPTION OF BUSINESS

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

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

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Development Stage Activities

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

Going Concern

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

For the six months ended June 30, 2002, the Company incurred a net loss of $566,145 and had an accumulated deficit during the development stage of $5,634,571 for the period then ended. Although the Company raised over $3.6 million in convertible debt during the quarter ended June 30, 2002 to fund research and development costs and operations, it does not have a source of revenues to continue its operations, research and development costs or to service its debt at maturity beyond such funding. For the twelve-month period subsequent to June 30, 2002, the Company anticipates that its minimum cash requirements to continue as a going concern will be less than $1,500,000, and therefore, believes that it has adequate cash to maintain operations during that period. The future of the Company is dependent upon future profitable operations from the commercial success of its medical research and development of products to combat diseases of the human immune system. Management’s goal is to actively seek a collaborative relationship with either a pharmaceutical or biotechnology company. If successful, future cash requirements may be met through licensing fees and royalties. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounting Method

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

Accounting Pronouncements

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

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

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

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

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounting Pronouncements (Continued)

believe that the adoption will have a material impact on the financial statements of the Company.

In April 2002, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”, which updates, clarifies and simplifies existing accounting pronouncements. FASB No. 4, which required all gains and losses from the extinguishment of debt to be aggregated and, if material, classified as an extraordinary item, net of related tax effect was rescinded, as a result, FASB 64, which amended FASB 4, was rescinded as it was no longer necessary. FASB 145 amended FASB 13 to eliminate an inconsistency between the required accounting for sale-leaseback transaction and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. Management has not yet determined the effects of adopting this Statement on the financial position or results of operations.

Interim Financial Statements

The interim financial statements as of and for the quarter ended June 30, 2002, included herein, have been prepared for the Company without audit. These statements reflect all adjustments, which are, in the opinion of management, necessary to present fairly the results of operations for these periods. All such adjustments are normal recurring adjustments. The results of operations for the periods presented are not necessarily indicative of the results to be expected for the full fiscal year.

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

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

Cash and Cash Equivalents

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

Provision for Taxes

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

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Provision for Taxes (Continued)

At June 30, 2002, the Company had net deferred tax assets of approximately $1,106,000, principally arising from net operating loss carryforwards for income tax purposes. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the net deferred tax asset, a valuation allowance equal to the net deferred tax asset has been established.

At June 30, 2002, the Company’s net operating loss carryforwards amount to approximately $4,424,000, which expires in the years 2002 through 2022. At December 31, 2001, approximately $288,000 of net operating losses expired. Approximately $878,000 of net operating losses will expire on December 31, 2002.

Use of Estimates

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

Reclassifications

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

Promotional Fees

Promotional fees are charged to operations in the year incurred. Promotional fees amounted to $9,079 and $625 for the six months ended June 30, 2002 and 2001, respectively.

Research and Development Costs

Costs of research and development are expensed as incurred.

Compensated Absences

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

Deferred Loan Origination Fees

During the year ended December 31, 2000, the Company entered into convertible subordinated debt, which required the payment of loan origination fees. See Note 13. These loan origination fees, which totaled $52,352, net of accumulated amortization at June 30, 2002, are amortized over the life of the related debt. During the six months ended June 30, 2002, the Company recorded amortization expense in the amount of $13,856 related to these fees.

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Deferred Loan Origination Fees (Continued)

During the period ended June 30, 2002, the Company entered into convertible subordinated debt, which required the payment of loan origination fees. See Note 13. These loan origination fees, which totaled $37,119, net of accumulated amortization at June 30, 2002, are amortized over the life of the related debt. During the six months ended June 30, 2002, the Company recorded amortization expense in the amount of $3,726 related to these fees.

Revenue Recognition

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

Fair Value of Financial Instruments

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

Derivative Instruments

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

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

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

At June 30, 2002, the Company has not engaged in any transactions that would be considered derivative instruments or hedging activities.

Internal Gain On Sale of Securities

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

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

NOTE 3 — PROPERTY AND EQUIPMENT

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

The following is a summary of property, equipment and accumulated depreciation at June 30, 2002:


			Accumulated
	Cost		Depreciation

Lab equipment	$	27,582	$	27,582
Office equipment		12,874		9,325
Furniture and fixtures		1,302		1,302

	$	41,758	$	38,209

Depreciation expense for the six months ended June 30, 2002 and 2001 was $1,339 and $1,824, respectively.

NOTE 4 — INVESTMENTS

Marketable Securities

The Company’s investments in equity securities that are intended to be held for a short period are classified as trading securities. These securities are recorded at fair value under marketable securities in current assets on the balance sheet with the change in fair value during the period included in earnings. During the period ended June 30, 2002, there was no change in the fair market value of the securities.

Available-for-Sale Securities

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

NOTE 5 — INTANGIBLE ASSETS

Patents and Patents Pending

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

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

NOTE 5 — INTANGIBLE ASSETS (Continued)

Patents and Patents Pending (Continued)

The following is a summary of the costs of patents and patents pending at June 30, 2002:


			Accumulated
	Cost		Amortization			Net Amount

Balance, December 31, 2000	$	251,120	$	(77,611	)	$	173,509
2001 Activity		109,977		(18,993	)		90,984

Balance, December 31, 2001		361,097		(96,604	)		264,493
2002 Activity		63,517		(10,931	)		52,586

Balance, June 30, 2002	$	424,614	$	(107,535	)	$	317,079

NOTE 6 — RELATED PARTY TRANSACTIONS

Current Transactions

During the period ended June 30, 2002, the Company sold $25,000 of subordinated convertible pay-in-kind note to a related party. See Note 13.

During the period ended June 30, 2002, the Company has included in professional fees, $60,000 paid to a director in connection with the sale of subordinated debt. See Note 13.

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

Notes payable to related parties consist of notes payable to the former chairman and principal shareholder. During 2000, $85,750 of the notes was used to offset a bonus stock sale. The note has no specific due date, is currently uncollateralized, and is non-interest bearing, however, interest is calculated at the applicable federal rate each quarter. The calculated interest of $3,046 was recorded as interest expense and contributed capital in the accompanying financial statements.

Transactions in 1999

The Company’s former chairman and principal shareholder has advanced funds to pay a significant portion of the Company’s expenses since 1989. At December 31, 1999, the cumulative amounts owed to him for expenses amount to $257,076. Even though he was not charging interest to the Company, interest was calculated at the applicable federal rate of 5.59% at December 31, 1999. This interest was recorded as interest expense and contributed capital in the accompanying financial statements. During 2000, the Company paid part of this note and the balance was used to offset a bonus stock sale to the chairman. At December 31, 1998, the amounts owing for accrued salary was $1,146,000. During 1999, additional salary was accrued in the amount of $100,000. At December 31, 1999, in accordance with an agreement with other employee/shareholders of the Company, he received options to purchase 623,000 shares of common stock at $0.10 per share. The value of these options, in the amount of $155,750, was used to reduce his accrued salary. See Note 10. In 1999, he forgave the balance of accrued salary of $1,090,250 along with accrued interest of $9,962. This is recorded in the financial statements as a component of extraordinary income in 1999.

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

NOTE 6 — RELATED PARTY TRANSACTIONS (Continued)

Transactions in 1999 (Continued)

At December 31, 1999, the Company owed its then secretary/treasurer $13,381 for expenses paid in previous years and recorded in notes payable. During 2000, this note was used as partial payment for a bonus stock purchase by the secretary/treasurer. At December 31, 1998, the Company also owed this employee $184,000 in unpaid salary recorded as salary payable. During 1999, additional salary in the amount of $45,000 was accrued for this employee. At December 31, 1999, in accordance with an agreement with other employee/shareholders of the Company, she received options to purchase 114,500 shares of common stock at $0.10 per share. The value of these options, in the amount of $28,625, was used to reduce the accrued salary of this employee/shareholder. See Note 10. In 1999, she forgave the balance of accrued salary in the amount of $200,375. This is recorded in the financial statements as a component of extraordinary income in 1999.

At December 31, 1998, the then president of the Company was owed $171,360 in accrued salary. During 1999, a portion of this liability was paid. Also during 1999, additional salary in the amount of $75,000 was accrued. At December 31, 1999, in accordance with an agreement with other employee/shareholders of the Company, he received options to purchase 105,453 shares of common stock at $0.10 per share. The value of these options in the amount of $26,363 was used to reduce the accrued salary of the president. See Note 10. In 1999, he forgave the balance of accrued salary in the amount of $181,622. This is recorded in the financial statements as a component of extraordinary income in 1999.

Transactions Involving Leased Space

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

During 2000, the Company leased office space from a company owned in part by a shareholder. The minimum base lease payment was $4,800 annually. This lease was terminated effective December 31, 2000. See Note 14.

The Company’s trading security investment is in one auction rate preferred money market alternative that rolls every seven days at the then market interest rate.

NOTE 7 — CONCENTRATIONS

The Company maintains cash in a money market account at a bank in California. The funds on deposit are not insured by the FDIC, and therefore, a total of $1,210,646 is at risk on June 30, 2002.

NOTE 8 — COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL

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

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

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


	Common Stock

	Average							Additional
	price per							Paid-in
	share		Shares		Amount			Capital

Common stock issued for cash:
1985	$	.50		100,000	$	100		$	49,900
1986		1.00		639,500		640			678,861
1987		1.00		850,500		850			759,650
1988		1.00		25,000		25			24,975
1993		.25		2,402,000		2,402			475,900
1995		.05		1,000,000		1,000			49,000
1996		.05		520,000		520			25,480
1997		.09		1,800,500		1,801			153,749
1998		.10		305,000		305			30,195
1999		.05		3,158,000		3,158			151,993

				10,800,500		10,801			2,399,703

Common stock issued for patents assigned:
1984		.01		550,000		5,500			—
1985, adjustment to reflect change in number and par value of shares outstanding		—		2,750,000		(2,200	)		2,200

				3,300,000		3,300			2,200

Common stock issued for acquisitions:
1985		.01		13,333,500		13,334			(41,112	)

Common stock issued for note receivable:
1986		1.00		10,000		10			9,990
2000		.05		4,932,380		4,932			241,687

				4,942,380		4,942			251,677


	Common Stock

	Average						Additional
	price per						Paid-in
	share		Shares		Amount		Capital

Contribution of additional paid-in capital:
1991	$	—		—	$	—	$	35,825
1999		—		—		—		28,098
2000		—		—		—		9,735

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

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


	Common Stock

	Average								Additional
	price per								Paid-in
	share		Shares			Amount			Capital

2001		—		—			—			8,113

2002		—		—			—			3,046

				—			—			84,817

Stock subscriptions:
1999		.05		650,000			650			31,850

Cancellation of escrowed shares in
1999		001		(850,000	)		(850	)		850
Reissued escrowed shares cancelled in error:
2001- See Note 15		001		850,000			850			(850	)

				—			—			—

Common stock issued for services(1):
1988		.50		25,000			25			12,475
1989		.38		25,000			25			9,475
1990		.66		37,375			37			24,635
1991		.51		159,500			160			81,010
1992		.75		62,500			62			46,563
1993		.25		120,000			120			29,880
1996		.05		308,500			308			13,832
1997		.05		155,500			155			7,619
1999		.05		99,190			99			4,860

				992,565			991			230,349

Common stock issued to replace unrecorded certificates:
1988		001		1,200			1			(1	)
1992		001		500			1			(1	)
2000		001		100,000			100			(100	)

				101,700			102			(102	)

Common stock issued for forgiveness of accounts payable(1):
1990		.50		25,000			25			12,475
1996		.05		150,000			150			7,350

				175,000			175			19,825

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

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


	Common Stock

	Average						Additional
	price per						Paid-in
	share		Shares		Amount		Capital

	.04		150,000		150		5,850

Common stock issued in payment of notes payable(1):
1993	$	.25		200,000	$	200	$	49,800
2000		.05		1,714,995		1,715		84,035

				1,914,995		1,915		133,835

Common stock issued in payment of loans payable(1):
2000		.05		2,552,625		2,553		125,078

Common stock issued for commissions(1):
1993		.001		1,260,000		1,260		—

Common stock issued for convertible debt:
2001		.25		1,605,346		1,605		399,504
2002		.25		1,099,872		1,099		273,870

				2,705,218		2,704		673,374

Stock options exercised:
1997		.01		325,000		325		2,929
2000		.01		350,000		350		3,150
2002		.04		150,000		150		5,850

				825,000		825		11,929

Total				43,553,483	$	43,552	$	3,923,423

(1)

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

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

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

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

Stock Bonus Plan

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

Omnibus Equity Incentive Plan

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

NOTE 9 — PREFERRED STOCK

With the merger into its Delaware subsidiary, the Company has authorized 20,000,000 shares of $0.001 par value preferred stock authorized. As of June 30, 2002, the Company has not issued any of its preferred stock.

NOTE 10 — STOCK OPTIONS AND ISSUANCE COMMITMENTS

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

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

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

NOTE 10 — STOCK OPTIONS AND ISSUANCE COMMITMENTS (Continued)

assumptions. These stock options are exercisable immediately, and expire on December 31, 2005. See Note 6. During the year ended December 31, 2000, 350,000 options were exercised at $0.01 per share.

During November 2001, the Company issued stock options to purchase 250,000 shares of the Company’s stock at $0.25 per share to a consultant. The options are exercisable immediately and expire on November 15, 2011. The options have piggyback registration rights to be effective in the next SEC registration statement. See Note 14. In accordance with Statement of Financial Accounting Standard No. 123, the fair value of the options was estimated using the Black Scholes Option Price Calculation. The following assumptions were made to value the stock options: strike price at $0.25, risk free interest rate of 5%, expected life of 10 years, and expected volatility of 38% and no dividends are expected to be paid. At November 15, 2001, the Company recorded $75,000 ($0.30 per option) to professional fees for the value of these options based upon these Black Scholes assumptions.

During January 2002, the Company issued stock options to purchase 80,000 shares of the Company’s stock at $0.25 per share to its board of directors for services rendered during the year ended December 31, 2001. In accordance with Statement of Financial Accounting Standard No. 123, the fair value of the options was estimated using the Black Scholes Option Price Calculation. The following assumptions were made to value the stock options: strike price at $0.25, risk free interest rate of 5%, expected life of 5 years, and expected volatility of 38% and no dividends are expected to be paid. At December 31, 2001, the Company recorded $13,600 ($0.17 per option) to professional fees for the value of these options based upon these Black Scholes assumptions.

During April 2002, the Company issued stock options to purchase 100,000 shares of the Company’s stock at $0.25 per share to a consultant. The options are exercisable immediately and expire on April 15, 2011. The options have piggyback registration rights to be effective in the next SEC registration statement. In accordance with Statement of Financial Accounting Standard No. 123, the fair value of the options was estimated using the Black Scholes Option Price Calculation. The following assumptions were made to value the stock options: strike price at $0.25, risk free interest rate of 5%, expected life of 9 years, and expected volatility of 98% and no dividends are expected to be paid. At April 15, 2002, the Company recorded $28,900 ($0.289 per option) to professional fees for the value of these options based upon these Black Scholes assumptions.

Following is a summary of the status of the options during the six months ended June 30, 2002 and the year ended December 31, 2001:

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

NOTE 10 — STOCK OPTIONS AND ISSUANCE COMMITMENTS (Continued)


				Weighted
	Number of			Average
	Shares			Exercise Price

Outstanding at January 1, 2001		2,527,953		$	0.11
Granted		250,000			0.25
Exercised		—			—
Forfeited		—			—

Outstanding at December 31, 2001		2,777,953			0.14
Granted		180,000			0.25
Exercised		(150,000	)		0.04
Forfeited		(860,000	)		0.20

Outstanding at June 30, 2002		1,947,953			0.13

Options exercisable at June 30, 2002		1,947,953		$	0.13

Weighted average fair value of options granted in 2002				$	0.24

NOTE 11 — INCOME (LOSS) PER SHARE

Basic earnings (loss) per share is computed by dividing the net income (loss) by the weighted average number of shares outstanding during the period. The weighted average number of shares is calculated by taking the number of shares outstanding and weighting them by the amount of time that they were outstanding.

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

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


		Quarter Ended				From Inception
						(December 2, 1985)
		June 30,		June 30,		through
		2002		2001		June 30, 2002

Earnings per share
	Extraordinary gains	$	—	$	—	$	0.05

Earnings per share — assuming dilution
	Extraordinary gains	$	—	$	—	$	0.05

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

NOTE 12 — NON-CASH COMMITMENT AND WARRANTS

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

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

At June 30, 2002, the total of the Company’s exercisable warrants is 5,085,135. The average exercise price of the warrants at June 30, 2002 is $0.16 per share.

NOTE 13 — CONVERTIBLE DEBT

2000 Convertible Notes

During the year ended December 31, 2000, the Company sold in a private placement to accredited investors $1,510,500 of convertible subordinated debt due and payable September 30, 2004. The debt bears interest at the rate of 10% per annum and is payable semi-annually in cash or additional convertible subordinated debt. The unpaid accrued interest at June 30, 2002, December 31, 2001, June 30, 2001 and December 31, 2000 of $60,894, $77,979, $77,262 and $49,669, respectively, was converted to additional convertible debt.

This debt is convertible into shares of Company common stock at a conversion price equal to $0.25 per share, subject to certain anti-dilution provisions. The Company offered the convertible subordinated debt pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D, promulgated under the Securities Act. In connection with the placement of the debt, the Company paid a loan origination fee of $113,288 to its financial advisor, in addition to the granting of an option to purchase an equivalent principal amount of convertible subordinated debt at the face amount thereof over a period of ten years. The aforementioned fee is currently included in other assets and is being amortized over the term of the debt. Amortization for the six months ended June 30, 2002 was $13,856.

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

NOTE 13 — CONVERTIBLE DEBT (Continued)

2000 Convertible Notes (Continued)

During the year ended December 31, 2001, a total of $355,000 original debt and $46,109 of accrued and converted interest was converted into 1,605,346 shares of common stock at $0.25 per share. During the six months ended June 30, 2002, a total of $235,000 original debt and $39,968 of accrued and converted interest was converted into 1,099,872 shares of common stock at $0.25 per share.

2002 Convertible Notes due September 30, 2004

During the six months ended June 30, 2002, the Company sold in a private placement to accredited investors 2002 subordinated convertible pay-in-kind notes due September 30, 2004 (“2002-2004 convertible notes”), in the principal amount of $1,145,500 in cash. The 2002-2004 convertible notes bear interest at the rate of 11% per annum payable semi-annually in cash or additional 2002-2004 convertible notes.

This debt is convertible into shares of Company common stock at a conversion price equal to $0.25 per share, subject to certain anti-dilution provisions. The Company offered the convertible subordinated debt pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D, promulgated under the Securities Act. In connection with the placement of the debt, the Company paid a loan origination fee of $40,845 to two advisors, together with an option to purchase 10% of the private placed principal amount or a warrant to acquire 10% of the shares which the private placement amount is converted, at a price equal to that paid by other investors in the note offering. Amortization of the loan origination fee for the six months ended June 30, 2002 was $3,726.

2002 Convertible Notes due June 1, 2006

During the six months ended June 30, 2002, the Company sold in a private placement to accredited investors its 2002 subordinated convertible pay-in-kind notes due June 1, 2006 (“2002-2006 convertible notes”), in the principal amount of $2,520,000 in cash. The 2002-2006 convertible notes bear interest at the rate of 11% per annum payable semi-annually in cash or additional 2002-2006 convertible notes.

Subsequently, during July 2002, the Company sold an additional $35,000 of convertible subordinated pay-in-kind notes, which are due and payable June 1, 2006. The debt bears interest at the rate of 11% per annum and is payable semi-annually in cash or additional convertible subordinated debt.

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

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

NOTE 14 — COMMITMENTS AND CONTINGENCIES

Consulting Contract

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

Office Lease

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

Contract

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

ADVANCED BIOTHERAPY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO FINANCIAL STATEMENTS
June 30, 2002

NOTE 15 — RESTATEMENT OF WEIGHTED AVERAGE SHARES

During the quarter ended March 31, 2002, it was discovered that the Company mistakenly cancelled 850,000 shares of common stock in 1999. Under the terms of a settlement agreement and mutual general release and an escrow agreement each dated July 31, 1991 (collectively referred to as “settlement agreements”) among the Company, a shareholder, a consultant and certain other parties, the Company issued 850,000 shares in the name of the consultant and placed these shares into escrow. These shares were to be released to the consultant upon performance of certain services that were to be provided by the consultant no later than January 15, 1993. The settlement agreements also stated that the 850,000 shares of common stock would be distributed back to the original shareholder, if such services were not provided by the consultant. Such services were not provided by the consultant, in whole or in part, and all 850,000 shares were cancelled by the Company in 1999. However, instead of being cancelled the shares should have been returned to the original shareholder in 1999 pursuant to the settlement agreements. Therefore, the shares were reissued to the original shareholder and are reflected in the accompanying financial statements as if they were never cancelled.

The effect of this restatement is as follows for the six months ended June 30, 2001:


	As Previously
	Reported			As Restated

Weighted average shares outstanding		39,848,265			40,698,265
Basic and diluted net loss per common share	$	(0.01	)	$	(0.01	)

NOTE 16 — SUBSEQUENT EVENTS

Subsequent to the financial statements, the Company sold an additional $35,000 of convertible subordinated pay-in-kind notes, which are due and payable June 1, 2006. The debt bears interest at the rate of 11% per annum and is payable semi-annually in cash or additional convertible subordinated debt.

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

Except for the historical information contained herein, the matters discussed herein are by their nature forward-looking. Investors are cautioned that forward-looking statements or projections made by the Company, including those made in this document, are subject to risks and uncertainties that may cause actual results to differ materially from those projected. The Company operates in a rapidly changing environment that involves a number of risks, some of which are beyond the Company’s control. Future operating results and the Company’s stock price may be affected by a number of factors, including, without limitation: availability of capital for research and development; availability for capital for clinical trials; opportunities for joint ventures and corporate partnering; opportunities for mergers and acquisitions to expand the Company’s biotechnology base or acquire revenue generating products; the results of preclinical and clinical trials, if any; regulatory approvals of product candidates new indications and manufacturing facilities; health care guidelines and policies relating to prospective Company products; intellectual property matters (patents); and competition. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section entitled “Item 1 Business”, and all subsections therein, including, without limitation, the subsections entitled, Technical Background, Government Regulation, Federal Drug Administration Regulation, and Factors That May Affect the Company, and the section entitled “Market for Registrant’s Common Stock and Related Stockholder Matters”, all contained in the Company’s Annual Report (Form 10-KSB) for the fiscal year ended December 31, 2001.

Results of Operations

Liquidity and Capital Resources

As of June 30, 2002, the Company has issued and outstanding 43,553,483 shares of its Common Stock. The Company is a development stage company and has no material assets other than cash. The Company had $3,210,646 in cash and short-term investments as of June 30, 2002. For the twelve-month period subsequent to June 30, 2002, the Company anticipates that its minimum cash requirements to continue as a going concern will be less than $1,500,000, and therefore, believes that it has adequate cash to maintain operations during that period.

Three Months Ended June 30, 2002 and 2001

For the three months ended June 30, 2002, the Company realized a net loss of $389,942 compared to a net loss of $259,340 for the three months ended June 30, 2001. The Company had increases in expenses over the quarter ended June 30, 2001 principally related to the following: professional fees in the amount of $90,941 principally due to increased legal fees related to amendments to the Company’s registration statement covering shares underlying its convertible subordinated debt due September 30, 2004, and other regulatory filing requirements with the Securities and Exchange Commission, and payment of $60,000 to Mr. Lawrence Loomis, one of the Company’s directors, for consulting services related to the placement of the Company’s Convertible Notes, increased research and development expenses in the amount of $12,437, increased depreciation and amortization in the amount of $4,995, increased promotional fees related to the issuance and publication of press releases in the amount of $9,214, increased travel expenses in the amount of $15,790 related to business development and other Company matters, and increased interest expense in the amount of $31,697 related to the Company’s convertible subordinated debt and subordinated convertible pay-in-kind notes, all net of decreased salaries and benefits of $11,576 and decreased rent of $18,943.

Six Months Ended June 30, 2002 and 2001

During the six months ended June 30, 2002, the Company’s financial condition changed in the following manner: Cash increased by $1,174,031, marketable securities increased by $2,000,000, and loan fees increased by $23,263. All of these increases are directly related to the increase in convertible debt in the amount of $3,494,033, which also includes an increase of $103,500 representing accrued interest recharacterized as convertible debt during the period. Prepaid insurance decreased approximately $27,500 due to the utilization of premiums previously paid. Expenditures related to patents and patents pending during the six months ended June 30, 2002 amounted to approximately $63,500. The Company paid approximately $25,000 of current liabilities in the normal course of business.

For the six months ended June 30, 2002, the Company realized a net loss of $566,145 compared to a net loss of $539,032 for the six months ended June 30, 2001. The Company had increases in expenses over the six months ended June 30, 2001 related to the following: increased interest expense in the amount of $25,435 related to the Company’s convertible subordinated debt and subordinated convertible pay-in-kind notes, and increased expenditures in the aggregate amount of $84,247 for professional fees primarily related to amendments to its registration statement and other regulatory filing requirements with the Securities and Exchange Commission, other corporate matters, and payment of $60,000 to Mr. Lawrence Loomis, one of the Company’s directors, for consulting services related to the placement of the Company’s Convertible Notes, increased research and development expenses in the amount of $15,570, increased depreciation and amortization in the amount of $6,272, all net of decreased salaries and benefits of $84,185, decreased general operating expenses of $15,537 and decreased rent of $27,979.

RESTATEMENT OF COMPANY FINANCIAL STATEMENTS

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

Part II

Item 2.

(c) During the quarter ended June 30, 2002, the Company sold approximately $1,110,500 principal amount of its Subordinated Convertible Pay-In-Kind Notes due September 30, 2004 (“2002 Convertible Notes Due 2004”) in a private placement to accredited investors, paid in cash. The sale of $593,000 of such $1,110,000 principal amount of 2002 Convertible Notes Due 2004 was reported previously by the Company in its Form 10-QSB for the quarter ended March 31, 2002. The 2002 Convertible Notes Due 2004 bear interest at the rate of 11% per annum payable semi-annually in cash or additional 2002 Convertible Notes Due 2004. The 2002 Convertible Notes Due 2004 are convertible into shares of Company Common Stock at a conversion price per share equal to twenty-five cents ($0.25), subject to certain anti-dilution provisions. The 2002 Convertible Notes Due 2004 are to be paid ratably with the Company’s Subordinated Convertible Debt due September 30, 2004 and the Company’s Subordinated Convertible Pay-In-Kind Notes due June 1, 2006. The holders of 2002 Convertible Notes Due 2004 are entitled to certain demand registration rights at the sole expense of such holders, and certain other registration rights. In connection with the placement of $585,500 principal amount of such 2002 Convertible Notes Due 2004, the Company paid a fee of 7%, in cash, together with warrants to purchase 234,200 shares of Common Stock at an exercise price of $0.25 per share, exercisable for a period of ten years. The Company paid such 7% placement fee together with costs, in the aggregate amount of $41,195 in cash. In addition, a $10,000 fee was paid in cash to Director Lawrence Loomis in connection with the placement of $500,000 principal amount of 2002 Convertible Notes Due 2004 to Richard Kiphart, who purchased such securities prior to his becoming a Director of the Company. The Company offered the 2002 Convertible Notes Due 2004 pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D. The proceeds from the placement of 2002 Convertible Notes Due 2004 have been, and will be, used for working capital, including salaries of management, scientific development costs and patent application legal costs, preclinical trial costs, Phase I Investigational New Drug Applications for two specific autoimmune diseases, including related clinical studies, and to pursue certain collaborative relationships with other biotechnology or pharmaceutical companies.

During the quarter ended June 30, 2002, the Company sold the principal amount of $2,520,000 of its Subordinated Convertible Pay-In-Kind Notes due June 6, 2006 (“2002 Convertible Notes Due 2006”) in a private placement to accredited investors, paid in cash. The 2002 Convertible Notes Due 2006 bear interest at the rate of 11% per annum payable semi-annually in cash or additional 2002 Convertible Notes Due 2006. The 2002 Convertible Notes Due 2006 are convertible into shares of Company Common Stock at a conversion price per share equal to twenty-five cents ($0.25), subject to certain anti-dilution provisions. The 2002 Convertible Notes Due 2006 are to be paid ratably with the Company’s Subordinated Convertible Debt due September 30, 2004, and the Company’s 2002 Convertible Notes Due 2004. The holders of 2002 Convertible Notes Due 2006 are entitled to certain piggyback registration rights. A total of $2,500,000 of such $2,520,000 principal amount of 2002 Convertible Notes Due 2006 was sold to Richard Kiphart, a director of the Company.

In connection with the placement of $2,500,000 principal amount of such 2002 Convertible Notes Due 2006, the Company paid an aggregate fee of $50,000 in cash to Director Lawrence Loomis. The Company offered the 2002

Convertible Notes Due 2006 pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D. The proceeds from the placement of 2002 Convertible Notes Due 2006 will be used for working capital, including salaries of management, scientific development costs and patent application legal costs, preclinical trial costs, Phase I Investigational New Drug Applications for two specific autoimmune diseases, including related clinical studies, and to pursue certain collaborative relationships with other biotechnology or pharmaceutical companies.

The form of 2002 Convertible Pay-In-Kind Notes Due June 1, 2006, is filed as an Exhibit to this Form 10-QSB. The form of the related Investors Rights Agreement also is filed as an Exhibit to this Form 10-QSB.

Item 6. Exhibits and Reports on Form 8-K.


(a)	(i)	Exhibit (4.1) Form of Registrant’s Common Stock Certificate
	(ii)	Exhibit (10.10) Form of 2002 Subordinated Convertible Pay-In-Kind Note Due June 1, 2006
	(iii)	Exhibit (10.11) Form of Investor Rights Agreement
	(iv)	Exhibit (99.1) Certification of Periodic Financial Report
(b)	The following reports on Form 8-K were filed during the quarter ended June 30, 2002, for which this report on Form 10-QSB is filed:


	May 20, 2002 May 28, 2002 June 5, 2002 June 10, 2002 June 17, 2002 June 19, 2002 June 20, 2002		Item 5. Other Events Item 5. Other Events Item 5. Other Events Item 5. Other Events Item 5. Other Events Item 5. Other Events Item 5. Other Events

Signatures

In accordance with the requirements of the Securities Act of 1933, the Registrant certifies that it has reasonable grounds to believe that it meets all the requirements for filing on Form 10-QSB/A and has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Woodland Hills, State of California, on August 23, 2002.

Advanced Biotherapy, Inc.


By:		s/ Edmond F. Buccellato President and CEO		s/ William Finkelstein Chief Financial Officer

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	a.		The Company’s net loss for the three months ended June 30, 2002, was $389,942 rather than $383,616;

	b.		The increase in professional fees over the comparable quarter ended June 30, 2001, of $90,941 includes the sum of $60,000 paid to a director, and such $60,000 was incorrectly described as a separate Company expense in addition to its inclusion in professional fees;

	c.		The Company’s net loss for the six months ended June 30, 2002, was $566,145 rather than $559,819;

	d.		The increase in interest expense over the comparable six months ended June 30, 2001, was $25,435 rather than $75,543;

	e.		The increase in depreciation and amortization over the comparable six months ended June 30, 2001, was $6,272 rather than $17,977.