Form 10-K for ADVANCED VIRAL RESEARCH CORP

30-Mar-2004

Annual Report

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.

               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

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

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

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

                                        ===========  ===========  ===========  ===========  ===========  ===========   ===========

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.

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
                                       =============  -------------  =============  =============    -------------    =============

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
                                       =============  -------------  =============  =============    -------------    =============

                                                           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

                  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).

         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.

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.

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.

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.

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

                                                                            Payments Due by Period
                                             ----------------------------------------------------------------------------------
                                                               Less Than                                              More Than
     Contractual Obligations                   Total             1 Year          1-3 Years          3-5 Years          5 Years
     -----------------------                 ---------         ----------        ----------        -----------       ----------

Long-Term Debt Obligations                   $1,427,946        $1,427,946        $        0        $        0        $        0
Capital Lease Obligations                    $    2,451        $    2,451        $        0        $        0        $        0
Notes Payable                                $   13,121        $   13,121        $        0        $        0        $        0
Operating Lease Obligations                  $  413,000        $  299,000        $  114,000        $        0        $        0
Purchase Obligations                         $        0        $        0        $        0        $        0        $        0
Other Long-Term Liabilities Reflected
on the Registrant's Balance Sheet            
under GAAP                                   $        0        $        0        $        0        $        0        $        0
                                             ----------        ----------        ----------        ----------        ----------
TOTAL                                        $1,856,518        $1,742,518        $  114,000        $        0        $        0
                                             ==========        ==========        ==========        ==========        ==========

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.

(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

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

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.

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

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

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.