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

(Mark One)

[X]		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the period ended September 30, 2002
		OR
[   ]		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 of 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 September 30, 2002, the Registrant had 43,601,317 shares of common stock, $0.001 par value, outstanding.

TABLE OF CONTENTS

PART I

ITEM 1. FINANCIAL STATEMENTS

ITEM1 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

ITEM 4.  CONTROLS AND PROCEDURES

PART II

ITEM 2.  CHANGES IN SECURITIES

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

SIGNATURES

EXHIBIT INDEX

Exhibit 10.10

Exhibit 99.1

Exhibit 99.2

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TABLE OF CONTENTS

ITEM

PAGE

PART I.

1.

Financial Statements

a.

Accountant’s Review Report

1

b.

Balance Sheets — September 30, 2002 (unaudited) and December 31, 2001

2

c.

Statements of Operations — Three Months Ended September 30, 2002, September 30, 2001, Six Months Ended September 30, 2002, September 30, 2001 and from Inception through September 30, 2002

3

d.

Statements of Stockholders’ Equity (Deficit)

4

e.

Statements of Cash Flows — Six Months Ended September 30, 2002, September 30, 2001 and from Inception through September 30, 2002

5

f.

Notes to Financial Statements

6

g.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

4.

Controls and Procedures

24

PART II.

2.

Changes in Securities

25

6.

Exhibits and Reports on Form 8-K

25

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

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

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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 and a Delaware corporation) as of September 30, 2002, and the related statements of operations, stockholders’ equity (deficit), and cash flows for the nine months ended September 30, 2002 and 2001 and for the period from December 2, 1985 (inception) to September 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 them 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 $6,141,136 at September 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
October 29, 2002

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

ASSETS

				September 30,
				2002				December 31,
				(unaudited)				2001
CURRENT ASSETS
	Cash			$	119,210			$	36,615
	Marketable securities				2,750,000				—
	Notes receivable — related party				246,619				246,619
	Interest receivable — related party				43,601				31,579
	Deposits and prepaid expenses				484				40,710
		Total Current Assets			3,159,914				355,523
PROPERTY AND EQUIPMENT, net of accumulated depreciation					15,639				4,888
OTHER ASSETS
	Deferred loan origination fees, net of accumulated amortization				88,382				74,791
	Patents and patents pending, net of accumulated amortization				337,328				264,493
		Total Other Assets			425,710				339,284
TOTAL ASSETS				$	3,601,263			$	699,695
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
CURRENT LIABILITIES
	Accounts payable			$	86,555			$	142,206
	Accounts payable — related party				—				9,740
	Accrued expenses — related party				5,715				13,600
	Accrued interest on convertible debt				131,222				—
		Total Current Liabilities			223,492				165,546
LONG-TERM DEBT
	Convertible notes payable				4,834,375				1,314,301
	Notes payable to related parties				127,631				127,631
		Total Long-Term Debt			4,962,006				1,441,932
		Total Liabilities			5,185,498				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, 43,601,317 and 42,303,611 shares issued and outstanding, respectively				43,600				42,303
	Additional paid-in capital				3,936,874				3,640,657
	Stock options and warrants				576,427				477,683
	Deficit accumulated during development stage				(6,141,136	)			(5,068,426	)
		Total Stockholders’ Equity (Deficit)			(1,584,235	)			(907,783	)
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)				$	3,601,263			$	699,695

See accompanying notes and accountant’s review report.

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

				Three Months Ended								Nine Months Ended								From Inception
				September 30,								September 30,								(December 2, 1985)
																				through
				2002				2001				2002				2001				September 30, 2002
				(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)				(Unaudited)
REVENUES				$	—			$	—			$	—			$	—			$	89,947
OPERATING EXPENSES
	Research and development				110,855				33,648				192,833				100,056				2,471,205
	Promotional fees				240				9,761				9,319				10,386				25,863
	Professional fees				152,755				43,807				416,382				223,187				2,363,815
	Directors’ fees				—				23,280				—				23,280				29,080
	Depreciation and amortization				18,164				12,235				48,015				35,814				529,898
	Salaries and benefits				57,072				—				57,072				84,185				1,066,932
	Insurance				13,218				10,838				39,656				34,797				98,630
	Shareholder relations and transfer fees				8,555				5,319				15,555				15,740				192,102
	Rent				—				5,983				—				33,962				156,116
	Travel and entertainment				21,093				5,840				51,364				28,838				150,520
	Telephone and communications				448				176				2,107				11,028				29,487
	Office				2,362				3,280				5,650				15,571				48,770
	General and administrative				6,091				122				22,782				14,154				604,428
		Total Operating Expenses			390,853				154,289				860,735				630,998				7,766,846
Loss From Operations					(390,853	)			(154,289	)			(860,735	)			(630,998	)			(7,676,899	)
Other Income (Expense)
	Miscellaneous income				—				—				—				—				22,000
	Interest and dividend income				17,050				10,268				27,334				31,281				94,327
	Internal gain on sale of securities				—				—				—				—				157,520
	Accounts payable forgiveness				—				—				—				—				45,396
	Loss on disposal of office equipment				—				—				—				(2,224	)			(2,224	)
	Interest expense				(132,762	)			(43,112	)			(239,309	)			(124,224	)			(828,693	)
		Total Other Income (Expense)			(115,712	)			(32,844	)			(211,975	)			(95,167	)			(511,674	)
Loss Before Income Taxes					(506,565	)			(187,133	)			(1,072,710	)			(726,165	)			(8,188,573	)
Income Taxes					—				—				—				—				—
Loss Before Extraordinary Item					(506,565	)			(187,133	)			(1,072,710	)			(726,165	)			(8,188,573	)
Extraordinary item, forgiveness of debt					—				—				—				—				2,047,437
NET LOSS				$	(506,565	)		$	(187,133	)		$	(1,072,710	)		$	(726,165	)		$	(6,141,136	)
BASIC AND DILUTED NET LOSS PER COMMON SHARE				$	(0.01	)		$	nil			$	(0.02	)		$	(0.02	)
WEIGHTED AVERAGE NUMBER OF BASIC AND DILUTED COMMON STOCK SHARES OUTSTANDING					43,592,998				40,698,265				43,032,548				40,698,265

See accompanying notes and accountant’s review report.

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

																		Deficit
																		Accumulated				Total
		Common Stock								Additional				Stock				During				Stockholders'
										Paid-in				Options and				Development				Equity
		Shares				Amount				Capital				Warrants				Stage				(Deficit)
Balance, December 31, 2000			40,698,265			$	40,698			$	3,233,040			$	379,403			$	(4,048,125	)		$	(394,984	)
Common stock issued in exchange for convertible debt at $0.25 per share			1,605,346				1,605				399,504				—				—				401,109
Contribution of capital by shareholders in form of foregone interest and rent			—				—				8,113				—				—				8,113
Stock warrants issued in exchange for services			—				—				—				23,280				—				23,280
Stock options issued in exchange for services			—				—				—				75,000				—				75,000
Net loss for the year ended December 31, 2001			—				—				—				—				(1,020,301	)			(1,020,301	)
Balance, December 31, 2001			42,303,611				42,303				3,640,657				477,683				(5,068,426	)			(907,783	)
Contribution of capital by shareholders in form of foregone interest			—				—				4,586				—				—				4,586
Common stock issued in exchange for convertible debt at $0.25 per share			1,147,706				1,147				285,781				—				—				286,928
Stock issued for cash at an average price of $0.04 per share from the exercise of options			150,000				150				5,850				—				—				6,000
Stock warrants issued in exchange for services			—				—				—				54,344				—				54,344
Stock options issued in exchange for services			—				—				—				44,400				—				44,400
Net loss for the nine months ended September 30, 2002			—				—				—				—				(1,072,710	)			(1,072,710	)
Balance, September 30, 2002 (Unaudited)			43,601,317			$	43,600			$	3,936,874			$	576,427			$	(6,141,136	)		$	(1,584,235	)

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

See accompanying notes and accountant’s review report.

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

												From Inception
				Nine Months Ended September 30,								(December 2, 1985)
												through
				2002				2001				September 30, 2002
				(Unaudited)				(Unaudited)				(Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)				$	(1,072,710	)		$	(726,165	)		$	(6,141,136	)
	Extraordinary gain				—				—				(2,047,437	)
Adjustments to reconcile net loss to cash used in operating activities:
	Depreciation and amortization				48,015				35,814				529,898
	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				98,744				23,280				365,689
	Accrued interest paid by convertible debt				103,501				77,262				308,412
	Expenses paid through contribution of additional paid-in capital				4,586				6,590				50,532
	Organization costs				—				—				(9,220	)
	Decrease (increase) in:
		Deposits and prepaid expenses			40,226				17,317				(484	)
		Interest receivable			(12,022	)			(12,023	)			(43,601	)
		Deferred loan origination cost			(41,895	)			—				(155,183	)
	Increase (decrease) in:
		Accounts payable			(73,276	)			34,973				92,270
		Accounts and notes payable, related parties			—				—				127,631
		Payroll and payroll taxes payable			—				—				2,046,353
		Accrued interest			131,222				41,272				141,184
Net cash used in operating activities					(773,609	)			(499,456	)			(4,659,048	)
CASH FLOWS FROM INVESTING ACTIVITIES:
	Purchase of fixed assets				(13,169	)			—				(61,172	)
	Internal gain on sale of securities				—				—				157,520
	Purchase of investments				(2,750,000	)			—				(2,750,000	)
	Acquisition of patents				(90,127	)			(93,403	)			(451,225	)
Net cash used in investing activities					(2,853,296	)			(93,403	)			(3,104,877	)
CASH FLOWS FROM FINANCING ACTIVITIES:
	Proceeds from issuance of common stock				6,000				—				2,455,754
	Proceeds from convertible notes				3,703,500				—				5,214,000
	Proceeds from notes payable				—				—				388,508
	Payments on notes payable				—				—				(175,127	)
Net cash provided by financing activities					3,709,500				—				7,883,135
Net increase (decrease) in cash					82,595				(592,859	)			119,210
Cash, beginning					36,615				758,267				—
Cash, ending				$	119,210			$	165,408			$	119,210
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			$	4,586			$	6,590			$	50,532
	Common stock issued for a loan payable			$	—			$	—			$	213,381
	Common stock issued for notes receivable			$	—			$	—			$	246,619
	Options issued for services			$	98,744			$	—			$	173,744
	Warrants issued for services			$	—			$	23,280			$	191,945
	Accrued interest paid by convertible debt			$	103,501			$	77,262			$	308,412
	Common stock issued for convertible debt			$	286,928			$	—			$	688,037

See accompanying notes and accountant’s review report.

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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 nine months ended September 30, 2002, the Company incurred a net loss of $1,072,710 and had an accumulated deficit during the development stage of $6,141,136 for the period then ended. Although the Company raised over $3.7 million in convertible debt during the nine months period ended September 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 September 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.

Accounting Method

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

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NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 No. 144 replaces SFAS No. 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. SFAS No. 144 requires that these long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or discontinued operations. This statement is effective beginning for fiscal years after December 15, 2001, with earlier application encouraged. The Company adopted SFAS No. 144 and does not believe that the adoption will have a material impact on the financial statements of the Company.

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NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Accounting Pronouncements (Continued)

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. SFAS No. 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.

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

Interim Financial Statements

The interim financial statements as of and for the quarter ended September 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.

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.

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NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

Provision for Taxes

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

At September 30, 2002, the Company had net deferred tax assets of approximately $1,270,000, 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 September 30, 2002, the Company’s net operating loss carryforwards amount to approximately $5,090,000, 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.

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 $9,319 and $10,386 for the nine months ended September 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.

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.

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NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

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 $54,008, net of accumulated amortization at September 30, 2002, are amortized over the life of the related debt. During the nine months ended September 30, 2002, the Company recorded amortization expense in the amount of $20,784 related to these fees.

During the nine months ended September 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 $34,375, net of accumulated amortization at September 30, 2002, are amortized over the life of the related debt. During the nine months ended September 30, 2002, the Company recorded amortization expense in the amount of $7,520 related to these fees.

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 September 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 statement of operations as internal gain on sale of securities.

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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 September 30, 2002:

						Accumulated
		Cost				Depreciation
Lab equipment		$	27,582			$	27,582
Office equipment			15,962				10,077
Furniture and fixtures			11,384				1,630
		$	54,928			$	39,289

Depreciation expense for the nine months ended September 30, 2002 and 2001 was $2,419 and $2,499, 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 September 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.

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NOTE 5 — INTANGIBLE ASSETS (Continued)

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

						Accumulated				Net
		Cost				Amortization				Amount
Balance, December 31, 2000		$	251,120			$	(77,611	)		$	173,509
2001 Activity			109,977				(18,993	)			90,984
Balance, December 31, 2001			361,097				(96,604	)			264,493
2002 Activity			90,127				(17,292	)			72,835
Balance, September 30, 2002		$	451,224			$	(113,896	)		$	337,328

NOTE 6 — RELATED PARTY TRANSACTIONS

Current Transactions

During the period ended June 30, 2002, the Company sold a $25,000 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 aggregate 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 mature on December 31, 2002.

The notes payable to related parties consist of notes payable to the former chairman and principal shareholder. The note has no specific due date, is currently uncollateralized, and is non-interest bearing, however, interest is calculated at the applicable federal rate each quarter. The calculated interest of $4,586 was recorded in 2002 as interest expense and contributed capital in the accompanying financial statements.

Transactions in 1999

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

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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.

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 $119,210 is at risk on September 30, 2002.

The Company’s marketable security investment consists of one auction rate preferred money market alternative that rolls every seven days at the then market interest rate.

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NOTE 8 — COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL

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

		Common Stock
		Average
		price												Additional
		per share				Shares				Amount				Paid-in 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
Contribution of additional paid-in capital:
1991			—				—				—				35,825
1999			—				—				—				28,098
2000			—				—				—				9,735
2001			—				—				—				8,113
2002			—				—				—				4,586
							—				—				86,357
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	)
							—				—				—

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

			Common Stock
			Average												Additional
			price												Paid-in
			per share				Shares				Amount				Capital
Common stock issued for services(1):
1988			$	.50				25,000			$	25			$	12,475
1989				.38				25,000				25				9,475
1990				.66				37,375				37				24,635
1991				.51				159,500				160				81,010
1992				.75				62,500				62				46,563
1993				.25				120,000				120				29,880
1996				.05				308,500				308				13,832
1997				.05				155,500				155				7,619
1999				.05				99,190				99				4,860
								992,565				991				230,349
Common stock issued to replace unrecorded certificates:
1988				.001				1,200				1				(1	)
1992				.001				500				1				(1	)
2000				.001				100,000				100				(100	)
								101,700				102				(102	)
Common stock issued for forgiveness of accounts payable(1):
1990				.50				25,000				25				12,475
1996				.05				150,000				150				7,350
								175,000				175				19,825
Common stock issued in payment of notes payable(1):
1993				.25				200,000				200				49,800
2000				.05				1,714,995				1,715				84,035
								1,914,995				1,915				133,835
Common stock issued in payment of loans payable(1):
2000				.05				2,552,625				2,553				125,078
Common stock issued for commissions(1):
1993				.001				1,260,000				1,260				—

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

		Common Stock
		Average												Additional
		price												Paid-in
		per share				Shares				Amount				Capital
Common stock issued for convertible debt:
2001			.25				1,605,346			$	1,605			$	399,504
2002			.25				1,147,706				1,147				285,781
							2,753,052				2,752				685,285
Stock options exercised:
1997			.01				325,000				325				2,929
2000			.01				350,000				350				3,150
2002			.04				150,000				150				5,850
							825,000				825				11,929
Total							43,601,317			$	43,600			$	3,936,874

(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.

Stock Bonus Plan

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

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. At September 30, 2002, there are 4,060,000 shares available under this plan.

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 September 30, 2002, the Company has not issued any preferred stock.

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NOTE 10 — STOCK OPTIONS AND ISSUANCE COMMITMENTS

On February 25, 1991, the Company 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 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) of expense 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. The options are exercisable immediately and expire on December 31, 2011. In accordance with Statement of Financial Accounting Standard No. 123, the fair value of the options was estimated using the Black Scholes Option Price Calculation. The following assumptions were made to value the stock options: strike price at $0.25, risk free interest rate of 5%, expected life of 10 years, and expected volatility of 38% and no dividends are expected to be paid. At December 31, 2001, the Company recorded $13,600 ($0.17 per option) of expense to professional fees for the value of these options based upon these Black Scholes assumptions.

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NOTE 10 — STOCK OPTIONS AND ISSUANCE COMMITMENTS (Continued)

During the nine months ended September 30, 2002, the Company issued stock options to purchase a total of 110,000 shares of the Company’s stock at $0.25 per share for services. The options are exercisable immediately and expire between July 28, 2007 and April 15, 2011. The options have piggyback registration rights to be effective in the Company’s next SEC registration statement. In accordance with Statement of Financial Accounting Standard No. 123, the fair value of the options was estimated using the Black Scholes Option Price Calculation. The following assumptions were made to value the stock options: strike price at $0.25, risk free interest rate of 5%, expected lives of 5 to 9 years, and expected volatility of 98% and no dividends are expected to be paid. The Company recorded a total expense of $30,800 (an average of $0.28 per option) to professional fees for the value of the options based upon these Black Scholes assumptions.

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

						Weighted
		Number				Average
		of 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			190,000				0.25
Exercised			(150,000	)			0.04
Forfeited			(860,000	)			0.20
Outstanding at September 30, 2002			1,957,953				0.13
Options exercisable at September 30, 2002			1,957,953			$	0.13
Weighted average fair value of options granted in 2002						$	0.23

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.

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NOTE 11 — INCOME (LOSS) PER SHARE (Continued)

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

			Quarter Ended								From Inception
											(December 2, 1985)
			September 30,				September 30,				through
			2002				2001				September 30, 2002
Earnings per share
	Extraordinary gains		$	—			$	—			$	0.08
Earnings per share — assuming dilution
	Extraordinary gains		$	—			$	—			$	0.08

NOTE 12 — NON-CASH COMMITMENT AND WARRANTS

During the nine months ended September 30, 2002, the Company issued warrants to two advisors to purchase 239,400 shares of common stock in connection with the sale of subordinated convertible pay-in-kind notes. The warrants are exercisable for ten years and have an exercise price of $0.25 per share. In accordance with Statement of Financial Accounting Standards No. 123, the fair value of the warrants was estimated using the Black Scholes Option Price Calculation. The following assumptions were made to value the warrants: strike price at $0.25, risk free interest rate of 5%, expected life of 10 years, and expected volatility of 98%. During the nine months ended September 30, 2002, the Company recorded $54,344 as consulting fees for the aforementioned services. A cash-less exercise may be used for all warrant transactions.

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

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NOTE 12 — NON-CASH COMMITMENT AND WARRANTS (Continued)

At September 30, 2002, the total of the Company’s exercisable warrants is 5,324,535. The average exercise price of the warrants at September 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 nine months ended September 30, 2002 was $20,784.

During the year ended December 31, 2001, a total of $355,000 original debt and $46,109 of accrued interest and previously converted interest was converted into 1,605,346 shares of common stock at $0.25 per share. During the nine months ended September 30, 2002, a total of $245,000 original debt and $41,928 of accrued interest and previously converted interest was converted into 1,147,706 shares of common stock at $0.25 per share.

2002 Convertible Notes due September 30, 2004

During the nine months ended September 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 $1,148,500 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. The unpaid accrued interest at June 30, 2002 of $19,148 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 $41,895 to two advisors, together with 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 nine months ended September 30, 2002 was $7,520.

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NOTE 13 — CONVERTIBLE DEBT (Continued)

2002 Convertible Notes due June 1, 2006

During the nine months ended September 30, 2002, the Company sold in a private placement to accredited investors 2002 subordinated convertible pay-in-kind notes due June 1, 2006 (“2002-2006 convertible notes”), in the principal amount of $2,555,000 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. The unpaid accrued interest at June 30, 2002 of $23,459 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 related party a professional fee of $60,000.

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.

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. The Company is in the process of negotiating an extension of this contract.

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.

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NOTE 14 — COMMITMENTS AND CONTINGENCIES (Continued)

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.

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 nine months ended September 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		$	(0.02	)		$	(0.02	)

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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 year ended December 31, 2001.

Results of Operations

Liquidity and Capital Resources

As of September 30, 2002, the Company has issued and outstanding 43,601,317 shares of its Common Stock. The Company is a development stage company and has no material assets other than cash and short-term securities. The Company had $2,869,210 in cash and short-term investments as of September 30, 2002. For the twelve-month period subsequent to September 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 September 30, 2002 and 2001

For the three months ended September 30, 2002, the Company realized a net loss of $506,565 compared to a net loss of $187,133 for the three months ended September 30, 2001. The Company had increases in expenses over the quarter ended September 30, 2001 principally related to the following: increased research and development expenses in the amount of $77,207, increased professional fees in the amount of $108,948 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 as well as fees related to documentation and issuance of the Company’s subordinated convertible pay-in-kind notes, increased depreciation and amortization in the amount of $5,929, increase in salaries and benefits in the amount of $57,072, increased travel expenses in the amount of $15,253 related to business development and other Company matters, increased general and administrative expenses in the amount of $5,969, and increased interest expense in the amount of $89,650 related to the Company’s convertible subordinated debt and subordinated convertible pay-in-kind notes, all net of decreased

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promotional fees related to the issuance and publication of press releases in the amount of $9,521, decreased Director’s fees in the amount of $23,280, and decreased rent of $5,982.

Nine Months Ended September 30, 2002 and 2001

During the nine months ended September 30, 2002, the Company’s financial condition changed in the following manner: Cash increased by $82,595, marketable securities increased by $2,750,000, and loan fees increased by a net of $13,591. All of these increases are directly related to the increase in convertible debt in the net amount of $3,520,074, which also includes an increase of $262,405 representing accrued interest recharacterized as convertible debt during the period. Prepaid insurance decreased by $40,226 due to the utilization of premiums previously paid. Expenditures related to patents and patents pending during the nine months ended September 30, 2002 amounted to approximately $90,127. The Company paid $73,276 of current liabilities in the normal course of business.

For the nine months ended September 30, 2002, the Company realized a net loss of $1,072,710 compared to a net loss of $726,165 for the nine months ended September 30, 2001. The Company’s increases in expenses over the nine months ended September 30, 2001 consists primarily of the following: increased research and development expenses in the amount of $92,777, increased expenditures in the aggregate amount of $193,195 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 interest expense in the amount of $115,085 related to the Company’s convertible subordinated debt and subordinated convertible pay-in-kind notes, increased depreciation and amortization in the amount of $12,201, and increased travel expenses in the amount of $22,526 related to business development and other Company matters, and increased general and administrative expenses in the amount of $8,628, all net of decreased Directors’ fees of $23,280, decreased salaries and benefits of $27,113, decreased rent of $33,962, decreased telephone and communications of $8,921 and decreased office expenses in the amount of $9,921.

ITEM 4.  CONTROLS AND PROCEDURES

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures within 90 days of the filing date of this quarterly report, and, based on their evaluation, our principal executive officer and principal financial officer have concluded that these controls and procedures are effective. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.

Disclosure controls and procedures are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

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PART II

ITEM 2.  CHANGES IN SECURITIES

	(c)		During the quarter ended September 30, 2002, the Company sold the principal amount of $35,000 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 Subordinated Convertible Pay-In-Kind Notes due September 30, 2004. The holders of 2002 Convertible Notes Due 2006 are entitled to certain piggyback registration rights.
			The Company offered the 2002 Convertible Notes Due 2006 pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D. The proceeds from the placement of 2002 Convertible Notes Due 2006 will be used for working capital, including salaries of management, scientific 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 the Company’s Convertible Pay-In-Kind Notes Due June 1, 2006, was filed as an Exhibit to the company’s Form 10-QSB for the quarter ended June 30, 2002. The form of the related Investors Rights Agreement also was filed as an Exhibit to the Company’s Form 10-QSB for the quarter ended June 30, 2002.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)	Exhibit
	Number	Description
	10.10	Form of 2002 Subordinated Convertible Pay-In-Kind Note Due June 1, 2006 as corrected for the payment maturity date on page 2 thereof, from the form attached as Exhibit 10.10 to Form 10-QSB filed on August 13, 2002, and Form 10-QSB/A filed on August 23, 2002.

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(a)	Exhibit
	Number	Description
	99.1	Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	99.2	Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

(b) Reports on Form 8-K

		Current Report on Form 8-K dated July 30, 2002		Item 5.  Other Events
		Current Report on Form 8-K dated August 26, 2002		Item 5.  Other Events

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this Report on Form 10-QSB to be signed on its behalf by the undersigned thereunto duly authorized as of November 12, 2002.

				Advanced Biotherapy, Inc. (Registrant)
By:		s/   Edmond F. Buccellato Edmond F. Buccellato President and CEO		By:		s/   William M. Finkelstein William M. Finkelstein Chief Financial Officer

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Certification by Edmond F. Buccellato, President and Chief Executive Officer
of
Advanced Biotherapy, Inc.

I, Edmond F. Buccellato, certify that:

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

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

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

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

     a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

     b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

     c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

     a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could

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significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

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

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Certification by William M. Finkelstein, Chief Financial Officer
of
Advanced Biotherapy, Inc.

I, William M. Finkelstein, certify that:

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

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

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

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

     a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

     b) evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

     c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

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

     a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

     b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could

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significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: November 12, 2002

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

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EXHIBIT INDEX

Exhibit		Description
10.10		Form of 2002 Subordinated Convertible Pay-In-Kind Note Due June 1, 2006 (with corrected maturity date on page 2), as filed with Form 10-QSB on August 13, 2002, and Form 10-QSB/A on August 23, 2002.
99.1		Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2		Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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