ADVANCED VIRAL RESEARCH CORP - 10-K Annual Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended
DECEMBER 31, 2003

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 33-2262-A

ADVANCED VIRAL RESEARCH CORP.
------------------------------------------------------
(Exact name of registrant as specified in its charter)

Delaware 59-2646820
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)

200 Corporate Boulevard South, Yonkers, New York 10701
- ------------------------------------------------ -----
Address of principal executive offices) Zip Code

(914) 376-7383
--------------
(Registrant's telephone number, including area code)

Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]

The aggregate market value of the voting and non-voting common equity held
by nonaffiliates of the registrant, based upon the last known price at which the
common equity was sold, as of the last business day of the registrant's most
recently completed second fiscal quarter was $38,545,771.

As of March 30, 2004, the Registrant had 602,291,677 shares of Common Stock
outstanding.

DOCUMENTS INCORPORATED BY REFERENCE: None.

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TABLE OF CONTENTS

PART I............................................................................................................1
ITEM 1. BUSINESS..................................................................................1
ITEM 2. DESCRIPTION OF PROPERTY..................................................................10
ITEM 3. LEGAL PROCEEDINGS........................................................................11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS......................................11

PART II..........................................................................................................11
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.....................................................................11
ITEM 6. SELECTED FINANCIAL DATA..................................................................12
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.....................................................14
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA...............................................28
ITEM 9. CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS................................................28
ITEM 9A. CONTROLS AND PROCEDURES..................................................................28
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.......................................28
ITEM 11. EXECUTIVE COMPENSATION...................................................................31
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS..............................................36
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................................37
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES...................................................39

PART IV..........................................................................................................40
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K.............................................................................40

SIGNATURES.......................................................................................................46

FORWARD-LOOKING STATEMENTS

Advanced Viral cautions readers that some of the information in this
report contains forward-looking statements within the meaning of the federal
securities laws. For this purpose, any statements contained in this report that
are not statements of historical fact may be deemed to be forward-looking
statements. Forward-looking statements typically are identified by use of terms
like "may," "will," "expect," "anticipate," "estimate", "believe", "intend",
"could", "would" and similar words, although some forward-looking statements are
expressed differently. You should be aware that our actual results could differ
materially from those contained in the forward-looking statements due to a
number of factors, including our limited operating history and substantial
operating losses, availability of capital resources, ability to effectively
compete, economic conditions, unanticipated difficulties in pharmaceutical
research and development, ability to continue research and development, ability
to gain governmental approvals, uncertainty relating to timing of governmental
approval process, dependence on equity and debt financing for continued
operations, dependence on third party distributors and consultants, dependence
on our key personnel, ability to protect our intellectual property and the
impact of future government regulation on our business. You should also consider
carefully the risks described in this report or detailed from time to time in
our filings with the Securities and Exchange Commission (the "SEC").

AS USED IN THIS ANNUAL REPORT ON FORM 10-K, THE TERMS "WE," "US,"
"OUR," AND "ADVANCED VIRAL" MEAN ADVANCED VIRAL RESEARCH CORP. AND ITS
SUBSIDIARIES (UNLESS THE CONTEXT INDICATES A DIFFERENT MEANING).

PART I

ITEM 1. BUSINESS

OVERVIEW

Advanced Viral Research Corp. was incorporated in Delaware in July 1985
to engage in the production and marketing, promotion and sale of a
pharmaceutical drug known by the trademark Reticulose(R). This drug was the
forerunner of our current drug, "AVR118". We believe AVR118 may be employed in
the treatment of diseases such as:

o Cachexia, or body wasting, in patients with acquired immune
deficiency syndrome (AIDS), and cancer;

o Human immunodeficiency virus, or HIV, including AIDS as a
combination therapy;

o Human papilloma virus, or HPV, which causes genital warts and
may lead to cervical cancer; and

o Rheumatoid arthritis.

Since we incorporated in July 1985, we have been engaged primarily in
research and development activities. We have not generated significant operating
revenues, and as of December 31, 2003, we had incurred a cumulative net loss of
$56,915,000. Our ability to generate substantial operating revenue depends upon
our success in gaining FDA approval for the commercial use and distribution of
AVR118.

Our operations over the last five years have been limited principally
to research, testing and analysis of AVR118 in the United States, either in
vitro (outside the living body in an artificial environment, such as in a test
tube), or on animals, and engaging others to perform testing and analysis of
AVR118 on human patients both inside and outside the United States. On July 30,
2001, we submitted an IND application to the FDA for the use of AVR118 as a
topical treatment for genital warts caused by the human papilloma virus (HPV)
infection. In September 2001, the FDA allowed the IND application, which
permitted us to begin Phase I clinical trials. Our Phase I study was performed
in the United States on healthy volunteers. In March 2002, we completed the
Phase I trial and submitted to the FDA the results, which indicated that AVR118
was safe and well tolerated dermatologically at all the doses applied in the
study. Currently, we are determining the best course of action to proceed with
the Phase II clinical trials of AVR118 for topical use.

In February 2004, we retained Elma S. Hawkins, Ph.D. as our President
and Chief Executive Officer. Pursuant to the employment agreement, the term of
Dr. Hawkins' employment commences February 2004 and continues until February
2006 unless terminated earlier as provided in the agreement. Dr. Hawkins
receives a base salary of $350,000 per year, and is eligible to receive an
annual cash bonus of up to 50% of her then base salary based on certain
performance objectives in the sole discretion of the Board of Directors. In
addition, we paid Dr. Hawkins a signing bonus of $50,000. Pursuant to the
agreement, Dr. Hawkins also received an option to purchase 40 million shares of
our common stock which options become exercisable on a monthly basis (1/60 per
month) through February 2009 (1/60th per month) so long as she is employed by
Advanced Viral at exercise prices ranging from $0.12 to $0.16. See "EMPLOYMENT
CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL ARRANGEMENTS."

In February 2004, we entered into an agreement with James Dicke II and
his son James Dicke III, whereby we agreed to sell an aggregate of 120 million
shares of our common stock and warrants to purchase 15 million shares of our
common stock for an aggregate purchase price of $12 million. Pursuant to the
agreement, the funding shall take place in four equal stages of $3 million each,
once every 90 days with the first $3 million funding having occurred on February
5, 2004.

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LIQUIDITY CONSIDERATIONS

The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2003
includes an emphasis paragraph regarding certain liquidity considerations. Note
2 to the Consolidated Financial Statements states that our cash position may be
inadequate to pay all the costs associated with the full range of testing and
clinical trials of AVR118 required by the FDA, and, unless and until AVR118 is
approved for sale in the United States or another industrially developed
country, we may be dependent upon the continued sale of our securities, debt or
equity financing for funds to meet our cash requirements. We believe that cash
flows from sales of securities and from current financing arrangements will be
sufficient to fund our current operations. Although we may not be successful in
doing so, we intend to continue to sell our securities in an attempt to mitigate
the effects of our cash position. No assurance can be given that equity or debt
financing, if and when required, will be available or that additional securities
will be authorized beyond the current authorization of 1 billion shares of our
common stock.

CLINICAL TRIALS CONDUCTED IN ISRAEL

We are currently testing injectable AVR118 in a Phase I/II study in
Israel involving cachectic AIDS patients who may or may not be receiving
anti-retroviral therapy or highly active anti-retroviral therapy (HAART). Our
objective for this study is to determine the safety and tolerance of AVR118.
Although there can be no assurances, we anticipate that the clinical trials in
Israel will help facilitate the planned investigational new drug (IND)
application process for injectable AVR118 with the FDA.

In August 2003, we decided to defer the continuation of and re-examine
the procedures, protocol and objectives of, two other clinical trials in Israel
using AVR118; a Phase I study for cachectic patients with leukemia and lymphoma
and a Phase I study for cachectic patients with solid tumors. There can be no
assurances as to when these two studies will be completed, if at all.

Because of our limited personnel, we believe it to be in our best
interest to focus our clinical efforts on our one ongoing PhaseI/II open-label
dose escalation clinical trial being conducted at The Kaplan Medical Center in
Rehovot, Israel of AVR118 for cachectic patients with AIDS. Out of 30 total
patients contemplated under the protocol for this study, 23 patients are
enrolled, 22 of whom have completed the full course of treatment of AVR118, and
one is continuing to receive treatments of AVR118, as required under the study.
Results from the first 15 patients showed improvement in appetite, weight gain
or stability, and enhanced quality of life. None of the patients reported any
serious side effects associated with AVR118 therapy. We estimate completion of
this study during the second quarter of 2004. It is uncertain at this time when
cash inflows will result from this study. The completion of the study is
dependent upon the availability of patients meeting the prescribed protocol and
the ability of the hospitals to meet the requirements of the protocol. From
inception of all three clinical studies in Israel we have expensed approximately
$1,692,000 through December 31, 2003. The cost to complete the Phase I/II study
in Israel of AVR118 for cachectic patients with AIDS is estimated to be
$277,000. In addition, we believe we will incur an additional $150,000 for
expenses in the U.S. related to the analysis of data from this Phase I/II study
as well as strategic consulting.

GOVERNMENT REGULATION

The FDA imposes substantial requirements upon and conditions precedent
to the introduction of therapeutic drug products, such as AVR118, through
lengthy and detailed laboratory and clinical testing procedures, sampling
activities and other costly and time-consuming procedures to demonstrate that
such products are both safe and effective in treating the indications for which
approval is sought. After testing in animals, an Investigational New Drug, or
IND, application must be filed with the FDA to obtain authorization for human
testing. When the clinical testing has been completed and analyzed, final
manufacturing processes and procedures are in place, and certain other required
information is available to the sponsor, a sponsor may submit a new drug
application, or NDA, to the FDA. No action can be taken to market AVR118, or any
therapeutic drug product, in the United States until an NDA has been approved by
the FDA.

The IND process in the United States is governed by regulations
established by the FDA, which strictly controls the use and distribution of
investigational drugs in the United States. The guidelines require that an
application contain sufficient information to justify administering the drug to
humans, that the application include relevant

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information on the chemistry, pharmacology and toxicology of the drug derived
from chemical, laboratory and animal or in vitro testing, and that a protocol be
provided for the initial study of the new drug to be conducted on humans.

In order to conduct a clinical trial of a new drug in humans, a sponsor
must prepare and submit to the FDA a comprehensive IND. One important aspect in
the IND is a description of the overall plan for investigating the drug product
and a comprehensive protocol for each planned study. The plan is typically
carried out in three phases: Phase I clinical trials, which involve the
administration of the drug to a small number of healthy subjects to determine
safety, tolerance, absorption and metabolism characteristics; Phase II clinical
trials, which involve the administration of the drug to a limited number of
patients for a specific disease to determine dose response, efficacy and safety;
and Phase III clinical trials, which involve the study of the drug to gain
confirmatory evidence of efficacy and safety from a wide base of investigators
and patients.

An investigator's brochure must be included in the IND and the sponsor
is required to obtain initial and continual review and approval of the clinical
investigation. A section describing the composition, manufacture and control of
the drug substance and the drug product is included in the IND. Sufficient
information is required to be submitted to assure the proper identification,
quality, purity and strength of the investigational drug. A description of the
drug substance, including its physical, chemical, and biological
characteristics, must also be included in the IND. The general method of
preparation of the drug substance must be included. A list of all components
including inactive ingredients must also be submitted. There must be adequate
information about pharmacological and toxicological studies of the drug
involving laboratory animals or in vitro tests on the basis of which the sponsor
has concluded that it is reasonably safe to conduct the proposed clinical
investigation. Where there has been widespread use of the drug outside of the
United States or otherwise, it is possible, in some limited circumstances, to
use well-documented clinical experience as a substitute for other preclinical
work.

After the FDA allows the IND, the investigation is permitted to
proceed, during which the sponsor must keep the FDA informed of new studies,
including animal studies, make progress reports on the study or studies covered
by the IND, and also be responsible for alerting FDA and clinical investigators
immediately of unforeseen serious side effects or injuries.

When all clinical testing has been completed and analyzed, final
sponsoring processes and procedures are in place, and certain other required
information is available to the sponsor, a sponsor may submit an NDA to the FDA.
An NDA must be approved by the FDA covering the drug before its manufacturer can
commence commercial distribution of the drug. The NDA contains a section
describing the clinical investigations of the drug which section includes, among
other things, the following: a description and analysis of each clinical
pharmacology study of the drug; a description and analysis of each controlled
clinical study pertinent to a proposed use of the drug; a description of each
non-controlled clinical study including a summary of the results and a brief
statement explaining why the study is classified as non-controlled; and a
description and analysis of any other data or information relevant to an
evaluation of the safety and effectiveness of the drug product obtained or
otherwise received by the applicant from any source foreign or domestic. The NDA
also includes an integrated summary of all available information about the
safety of the drug product including pertinent animal and other laboratory data,
demonstrated or potential adverse effects of the drug, including clinically
significant potential adverse effects of administration of the drug
contemporaneously with the administration of other drugs and other related
drugs. A section is included describing the statistical controlled clinical
studies and the documentation and supporting statistical analysis used in
evaluating the controlled clinical studies.

Another section of the NDA describes the data concerning the action of
a drug in the human body over a period of time and data concerning the extent of
drug absorption in the human body or information supporting a waiver of the
submission of such data. Also included in the NDA is a section describing the
composition, manufacture and specification of the drug substance including the
following: a full description of the drug substance, its physical and chemical
characteristics; its stability; the process controls used during manufacture and
packaging; and such specifications and analytical methods as are necessary to
assure the identity, strength, quality and purity of the drug substance as well
as the availability of the drug products made from the substance. NDA's contain
lists of all components used in the manufacture of the drug product and a
statement of the specifications and analytical methods for each component. Also
included are studies of the toxicological actions of the drug as they relate to
the drug's intended uses.

The data in the NDA must establish that the drug has been shown to be
safe for use under its proposed labeling conditions and that there is
substantial evidence that the drug is effective for its proposed use(s).
Substantial evidence is

3

defined by statute and FDA regulation to mean evidence consisting of adequate
and well-controlled investigations, including clinical investigations by experts
qualified by scientific training and experience, to evaluate the effectiveness
of the drug involved.

In February 1998, we contracted with GloboMax LLC to advise and assist
us in our preparation of the IND that was filed with the FDA in July 2001 and
allowed for Phase I trials in September 2001, and otherwise to guide us through
the FDA process. During 2001 and 2002, GloboMax continued its project management
services for the preclinical development and IND submission of AVR118 to the
FDA, the development of standard operating procedures and validation protocol
for the preparation and manufacture of AVR118. Expenses during 2001 and 2002
relating to the GloboMax agreement were approximately $3,587,000. Pursuant to
the agreement with GloboMax, we were obligated to pay for services on an hourly
basis, at prescribed rates. GloboMax LLC is no longer providing services to, or
representing, Advanced Viral.

It is possible that the results of clinical trials of AVR118, if
performed, will not prove that AVR118 is safe and effective. It is also possible
that the FDA will not approve the sale of AVR118 in the United States if we
submit an NDA. It is not known at this time how later stage clinical trials will
be conducted, if at all. Even if the data shows that AVR118 is safe and
effective, obtaining approval of the NDA could take years and require financing
of amounts not presently available to us.

In connection with our activities outside the United States, we are
also subject to regulatory requirements governing the testing, approval,
manufacture, labeling, marketing and sale of pharmaceutical and diagnostic
products, which requirements vary from country to country. Government regulation
in certain countries may delay marketing of AVR118 for a considerable period of
time and impose costly procedures upon our activities. The extent of potentially
adverse government regulations which might arise from future legislation or
administrative action cannot be predicted. Whether or not FDA approval has been
obtained for a product, approval of the product by comparable regulatory
authorities of foreign countries must be obtained prior to marketing the product
in those countries. The approval process may be more or less rigorous from
country to country, and the time required for approval may be longer or shorter
than that required in the United States. Clinical studies conducted outside of
any country may not be accepted by such country, and the approval of any
pharmaceutical or diagnostic product in one country does not assure that such
product will be approved in another country. Accordingly, until registration is
granted, if ever, in the United States or another developed or developing
country, we do not expect that we will be able to generate material sales
revenue.

RESEARCH, DEVELOPMENT AND TESTING

For the period from inception (February 20, 1984) through December 31,
2003 we expended approximately $19,666,000 on testing and research and
development activities either in our laboratories or pursuant to various testing
agreements with both domestic and foreign companies.

We are currently testing injectable AVR118 in a Phase I/II study in
Israel involving cachectic AIDS patients who may or may not be receiving
anti-retroviral therapy or highly active anti-retroviral therapy (HAART). Our
objective for this study is to determine the safety and tolerance of AVR118.
Although there can be no assurances, we anticipate that the clinical trials in
Israel will help facilitate the planned investigational new drug (IND)
application process for injectable AVR118 with the FDA.

In August 2003, we decided to defer the continuation of and re-examine
the procedures, protocol and objectives of, two other clinical trials in Israel
using AVR118; a Phase I study for cachectic patients with leukemia and lymphoma
and a Phase I study for cachectic patients with solid tumors. There can be no
assurances as to when these two studies will be completed, if at all.

We are focusing our clinical efforts on our one ongoing PhaseI/II
open-label, dose escalation clinical trial being conducted at The Kaplan Medical
Center in Rehovot, Israel of AVR118 for cachectic patients with AIDS. Out of 30
total patients contemplated under the protocol for this study, 23 patients are
enrolled, 22 of whom have completed the full course of treatment of AVR118, and
one is continuing to receive treatments of AVR118, as required under the study.
Results from the first 15 patients showed improvement in appetite, weight gain
or stability, and enhanced quality of life. None of the patients reported any
serious side effects associated with AVR118 therapy. We estimate completion of
this study during the second quarter of 2004. It is uncertain at this time when
cash inflows will result from this study. The completion of the study is
dependent upon the availability of patients meeting the prescribed protocol and
the ability of the hospitals to meet the requirements of

4

the protocol. From inception of all three clinical studies in Israel we have
expensed approximately $1,692,000 through December 31, 2003. The cost to
complete the Phase I/II study in Israel of AVR118 for cachectic patients with
AIDS is estimated to be $277,000. In addition, we believe we will incur an
additional $150,000 for expenses in the U.S. related to the analysis
of data from this Phase I/II study as well as strategic consulting.

In August 2003, we retained Oxford Pharmaceutical Resources, Inc., a
firm owned and controlled by Richard Guarino, MD, to assist us in conducting and
evaluating our clinical trials and resources in meeting federal FDA and foreign
regulatory requirements. Oxford Pharmaceutical Resources bills us on an hourly
basis, and we expensed approximately $61,000 during the year ended December 31,
2003 for such services.

Researchers at the Weizmann Institute of Science in Israel tested the
efficacy of AVR118 injected in rats with adjuvant arthritis and allergic
encephalitis. Results demonstrated that in both groups AVR118 inhibited the
progress of the disease in these rats. A third test was done by the Weizmann
Institute to assess the efficacy of oral AVR118 as an immunosuppressive agent in
mice with an induced immune skin reaction model. AVR118, used orally, did not
inhibit the appearance of this immune skin reaction in the mice.

In addition to our ongoing clinical trials, we have completed a Phase I
clinical trial in the U.S. to evaluate the safety of topical application of
AVR118 in healthy volunteers. There were no local adverse reactions to the
application of AVR118 to the skin of these subjects.

It is possible that the results of clinical trials of AVR118, if
performed, will not prove that AVR118 is safe and effective. It is also possible
that the FDA will not approve the sale of AVR118 in the United States if we
submit an NDA. It is not known at this time how later stage clinical trials will
be conducted, if at all. Even if the data shows that AVR118 is safe and
effective, obtaining approval of the NDA could take years and require financing
of amounts not presently available to us.

Conducting the clinical trials of AVR118 will require significant cash
expenditures. AVR118 may never be approved for commercial distribution by any
country. Because our research and development expenses and clinical trial
expenses will be charged against earnings for financial reporting purposes, we
expect that losses from operations will continue to be incurred for the near
future.

MATERIAL AGREEMENTS

In April 2001, we formalized a 12-month agreement with the Selikoff
Center in Israel to develop clinical trials in Israel using AVR118. As of
December 31, 2003, we paid $242,000 for such research which concluded the
agreement.

In September 2002 we entered into an agreement with EnviroGene LLC, an
affiliate of the Selikoff Center, to conduct, evaluate and maintain the
scientific quality for the three clinical studies. Under the agreement,
EnviroGene agreed to (1) finalize all Israeli government and hospital approval
documents, (2) complete and organize the three clinical trials including
establishing a network of scientists to perform said study/trial and initiate
recruitment of patients and (3) perform the studies/trials and evaluate the
results. The agreement provides for termination upon receipt and approval of
the final report required under the Agreement, and upon such termination we
retain all rights to the research performed under the agreement. Total costs for
all three clinical studies under the EnviroGene services agreement are
$1,551,000, of which approximately $1,323,000 has been expensed and
approximately $875,000 has been paid from inception through December 31, 2003.
If all three clinical studies in Israel were concluded, the additional expense
to be recorded under this contract is estimated to be approximately $228,000.

In October 2002 we entered into an agreement with Quintiles Israel Ltd.
to act as the auditor and monitor of the clinical studies. The agreement
terminates upon completion of the services unless terminated earlier by either
party upon prior written notice or upon a material breach and a failure to cure,
and upon such termination we retain all rights to the research performed under
the agreement. We have expensed $147,000 since inception of the contract through
December 31, 2003. If all three clinical studies in Israel were concluded, the
additional cost under this contract would be $106,000.

In November 2002 we entered into an agreement with Kaplan Medical
Center in Israel to act as the center for the Phase I/II study using AVR118 for
cachectic patients with AIDS. The agreement terminates upon conclusion of the
study, or upon prior written notice, and upon such termination we retain all
rights to the research performed under the

5

agreement. To date, 23 patients are enrolled, 22 of whom have completed the full
course of treatment of AVR118, and one is continuing to receive treatments of
AVR118, as required under the study protocol, and the estimated completion date
for the study is the second quarter of 2004. We have expensed $103,000 since
inception of the contract through December 31, 2003. The cost to complete this
contract is estimated to be $78,000.

In July 2003 our agreement entered in July 2002 with the Weizmann
Institute of Science and Yeda, its developmental arm in Israel, to conduct
research on the effects of AVR118 on the immune system expired in accordance
with its terms, and upon such termination we retained all rights to the research
performed under the agreement. Total costs incurred in connection with this
research are expected to be $138,000. Since inception through December 31, 2003,
we have expensed $120,000 and paid $90,000 in connection with this agreement.
Final payment has not been made pending receipt, review and approval of the
final report.

In August 2003, we decided to defer the continuation of and re-examine
the procedures, protocol and objectives of the Phase I study in Israel using
AVR118 for cachectic patients with leukemia and lymphoma and a recent Phase I
study for cachectic patients with solid tumors. There can be no assurances as to
when these two studies will be completed, if at all, and we cannot at this time
determine the financial impact not continuing of these two studies under the
foregoing contracts.

In August 2003, we retained Oxford Pharmaceutical Resources, Inc., a
firm owned and controlled by Richard Guarino, MD, to assist us in conducting and
evaluating our clinical trials and in meeting federal FDA and foreign regulatory
requirements. Oxford Pharmaceutical Resources bills us on an hourly basis, and
we expensed approximately $80,000 for the year ended December 31, 2003 for such
services.

The studies being conducted in Israel are subject to risks associated
with the political, economic and military conditions affecting Israel and the
Middle East, and recent world events, including terrorism and war, have made it
difficult to predict whether or in what manner these problems will effect our
clinical trials.

Our studies detailing the results of the research and testing being
conducted in Israel may not positively impact the FDA's decision to allow a new
IND for injectable AVR118 or approve the eventual marketing, sales or
distribution of AVR118 within the United States, and as a result may not improve
our chances of gaining approval for the marketing, sales or distribution of
AVR118 anywhere in the world. We cannot provide assurances that we will acquire
additional financial resources to complete all phases of our clinical trials,
or, if we acquire such resources, that we will do so on favorable terms.

In April 2003, Advanced Viral entered into a six-month consulting
agreement with Robert Nowinski, Ph.D., which agreement terminated in October
2003. Pursuant to the agreement, Dr. Nowinski acted as a consultant to the Board
of Directors and advised Advanced Viral in the areas of fund raising, strategic
partnerships and operations. Pursuant to the consulting agreement, Dr. Nowinski
received $22,500 monthly, which amount was increased in July 2003 from $15,700.
Pursuant to this agreement, Dr. Nowinski received an additional $56,682 and
warrants to purchase 1,159,125 shares of our common stock at exercise prices
ranging from $0.10 to $0.12 per share.

SCIENTIFIC ADVISORY BOARD

In January 2002, we formed a Scientific Advisory Board currently
consisting of people with experience in oncology, hematology, women's health and
related fields for the purpose of having access to additional expertise and
counsel to support the development of AVR118 in connection with the rigorous
clinical trials required by the FDA's regulatory approval process. The current
members of the Scientific Advisory Board are:

DR. GEORGE P. CANELLOS is the William Rosenberg Professor of Medicine
at Harvard Medical School where he served as Chief of the Division of Medical
Oncology for 20 years at the Dana-Farber Cancer Institute, and was Acting
Clinical Director of the National Cancer Institute (NCI) and a member of the
FDA's Oncologic Drugs Advisory Committee. Dr. Canellos was also a past president
of the American Society for Clinical Oncology and a former Editor-in-Chief of
the Journal of Clinical Oncology. Dr. Canellos currently serves as Medical
Director for Network Development, Dana-Farber/Partners CancerCare and is on the
senior staff at the Brigham and Women's Hospital, Dana-Farber Cancer Institute
and Massachusetts General Hospital.

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DR. MICHAEL HARRIS is Director of the Tomorrow's Children's Institute
for Cancer and Blood Disorders, Chief of Pediatric Hematology-Oncology at the
Hackensack University Medical Center and Professor of Pediatrics at the
UMDNJ-New Jersey Medical School. Additionally, Dr. Harris is a member of the
National Cancer Institute's Special Review Committee where he is responsible for
the review of Community Clinical Oncology Programs, and Associate Editor for
Pediatric Oncology for the scientific journal Cancer Investigation. Dr. Harris
previously served as Chief of Pediatric Hematology-Oncology at The Mt. Sinai
Medical Center in New York City.

DR. JAMES D'OLIMPIO is Director of the North Shore University
Hospital's Supportive Oncology and Palliative Care Service and is also Associate
Professor of Medical Oncology at New York University's School of Medicine. His
research has focused on improving the quality of life of cancer patients,
especially by reversing the wasting process (cachexia) associated with cancer,
and in cancer treatment related fatigue syndrome. During 2002, we paid Dr.
D'Olimpio approximately $18,000 for consulting services to us. We also retained
Dr. D'Olimpio as our "spokesperson at large." In this capacity, Dr. D'Olimpio
will be paid on an hourly basis to provide such services as requested, including
representing Advanced Viral at industry-wide and scientific conferences. Dr.
D'Olimpio billed us $7,500 for these services during 2003.

DR. HOWARD YOUNG currently serves on the staff of a cancer research
institute. He has been elected to serve as the Vice President of the
International Society for Interferon and Cytokine Research in 2002 and 2003 and
as President in 2004 and 2005. During 2001, Dr. Young was elected a fellow to
the American Academy of Microbiology. Dr. Young served as Chair of the
Immunology Division of the American Society for Microbiology from 1996-1997. Dr.
Young has authored/co-authored over 200 research papers in the field of cellular
and molecular immunology. Dr. Young is a member of the editorial boards of the
"Journal of Interferon and Cytokine Research," "The Journal of Biological
Chemistry, "Genes and Immunity," and served on the editorial board of "The
Journal of Immunology" from 1997-2001. Dr. Young is Editor-in-Chief of the
"Newsletter of the International Society of Interferon and Cytokine Research."

DR. SIDNEY PESTKA, a recipient of the National Medal of Technology for
2001, is currently Professor and Chairman of the Department of Molecular
Genetics, Microbiology and Immunology at New Jersey's Robert Wood Johnson
Medical School of the University of Medicine and Dentistry. Previously he was
Associate Director of the Roche Institute of Molecular Biology. His work in the
development of interferons, which are used clinically for treating a range of
diseases, including hepatitis B, multiple sclerosis and hairy cell leukemia, is
the basis of several U.S. and more than 100 foreign patents. Dr. Pestka was
inducted into the New Jersey Inventor's Hall of Fame in 1993. He has also
received the Selman Waksman Award in Microbiology and the Milstein Award from
the International Society for Interferon and Cytokine Research. He has served on
the National Cancer Institute's Breast Cancer Task Force, the Basic Pharmacology
Advisory Committee of the Pharmaceutical Manufacturers Association Foundation
and is secretary, and former President, of the International Society of
Interferon Research. Dr. Pestka received his undergraduate degree in chemistry
from Princeton University in 1957 and his medical degree from the University of
Pennsylvania School of Medicine in 1961. Over the past 30 years, he has
published several books and written more than 400 research articles for
prestigious peer-reviewed scientific journals.

PATENTS

Patent protection and trade secret protection are important to our
business and our future will depend, in part, on our ability to maintain trade
secret protection, obtain patents and operate without infringing the proprietary
rights of others both in the United States and abroad. We have 12 issued U.S.
patents, some covering the composition of AVR118 and others covering various
uses of AVR118. We have eight pending U.S. patent applications and 18 pending
foreign patent applications. In addition, we have two issued Australian patents
and one issued Chinese patent covering several uses of AVR118. During April
2002, under the terms of a settlement agreement entered as part of a final
judgment on March 25, 2002, we were assigned all rights, title and interest in
two issued U.S. patents pertaining to Reticulose technology. As patent
applications in the United States are maintained in secrecy until published or
patents issue and as publication of discoveries in the scientific or patent
literature often lag behind the actual discoveries, we cannot be certain that we
were the first to make the inventions covered by each of our pending patent
applications or that we were the first to file patent applications for such
inventions. Furthermore, the patent positions of biotechnology and
pharmaceutical companies are highly uncertain and involve complex legal and
factual questions, and, therefore, the breadth of claims allowed in
biotechnology and pharmaceutical patents or their enforceability cannot be
predicted. We cannot be sure that any additional patents will issue from any of
our patent applications or, should any patents issue, that we will be provided
with adequate protection against potentially competitive products. Furthermore,
we cannot be sure

7

that any patents will be of commercial value to us, or that private parties,
including competitors, will not successfully challenge our patents or circumvent
our patent position in the United States or abroad.

In the absence of adequate patent protection, our business may be
adversely affected by competitors who develop comparable technology or products.
Moreover, pursuant to the terms of the Uruguay Round Agreements Act, patents
filed on or after June 8, 1995 have a term of 20 years from the date of such
filing, irrespective of the period of time it may take for such patent to
ultimately issue. This may shorten the period of patent protection afforded to
our products as patent applications in the biopharmaceutical sector often take
considerable time to issue. Under the Drug Price Competition and Patent Term
Restoration Act of 1984 (the "Patent Act"), a sponsor may obtain marketing
exclusivity for a period of time following FDA approval of certain drug
applications, regardless of patent status, if the drug is a new chemical entity
or if new clinical studies were used to support the marketing application for
the drug. Pursuant to the FDA Modernization Act of 1997, the period of
exclusivity can be extended if the applicant performs certain studies in
pediatric patients. This marketing exclusivity prevents a third party from
obtaining FDA approval for a similar or identical drug under an Abbreviated New
Drug Application ("ANDA") or a "505(b)(2)" New Drug Application. The statute
also allows a patent owner to obtain an extension of applicable patent terms for
a period equal to one-half the period of time elapsed between the filing of an
IND and the filing of the corresponding NDA plus the period of time between the
filing of the NDA and FDA approval, with a five year maximum patent extension.
We cannot be sure that we will be able to take advantage of either the patent
term extension or marketing exclusivity provisions of this law.

In order to protect the confidentiality of our technology, including
trade secrets and know-how and other proprietary technical and business
information, we require all of our employees, consultants, advisors and
collaborators to enter into confidentiality agreements that prohibit the use or
disclosure of information that is deemed confidential. The agreements also
oblige our employees, consultants, advisors and collaborators to assign to us
developments, discoveries and inventions made by such persons in connection with
their work with us. We cannot be sure that confidentiality will be maintained or
disclosure prevented by these agreements or that our proprietary information or
intellectual property will be protected thereby or that others will not
independently develop substantially equivalent proprietary information or
intellectual property.

The pharmaceutical industry is highly competitive and patents have been
applied for by, and issued to, other parties relating to products competitive
with AVR118. Therefore, AVR118 and any other drug candidates may give rise to
claims that they infringe the patents or proprietary rights of other parties
existing now and in the future. Furthermore, to the extent that we or our
consultants or research collaborators use intellectual property owned by others
in work performed for us, disputes may also arise as to the rights in such
intellectual property or in related or resulting know-how and inventions. An
adverse claim could subject us to significant liabilities to such other parties
and/or require disputed rights to be licensed from such other parties. We cannot
be sure that any license required under any such patents or proprietary rights
would be made available on terms acceptable to us, if at all. If we do not
obtain such licenses, we may encounter delays in product market introductions,
or may find that the development, manufacture or sale of products requiring such
licenses may be precluded. In addition, we could incur substantial costs in
defending ourselves in legal proceedings instituted before the PTO or in a suit
brought against it by a private party based on such patents or proprietary
rights, or in suits by us asserting our patent or proprietary rights against
another party, even if the outcome is not adverse to us. There are extensions
available under the Patent Act if the delay in prosecution of the patent
application results from a delay in the PTO's handling of any interference or
appeal involving the application. We have not conducted any searches or made any
independent investigations of the existence of any patents or proprietary rights
of other parties.

MARKETING AND SALES

Except for limited sales of AVR118 for testing and other purposes,
AVR118 is not sold commercially anywhere in the world. To date, our efforts or
the efforts of our representatives have produced no material benefits to us
regarding our ability to have AVR118 sold commercially anywhere in the world. We
entered into exclusive distribution agreements with four separate entities
granting exclusive rights to distribute Reticulose in the countries of Canada,
China, Japan, Hong Kong, Macao, Taiwan, Mexico, Argentina, Bolivia, Paraguay,
Uruguay, Brazil and Chile. Pursuant to these agreements, the distributors were
obligated to cause AVR118 to be approved for commercial sale in such countries
and upon such approval, to purchase from us certain minimum quantities of AVR118
to maintain the exclusive distribution rights. Our marketing plans for AVR118
are still dependent upon registration of AVR118 for sale in various
jurisdictions. We have made no sales under the distribution agreements other
than for testing purposes.

8

During February 2004, we terminated the exclusive distribution
agreement with DCT S.R.L. Pursuant to the agreement, DCT: (i) released any
rights it may have had to distribute AVR118 in Argentina, Bolivia, Paraguay,
Uruguay, Brazil and Chile, and (ii) released us from any and all obligations
incurred in connection with testing and other services provided to us by DCT in
Argentina, in consideration for a payment to DCT of $60,000 and the issuance to
their affiliates of an aggregate of 5,000,000 warrants to purchase our common
stock at $.16 per share until February 2009. The warrant holders are subject to
a lock up agreement pursuant to which such persons shall be restricted from
selling more than 2,000,000 shares of our common stock in any six month period
during the term of the warrants. In addition, the warrant holders have
"piggyback" registration rights with respect to the resale of the shares of
common stock underlying the warrants.

To date we have received no information that would lead us to believe
that we will be positioned to sell AVR118 commercially anywhere in the world,
due to, among other reasons, the lack of financial resources to complete the
necessary clinical trials. On July 30, 2001, we submitted an IND application to
the FDA for the use of AVR118 as a topical treatment for genital warts caused by
the human papilloma virus (HPV) infection. In September 2001, the FDA allowed
the IND application to begin Phase I clinical trials in healthy volunteers. In
March 2002, Advanced Viral completed a Phase I trial and submitted to the FDA
the results, which indicated that AVR118 was safe and well tolerated
dermatologically at all the doses applied in the study. Currently, we are
determining the best course of action to proceed with the Phase II clinical
trials of AVR118 for topical use.

Until AVR118 is registered and approved for sale in the United States,
in another developed country or in the other countries included in the
distributors' territories, we will not generate any material sales of AVR118.
For the years ended December 31, 2003, 2002 and 2001, we reported no commercial
sales except limited sales for testing purposes. AVR118 is not legally available
for commercial sale anywhere in the world, except for testing purposes. See
"--Research, Development and Testing."

We currently produce bulk clinical trial batches for AVR118 in our
facility in Yonkers, New York under current Good Manufacturing Practices (cGMP)
as set forth by the FDA. The FDA has not approved AVR118 for distribution or
sale in the United States, nor has it approved our Yonkers, New York facility.

COMPETITION

The pharmaceutical drug industry is highly competitive and rapidly
changing. If we successfully develop AVR118, it will compete with numerous
existing therapies. In addition, many companies are pursuing novel drugs that
target the same diseases we are targeting with AVR118. We believe that a
significant number of drugs are currently under development and will become
available in the future for the treatment of HIV, HPV, other viruses, cachexia
(body wasting), cancer and rheumatoid arthritis. We anticipate that we will face
intense and increasing competition as new products enter the market and advanced
technologies become available. Our competitors' products may be more effective,
or more effectively marketed and sold, than AVR118. Competitive products may
render AVR118 obsolete or noncompetitive before we can recover the expenses of
developing and commercializing AVR118. Furthermore, the development of a cure or
new treatment methods for the diseases we are targeting could render AVR118
noncompetitive, obsolete or uneconomical. Many of our competitors:

o have significantly greater financial, technical and human
resources than we have and may be better equipped to develop,
manufacture and market products; - have extensive experience
in preclinical testing and clinical trials, obtaining
regulatory approvals and manufacturing and marketing
pharmaceutical products; and

o have products that have been approved or are in late stage
development and operate large, well-funded research and
development programs.

A number of therapeutics are currently marketed or are in advanced
stages of clinical development for the treatment of HIV infection and AIDS,
including several products currently marketed as part of a "cocktail" in the
United States. We believe AVR118 should be added to such cocktails in order to
enhance their effectiveness and mitigate the toxic effects of other drugs used
to treat HIV infections. Among the companies with significant commercial
presence in the AIDS market is GlaxoSmithKline, Bristol-Myers Squibb,
Hoffmann-La Roche, Gilead Pharmaceuticals and Merck & Co. Several products are
currently marketed for the treatment of cachexia (body wasting) including
Megace(R) oral

9

suspension manufactured by Bristol-Myers Squibb and Serostim(R) (injectable
human growth hormone) marketed by Serono Laboratories Inc.

Several therapeutics are currently marketed or are in advanced stages
of clinical development for the treatment of HPV. Schering Plough Corp.
manufactures Intron A, an injectable interferon product approved by the FDA for
the treatment of HPV. 3M Pharmaceuticals received FDA approval for its
immune-response modifier, Aldara(R), a self-administered topical cream, for the
treatment of HPV. AVR118, if approved for commercial sale by the FDA, would also
compete with surgical, chemical, and other methods of treating HPV. Products
developed by our competitors or advances in other methods of the treatment of
HPV may have a negative impact on the commercial viability of AVR118.

Several products are currently marketed or are in advanced stages of
clinical development for the treatment of rheumatoid arthritis. Immunex/Amgen
Corp.'s product Enbrel, a biologic response modifier, was approved by the FDA in
November 1998 for the treatment of moderate to severe rheumatoid arthritis.
Centocor Inc. is developing a monoclonal antibody known as Remicade, an
anti-inflammatory agent that has completed Phase III trials in rheumatoid
arthritis. The FDA approved Remicade for treatment of Crohn's disease in August
1998. Centocor filed for FDA approval of an expanded indication for Remicade for
rheumatoid arthritis in January 1999. These products represent significant
competition for AVR118 as a treatment for rheumatoid arthritis.

Other small companies may also prove to be significant competitors,
particularly through collaborative arrangements with large pharmaceutical and
biotechnology companies. Academic institutions, governmental agencies and other
public and private research organizations are also becoming increasingly aware
of the commercial value of their inventions and are more actively seeking to
commercialize the technology they have developed.

If we successfully develop and obtain approval for AVR118, we will face
competition based on the safety and effectiveness of AVR118, the timing and
scope of regulatory approvals, the availability of supply, marketing and sales
capability, reimbursement coverage, price, patent position and other factors.
Our competitors may develop or commercialize more effective or more affordable
products, or obtain more effective patent protection, than we do. Accordingly,
our competitors may commercialize products more rapidly or effectively than we
do, which could hurt our competitive position and adversely affect our business.
If and when we obtain FDA approval for AVR118, we expect to compete primarily on
the basis of product performance and price with a number of pharmaceutical
companies, both in the United States and abroad.

EMPLOYEES

In November 2002, we reduced our staff from 33 to 10 employees. Of the
23 employees, 18 were directly involved in our research and development efforts
and five were performing administrative functions. We currently have 12
full-time employees which we feel can sustain our current operations. Dr.
Hirschman, our chief scientist, is engaged on a full-time basis in research and
development activities. Our current research and development activity is our
Phase I/II study in Israel for cachectic AIDS patients.

Our 12 full-time employees consist of; our President and Chief
Executive Officer, Chief Financial Officer and Treasurer, chief scientist, one
employee involved in operations, three employees responsible for quality
assurance and quality control, an assistant controller, a chief information
officer and three administrative employees. Dr. Hawkins, our President and Chief
Executive Officer effective February 18, 2004, and Alan V. Gallantar, our Chief
Financial Officer and Treasurer, each devote all of their business time to our
day-to-day business operations. Eli Wilner, Secretary and Chairman of the Board
of Directors, devotes as much time to his duties as is reasonably necessary.
Additionally, we may hire, as and when needed, and as available, product
development staff and consultants for specific projects on a contract or
full-time basis. See "Management --Employment Contracts, Termination of
Employment and Change-in-Control Arrangements."

ITEM 2. DESCRIPTION OF PROPERTY

We lease approximately 16,650 square feet for executive offices,
including research laboratory space and production area at 200 Corporate
Boulevard South, Yonkers, New York from an unaffiliated third party (the
"Yonkers

10

Lease"). The term of the Yonkers Lease is five years through April 2005 and our
annual rental obligation under the Yonkers Lease is approximately $290,000.

The Bahamian manufacturing facility, which was acquired on December 16,
1987, is located in Freeport, Bahamas and consists of an approximate 29,000
square foot site containing a one-story concrete building of approximately 7,300
square feet. We are currently negotiating the sale of the Bahamian facility. We
manufacture AVR118 exclusively at our facility in Yonkers, New York.

ITEM 3. LEGAL PROCEEDINGS

We are not currently a party to any material litigation, nor to the
knowledge of management, is any such litigation threatened.

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

During the year ended December 31, 2003, no matters were submitted to a
vote of security holders of Advanced Viral.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

COMMON STOCK

The principal United States market in which our common stock is traded
is the over-the-counter market electronic Bulletin Board. The following table
shows the range of reported low bid and high bid per share quotations for our
common stock for each full quarterly period during the two recent years ended
December 31, 2002 and 2003, and for the first quarter of 2004 to date. The high
and low bid prices for the periods indicated reflect inter-dealer prices,
without retail markup, markdown or commission and may not represent actual
transactions.

Low Bid High Bid
------- --------

First Quarter 2002...............................0.158 0.285
Second Quarter 2002..............................0.096 0.300
Third Quarter 2002...............................0.112 0.220
Fourth Quarter 2002..............................0.065 0.119

First Quarter 2003...............................0.054 0.085
Second Quarter 2003..............................0.064 0.105
Third Quarter 2003...............................0.051 0.078
Fourth Quarter 2003..............................0.060 0.279

First Quarter 2004 through March 29, 2004........0.122 0.200

STOCKHOLDERS

The approximate number of holders of record of our common stock as of
March 29, 2004 is 3,401, inclusive of those brokerage firms and/or clearing
houses holding shares of common stock for their clientele (with each such
brokerage house and/or clearing house being considered as one holder).

11

DIVIDEND POLICY

We have not declared or paid any dividends on our shares of common
stock. We intend to retain future earnings, if any, that may be generated from
our operations to finance our future operations and expansion and do not plan
for the reasonably foreseeable future to pay dividends to holders of our common
stock. Any decision as to the future payment of dividends will depend on our
results of operations and financial position and such other factors as our board
of directors in its discretion deems relevant.

ITEM 6. SELECTED FINANCIAL DATA

The following selected historical financial data as of and for the
years ended December 31, 2003, 2002, 2001, 2000 and 1999 have been derived from
our audited financial statements. The selected consolidated financial data set
forth below should be read along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this report.

SELECTED STATEMENT OF OPERATIONS DATA

Year Ended December 31,
--------------------------------------------------------------------------------
2002 2001 2000 1999
2003 Restated Restated Restated Restated
------------ ------------ ------------ ------------ ------------

Revenues $ 0 $ 0 $ 17,601 $ 8,363 $ 10,953
Costs and Expenses:
Research and development 1,350,318 4,439,592 5,150,869 3,192,551 1,948,937
General and administrative 3,221,433 2,654,296 4,063,022 2,413,601 1,831,061
Compensation and other expense for
options and warrants 605,788 883,762 1,048,108 1,901,927 195,375
Depreciation 922,024 977,746 511,216 346,227 230,785
------------ ------------ ------------ ------------ ------------
6,099,563 8,955,396 10,773,215 7,854,306 4,206,158
------------ ------------ ------------ ------------ ------------
Loss from Operations (6,099,563) (8,955,396) (10,755,614) (7,845,943) (4,195,205)
------------ ------------ ------------ ------------ ------------

Other Income (Expense):
Interest income 12,785 27,659 113,812 161,832 42,744
Other income -- -- -- -- --
Interest expense (1,697,325) (192,174) 116,849 (908,220) (2,170,970)
Severance expense - former directors -- -- (302,500) -- --
------------ ------------ ------------ ------------ ------------
(1,684,540) (164,515) (71,839) (746,388) (2,128,226)
------------ ------------ ------------ ------------ ------------

Loss from continuing operations (7,784,103) (9,119,911) (10,827,453) (8,592,331) (6,323,431)
Loss from discontinued operations (32,708) (201,154) (259,114) (223,861) n/a
------------ ------------ ------------ ------------ ------------
Net Loss (7,816,811) $ (9,321,065) $ (11,086,567) $ (8,816,192) $(6,323,431)
========== ============ ============= ============ ===========

Net Loss Per Share of Common
Stock - Basic and Diluted
Continuing operations $ (0.02) $ (0.02) $ (0.03) $ (0.02) $ (0.02)
============ ============ ============ ============ ============
Discontinued operations $ (0.00) $ (0.00) $ (0.00) $ (0.00) n/a
============ ============ ============ ============ ============

- ------------------------------

See notes to consolidated financial statements.

12

SELECTED BALANCE SHEET DATA

As of December 31,
---------------------------------------------------------------------------------
2002 2001 2000 1999
2003 Restated Restated Restated Restated
------------- ------------- ------------- ------------- -------------

ASSETS
Current Assets:
Cash and cash equivalents $ 270,936 $ 1,475,755 $ 1,499,809 $ 5,962,633 $ 836,876
Investments -- -- -- -- --
Assets held for sale 147,531 172,601 188,999 179,622 178,182
Inventory -- -- -- 19,729 19,729
Other current assets 75,420 121,895 63,162 34,804 59,734
------------- ------------- ------------- ------------- -------------
Total current assets 493,887 1,770,251 1,751,970 6,196,788 1,094,521
------------- ------------- ------------- ------------- -------------

Property and Equipment, Net 1,322,253 2,244,118 2,818,045 1,771,038 1,204,202
Other Assets 1,172,778 931,660 878,776 840,888 562,851
------------- ------------- ------------- ------------- -------------
Total assets $ 2,988,918 $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574
============= ============= ============= ============= =============

LIABILITIES AND STOCKHOLDERS'
EQUITY (DEFICIENCY)
Current Liabilities:
Litigation settlement -- -- -- -- --
Accounts payable and accrued liabilities $ 912,885 $ 554,707 $ 1,843,706 $ 902,961 $ 728,872
Current portion of capital lease obligation -- 104,719 64,197 58,690 50,315
Current portion of note payable 15,572 25,165 24,246 21,517 19,095
------------- ------------- ------------- ------------- -------------
Total current liabilities 928,457 684,591 1,932,149 983,168 798,282
------------- ------------- ------------- ------------- -------------

Long-Term Debt:
Convertible debentures, net 1,427,946 1,610,499 -- -- 4,446,629
Capital lease obligation - long term portion -- 5,834 42,370 106,567 152,059
Note payable - long term portion -- 4,879 32,198 56,446 77,964
------------- ------------- ------------- ------------- -------------
Total long-term debt 1,427,946 1,621,212 74,568 163,013 4,676,652
------------- ------------- ------------- ------------- -------------
Deposit on Securities Purchase Agreement -- -- -- -- --
Common Stock Subscribed but not Issued 280,000 883,900 -- -- --

Stockholders' Equity (Deficiency):
Common stock: 1,000,000,000 shares of
$.00001 par value authorized 5,446 4,555 4,033 3,802 3,034
Additional paid-in capital 57,262,111 51,141,177 43,877,955 36,349,629 17,255,858
Deficit accumulated during development stage (56,915,042) (49,098,231) (39,777,166) (28,690,599) (19,874,407)
Deferred compensation cost -- -- -- -- --
Discount on warrants -- (291,175) (662,748) (299) 2,155
------------- ------------- ------------- ------------- -------------
Total stockholders' equity (deficiency) 352,515 1,756,326 3,442,074 7,662,533 (2,613,360)
------------- ------------- ------------- ------------- -------------
Total liabilities and stockholders' equity $ 2,988,918 $ 4,946,029 $ 5,448,791 $ 8,808,714 $ 2,861,574
============= ============= ============= ============= =============

Shares outstanding at period end 544,591,722 455,523,990 403,296,863 380,214,618 303,472,035
============= ============= ============= ============= =============

See notes to consolidated financial statements.

13

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

THE FOLLOWING DISCUSSION OF THE RESULTS OF OPERATIONS AND THE FINANCIAL
CONDITION OF ADVANCED VIRAL SHOULD BE READ IN CONJUNCTION WITH ADVANCED VIRAL'S
CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO INCLUDED ELSEWHERE IN THIS
REPORT.

OVERVIEW

Since our incorporation in Delaware in July 1985, Advanced Viral has
been engaged primarily in research and development activities. We have not
generated significant operating revenues, and as of December 31, 2003 we had
incurred a cumulative net loss of $56,915,000. Our ability to generate
substantial operating revenue depends upon our success in gaining FDA approval
for the commercial use and distribution of AVR118. All of our research and
development efforts have been devoted to the development of AVR118.

Conducting the clinical trials of AVR118 will require significant cash
expenditures. AVR118 may never be approved for commercial distribution by any
country. Because our research and development expenses and clinical trial
expenses will be charged against earnings for financial reporting purposes, we
expect that losses from operations will continue to be incurred for the
foreseeable future. We currently do not have sufficient funds to complete all
phases of clinical trials of AVR118. We are attempting to secure funds through
the sale of our securities.

In August 2003, we decided to defer the continuation of and re-examine
the procedures, protocol and objectives of the Phase I study in Israel using
AVR118 for cachectic patients with leukemia and lymphoma and a Phase I study for
cachectic patients with solid tumors. There can be no assurances as to when
these two studies will be completed, if at all. We cannot at this time determine
the financial impact of reducing the number of trials being conducted by
Advanced Viral.

We are focusing our clinical efforts on our one ongoing PhaseI/II
open-label dose escalation clinical trial being conducted at the Kaplan Medical
Center in Rehovot, Israel of AVR118 for cachectic patients with AIDS. Out of 30
total patients contemplated under the protocol for this study, 23 patients are
enrolled, 22 of whom have completed the full course of treatment of AVR118, and
one is continuing to receive treatments of AVR118, as required under the study.
Results from the first 15 patients showed improvement in appetite, weight gain
or stability, and enhanced quality of life. None of the first 15 patients
reported any serious side effects associated with AVR118 therapy.

We estimate completion of this study during the second quarter of 2004.
It is uncertain at this time when cash inflows will result from this study. The
completion of the study is dependent upon the availability of patients meeting
the prescribed protocol and the ability of the hospitals to meet the
requirements of the protocol. From inception of all the clinical studies in
Israel we have expensed approximately $1,692,000. The cost to complete the Phase
1/II study in Israel of AVR118 for cachectic patients with AIDS is estimated to
be $277,000. In addition, we believe we will incur an additional $150,000 for
expenses in the U.S. related to analyzing the data from the Phase I/II study in
Israel as well as strategic consulting.

The costs relating to our research and development efforts for the
years 2000, 2001, 2002 and 2003 as well as the estimated costs for completion ,
are presented below.

14

COSTS RELATING TO RESEARCH AND DEVELOPMENT EFFORTS
FROM JANUARY 2000 THROUGH DECEMBER 31, 2003

2000-2003 Costs of Grand
2000 2001 2002 2003 To Date Complete Total
----------- ----------- ----------- ----------- ----------- ----------- -----------

EnviroGene $ 0 $ 0 $ 625,838 $ 697,221 $ 1,323,059 $ 0 $ 1,323,059
Quintiles 0 0 52,226 94,842 147,068 105,932 253,000
Insurance Cost 0 0 3,359 38,195 41,554 (4,676) 36,878
Lab Costs 0 0 500 61,729 62,229 37,868 100,097
Consultant in Israel 0 0 0 15,048 15,048 60,000 75,048
Kaplan AIDS- Study 0 0 0 102,750 102,750 77,750 180,500
TOTAL R&D IN ISRAEL - CLINICAL
STUDIES (CONTINUING) 0 0 681,923 1,009,785 1,691,708 276,874 1,968,582

Selikoff Center - Israel 0 115,000 127,000 0 242,000 0 242,000
Yeda Research 0 118,000 80,000 40,000 238,000 18,000 256,000
TOTAL R & D IN ISRAEL - STUDIES
COMPLETED 0 233,000 207,000 40,000 480,000 18,000 498,000

Phase I (leukemia / lymphoma study) 0 0 0 0 0 210,000 210,000
Phase I (solid tumor study) 0 0 0 0 0 219,000 219,000
TOTAL R&D IN ISRAEL - CLINICAL
STUDIES ON HOLD 0 0 0 0 0 429,000 429,000

R&D Consulting Services in the
U.S. for clinical trials in Israel 0 0 82,314 83,230 165,544 150,000 315,544
Israel Clinical Trial batch costs in
the U.S. 0 0 96,173 0 96,173 0 96,173
R & D -Supplies -Israel Studies in
the U.S. 0 0 294,706 0 294,706 0 294,706
R & D Regulatory Consultants in the
U.S.- GloboMax for Israel Trials 0 0 904,476 0 904,476 0 904,476
R & D Salary & Facility allocations
in the U.S. for Israel Clinical Trials 0 0 2,126,082 175,219 2,301,301 0 2,301,301
R & D Travel Expenses 3,661 4,153 1,230 26,822 35,866 0 35,866

TOTAL R&D SERVICES PERFORMED IN THE
U.S. 3,661 4,153 3,504,981 285,271 3,798,066 150,000 3,948,066

R&D ARGENTINA CLINICAL STUDIES 242,586 0 10,582 0 253,168 0 253,168

R&D UNIVERSITY STUDIES 0 0 35,106 15,262 50,368 0 50,368

R&D GloboMax 1,250,000 2,682,828 0 0 3,932,828 0 3,932,828
R & D -Supplies -IND Application 327,601 407,699 0 0 735,300 0 735,300
R & D Salary & Facility allocations
(NY) for IND Application 1,368,703 1,823,189 0 0 3,191,892 0 3,191,892

TOTAL U.S. CLINICAL TRIAL EXPENSES FOR
U.S. IND SUBMISSION WITH THE FDA 2,946,304 4,913,716 0 0 7,860,020 0 7,860,020
----------- ----------- ----------- ----------- ----------- ----------- -----------

TOTAL RESEARCH AND DEVELOPMENT EXPENSE $ 3,192,551 $ 5,150,869 $ 4,439,592 $ 1,350,318 $14,133,330 $ 873,874 $15,007,204
=========== =========== =========== =========== =========== =========== ===========

During 2002, the Board of Directors approved a plan to sell Advance
Viral Research Ltd. (LTD), our Bahamian subsidiary. The decision was based upon
the completion of construction on our facility in Yonkers, New York capable of
providing all functions previously provided by the Freeport, Bahamas plant. The
assets of LTD have been classified on our Balance Sheet as of December 31, 2003
and 2002 as Assets held for Sale. LTD had no liabilities as of December 31,
2003, except inter-company payables which have been eliminated in consolidation.
The operations for LTD have been classified in the Consolidated Statements of
Operations for the years ended December 31, 2003, 2002 and 2001 as Loss from
Discontinued Operations.

15

In February 2004, we entered into an agreement with James Dicke II and
his son James Dicke III, whereby we agreed to sell an aggregate of 120 million
shares of our common stock and warrants to purchase 15 million shares of our
common stock for an aggregate purchase price of $12 million. Pursuant to the
agreement, the funding shall take place in four equal stages of $3 million each,
once every 90 days with the first $3 million funding having occurred on February
5, 2004.

The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2003
includes an emphasis paragraph regarding certain liquidity considerations. Note
2 to the Consolidated Financial Statements states that our cash position may be
inadequate to pay all the costs associated with the full range of testing and
clinical trials of AVR118 required by the FDA, and, unless and until AVR118 is
approved for sale in the United States or another industrially developed
country, we may be dependent upon the continued sale of our securities, debt or
equity financing for funds to meet our cash requirements. We believe that cash
flows from sales of securities and from current financing arrangements will be
sufficient to fund our current operations. Although we may not be successful in
doing so, we intend to continue to sell our securities in an attempt to mitigate
the effects of our cash position. No assurance can be given that equity or debt
financing, if and when required, will be available or that additional securities
will be authorized beyond the current authorization of 1 billion shares of our
common stock.

RESTATEMENT OF FINANCIAL STATEMENTS

The financial statements for the years ended December 31, 2002 and 2001
have been restated to reflect changes in accounting for warrants issued in
connection with equity transactions as well as options issued to the Board of
Directors and employees (on a pro-forma basis only) and its Advisory Board. The
restatement resulted in income which reduced the previously reported net loss
for 2002 and 2001 by approximately $1,021,000 and $629,000 respectively.

Basic and diluted net loss per common share on operations remained the
same for the years ended December 31, 2002 and 2001. Our deficit accumulated
during the development stage was reduced by $2,039,574 and $1,018,304 at
December 31, 2002 and 2001 respectively. The restatement did not impact our net
cash in investing and financing activities and net cash used in operating
activities remained unchanged. However, certain components within operating
activities consisting of amortization of deferred interest cost, discount on
warrants and compensation expense for options and warrants, were restated.

As of December 31, 2002 As of December 31, 2001
------------------------------------------- -----------------------------------------------
As Reported Adjustments Restated As Reported Adjustments Restated
------------- ------------- ------------- ------------- ------------- -------------

ASSETS
Current Assets $ 1,770,251 $ -- $ 1,770,251 $ 1,751,970 $ -- $ 1,751,970
Property and Equipment, Net 2,244,118 -- 2,244,118 2,818,045 -- 2,818,045
Other Assets 931,660 -- 931,660 878,776 -- 878,776
------------- ------------- ------------- ------------- ------------- -------------
Total assets $ 4,946,029 -- $ 4,946,029 $ 5,448,791 -- $ 5,448,791
============= ------------- ============= ============= ------------- =============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities $ 684,591 $ -- $ 684,591 $ 1,932,149 $ -- $ 1,932,149
Long-Term Debt:
Convertible debenture, net 1,658,231 (47,732) 1,610,499 -- -- --
Capital lease obligation 5,834 -- 5,834 42,370 -- 42,370

Note payable 4,879 -- 4,879 32,198 -- 32,198
------------- ------------- ------------- ------------- ------------- -------------
Total long-term debt 1,668,944 (47,732) 1,621,212 74,568 -- 74,568
------------- ------------- ------------- ------------- ------------- -------------
Common Stock Subscribed but not
Issued 883,900 -- 883,900 -- -- --
------------- ------------- ------------- ------------- ------------- -------------
Stockholders' Equity:
Common stock 4,555 -- 4,555 4,033 -- 4,033
Additional paid-in capital 57,530,605 (6,389,428) 51,141,177 47,666,141 (3,788,186) 43,877,955
Deficit accumulated during the
development stage (51,137,805) 2,039,574 (49,098,231) (40,795,470) 1,018,304 (39,777,166)
Discount on warrants (4,688,761) 4,397,586 (291,175) (3,432,630) 2,769,882 (662,748)
------------- ------------- ------------- ------------- ------------- -------------
Total stockholders' equity 1,708,594 47,732 1,756,326 3,442,074 -- 3,442,074
------------- ------------- ------------- ------------- ------------- -------------
Total liabilities and
stockholders' equity $ 4,946,029 $ -- $ 4,946,029 $ 5,448,791 $ -- $ 5,448,791
============= ------------- ============= ============= ------------- =============

16

2002 2001
------------------------------------------- -----------------------------------------------
As Reported Adjustments Restated As Reported Adjustments Restated
------------- ------------- ------------- ------------- ------------- -------------

Revenues $ -- $ -- $ -- $ 17,601 $ -- $ 17,601
------------- ------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 4,439,592 -- 4,439,592 5,150,869 -- 5,150,869
General and administrative 2,654,296 -- 2,654,296 4,063,022 -- 4,063,022
Compensation and other 755,397 128,365 883,762 691,404 356,704 1,048,108
expense for options and
warrants
Depreciation 977,746 -- 977,746 511,216 -- 511,216
------------- ------------- ------------- ------------- ------------- -------------
8,827,031 128,365 8,955,396 10,416,511 356,704 10,773,215
------------- ------------- ------------- ------------- ------------- -------------
Loss from Operations (8,827,031) (128,365) (8,955,396) (10,398,910) (356,704) (10,755,614)
------------- ------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 27,659 -- 27,659 113,812 -- 113,812
Other income
Interest expense (1,341,809) 1,149,635 (192,174) (868,856) 985,705 116,849
Severance expense -
former directors -- -- -- (302,500) -- (302,500)
------------- ------------- ------------- ------------- ------------- -------------
(1,314,150) 1,149,635 (164,515) (1,057,544) 985,705 (71,839)
------------- ------------- ------------- ------------- ------------- -------------
Loss from Continuing Operations (10,141,181) 1,021,270 (9,119,911) (11,456,454) 629,001 (10,827,453)
Loss from Discontinued Operations (201,154) -- (201,154) (259,114) -- (259,114)
------------- ------------- ------------- ------------- ------------- -------------
Net Loss $ (10,342,335) $ 1,021,270 $ (9,321,065) $ (11,715,568) $ 629,001 $ (11,086,567)
============= ============= ============= ============= ============= =============
Net Loss Per Common Share
Basic and Diluted:
Continuing operations (0.02) (0.02) (0.03) (0.03)
Discontinued operations (0.00) (0.00) (0.00) (0.00)
Net loss (0.02) (0.02) (0.03) (0.03)
Weighted Average Number of Common
Shares Outstanding 439,009,322 439,009,322 389,435,324 389,435,324

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

The financial statements for the years ended December 31, 2002 and 2001
have been restated to reflect changes in accounting for warrants issued in
connection with equity transactions as well as options issued to the Board of
Directors and employees (on a pro-forma basis only) and our advisory board. The
restatement resulted in income which reduced the previously reported net loss
for 2002 and 2001 by approximately $1,021,000 and $629,000, respectively. As a
result of this restatement interest expense and compensation and other expense
for options and warrants were adjusted as follows: Interest expense was reduced
from approximately $1,342,000 and $869,000 to approximately $192,000 and
($117,000) for the years ended 2002 and 2001, respectively. Compensation and
other expense for options and warrants expense increased from approximately
$755,000 and $691,000 to approximately $884,000 and $1,048,000 for the years
ended 2002 and 2001, respectively.

Basic and diluted net loss per common share on operations remained the
same for the years ended December 31, 2002 and 2001. Our deficit accumulated
during the development stage was reduced by $2,040,000 and $1,018,000, at
December 31, 2002 and 2001, respectively. The restatement did not impact our net
cash in investing and financing activities and net cash used in operating
activities remained unchanged. However, certain components within operating
activities consisting of amortization of deferred interest cost, discount on
warrants and compensation expense for options and warrants, were restated.

YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

During the years ended December 31, 2003, 2002 and 2001 we incurred
losses from continuing operations of approximately $7,784,000, $9,120,000, and
$10,827,000, respectively. Our losses for the years ended December 31, 2003,
2002 and 2001 were attributable primarily to:

RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was
approximately $1,350,000 in 2003 compared to $4,440,000 and $5,151,000 in 2002
and 2001 respectively. Research and development expenses decreased by
approximately $3,090,000 in 2003 vs. 2002 and decreased by approximately
$711,000 in 2002 vs. 2001. The decrease in research and development expenses
resulted from:

o allocation of research and development expenditures relating
to salaries and benefits, excluding Dr. Hirschman, were
approximately $0, $1,618,000 and $1,334,000 for the years
ending 2003, 2002 and 2001

17

respectively. Due to a reduction in staff at the end of 2002
no salaries and benefits were allocated to research and
development in 2003 with the exception of Dr. Hirschman. Dr.
Hirschman's salary and benefits allocated to research and
development were approximately $175,000, $187,000 and $197,000
for 2003, 2002, and 2001 respectively. We allocated Dr.
Hirschman's' salary in accordance with his time spent on
research and development activities. For the years ended
December 31, 2002 and 2001 we allocated 50% of his salary and
benefits to research and development and 50% to general and
administrative expenses. During the nine months ended
September 30, 2003, we allocated 30% of his salary and
benefits to research and development and 70% to general and
administrative expenses. During the three months ended
December 31, 2003, we allocated 100% of his salary and
benefits to research and development as a result of his
resignation during August 2003 as Chief Executive Officer and
Chief Scientific Officer to assume his new responsibilities as
chief scientist.

o decrease in research and development expenditures relating to
our GloboMax agreement in connection with the preparation of
our first IND filing of approximately $0, $904,000 and
$2,667,000 for the years ending 2003, 2002 and 2001,
respectively;

o decrease in laboratory supplies of approximately $0, $295,000
and $407,000 for the years ending 2003, 2002, and 2001,
respectively, offset by an increase in consulting expenses of
approximately $96,000, $82,000 and $1,000 for the year ending
2003, 2002 and 2001. In 2003 we signed consulting agreements
for research and development purposes with Oxford
Pharmaceuticals ($80,000) and our consultant retained in
Israel ($16,000). In 2002 we signed consulting agreements with
Keystone Validation Group ($66,000) for equipment validation
services and various other consultants providing services to
Advanced Viral for research and development purposes
($16,000).

GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were approximately $3,221,000, $2,654,000, and $4,063,000 in 2003, 2002
and 2001, respectively. General and administrative expenses increased by
approximately $567,000 in 2003 vs.2002 and decreased by $1,409,000 in 2002
vs.2001, resulting primarily from:

o increased payroll and related expenses, approximately $989,000
in 2003 vs. $866,000 in 2002 and $1,039,000 in 2001. The
increase in 2003 relates to the allocation of employee
salaries and benefits from research and development functions
to general and administrative functions. For the year ended
December 31, 2003 all salaries and benefits were recorded as
general and administrative expenses with the exception of Dr.
Hirschman, who was our Chief Scientific Officer and our Chief
Executive Officer until August 2003, and we allocated
approximately 70% of his salary and benefits (for the period
January through September 2003) and 0% of his salary and
benefits (for the period October through December 2003) to
general and administrative expenses. Approximately $189,000
and $180,000 of his salary and benefits has been allocated to
general and administration in 2003 and 2002, respectively. The
decrease from 2002 to 2001 was primarily attributed to a
reduction in personnel during November 2002 from 33 to 10
employees as a cost cutting measure and employee bonuses
granted in 2001 and not repeated in 2002;

o decreased benefit and insurance costs of approximately
$456,000 in 2003 vs. $564,000 in 2002 and a decrease to
$412,000 in 2001. The decrease in 2003 was attributed to lower
benefit costs (due to a reduction in staff at the end of 2002)
offset by higher insurance premiums. The increase in 2002 was
attributed to higher medical and insurance premiums;

o increase in professional fees of approximately $815,000 in
2003 vs. $501,000 in 2002 and $1,431,000 in 2001. The increase
in costs in 2003 as compared to 2002 was due to attorneys fees
related to our litigation, the cost of which was $257,000 in
2003 vs. $44,000 in 2002. Costs in 2001 included $953,000 to
attorney fees related for our litigation and;

o increase consulting costs in 2003 of $157,000 vs. $0 in
2002 for consultants retained by us for fund raising
initiatives; and

o decrease in consulting fees for 2002 and 2001 of $34,000 and
$212,000 respectively, primarily due to utilizing our
employees for computer consulting, rather than performing
these services utilizing outside consultants.

18

COMPENSATION AND OTHER EXPENSE FOR OPTIONS AND WARRANTS. Compensation
expense was approximately $606,000 in 2003, compared to $884,000 in 2002 and
$1,048,000 in 2001. Compensation expense includes an adjustment to restate our
financial statements for the years ended 2002 and 2001 of approximately $129,000
and $357,000. Compensation expense before this restatement was approximately
$755,000 and $691,000 for the years ended 2002 and 2001, respectively. Included
in compensation expense for these periods was:

o the calculation of the fair value of extending the expiration
dates of non-employee options outstanding of approximately
$178,000 and $691,000 for 2002 and 2001, respectively. The
restatement had no effect on this expense; and

o the issuance of options to our Scientific Advisory Board
resulting in compensation expense of $347,000, $108,000 and $0
for the years ending 2003, 2002 and 2001, respectively.
Compensation expense includes an adjustment to restate our
financial statements for the year ended 2002 of approximately
($279,000). Compensation expense before this restatement was
approximately $387,000; and

o the fair value of warrants issued in consideration for
terminating a contract resulting in our recording compensation
expense of $191,000 in 2002. The restatement had no effect on
this expense; and

o the fair value of warrants issued for our 2001 equity line of
credit with Cornell Capital Partners of $255,000, $408,000 and
$357,000 for the years ending 2003, 2002 and 2001,
respectively. Compensation expense includes an adjustment to
restate our financial statements for the years ended 2002 and
2001 of approximately $408,000 and $357,000. Compensation
expense before this restatement was $0 and $0 for the years
ended 2002 and 2001.

DEPRECIATION EXPENSE. Depreciation expense was approximately $922,000
in 2003 compared to $978,000 and $511,000 in 2002 and 2001 respectively. The
decrease in 2003 over 2002 resulted from equipment which was fully depreciated
during 2003. The increase from 2001 to 2002 resulted primarily from acquisitions
of furniture, fixtures and equipment for the Yonkers office, laboratory and
production facility during 2002 and 2001.

INTEREST EXPENSE. Interest expense for the years ended 2003 and 2002
was approximately $1,697,000 and $192,000 and ($117,000) in 2001. Interest
expense includes an adjustment to restate our financial statements for the years
ended 2002 and 2001of approximately $1,150,000 and $986,000. Interest expense
before this restatement was $1,342,000 and $869,000 for the years ended 2002 and
2001, respectively. Included in interest expense for these periods was:

o the beneficial conversion feature on convertible debentures of
approximately $809,000, $89,000 and $0 for the years ending
2003, 2002 and 2001, respectively. Before restatement this
expense for 2002 and 2001 was approximately $37,000 and
$0, respectively; and

o amortization of warrant costs associated with convertible
debentures of approximately $517,000, $0 and $3,000 for the
years ending 2003, 2002 and 2001, respectively. In 2002 and
2001 the expense before restatement was approximately was
approximately $1,102,000 and $989,000, respectively; and

o amortization of loan costs relating to the issuance of
convertible debentures of approximately $253,000, $34,000 and
$15,000 for the years ending 2003, 2002 and 2001,
respectively. Our restatement had no effect on this expense;
and

o interest expense associated with convertible debentures of
approximately $101,000, $43,000 and $0 for the years ending
2003, 2002 and 2001, respectively. Our restatement had no
effect on this expense.

SEVERANCE EXPENSE. Severance expense for the year ended December 31,
2001 was approximately $303,000, paid under severance agreements entered into
between the retiring directors and Advanced Viral.

19

LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations for
the years ended 2003, 2002 and 2001 was approximately $7,784,000, $9,120,000,
and $10,827,000, respectively. The decrease from 2003 to 2002 resulted primarily
from a reduction in research and development expenses due to a reduction in
personnel during 2002 from 33 to 10 employees and limiting our research and
development efforts to one clinical trial in Israel.

The financial statements for the years ended December 31, 2002 and 2001
have been restated to reflect changes in accounting for warrants issued in
connection with equity transactions as well as options issued to the Board of
Directors and employees (on a pro-forma basis only) and our advisory board. The
restatement resulted in income which reduced the previously reported net loss
for 2002 and 2001 by approximately $1,021,000 and $629,000, respectively. As a
result of this restatement interest expense and compensation and other expense
for options and warrants were adjusted as follows: Interest expense was reduced
from approximately $1,342,000 and $869,000 to approximately $192,000 and
($117,000) for the years ended 2002 and 2001, respectively. Compensation and
other expense for options and warrants expense increased from approximately
$755,000 and $691,000 to approximately $884,000 and $1,048,000 for the years
ended 2002 and 2001, respectively.

LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations
for the years ended 2003, 2002 and 2001 was approximately $33,000, $201,000, and
$259,000 respectively, relating to losses from our 99% owned subsidiary, Advance
Viral Research, Ltd.

REVENUES. There were approximately $0, $0 and $18,000 in sales revenue
in 2003, 2002 and 2001, respectively. All sales revenue resulted from purchases
of AVR118 for testing purposes.

INTEREST INCOME. Interest income was approximately $13,000 and $28,000
in 2003 and 2002, respectively, compared to approximately $114,000 in 2001
resulting from our cash balances invested in money market and overnight banking
obligations.

LIQUIDITY

YEARS ENDED DECEMBER 31, 2003 AND 2002

As of December 31, 2003, we had current assets of approximately
$494,000 compared to approximately $1,770,000 at December 31, 2002. We had total
assets of approximately $2,989,000 and $4,946,000 at December 31, 2003 and 2002,
respectively. Total current assets changed due to a decrease in case and cash
equivalents of approximately $1,205,000. Total assets declined due to
depreciation of fixed assets.

During 2003, we used cash of approximately $4,337,000 for operating
activities, as compared to approximately $8,701,000 in 2002. During 2003, we
incurred expenses of:

o approximately $1,164,000 for payroll and related costs
primarily for administrative staff, scientific personnel and
executive officers;

o approximately $250,000 in consulting fees;

o approximately $421,000 for rent and utilities for our Yonkers
facility;

o approximately $1,056,000 in expenditures on AVR118 research in
Israel;

o approximately $456,000 for insurance and approximately
$815,000 for other professional fees; and

o approximately $88,000 for travel-related expenses.

During the year ended December 31, 2003, cash flows provided by
financing activities was primarily due to the proceeds from the sale of our
common stock of approximately $2,133,000, convertible debentures of $2,169,000,
offset by payments under a litigation settlement agreement of $1,051,000 and
principal payments of approximately $122,000 and 3,000 on equipment obligations
and the repayment of a grant, respectively. This compares to the year ended
December 31, 2002 where funds of approximately $7,114,000 were provided from the
sale of our common stock; convertible debentures of $2,000,000, offset by
principal payments of approximately $169,000 for equipment obligations.

20

LIQUIDITY CONSIDERATIONS

The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2003
includes an emphasis paragraph regarding certain liquidity considerations. Note
2 to the Consolidated Financial Statements states that our cash position may be
inadequate to pay all the costs associated with the full range of testing and
clinical trials of AVR118 required by the FDA, and, unless and until AVR118 is
approved for sale in the United States or another industrially developed
country, we may be dependent upon the continued sale of our securities, debt or
equity financing for funds to meet our cash requirements. We believe that cash
flows from sales of securities and from current financing arrangements will be
sufficient to fund our current operations. Although we may not be successful in
doing so, we intend to continue to sell our securities in an attempt to mitigate
the effects of our cash position. No assurance can be given that equity or debt
financing, if and when required, will be available or that additional securities
will be authorized beyond the current authorization of 1 billion shares of our
common stock.

During January 2004, we received an additional $1 million from Cornell
Capital Partners under its April 28, 2003 agreement in consideration for the
issuance of a 5% convertible debenture by us which was later converted during
February 2004 into 12,558,219 shares of our common stock.

During February 2004, we entered into an agreement with James Dicke II
and his son, James Dicke III, whereby we agreed to sell an aggregate of 120
million shares of our common stock and warrants to purchase 15 million shares of
our common stock for an aggregate purchase price of $12 million. Pursuant to the
agreement, the funding shall take place in four equal stages of $3 million each,
once every 90 days with the first $3 million funding having occurred on February
5, 2004.

We have no off-balance sheet transactions.

The following table shows total contractual payment obligations as of
December 31, 2003.

Total Contractual Obligations Table

21

CAPITAL RESOURCES

We have and continue to be dependent upon the proceeds from the
continued sale of securities and convertible debentures for the funds required
to continue operations at present levels and to fund further research and
development activities. The following table summarizes sales of our securities
over the last three years.

Purchase Price
Convertible / Conversion Price / Maturity Date /
Date Issued Gross Proceeds Security Issued Exercisable Into Exercise Price Expiration Date
----------- -------------- --------------- ---------------- -------------- ---------------

Feb-2001 equity line warrants 10,000,000 shares (1) $1.00 per share 2/9/2006
Jul-2001 $1,000,000 common stock 3,125,000 shares $0.32 per share n/a
Jul-2001 $490,000 common stock 1,225,000 shares $0.40 per share n/a
warrants 367,500 shares $0.48 per share 7/27/2006
367,500 shares $0.56 per share
Aug-2001 $600,000 common stock 2,000,000 shares $0.30 per share n/a
Sep-2001 $1,000,000 common stock 6,666,667 shares $0.15 per share n/a
Dec-2001 $2,000,000 common stock 7,407,407 shares $0.27 per share n/a
Dec-2001 $410,000 common stock 1,518,519 shares $0.27 per share n/a
Dec-2001 $200,000 common stock 740,741 shares $0.27 per share n/a
Feb-2002 $500,000 common stock 3,333,333 shares $0.15 per share n/a
Feb-2002 $500,000 common stock 3,333,333 shares $0.15 per share n/a
Mar-2002 $500,000 common stock 3,333,333 shares $0.15 per share n/a
Apr-2002 $1,939,000 common stock 17,486,491 shares $0.11089 per share n/a
May-2002 $500,000 convertible debenture Approx. 4,412,000 shares (2) 5/30/2004
May-2002 consulting warrants 1,000,000 shares $0.18 per share 5/30/2008
services
Jul-2002 $1,000,000 convertible debenture Approx. 9,350,000 shares (3) 7/3/2004
Jul-2002 $500,000 convertible debenture Approx. 4,588,000 shares (4) 7/15/2004
Sep-2002 $3,010,000 common stock 21,500,000 shares (5) $0.14 per share n/a
warrants 16,125,000 shares $0.001 per share (5) 9/9/2007
Dec-2002 & $1,100,000 common stock 13,750,000 shares $0.08 per share n/a
Mar-2003 warrants 9,075,000 shares $0.12 per share 12/2007 - 3/2008
Apr-May 2003 $562,000 common stock 7,337,500 shares $0.08 per share n/a
Apr-2003 $1,000,000 convertible debenture 22,484,276 shares (6) (8) 4/2008
Apr-2003 warrants 15,000,000 shares (7) $0.091 per share 4/2008
June 2003 $125,000 common stock 1,562,500 shares $0.08 per share n/a
June 2003 warrants 1,109,375 shares $0.12 per share 6/2008
July 2003 $1,500,000 convertible debenture 22,929,167 shares (6) (8) 7/2008

Sep 2003 $1,081,000 common stock 21,620,000 shares $0.05 per share n/a
Sept 2003 warrants 13,188,200 shares $0.10 per share 9/2008
Jan 2004 $1,000,000 convertible debenture 12,558,219 shares (6) (8) 1/2009

Dec.2003 & $325,000 common stock 2,166,666 shares $0.15 per share n/a
Jan 2004
warrants 931,666 shares $0.19 per share 1/2009
Feb 2004 $3,000,000 common stock 30,000,000 shares $0.10 per share n\a

- -------------------------

(1) $0.11 per share for the first 20% of the principal balance of the Debenture,
thereafter, 20% of the principal balance may be converted at six-month intervals
at a conversion price equal to the higher of (i) 90% of the average closing bid
price for the five trading days prior to the conversion date (the "Market
Price"); or (ii) ten cents ($0.10) which amount is subject to certain
adjustments.
(2) $0.1539 per share for the first 20% of the principal balance of the
Debenture, thereafter, 20% of the principal balance may be converted at
six-month intervals at a conversion price equal to the higher of (i) 90% of the
Market Price; or (ii) ten cents ($0.10) which amount is subject to certain
adjustments.
(3) $0.1818 per share for the first 20% of the principal balance of the
Debenture, thereafter, 20% of the principal balance may be converted at
six-month intervals at a conversion price equal to the higher of (i) 90% of the
Market Price; or (ii) ten cents ($0.10) which amount is subject to certain
adjustments.
(4) Does not include an additional 1,032,000 shares of common stock issued to
H.C. Wainwright & Co. as part of the finder's fee for the transaction.
(5) Represents shares issued in connection with certain settlement and mutual
release agreements entered in May 2003, pursuant to which, among other things,
warrants to purchase 16,125,000 shares of our common stock were cancelled.

22

(6) The debentures were convertible commencing July 27, 2003 at a conversion
price equal to the lesser of (i) $0.08 or (ii) 80% of the lowest closing bid
price of our common stock for the four trading days immediately preceding the
conversion date. All of such debentures have been converted.
(7) The warrants are exercisable commencing October 28, 2003.
(8) The debentures are convertible at a conversion price equal to the lesser of
(i) $.08 or (ii) 80% of the lowest closing bid price of our common stock for the
four trading days immediately preceding the conversion date. All of such
debentures have been converted.

On May 30, 2002 we entered into an agreement with Harbor View Group,
Inc. to terminate a consulting agreement effective as of December 31, 2001. The
consultant continued to perform services after the termination date and as full
compensation we granted warrants to purchase 1 million shares of our common
stock at an exercise price of $0.18 per share. The warrants are exercisable in
whole or in part at any time and from time to time prior to May 30, 2008.

During the second quarter of 2002, we issued to James Dicke II, a
former director, Peter Lunder, a former advisory board member, and O. Frank
Rushing and Justine Simoni an aggregate of $2 million principal amount of our 5%
convertible debentures at par in several private placements pursuant to Section
4(2) of the Securities Act. Under the terms of each 5% convertible debenture,
20% of the original issue is convertible on the original date of issue at a
price equal to the closing bid price quoted on the OTC Bulletin Board on the
trading day immediately preceding the original issue date (except for the
$500,000 of the debentures which had an initial conversion price of $0.11 per
share). Thereafter, 20% of the principal balance may be converted at six-month
intervals at a conversion price equal to the higher of (i) 90% of the average
closing bid price for the five trading days prior to the conversion date; or
(ii) ten cents ($0.10) which amount is subject to certain adjustments. The
convertible debentures, including interest accrued thereon, are payable by
Advanced Viral in shares of common stock and mature two years from the date of
issuance. The shares issued upon conversion of the debentures cannot be sold or
transferred for a period of one year from the applicable vesting date of the
convertible portion of the debentures. As of February 10, 2004, principal and
interest on the debentures in the amount of $1,665,466 had been converted into
14,260,468 shares of our common stock.

On September 10, 2002, we issued and sold an aggregate of 21,500,000
shares of our common stock pursuant to a securities purchase agreement with
certain investors for total proceeds of approximately $3,010,000, or $0.14 per
share, along with warrants to purchase 16,125,000 shares of our common stock at
an exercise price of $0.25 per share, subject to adjustment, as described below,
in a private offering transaction pursuant to Section 4(2) of the Securities
Act.

In addition, pursuant to a placement agent agreement with H.C.
Wainwright & Co., Inc. ("HCW"), we paid HCW a placement fee of $150,500 cash and
issued to HCW 1,032,000 shares of our common stock. An adjustment provision in
the warrants provided that at 60 and 120 trading days following the original
issue date of the warrants, a certain number of warrants shall become
exercisable at $0.001. The number of shares for which the warrants are
exercisable at $0.001 per share is equal to the positive difference, if any,
between (i) $3,010,000 divided by the volume weighted average price ("VWAP") of
our common stock for the 60 trading days preceding the applicable determination
date and (ii) 21,500,000, provided however, that no adjustment will be made in
the event that the VWAP for the 60 trading day period preceding the applicable
determination date is $0.14 or greater. In December 2002 we filed suit against
certain of the investors in connection with the warrant repricing provisions of
the agreement, and during May 2003, we entered into settlement and mutual
release agreements with the parties involved in both the Florida and New York
litigation, which, among other things, dismissed the lawsuits with prejudice,
and Alpha Capital separately dismissed its lawsuit with prejudice. Pursuant to
the agreements, in exchange for release by the parties to the lawsuits and
certain parties to the September 2002 financing of their right to exercise the
warrants issued in the September 2002 financing, we issued an aggregate of
947,000 shares of our common stock and became obligated to pay $1,047,891 to
such parties. During September, 2003, we paid an additional $29,000 and the
947,000 shares previously issued by the Company were cancelled.

From December 2002 through June 2003, we authorized the issuance of and
sold 22,650,000 shares of our common stock and warrants to purchase up to
13,590,000 shares of our common stock at $0.08 per share, for an aggregate
purchase price of $1,812,000 pursuant to securities purchase agreements in a
private offering transaction pursuant to Section 4(2) of the Securities Act. In
connection with the agreement, we paid finders' fees to Harbor View Group, AVIX,
Inc. and Robert Nowinski consisting of an aggregate (i) approximately $98,095
and (ii) warrants to purchase 1,246,500 shares of our common stock. All of the

23

aforementioned warrants are exercisable at $0.12 per share commencing six months
after the closing date of the agreement, for a period of five years. As of the
date hereof, none of such warrants had been exercised.

On April 11, 2003 pursuant to a securities purchase agreement with
James F. Dicke II, a former member of our Board of Directors, we sold 3,125,000
shares of common stock and warrants to purchase 1,875,000 shares of common stock
at an exercise price of $0.12 per share through April 2008, for an aggregate
purchase price of $250,000 in a private offering transaction pursuant to Section
4(2) of the Securities Act.

On April 28, 2003 pursuant to a securities purchase agreement with
David Provence in a private offering transaction pursuant to Section 4(2) of the
Securities Act, we sold 312,500 shares of common stock and warrants to purchase
187,500 shares of common stock at an exercise price of $0.12 per share through
April 2007, for an aggregate purchase price of $25,000. In connection with the
transaction, we paid a finders' fee to Diego Vallone consisting of warrants to
purchase 15,625 shares of our common stock at an exercise price per share of
$0.12 until April 2008.

On April 28, 2003, we entered into an Equity Line of Credit Agreement
with Cornell Capital Partners in a private offering transaction pursuant to
Section 4(2) of the Securities Act. The equity line agreement provides,
generally, that Cornell Capital Partners has committed to purchase up to $50
million of our common stock over a three-year period, with the timing and amount
of such purchases, if any, at our discretion, provided, however, that the
maximum amount of each advance is $500,000, and the date of each advance shall
be no less than six trading days after our notification to Cornell Capital
Partners of its obligation to purchase shares. Any shares of common stock sold
under the equity line will be priced at the lowest closing bid price of our
common stock during the five consecutive trading days following our notification
to Cornell Capital Partners requesting an advance under the equity line. In
addition, at the time of each advance, we are obligated to pay Cornell Capital
Partners a fee equal to five percent (5%) of the amount of each advance.
However, Cornell Capital Partner's obligation to purchase and our obligation to
sell our common stock is conditioned upon the per share purchase price being
equal to or greater than a price we set on the advance notice date, the minimum
acceptable price, which may not be set any closer than 7.5% percent below the
closing bid price of the common stock the day prior to the date we notify
Cornell Capital Partners of its obligation to purchase shares. In addition,
there are certain other conditions applicable to our ability to draw down on the
equity line including the filing and effectiveness of a registration statement
registering the resale of all shares of common stock that may be issued to
Cornell Capital Partners under the equity line and our adherence with certain
covenants. There can be no assurance of the amount of proceeds we will receive,
if any, under the equity line of credit with Cornell Capital Partners. For its
services as placement agent, Katalyst Securities LLC received 107,527 shares of
our common stock, which was valued at $10,000. Katalyst Securities may be deemed
to be an underwriter in connection with the sale of common stock under the
Equity Line of Credit.

On April 28, 2003 we entered into a securities purchase agreement with
Cornell Capital Partners, in a private offering transaction pursuant to Section
4(2) of the Securities Act, to sell up to $2,500,000 of our 5% convertible
debentures, due April 28, 2008, $1 million of which was purchased on April 28,
2003; $1.5 million of which was purchased on July 18, 2003; and $1 million of
which was purchased on January 8, 2004. Interest was payable in cash or common
stock at the option of Cornell Capital Partners. Pursuant to the agreement,
Cornell Capital Partners received a 10% discount to the purchase price of the
convertible debentures purchased. Pursuant to the terms of the agreement,
commencing July 27, 2003, Cornell Capital Partners became eligible to convert
the debenture plus accrued interest, in shares of our common stock at a
conversion price equal to the lesser of (a) $0.08 or (b) 80% of the lowest
closing bid price of our common stock for the four trading days immediately
preceding the conversion date. In addition, in connection with the securities
purchase agreement, we issued to Cornell Capital Partners a warrant to purchase
15 million shares of our common stock exercisable for five years at an exercise
price of $0.091. The warrant became exercisable on October 28, 2003.

On July 18, 2003 we entered into an additional securities purchase
agreement with Cornell Capital, in a private offering transaction pursuant to
Section 4(2) of the Securities Act, whereby Cornell Capital Partners
purchased $1 million of our 5% secured convertible debentures, due July 17,
2008. Pursuant to the agreement, Cornell Capital Partners Capital received a 10%
discount to the purchase price of the convertible debentures purchased. Our
repayment obligations under the convertible

24

debentures were secured by the assets of Advanced Viral. Pursuant to the terms
of the agreement, commencing October 18, 2003, Cornell Capital Partners became
eligible convert the debenture plus accrued interest, in shares of our common
stock at a conversion price equal to the lesser of (a) $0.08 or (b) 80% of the
lowest closing bid price of our common stock for the four trading days
immediately preceding the conversion date.

On September 10, 2003, principal on the Cornell Capital Partners
convertible debentures in the amount of $600,000 had been converted into
14,150,943 shares of common stock at a conversion price of $.0424 per share. On
November 6, 2003, Cornell Capital Partners converted $600,000 principal amount
of the convertible debentures into 12,500,000 shares of common stock at a
conversion price of $0.048 per share. On November 20, 2003, Cornell Capital
converted $600,000 principal amount of the convertible debenture into 9,375,000
shares of our common stock at a conversion price of $.064 per share. On January
13, 2003, Cornell Capital Partners converted $700,000 principal amount plus
interest of $51,000 on the convertible debentures into 9,387,500 shares of
common stock at a conversion price of $0.08 per share. On February 11, 2004,
Cornell Capital Partners converted $1,000,000 principal amount plus interest of
$4,558 on the convertible debenture into 12,558,219 shares of common stock at a
conversion price of $0.08 per share. As of the date hereof, the April and July
debentures have been fully converted into an aggregate of 57,971, 662 shares of
common stock.

Our obligations under the convertible debentures and the April and July
Agreements were secured by a first priority security interest in substantially
all of our assets. Pursuant to the agreements, this security interest terminated
upon Advanced Viral receiving $3 million of capital in any form other than
through the issuance of free-trading shares of our common stock from sources
other than Cornell Capital Partners Capital. This termination occurred during
February 2004, upon the funding of $3 million under the Dicke Agreement.

In September 2003, in connection with a private offering transaction
pursuant to Section 4(2) of the Securities Act, we authorized the issuance of
and sold 21,620,000 shares of our common stock and warrants to purchase up to
10,810,000 shares of our common stock, for an aggregate purchase price of
$1,081,000, or $0.05 per share, pursuant to securities purchase agreements. The
warrants are exercisable at $0.10 per share. In connection with the agreements,
we paid finders' fees to Harbor View Group, AVIX, Inc and Robert Nowinski
consisting in the aggregate of (i) approximately $115,667 and (ii) warrants to
purchase 2,378,200 shares of our common stock. All of the aforementioned
warrants are exercisable at $0.10 per share commencing six months after the
issuance date, for a period of five years. As of the date hereof, none of such
warrants have been exercised.

In December/January 2004, in connection with a private offering
transaction pursuant to Section 4(2) of the Securities Act, we authorized the
issuance of and sold 2,166,666 shares of our common stock and warrants to
purchase up to 758,334 shares of our common stock, for an aggregate purchase
price of $325,000, or $0.15 per share, pursuant to securities purchase
agreements with certain purchasers. In connection with the agreements, we paid
finders' fees to Harbor View Group consisting in the aggregate of (i)
approximately $26,000 and (ii) warrants to purchase 173,333 shares of our common
stock. All of the aforementioned warrants are exercisable at $0.19 per share
commencing six months after the issuance date, for a period of five years. As of
the date hereof, none of such warrants have been exercised.

On February 3, 2004, we entered into an agreement with James Dicke II
and his son James Dicke III, whereby we agreed to sell an aggregate of 120
million shares of our common stock and warrants to purchase 15 million shares of
our common stock for an aggregate purchase price of $12 million. Pursuant to the
agreement, the funding shall take place in four equal stages of $3 million each,
once every 90 days with the first $3 million funding having occurred on February
5, 2004. There are no conditions precedent to the investors' obligation to close
other than the accuracy of our representations and warrants and our compliance
with the agreement. The warrants have an exercise price of $0.20 per share and
are exercisable at any time through February 2, 2007. In addition, we granted
demand and piggyback registration rights to the investors for the shares issued
or issuable in connection with the transaction pursuant. James F. Dicke II is
the Chairman and CEO of Crown Equipment Corporation and a former member of our
Board of Directors.

25

On February 9, 2004, we entered into a termination and release
agreement with DCT, S.R.L. and certain of its affiliates pursuant to which
pursuant to which a distribution agreement and various testing agreements with
DCT, along with any and all distribution rights and rights to royalties or fees
thereunder, were terminated. In addition, the agreement provides that any and
all intellectual property rights relating to the terminated agreements were the
property of Advanced Viral, and the parties released each other from claims
relating thereto. In consideration, we agreed to pay DCT $60,000 and granted
warrants to purchase an aggregate of five million shares of our common stock to
certain of DCT's affiliates at an exercise price of $0.16 for a period of five
years. In addition the recipients of the warrants agreed not to sell more than
an aggregate of two million shares of our common stock in any six-month period
for a period of five years.

OUTSTANDING SECURITIES

Currently, in addition to the 602,291,677 shares of our common stock
currently outstanding, we have: (i) outstanding stock options to purchase an
aggregate of approximately 146.7 million shares of common stock at exercise
prices ranging from $0.052 to $0.36, of which approximately 94.9 million are
currently exercisable; (ii) outstanding warrants to purchase an aggregate of
approximately 91.3 million shares of common stock at prices ranging from $0.091
to $1.00, all of which warrants are currently exercisable; (iii) approximately
4 million shares of common stock underlying certain outstanding convertible
debentures; and (iv) an aggregate of 90 million shares to be sold in three
fundings by November 3, 2004 pursuant to a securities purchase agreement. The
foregoing does not include shares issuable pursuant to the Equity Line of Credit
Agreement with Cornell Capital Partners.

If all of the foregoing were fully issued, exercised and/or converted,
as the case may be, we would receive proceeds of approximately $53.1 million,
and we would have approximately 934.3 million shares of common stock
outstanding. The sale or availability for sale of this number of shares of
common stock in the public market could depress the market price of the common
stock. Additionally, the sale or availability for sale of this number of shares
may lessen the likelihood that additional equity financing will be available to
us, on favorable or unfavorable terms. Furthermore, the sale or availability for
sale of this number of shares could limit the annual amount of net operating
loss carryforwards that could be utilized.

PROJECTED EXPENSES

During the next 12 months, we expect to incur significant expenditures
relating to operating expenses and expenses relating to regulatory filings and
clinical trials for AVR118.

We believe that our current liquid assets and cash flows from the sale
of securities and current financing arrangements will be sufficient to fund our
current operations. Any proceeds received from the exercise of outstanding
options or warrants will contribute to working capital and increase our budget
for research and development and clinical trials and testing, assuming AVR118
receives subsequent approvals to justify such increased levels of operation. The
recent prevailing market price for shares of common stock has from time to time
been below the exercise prices of certain of our outstanding options or
warrants. As such, recent trading levels may not be sustained nor may any
additional options or warrants be exercised. If none of the outstanding options
or warrants is exercised, and we obtain no other additional financing, in order
for us to achieve the level of operations contemplated by management, management
anticipates that we will have to materially limit or suspend operations. We are
currently seeking debt financing, licensing agreements, joint ventures and other
sources of financing, but the likelihood of obtaining such financing on
favorable terms is uncertain. Management is not certain whether, at present,
debt or equity financing will be readily obtainable or whether it will be on
favorable terms. Because of the large uncertainties involved in the FDA approval
process for commercial drug use on humans, it is possible that we will never be
able to sell AVR118 commercially.

LIQUIDITY CONSIDERATIONS

The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2003
includes an emphasis paragraph regarding certain liquidity considerations. Note
2 to the Consolidated Financial Statements states that our cash position may be
inadequate to pay all the costs associated with the full range of testing and
clinical trials of AVR118 required by the FDA, and, unless and until AVR118 is
approved for sale in the United States or another industrially developed
country, we may be dependent upon the continued sale of our securities, debt or
equity financing for funds to meet our cash requirements. We believe that cash

26

flows from sales of securities and from current financing arrangements will be
sufficient to fund our current operations. Although we may not be successful in
doing so, we intend to continue to sell our securities in an attempt to mitigate
the effects of our cash position. No assurance can be given that equity or debt
financing, if and when required, will be available or that additional securities
will be authorized beyond the current authorization of 1 billion shares.

CRITICAL ACCOUNTING POLICIES

OTHER ASSETS

Patent development costs are capitalized as incurred. Such costs will
be amortized over the life of the patent, commencing at the time AVR118 is
marketed. Loan costs include fees paid in connection with the February 2001
private equity line of credit agreement and are being amortized over the life of
the agreement.

STOCK-BASED COMPENSATION

Advanced Viral has elected to follow Accounting Principles Board
Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25), and
related interpretations, in accounting for its employee stock options rather
than the alternative fair value accounting allowed by SFAS No. 123, Accounting
for Stock-Based Compensation. APB No. 25 provides that the compensation expense
relative to Advanced Viral's employee stock options is measured based on the
intrinsic value of the stock option. SFAS No. 123 requires companies that
continue to follow APB No. 25 to provide a pro-forma disclosure of the impact of
applying the fair value method of SFAS No. 123. Advanced Viral follows SFAS No.
123 in accounting for stock options issued to non-employees.

RECENT ACCOUNTING PRONOUNCEMENTS

During May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial Instruments
with Characteristics of both Liabilities and Equity". SFAS 150 clarifies the
accounting for certain financial instruments with characteristics of both
liabilities and equity and requires that those instruments be classified as
liabilities in statements of financial position. Previously, many of those
financial instruments were classified as equity. SFAS 150 is effective for
financial instruments entered into or modified after May 31, 2003 and otherwise
is effective at the beginning of the first interim period beginning after June
15, 2003. The adoption of SFAS 150 did not have an impact on our operating
results or financial position as we do not have any financial instruments with
characteristics of both liabilities and equity that are not already classified
as liabilities.

During April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 (" SFAS 149"), "Amendment of Statement 133 on Derivative
Instruments and Hedging Activities". SFAS 149 amends and clarifies accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts, and for hedging activities under Statement 133. SFAS 149 is
effective for contracts entered into or modified after June 30, 2003 and for
hedging relationships designated after June 30, 2003. The guidance should be
applied prospectively. The adoption of SFAS 149 did not have an impact on our
operating results or financial position as we do not have any derivative
instruments that are affected by SFAS 149.

In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of Accounting
Research Bulletin No. 51. In December 2003, the FASB issued FIN 46R, which
clarified certain issues identified in FIN 46. FIN 46R requires an entity to
consolidate a variable interest entity if it is designated as the primary
beneficiary of that entity even if the entity does not have a majority of voting
interests. A variable interest entity is generally defined as an entity where
its equity is unable to finance its activities or where the owners of the entity
lack the risk and rewards of ownership. The provisions of this statement apply
at inception for any entity created after January 31, 2003. For an entity
created before February 1, 2003, the provisions of this interpretation must be
applied at the beginning of the first interim or annual period beginning after
March 1, 2004. We do not have any interest in variable interest entities and
therefore the adoption of this standard is not expected to have an impact on our
financial position and results of operations.

On December 31, 2002, the FASB issued SFAS No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of SFAS 123.
The standard provides additional transition guidance for companies that
voluntarily elect to adopt the accounting provisions of SFAS 123, Accounting for
Stock-Based Compensation. SFAS 148 does not change the provisions of SFAS 123
that permits entities to continue to apply the

27

intrinsic value method of APB 25, Accounting for Stock Issued to Employees. As
Advanced Viral continues to follow APB 25, its accounting for stock-based
compensation will not change as a result of SFAS 148. SFAS 148 does require
certain new disclosures in both annual and interim financial statements. The
required annual disclosures are effective immediately and have been included in
Advanced Viral's consolidated financial statements. The new interim disclosure
provisions became effective in the first quarter of 2003.

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS 146 is effective for exit or
disposal activities initiated after December 31, 2002. The adoption of this
standard did not have an impact on our financial position or results of
operations.

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. SFAS 145 is effective for fiscal years beginning after May 15,
2002. The adoption of this standard did not have an impact on our financial
position or results of operations.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Advanced Viral does not own any securities or instruments subject to
market risk for which disclosure is required.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA

The Independent Auditors' Report, Consolidated Financial Statements and
Notes to Consolidated Financial Statements begin on page F-1.

ITEM 9. CHANGES OR DISAGREEMENTS WITH ACCOUNTANTS

There have been no changes to, or disagreements with, our accountants,
Rachlin Cohen & Holtz LLP, during the past two fiscal years.

ITEM 9A. CONTROLS AND PROCEDURES

Management, including our interim Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures as of December 31, 2003.
Based upon the evaluation, management concluded that our disclosure controls and
procedures are effective to ensure that all material information requiring
disclosure in this annual report was made known to them in a timely manner.

We made no significant changes in internal controls over financial
reporting or in other factors that could materially affect our internal control
over financial reporting.

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

Our directors and executive officers, their respective ages, and their
positions held with us are as follows:

28

Name Age Position
---- --- --------

Elma S. Hawkins, Ph.D 47 President, Chief Executive Officer
and Director *
Eli Wilner (1,2,3) 48 Chairman of the Board and Secretary
Alan V. Gallantar 46 Chief Financial Officer and Treasurer
David Seligman 65 Director
Nancy J. Van Sant 54 Director
Roy S. Walzer 56 Director

- ---------------------

* Effective February 18, 2004, Dr. Hawkins succeeded Mr. Wilner as President
and Chief Executive Officer of Advanced Viral.

The following is certain summary information with respect to the
directors and executive officers of Advanced Viral. There are no family
relationships between or among the directors, executive officers or any other
person. None of Advanced Viral's directors or executive officers is a director
of any company that files reports with the SEC. None of the Advanced Viral's
directors have been involved in any bankruptcy or criminal proceeding (excluding
traffic or other minor offenses), nor has been enjoined from engaging in any
business.

DR. ELMA HAWKINS, our President and Chief Executive Officer since
February 18, 2004, has been a member of our Board of Directors and Executive
Management Committee since December 9, 2003. Dr. Hawkins was Vice Chairman of
Antigenics Inc., a publicly traded biotechnology company from 1996 to February
2004. Prior to joining Antigenics in 1996 as Chief Operating Officer, Dr.
Hawkins served in a number of senior positions with Genzyme Corporation and its
affiliates, including Director of Corporate Development and Director of Clinical
and Regulatory Affairs. Dr. Hawkins has also held positions in preclinical and
clinical research at Warner-Lambert/Parke-Davis and at the Center for the Study
of Drug Development at Tufts Medical School. Dr. Hawkins holds a Ph.D. in
medicinal chemistry from the University of Alabama and an M.B.A. from Boston
University.

ELI WILNER, our Secretary and Chairman of the Board of Directors, has
been a director since December 2001, Chairman of the Board since May 2002 and
President and Chief Executive Officer from August 2003 to February 2004. He is
the founder and CEO of Eli Wilner & Company, a New York City art gallery
established in 1983, and is also a leading frame dealer, restorer, collector and
published author. Mr. Wilner was a Bryant Fellows Member of the Metropolitan
Museum of Art in New York City from 1990 to 2000 and since 1990 has been a
member of the Forum and Director's Circle of the National Museum of American Art
in Washington, D.C. Mr. Wilner is a graduate of Brandeis University, where he
received his B.A. in Fine Arts in 1976, and Hunter College, where he received
his M.A. in 1978.

ALAN V. GALLANTAR has been Chief Financial Officer since October 1999
and Treasurer since December 2001. Mr. Gallantar was treasurer and controller
from 1998 to 1999 of AMBI, Inc., a nutraceutical company, senior vice president
and chief financial officer from 1992 to 1997 of Bradley Pharmaceuticals, Inc.,
a pharmaceutical manufacturer, and vice president and divisional controller from
1989 to 1991 for PaineWebber Incorporated. Mr. Gallantar also held senior
financial officer positions at The Chase Manhattan Bank, N.A. (1985-1989),
Philip Morris Incorporated (1983-1985) and Deloitte & Touche. (1979-1983).

DAVID SELIGMAN, a director since December 2001, is a partner and
founder of the Law Office of David Seligman, established in 1995. Since 1997,
Mr. Seligman has been a consulting attorney to Gibbons, Del Deo, Dolan,
Griffinger and Vecchione, a New Jersey based law firm. Mr. Seligman has over
thirty years of legal experience in the pharmaceutical industry, twenty-five of
which were spent supervising the activities of law department attorneys and
outside counsel. From 1989 to 1995, Mr. Seligman was Associate Vice President
and responsible for the general legal activities of various divisions of
Hoffmann-La Roche Inc. Mr. Seligman is a member of the New York and New Jersey
State Bar Associations, and is a member of the board and Greenbrook
Pharmaceuticals, LLC. Mr. Seligman graduated from Columbia University, College
of Pharmacy (B.S.) in 1959, Fordham University School of Law (J.D.) in 1962, and
New York University School of Law (L.L.M.) in 1966.

NANCY J. VAN SANT, ESQ., a director since May 2002, has been a director
of the Miami, Florida law firm of Sacher, Zelman, Van Sant, Paul, Beiley,
Hartman, Terzo & Waldman, P.A. and/or its predecessors since 1992. From 1977
through 1990, Ms. Van Sant was an attorney with the SEC serving as Regional
Trial Counsel and Chief of the Branch of Investigations and Enforcement.

29

ROY S. WALZER, a director since June 2002, has been the President of
the private investment firms Litchfield Partners, Ltd. since 1987 and the
Managing Partner of Litchfield Partners I since 1999, which firms invest in
pharmaceuticals, biotech and technology companies. Prior to founding Litchfield
Partners, Mr. Walzer served as Executive Vice President and General Counsel with
Sealy Connecticut from 1976 to 1986.

SHALOM Z. HIRSCHMAN, M.D. resigned in August 2003 from his position as
our President, Chief Executive Officer and Chief Scientific Officer and a
director of Advanced Viral, which positions he had held since October 1996, in
order to devote his full efforts to his position as our chief scientist with
responsibilities assigned by the Board. Dr. Hirschman was Director of the
Division of Infectious Diseases and Professor of Medicine at Mount Sinai School
of Medicine, New York, New York, from May 1969 until October 1996. Dr. Hirschman
has been responsible for bringing our principal product, AVR118, into human
clinical trials.

ELECTION OF DIRECTORS AND OFFICERS

Directors are elected at each annual meeting of stockholders and hold
office until the next succeeding annual meeting and the election and
qualification of their respective successors. Officers are elected annually by
the Board of Directors and hold office at the discretion of the Board of
Directors. Advanced Viral's By-Laws permit the Board of Directors to fill any
vacancy and such director may serve until the next annual meeting of
stockholders and the due election and qualification of his successor.

MEETINGS OF THE BOARD OF DIRECTORS

During our fiscal year ended December 31, 2003, our Board of Directors
held 19 meetings and acted by written consent six times. All members of the
Board of Directors attended at least 75% of such meetings. Advanced Viral does
not pay cash to directors for their attendance at meetings, but reimburses
directors for their out-of-pocket expenses incurred in connection with the
performance of their duties.

RESIGNATIONS OF MEMBERS OF THE BOARD OF DIRECTORS

Richard Kent, M.D. and Shalom Z. Hirschman, M.D. resigned as members of
our Board of Directors in February 2003 and August 2003, respectively.

COMMITTEES OF THE BOARD OF DIRECTORS

Advanced Viral's Board of Directors has an Executive Management
Committee, Audit Committee and Compensation Committee. The Board of Directors
does not have a standing Nominating Committee.

EXECUTIVE MANAGEMENT COMMITTEE. The Executive Management Committee has
been delegated the authority to oversee the strategic management of Advanced
Viral. Eli Wilner, David Seligman, Roy Walzer and Elma Hawkins serve as members
of the Executive Management Committee.

AUDIT COMMITTEE. The Audit Committee is responsible for nominating
Advanced Viral's independent accountants for approval by the Board of Directors,
reviewing the scope, results and costs of the audit with Advanced Viral's
independent accountants, and reviewing the financial statements, audit practices
and internal controls of Advanced Viral. The current members of the Audit
Committee are David Seligman and Roy A. Walzer. During 2003, the Audit Committee
held three meetings. The Board has determined that Mr. Walzer is an "audit
committee financial expert" within the meaning of the regulations promulgated by
the SEC.. In addition, the Board has determined that Mr. Walzer is
"independent."

COMPENSATION COMMITTEE. The Compensation Committee is responsible for
recommending compensation and benefits for the executive officers of Advanced
Viral to the Board of Directors. The current members of the Compensation
Committee are Eli Wilner, David Seligman, Nancy Van Sant and Roy A. Walzer.

30

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The Compensation Committee of the Board of Directors currently consists
of Eli Wilner, David Seligman, Nancy Van Sant and Roy A. Walzer. During the last
fiscal year, no interlocking relationship existed between Advanced Viral's Board
of Directors or Compensation Committee and the board of directors or
compensation committee of any other company.

AUDIT COMMITTEE REPORT

The Audit Committee for the last fiscal year consisted of two
non-employee Directors. The Board of Directors has determined that none of the
members of the Audit Committee has a relationship to Advanced Viral that may
interfere with his independence from Advanced Viral and its management.

The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its oversight responsibilities by reviewing financial
reports and other financial information provided by Advanced Viral to any
governmental body or the public, Advanced Viral's systems of internal controls
regarding finance, accounting, legal compliance and ethics that management and
the Board of Directors have established, and Advanced Viral's auditing,
accounting and financial processes generally. The Audit Committee annually
recommends to the Board of Directors the appointment of a firm of independent
auditors to audit the financial statements of Advanced Viral and meets with such
personnel of Advanced Viral to review the scope and the results of the annual
audit, the amount of audit fees, Advanced Viral's internal accounting controls,
Advanced Viral's financial statements contained in Advanced Viral's Annual
Report to Stockholders and other related matters.

The Audit Committee has reviewed and discussed with management the
financial statements for fiscal year 2003 audited by Rachlin Cohen & Holtz LLP,
Advanced Viral's independent auditors. The Audit Committee has discussed with
Rachlin Cohen & Holtz LLP various matters related to the financial statements,
including those matters required to be discussed by SAS 61 (Codification of
Statements on Auditing Standards, AU Section 380). The Audit Committee has also
received the written disclosures and the letter from Rachlin Cohen & Holtz LLP
required by Independence Standards Board Standard No. 1 (Independence Standards
Board Standard No. 1, Independence Discussions with Audit Committees), and has
discussed with the firm its independence. Based upon such review and discussions
the Audit Committee recommended to the Board of Directors that the audited
financial statements be included in Advanced Viral's Annual Report on Form 10-K
for the fiscal year ending December, 31, 2003 for filing with the Securities and
Exchange Commission.

The report of the Audit Committee shall not be deemed incorporated by
reference by any general statement incorporating by reference this report into
any filing under the Securities Act of 1933 or under the Securities Exchange Act
of 1934, except to the extent that the filing specifically incorporates this
information by reference, and shall not otherwise be deemed filed under such
Acts.

CODE OF ETHICS

The Board of Directors has not yet adopted a Code of Ethics because it
has not yet completed its review of a draft, which review is currently in
process.

ITEM 11. EXECUTIVE COMPENSATION

DIRECTORS

We currently do not pay directors fees for their attendance at meetings
of the board of directors. Advanced Viral may revisit this position in the
future. The directors are reimbursed for their out-of-pocket expenses incurred
in connection with their attendance at meetings.

EXECUTIVE OFFICERS

The following table summarizes all compensation awarded to, earned by
or paid to (a) our Chief Executive Officer and (b) our other executive officers
whose total salary and bonus exceeded $100,000 (together, the "Named Executive
Officers") for services rendered in all capacities to us during the years
indicated.

31

SUMMARY COMPENSATION TABLE

Long Term
Annual Compensation Compensation
--------------------------- --------------------- All Other
Other Annual Securities Underlying Compensation
Name and Principal Position Year Salary Bonus Compensation (2) Options/SARs(3) (4)
--------------------------- ---- ------ ----- ---------------- --------------------- ------------

Eli Wilner, Chairman and 2003 -- -- n/a 19,700,000 n/a
Secretary, May 2002 to 2002 n/a n/a n/a n/a
Present, President, Chief 2001 n/a n/a n/a n/a
Executive Officer from August
2003 to February 2004

Shalom Z. Hirschman, MD, 2003 361,000 -- $27,843 -- $15,410
Chief Scientist, August 2003 2002 361,000 $25,000 26,800 -- 17,865
to Present, Chairman December 2001 361,000 $25,000 30,192 -- 4,540
2001 to May 2002, President,
Chief Executive Officer and
Chief Scientist Officer
from October 1996 to August
2003, and consultant from
May 24, 1995 until
October 1996

Alan V. Gallantar, Chief 2003 $200,000 0 $6,000 -- --
Financial Officer since 2002 $223,000 $22,500 $6,000 -- --
October 1999; Treasurer since 2001 $225,000 $25,000 $6,000 -- --
December 2001

William Bregman, Secretary 2003 n/a n/a n/a n/a n/a
and director from 1985 until 2002 n/a n/a n/a n/a n/a
December 2001, treasurer from 2001 $70,000 --- --- n/a $150,000 (5)
1985 to 1999

Bernard Friedland, Chairman 2003 n/a n/a n/a n/a n/a
of Advanced Viral and 2002 n/a n/a n/a n/a n/a
President of subsidiary 2001 $70,000 --- --- --- $150,000 (5)
Advance Viral Research LTD.
From 1985 to December 2001

- ---------------------------

(1) With respect to Dr. Hirschman, represents portion of bonus paid to Dr.
Hirschman pursuant to the terms of his employment agreement in
connection with the IND number granted by the FDA. The remaining
$50,000 due has been accrued as of December 31, 2003 and was paid in
January 2004.
(2) Other Annual Compensation for Dr. Hirschman includes medical insurance
premiums paid by Advanced Viral on his behalf, and aggregate
incremental cost to Advanced Viral of Dr. Hirschman's automobile lease,
gas, oil, repairs and maintenance. Other Annual Compensation for Mr.
Gallantar includes an automobile allowance of $500 per month.
(3) Includes (a) options granted in December 2003 to purchase 4,700,000
shares at $0.18 per share for a period of five years; (b) options
granted in August 2003 to purchase 10,000,000 shares at $0.052 per
share for a period of five years; and (c) options granted in August
2003 to purchase 5,000,000 shares at $0.063 per share for a period of
five years. No stock appreciation rights were granted with any options.
(4) Represents the dollar value of insurance premiums paid by or on behalf
of Advanced Viral with respect to term life insurance for the benefit
of the Named Executive Officers.
(5) Represents payments made to Messrs. Bregman and Friedland pursuant to
the terms of the severance agreements discussed below.

The following table sets forth certain summary information concerning
exercised and unexercised options to purchase our common stock as of December
31, 2003 held by the Named Executive Officers. No options were exercised during
the year ended December 31, 2003 by the Named Executive Officers.

AGGREGATED OPTION EXERCISES IN
LAST FISCAL YEAR AND YEAR-END OPTION VALUES

Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-money Options At
Acquired On Value Options At Fiscal Year-end Fiscal Year-end
Name Exercise (#) Realized (1) Exercisable/unexercisable Exercisable/unexercisable
- ---- ------------ ------------ ------------------------- -------------------------

Eli Wilner 0 N/A 22,250,000 / 1,600,000 $1,241,950 / $0 (2)(3)

Shalom Z. Hirschman, M.D. 0 N/A 29,100,000 / 0 $0 / $0 (2)(3)

32

Number of Securities Value of Unexercised
Shares Underlying Unexercised In-the-money Options At
Acquired On Value Options At Fiscal Year-end Fiscal Year-end
Name Exercise (#) Realized (1) Exercisable/unexercisable Exercisable/unexercisable
- ---- ------------ ------------ ------------------------- -------------------------

Alan V. Gallantar 0 N/A 4,547,880 / 0 $0 / $0 (2)(4)

- --------------------------------

(1) Based on the difference between the average of the high and low bid
prices per share of the common stock as reported by the Bulletin Board on the
date of exercise, and the exercise or base price.

(2) Based on the difference between the average of the closing bid and
ask prices per share of the common stock as reported by the Bulletin Board on
December 31, 2003, and the exercise or base price of in-the-money stock options.

(3) As of December 31, 2003, Mr. Wilner held (a) options to purchase
4,700,000 shares at $0.18 per share, of which 1,600,000 are not exercisable; (b)
options to purchase 10,000,000 shares at $0.052 per share; (c) options to
purchase 5,000,000 shares at $0.063 per share; (d) options to purchase 2,750,000
shares at $0.08 per share; and (e) options to purchase 1,400,000 shares at $0.12
per share.

(4) As of December 31, 2003, Dr. Hirschman held (a) options to purchase
4,100,000 shares of common stock at $0.18 per share; (b) 4,000,000 shares of
common stock at $0.19 per share; (c) 4,000,000 shares of common stock at $0.27
per share; (d) 4,000,000 shares of common stock at $0.36 per share, and (e)
23,000,000 shares of common stock at $0.27, all of which are currently
exercisable.

(5) As of December 31, 2003, Mr. Gallantar held options to purchase
4,547,880 shares of common stock at $0.24255 per share, all of which were
exercisable as of such date.

EMPLOYMENT CONTRACTS, TERMINATION OF EMPLOYMENT AND CHANGE-IN-CONTROL
ARRANGEMENTS

HAWKINS EMPLOYMENT AGREEMENT

Pursuant to an Employment Agreement dated February 10, 2004, we
retained Elma S. Hawkins, Ph.D. as our President and Chief Executive Officer
commencing February 18, 2004 until February 2006 unless terminated earlier as
provided in the agreement. The initial term may be extended for successive one
(1) year periods unless either party gives the other thirty (30) days prior
written notice of its intent not to renew prior to the expiration of the then
current term. Dr. Hawkins receives a base salary of $350,000 per year, and is
eligible to receive an annual cash bonus of up to 50% of her then base salary
based on certain performance objectives in the sole discretion of the Board of
Directors. In addition, we paid Dr. Hawkins a signing bonus of $50,000. The
agreement also entitles Dr. Hawkins and her dependents to participate in all
incentive, savings and retirement plans, practices, policies and programs
applicable generally to other executives of Advanced Viral and their families.
The agreement further provides that:

o We shall pay the dues of such professional associations and
societies of which Dr. Hawkins is a member in furtherance of
her duties.

o We shall reimburse Dr. Hawkins for reasonable expenses
relating to professional licenses, entertainment, travel, and
similar items in accordance with the policies, practices and
procedures of Advanced Viral.

o We shall furnish Employee with an automobile and pay all
expenses related to such automobile for use in the performance
of her duties, or, at our discretion provide, at our expense,
car transportation between New York City and our Yonkers, New
York headquarters.

o Dr. Hawkins will be entitled to four (4) weeks paid vacation
annually or such other time as authorized by the Board of
Directors during which time her compensation shall be paid in
full. Vacation Days unused in any calendar year may not be
accumulated and carried forward and used in future years.

Furthermore, if the agreement is terminated by us for cause, or Dr.
Hawkins voluntarily resigns, becomes disabled or dies, then Dr. Hawkins or her
estate shall be entitled to her base salary earned through the date of
termination, accrued vacation, and all applicable reimbursements due. If the
agreement is terminated for other reasons by either party, Dr. Hawkins shall be
entitled to, in one lump sum payment, that amount which is equivalent to her
base salary paid for the fiscal year immediately prior to her termination, and
all applicable reimbursements due. Payment of the lump sum severance benefit is
conditioned upon the release by Dr. Hawkins of Advanced Viral, to the maximum
extent permitted by law, from any and all claims she may have against us that
relate to or arise out of her employment or termination of employment.

33

Pursuant to the agreement, Dr. Hawkins received an option to purchase
40 million shares of our common stock through February 2009. The option vests in
increments of 666,667 on a monthly basis, and is exercisable at four different
prices, as follows: (i) $0.12 for the first 8 million option shares; (ii) $0.129
for the next 8 million option shares; (iii) $0.139 for the next 8 million option
shares; (iv) $0.149 for the next 8 million option shares, and (v) $0.160 for the
last 8 million option shares. If Dr. Hawkins is terminated for cause or if she
voluntarily resigns without cause, the option shall expire for all option shares
which have as of such date not become exercisable but shall survive with respect
to option shares that have become exercisable as of such date, (the "Surviving
Options"), provided, however, she shall have 90 days to exercise the Surviving
Options. Upon the termination of her employment for reasons other than by for
cause; or due to her voluntary unilateral decision to terminate her employment
without cause, including her death or disability, the option shall immediately
become exercisable for that number of option shares equal to the number of
option shares which would have been subject to exercise by Dr. Hawkins during
the then current term of the agreement (without giving effect to any extensions
thereof).

HIRSCHMAN EMPLOYMENT AGREEMENT

On August 27, 2003, Shalom Z. Hirschman, M.D. resigned as an officer
and director of Advanced Viral upon the terms and conditions of a Third Amended
and Restated Employment Agreement dated August 27, 2003. The resignation of Dr.
Hirschman was not due to any disagreement with Advanced Viral on any matter
relating to Advanced Viral's operations, policies or practices.

Pursuant to a Third Amended and Restated Employment Agreement dated as
of August 26, 2003 between Advanced Viral and Dr. Hirschman, we employ Dr.
Hirschman on a full business time basis as our as our chief scientist. Pursuant
to the agreement, the term of Dr. Hirschman's employment continues until
December 31, 2004 unless sooner terminated pursuant to the agreement. If the
agreement is terminated by us for cause, all unvested stock options granted to
Dr. Hirschman expire within 90 days of such termination date. If the agreement
is terminated by Dr. Hirschman for good reason, we are required to pay to Dr.
Hirschman his annual salary and employee benefits through the term of the
agreement. Pursuant to the agreement, Dr. Hirschman receives an annual salary of
$361,000, payable in equal biweekly installments. The agreement also entitles
Dr. Hirschman to a major medical insurance policy, disability policy and dental
policy insurance to Dr. Hirschman and his dependents that is reasonably
acceptable to the parties, and a term life insurance policy for at least $1
million, with a beneficiary to be designated by Dr. Hirschman. The agreement
further provides that we shall:

o lease or purchase for Dr. Hirschman, at his discretion, an
automobile selected and to be used by him, having a list price
not in excess of $40,000, and pay for all gas, oil, repairs
and maintenance, as well as the lease or purchase payments, as
applicable, in connection with the automobile;

o reimburse Dr. Hirschman for all of his proven expenses
incurred in and about the course of his employment that are
deductible under the current tax law, including, among other
expenses (i) his license fees, membership dues in professional
organizations, subscriptions to two professional journals, not
to exceed $1,200; (ii) necessary travel, hotel and
entertainment expenses incurred in connection with overnight,
out-of-town trips that contribute to the benefit of Advanced
Viral and as requested by the board of directors, and all
other expenses that may be pre-approved by our board of
directors; and

o provide not less than four weeks paid vacation annually and
such paid sick or other leave as we provide to all of our
employees.

The agreement also provides for the payment of $50,000 to Dr. Hirschman
provided (i) we receive new financing or a capital investment of not less than
$1,500,000, and (ii) Dr. Hirschman is terminated other than for cause. This
amount was paid to Dr. Hirschman in January 2004. The agreement further contains
certain confidentiality and non-compete provisions, ratifies his currently
outstanding stock options, and obligates us to use our best efforts to cause
shares underlying the options to be registered or to have the registration of
such shares to continue to be effective in order that the shares may be resold
without a restrictive legend.

34

SEVERANCE AGREEMENTS

On December 3, 2001, William Bregman, Bernard Friedland and Louis
Silver resigned as officers and directors of Advanced Viral upon the terms and
conditions of separate Severance Agreements (the "Severance Agreements"), and
James F. Dicke II, Christopher Forbes, David Seligman, and Eli Wilner were
appointed to the board of directors of Advanced Viral. The resignations of
Messrs. Bregman, Friedland and Silver were not due to any disagreement with
Advanced Viral on any matter relating to Advanced Viral's operations, policies
or practices.

In connection with their resignation, we paid $150,000 in one lump sum
to each of Messrs. Bregman and Friedland, and $2,500 to Mr. Silver. In addition,
the Severance Agreements provided as follows:

o That Messrs. Bregman and Friedland had the combined right
until November 29, 2003 to appoint one additional member to
the Board of Directors of Advanced Viral reasonably acceptable
to Advanced Viral, so long as both Messrs. Bregman and
Friedland own shares of Advanced Viral. The Bregman/Friedland
designee, if elected, shall serve on Advanced Viral's Board of
Directors until his successor is duly elected and qualified,
and may be removed as a member of the Board of Directors of
Advanced Viral, with or without cause, by the affirmative vote
of the members of Advanced Viral's then Board of Directors at
any time following the date which is the earlier to occur of:
(i) November 29, 2003 or (ii) the complete divestiture of both
Messrs. Bregman's and Friedland's ownership in Advanced Viral.

o All agreements regarding the voting or disposition of shares
of common stock of Advanced Viral held by each of Messrs.
Bregman and Friedland are terminated.

o Advanced Viral shall have a right of first refusal to purchase
shares of common stock owned by Messrs. Bregman and Friedland
upon the receipt by Messrs. Bregman or Friedland, as the case
may be, of a bona fide offer from an unrelated third party to
purchase such shares in an "on-the-market" or "off-the-market"
transaction, upon the terms set forth in the Severance
Agreements.

o With respect to the election of directors and compensation
packages for directors of Advanced Viral, each of Messrs.
Bregman and Friedland granted Advanced Viral an irrevocable
proxy to vote all the shares of its common stock they
beneficially own at any annual, special or adjourned meeting
of the stockholders of Advanced Viral until the earlier to
occur of November 29, 2003 or, as to those shares sold, the
date of the sale of such shares by Messrs. Bregman or
Friedland, as the case may be, to one or more unrelated third
parties in a bona fide sale after Messrs. Bregman or
Friedland, as the case may be, shall have first complied with
Advanced Viral's right of first refusal described in the
Severance Agreements.

o Advanced Viral agreed, to the fullest extent permitted by
Delaware law and its charter documents, to indemnify each of
Messrs. Bregman, Friedland and Silver for all amounts
(including reasonable attorneys' fees) incurred or paid in
connection with any action, proceeding, suit or investigation
arising out of or relating to their performance of services
for Advanced Viral.

o Advanced Viral agreed to continue the directors' and officers'
liability insurance for each of Messrs. Bregman, Friedland and
Silver until November 29, 2007.

In connection with satisfying our financial obligations to our retiring
directors under the Severance Agreements, we obtained a loan for $200,000 from
our Chief Financial Officer, Alan Gallantar, as evidenced by a Demand Promissory
Note dated December 14, 2001 (the "Note"). We were obligated to repay the Note
upon our receipt of proceeds upon the consummation of new financing. The Note
was repaid in full on December 17, 2001.

ADVANCED VIRAL RESEARCH CORP. CASH OR DEFERRED PLAN AND TRUST (401(K))

Advanced Viral has adopted a 401(k) plan that allows eligible employees
to contribute up to 20% of their salary, subject to annual limits, which were
$10,500 in 2001. We match 50% of the first 6% of the employee contributions with
our common stock and may from time to time, at our discretion, make additional
contributions based upon earnings. In May 2002 we funded our matching
contribution of approximately $33,000 for the year ended

35

December 31, 2001 by purchasing our common stock in open market transactions. At
December 31, 2002 we accrued $40,675 to fund the 401k plan representing our
match for the plan year 2002. We purchased $40,675 of our common stock in the
open market at prevailing market prices to satisfy our 2002 matching
contribution obligations. In March 2003, we amended the terms of the 401(k) plan
to terminate our obligation to make matching contributions.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS

The following table sets forth certain information regarding the common
shares of Advanced Viral owned as of March 30, 2004: (i) by each person who
beneficially owns more than 5% of the common shares, (ii) by each of our
directors, (iii) by each of our Named Executive Officers identified in the
Summary Compensation Table above and (iv) by all directors and executive
officers of Advanced Viral as a group. Except as otherwise indicated, each
person listed below has sole voting and investment power with respect to such
common shares.

PERCENT
NAME OF BENEFICIAL OWNER NUMBER OF SHARES BENEFICIALLY OWNED (1)
- ------------------------ ---------------- ----------------------

Elma S. Hawkins (2) 2,375,000 *
Eli Wilner (3) 25,911,700 4.1%
Alan Gallantar (4) 4,547,880 *
David Seligman (5), (6) 4,825,000 *
Nancy Van Sant (5) 5,250,000 *
Roy Walzer (5) 6,653,800 1.1%
Shalom Z. Hirschman, M.D. (7) 39,100,000 6.1%
William Bregman (8) 38,156,988 6.3%
James F. Dicke II (9) 50,075,686 8.2%
James F. Dicke III (10) 33,756,000 5.6%
Cornell Capital Partners (11) 37,600,719 6.1%
Lawrence Pomerantz (12) 30,524,243 5.0%
---------- ----
ALL OFFICERS & DIRECTORS AS A GROUP (6 PERSONS) 49,563,380 7.6%

- -------------------------------
* Less than 1%

(1) The applicable percentage ownership is based on 602,291,677 shares
outstanding as of March 30, 2004, together with securities which may be
acquired within 60 days from March 30, 2004 pursuant to exercisable or
convertible securities or contracts to purchase securities.

(2) Represents shares that may be acquired pursuant to currently exercisable
stock options. Dr. Hawkins became the President and Chief Executive
Officer of Advanced Viral Research Corp. on February 18, 2004.

(3) Includes (i) 750,000 shares issuable pursuant to currently exercisable
outstanding warrants; (ii) 22,252,500 shares that may be acquired
pursuant to currently exercisable stock options; (iii) 362,500 shares
beneficially owned by his wife Barbara Ann Brennan; (iv) 70,000 shares
beneficially owned by his step-daughter Celia Conaway; (v) 16,900 shares
beneficially owned by his father, Abraham Wilner, and (vi) 17,000 shares
owned by his mother, Zelotta Wilner. Mr. Wilner is the Secretary and
Chairman of the Board of Directors of Advanced Viral Research Corp., and
was the President and Chief Executive Officer of Advanced Viral Research
Corp. from August 2003 until February 18, 2004.

(4) Represents shares that may be acquired pursuant to currently exercisable
stock options. Mr. Gallantar is the CFO and Treasurer of Advanced Viral
Research Corp.

(5) Represents shares that may be acquired pursuant to currently exercisable
stock options. The persons listed are Directors of Advanced Viral
Research Corp.

(6) Excludes 3,000,000 shares that may be acquired pursuant to currently
exercisable stock options transferred by Mr. Seligman to his children,
over which he disclaims beneficial ownership.

(7) Represents 39,100,000 shares that may be acquired pursuant to currently
exercisable options to purchase common stock.

36

(8) Includes 21,758,614 shares held in a trust for which Mr. Bregman is the
sole trustee and sole beneficiary; 70,000 shares owned by Carol Bregman,
his daughter; 215,000 shares owned by Forest Berlin, his grandson; and
215,000 shares owned by Jessica Berlin, his granddaughter.

(9) Includes (i) 5,625,000 shares issuable pursuant to currently exercisable
outstanding warrants; (ii) 700,000 shares that may be acquired pursuant
to currently exercisable stock options; (iii) approximately 2,000,000
shares issuable pursuant to convertible debentures; (iv) approximately
15,000,000 shares issuable in May 2004 pursuant to a Securities Purchase
Agreement. Excludes an aggregate of 30,000,000 shares issuable in two
fundings which are committed to take place in August and November 2004
pursuant to a securities purchase agreement entered in February 2004.
Mr. Dicke II disclaims beneficial ownership of stock owned by his son,
James F. Dicke III. Mr. Dicke II is a former Director of Advanced Viral
Research Corp.

(10) Includes (i) 3,750,000 shares issuable pursuant to currently exercisable
outstanding warrants; (ii) approximately 15,000,000 shares issuable in
May 2004 pursuant to a Securities Purchase Agreement. Excludes an
aggregate of 30,000,000 shares issuable in two fundings which are
committed to take place in August and November, 2004 pursuant to a
securities purchase agreement entered in February 2004.

(11) Includes 15 million shares issuable pursuant to outstanding warrants
with an exercise price of $0.091.

(12) Includes 1,680,000 shares held in the Lawrence J. Pomerantz Trust.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

We have granted stock options to certain of our executive officers, as
described under the caption "Executive Compensation." We have entered into
severance agreements with certain of our former officers and directors as
described under the caption "Employment Contracts and Termination of Employment
and Change-in-Control Arrangements."

In November 2002, we retained Sacher, Zelman, Van Sant, Paul, Beiley,
Hartman, Terzo & Waldman, P.A., a law firm of which Ms. Van Sant is a partner,
to provide legal services in connection with certain legal proceedings. For the
fiscal year ended December 2002 we were billed and paid approximately $69,000.
For the fiscal year ended December 31, 2003, we were billed approximately
$325,000 and have paid approximately $322,000 to date.

Article 9 of our Certificate of Incorporation contains the following
provision with respect to indemnification of directors and officers:

"The Corporation shall, to the fullest extent permitted by Section 145
of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any
and all of the expenses, liabilities or other matters referred to in or
covered by said section, and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any By-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person, who has ceased
to be director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person."

Delaware law also permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer against
any liability asserted against him and incurred by him in such capacity or
arising out of his status as such, whether or not the corporation has the power
to indemnify him against that liability under Section 145 of the Delaware
General Corporation Law ("DGCL"). Our Certificate of Incorporation was amended
on December 30, 1987, to limit or eliminate director liability by incorporating
new Article 11, which provides:

"A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of laws, (iii)
under Section 174 of the Delaware General Corporation Law, or (iv) for
any transaction from which the director derived an improper personal
benefit."

The above discussion of our Certificate of Incorporation is not
intended to be exhaustive and is respectively qualified in its entirety by such
document.

37

Pursuant to the foregoing, we currently maintain directors and officers
insurance coverage. We may be required to indemnify certain officers and
directors against liabilities that arise by reason of their status or service as
officers or directors. In certain circumstances, we may be required to advance
the expenses an officer or director incurs in legal proceedings. We believe that
the provisions in our Certificate of Incorporation are necessary to attract and
retain qualified persons as directors and officers.

We believe that all of the above transactions were conducted at "arm's
length," representing what we believe to be fair market value for those
services.

DESCRIPTION OF SECURITIES

Our Certificate of Incorporation authorizes us to issue 1,000,000,000
shares of common stock, par value $0.00001 per share. As of March 30, 2004,
there were outstanding 602,291,677 shares of common stock, all of which are
fully paid for and non-assessable. The holders of common stock (i) have equal
ratable rights to dividends from funds legally available therefore, when, as and
if declared by our board of directors; (ii) are entitled to share ratable in all
of our assets available for distribution to holders of common stock upon
liquidation, dissolution or winding up of our affairs; (iii) do not have
preemptive, subscription, or conversion rights and there are no redemption or
sinking fund provisions applicable thereto; and (iv) are entitled to one
noncumulative vote per share on all matters which stockholders may vote on at
all meetings of stockholders.

TRANSFER AGENT

The transfer agent and registrar for our common stock is American Stock
Transfer & Trust Company, located in Brooklyn, New York. The transfer agent's
phone number is 718-921-8120.

INDEMNIFICATION OF DIRECTORS AND OFFICERS

As permitted by the Delaware General Corporation Law ("DGCL"), we have
included in Article 9 of our Certificate of Incorporation the following with
respect to indemnification of directors and officers:

"The Corporation shall, to the fullest extent permitted by Section 145
of the General Corporation Law of the State of Delaware, as the same
may be amended and supplemented, indemnify any and all persons whom it
shall have power to indemnify under said section from and against any
and all of the expenses, liabilities or other matters referred to in or
covered by said section, and the indemnification provided for herein
shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under any By-law, agreement, vote of
stockholders or disinterested directors or otherwise, both as to action
in his official capacity and as to action in another capacity while
holding such office, and shall continue as to a person, who has ceased
to be director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person."

Delaware law also permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer against
any liability asserted against him and incurred by him in such capacity or
arising out of his status as such, whether or not the corporation has the power
to indemnify him against that liability under Section 145 of the DGCL. Our
Certificate of Incorporation was amended on December 30, 1987, to limit or
eliminate director liability by incorporating new Article 11, which provides:

"A director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a director, except for liability (i) for any breach
of the director's duty of loyalty to the Corporation or its
stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of laws, (iii)
under Section 174 of the DGCL, or (iv) for any transaction from which
the director derived an improper personal benefit."

Insofar as indemnification for liabilities arising under the Securities
Act of 1933 (the "Act") may be permitted to directors, officers or controlling
persons of Advanced Viral pursuant to the foregoing provisions, or otherwise,

38

Advanced Viral has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Rachlin Cohen & Holtz LLP, independent certified public accountants,
are the principal independent accountants of Advanced Viral and its
subsidiaries. Advanced Viral's auditors are retained solely to provide audit and
audit-related services and advice with respect to tax matters, and have never
provided any other type of non-audit services to Advanced Viral or its
subsidiaries.

AUDIT FEES. Rachlin Cohen & Holtz LLP billed Advanced Viral
approximately $82,000 $75,000 and $79,000 in 2003, 2002 and 2001, respectively,
for the following audit services: (i) audit of the annual consolidated financial
statements of Advanced Viral for the fiscal years ended December 31, 2003, 2002
and 2001; (ii) review of the interim financial statements of Advanced Viral
included in quarterly reports on Form 10-Q and quarterly reports to shareholders
for the periods ended March 31, June 30 and September 30, 2003, 2002 and 2001;
(iii) the provision of consent letters; and (iv) review and advice in respect of
accounting matters in connection with registration statement and prospectus
filings of Advanced Viral and related public offerings by Advanced Viral of its
equity securities.

AUDIT-RELATED FEES. No audit-related services were provided by Rachlin
Cohen & Holtz LLP to Advanced Viral during 2003, 2002 and 2001.

TAX FEES. Rachlin Cohen & Holtz LLP billed by Advanced Viral
approximately $6,000, $6,000 and $5,000 in 2003, 2002 and 2001, respectively,
for the following tax services: (i) tax compliance; (ii) tax planning; and (iii)
tax advice, including preparation of United States and state related tax
filings.

ALL OTHER FEES. No other services were provided by Rachlin Cohen &
Holtz LLP to Advanced Viral during 2003, 2002 and 2001.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES. The Company's
Audit Committee has not adopted/enacted pre-approval policies and procedures for
audit and non-audit services. The Audit Committee of Advanced Viral continues to
monitor legislative and regulatory developments concerning auditor independence
and services that may be provided by independent auditors to an audit client,
including those developments under the Sarbanes-Oxley Act of 2002 and related
rules issued by the SEC.

39

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) FINANCIAL STATEMENTS

The following consolidated financial statements are included in Part
II, Item 8:

Report of Independent Certified Public Accountants....................................................F-1
Consolidated Financial Statements Years Ended 2003, 2002 and 2001
Balance Sheets, December 31, 2003 and 2002...................................................F-2
Statements of Operations for the Years Ended December 31, 2003, 2002 and 2001 and
from Inception (February 20, 1984) to December 31, 2003......................................F-3
Statements of Stockholders' Equity from Inception (February 20, 1984) to December 31, 2003............F-4
Statements of Cash Flows for the Years Ended December 31, 2003, 2002 and 2001 and from
Inception (February 20, 1984) to December 31, 2003.........................................F-15
Notes to Consolidated Financial Statements...........................................................F-16

(a)(2) FINANCIAL STATEMENT SCHEDULES

No schedules have been submitted because they are not applicable or the
required information is included in the financial statements or notes thereto.

(a)(3) EXHIBITS

The Exhibits listed below are filed or incorporated by reference as
part of this report.

Exhibit Description
------- -----------

3.1 Certificate of Incorporation of Advanced Viral Research Corp.
("ADVR"). (2)

3.2 Bylaws of ADVR, as amended. (1)

3.3 Amendment to Certificate of Incorporation of ADVR. (2)

4.1 Specimen Certificate of Common Stock. (1)

4.2 Specimen Warrant Certificate. (1)

4.3 Warrant Agreement between ADVR and American Stock Transfer and
Trust Company. (1)

4.4 Forms of Common Stock Options and Agreements granted by ADVR to
TRM Management Corp. (5)

4.5 Form of Common Stock Option and Agreement granted by ADVR to
Plata Partners Limited Partnership. (12)

4.6 Consulting Agreement, dated September 11, 1992, and Form of
Common Stock granted by ADVR to Leonard Cohen. (6)

4.7 Addendum to Agreement granted by ADVR to Shalom Z. Hirschman, MD
dated March 24, 1996. (10)

4.8 Securities Purchase Agreement dated November 16, 1998 by and
between ADVR and RBB Bank AG. (11)(o)

4.9 7% Convertible Debenture dated November 16, 1998. (11)(o)

4.10 Warrant dated November 16, 1998 to purchase 375,000 shares of
common stock at $0.20 per share. (11)(o)

4.11 Warrant dated November 16, 1998 to purchase 375,000 shares of
common stock at $0.24 per share. (11)(o)

4.12 Securities Purchase Agreement dated December 22, 1998 by and
between ADVR and various purchasers. (15)

4.13 Form of Warrant dated December 22, 1998 to purchase shares of
common stock of ADVR at $0.2040 per share. (15)

4.14 Form of Warrant dated December 22, 1998 to purchase shares of
common stock of ADVR at $0.2448 per share. (15)

4.15 Securities Purchase Agreement dated June 23, 1999 by and between
ADVR and various purchasers. (15)

4.16 Form of Warrant dated June 23, 1999 to purchase shares of common
stock of ADVR at $0.324 per share. (15)

4.17 Form of Warrant dated June 23, 1999 to purchase shares of common
stock of ADVR at $0.378 per share. (15)

40

4.18 Securities Purchase Agreement dated August 3, 1999 by and between
ADVR and Focus Investors, LLC. (15)

4.19 Form of 7% Convertible Debenture dated August 3, 1999. (15)

4.20 Form of Warrant dated August 3, 1999 to purchase 50,000 shares of
common stock at $0.2461 per share. (15)

4.21 Securities Purchase Agreement dated December 28, 1999 between
ADVR and Endeavour Capital Fund S.A. (16)

4.22 Form of 7% Convertible Debenture dated December 28, 1999. (16)

4.23 Form of Warrant dated December 28, 1999 to purchase shares of
common stock at $0.19916667 per share. (16)

4.24 Form of Warrant dated February 7, 2000 to purchase shares of
common stock at $0.21 per share. (17)

4.25 Form of Warrant dated February 7, 2000 to purchase shares of
common stock at $0.26 per share. (17)

4.26 Form of Warrant dated February 16, 2000 to purchase shares of
common stock at $0.275 per share. (17)

4.27 Form of Warrant dated February 16, 2000 to purchase shares of
common stock at $0.33 per share. (17)

4.28 Form of Class A Warrant dated September 18, 2000 to purchase 5
million shares of common stock. (19)

4.29 Form of Class B Warrant dated September 18, 2000 to purchase 5
million shares of common stock. (19)

4.30 Form of Class A Warrant dated February 9, 2001 to purchase 5
million shares of common stock. (21)

4.31 Form of Class B Warrant dated February 9, 2001 to purchase 5
million shares of common stock. (21)

4.32 Promissory Note and Guaranty in favor of Alan V. Gallantar dated
November 29, 2001 by ADVR. (11)(p)

4.33 Form of Warrant dated September 9, 2002 between ADVR and various
investors. 11(q)

4.34 5% Convertible Debenture dated April 28, 2003. (27)

4.35 Warrant dated April 28, 2003 to purchase 15 million shares of
common stock at an exercise price of $0.091 per share. (27)

4.36 5% Convertible Debenture dated July 18, 2003. (28)

4.37 Warrant dated February 3, 2003 to purchase 7,500,000 shares of
common stock at an exercise price of $0.20 per share granted to
James F. Dicke II. (11s)

4.38 Warrant dated February 3, 2003 to purchase 7,500,000 shares of
common stock at an exercise price of $0.20 per share granted to
James F. Dicke III. (11s)

4.39 Form of Warrant dated February 9, 2004 to purchase shares of
common stock at an exercise price of $0.16 per share granted to
certain affiliates of DCT. (28)

4.40 Stock Option Agreement dated February 10, 2004 to purchase 40
million shares of common stock granted to Elma S. Hawkins. (28)

10.1 Declaration of Trust by Bernard Friedland and William Bregman in
favor of ADVR dated November 16, 1987. (12)

10.2 Clinical Trials Agreement, dated September 19, 1990, between
Clinique Medical Actuel and ADVR. (3)

10.3 Letter, dated March 15, 1991 to ADVR from Health Protection
Branch. (3)

10.4 Agreement dated August 20, 1991 between TRM Management Corp. and
ADVR. (11)(a)

10.5 Lease dated December 18, 1991 between Bayview Associates, Inc.
and ADVR. (4)

10.6 Lease Agreement, dated February 16, 1993 between Stortford
Brickell Inc. and ADVR. (7)

10.7 Consulting Agreement dated February 28, 1993 between Leonard
Cohen and ADVR. (8)

10.8 Medical Advisor Agreement, dated as of September 14, 1993,
between Lionel Resnick, MD and ADVR. (11)(b)

10.9 Agreement, dated November 9, 1993, between Dormer Laboratories
Inc. and ADVR. (12)

10.10 Exclusive Distribution Agreement, dated April 25, 1994, between
C.U.R.E. Pharmaceutical Corp. and ADVR. (11)(c)

10.11 Exclusive Distribution Agreement, dated as of June 1, 1994,
between C.U.R.E. Pharmaceutica Central Americas Ltd. and ADVR.
(11)(d)

10.12 Exclusive Distribution Agreement dated as of June 17, 1994
between DCT S.R.L. and ADVR, as amended. (11)(e)

10.13 Contract, dated as of October 25, 1994 between Commonwealth
Pharmaceuticals of the Channel Islands and ADVR. (11)(f)

10.14 Agreement dated May 24, 1995 between ADVR and Deborah Silver. (9)

10.15 Agreement dated May 29, 1995 between ADVR and Shalom Z.
Hirschman, MD. (9)

10.16 Exclusive Distribution Agreement, dated as of June 2, 1995,
between AVIX International Pharmaceutical Corp. and ADVR. (12)

41

10.17 Supplement to Exclusive Distribution Agreement, dated November 2,
1995 with Commonwealth Pharmaceuticals. (12)

10.18 Exclusive Distributorship & Limited License Agreement, dated
December 28, 1995, between AVIX International Pharmaceutical
Corp., Beijing Unistone Pharmaceutical Co., Ltd. and ADVR.
(11)(g)

10.19 Modification Agreement, dated December 28, 1995, between AVIX
International Pharmaceutical Corp. and ADVR. (11)(g)

10.20 Agreement dated April 1, 1996, between DCT S.R.L. and ADVR.
(11)(h)

10.21 Addendum, dated as of March 24, 1996, to Consulting Agreement
between ADVR and Shalom Z. Hirschman, MD. (10)

10.22 Addendum to Agreement, dated July 11, 1996, between AVIX
International Pharmaceutical Corp. and ADVR. (11)(i)

10.23 Employment Agreement, dated October 17, 1996, between ADVR and
Shalom Z. Hirschman, MD. (11)(j)

10.24 Lease, dated February 7, 1997 between Robert Martin Company, LLC
and ADVR. (12)

10.25 Copy of Purchase and Sale Agreement, dated February 21, 1997
between ADVR and Interfi Capital Group. (11)(k)

10.26 Material Transfer Agreement-Cooperative Research And Development
Agreement, dated March 13, 1997, between National Institute of
Health, Food and Drug Administration and the Centers for Disease
Control and Prevention. (11)(l)

10.27 Copy of Purchase and Sale Agreement, dated September 26, 1997
between ADVR and RBB Bank AG. (11)(m)

10.28 Copy of Extension to Materials Transfer Agreement-Cooperative
Research and Development Agreement, dated March 4, 1998, between
National Institute of Health, Food and Drug Administration and
the Centers for Disease Control and Prevention. (13)

10.29 Amended and Restated Employment Agreement dated July 8, 1998
between ADVR and Shalom Z. Hirschman, MD. (11)(n)

10.30 Agreement between ADVR and Angelo Chinnici, MD dated July 1,
1999. (14)

10.31 Consulting Agreement between ADVR and GloboMax LLC dated January
18, 1999. (15)

10.32 Registration Rights Agreement dated August 3, 1999 between ADVR
Research and Focus Investors LLC. (15)

10.33 Employment Agreement dated October 1, 1999 between ADVR and Alan
V. Gallantar. (15)

10.34 Registration Rights Agreement dated December 28, 1999 between
ADVR and Endeavour Capital Fund, S.A. (16)

10.35 Consulting Agreement dated February 7, 2000 between ADVR and
Harbor View Group, Inc. (17)

10.36 Securities Purchase Agreement dated February 16, 2000 between
ADVR and Harbor View Group, Inc. (17)

10.37 Letter Agreement dated November 16, 1999 between ADVR and
Bratskeir & Company. (18)

10.38 Amended and Restated Employment Agreement dated May 12, 2000
between ADVR and Shalom Z. Hirschman, MD. (18)

10.39 Equity Line of Credit Agreement dated as of September 18, 2000
between ADVR and Spinneret Financial Systems, Inc. (19)

10.40 Registration Rights Agreement dated as of September 18, 2000
between ADVR and Spinneret Financial Systems, Inc. (19)

10.41 Registration Rights Agreement dated as of September 18, 2000
between ADVR and May Davis Group, Inc. (19)

10.42 Placement Agent Agreement dated September 18, 2000 between ADVR
and May Davis Group, Inc. (19)

10.43 Assignment and Assumption Agreement dated December 12, 2000
between Spinneret Financial Systems, Inc. and GMF Holdings Inc.
(20)

10.44 Agreement to Waive Assignment Rights dated December 12, 2000 by
GMF Holdings Inc. (20)

10.45 Termination Agreement dated January 22, 2001 between GMF
Holdings, Inc., May Davis Group, Inc. and ADVR. (21)

10.46 Equity Line of Credit Agreement dated as of February 9, 2001
between ADVR and Cornell Capital Partners, LP. (21)

10.47 Registration Rights Agreement dated as of February 9, 2001
between ADVR and Cornell Capital Partners, LP. (21)

10.48 Registration Rights Agreement dated as of February 9, 2001
between ADVR and May Davis Group, Inc. (21)

42

10.49 Placement Agent Agreement dated February 9, 2001 between ADVR and
May Davis Group, Inc. (21)

10.50 Agreement dated as of April 2, 2001 between ADVR and Selikoff
Center of Ra'Anana, Israel. (22)

10.51 Agreement dated as of January 29, 2001 between ADVR and The
Weizmann Institute of Science and Yeda. (22)

10.52 Securities Purchase Agreement dated November 8, 2000 by and
between ADVR and various investors. (23)

10.53 Securities Purchase Agreement dated July 27, 2001 by and between
ADVR and various investors. (23)

10.54 Severance Agreement dated November 29, 2001 by and between ADVR
and William Bregman. (11)(p)

10.55 Severance Agreement dated November 29, 2001 by and between ADVR
and Bernard Friedland. (11)(p)

10.56 Severance Agreement dated November 29, 2001 by and between ADVR
and Louis Silver. (11)(p)

10.57 Settlement Agreement dated March 20, 2002 by and among ADVR,
Immune Modulation Maximum Corporation, Commonwealth
Pharmaceuticals, Ltd, and Charles E. Miller. (24)

10.58 Termination Agreement dated May 30, 2002 between ADVR and Harbor
View Group, Inc. (25)

10.59 Securities Purchase Agreement dated May 30, 2002 between ADVR and
O. Frank Rushing and Justine Simoni, as joint tenants. (25)

10.60 Securities Purchase Agreement dated July 3, 2002 between ADVR and
James F. Dicke III. (25)

10.61 Securities Purchase Agreement dated July 15, 2002 between ADVR
and Peter Lunder. (25)

10.62 Securities Purchase Agreement dated September 9, 2002 between
ADVR and various investors. 11(q)

10.63 Registration Rights Agreement dated September 9, 2002 between
ADVR and various investors. 11(q)

10.66 Agreement dated May 1, 2002 (effective September 2002) between
Advanced Viral Research Corp. and EnviroGene LLC. (26)

10.64 Agreement dated October 8, 2002 between Advanced Viral Research
Corp. and Quintiles Israel Ltd. (26)

10.65 Securities Purchase Agreement dated as of April 28, 2003 between
the Registrant and Cornell Capital Partners, LP. (27)

10.66 Registration Rights Agreement dated as of April 28, 2003 between
the Registrant and Cornell Capital Partners, LP. (27)

10.67 Equity Line of Credit Agreement dated as of April 28, 2003
between the Registrant and Cornell Capital Partners, LP. (27)

10.68 Registration Rights Agreement dated as of April 28, 2003 between
the Registrant and Cornell Capital Partners, LP. (27)

10.69 Consulting Agreement dated April 22, 2003 between Registrant and
Robert Nowinski, Ph.D. (28)

10.70 Securities Purchase Agreement dated as of July 18, 2003 between
the Registrant and Cornell Capital Partners, LP. (28)

10.71 Investor Registration Rights Agreement dated as of July 18, 2003
between the Registrant and Cornell Capital Partners, LP. (28)

10.72 Escrow Agreement dated July 18, 2003, between Registrant and
Butler Gonzalez, LLP. (28)

10.73 Security agreement dated July 18, 2003 between Registrant and
Cornell Capital Partners, L.P. (28)

10.74 Placement Agent Agreement dated April 28, 2003, between
Registrant and Katalyst Securities LLC. (28)

10.75 Third Amended and Restated Employment Agreement dated August 27,
2003 between Registrant And Shalom Z. Hirschman, M.D. (11r)

10.76 First Supplementary Agreement dated July 8, 2002 by and between
Registrant and Yeda Research And Development Company Limited.
(28)

10.77 Agreement dated November 19, 2002 by and between Registrant and
Kaplan Medical Center. (28)

10.78 Securities Purchase Agreement dated as of February 3, 2003
between the Registrant, James F. Dicke II and James F. Dicke III.
(11s)

10.79 Registration Rights Agreement dated as of February 3, 2003
between the Registrant, James F. Dicke II and James F. Dicke III.
(11s)

10.80 Termination and Release Agreement dated as of February 9, 2004
between the Registrant, DCT and certain affiliates of DCT. (28)

10.81 Employment Agreement dated as of February 10, 2004 between the
Registrant and Elma S. Hawkins. (28)

21 Subsidiaries of Registrant: Advance Viral Research Ltd., a
Bahamian corporation.

31.1 Section 302 Certification of the Chief Executive Officer.*

31.2 Section 302 Certification of the Chief Financial Officer.*

32.1 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.**

32.2 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.**

43

- -----------------

* Filed herewith.
** Furnished herewith.

- ----------------------------------

Footnotes to Index to Exhibits

1. Documents incorporated by reference herein to certain exhibits
our registration statement on Form S-1, as amended, File No.
33-33895, filed with the Securities and Exchange Commission on
March 19, 1990.

2. Documents incorporated by reference herein to certain exhibits to
our registration statement on Form S-18, File No. 33-2262-A,
filed with the Securities and Exchange Commission on February 12,
1989.

3. Documents incorporated by reference herein to certain exhibits to
our Annual Report on Form 10-K for the fiscal year ended December
31, 1990.

4. Documents incorporated by reference herein to certain exhibits to
our Annual Report on Form 10-K for period ended March 31, 1991.

5. Documents incorporated by reference herein to certain exhibits to
our Annual Report on Form 10-K for the fiscal year ended December
31, 1991.

6. Documents incorporated by reference herein to certain exhibits to
our Quarterly Report on Form 10-Q for the period ended September
30, 1992.

7. Documents incorporated by reference herein to certain exhibits to
our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1992.

8. Documents incorporated by reference herein to certain exhibits to
our Quarterly Report on Form 10-QSB for the period ended March
31, 1993.

9. Documents incorporated by reference herein to certain exhibits to
our Quarterly Report on Form 10-QSB for the period ended June 30,
1995.

10. Documents incorporated by reference herein to certain exhibits to
our Quarterly Report on Form 10-QSB for the period ended March
31, 1996. 11. Incorporated by reference herein to our Current
Reports on Form 8-K and exhibits thereto as follows:

11(a) A report on Form 8-K dated January 3, 1992.

11(b) A report on Form 8-K dated September 14, 1993.

11(c) A report on Form 8-K dated April 25, 1994.

11(d) A report on Form 8-K dated June 3, 1994.

11(e) A report on Form 8-K dated June 17, 1994.

11(f) A report on Form 8-K dated October 25, 1994.

11(g) A report on Form 8-K dated December 28, 1995.

11(h) A report on Form 8-K dated April 22, 1996.

11(i) A report on Form 8-K dated July 12, 1996.

11(j) A report on Form 8-K dated October 17, 1996.

11(k) A report on Form 8-K dated February 21, 1997.

11(l) A report on Form 8-K dated March 25, 1997.

11(m) A report on Form 8-K dated September 26, 1997.

11(n) A report on Form 8-K dated July 21, 1998.

11(o) A report on Form 8-K dated November 24, 1998.

11(p) A report on Form 8-K dated December 3, 2001.

11(q) A report on Form 8-K dated September 10, 2002.

11(r) A report on Form 8-K dated August 27, 2003.

11(s) A report on Form 8-K dated February 4, 2004.

12. Documents incorporated by reference herein to certain exhibits to
our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1996.

13. Documents incorporated by reference herein to certain exhibits to
our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997.

14. Documents incorporated by reference herein to certain exhibits to
our Annual Report on Form 10-K for the fiscal year ended December
31, 1998.

15. Documents incorporated by reference herein to certain exhibits to
our registration statement on Form S-1, as amended, File No.
33-70523, filed with the Securities and Exchange Commission on
January 13, 1999, and Amendment No. 5 thereto, declared effective
on December 15, 1999.

16. Documents incorporated by reference herein to certain exhibits to
our registration statement on Form S-1, as amended, File No.
333-94529, filed with the Securities and Exchange Commission on
January 12, 2000.

17. Documents incorporated by reference herein to certain exhibits to
our Annual Report on Form 10-K for the fiscal year ended December
31, 1999.

18. Documents incorporated by reference herein to certain exhibits to
our registration statement on Form S-1, as amended, File No.
333-37974, filed with the Securities and Exchange Commission on
June 6, 2000.

44

19. Documents incorporated by reference herein to certain exhibits to
Post-effective Amendment No. 1 to our Registration Statement on
Form S-1, as amended, File No. 333-70523, filed with the
Securities and Exchange Commission on September 25, 2000.

20. Documents incorporated by reference herein to certain exhibits to
our Registration Statement on Form S-1, File No. 333-49038, filed
with the Securities and Exchange Commission on October 31, 2000
and amended pursuant to Amendment No. 1 to Form S-1 filed with
the Commission on December 15, 2000.

21. Documents incorporated by reference herein to certain exhibits to
our Registration Statement on Form S-1, File No. 333-55430, filed
with the Securities and Exchange Commission on February 12, 2001
and amended pursuant to Amendment No. 1 to Form S-1 filed with
the Commission on February 13, 2000.

22. Documents incorporated by reference herein to certain exhibits to
our Annual Report on Form 10-K for the fiscal year ended December
31, 2000.

23. Documents incorporated by reference herein to certain exhibits to
our Registration Statement on Form S-1, File No. 333-62788, filed
with the Securities and Exchange Commission on June 13, 2001 and
amended pursuant to Amendment No. 1 to Form S-1 filed with the
Commission on August 23, 2001.

24. Documents incorporated by reference herein to certain exhibits to
our Annual Report on Form 10-K for the fiscal year ended December
31, 2001.

25. Documents incorporated by reference herein to certain exhibits to
our Quarterly Report on Form 10-Q for the period ended June 30,
2002.

26. Documents incorporated by reference herein to certain exhibits to
our Quarterly Report on Form 10-Q for the period ended September
30, 2002.

27. Document incorporated by reference herein to certain exhibits to
our quarterly report for the period ended March 31, 2003.

28. Documents incorporated by reference herein to certain exhibits to
our Registration Statement on Form S-1, File No. 333-107178,
filed with the Securities and Exchange Commission on July 18,
2003 and amended pursuant to Amendment No. 1 to Form S-1 filed
with the Commission on September 19, 2003, Amendment No. 2 to
Form S-1 filed with the Commission on November 18, 2003,
Amendment No. 3 to Form S-1 filed with the Commission on December
19, 2003 and declared effective by the Commission on December 23,
2003.

29. Documents incorporated by reference herein to certain exhibits to
our Registration Statement on Form S-1, File No. 333-112296,
filed with the Securities and Exchange Commission on January 29,
2004, as amended pursuant to Amendment No. 1 to Form S-1 filed
with the Commission on February 12, 2004, and declared effective
by the Commission on February 17, 2004.

(b) REPORTS ON FORM 8-K DURING AND AFTER THE FISCAL QUARTER ENDED DECEMBER 31,
2003:

We did not file any reports on Form 8-K during the fourth
quarter ended December 31, 2003. However, we filed a Current
Report on Form 8-K dated February 3, 2004 with respect to Item
5.

SUPPLEMENTAL INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT

No annual report or proxy material has been sent to security holders of
Advanced Viral.

45

SIGNATURES

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

Date: March 30, 2004 ADVANCED VIRAL RESEARCH CORP.
(REGISTRANT)

By: /s/ ELMA S. HAWKINS, PHD
-------------------------------------
Elma S. Hawkins, PhD
President, Chief Executive Officer
and Director

Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

Date: March 30, 2004 By: /s/ ALAN V. GALLANTAR
------------------------------------
Alan V. Gallantar,
Principal Financial and Accounting
Officer

Date: March 30, 2004 By: /s/ ELI WILNER
------------------------------------
Eli Wilner
Chairman of the Board and Secretary

Date: March 30, 2004 By: /s/ DAVID SELIGMAN
------------------------------------
David Seligman, Director

Date: March 30, 2004 By: /s/ NANCY VAN SANT
------------------------------------
Nancy Van Sant, Director

Date: March 30, 2004 By: /s/ ROY WALZER
------------------------------------
Roy Walzer, Director

46

EXHIBIT INDEX

Exhibit No. Description
- ----------- -----------

31.1 Certification of Chief Executive Officer pursuant to Item
601(b)(31) of Regulations S-K, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

31.2 Certification of Chief Financial Officer pursuant to Item
601(b)(31) of Regulations S-K, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

32.1 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.

32.2 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.

REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS

Stockholders and Directors
Advanced Viral Research Corp.
(A Development Stage Company)
Yonkers, New York

We have audited the accompanying consolidated balance sheets of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 2003 and 2002,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
2003 and for the period from inception (February 20, 1984) to December 31, 2003.
These consolidated financial statements are the responsibility of the management
of the Company. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 2003 and 2002
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 2003 and for the period from
inception (February 20, 1984) to December 31, 2003 in conformity with accounting
principles generally accepted in the United States.

As more fully described in Note 2, the Company is subject to certain liquidity
considerations. The Company's plans with respect to this matter are also
described in Note 2.

As discussed in Note 3 to the Company's financial statements, errors in the
valuation of certain options and warrants which resulted in an overstatement of
previously reported expenses for the years ended December 31, 2002 and 2001 were
discovered by the Company's management. Accordingly, the financial statements
for the years ended December 31, 2002 and 2001 have been restated to correctly
reflect the valuations of such options and warrants.

RACHLIN COHEN & HOLTZ LLP

Miami, Florida
March 1, 2004

F-1

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED BALANCE SHEETS

DECEMBER 31, 2003 AND 2002

2003 2002
------------ ------------
(Restated)

ASSETS
Current Assets:
Cash and cash equivalents $ 270,936 $ 1,475,755
Prepaid insurance 71,312 86,368
Assets held for sale 147,531 172,601
Other current assets 4,108 35,527
------------ ------------
Total current assets 493,887 1,770,251

Property and Equipment, Net 1,322,253 2,244,118

Other Assets 1,172,778 931,660
------------ ------------
Total assets $ 2,988,918 $ 4,946,029
============ ============

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
Accounts payable $ 792,398 $ 417,061
Accrued liabilities 120,487 137,646
Current portion of capital lease obligation -- 104,719
Current portion of note payable 15,572 25,165
------------ ------------
Total current liabilities 928,457 684,591
------------ ------------

Long-Term Debt:
Convertible debenture, net 1,427,946 1,610,499
Capital lease obligation -- 5,834
Note payable -- 4,879
------------ ------------
Total long-term debt 1,427,946 1,621,212
------------ ------------

Common Stock Subscribed but not Issued 280,000 883,900
------------ ------------

Commitments, Contingencies and Subsequent Events -- --
------------ ------------

Stockholders' Equity:
Common stock; 1,000,000,000 shares of $.00001 par value
authorized, 544,591,722 and 455,523,990 shares issued
and outstanding 5,446 4,555
Additional paid-in capital 57,262,111 51,141,177
Deficit accumulated during the development stage (56,915,042) (49,098,231)
Discount on warrants -- (291,175)
------------ ------------
Total stockholders' equity 352,515 1,756,326
------------ ------------
Total liabilities and stockholders' equity $ 2,988,918 $ 4,946,029
============ ============

See notes to consolidated financial statements.

F-2

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF OPERATIONS

Inception
(February 20,
Year Ended December 31, 1984) to
--------------------------------------------------------- December 31,
2003 2002 2001 2003
------------- ------------- ------------- -------------
(Restated) (Restated)

Revenues
$ -- $ -- $ 17,601 $ 231,892
------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 1,350,318 4,439,592 5,150,869 19,665,734
General and administrative 3,221,433 2,654,296 4,063,022 20,815,910
Compensation and other expense for --
options and warrants 605,788 883,762 1,048,108 4,929,024
Depreciation 922,024 977,746 511,216 2,795,149
------------- ------------- ------------- -------------
6,099,563 8,955,396 10,773,215 48,205,817
------------- ------------- ------------- -------------

Loss from Operations (6,099,563) (8,955,396) (10,755,614) (47,973,925)
------------- ------------- ------------- -------------

Other Income (Expense):
Interest income 12,785 27,659 113,812 914,220
Other income -- -- -- 120,093
Interest expense (1,697,325) (192,174) 116,849 (8,063,029)
Severance expense - former directors -- -- (302,500) (302,500)
------------- ------------- ------------- -------------
(1,684,540) (164,515) (71,839) (7,331,216)
------------- ------------- ------------- -------------

Loss from Continuing Operations (7,784,103) (9,119,911) (10,827,453) (55,305,141)
Loss from Discontinued Operations (32,708) (201,154) (259,114) (1,609,901)
------------- ------------- ------------- -------------

Net Loss $ (7,816,811) $ (9,321,065) $ (11,086,567) $ (56,915,042)
============= ============= ============= =============

Net Loss Per Common Share
Basic and Diluted:
Continuing operations $ (0.02) $ (0.02) $ (0.03)
Discontinued operations (0.00) (0.00) (0.00)
------------- ------------- -------------
Net loss $ (0.02) $ (0.02) $ (0.03)
============= ============= =============

Weighted Average Number of
Common Shares Outstanding 495,008,372 439,009,322 389,435,324
============= ============= =============

See notes to consolidated financial statements.

F-3

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2003

Common Stock Deficit
-------------------------------- Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ----------- -------- -------- -----------

Balance, inception (February 20, 1984)
as previously reported -- $ 1,000 $ -- $ (1,000)

Adjustment for pooling of interests -- (1,000) 1,000 --
----------- -------- -------- ----------

Balance, inception, as restated -- -- 1,000 (1,000)

Net loss, period ended December 31, 1984 -- -- -- (17,809)
----------- -------- -------- ----------

Balance, December 31, 1984 -- -- 1,000 (18,809)

Issuance of common stock for cash $0.00 113,846,154 1,138 170 --
Net loss, year ended December 31, 1985 - -- -- (25,459)
----------- -------- -------- ----------

Balance, December 31, 1985 113,846,154 1,138 1,170 (44,268)

Issuance of common stock - public offering 0.01 40,000,000 400 399,600 --
Issuance of underwriter's warrants -- -- 100 --
Expenses of public offering -- -- (117,923) --
Issuance of common stock, exercise of "A" warrants 0.03 819,860 9 24,587 --
Net loss, year ended December 31, 1986 - -- - (159,674)
----------- -------- -------- ----------

Balance, December 31, 1986 154,666,014 $ 1,547 $307,534 $ (203,942)
----------- -------- -------- ----------

See notes to consolidated financial statements.

F-4

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)

INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2003

Common Stock Deficit
-------------------------------- Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ----------- -------- -------- -----------

Balance, December 31, 1986 154,666,014 $ 1,547 $ 307,534 $ (203,942)

Issuance of common stock, exercise of "A" warrants $0.03 38,622,618 386 1,158,321 --
Expenses of stock issuance -- -- -- (11,357) --
Acquisition of subsidiary for cash -- -- -- (46,000) --
Cancellation of debt due to stockholders -- -- -- 86,565 --
Net loss, year ended December 31, 1987 -- -- -- -- (258,663)
------------ -------- ------------ -------------

Balance, December 31, 1987 193,288,632 1,933 1,495,063 (462,605)

Net loss, year ended December 31, 1988 -- -- -- (199,690)
------------ -------- ------------ -------------

Balance, December 31, 1988 193,288,632 1,933 1,495,063 (662,295)

Net loss, year ended December 31, 1989 -- -- -- (270,753)
------------ -------- ------------ -------------

Balance, December 31, 1989 193,288,632 1,933 1,495,063 (933,048)

Issuance of common stock, expiration of redemption 0.05 6,729,850 67 336,475 --
offer on "B" warrants
Issuance of common stock, exercise of "B" warrants 0.05 268,500 3 13,422 --
Issuance of common stock, exercise of "C" warrants 0.08 12,900 -- 1,032 --
Net loss, year ended December 31, 1990 -- -- -- (267,867)
------------ -------- ------------ -------------

Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)
------------ -------- ------------ -------------

See notes to consolidated financial statements.

F-5

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)

INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2003

Common Stock Deficit
-------------------------------- Accumulated
Amount Additional during the
Per Paid-In Development
Share Shares Amount Capital Stage
----- ----------- -------- -------- -------------

Balance, December 31, 1990 200,299,882 $ 2,003 $ 1,845,992 $ (1,200,915)

Issuance of common stock, exercise of "B" warrants $0.05 11,400 -- 420 --
Issuance of common stock, exercise of "C" warrants 0.08 2,500 -- 200 --
Issuance of common stock, exercise of underwriter
warrants 0.12 3,760,000 38 45,083 --
Net loss, year ended December 31, 1991 -- -- -- -- (249,871)
------------ -------- ------------ -------------

Balance, December 31, 1991 204,073,782 2,041 1,891,695 (1,450,786)

Issuance of common stock, for testing 0.04 10,000,000 100 404,900 --
Issuance of common stock, for consulting services 0.06 500,000 5 27,495 --
Issuance of common stock, exercise of "B" warrants 0.05 7,458,989 75 372,875 --
Issuance of common stock, exercise of "C" warrants 0.08 5,244,220 52 419,487 --
Expenses of stock issuance -- -- -- (7,792) --
Net loss, year ended December 31, 1992 -- -- -- - (839,981)
------------ -------- ------------ -------------

Balance, December 31, 1992 227,276,991 2,273 3,108,660 (2,290,767)

Issuance of common stock, for consulting services 0.06 500,000 5 27,495 --
Issuance of common stock, for consulting services 0.03 3,500,000 35 104,965 --
Issuance of common stock, for testing 0.04 5,000,000 50 174,950 --
Net loss, year ended December 31, 1993 -- -- -- -- (563,309)
------------ -------- ------------ -------------

Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ (2,854,076)
------------ -------- ------------ -------------

See notes to consolidated financial statements.

F-6

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)

INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2003

Common Stock Deficit
------------------------------- Accumulated
Amount Additional During the Deferred
Per Paid-in Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------- ----------- ------- ----------- ------------ ------------ ------------

Balance, December 31, 1993 236,276,991 $ 2,363 $ 3,416,070 $ -- $ (2,854,076) $ --

Issuance of common stock, for
consulting services $0.05 4,750,000 47 237,453 -- -- --
Issuance of common stock,
exercise of options 0.08 400,000 4 31,996 -- -- --
Issuance of common stock,
exercise of options 0.10 190,000 2 18,998 -- -- --
Net loss, year ended
December 31, 1994 -- -- -- -- -- (440,837) --
----------- ------- ----------- ---- ------------- -----

Balance, December 31, 1994 241,616,991 2,416 3,704,517 -- (3,294,913) --
----------- ------- ----------- ---- ------------- -----
Issuance of common stock,
exercise of options 0.05 3,333,333 33 166,633 -- -- --
Issuance of common stock,
exercise of options 0.08 2,092,850 21 167,407 -- -- --
Issuance of common stock,
exercise of options 0.10 2,688,600 27 268,833 -- -- --
Issuance of common stock,
for consulting services 0.11 1,150,000 12 126,488 -- -- --
Issuance of common stock,
for consulting services 0.14 300,000 3 41,997 -- -- --
Net loss, year ended
December 31, 1995 -- -- -- -- -- (401,884) --
----------- ------- ----------- ---- ------------- -------

Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875 $ -- $ (3,696,797) $ --
----------- ------- ----------- ---- ------------- -------

See notes to consolidated financial statements.

F-7

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)

INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2003

Common Stock Deficit
------------------------------- Accumulated
Amount Additional During the Deferred
Per Paid-in Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ----------- ------- ----------- ------------ ------------ ------------

Balance, December 31, 1995 251,181,774 $ 2,512 $ 4,475,875 $ -- $ (3,696,797) $ --

Issuance of common stock,
exercise of options $0.05 3,333,334 33 166,634 -- -- --
Issuance of common stock,
exercise of options 0.08 1,158,850 12 92,696 -- -- --
Issuance of common stock,
exercise of options 0.10 7,163,600 72 716,288 -- -- --
Issuance of common stock,
exercise of options 0.11 170,000 2 18,698 -- -- --
Issuance of common stock,
exercise of options 0.12 1,300,000 13 155,987 -- -- --
Issuance of common stock,
exercise of options 0.18 1,400,000 14 251,986 -- -- --
Issuance of common stock,
exercise of options 0.19 500,000 5 94,995 -- -- --
Issuance of common stock,
exercise of options 0.20 473,500 5 94,695 -- -- --
Issuance of common stock,
for services rendered 0.50 350,000 3 174,997 -- -- --
Options granted -- -- -- 760,500 -- -- (473,159)
Subscription receivable -- -- -- -- (19,000) -- --
Net loss, year ended
December 31, 1996 -- -- -- -- -- (1,154,740) --
----------- ------- ----------- --------- ------------ ----------
Balance, December 31, 1996 267,031,058 $ 2,671 $ 7,003,351 $ (19,000) $ (4,851,537) $ (473,159)
----------- ------- ----------- --------- ------------ ----------

See notes to consolidated financial statements.

F-8

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)

INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2003

Common Stock Deficit
--------------------------------- Accumulated
Amount Additional During the Deferred
Per Paid-in Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ----------- ------- ----------- ------------ ------------ ------------

Balance, December 31, 1996 267,031,058 $ 2,671 $7,003,351 $ (19,000) $ (4,851,537) $ (473,159)

Issuance of common stock,
exercise of options $ 0.08 3,333,333 33 247,633 -- -- --
Issuance of common stock,
conversion of debt 0.20 1,648,352 16 329,984 -- -- --
Issuance of common stock,
conversion of debt 0.15 894,526 9 133,991 -- -- --
Issuance of common stock,
conversion of debt 0.12 2,323,580 23 269,977 -- -- --
Issuance of common stock,
conversion of debt 0.15 1,809,524 18 265,982 -- -- --
Issuance of common stock,
conversion of debt 0.16 772,201 8 119,992 -- -- --
Issuance of common stock,
for services rendered 0.41 50,000 -- 20,500 -- -- --
Issuance of common stock,
for services rendered 0.24 100,000 1 23,999 -- -- --
Beneficial conversion feature,
February debenture -- -- -- 413,793 -- -- --
Beneficial conversion feature,
October debenture -- -- -- 1,350,000 -- -- --
Warrant costs, February
debenture -- -- -- 37,242 -- -- --
Warrant costs, October
debenture -- -- -- 291,555 -- -- --
Amortization of deferred
compensation cost -- -- -- -- -- -- 399,322
Imputed interest on
convertible debenture -- -- -- 4,768 -- -- --
Net loss, year ended
December 31, 1997 -- -- -- -- -- (4,141,729) --
----------- ------- ------------ --------- ------------ ----------

Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767 $ (19,000) $ (8,993,266) $ (73,837)
------------ -------- ------------ --------- ------------ ----------

See notes to consolidated financial statements.

F-9

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)

INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2003

Common Stock Deficit
--------------------------------- Accumulated
Amount Additional During the Deferred
Per Paid-in Subscription Development Compensation
Share Shares Amount Capital Receivable Stage Cost
------ ------------ ------- ---------- ------------ ------------ ------------

Balance, December 31, 1997 277,962,574 $ 2,779 $ 10,512,767 $ (19,000) $(8,993,266) $ (73,837)

Issuance of common stock,
exercise of options $ 0.12 295,000 3 35,397 -- -- --
Issuance of common stock,
exercise of options 0.14 500,000 5 69,995 -- -- --
Issuance of common stock,
exercise of options 0.16 450,000 5 71,995 -- -- --
Issuance of common stock,
exercise of options 0.20 10,000 -- 2,000 -- -- --
Issuance of common stock,
exercise of options 0.26 300,000 3 77,997 -- -- --
Issuance of common stock,
conversion of debt 0.13 1,017,011 10 132,990 -- -- --
Issuance of common stock,
conversion of debt 0.14 2,512,887 25 341,225 -- -- --
Issuance of common stock,
conversion of debt 0.15 5,114,218 51 749,949 -- -- --
Issuance of common stock,
conversion of debt 0.18 1,491,485 15 274,985 -- -- --
Issuance of common stock,
conversion of debt 0.19 3,299,979 33 619,967 -- -- --
Issuance of common stock,
conversion of debt 0.22 1,498,884 15 335,735 -- -- --
Issuance of common stock,
conversion of debt 0.23 1,870,869 19 424,981 -- -- --
Issuance of common stock,
for services rendered 0.21 100,000 1 20,999 -- -- --
Beneficial conversion
feature, November debenture -- -- -- 625,000 -- -- --
Warrant costs,
November debenture -- -- -- 48,094 -- -- --
Amortization of deferred
compensation cost -- -- -- -- -- -- 59,068
Write off of subscription
receivable -- -- -- (19,000) 19,000 -- --
Net loss, year ended
December 31, 1998 -- -- -- -- -- (4,557,710) --
----------- ------- ------------ ------- ------------ ---------

Balance, December 31, 1998 -- 296,422,907 $ 2,964 $ 14,325,076 $ -- $(13,550,976) $ (14,769)
----------- ------- ------------ ------- ------------ ---------

See notes to consolidated financial statements.

F-10

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)

INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2003

Common Stock Deficit
--------------------------------- Accumulated
Amount Additional During the Deferred Discount
Per Paid-in Development Compensation on
Share Shares Amount Capital Stage Cost Warrants
------ ------------ --------- ------------ ------------ ------------ ----------

Balance, December 31, 1998 296,422,907 $ 2,964 $ 14,325,076 $ (13,550,976) $(14,769) $ --

Issuance of common stock,
securities purchase
agreement $ 0.16 4,917,276 49 802,451 -- -- --
Issuance of common stock,
securities purchase
agreement 0.27 1,851,852 18 499,982 -- -- --
Issuance of common stock,
for services rendered 0.22 100,000 1 21,999 -- -- --
Issuance of common stock,
for services rendered 0.25 180,000 2 44,998 -- -- --
Beneficial conversion
feature, August
debenture -- -- -- 950,036 -- -- --
Beneficial conversion
feature, December
debenture -- -- -- 361,410 -- -- --
Amortization of warrant
costs, convertible
debentures -- -- -- 300 -- -- (300)
Warrant costs, related
to convertible
debentures -- -- -- -- -- -- 2,455
Warrant costs, August
debenture -- -- -- 49,964 -- -- --
Warrant costs, December
debenture -- -- -- 4,267 -- -- --
Amortization of warrant
costs, securities
purchase agreement -- -- -- -- -- -- --
Amortization of
deferred compensation
cost -- -- -- (14,769) -- 14,769 --
Credit arising from
modification of
option terms -- -- -- 210,144 -- -- --
Net loss, year ended
December 31, 1999 -- -- -- -- (6,323,431) -- --
----------- -------- ----------- ------------- -------- -------

Balance, December 31, 1999
(Restated) 303,472,035 $ 3,034 $ 17,255,858 $ (19,874,407) $ -- $ 2,155
----------- -------- ------------ ------------- -------- -------

See notes to consolidated financial statements.

F-11

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)

INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2003

Common Stock Deficit
-------------------------------------- Accumulated
Amount Additional During the Discount
Per Paid-in Development On
Share Shares Amount Capital Stage Warrants
-------- ----------- ------ ------------ ------------ -------

Balance, December 31, 1999 (Restated) 303,472,035 $3,034 $ 17,255,858 $(19,874,407) $ 2,155

Issuance of common stock,
exercise of options $ 0.1400 600,000 6 83,994 -- --
Issuance of common stock,
exercise of options 0.1500 1,600,000 16 239,984 -- --
Issuance of common stock,
exercise of options 0.1600 650,000 7 103,994 -- --
Issuance of common stock,
exercise of options 0.1700 100,000 1 16,999 -- --
Issuance of common stock,
exercise of options 0.2100 792,500 8 166,417 -- --
Issuance of common stock,
exercise of options 0.2500 1,000,000 10 246,090 -- --
Issuance of common stock,
exercise of options 0.2700 281,000 3 75,867 -- --
Issuance of common stock,
exercise of options 0.3600 135,000 1 48,599 -- --
Issuance of common stock,
exercise of warrants 0.2040 220,589 2 44,998 -- --
Issuance of common stock,
exercise of warrants 0.2448 220,589 2 53,998 -- --
Issuance of common stock,
exercise of warrants 0.2750 90,909 1 24,999 -- --
Issuance of common stock,
exercise of warrants 0.3300 90,909 1 29,999 -- --
Issuance of common stock,
conversion of debt 0.1400 35,072,571 351 4,907,146 -- --
Issuance of common stock,
conversion of debt 0.1900 1,431,785 14 275,535 -- --
Issuance of common stock,
conversion of debt 0.2000 1,887,500 19 377,481 -- --
Issuance of common stock,
conversion of debt 0.3600 43,960 -- 15,667 -- --
Issuance of common stock,
cashless exercise of warrants -- 563,597 6 326,153 -- --
Issuance of common stock,
services rendered 0.4650 100,000 1 46,499 -- --
Private placement of common stock 0.2200 13,636,357 136 2,999,864 -- --
Private placement of common stock 0.3024 4,960,317 50 1,499,950 -- --
Private placement of common stock 0.4000 13,265,000 133 5,305,867 -- --
Cashless exercise of warrants -- -- -- (326,159) -- --
Beneficial conversion feature,
January Debenture -- -- -- 395,236 -- --
Warrant costs, consulting agreement -- -- -- 200,249 -- --
Warrant costs, January Debenture -- -- -- 13,418 -- --
Warrant costs, related to
convertible debentures -- -- -- -- -- (2,454)
Recovery of subscription receivable
previously written off -- -- -- 19,000 -- --
Credit arising from modification
of option terms -- -- -- 1,901,927 -- --
Net loss, year ended
December 31, 2000 -- -- -- -- (8,816,192) --
----------- ------ ------------ ------------ -------

Balance, December 31, 2000
(Restated) 380,214,618 $3,802 $ 36,349,629 $(28,690,599) $ (299)
----------- ------ ------------ ------------- -------

See notes to consolidated condensed financial statements.

F-12

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)

INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2003

Common Stock Deficit
-------------------------------------- Accumulated
Amount Additional During the Discount
Per Paid-in Development On
Share Shares Amount Capital Stage Warrants
-------- ----------- ------ ------------ ------------ -------

Balance, December 31, 2000 (Restated) 380,214,618 $ 3,802 $ 36,349,629 $ (28,690,599) $ (299)

Issuance of common stock,
exercise of options $ 0.2700 40,000 1 10,799 -- --
Issuance of common stock,
exercise of options 0.3600 20,000 1 7,199 -- --
Issuance of common stock,
cashless exercise of warrants -- 76,411 1 77,491 -- --
Issuance of common stock,
for services rendered 0.3500 100,000 1 34,999 -- --
Sale of common stock, for cash 0.1500 6,666,667 66 999,933 -- --
Sale of common stock, for cash 0.3000 2,000,000 20 599,980 -- --
Sale of common stock, for cash 0.3200 3,125,000 31 999,969 -- --
Sale of common stock, for cash 0.4000 1,387,500 14 554,986 -- --
Sale of common stock, for cash 0.2700 9,666,667 96 2,609,904 -- --
Warrant costs, private equity
line of credit -- -- -- 1,019,153 (1,019,043)
Amortization of warrant costs,
equity line of credit -- -- -- -- -- 356,594
Cashless exercise of warrants -- -- -- (77,491) -- --
Credit arising from modification
of option terms -- -- -- 691,404 -- --
Net loss, year ended
December 31, 2001 -- -- -- -- (11,086,567) --
----------- ------- ------------ ------------- ----------
Balance, December 31, 2001 (Restated) 403,296,863 $ 4,033 $ 43,877,955 $ (39,777,166) $ (662,748)
=========== ======= ============ ============= ==========

See notes to consolidated condensed financial statements.

F-13

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Continued)

INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2003

Common Stock Deficit
----------------------------------- Accumulated
Amount Additional During the Discount
Per Paid-in Development On
Share Shares Amount Capital Stage Warrants
-------- ----------- -------- ------------ ------------ ----------

Balance, December 31, 2001 (Restated) 403,296,863 $ 4,033 $ 43,877,955 $ (39,777,166) $ (662,748)

Sale of common stock, for cash $ 0.1109 17,486,491 175 1,938,813 -- --
Sale of common stock, for cash 0.1400 22,532,001 225 2,840,575 -- --
Sale of common stock, for cash 0.1500 9,999,999 100 1,499,900 -- --
Issuance of common stock,
conversion of debt 0.1100 909,091 9 99,991 -- --
Issuance of common stock,
conversion of debt 0.1539 1,299,545 13 199,987 -- --
Warrant costs, termination
agreement -- -- -- 190,757 -- --
Warrant costs, issued with sale
of common stock, for cash -- -- -- 36,086 -- --
Expenses of stock issuance -- -- -- (50,160) -- (36,087)
Warrants granted for consulting
services -- -- -- 107,382 -- --
Credit arising from modification
of option terms -- -- -- 177,963 -- --
Amortization of warrant costs,
equity line of credit -- -- -- -- -- 407,660
Beneficial conversion feature,
May debenture -- -- -- 55,413 -- --
Beneficial conversion feature,
July debentures -- -- -- 166,515 -- --
Net loss, year ended December 31, 2002 -- -- -- -- (9,321,065) --
----------- ------- ------------ ------------- ----------
Balance, December 31, 2002 (Restated) 455,523,990 $ 4,555 $ 51,141,177 $ (49,098,231) $ (291,175)
=========== ======= ============ ============= ==========

See notes to consolidated condensed financial statements.

F-14

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' (DEFICIT) EQUITY
(Continued)

INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2003

Common Stock Deficit
--------------------------------------- Accumulated
Amount Additional During the Discount
Per Paid-in Development On
Share Shares Amount Capital Stage Warrants
-------- ----------- -------- ----------- ------------ ----------

Balance, December 31, 2002 (Restated) -- 455,523,990 $ 4,555 $ 51,141,177 $(49,098,231) $(291,175)

Sale of common stock, for cash $ 0.0500 21,620,000 216 1,080,784 -- --
Sale of common stock, for cash 0.0800 22,650,000 226 1,811,774 -- --
Issuance of common stock,
conversion of debt 0.0424 14,150,943 142 599,858 -- --
Issuance of common stock,
conversion of debt 0.0480 12,500,000 125 599,875 -- --
Issuance of common stock,
conversion of debt 0.0640 9,375,000 94 599,906 -- --
Issuance of common stock,
conversion of debt 0.1000 7,255,754 73 725,653 -- --
Issuance of common stock,
conversion of debt 0.1442 745,643 7 107,499 -- --
Issuance of common stock,
conversion of debt 0.1818 562,865 6 102,323 -- --
Issuance of common stock,
for services rendered 0.0790 100,000 1 7,899 -- --
Issuance of common stock,
for services rendered 0.0930 107,527 1 9,999 -- --
Warrant costs, issued with
issue of convertible debenture -- -- -- 517,141 -- (517,141)
Expenses of stock issuance -- -- (199,989) -- 36,386
Amortization of warrant costs,
related to convertible debenture -- -- -- -- -- 517,141
Amortization of warrant costs,
equity line of credit -- -- -- -- -- 254,789
Litigation settlement -cash -- (1,050,647) -- --
Options issued for services
rendered -- -- -- 351,000 -- --
Beneficial conversion feature,
April debenture -- -- -- 482,859 -- --
Beneficial conversion feature,
July debenture -- -- -- 375,000 -- --

Net loss, year ended
December 31, 2003 -- -- -- -- (7,816,811) --
----------- ------- ------------ ------------ ---------
Balance, December 31, 2003 544,591,722 $ 5,446 $ 57,262,111 $(56,915,042) $ --
=========== ======= ============ ============ =========

See notes to consolidated condensed financial statements.

F-15

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

CONSOLIDATED STATEMENTS OF CASH FLOWS

Inception
(February 20,
Year Ended December 31, 1984) to
------------------------------------------ December 31,
2003 2002 2001 2003
------------ ------------ ------------ -------------
(Restated) (Restated)

Cash Flows from Operating Activities:
Net loss $ (7,816,811) $(9,321,065) $(11,086,567) $ (56,915,042)
------------ ------------ ------------ -------------
Adjustments to reconcile net loss to
net cash used by operating activities:
Depreciation 937,868 997,874 532,264 3,376,531
Amortization of debt issuance costs 242,513 34,078 15,344 1,071,150
Amortization of deferred interest cost on beneficial -- -- -- --
conversion feature of convertible debenture 809,401 89,001 -- 4,992,196
Amortization of discount on warrants 517,141 407,660 356,704 1,681,533
Amortization of discount on warrants - consulting services -- -- -- 230,249
Amortization of deferred compensation cost -- -- -- 760,500
Issuance of common stock for debenture interest 101,466 43,425 -- 221,103
Issuance of common stock for services -- -- 35,000 1,586,000
Compensation expense for options and warrants 605,788 476,102 691,404 3,870,596
Changes in operating assets and liabilities: -- -- -- --
( Increase) decrease in other current assets 50,772 (52,155) (28,358) (94,539)
Decrease in inventory -- -- 19,729 --
Increase in other assets (143,019) (86,962) (53,232) (1,778,208)
Increase (decrease) in accounts payable and
accrued liabilities 358,178 (1,288,999) 940,745 919,085
------------ ------------ ------------ ------------
Total adjustments 3,480,108 620,024 2,509,600 16,836,196
------------ ------------ ------------ ------------
Net cash used by operating activities (4,336,703) (8,701,041) (8,576,967) (40,078,846)
------------ ------------ ------------ ------------

Cash Flows from Investing Activities:
Purchase of investments -- -- -- (6,292,979)
Proceeds from sale of investments -- -- -- 6,292,979
(Acquisition) disposal of property and equipment 4,769 (267,715) (1,588,648) (4,318,615)
------------ ------------ ------------ ------------
Net cash provided (used) by investing activities 4,769 (267,715) (1,588,648) (4,318,615)
------------ ------------ ------------ ------------

Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt 2,169,388 2,000,000 -- 13,669,388
Proceeds from sale of securities, net of issuance costs 2,737,298 6,229,628 5,783,000 32,266,984
Issuance of common stock subscribed (883,900) -- -- (883,900)
Proceeds from common stock subscribed but not issued 280,000 883,900 -- 1,163,900
Payments under litigation settlement (1,050,647) -- -- (1,050,647)
Payments under capital lease (110,553) (142,426) (58,690) (420,581)
Payments on note payable (14,471) (26,400) (21,519) (95,747)
Recovery of subscription receivable written off -- -- -- 19,000
------------ ------------ ------------ ------------
Net cash provided by financing activities 3,127,115 8,944,702 5,702,791 44,668,397
------------ ------------ ------------ ------------

Net Increase (Decrease) in Cash and Cash Equivalents (1,204,819) (24,054) (4,462,824) 270,936

Cash and Cash Equivalents, Beginning 1,475,755 1,499,809 5,962,633 --
------------ ------------ ------------ ------------

Cash and Cash Equivalents, Ending $ 270,936 $ 1,475,755 $ 1,499,809 $ 270,936
============ ============ ============ ============

Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest $ 16,804 $ 25,669 $ 20,556
============ ============ ============

Supplemental Schedule of Non-Cash Investing and Financing Activities:
A note was issued in 2003 for approximately $16,000 to secure an obligation to
an agency of New York State.
A capital lease obligation of approximately $140,000 was incurred during
2002 to finance the purchase of new equipment.

See notes to consolidated condensed financial statements.

F-16

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Year Ended December 31, 2003, 2002 and 2001

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS

Advanced Viral Research Corp. (the Company) was incorporated in
Delaware on July 31, 1985. The Company was organized for the purpose of
manufacturing and marketing a pharmaceutical product initially named
Reticulose. This drug was the forerunner of the Company's current drug,
"AVR118". The success of the Company will be dependent upon obtaining
certain regulatory approvals for its pharmaceutical product, AVR118, to
commence commercial operations.

PRINCIPLES OF CONSOLIDATION

The consolidated financial statements include the accounts of the
Company and its 99.6% owned subsidiary, Advance Viral Research, Ltd.
(LTD), a Bahamian Corporation. LTD is presented in the financial
statements under "Discontinued Operations" (See Notes 6 and 16). All
significant intercompany accounts have been eliminated.

DEVELOPMENT STAGE ENTERPRISE

As described above, the Company was incorporated on July 31, 1985, and,
since that time, has been primarily involved in organizational
activities, research and development activities, and raising capital.
Planned operations, as described above, have not commenced to any
significant extent. Accordingly, the Company is considered to be in the
development stage, and the accompanying consolidated financial
statements represent those of a development stage enterprise.

CASH AND CASH EQUIVALENTS

Cash equivalents consist of highly liquid investments (primarily a
money market fund), with original maturities of three months or less.

PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the
assets. Gain or loss on disposition of assets is recognized currently.
Maintenance and repairs are charged to expense as incurred. Major
replacements and betterments are capitalized and depreciated over the
remaining useful lives of the assets.

RESEARCH AND DEVELOPMENT

Research and development costs are expensed as incurred by the Company.
Internal research and development services that the Company contracts
out are expensed as incurred by the Company. The Company does not
conduct research and development for third parties. Research and
development costs may include consultants, Israel studies, U.S. studies
at universities, laboratory gases, gloves and apparel, and travel.

F-17

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

RESEARCH AND DEVELOPMENT (Continued)

During 2002 and 2001, an allocation of rent, utilities, payroll,
payroll taxes (except CEO salary and payroll taxes for Dr. Hirschman
who was CEO during this period) and telephone were allocated to
research and development at 80% of actual costs with 20% of actual
costs allocated to general and administrative in 2002 and 2001.
Approximately 50% of the salary and payroll taxes in 2002 and 2001 for
Dr. Hirschman, the Company's Chief Executive Officer and Chief
Scientific Officer during this period were allocated to research and
development expense.

In November 2002, the Company reduced its staff from 33 employees to 10
and limited its research and development efforts to the studies being
performed in Israel. As a result, beginning in January 2003 and going
forward, the Company discontinued allocating the above expenses to
research and development expense (with the exception of Dr. Hirschman).
For the period January through September 2003 30% of Dr. Hirschman's
salary and payroll taxes were allocated to research and development.
Dr. Hirschman resigned as CEO and was appointed to the position of
Chief Scientist toward the end of the third quarter and the Company
began allocating 100% of his payroll costs to research and development
for the period October through December 2003.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company regularly evaluates its long-lived assets for indicators of
possible impairment, whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not
be fully recoverable. An impairment loss would be recognized when
estimated undiscounted future cash flows expected to result from the
use of the asset and its eventual disposition are less than its
carrying amount.

OTHER ASSETS

Patent development costs are capitalized as incurred. Such costs will
be amortized over the life of the patent, commencing at the time AVR118
is marketed. Loan costs include fees paid in connection with the
convertible debenture agreements and are being amortized over the life
of the agreement (see Note 9).

INCOME TAXES

The Company accounts for its income taxes using Statement of Financial
Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME TAXES, which
requires recognition of deferred tax liabilities and assets for
expected future tax consequences of events that have been included in
the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the differences
between the financial statement and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences
are expected to reverse.

F-18

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

The information set forth below provides disclosure of the estimated
fair value of the Company's financial instruments presented in
accordance with the requirements of Statement of Financial Accounting
Standards (SFAS) No. 107. Fair value estimates discussed herein are
based upon certain market assumptions and pertinent information
available to management as of December 31, 2003 and 2002. Since the
reported fair values of financial instruments are based upon a variety
of factors, they may not represent actual values that could have been
realized as of December 31, 2003 and 2002 or that will be realized in
the future.

The respective carrying value of certain on-balance-sheet financial
instruments approximated their fair values. These financial instruments
include cash, a money market fund and accounts payable. Fair values
were assumed to approximate carrying values for these financial
instruments since they are short-term in nature and their carrying
amounts approximate fair values or they are payable on demand.

CONCENTRATIONS OF CREDIT RISK

Financial instruments that potentially subject the Company to
concentrations of credit risk consist principally of cash. At various
times during the year, the Company had cash balances in excess of
federally insured limits. The Company maintains its cash, which
consists primarily of demand deposits, with high quality financial
institutions, which the Company believes limits this risk.

STOCK-BASED COMPENSATION

The Company has elected to follow Accounting Principles Board Opinion
No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES (APB No. 25), and
related interpretations, in accounting for its employee stock options
rather than the alternative fair value accounting allowed by SFAS No.
123, ACCOUNTING FOR STOCK-BASED COMPENSATION. APB No. 25 provides that
the compensation expense relative to the Company's employee stock
options is measured based on the intrinsic value of the stock option.
SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro-forma disclosure of the impact of applying the fair value
method of SFAS No. 123. The Company follows SFAS No. 123 in accounting
for stock options issued to non-employees.

No stock-based employee compensation cost is reflected in net loss, as
all options granted under those plans had an exercise price equal to
the market value of the underlying common stock on the date of the
grant. The following table illustrates the effect on net loss and loss
per share if the Company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation.

F-19

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

STOCK-BASED COMPENSATION (Continued)

2003 2002 2002 2001 2001
Reported Reported Restated Reported Restated
-------- -------- ------------ ------------ -------------

Net loss $ (7,816,811) $(10,342,335) $(9,321,065) $(11,715,568) $(11,086,567)
Deduct: total stock-based compensation
expense determined under fair value based
method for all awards, net of related tax
effects (2,790,859) (2,016,132) (724,048) (2,374,643) (154,034)
Pro forma net loss $(10,607,670) $(12,358,467) $(10,045,113) $(14,090,211) $(11,240,601)
Loss per share - basic and diluted
As reported $ (0.02) $ (0.02) $ (0.02) $ (0.03) $ (0.03)
Pro forma $ (0.02) $ (0.03) $ (0.02) $ (0.04) $ (0.03)

There are no other options outstanding that would require pro forma
presentation.

NET LOSS PER COMMON SHARE

The Company computes loss per share in accordance with SFAS No. 128,
EARNINGS PER SHARE. This standard requires dual presentation of basic
and diluted earnings per share on the face of the income statement for
all entities with complex capital structures and requires a
reconciliation of the numerator and denominator of the diluted earnings
per share computation.

Net loss per common share (basic and diluted) is based on the net loss
divided by the weighted average number of common shares outstanding
during the year. The Company's potentially issuable shares of common
stock pursuant to outstanding stock options and warrants are excluded
from the Company's diluted computation, as their effect would be
anti-dilutive.

REVENUE RECOGNITION

The limited sales generated by the Company have consisted of sales of
AVR118 for testing and other purposes. The Company records sales when
the product is shipped to customers. There were no sales for the year
ended December 31, 2003 and 2002.

USE OF ESTIMATES

The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management
to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Although these
estimates are based on management's knowledge of current events and
actions it may undertake in the future, they may ultimately differ from
actual results.

RECLASSIFICATIONS

Certain amounts in the financial statements have been reclassified to
conform to the current presentation.

F-20

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

RECENT ACCOUNTING PRONOUNCEMENTS

During May 2003, the FASB issued Statement of Financial Accounting
Standards No. 150 ("SFAS 150"), "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity". SFAS
150 clarifies the accounting for certain financial instruments with
characteristics of both liabilities and equity and requires that those
instruments be classified as liabilities in statements of financial
position. Previously, many of those financial instruments were
classified as equity. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003 and otherwise is effective
at the beginning of the first interim period beginning after June 15,
2003. The adoption of SFAS 150 did not have an impact on the Company's
operating results or financial position as the Company does not have
any financial instruments with characteristics of both liabilities and
equity that are not already classified as liabilities.

During April 2003, the FASB issued Statement of Financial Accounting
Standards No. 149 (" SFAS 149"), "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". SFAS 149 amends and
clarifies accounting for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging
activities under Statement 133. SFAS 149 is effective for contracts
entered into or modified after June 30, 2003 and for hedging
relationships designated after June 30, 2003. The guidance should be
applied prospectively. The adoption of SFAS 149 did not have an impact
on the Company's operating results or financial position as the Company
does not have any derivative instruments that are affected by SFAS 149.

In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin No. 51." In December 2003, the FASB issued
FIN No. 46R, which clarified certain issues identified in FIN 46. FIN
46R requires an entity to consolidate a variable interest entity if it
is designated as the primary beneficiary of that entity even if the
entity does not have a majority of voting interests. A variable
interest entity is generally defined as an entity where its equity is
unable to finance its activities or where the owners of the entity lack
the risk and rewards of ownership. The provisions of this statement
apply at inception for any entity created after January 31, 2003. For
an entity created before February 1, 2003, the provisions of this
interpretation must be applied at the beginning of the first interim or
annual period beginning after March 1, 2004. The Company does not have
any interest in variable interest entities and therefore the adoption
of this standard is not expected to have an impact on the Company's
financial position and results of operations.

On December 31, 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR
STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF
SFAS 123. The standard provides additional transition guidance for
companies that elect to voluntarily adopt the accounting provisions of
SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS 148 does not
change the provisions of SFAS 123 that permits entities to continue to
apply the intrinsic value method of APB 25, ACCOUNTING FOR STOCK ISSUED
TO EMPLOYEES. As the Company continues to follow APB 25, its accounting
for stock-based compensation will not change as a result of SFAS 148.
SFAS 148 does require certain new disclosures in both annual and
interim financial statements. The required annual disclosures are
effective immediately and have been included in Note 11 of the
Company's consolidated financial statements. The new interim disclosure
provisions became effective in the first quarter of 2003.

F-21

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

In July 2002, the FASB issued SFAS No. 146, ACCOUNTING FOR COSTS
ASSOCIATED WITH EXIT OR DISPOSAL ACTIVITIES. SFAS 146 is effective for
exit or disposal activities initiated after December 31, 2002. The
adoption of this standard did not have an impact on the Company's
financial position or results of operations.

In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB
STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND
TECHNICAL CORRECTIONS. SFAS 145 is effective for fiscal years beginning
after May 15, 2002. The adoption of this standard did not have an
impact on the Company's financial position or results of operations.

NOTE 2. LIQUIDITY CONSIDERATIONS

As indicated in the accompanying financial statements, the Company has
suffered accumulated net losses of $56,915,042 since inception and is
dependent upon registration of AVR118 for sale before it can begin
commercial operations. The Company's cash position may be inadequate to
pay all the costs associated with operations and the full range of
testing and clinical trials required by the FDA. Unless and until
AVR118 is approved for sale in the United States or another
industrially developed country, the Company will be dependent upon the
continued sale of its securities, debt or equity financing for funds to
meet its cash requirements.

During the year ended December 31, 2003, the Company completed several
equity transactions and issued convertible debt in which it received
cash proceeds of approximately $4,900,000.

On February 5, 2004, the Company entered into an agreement with two
investors whereby the Company agreed to sell an aggregate of 120
million shares of its common stock and warrants to purchase 15 million
shares of its common stock for an aggregate purchase price of $12
million. Pursuant to the agreement, the funding shall take place in
four equal stages of $3 million each, once every 90 days with the first
$3 million funding having occurred on February 5, 2004 (See Note 9).

Management believes that cash flows from the foregoing agreement and
from current financing arrangements will be sufficient to fund current
operations. Management intends to continue to sell the Company's
securities in an attempt to meet its cash flow requirements; however,
no assurance can be given that equity or debt financing, if and when
required, will be available.

NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS

The accompanying financial statements for the years ended December 31,
2002 and 2001 have been restated to reflect changes in accounting for
warrants issued in connection with equity transactions as well as
options issued to the Board of Directors and employees (on a pro-forma
basis only) and its Advisory Board. The restatement resulted in income
which reduced the previously reported net loss for 2002 and 2001 by
approximately $1,021,000 and $629,000 respectively.

Basic and diluted net loss per common share on operations remained the
same for the years ended December 31, 2002 and 2001. The Company's
deficit accumulated during the development stage was reduced by
$2,039,574 and $1,018,304 at December 31, 2002 and 2001 respectively.
The restatement did not impact the Company's net cash in investing and
financing activities and net cash used in operating activities remained
unchanged. However, certain components within operating

F-22

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

activities consisting of amortization of deferred interest cost,
discount on warrants and compensation expense for options and warrants,
were restated.

As of December 31, 2002 As of December 31, 2001
------------------------------------------ ------------------------------------------
As Reported Adjustments Restated As Reported Adjustments Restated
------------ ------------ ------------ ------------ ------------ ------------

ASSETS
Current Assets $ 1,770,251 $ -- $ 1,770,251 $ 1,751,970 $ -- $ 1,751,970
Property and Equipment, Net 2,244,118 -- 2,244,118 2,818,045 -- 2,818,045
Other Assets 931,660 -- 931,660 878,776 -- 878,776
------------ ------------ ------------ ------------ ------------ ------------
Total assets 4,946,029 -- 4,946,029 5,448,791 -- 5,448,791
============ ------------ ============ ============ ------------ ============

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities 684,591 -- 684,591 1,932,149 -- 1,932,149
------------ ------------ ------------ ------------ ------------ ------------
Long-Term Debt:
Convertible debenture, net 1,658,231 (47,732) 1,610,499 -- -- --
Capital lease obligation 5,834 -- 5,834 42,370 -- 42,370

Note payable 4,879 -- 4,879 32,198 -- 32,198
------------ ------------ ------------ ------------ ------------ ------------
Total long-term debt 1,668,944 (47,732) 1,621,212 74,568 -- 74,568
------------ ------------ ------------ ------------ ------------ ------------
Common Stock Subscribed but not
Issued 883,900 -- 883,900 -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Stockholders' Equity:
Common stock 4,555 -- 4,555 4,033 -- 4,033
Additional paid-in capital 57,530,605 (6,389,428) 51,141,177 47,666,141 (3,788,186) 43,877,955
Deficit accumulated during the
development stage (51,137,805) 2,039,574 (49,098,231) (40,795,470) 1,018,304 (39,777,166)
Discount on warrants (4,688,761) 4,397,586 (291,175) (3,432,630) 2,769,882 (662,748)
------------ ------------ ------------ ------------ ------------ ------------

Total stockholders' equity 1,708,594 47,732 1,756,326 3,442,074 -- 3,442,074
------------ ------------ ------------ ------------ ------------ ------------
Total liabilities and
stockholders' equity $ 4,946,029 $ -- $ 4,946,029 $ 5,448,791 $ -- $ 5,448,791
============ ------------ ============ ============ ------------ ============

F-23

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 3. RESTATEMENT OF FINANCIAL STATEMENTS (Continued)

2002 2001
--------------------------------------------- ---------------------------------------------
As Reported Adjustments Restated As Reported Adjustments Restated
------------- ------------- ------------- ------------- ------------- -------------

Revenues $ -- $ -- $ -- $ 17,601 $ -- $ 17,601
------------- ------------- ------------- ------------- ------------- -------------
Costs and Expenses:
Research and development 4,439,592 -- 4,439,592 5,150,869 -- 5,150,869
General and administrative 2,654,296 -- 2,654,296 4,063,022 -- 4,063,022
Compensation and other expense 755,397 128,365 883,762 691,404 356,704 1,048,108
for options and warrants
Depreciation 977,746 -- 977,746 511,216 -- 511,216
------------- ------------- ------------- ------------- ------------- -------------
8,827,031 128,365 8,955,396 10,416,511 356,704 10,773,215
------------- ------------- ------------- ------------- ------------- -------------

Loss from Operations (8,827,031) (128,365) (8,955,396) (10,398,910) (356,704) (10,755,614)
------------- ------------- ------------- ------------- ------------- -------------
Other Income (Expense):
Interest income 27,659 -- 27,659 113,812 -- 113,812
Other income
Interest expense (1,341,809) 1,149,635 (192,174) (868,856) 985,705 116,849
Severance expense -
former directors -- -- -- (302,500) -- (302,500)
------------- ------------- ------------- ------------- ------------- -------------
(1,314,150) 1,149,635 (164,515) (1,057,544) 985,705 (71,839)
------------- ------------- ------------- ------------- ------------- -------------

Loss from Continuing Operations (10,141,181) 1,021,270 (9,119,911) (11,456,454) 629,001 (10,827,453)
Loss from Discontinued Operations (201,154) -- (201,154) (259,114) -- (259,114)
------------- ------------- ------------- ------------- ------------- -------------
Net Loss $ (10,342,335) $ 1,021,270 $ (9,321,065) $ (11,715,568) $ 629,001 $ (11,086,567)
============= ============= ============= ============= ============= =============
Net Loss Per Common Share
Basic and Diluted:
Continuing operations (0.02) (0.02) (0.03) (0.03)
Discontinued operations (0.00) (0.00) (0.00) (0.00)
Net loss (0.02) (0.02) (0.03) (0.03)
Weighted Average Number of 439,009,322 $ -- 439,009,322 389,435,324 $ -- 389,435,324
Common Shares Outstanding

NOTE 4. PROPERTY AND EQUIPMENT

Estimated Useful
Lives (Years) 2003 2002
---------------- ---------- ----------

Land and improvements 15 $ 34,550 $ 34,550
Building and improvements 30 1,410,165 1,410,165
Machinery and equipment 5 3,384,391 3,394,431
---------- ----------
4,829,106 4,839,146
Less accumulated depreciation 3,365,784 2,433,185
---------- ----------
1,463,322 2,405,961
Less property and equipment included in
assets held for sale, net (Note 5) 141,069 161,843
---------- ----------
$1,322,253 $2,244,118

The Company maintains a building and equipment in Freeport, Bahamas.
This building and equipment amounted to $419,583 as of December 31,
2003 and $429,782 as of December 31, 2002. Included with machinery and
equipment is equipment purchased under capital leases of $135,537
during 2002. Depreciation expense for equipment under the capital
leases was approximately $27,107, $24,848 and $10,368 in 2003, 2002 and
2001, respectively. These amounts are included above.

F-24

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 5. OTHER ASSETS

2003 2002
---------- ----------

Patent development costs $ 952,687 $ 897,385
Loan costs, net of accumulated amortization of $1,071,150
and $828,637 132,374 34,275
Other 94,178 6,461
---------- ----------
1,179,239 938,121
Less other assets included in assets held for sale, net (Note 6) 6,461 6,461
---------- ----------
1,172,778 $ 931,660
========== ==========

NOTE 6. ASSETS HELD FOR SALE

During 2002, the Board of Directors approved a plan to sell Advance
Viral Research, Ltd. (LTD), the Company's Bahamian subsidiary. As
required under SFAS 144, the net book values of the assets (LTD had no
liabilities as of December 31, 2003 other than an inter-company payable
that has been eliminated) have been reflected on the balance sheet as
held for sale and the operations have been included in discontinued
operations for the years ended December 31, 2003, 2002 and 2001 (see
Note 16).

Although no formal contract has been executed, management continues to
evaluate offers and believes that the estimated selling price less
estimated cost to sell exceeds the net book value of LTD and therefore
there is no impairment loss charged to discontinued operations.

NOTE 7. ACCRUED LIABILITIES

2003 2002
-------- --------
Accrued bonus $ 50,000 $ 50,000
Accrued 401k contribution -- 40,675
Accrued payroll 36,079 35,157
Other 34,408 11,814
-------- --------
$120,487 $137,646

NOTE 8. NOTE PAYABLE

During 1999, the Company entered into an installment purchase agreement
for equipment totaling $123,600. The agreement is collateralized by the
equipment and calls for monthly installments of $2,476, including
interest at 12% per annum, with a final installment due and paid during
January 2004.

In November 2003 the Company entered into an agreement with the Empire
State Development Corporation to return a portion of a $25,000 grant it
received in 2001 for creating new jobs. The grant was reduced due to a
reduction in personnel by the Company during November 2002. The amount
of the note is $15,745 payable in twelve installments of $1,312
beginning November 2003. At December 31, 2003 the balance due on the
note is $13,121.

The aggregate maturities of Notes Payable at December 31, 2003 are
$15,572 and are due in 2004.

F-25

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 9. SECURITIES PURCHASE AGREEMENTS

CONVERTIBLE DEBENTURES AND WARRANTS

The Company issued warrants to purchase common stock in connection with
the issuance of several convertible debentures sold during the years
1997 to 2000, which debentures have all been fully converted. As of
December 31, 2003, warrants to purchase approximately 3.1 million
shares of the Company's common stock relating to these fully converted
debentures were outstanding with expiration dates through 2009 at
exercise prices ranging from $.199 to $.864.

During the second and third quarters of 2002, the Company issued to
certain investors an aggregate of $2,000,000 principal amount of its 5%
convertible debentures at par in several private placements. Under the
terms of each 5% convertible debenture, 20% of the original issue is
convertible on the original date of issue at a price equal to the
closing bid price quoted on the OTC Bulletin Board on the trading day
immediately preceding the original issue date (except for the
Rushing/Simoni issuance detailed below which had an initial conversion
price of $0.11 per share). Thereafter, 20% of the principal balance may
be converted at six-month intervals at a conversion price equal to the
higher of (i) 90% of the average closing bid price for the five trading
days prior to the conversion date (the "Market Price"); or (ii) ten
cents ($0.10) which amount is subject to certain adjustments. The
convertible debentures, including interest accrued thereon, are payable
by Advanced Viral in shares of common stock and mature two years from
the date of issuance. The shares issued upon conversion of the
debentures cannot be sold or transferred for a period of one year from
the applicable vesting date of the convertible portion of the
debentures. The Company issued its 5% convertible debentures as
follows:

o On May 30, 2002, the Company sold to O. Frank Rushing and
Justine Simoni, as joint tenants, $500,000 principal amount of
its 5% convertible debenture. Based on the terms for
conversion associated with this debenture, there was an
intrinsic value associated with the beneficial conversion
feature, which was recorded as deferred interest expense and
is presented as a discount on the convertible debenture. On
June 3, 2002, these investors converted the first 20%
($100,000) into 909,091 shares of common stock at a conversion
price of $0.11 per share. In January 2003, the holder
converted the second 20% ($100,000 plus interest of $3,041)
into 1,030,411 shares of common stock at a conversion price of
$.10 per share. In May 2003 the holder converted the third 20%
of the debenture ($100,000 plus interest of $5,000) into
$1,050,000 shares of common stock at a conversion price of
$.10 per share. In November 2003 the holder converted the
fourth 20% of the debenture ($100,000 plus interest of $7,500
into 745,643 shares of common stock at a conversion price of
$0.1442 per share.

o On July 3, 2002, the Company sold to James F. Dicke II, who
was then a member of its Board of Directors, $1,000,000
principal amount of its 5% convertible debenture. Based on the
terms for conversion associated with this debenture, there was
an intrinsic value associated with the beneficial conversion
feature which was recorded as deferred interest expense and is
presented as a discount on the convertible debenture. On July
3, 2002, Mr. Dicke converted the first 20% of the debenture
($200,000) for 1,299,545 shares of common stock at a
conversion price of $0.1539 per share. . In January 2003, the
holder converted the second 20% ($200,000 plus interest of
$5,041) of the debenture into 2,050,411 shares of common stock
at a

F-26

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 9. SECURITIES PURCHASE AGREEMENTS

CONVERTIBLE DEBENTURES AND WARRANTS (CONTINUED)

conversion price of $.10 per share. In July 2003, the holder
converted the third 20% of the debenture ($200,000 plus
$10,000 of interest) for 2,100,000 shares of common stock at a
conversion price of $.10 per share. At December 31, 2003 the
outstanding balance was approximately $430,000 including
accrued interest. In January 2004 the holder converted the
fourth 20% of the debenture ($200,000 plus $15,014 of the
interest) into 1,857,730 shares of common stock at a
conversion price of $.1157 per share.

o On July 15, 2002, the Company sold to Peter Lunder $500,000
principal amount of the Company's 5% convertible debenture.
Based on the terms for conversion associated with this
debenture, there was an intrinsic value associated with the
beneficial conversion feature, which was recorded as deferred
interest expense and is presented as a discount on the
convertible debenture. In January 2003, the holder converted
40% ($200,000 plus interest of $4,822) of the debenture into
1,587,797 shares of common stock, the first 20% of which was
converted at a conversion price of $.1818 per share, and the
second 20% of which was converted at a conversion price of
$.10 per share. At December 31, 2003 the outstanding balance
was approximately $322,000 including accrued interest. On
January 14, 2004 the holder converted 40% ($200,000 plus
interest of $15,041) of the debenture into 1,629,840 shares at
a conversion price of $.13194 per share.

o On April 28, 2003 and July 18, 2003 the Company entered into
separate securities purchase agreements with Cornell Capital
Partners (i) to sell up to $2,500,000 of the Company's 5%
convertible debentures, due April 28, 2008, $1,000,000 of
which was purchased on April 28, 2003; $500,000 of which was
purchased on July 18, 2003; and $1,000,000 of convertible
debentures will be purchased within 20 business days from the
date the registration statement is declared effective by the
SEC (the "April Agreement"); and (ii) whereby the Company sold
to Cornell Capital Partners an additional $1,000,000 of the
Company's 5% convertible debentures due July 18, 2008 for
gross cash consideration of $1 million (the "July Agreement").
Interest is payable in cash or common stock at the option of
Cornell Capital Partners. Pursuant to the April Agreement and
the July Agreement, Cornell Capital Partners or its assignees
receive cash compensation equal to 10% of the gross proceeds
of the convertible debentures purchased by Cornell Capital
Partners, along with warrants to purchase an aggregate of
15,000,000 shares of common stock at an exercise price of
$0.091 commencing on October 28, 2003 through April 28, 2008.
In the event the closing bid price of common stock on the date
the Company's registration statement is declared effective by
the SEC is less than $0.10, then under the April Agreement,
the Company has the right to redeem the last $1,000,000
convertible debenture at the face amount of the convertible
debenture within 10 days of the effectiveness of the
registration statement. Pursuant to the terms of the April
Agreement, commencing July 27, 2003, and in the case of the
July Agreement, commencing October 18, 2003, Cornell Capital
Partners may convert the debenture plus accrued interest,
(which may be taken at Cornell Capital Partner's option in

F-27

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 9. SECURITIES PURCHASE AGREEMENTS (CONTINUED)

CONVERTIBLE DEBENTURES AND WARRANTS (CONTINUED)

cash or common stock), in shares of common stock at a
conversion price equal to the lesser of (a) $0.08 or (b) 80%
of the lowest closing bid price of common stock for the four
trading days immediately preceding the conversion date. No
more than $600,000 may be converted in any thirty-day period
under both the April and July Agreements Subject to certain
exceptions, at its option, the Company may redeem a portion or
the entire outstanding debenture at a price equal to 115% of
the amount redeemed plus accrued interest and Cornell Capital
Partners will receive a warrant to purchase 1,000,000 shares
of common stock for every $100,000 redeemed. The warrant shall
be exercisable on a cash basis and have an exercisable price
of the higher of 110% of the closing bid price of common stock
on the closing date or $0.08. The warrant shall have "piggy
back" registration rights and shall survive for 5 years from
the closing date.

The Company's obligations under the convertible debentures and
the April and July Agreements are secured by a first priority
security interest in substantially all of its assets. This
security interest expires upon the earlier to occur of (i) the
fiftieth (50th) day following the effectiveness of the
registration statement covering the resale of the shares
underlying the convertible debentures; (ii) the date the
Company receive, three million dollars ($3,000,000) of
capital, in any form other than through the issuance of
free-trading shares of the Company's common stock, from
sources other than Cornell Capital Partners; or (iii) the
satisfaction of the Company's obligations under the April and
July Agreements, the convertible debentures and the ancillary
documents entered into thereby. The security interest expired
during February 2004. The legal expenses associated with these
transactions were approximately $73,000 and were paid as of
September 2003.

The Company received net proceeds of $1,312,500 and $869,486
for the April and July debentures respectively. These
convertible debentures were converted as follows:

o On September 10, 2003, Cornell Capital Partners
converted $600,000 principal amount of the
convertible debenture into 14,150,943 shares of
common stock at a conversion price of $0.0424 per
share.

o On November 6, 2003, Cornell Capital Partners
converted $600,000 principal amount of the
convertible debentures into 12,500,000 shares of
common stock at a conversion price of $0.048 per
share.

o On November 20, 2003, Cornell Capital Partners
converted $600,000 principal amount of convertible
debentures into 9,375,000 shares of common stock at a
conversion price of $.064 per share.

o On January 8, 2004, Cornell Capital Partners
converted the remaining $700,000 principal amount of
convertible debentures plus $51,000 of interest into
9,387,500 shares of common stock at a conversion
price of $.08 per share.

F-28

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 9. SECURITIES PURCHASE AGREEMENTS (CONTINUED)

CONVERTIBLE DEBENTURES AND WARRANTS (CONTINUED)

At December 31, 2003 the outstanding balance was approximately
$750,000 including accrued interest.

o Upon the Company's registration statement going effective with
the SEC, the Company issued to Cornell Capital Partners on
January 7, 2004 a $1,000,000 5% convertible debenture and
received consideration of $882,402. On February 11, 2004,
Cornell Capital Partners converted $1,000,000 principal amount
plus interest of $4,657 into 12,558,219 shares of the
Company's common stock at a conversion price of $0.08 per
share.

STOCK PURCHASE AGREEMENTS

Pursuant to certain securities purchase agreements, the Company issued
warrants to purchase common stock in connection with the sale of
approximately 61,500,000 shares of common stock during the years 1998
to 2001 for cash consideration of approximately $16,900,000. As of
December 31, 2003, warrants to purchase approximately 16.5 million
shares of the Company's common stock relating to these securities
purchase agreements were outstanding with expiration dates through
2006.

During the quarter ended March 31, 2002, under several stock purchase
agreements, the Company sold an aggregate of 9,999,999 shares of its
common stock at $0.15 per share, for cash consideration of $1,500,000.

On April 12, 2002, pursuant to stock purchase agreements with various
institutional investors, the Company issued 17,486,491 shares of its
common stock at a market price of $0.11089 per share and received net
proceeds of approximately $1,939,000.

On September 10, 2002, the Company issued and sold an aggregate of
21,500,000 shares of its common stock pursuant to a securities purchase
agreement with certain institutional investors for total proceeds of
approximately $3,010,000, or $0.14 per share, along with warrants to
purchase 16,125,000 shares of the Company's common stock at an exercise
price of $0.25 per share, subject to adjustment, as described below. In
addition, pursuant to a placement agent agreement with H. C. Wainwright
& Co., Inc. ("HCW"), the Company paid HCW a placement fee of $150,500
cash and issued to HCW 1,032,000 shares of its common stock. An
adjustment provision in the warrants provides that 60 trading days
following the original issue date of the warrants (the "First
Determination Date"), a certain number of warrants shall become
exercisable at $0.001. The number of shares for which the warrants are
exercisable at $0.001 per share is equal to the positive difference, if
any, between (i) $3,010,000 divided by the volume weighted average
price ("VWAP") of the Company's common stock for the 60 trading days
preceding the First Determination Date and (ii) 21,500,000. Upon 120
trading days following the original issue date of the warrants (the
"Second Determination Date"), a certain number of remaining warrants
shall become exercisable at $0.001. The number of shares for which the
Warrants are exercisable at $.001 per share is equal to the positive
difference, if any, between (i) $3,010,000 divided by the VWAP of the
Company's common

F-29

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 9. SECURITIES PURCHASE AGREEMENTS (CONTINUED)

STOCK PURCHASE AGREEMENTS (CONTINUED)

stock for the 60 trading days preceding the Second Determination Date
and (ii) 21,500,000. No adjustment will be made in the event that the
VWAP for the 60 trading day period preceding the applicable
determination date is $0.14 or greater.

On December 16, 2002, the Company entered into securities purchase
agreements with various investors, pursuant to which the Company sold
an aggregate of 10,450,000 shares of its common stock for total
proceeds of approximately $836,000, or $0.08 per share. The shares of
common stock were issued by the Company on January 2, 2003 along with
warrants issued in December 2002 to purchase 6,270,000 shares of common
stock at an exercise price of $0.12 per share until December 2007. In
connection with these agreements, finder's fees of approximately
$50,000 were paid in December 2002 and 627,000 warrants were issued
during January 2003.

On December 23, 2002 the Company received an additional $40,000 from
various investors representing 500,000 shares of common stock or $0.08
per share. These shares of common stock were issued during January 2003
along with warrants dated January 2003 to purchase 300,000 shares of
common stock at an exercise price of $0.12 per share until January
2008. In connection with this transaction the Company paid a finders
fee of $2,400 during January 2003 and issued warrants to purchase
30,000 shares of common stock with an exercise price of $.12 for a
period of five years.

During January 2003, pursuant to a securities purchase agreement with
various investors, the Company issued 1,550,000 shares of common stock
at a price of $0.08 per share, for a total purchase price of $124,000,
along with warrants to purchase 930,000 shares of common stock at an
exercise price of $0.12 per share until January 2008. In connection
with this transaction the Company paid a finders' fee to AVIX
consisting of (i) $7,440 and (ii) issued warrants to purchase 93,000
shares of common stock at an exercise price per share of $0.12 until
January 2008.

During January and February 2003, pursuant to a securities purchase
agreement with various investors, the Company issued 1,250,000 shares
of common stock at $0.08 per share, for a total purchase price of
$100,000, along with warrants to purchase 750,000 shares of common
stock at an exercise price of $0.12 per share through March 2008. In
connection with this transaction the Company paid finders' fees to
Harbor View consisting of (i) $6,000 and (ii) warrants to purchase
75,000 shares of common stock at an exercise price per share of $0.12
until March 2006.

F-30

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 9. SECURITIES PURCHASE AGREEMENTS (CONTINUED)

STOCK PURCHASE AGREEMENTS (CONTINUED)

In April and May 2003, pursuant to securities purchase agreements with
various investors, the Company sold 3,900,000 shares of common stock at
a price of $0.08 per share and issued warrants to purchase 2,340,000
shares of common stock at an exercise price per share of $0.12 through
April and May 2008, for an aggregate purchase price $312,000. In
connection with this transaction, the Company paid a finders' fee to
Harbor View consisting of (i) $18,720 and (ii) warrants to purchase
234,000 shares of common stock at an exercise price per share of $0.12
through April 2008.

On April 11, 2003, pursuant to a securities purchase agreement with
James F. Dicke II, a former member of the Company's Board of Directors,
the Company sold 3,125,000 shares of common stock at $0.08 per share
for a total purchase price of $250,000, along with warrants to purchase
1,875,000 shares of common stock at an exercise price per share of
$0.12 through April 2008.

On April 28, 2003 pursuant to a securities purchase agreement with
David Provence in a private offering transaction pursuant to Section
4(2) of the Securities Act, the Company sold 312,500 shares of common
stock and warrants to purchase 187,500 shares of common stock at an
exercise price of $0.12 per share through April 2008, for an aggregate
purchase price of $25,000. In connection with the transaction, the
Company paid a finders' fee to Diego Vallone consisting of warrants to
purchase 15,625 shares of common stock at an exercise price per share
of $0.12 until April 2008.

In June 2003, pursuant to a securities purchase agreement with an
investor, the Company sold 1,562,500 shares of common stock at $0.08
per share for a total purchase price of $125,000, along with warrants
to purchase 937,500 shares of common stock at an exercise price per
share of $0.12 through June 2008. In July in connection with this
transaction, the Company paid finders' fees to Avix, Inc. and Robert
Nowinski consisting of an aggregate of $13,375 and warrants to purchase
171,875 shares of common stock at an exercise price per share of $0.12
through June 2008.

In September 2003, in connection with a private offering transaction
pursuant to Section 4(2) of the Securities Act, the Company authorized
the issuance of and sold 21,620,000 shares of common stock and warrants
to purchase up to 10,810,000 shares of common stock, for an aggregate
purchase price of $1,081,000, or $0.05 per share, pursuant to
securities purchase agreements with various purchasers. The warrants
are exercisable at $0.10 per share. In connection with the agreements,
the Company paid finders' fees to Harbor View Group, AVIX, Inc and
Robert Nowinski consisting in the aggregate of (i) approximately
$64,860 and (ii) warrants to purchase 1,297,200 shares of common stock.
All of the aforementioned warrants are exercisable at $0.10 per share
commencing six months after the issuance date, for a period of five
years.

In December 2003, pursuant to a securities purchase agreement with an
investor the company received $280,000 to purchase 1,866,667 shares of
the company's common stock at $.15 per share along with warrants to
purchase 653,333 shares of common stock at $.19 through December 2008.
The shares and warrants were not issued until January 2004. The
$280,000 was carried on the company's balance sheet as common stock
subscribed but not issued.

F-31

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 9. SECURITIES PURCHASE AGREEMENTS (CONTINUED)

SUBSEQUENT FINANCINGS AND AGREEMENTS

In January 2004 pursuant to a security purchase agreement with an
investor, the Company received $45,00 to purchase 300,000 shares of the
company's common stock at $.15 per share along with warrants to
purchase 105,000 shares of common stock at $.19 through January 2009.
In addition, a finder's fee associated with the December 2003 and
January 2004 financing was paid to Harbor View Group in the amount of
$26,000 along with warrants to purchase 173,333 shares of the Company's
common stock at $0.19 until January 2009.

On February 3, 2004, the Company entered into an agreement with James
Dicke II and his son James Dicke III, whereby the Company agreed to
sell an aggregate of 120 million shares of its common stock and
warrants to purchase 15 million shares of its common stock for an
aggregate purchase price of $12 million. Pursuant to the agreement, the
funding shall take place in four equal stages of $3 million each, once
every 90 days with the first $3 million funding having occurred on
February 5, 2004. There are no conditions precedent to the investors'
obligation to close other than the accuracy of the Company's
representations and warrants and its compliance with the agreement. The
warrants have an exercise price of $0.20 per share and are exercisable
at any time through February 2, 2007.

In addition, the Company granted demand and piggyback registration
rights to the investors for the shares issued or issuable in connection
with the transaction pursuant. James F. Dicke II is the Chairman and
CEO of Crown Equipment Corporation and a former member of the Board of
Directors.

On February 9, 2004, the Company entered into a termination and release
agreement with DCT, S.R.L. and certain of its affiliates pursuant to
which pursuant to which a distribution agreement and various testing
agreements with DCT, along with any and all distribution rights and
rights to royalties or fees there under, were terminated. In addition,
the agreement provides that any and all intellectual property rights
relating to the terminated agreements were the property of Advanced
Viral, and the parties released each other from claims relating
thereto. In consideration, the Company agreed to pay DCT $60,000 and
granted warrants to purchase an aggregate of 5 million shares of common
stock to certain of DCT's affiliates at an exercise price of $0.16 for
a period of five years. In addition the recipients of the warrants
agreed not to sell more than an aggregate of 2 million shares of common
stock in any six-month period for a period of five years.

F-32

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 9. SECURITIES PURCHASE AGREEMENTS (Continued)

PRIVATE EQUITY LINE OF CREDIT

On February 9, 2001, the Company entered into an equity line of credit
agreement with Cornell Capital Partners Capital Partners, LP, an
institutional investor, to sell up to $50,000,000 of the Company's
common stock. Under such agreement, the Company may exercise "put
options" to sell shares for certain prices based on certain average
trading prices. Upon signing this agreement, the Company issued to its
placement agent, May Davis Group, Inc., and certain investors, Class A
warrants to purchase an aggregate of 5,000,000 shares of common stock
at an exercise price of $1.00 per share, exercisable in part or whole
until February 9, 2006, and Class B warrants to purchase an aggregate
of 5,000,000 shares of common stock at an exercise price equal to the
greater of $1.00 or 110% of the bid price on the applicable advance
date. Such Class B warrants are exercisable pro rata with respect to
the number of warrant shares as determined by the fraction of the
advance payable on that date as the numerator and $20,000,000 as the
denominator multiplied by 5,000,000, until sixty months from the date
of issuance. The Company has not issued any shares under this equity
line, which expired in August 2003. The Class B Warrants have expired
by their terms. There is no financial statement impact for the Class B
Warrants issued under this equity line. The fair value of the Class A
warrants was estimated to be $1,019,153 ($0.204 per warrant) based upon
a financial analysis of the terms of the warrants using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 80%; a risk free interest rate of 6% and an expected
holding period of five years. This amount is being amortized to
compensation and other expense for options and warrants over the life
of the equity line of credit (30 months) in the accompanying financial
statements.

On April 28, 2003, the Company entered into an equity line of credit
with Cornell Capital Partners LP. Pursuant to the equity line of
credit, the Company may, at its discretion, periodically sell to
Cornell Capital Partners Capital shares of common stock for a total
purchase price of up to $50 million. For each share of common stock
purchased under the equity line of credit, Cornell Capital Partners
Capital will pay Advanced Viral 100% of the lowest closing bid price of
its common stock on the over-the-counter Bulletin Board or other
principal market on which its common stock is traded for the five days
immediately following the notice date. Further, Cornell Capital
Partners Capital is entitled to a retain 5% of each advance under the
equity line of credit. The Company's obligation to sell its common
stock is conditioned, at its option, upon the per share purchase price
being equal to or greater than a minimum acceptable price, set by the
Company on the advance notice date, which may not be set any closer
than 7.5% below the closing bid price of its common stock the day prior
to the notice date. In December 2003, the Company registered 95,712,595
shares that may be issued under the equity line of credit.

For its services as placement agent, Katalyst Securities LLC received
107,527 shares of common stock, which was valued at $10,000.

F-33

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 9. SECURITIES PURCHASE AGREEMENTS (Continued)

SUMMARY OF WARRANT ACTIVITY

A summary of warrants issued and outstanding in connection with
convertible debentures and equity transactions as discussed above is
presented below. Upon exercise, warrants are convertible into an equal
number of the Company's .00001 par value common stock. The warrants are
exercisable immediately, with one exception, 5,000,000 Class B warrants
issued in 2001 which expired during August 2003.

Warrants 2003 Warrants 2002 Warrants 2001
1/1/2003 - Weighted-Average 1/1/2002- Weighted-Average 1/1/2001 - Weighted-Average
12/31/2003 Exercise Price 12/31/2002 Exercise Price 12/31/2001 Exercise Price
---------- -------------- ---------- -------------- ---------- --------------

Outstanding at beginning of
year 57,118,572 .342 33,597,172 .555 24,476,498 .353
Granted 36,127,700 .101 24,022,000 .042 10,735,000 .0967
Exercised 0 .0 0 0 (181,818) .275
Forfeited (22,828,102) .0236 (500,600) .20 (1,432,508) .234
Outstanding at end of year 70,418,170 .253 57,118,572 .342 33,597,172 .555
Warrants exercisable at 70,418,170 .253 52,118,572 .279 28,597,172 .533
year-end

The following table summarizes information for warrants to purchase common stock
outstanding at December 31, 2003:

Warrants Outstanding Warrants Exercisable
------------------------------------------------------ -----------------------------------
Number Weighted-average Number
Range of Outstanding Remaining Weighted-average Exercisable Weighted-average
Exercise Prices at 12/31/03 in Months Exercise Price At 12/31/03 Exercise Price
--------------- ----------- --------- -------------- ----------- --------------

.091 - .11 28,188,200 51 .0952 28,188,200 .0952
.12 - .18 15,836,500 55 .1238 15,836,500 .1238
.19 - .27 6,050,000 39 .2326 6,050,000 .2326
.28 - .41 6,195,214 16 .3101 6,195,214 .3101
.42 - 61 8,969,878 29 .5211 8,969,878 .5211
.62 - .92 178,378 38 .8640 178,378 .8640
1.0 5,000,000 25 1.0000 5,000,000 1.0000

NOTE 10. COMMON STOCK SUBSCRIBED BUT NOT ISSUED

Represents cash received during December 2003 pursuant to several
private placements of securities with various investors ($280,000) for
1,866,667 shares of common stock at a negotiated price of $0.15 per
share. These shares of common stock were issued during January 2004.

F-34

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES

GENERAL

POTENTIAL CLAIM FOR ROYALTIES

The Company may be subject to claims from certain third parties for
royalties due on sale of AVR118. The Company has not as yet received
any notice of claim from such parties.

PRODUCT LIABILITY

The Company is unaware of any claims or threatened claims since AVR118
was initially marketed in the 1940's; however, one study noted adverse
reactions from highly concentrated doses in guinea pigs. Therefore, the
Company could be subjected to claims for adverse reactions resulting
from the use of AVR118. In the event any claims for substantial amounts
were successful, they could have a material adverse effect on the
Company's financial condition and on the marketability of AVR118.
During November 2003, the Company secured $3,000,000 of product
liability coverage at a cost of approximately $15,000 per annum. In
addition, the Company extended at no cost, liability coverage for its
clinical trials in Israel. There can be no assurance that the Company
will be able to secure additional insurance in adequate amounts or at
reasonable premiums if it determined to do so. Should the Company be
unable to secure additional product liability insurance, the risk of
loss to the Company in the event of claims would be greatly increased
and could have a material adverse effect on the Company.

LACK OF PATENT PROTECTION

The Company has 11 issued U.S. patents, two issued Australian patents
and one granted China patent for the use of AVR118 at 12/31/03. The
Company currently has eight patent applications pending with the U.S.
Patent Office and 18 foreign patent applications at 12/31/03. The
Company can give no assurance that other companies, having greater
economic resources, will not be successful in developing a similar
product. There can be no assurance that such patents, if obtained, will
be enforceable.

F-35

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES

STATUS OF FDA FILINGS

On July 30, 2001, the Company submitted an Investigational New Drug
(IND) application to the United States Food and Drug Administration
(FDA) for the use of AVR118 as a topical treatment for genital warts
caused by human papilloma virus (HPV) infection. In September 2001, the
FDA allowed the Company's IND application for AVR118, which permitted
the Company to begin Phase I clinical trials. The Phase I initial
trials are placebo controlled, open label, dose escalation safety
studies in healthy trial volunteers. The Phase I study was performed in
the United States on healthy volunteers. In March 2002, the Company
completed the Phase I trial and submitted to the FDA the results which
indicated that AVR118 was safe and well tolerated dermatologically in
all doses applied in the study. Phase II trials are pivotal clinical
investigations designed to establish the efficacy and safety of AVR118.
Currently, the Company is determining the best course of action to
proceed with the Phase II clinical trials of AVR118 for topical use.

STATUS OF CLINICAL TRIALS IN ISRAEL

The Company is currently testing injectable AVR118 in a Phase I/II
study in Israel involving cachectic AIDS patients who may or may not be
receiving anti-retroviral therapy or highly active anti-retroviral
therapy (HAART). The Company's objective for this study is to determine
the safety and tolerance of AVR118. Although there can be no
assurances, the Company anticipates that the clinical trials in Israel
will help facilitate the planned investigational new drug (IND)
application process for injectable AVR118 with the FDA.

In August 2003, the Company decided to defer the continuation of and
re-examine the procedures, protocol and objectives of, two other
clinical trials in Israel using AVR118; a Phase I study for cachectic
patients with leukemia and lymphoma and a Phase I study for cachectic
patients with solid tumors. There can be no assurances as to when these
two studies will be completed, if at all.

Because of the Company's limited personnel, the Company believes it to
be in its best interests to focus its clinical efforts on its one
ongoing Phase I/II open-label dose escalation clinical trial being
conducted at The Kaplan Medical Center in Rehovot, Israel of AVR118 for
cachectic patients with AIDS. Out of 30 total patients contemplated
under the protocol for this study, 23 patients are enrolled, 22 of whom
have completed the full course of treatment of AVR 118, and one is
continuing to receive treatments of AVR 118, as required under the
study. Results from the first 15 patients showed improvement in
appetite, weight gain or stability, and enhanced quality of life. None
of the first 15 patients reported any serious side effects associated
with AVR118 therapy.

The Company estimates completion of this study during the second
quarter of 2004. It is uncertain at this time when cash inflows will
result from this study. The completion of the study is dependent upon
the availability of patients meeting the prescribed protocol and the
ability of the hospitals to meet the requirements of the protocol. From
inception of all the clinical studies in Israel through December 31,
2003, the Company has expensed approximately $1,692,000. The cost to
complete the Phase I/II study in Israel of AVR118 for cachectic
patients with AIDS is estimated to be $277,000. In addition, the
Company believes it will incur an additional $150,000 for consulting
expenses in the U.S. related to the analysis of data from this Phase
I/II study as well as strategic consulting.

F-36

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (CONTINUED)

STATUS OF ISRAEL CLINICAL TRIALS (CONTINUED)

In April 2001, the Company formalized a 12-month agreement with
Selikoff Center in Israel to develop clinical trials in Israel using
AVR118, which has concluded, the Company paid $242,000 for such
research.

In September 2002, the Company entered into a contract with EnviroGene
LLC, an affiliate of the Selikoff Center, to conduct, evaluate and
maintain the scientific quality for the three clinical studies listed
above. Under the terms of this agreement, EnviroGene will (1) finalize
all Israeli government and hospital approval documents, (2) complete
and organize the three clinical trials including establishing a network
of scientists to perform said study/trial and initiate recruitment of
patients and (3) perform the studies/trials and evaluate the results.
Total costs for EnviroGene LLC in connection with these three clinical
trials are $1,551,000, of which approximately $1,323,000 has been
expensed and approximately $875,000 has been paid through December 31,
2003.

On July 8, 2002, the Company extended an agreement with the Weizmann
Institute of Science and Yeda its developmental arm in Israel, to
conduct research on the effects of AVR118 on the immune system,
especially on T lymphocytes. In addition, scientists will explore the
effects of AVR118 in animal models. Under its provisions the study
period is extended for another twelve months to July 7, 2003. Total
costs incurred in connection with this research are expected to be
$138,000. Since inception, through December 31, 2003, the Company
expensed $120,000 and paid $90,000 in connection with this agreement.
Final payment has not been made pending receipt, review and approval of
the final report.

In October 2002 the Company entered into an agreement with Quintiles
Israel Ltd. to act as the auditor and monitor of the clinical studies.
The agreement terminates upon completion of the services unless
terminated earlier by either party upon prior written notice or upon a
material breach and a failure to cure, and upon such termination the
Company retain all rights to the research performed under the
agreement. The Company has expensed $147,000 since inception of the
contract through December 31, 2003. If all three clinical studies in
Israel were concluded, the additional cost under this contract would be
$106,000. The Company cannot at this time determine the financial
impact of reducing the number of trials under this contract.

In November 2002 the Company entered into an agreement with Kaplan
Medical Center in Israel to act as the center for the Phase I/II
study using AVR118 for cachectic patients with AIDS. The agreement
terminates upon conclusion of the study, or upon prior written notice,
and upon such termination the Company retains all rights to the
research performed under the agreement. To date, 23 patients have been
enrolled in the study out of 30 patients contemplated under the study
protocol, and the estimated completion date for the study is the second
quarter of 2004. The Company has expensed $103,000 since inception of
the contract through December 31, 2003.

The cost to complete the Phase I/II study in Israel of AVR118 for
cachectic patients with AIDS is estimated to be $277,000. In addition,
the Company believes it will incur an additional $150,000 for expenses
in the U.S. related to analyzing the data from the Phase I/II study in
Israel as well as strategic consulting.

F-37

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

STATUS OF ISRAEL CLINICAL TRIALS (Continued)

Conducting the clinical trials of AVR118 will require significant cash
expenditures. AVR 118 may never be approved for commercial distribution
by any country. Because the Company's research and development expenses
and clinical trial expenses will be charged against earnings for
financial reporting purposes, we expect that losses from operations
will continue to be incurred for the foreseeable future. We currently
do not have sufficient funds to complete all phases of clinical trials
of AVR 118. We are attempting to secure funds through the sale of the
Company's securities.

The studies being conducted in Israel are subject to risks associated
with the political, economic and military conditions affecting Israel
and the Middle East, and recent world events, including terrorism and
war, have made it difficult to predict whether or in what manner these
problems will be resolved.

The Company's studies detailing the results of the research and testing
being conducted in Israel may not positively impact the FDA's decision
to approve a new IND for injectable AVR118 or approve the marketing,
sales or distribution of AVR118 within the United States, and as a
result may not improve the Company's chances of gaining approval for
the marketing, sales or distribution of AVR118 anywhere in the world.
The Company cannot provide assurances that it will acquire additional
financial resources to complete all phases of the clinical trials, or,
if it acquires such resources, that it will do so on favorable terms.

F-38

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

CONSULTING AND EMPLOYMENT AGREEMENTS

GLOBOMAX AGREEMENT

On January 18, 1999, the Company entered into a consulting agreement
with GloboMax LLC to provide services at hourly rates established by
the contract to the Company's Investigational New Drug application
submission and to perform all work that is necessary to obtain FDA
approval. In addition, GloboMax and its subcontractors are assisting
the Company in conducting Phase I clinical trials for AVR118. The
contract was extended by mutual consent of both parties. The Company
has paid approximately $5,031,000 for services rendered and
reimbursement of expenses by GloboMax and its subcontractors through
December 31, 2002. There were no expenditures in 2003 and GloboMax is
no longer providing services to or representing Advanced Viral.

HARBOR VIEW AGREEMENTS

On February 7, 2000, the Company entered into a consulting agreement
with Harbor View Group, Inc. for past and future consulting services
related to corporate structures, financial transactions, financial
public relations and other matters through December 31, 2000. In
connection with this agreement, the Company issued warrants to purchase
1,750,000 shares at an exercise price of $0.21 per share and warrants
to purchase 1,750,000 shares at an exercise price of $0.26 per share
until February 28, 2005. The fair value of the warrants was estimated
to be $200,249 ($0.057 per warrant) based upon a financial analysis of
the terms of the warrants using the Black-Scholes Pricing Model with
the following assumptions: expected volatility of 90%; a risk-free
interest rate of 6% and an expected holding period of eleven months
(the term of the consulting agreement). This amount was amortized to
consulting expense during the year ended December 31, 2000.

In May 2002, the Company entered into an agreement with Harbor View
Group, Inc., which terminated all consulting agreements with Harbor
View Group, Inc. as of December 31, 2001. In consideration for
consulting services provided by Harbor View to the Company from January
2002 to May 2002, the Company granted to Harbor View warrants to
purchase 1,000,000 shares of the Company's common stock at an exercise
price of $0.18 per share. The warrants are exercisable in whole or in
part at any time and from time to time prior to May 30, 2008. The fair
value of the warrants was estimated to be $190,757 ($0.1908 per
warrant) based upon a financial analysis of the terms of the warrants
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 117%; a risk-free interest rate of 4.38% and an
expected holding period of six years. This amount was charged to
compensation expense for options and warrants during the year ended
December 31, 2002.

F-39

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)

HIRSCHMAN AGREEMENT

In May 1995, the Company entered into a consulting agreement with
Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School of
Medicine, New York, New York and Director of Mt. Sinai's Division of
Infectious Diseases, whereby Dr. Hirschman was to provide consulting
services to the Company through May 1997. The consulting services
included the development and location of pharmacological and
biotechnology companies and assisting the Company in seeking joint
ventures with and financing of companies in such industries. In
connection with the consulting agreement, the Company issued to Dr.
Hirschman 1,000,000 shares of the Company's common stock and the option
to acquire 5,000,000 shares of the Company's common stock for a period
of three years as per the vesting schedule as referred to in the
agreement, at a purchase price of $0.18 per share. As of December 31,
2003, 900,000 shares have been issued upon exercise of these options
for cash consideration of $162,000 under this Agreement.

In March 1996, the Company entered into an addendum to the consulting
agreement with Dr. Hirschman whereby Dr. Hirschman agreed to provide
consulting services to the Company through May 2000 (the "Addendum").
Pursuant to the Addendum, the Company granted to Dr. Hirschman and his
designees options to purchase an aggregate of 15,000,000 shares of the
Company's common stock for a three year period pursuant to the
following schedule: (i) options to purchase 5,000,000 shares
exercisable at any time and from time to time commencing March 24, 1996
and ending March 1999 at an exercise price of $0.19 per share; (ii)
options to purchase 5,000,000 shares exercisable at any time and from
time to time commencing March 24, 1997 and ending March 1999 at an
exercise price of $0.27 per share; and (iii) options to purchase
5,000,000 shares exercisable at any time and from time to time
commencing March 24, 1998 and ending March 1999 at an exercise price of
$0.36 per share. In addition, the Company has agreed to cause the
shares underlying these options to be registered so long as there is no
cost to the Company.

Dr. Hirschman assigned to third parties unaffiliated with the Company
options to acquire an aggregate of three million shares of the
Company's common stock, all of which assigned options have expired and
are no longer exercisable, except for 75,000 at $0.27 and 75,000 at
$0.36. During March 2001 these options were extended until December
2001. As a result of this modification of the option terms, the fair
value of the option was estimated to be $23,291 based on a financial
analysis of the terms of the option using the Black-Scholes pricing
model with the following assumptions: expected volatility of 80%; risk
free interest rate of 6%. This amount was recorded in March 2001. These
options were further extended in December 2001 until June 2002. As a
result of this modification of the option terms, the fair value of the
options was estimated to be $6,158 based on a financial analysis of the
terms of the options using the Black-Scholes pricing model with the
following assumptions: expected volatility of 80%; risk free interest
rate of 5%. This amount was recorded in December 2001. These options
were further extended in June 2002 until December 2002, and the
exercise prices were increased to $0.28 and $0.37, respectively. This
amount was recorded in June 2002. As a result of this modification of

F-40

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)

HIRSCHMAN AGREEMENT (Continued)

the option terms, the fair value of the options was estimated to be
$3,078 based on a financial analysis of the terms of the options using
the Black-Scholes pricing model with the following assumptions:
expected volatility of 80%; risk free interest rate of 5%.

From October 1996 to August 2003, Dr. Hirschman was the Chief Executive
Officer of the Company. In February 1998, the Company granted to Dr.
Hirschman options to purchase 23,000,000 shares of the Company's common
stock at an exercise price of $0.27 from time to time until February
2008. These options vested upon the Company's filing an IND application
with the FDA. In February 1998, the Company extended the expiration
date of the following options previously granted to Dr. Hirschman from
March 1999 to February 2008: (i) options to purchase 4,100,000 shares
at $0.18 per share; (ii) options to purchase 4,000,000 shares at $0.19
per share; (iii) options to purchase 4,000,000 shares at $0.27 per
share; and (iv) options to purchase 4,000,000 shares at $0.36 per
share.

In May 2000, the Company and Dr. Hirschman entered into a second
amended and restated employment agreement (the "Agreement") which
supersedes in its entirety the July 1998 Employment Agreement. Pursuant
to this Agreement, Dr. Hirschman was employed to serve as Chief
Executive Officer and President of the Company until December 31, 2002,
provided, however, the Agreement is extended automatically by one year,
each year, unless notice of termination has been given by either Dr.
Hirschman or the Company. In July 2002, the Company notified Dr.
Hirschman that the Agreement will not be extended subsequent to
December 31, 2004. The Agreement provides for Dr. Hirschman to receive
an annual base salary of $361,000 (effective January 1, 2000), use of
an automobile, major medical, disability, dental and term life
insurance benefits for the term of his employment and for the payment
of $100,000 to Dr. Hirschman on the earlier to occur of (i) the date an
IND number is obtained from and approved by the FDA so that human
research may be conducted using AVR118; or (ii) the execution of an
agreement relating to co-marketing pursuant to which one or more third
parties commit to make payments to the Company of at least $15 million.
On September 4, 2001, the Company received an IND number from the FDA.
Therefore, of the $100,000 described above, $25,000 was paid as of
December 31, 2001 with an additional $25,000 paid in January 2002 and
the $50,000 balance paid in January 2004.

The Agreement also provides for previously issued options to acquire
23,000,000 shares of common stock at $0.27 per option share to be
immediately vested as of the date of this agreement and are exercisable
until February 17, 2008. The fair value of these options was estimated
to be $5,328,000 based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 80%; a risk-free interest rate of
6% and an expected life of 32 months. The Company has recognized the
$5,328,441 fair value of the options as compensation expense on a
pro-forma basis in May 2000 based upon the vesting terms of the
employment agreement.

F-41

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)

HIRSCHMAN AGREEMENT (Continued)

On August 27, 2003, Shalom Z. Hirschman, M.D. resigned as an officer and
director of Advanced Viral upon the terms and conditions of a Third
Amended and Restated Employment Agreement dated August 27, 2003. The
resignation of Dr. Hirschman was not due to any disagreement with
Advanced Viral on any matter relating to Advanced Viral's operations,
policies or practices.

Pursuant to a Third Amended and Restated Employment Agreement dated as
of August 26, 2003 between Advanced Viral and Dr. Hirschman, the Company
employ Dr. Hirschman on a full business time basis as its chief
scientist. Pursuant to the agreement, the term of Dr. Hirschman's
employment continues until December 31, 2004 unless sooner terminated
pursuant to the agreement. If the agreement is terminated by the Company
for cause, all unvested stock options granted to Dr. Hirschman expire
within 90 days of such termination date. If the agreement is terminated
by Dr. Hirschman for good reason, the Company is required to pay to Dr.
Hirschman his annual salary and employee benefits through the term of
the agreement. Pursuant to the agreement, Dr. Hirschman receives an
annual salary of $361,000, payable in equal biweekly installments. The
agreement also entitles Dr. Hirschman to a major medical insurance
policy, disability policy and dental policy insurance to Dr. Hirschman
and his dependents that is reasonably acceptable to the parties, and a
term life insurance policy for at least $1 million, with a beneficiary
to be designated by Dr. Hirschman. The agreement further provides that
the Company shall:

o lease or purchase for Dr. Hirschman, at his discretion, an
automobile selected and to be used by him, having a list price
not in excess of $40,000, and pay for all gas, oil, repairs
and maintenance, as well as the lease or purchase payments, as
applicable, in connection with the automobile;

o reimburse Dr. Hirschman for all of his proven expenses
incurred in and about the course of his employment that are
deductible under the current tax law, including, among other
expenses (i) his license fees, membership dues in professional
organizations, subscriptions to two professional journals, not
to exceed $1,200; (ii) necessary travel, hotel and
entertainment expenses incurred in connection with overnight,
out-of-town trips that contribute to the benefit of Advanced
Viral and as requested by the board of directors, and all
other expenses that may be pre-approved by our board of
directors; and

o provide not less than four weeks paid vacation annually and
such paid sick or other leave as the Company provide to all of
its employees.

The agreement also provides for the payment of $50,000 to Dr. Hirschman
provided (i) the Company receive new financing or a capital investment
of not less than $1,500,000, and (ii) Dr. Hirschman is terminated other
than for cause. The agreement further contains certain confidentiality
and non-compete provisions, ratifies his currently outstanding stock
options, and obligates the Company to use its best efforts to cause
shares underlying the options to be registered or to have the
registration of such shares to continue to be effective in order that
the shares may be resold without a restrictive legend.

F-42

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)

HAWKINS EMPLOYMENT AGREEMENT

Pursuant to an Employment Agreement dated February 10, 2004, the
Company engaged Elma S. Hawkins, Ph.D. to be its President and Chief
Executive Officer on a full time basis commencing February 18, 2004
until February 2006 unless terminated earlier as provided in the
agreement. The initial term may be extended for successive one (1) year
periods unless either party gives the other thirty (30) days prior
written notice of its intent not to renew prior to the expiration of
the then current term. Dr. Hawkins shall receive a base salary of
$350,000 per year, and shall be eligible to receive an annual cash
bonus of up to 50% of her then base salary based on certain performance
objectives in the sole discretion of the Board of Directors. In
addition, Advanced Viral agreed to pay Dr. Hawkins a signing bonus of
$50,000. The agreement also entitles Dr. Hawkins and her dependents to
participate in all incentive, savings and retirement plans, practices,
policies and programs applicable generally to other executives of
Advanced Viral and their families. The agreement further provides that:

o The Company shall pay the dues of such professional
associations and societies of which Dr. Hawkins is a
member in furtherance of her duties.

o The Company shall reimburse Dr. Hawkins for
reasonable expenses relating to professional licenses,
entertainment, travel, and similar items in accordance
with the policies, practices and procedures of Advanced
Viral.

o The Company shall furnish Employee with an automobile
and pay all expenses related to such automobile for use in
the performance of her duties, or, at the Company's
discretion provide, at its expense, car transportation
between New York City and the Yonkers, New York
headquarters.

o Dr. Hawkins will be entitled to four (4) weeks paid
vacation annually or such other time as authorized by the
Board of Directors during which time her compensation
shall be paid in full. Vacation Days unused in any
calendar year may not be accumulated and carried forward
and used in future years.

If the agreement is terminated by the Company for cause, or Dr. Hawkins
voluntarily resigns, becomes disabled or dies, then Dr. Hawkins or her
estate shall be entitled to her base salary earned through the date of
termination, accrued vacation, and all applicable reimbursements due.
If the agreement is terminated for other reasons by either party, Dr.
Hawkins shall be entitled to, in one lump sum payment, that amount
which is equivalent to her base salary paid for the fiscal year
immediately prior to her termination, and all applicable reimbursements
due. Payment of the lump sum severance benefit is conditioned upon the
release by Dr. Hawkins of Advanced Viral, to the maximum extent
permitted by law, from any and all claims she may have against the
Company that relate to or arise out of her employment or termination of
employment.

F-43

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)

HAWKINS AGREEMENT (Continued)

Pursuant to the agreement, Dr. Hawkins received an option to purchase
40 million shares of common stock through February 2009. The option
vests in increments of 666,667 on a monthly basis, and is exercisable
at four different prices, as follows: (i) $0.12 for the first 8 million
option shares; (ii) $0.129 for the next 8 million option shares; (iii)
$0.139 for the next 8 million option shares; (iv) $0.149 for the next 8
million shares and (v) $0.160 for the last 8 million option shares. If
Dr. Hawkins is terminated for cause or if she voluntarily resigns
without cause, the option shall expire for all option shares which have
as of such date not become exercisable but shall survive with respect
to option shares that have become exercisable as of such date, (the
"Surviving Options"), provided, however, notwithstanding anything
contained herein to the contrary, she shall have 90 days to exercise
the Surviving Options. the option shall immediately expire and she
shall forfeit all rights to acquire the option shares. Upon the
termination of Dr. Hawkins' employment for other reasons, the option
shall immediately become exercisable for that number of option shares
equal to the number of option shares which would have been subject to
exercise by Dr. Hawkins during the then current term of the employment
agreement (without giving effect to any extensions thereof).

OTHER EMPLOYEES

In connection with the employment of its Chief Financial Officer, the
Company granted Alan Gallantar options to purchase an aggregate of
4,547,880 shares of the Company's common stock. Such options have a
term of ten years commencing October 1, 1999 through September 30, 2009
and have an exercise price of $0.24255 per share. These options are
fully vested.

The fair value of these options was estimated to be $376,126 ($0.0827
per option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 20%; a risk-free interest rate of
6% and an expected life of ten years.

On January 3 and December 29, 2000, the Company issued to certain other
employees stock options to acquire an aggregate of 430,000 and 716,000
shares of common stock at an exercise price of $0.21 and $0.33 per
share, respectively. These options expire on January 2, 2010 and
December 29, 2010, respectively, and vest in 20% increments at the end
of each year for five years. The fair value of the these options was
estimated to be $42,342 ($0.1721 per option share) and $117,893
($0.2788 per option share), respectively, based upon a financial
analysis of the terms of the options using the Black-Scholes Pricing
Model with the following assumptions: expected volatility of 80%; a
risk-free interest rate of 6%; an expected life of ten years; and a
termination rate of 10%.

In May 2002, the Company granted to certain of its employees options to
purchase 274,000 shares of the Company's common stock. Such options
have an exercise price of $0.17 per share, vest in 20% increments over
a five-year period commencing January 2003 through January 2012. The
fair value of the these options was estimated to be $43,922 ($0.1603
per option share) and based upon a financial analysis of the terms of
the options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 117%; a risk-free interest rate of
4.38%; an expected

F-44

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)

OTHER EMPLOYEES (Continued)

life of approximately 10 years. The Company will recognize the fair
value of the options as compensation expense on a pro-forma basis over
approximately 5 years (the vesting period of the options).

In August 2003, the Company granted an aggregate of 3,010,000 options
to purchase shares of the Company's common stock to certain employees.
The options are exercisable at $0.052 per share through August 26,
2008, and vest in 20 equal installments each quarter over five years.
The fair value of the options was estimated to be $147,177 ($0.049 per
option) based upon a financial analysis of the terms of the options
using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 128%; a risk-free interest rate of 3.99% and an
expected holding period of eight years.

OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS

MEMBERS OF ADVISORY BOARDS

The Company values these options based upon a measurement date
consistent with the vesting schedule of the options.

In May 2002, the Company granted to members of its Scientific Advisory
Board and Business Advisory Board options to purchase an aggregate of
2,250,000 shares of common stock at an exercise price of $0.12 per
share, which options are exercisable 25% immediately, 25% on June 20,
2002, 25% on September 20, 2002 and 25% on December 20, 2002 through
May 5, 2010. The fair value of the options was estimated to be $246,822
($0.1097 per option) based upon a financial analysis of the terms of
the options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 115%; a risk-free interest rate of
4.88% and an expected holding period of eight years. This amount was
charged to compensation expense for options and warrants during the
year ended December 31, 2002. The Business Advisory Board was dissolved
during December 2002

In September 2002, the Company granted to Sidney Pestka, M.D., a member
of the Scientific Advisory Board, options to purchase 250,000 shares of
common stock at an exercise price of $0.14 per share, which options are
exercisable 25% immediately, 25% on December 18, 2002, 25% on March 18,
2003 and 25% on June 18, 2003 through September 17, 2010. Compensation
expense for the year ended December 31, 2002 was $6,438.

F-45

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)

MEMBERS OF ADVISORY BOARDS (Continued)

In December 2002, the Company granted to members of its Scientific
Advisory Board options to purchase an additional 1,500,000 shares of
common stock at an exercise price of $0.075 per share, which options
are exercisable 25% on March 20, 2003, 25% on June 20, 2003, 25% on
September 20, 2003 and 25% on December 20, 2003 through December 20,
2010. Because the options did not begin to vest until March 2003, there
was no compensation expense for the year ended December 31, 2002.

In December 2003 the Company granted to members of its Scientific
Advisory Board, options to purchase 1,450,000 shares of common stock at
an exercise price of $0.18 per share vesting immediately and
exercisable until December 2013. The fair value of these options was
estimated to be $252,934 ($.1744 per option) based upon a financial
analysis of the terms of the options using the Black-Scholes pricing
model with the following assumptions expected volatility of 131%; a
risk-free interest rate of 4.20% and an expected holding period of 10
years. This amount was charged to compensation expense for options and
warrants during the year ended December 31, 2003.

BOARD OF DIRECTORS

In May 2002, the Company granted an aggregate of 4,150,000 options to
purchase shares of the Company's Common stock to certain Members of the
Board of Directors and various committees of the Board of Directors.
The exercise price was $0.12 per share exercisable 25% immediately, 25%
on June 20, 2002, 25% on September 20, 2002 and 25% on December 20,
2002 through May 5, 2010. The fair value of the these options was
estimated to be $455,249 ($0.1097 per option share) based upon a
financial analysis of the terms of the options using the Black-Scholes
Pricing Model with the following assumptions: expected volatility of
115%; a risk free interest rate of 4.88% and an expected life of eight
years. The Company will recognize the fair value of the options as
compensation expense on a pro-forma basis recognizing 25% of the fair
value over each vesting period.

In June 2002, the Company granted to Roy S. Walzer, upon his becoming a
member of the Board of Directors and member of various committees of
the Board, options to purchase 528,800 shares of common stock at an
exercise price of $0.295 per share, which options are exercisable 25%
immediately, 25% on September 10, 2002, 25% on December 10, 2002 and
25% on March 10, 2003 through June 9, 2010. The fair value of the these
options was estimated to be $140,608 ($0.2659 per option share) based
upon a financial analysis of the terms of the options using the
Black-Scholes Pricing Model with the following assumptions: expected
volatility of 115%; a risk-free interest rate of 4.88% and an expected
life of eight years. The Company will recognize the fair value of the
options as compensation expense on a pro-forma basis recognizing 25% of
the fair value over each vesting period.

F-46

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)

BOARD OF DIRECTORS (Continued)

In July 2002, the Company granted to Paul Bishop, upon his becoming a
member of the Board of Directors, options to purchase 238,356 shares of
common stock at an exercise price of $0.17 per share,) which options
are exercisable 25% immediately, 25% on October 29, 2002, 25% on
January 29, 2003 and 25% on April 29, 2003 through July 28, 2010. The
fair value of the these options was estimated to be $38,509 ($0.1616
per option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 133%; a risk-free interest rate of
4.38% and an expected life of eight years. The Company will recognize
the fair value of the options as compensation expense on a pro-forma
basis recognizing 25% of the fair value over each vesting period.

In September 2002, the Company granted to Richard Kent, upon his
becoming a member of the Board of Directors, and member of various
committees of the Board, options to purchase 241,096 shares of common
stock at an exercise price of $0.14 per share, which options are
exercisable 25% immediately, 25% on December 24, 2002, 25% on March 24,
2003 and 25% on June 24, 2003 through September 23, 2010. The fair
value of the these options was estimated to be $29,377 ($0.1218 per
option share) based upon a financial analysis of the terms of the
options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 127%; a risk-free interest rate of
4.38% and an expected life of eight years. The Company will recognize
the fair value of the options as compensation expense on a pro-forma
basis recognizing 25% of the fair value over each vesting period.

In December 2002, the Company granted an aggregate of 10,600,000
options to purchase shares of the Company's Common stock to certain
Members of the Board of Directors and various committees of the Board
of Directors. The exercise price was $0.075 per share, and the options
are exercisable 25% on March 20, 2003, 25% on June 20, 2003, 25% on
September 20, 2003 and 25% on December 20, 2003 through December 20,
2010. The fair value of the options was estimated to be $773,042
($0.0729 per option) based upon a financial analysis of the terms of
the options using the Black-Scholes Pricing Model with the following
assumptions: expected volatility of 114%; a risk-free interest rate of
4.14% and an expected holding period of eight years. The Company will
recognize the fair value of the options as compensation expense on a
pro-forma basis recognizing 25% of the fair value over each vesting
period.

In August 2003, the Company granted an aggregate of 22,500,000 options
to purchase shares of the Company's Common stock to certain members of
the Board of Directors. Options to purchase 17,500,000 shares are
exercisable at $0.052 per share through August 26, 2013. Options to
purchase 5,000,000 shares are exercisable at $0.063 per share through
August 26, 2013. The fair value of the options was estimated to be
$1,129,017 ($0.05 per option) based upon a financial analysis of the
terms of the options using the Black-Scholes Pricing Model with the
following assumptions: expected volatility of 128%; a risk-free
interest rate of 4.47% and an expected holding period of 10 years.

F-47

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)

BOARD OF DIRECTORS (Continued)

In December 2003, the Company granted an aggregate of 21,200,000 shares
of the Company's common stock to certain members of the Board of
Directors and various committees of the Board of Directors options to
purchase 12,200,000 shares are exercisable at $0.18 per share, which
options vest 25% immediately, 25% on March 19, 2004, 25% on June 19,
2004 and 25% on September 19, 2004 through December 19, 2003. The
remaining 9,000,000 shares are exercisable at $0.18 per share and vest
at the rate of 750,000 options every 30 days commencing December 20,
2003 through December 2013. The fair value of the options was estimated
to be $3,698,678 ($0.1745 per option) based upon a financial analysis
of the terms of the options using the Black-Scholes pricing model with
the following assumptions: expected volatility of 131%; a risk-free
interest rate of 4.20% and on expected holding period of ten years. The
company will recognize the fair value of the options as compensation
expense on a pro-forma basis based on the percentage vested at each
vesting period.

The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB No. 25), and
related interpretations, in accounting for its employee stock options
rather than the alternative fair value accounting allowed by SFAS no.
123, Accounting for Stock-Based Compensation. APB No. 25 provides that
the compensation expense relative to the Company's employee stock
options is measured based on the intrinsic value of the stock option.
SFAS No. 123 requires companies that continue to follow APB No. 25 to
provide a pro-forma disclosure of the impact of applying the fair value
method of SFAS No. 123. The Company follows SFAS No. 123 in accounting
for stock options issued to non-employees.

Upon resignation, directors no longer provide services to the Company
and there are no modifications to the terms of their options.

There were no other options outstanding that would require pro forma
presentation.

During February 2003, Richard S. Kent resigned from the Company's Board
of Directors. Under the terms of his option agreements he is entitled
to exercise options to purchase 431,271 shares of the Company's common
stock until February 2006.

F-48

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
BOARDS (Continued)

BOARD OF DIRECTORS (Continued)

During September 2003 Ms. Carol Armenti resigned from the Scientific
Advisory Board. Under terms of her option agreement she is entitled to
exercise options to purchase 434,103 options shares of the Company's
common stock until September 2006.

SUMMARY OF STOCK OPTIONS

The fair value of each option is estimated on the date of grant using
Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 2003, 2002, and 2001, respectively:
divided yield of 0.0% percent for all years; expected volatility of
113% to 128%, 113% to 133%,, N/A, and, risk-free interest rates of 4%,
4%,and N/A and expected lives of 8 to 10, 8 to 10, and N/A years. A
summary of the status of the Company's fixed stock options as of
December 31, 2003, 2002 and 2001, and changes during the years ending
on those dates is presented below

2003 2002 2001
Weighted- Weighted- Weighted-
average average average
Exercise Exercise Exercise
Shares Price Shares Price Shares Prie
---------- --------- ---------- ---------- ---------- ---------

Outstanding at beginning of
year 63,833,427 .2122 51,056,380 .2557 51,426,380 .2560
Granted 48,410,000 .113 19,782,252 .10 100,000 .31
Exercised -- -- -- (60,000) .30
Forfeited (2.068,722) (.1277) (7,005,205) -- (410,000) --
Outstanding at end of year 110,174,705 .1704 63,833,427 .2122 51,056,380 .2557
Options exercisable at
year-end; 90,824,305 .1724 50,473,879 .2433 48,518,420 .2553
weighted-average fair value
of options granted during
the year .11 .10 .31

The following table summarizes information about stock options
outstanding at December 31, 2003:

Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------
Number Weighted-average Number
Range of Outstanding Remaining Weighted-average Exercisable Weighted-average
Exercise Prices At 12/31/03 Contractual Life Exercise Price At 12/31/03 Exercise Price
--------------- ----------- ---------------- -------------- ----------- --------------

.01 - .07 25,510,000 9.5 years .0542 22,510.000 .0544
.08 - .12 16,695,492 7.9 years . 0944 16,695,492 .0944
.13 - .18 27,328,382 9.0 years .1793 11,166,582 .1790
.19 - .27 35,727,880 4.5 years .2572 35,655,880 .2573
.28 - .36 4,912,951 4.8 years .3497 4,796,351 .3502

F-49

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

SUMMARY OF STOCK OPTIONS (Continued)

Financial reporting of the options granted to Hirschman, Gallantar,
other employees and members of the Board of Directors and committees of
the Board of Directors has been prepared pursuant to the Company's
policy of following APB No. 25 and related interpretations.
Accordingly, the following pro-forma financial information is presented
to reflect amortization of the fair value of the options.

Year Ended December 31,
------------------------------------------------------------------------------------
2003 2002 2002 2001 2001
Reported Reported Restated Reported Restated
-------- -------- -------- -------- --------

Net loss $ (7,816,811) $(10,342,335) $ (9,321,065) $(11,715,568) $(11,086,567)
Deduct: total stock-based
compensation expense
determined under fair value
based method for all awards,
net of related tax effects (2,790,859) (2,016,132) (724,048) (2,374,643) (154,034)
Pro forma net loss $(10,607,670) $(12,358,467) $(10,045,113) $(14,090,211) $(11,240,601)
Loss per share - basic and
diluted
As reported $ (.02) $ (0.02) $ (0.02) $ (0.03) $ (0.03)
Pro forma $ (.02) $ (0.03) $ (0.02) $ (0.04) $ (0.03)

DISTRIBUTION AGREEMENTS

The Company currently is a party to separate agreements with four
different entities, whereby the Company has granted exclusive rights to
distribute AVR118 in the countries of Canada, China, Japan, Macao, Hong
Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay, Uruguay, Brazil and
Chile. Pursuant to these agreements, distributors are obligated to
cause AVR118 to be approved for commercial sale in such countries and,
upon such approval, to purchase from the Company certain minimum
quantities of AVR118 to maintain the exclusive distribution rights.
Leonard Cohen, a former consultant to the Company, has informed the
Company that he is an affiliate of two of these entities. To date, the
Company has recorded revenue classified as other income for the sale of
territorial rights under the distribution agreements. The Company has
made no sales under the distribution agreements other than for testing
purposes.

On February 9, 2004, the Company entered into a termination and release
agreement with DCT, S.R.L. and certain of its affiliates pursuant to
which a distribution agreement and various testing agreements with DCT,
along with any and all distribution rights and rights to royalties or
fees thereunder, were terminated. In addition, the agreement provides
that any and all intellectual property rights relating to the
terminated agreements were the property of Advanced Viral, and the
parties released each other from claims relating thereto. In
consideration, the Company agreed to pay DCT $60,000 and granted
warrants to purchase an aggregate of five million shares of common
stock to certain of DCT's affiliates at an exercise price of $0.16 for
a period of five years. In addition the recipients of the warrants
agreed not to sell more than an aggregate of two million shares of
common stock in any six-month period for a period of five years.

F-50

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

CONSTRUCTION COMMITMENT

In November 1999, the Company entered into an agreement with an
unaffiliated third party to construct leasehold improvements at an
approximate cost of $380,000 for research and development purposes at
the Company's Yonkers, New York facilities which has been completed as
of June 30, 2001. In October 2000, the Company entered into another
agreement with the unaffiliated third party to construct additional
leasehold improvements at an approximate cost of $325,000 for research
and development purposes at the Company's Yonkers, New York facilities,
of which the entire amount has been incurred as of December 31, 2001.
During 2002, additional costs were incurred to complete leasehold
improvements for research and development purposes of approximately
$222,000, which was paid during 2003.

LEASES

CAPITAL LEASES

During 1998, the Company entered into a purchase lease agreement for
equipment totaling $222,318. The lease calls for monthly payments of
$4,529 for 60 months commencing on September 1998 and expiring on July
2003. During 1999, the Company entered into a purchase lease agreement
for equipment totaling $38,645. The lease calls for monthly payments of
$965 for 48 months commencing in August 1999 and expiring in July 2003.
During 2000, the Company entered into a purchase lease agreement for
equipment totaling $13,197. The lease calls for monthly payments of
$447 for 36 months commencing in January 2001 and expiring in December
2003. During 2002, the Company entered into a purchase lease agreement
for equipment totaling $146,672. The lease calls for monthly payments
of $5,903 for 24 months commencing in February 2002 and expiring in
January 2004. The January 2004 payment was made in December 2003. There
are no lease obligations at December 31, 2003.

OPERATING LEASES

Management executed a non-cancelable lease for new office space in
Florida on January 1, 1996, expiring on December 31, 1999 at
approximately $17,000 annually. The Company has three options to renew
for an additional one year per option. Management has exercised its
second option for the year 2001. Effective December 2001, the Company
closed its Florida office.

On December 30, 1998, the Company executed an amendment to its existing
lease dated April 1997 for the laboratory facilities in Yonkers, New
York. The lease on the additional space is effective May 1, 1999. The
new lease adds 10,550 square feet (for a total of 16,650 square feet)
and extends its term until April 2005. Annual rent on the original
lease is approximately $85,000. Rent for the additional facilities is
approximately $175,000. Total rental commitment for the Yonkers
facilities will be $260,000 until May 1, 2002 at which time it will
increase to approximately $290,000.

The Company leased an automobile in November 1999 for 39 months at $711
per month expiring in January 2003. Dr. Hirschman entered into a new
39 month lease for $716 per month, starting in February 2003 and
expiring in April 2006. The Company is obligated to make payments under
this lease through December 2004, which is reflected in the following
table.

F-51

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 11. COMMITMENTS AND CONTINGENCIES (Continued)

LEASES (Continued)

OPERATING LEASES (Continued)

Total lease expense for the years ended December 31, 2003, 2002 and
2001 amounted to $298,763, $263,609 and $296,064, respectively.

Future minimum lease commitments as of December 31, 2003 are as
follows:

Year ending December 31:
2004 $299,000
2005 97,000
--------
TOTAL $396,000
========
NOTE 12. SEVERANCE AGREEMENTS

On December 3, 2001, William Bregman, Bernard Friedland and Louis
Silver resigned as officers and directors of the Company upon the terms
and conditions of separate severance agreements. The resignations were
not due to any disagreement with the Company or any matter relating to
the Company's operations, policies or practices.

In connection with their resignation, the Company paid $150,000 to each
of Messrs. Bregman and Friedland and $2,500 to Mr. Silver. In
connection with the severance agreements, the Company obtained a loan
in the amount of $200,000 from the Company's Chief Financial Officer,
as evidenced by a demand promissory note. The note was repaid on
December 17, 2001.

NOTE 13. SETTLED LITIGATION

In December 2002 the Company filed suit in the Circuit Court of the
11th Judicial Circuit of Florida charging that certain investors
"misrepresented their intentions in investing in the Company" and
"engaged in a series of manipulative activities to depress the price of
Advanced Viral stock." The Company alleges that the defendants sought
to "guarantee they would be issued significantly more shares of ADVR
common stock" as a result of warrant repricing provisions of a
September 2002 financing agreement. The Company is seeking a judgment
for damages, interest and costs.

The complaint names SDS Merchant Fund, L.P., a Delaware limited
partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein;
Knight Securities, L.P., a limited partnership conducting securities
business in Florida; Stonestreet Limited Partnership located in Canada;
and Bristol Investment Fund, LTD., whose principal place of business is
in Grand Cayman, Cayman Islands, among others. The complaint claims
that the "defendants have each, at times acting individually, and at
times acting in concert with at least one or more of each other,"
engaged in practices that violate sections of the Florida Securities
and Investor Protection Act.

F-52

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 13. SETTLED LITIGATION (Continued)

Also named as a plaintiff in the case is William B. Bregman, a resident
of Miami-Dade County, Florida, and one of the largest shareholders of
the Company. The complaint alleges that Mr. Bregman suffered losses of
approximately $3.9 million as a result of the stock manipulation
scheme. The suit is related to an agreement, announced September 9,
2002, pursuant to which the Company issued and sold to certain
investors 21,500,000 shares of its common stock for total gross
proceeds of $3,010,000, or $.14 per share. The Company also issued
warrants to purchase an aggregate of 16,125,002 shares of the Company's
common stock, which were covered by provisions that allowed for an
adjustment of the warrant exercise price. The complaint charges the
defendants with manipulating the share price to take favorable
advantage of these warrant pricing provisions.

Following the initiation of the Company's lawsuit in Florida, three of
the purchasers in the September financing (Alpha Capital, A.G., Bristol
Investment Fund, Ltd. and Stonestreet Limited Partnership (the "Alpha
Plaintiffs") filed separate lawsuits in the U.S. District Court for the
Southern District of New York. The suits sought a preliminary
injunction and other relief for breach of contract. The District Court
entered an order on February 11, 2003 upon a motion of the Alpha
Plaintiffs, that required that (i) the Company deliver to the Alpha
Plaintiffs the shares of Company common stock issuable upon exercise of
the warrants; (ii) the Alpha Plaintiffs post a bond of either $100,000
or the market value of the warrant shares, whichever is higher for each
group of warrants as of the first and second determination dates; and
(iii) all the proceeds from the sale of the warrant shares be placed in
escrow pending final resolution of the litigation. Within ten days of
the entry of the order, the Company moved to alter/amend the judgment
and/or reconsideration of the Court's order requesting relief from the
Court's order. The Court denied this motion and ordered the Company to
immediately deliver the warrant shares to the Alpha Plaintiffs upon
their payment of the exercise price and posting of a bond, without
further delay and no later than April 8, 2003. The Company appealed the
order denying the motion for reconsideration.

During May 2003, the Company entered into a settlement and mutual
release agreements with the parties involved in both the Florida and
New York litigation, which, among other things, dismissed the lawsuits
with prejudice. In exchange for release by the parties to the lawsuits
of their rights to exercise the warrants issued in the September 2002
financing, the Company paid and recorded $1,050,647. Therefore, the
Company recorded this obligation as a cost associated with the
September 2002 financing by reducing Paid in Capital.

F-53

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 14. STOCKHOLDERS' EQUITY

During 2001, the Company issued 23,082,245 shares of common stock for
an aggregate consideration of $5,895,491. The amounts were comprised of
the issuance of 22,845,834 shares of common stock for cash of
$5,765,000, issuance of 60,000 shares common stock pursuant to the
exercise of options for $18,000, issuance of 76,411 shares of common
stock pursuant to the cashless exercise of warrants for $77,491 and
issuance of 100,000 shares of common stock in exchange for services for
$35,000.

During 2002, Company issued 52,227,127 shares of common stock for an
aggregate consideration of $6,529,608. The amounts were comprised of
the issuance of 50,018,491 shares of common stock for cash of
$6,229,608 and issuance of 2,208,636 shares of common stock upon
conversion of $300,000 of convertible debentures.

During 2003 the Company issued 89,067,732 shares of common stock for an
aggregate of $5,646,000. The amounts were comprised of the issuance of
44,720,000 shares of common stock for $2,893,000, the issuance of
44,590,205 shares of common stock upon the conversion of $2,700,000 of
convertible debentures and $36,000 of interest and the issuance of
107,527 shares of common stock for a $10,000 finders fee for the
Cornell Capital Partners April Debenture and an additional 100,000
shares of common stock for $7,900 of services rendered to the Company
during 2003.

During 2003, 2002 and 2001, additional paid-in-capital was recorded of
$0, $177,963 and $691,404 respectively, relating to the modification of
option terms. A summary of these modifications to equity instruments is
set forth below:

SUMMARY OF MODIFICATIONS TO EQUITY INSTRUMENTS

Original New
Black-scholes Exercise Original New Expiration
Year Grantee Calculation Option Shares Price Expiration Date Exercise Price Date
---- ------- ----------- ------------- ----- --------------- -------------- ----

2001 Richard Rubin $25,595 144,000 $0.27 3/23/2001 $0.27 12/31/2001
2001 Richard Rubin $38,518 290,000 $0.36 3/23/2001 $0.36 12/31/2001
2001 Elliott Bauer $13,330 75,000 $0.27 3/23/2001 $0.27 12/31/2001
2001 Elliott Bauer $9,961 75,000 $0.36 3/23/2001 $0.36 12/31/2001
2001 Henry Kamioner $115,291 500,000 $0.19 3/23/2001 $0.19 12/31/2001
2001 Henry Kamioner $88,870 500,000 $0.27 3/23/2001 $0.27 12/31/2001
2001 Henry Kamioner $66,410 500,000 $0.36 3/23/2001 $0.36 12/31/2001
2001 Elliott Bauer $318,359 3,349,500 $0.18 12/31/2001 $0.19 6/30/2002
2001 Elliott Bauer $3,958 75,000 $0.27 12/31/2001 $0.28 6/30/2002
2001 Elliott Bauer $2,200 75,000 $0.36 12/31/2001 $0.37 6/30/2002
2001 Leonard Cohen $8,912 100,000 $0.19 12/31/2001 $0.20 6/30/2002
-------- ---------
$691,404 5,683,500

2002 Bauer $174,068 3,349,500 $0.19 6/30/2002 $0.19 12/31/2002
2002 Bauer $2,372 75,000 $0.28 6/30/2002 $0.28 12/31/2002
2002 Bauer $1,523 75,000 $0.37 6/30/2002 $0.37 12/31/2002
-------- ---------
$177,963 3,499,500

F-54

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 15. INCOME TAXES

The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME
TAXES. SFAS No. 109 is an asset and liability approach for computing
deferred income taxes.

As of December 31, 2003, the Company had net operating loss carry
forwards for Federal income tax reporting purposes amounting to
approximately $44,891,000, which expire in varying amounts to 2023.

The Company presently has temporary differences between financial
reporting and income tax reporting relating to the amortization of
warrant costs, compensation expense for the extension of options,
depreciation and patent costs.

The components of the deferred tax asset as of December 31, 2003 and
2002 were as follows:

2003 2002 2002
Reported Reported Restated
----------- ----------- -----------

Benefit of net operating loss carry forwards $15,297,000 $13,634,000 $13,379,340
Less valuation allowance $15,297,000 13,634,000 13,379,340
----------- ----------- -----------
Net deferred tax asset $ -- $ -- $ --
=========== =========== ===========

As of December 31, 2003 and 2002, sufficient uncertainty exists
regarding the realizability of these operating loss carry forwards and,
accordingly, a 100% valuation allowance has been established regarding
these deferred tax assets.

In accordance with certain provisions of the Tax Reform Act of 1986, a
change in ownership of greater than 50% of a corporation within a three
year period will place an annual limitation on the corporation's
ability to utilize its existing tax benefit carry forwards. The
Company's utilization of its tax benefit carry forwards may be further
restricted in the event of future changes in the ownership of the
Company from the exercise of options and warrants or other future
issuances of common stock.

F-55

ADVANCED VIRAL RESEARCH CORP.
(A DEVELOPMENT STAGE COMPANY)

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)

NOTE 16. DISCONTINUED OPERATIONS

SFAS No. 144 requires the operating results of any assets with their
own identifiable cash flows that are disposed of or held for sale to be
removed from income from continuing operations and reported as
discontinued operations. The operating results for any such assets for
any prior periods presented must also be reclassified as discontinued
operations. See Note 6 for more detail regarding the planned sale of
LTD and classification as held for sale during 2002. The following
table details the amounts reclassified to discontinued operations:

Inception
(February 20,
Year Ended December 31, 1984) to
------------------------------------------------- December 31,
2003 2002 2001 2003
----------- ----------- ----------- -----------

Revenues $ -- $ -- $ -- $ --
----------- ----------- ----------- -----------
Costs and Expenses:
General and administrative $ 16,864 181,348 238,311 1,327,214
Depreciation 15,844 20,062 21,048 287,342
----------- ----------- ----------- -----------
32,708 201,410 259,359 1,614,556
----------- ----------- ----------- -----------
Loss from Operations (32,708) (201,410) (259,359) (1,614,556)

Other Income -- 256 245 4,655
----------- ----------- ----------- -----------
Discontinued operations $ (32,708) $ (201,154) $ (259,114) $(1,609,901)
=========== =========== =========== ===========

NOTE 17. 401(K) PLAN

In December 1999, the Company adopted a 401(k) plan that allows
eligible employees to contribute up to 20% of their salary, subject to
annual limits imposed by the Internal Revenue Service. The Company
matches 50% of the first 6% of the employee contributions in common
stock and may, at its discretion, make additional contributions based
upon earnings. In March 2001, the Company funded the 401(k) plan with
$23,757 to enable the 401(k) plan to purchase shares of common stock on
the open market to contribute to the 401(k) plan for the employer match
for the year ended December 31, 2001. At December 31, 2002 the Company
accrued $40,675 to fund the 401k plan representing the Company's match
for the plan year 2002. In 2003 the Company purchased $40,675 of common
stock in the open market at prevailing market prices to satisfy its
2002 matching contribution obligations. In March 2003, the Company
amended the terms of the Company's 401(k) plan to terminate the
obligation to make matching contributions.

F-56