Advanced Viral Research (ADVR) 10-Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

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

For the transition period from     to

Commission File Number 000-18293

ADVANCED VIRAL RESEARCH CORP.

(Exact name of registrant as specified in its charter)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934).

Large accelerated filero     Accelerated filero     Non-accelerated filerþ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso Noþ

Indicate the number of shares of the registrant’s Common Stock outstanding as of the close of business on November 13, 2006: 696,587,734

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION	1
Item 1. Condensed Consolidated Financial Statements (Unaudited)	1
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3. Quantitative and Qualitative Disclosures About Market Risk	23
Item 4. Controls and Procedures	23
PART II. OTHER INFORMATION	24
ITEM 6. Exhibits	24
EX-31.1 Section 302 Certification of CEO
EX-31.2 Section 302 Certification of CFO
EX-32.1 Section 906 Certification of CEO
EX-32.2 Section 906 Certification of CFO

As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” the “Company” and “Advanced Viral” mean Advanced Viral Research Corp. and its subsidiaries (unless the context indicates a different meaning).

ADVANCED VIRAL RESEARCH CORP.

PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

     The condensed consolidated financial statements include the accounts of the Company and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of the Company, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the information in the following unaudited consolidated financial statements of the Company have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year.

     These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K.

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)

CONDENSED CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2006			2005
ASSETS
Current Assets:
Cash and cash equivalents	$	1,718,156		$	4,615,581
Prepaid insurance		79,057			88,683
Other current assets		24,553			32,445
Total current assets		1,821,766			4,736,709
Property and Equipment, Net		68,051			212,732
Assets Held for Sale		107,707			112,319
Other Assets		93,319			87,717
Total assets	$	2,090,843		$	5,149,477
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	166,910		$	140,278
Accrued liabilities		102,670			185,117
Total current liabilities		269,580			325,395
Commitments and Contingencies
Stockholders’ Equity:
Common stock; 1,000,000,000 shares of $.00001 par value authorized, 696,587,734 shares issued and outstanding		6,966			6,966
Additional paid-in capital		73,321,361			73,145,593
Deficit accumulated during the development stage		(71,507,064	)		(68,328,477	)
Total stockholders’ equity		1,821,263			4,824,082
Total liabilities and stockholders’ equity	$	2,090,843		$	5,149,477

See notes to condensed consolidated financial statements

2

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

													Inception
	Three Months Ended						Nine Months Ended						(February 20,
	September 30,						September 30,						1984) to
													September 30,
	2006			2005			2006			2005			2006
											`
Revenues	$	—		$	—		$	—		$	—		$	231,892
Costs and Expenses:
Research and development		353,029			587,627			1,420,604			1,362,750			24,617,237
General and administrative		472,179			484,089			1,480,758			1,520,145			26,751,220
Compensation and other expense for options and warrants		89,391			—			175,768			—			5,110,576
Cost in connection with settlement of distribution agreement		—			—			—			—			687,005
Depreciation and amortization		39,611			2,188			154,445			331,391			4,284,062
Impairment charge — patent cost		—			—			—			—			1,081,085
		954,210			1,073,904			3,231,575			3,214,286			62,531,185
Loss from Operations		(954,210	)		(1,073,904	)		(3,231,575	)		(3,214,286	)		(62,299,293	)
Other Income (Expense):
Interest income		20,533			44,841			85,568			137,008			1,290,890
Other income		—			—			—			—			120,093
Interest expense		(1,968	)		(1,547	)		(4,585	)		(4,386	)		(8,760,208	)
Severance expense — former directors		—			—			—			—			(302,500	)
		18,565			43,294			80,983			132,622			(7,651,725	)
Loss from Continuing Operations		(935,645	)		(1,030,610	)		(3,150,592	)		(3,081,664	)		(69,951,018	)
Loss from Discontinued Operations		(2,872	)		(3,824	)		(27,995	)		(18,134	)		(1,556,046	)
Net Loss	$	(938,517	)	$	(1,034,434	)	$	(3,178,587	)	$	(3,099,798	)	$	(71,507,064	)
Net Loss Per Common Share
Basic and Diluted:
Continuing operations	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.00	)
Discontinued operations		(0.00	)		(0.00	)		(0.00	)		(0.00	)
Net loss	$	(0.00	)	$	(0.00	)	$	(0.00	)	$	(0.00	)
Weighted Average Number of Common Shares Outstanding		696,587,734			696,531,067			696,587,734			696,502,178

See notes to condensed consolidated financial statements

3

Advanced Viral Research Corp.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

							Inception
							(February 20,
	Nine Months Ended						1984) to
	September 30,						September 30,
	2006			2005			2006
Cash Flows from Operating Activities:
Net loss	$	(3,178,587	)	$	(3,099,798	)	$	(71,507,064	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		160,022			344,428			4,900,416
Impairment charge — patent cost		—			—			1,081,085
Cost in conection with settlement of distribution agreement		—			—			687,005
Amortization of debt issuance costs		—			—			1,303,524
conversion feature of convertible debenture		—			—			5,423,579
Amortization of discount on warrants		—			—			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		—			—			237,486
Issuance of common stock for services		—			—			1,586,000
Compensation expense for options and warrants		175,768			—			4,052,148
Changes in operating assets and liabilities:
(Increase) decrease in other current assets		16,553			(2,189	)		(124,338	)
(Increase) decrease in other assets		(602	)		—			(819,663	)
Increase (decrease) in accounts payable and accrued liabilities		(55,815	)		(176,608	)		275,782
Total adjustments		295,926			165,631			21,275,306
Net cash used by operating activities		(2,882,661	)		(2,934,167	)		(50,231,758	)
Cash Flows from Investing Activities:
Purchase of investments		—			—			(6,292,979	)
Patent costs incurred		—			(139,990	)		(1,239,119	)
Acquisition of property and equipment		(9,764	)		(48,484	)		(4,395,291	)
Net cash used by investing activities		(9,764	)		(188,474	)		(11,927,389	)
Cash Flows from Financing Activities:
Proceeds (payment) from issuance of convertible debt		(5,000	)		—			14,564,388
Proceeds from sale of securities, net of issuance costs		—			9,000			43,410,584
Proceeds from common stock subscribed but not issued		—			—			1,163,900
Proceeds from sale of investments		—			—			6,301,979
Payments under litigation settlement		—			—			(1,050,647	)
Payments under capital lease		—			—			(420,581	)
Payments on note payable		—			—			(111,320	)
Recovery of subscription receivable written off		—			—			19,000
Net cash provided (used) by financing activities		(5,000	)		9,000			63,877,303
Net Increase (Decrease) in Cash and Cash Equivalents		(2,897,425	)		(3,113,641	)		1,718,156
Cash and Cash Equivalents, Beginning		4,615,581			8,600,590			—
Cash and Cash Equivalents, Ending	$	1,718,156		$	5,486,949		$	1,718,156
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest

See notes to consolidated condensed financial statements.

4

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements as of September 30, 2006 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information on Form 10-Q and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position as of September 30, 2006 and results of operations for the three and nine months ended September 30, 2006 and 2005 and cash flows for the nine months ended September 30, 2006 and 2005. All such adjustments are of a normal recurring nature. Certain general and administrative expenses from inception relating to consulting services were reclassified to compensation expense for options and warrants to be consistent with current presentation.

The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. The statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005.

Certain amounts in prior year financial statements have been reclassified for comparative purposes to conform to the presentation in the current year financial statements.

NOTE 2. GOING CONCERN

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has suffered accumulated net losses of $71,507,064 since inception and is dependent upon registration of AVR118 for sale before it can begin commercial operations. The Company’s current cash position is 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. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. No assurance can be given that the Company will be able to sustain its operations until FDA approval of AVR118 for commercial sale is granted or that any approval will ever be granted. Management is currently seeking equity and debt financing, and exploring the sale of certain assets.

During 2005 and the first nine months of 2006, the Company did not receive any proceeds from any debt or equity transactions. During 2004, the Company completed several equity transactions and issued convertible debt for which it received cash proceeds of approximately $13,208,000.

5

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)

NOTE 3. RESEARCH AND DEVELOPMENT, CLINICAL TRIALS AND DRUG TESTING

Status of FDA Filings and Studies

In December 2004, the FDA notified the Company that its IND application was allowed and that it could proceed with a clinical study to evaluate the effect of a 4.0 ml dose of AVR118 administered to patients with systemic symptoms related to advanced cancers who are not receiving chemotherapy (the “Phase II Study”).

Phase II Study

In February 2005, the Company entered into an agreement with the Biomedical Research Alliance (BRANY), as agent for a network of hospitals, pursuant to which the hospitals would conduct the Phase II Study. The agreement with BRANY, among other things, defined the protocol for the study, outlined the terms of payment and provided for cancellation of the contract by either party.

The Company experienced difficulty accruing patients for the Phase II Study and in December 2005, amended the protocol to permit patients undergoing third-line chemotherapy treatment to become participants in the study, in order to facilitate patient accrual.

In the Phase II Study, patients are administered AVR118 for three weeks in order to compare treatment versus no treatment, after which the results of the study are be analyzed. Those patients who did not receive AVR118 during the first three-week period are permitted to take the drug for the second three-week period. Patients who appear to benefit from treatment may be eligible to remain on AVR118, generating longer term safety data. The total cost incurred through September 30, 2006 relating to this Phase II study is approximately $474,000.

As of September 30, 2006, only eleven patients had been enrolled in the Phase II Study. The Company is currently in discussions with several teaching centers to expand the study to include patients in the earlier stages of disease to determine the efficacy of AVR118 on such patients. The Company believes transitioning the study to such centers would not only enable it to accelerate enrollment in an expanded program where higher patient accrual rates can be achieved, but would also be a more cost-efficient method for accruing patients by eliminating a private vendor. The Company has requested that BRANY provide a complete report on the status of patients currently enrolled in the Phase II Study.

Phase I Study on Type 2 Diabetes

In October 2005 the Company initiated a Phase I, double blind, placebo controlled, randomized, single center, safety study with AVR118 in subjects with Type 2 diabetes in the United States. Approximately 30 patients were to be entered in the study, the primary objective of which was to explore the effect of a 4.0 ml dose of AVR118 given subcutaneously on blood glucose in subjects with Type 2 diabetes who are on sulfonylureas and/or metformin, as compared to subjects not receiving AVR118. Sulfonylureas and metformin are commonly used drugs to control Type 2 diabetes. Additional objectives of this study were to explore the potential for AVR118 in decreasing blood glucose in patients with Type 2 diabetes.

6

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)

NOTE 3. RESEARCH AND DEVELOPMENT, CLINICAL TRIALS AND DRUG TESTING(Continued)

Status of FDA Filings and Studies(Continued)

Phase I Study on Type 2 Diabetes(Continued)

In February 2006, the Company amended the protocol for the Phase I diabetes study to include an additional 12 patients at a dose of 1.0 ml of AVR118 given subcutaneously. The purpose of this study was to determine if a lower dose would produce a more pronounced effect on blood glucose levels.

In May 2006, the Company completed enrollment of the first 30 patients on the 4.0 ml dosage portion of the study. In June 2006, the Company terminated further accrual of the patients on the 1.0 ml dosage after three patients had been accrued. Following an interim analysis of the 30 patients treated with the 4.0 ml dose as well as the additional three patients treated with the 1.0 ml dose, the Company concluded that: (i) AVR118 can be given safely to patients with Type 2 diabetes, and (ii) in contrast to previous reports, AVR118 had no apparent effects on blood glucose levels in patients receiving oral hypoglycemic therapies, and no demonstrable effect on blood chemistry, hematology, weight gain or lean body mass in Type 2 diabetes patients. The total cost incurred through September 30, 2006 relating to this Phase I study is approximately $500,000.

Wound Healing

In April 2006, the Company commenced a study at the University of Miami to preliminarily test the efficacy of topically applying AVR118 to wounds in animal models (e.g. pigs). A report received from the University of Miami in August 2006 analyzing the data from the three pig study indicated that the topical application of AVR118 accelerates the rate at which wounds heal. Although preliminary, the Company believes that further study is merited. Total costs incurred through September 30, 2006 relating to this study were approximately $35,000.

Testing on Avian Flu

In 2006, the Company performed testing for the efficacy of AVR118 on the H5N1 hybrid strain of the avian flu. Although antiviral activity was seen at very high dosages, there are no current plans to pursue further work in this area. The total cost incurred through September 30, 2006 relating to this study was approximately $6,000.

7

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)

NOTE 3. RESEARCH AND DEVELOPMENT, CLINICAL TRIALS AND DRUG TESTING(Continued)

Status of FDA Filings and Studies(Continued)

MediVector Agreement

In March 2004, the Company entered into a Master Contract Services Agreement with MediVector, Inc. whereby, pursuant to various project orders, MediVector processed and analyzed data and provided biopharmaceutical consulting services in connection with the Company’s ongoing studies and IND activities on a project by project basis. Through September 2006, the Company has incurred and paid MediVector approximately $1,779,000.

In April 2004, the Company appointed Carol Epstein, MD, a co-founder of MediVector, Inc. as acting Medical Director to Advanced Viral Research Corp to guide the Company in the clinical development of AVR118, including choice of clinical indications, design and preparation of protocols for clinical trials, analysis of compiled data, the processing of adverse events in clinical trials, writing clinical sections of the IND and meeting with the FDA.

In June 2006, the Master Contract Services Agreement and associated project orders were amended to provide, among other things, that instead of a monthly retainer of $35,000, MediVector shall be available to provide consulting services at the Company’s request at the rate of $400 per hour through June 1, 2007. MediVector completed the outstanding project orders and delivered the required reports and documentation. The agreement and associated project orders can be terminated by the Company at any time upon written notice to MediVector in the event of a breach by MediVector that cannot be cured (i.e. breach of the confidentiality obligations), or by either party for cause at any time upon thirty (30) days prior written notice to the other party. The Company made final project payments of $79,000 in October 2006.

Conducting the clinical trials of AVR118 will require significant cash expenditures. AVR118 may never be approved for commercial distribution by any country, and because the Company’s research and development expenses and clinical trial expenses will be charged against earnings for financial reporting purposes, the Company expects that losses from operations will continue to be incurred for the foreseeable future. The Company currently does not have sufficient funds to complete all phases of clinical trials of AVR118 which are necessary to permit the commercial sale of AVR118. The Company is attempting to secure funds through the sale of its securities.

The Company cannot provide assurances that it will acquire additional financial resources to complete all phases of the clinical trials of AVR118, or, if it acquires such resources, that it will do so on favorable terms. It is possible that the results of clinical trials 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 the Company submits a New Drug Application, or NDA. It is not known at this time how later stage clinical trials will be conducted, if at all. Even if the data show that AVR118 is safe and effective, obtaining approval of the NDA could take years and require financing of amounts not presently available to the Company.

8

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)

NOTE 4. CONSULTING AND EMPLOYMENT AGREEMENTS

Hawkins Consulting Agreement

On February 17, 2006, the Company entered into a consulting agreement with Dr. Elma Hawkins, the Company’s former President and Chief Executive Officer, pursuant to which she provided consulting services to the Company as requested of her by our Chairman of the Board of Directors or his designee. Dr. Hawkins received a consulting fee of $325 per hour for her consulting services. The consulting agreement was 90 days, which term was extended by 30 days until its termination on June 18, 2006. Through June 18, 2006 the Company has incurred approximately $153,000 for such consulting services.

Botter Consulting Agreement

In June 2006, the Company entered into a consulting agreement with a member of the Board of Directors, Angelo Botter, pursuant to which Mr. Botter receives a consulting fee of $1,000 per day for his services. The initial term of the consulting agreement is nine months, unless automatically extended by successive thirty (30) day periods unless either party notifies the other in writing of its intent not to extend the term within five days of the end of the then existing term.

Pike Consulting Agreement

In June 2006, the Company entered into a consulting agreement with Izzy Pike, MD, Consulting, LLC, whose principal is Isadore Murray Pike, M.D., pursuant to which Dr. Pike provides consulting services in connection with the Company’s clinical programs and related matters. Dr. Pike’s firm receives a consulting fee of $375 per hour for his consulting services. The initial term of the consulting agreement shall be for nine months, unless automatically extended by successive thirty (30) day periods unless either party notifies the other in writing of its intent not to extend the term within five days of the end of the then existing term.

KGA Consulting Agreement

In June 2006, the Company entered into a consulting agreement with Kensington Global Alliances LLC (“KGA”), whose principal is Dr. Pablo A. Scolnick, pursuant to which KGA will provide consulting services to the Company on matters relating to business development. KGA receives a retainer of $5,000 per month for such consulting services. The agreement may be terminated by either party at any time upon thirty (30) days written notice.

9

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)

NOTE 5. STOCK-BASED COMPENSATION

Stock Options Granted to Officers, Directors, Advisory Boards and Employees

From time to time, the Company has granted options to purchase common stock to officers, various members of the Board of Directors, Advisory Boards and employees for their services. The following is a summary of those options that have been recently granted.

				Weighted Average
	Total Options			Exercise Price
Outstanding at January 1, 2006		154,014,554		$	0.1588
Granted		—			—
Exercised		—			—
Forfeited		(24,000,000	)	($	0.1493	)
Expired unexercised		(16,806,271	)	($	0.1251	)
Outstanding at September 30, 2006		113,208,283		$	0.1658
Options exercisable at September 30, 2006		108,717,616		$	0.1676

No stock options were granted during the nine months ended September 30, 2006. During the nine months ended September 30, 2005, a total of 9,550,000 stock options were issued with a weighted-average fair value of $1,289,250. No stock options were exercised during the nine months ended September 30, 2006 however, 100,000 stock options were exercised during the nine months ended September 30, 2005 by a former employee.

The weighted-average remaining contractual terms of outstanding stock options and exercisable stock options at September 30, 2006 was 4.5 years and 4.2 years, respectively. The aggregate intrinsic value of outstanding stock options and exercisable stock options at September 30, 2006 was approximately $78,000 and $74,800 respectively.

In January 2005, the Company granted options to purchase an aggregate of 9,550,000 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 these shares are exercisable at $0.14 per share and vest 25% immediately, 25% on April 11, 2005, 25% on July 11, 2005, and 25% on October 11, 2005 through January 10, 2015. The fair value of the options was estimated to be $1,287,625 ($0.1348 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 200%; a risk-free interest rate of 4.26% and an expected holding period of ten years.

In February 2006, Elma Hawkins resigned as CEO, President and as a member of the Board of Directors. Pursuant to a termination agreement with Dr. Hawkins, options to purchase an aggregate of 24,000,000 shares were cancelled. In May 2006, options to purchase an aggregate of 16,375,000 shares expired in accordance with their terms.

The exercise period of director options expire upon the earlier to occur of the expiration date of the option or three years from the date of termination of a director’s service to the Company as a member of the Board of Directors.

10

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)

NOTE 5. STOCK-BASED COMPENSATION(Continued)

On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (“SFAS No. 123R”), which is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”). SFAS No. 123R supersedes APB No. 25, “Accounting for Stock Issued to Employees”, and amends SFAS No. 95, “Statement of Cash Flows”. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based upon their fair values. As a result, the intrinsic value method of accounting for stock options with pro forma footnote disclosure, as allowed for under SFAS No. 123, is no longer permitted.

The Company adopted SFAS No. 123R using the modified prospective method, which requires the Company to record compensation expense for all awards granted after the date of adoption, and for the unvested portion of previously granted awards that remain outstanding at the date of adoption. Accordingly, prior period amounts have not been restated to reflect the adoption of FAS 123R. The fair value assumptions for stock-based compensation did not change significantly under SFAS No. 123R. After assessing alternative valuation models and amortization assumptions, the Company chose to continue using both the Black-Scholes valuation model and straight-line amortization of compensation expense over the requisite service period of the grant. The Black-Scholes valuation model is based on a series of assumptions, including the risk free interest rate, expected life and expected volatility. The risk free interest rate is based on the U.S. Treasury yield in effect at the time of grant; the expected life is based on historical and expected exercise behavior; and expected volatility is based on the historical volatility of the Company’s stock price, over a time period that is consistent with the expected life of the option.

During the first nine months of 2006, the Company recorded stock-based compensation in the amount of $175,768, substantially all of which pertained to options granted to the Company’s officers and directors during 2004. The adoption of SFAS No. 123R resulted in an increase to selling, general and administrative expenses, loss before income taxes and net loss of approximately $176,000, or $0.0 per share, over what would have been recorded under the original provisions of SFAS No. 123. At September 30, 2006, there was approximately $405,000 of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 2.0 years.

SFAS No. 123R also requires entities to report the excess tax benefits from the exercise of stock options as cash inflows from financing activities. This requirement did not have an effect upon the Company due to the substantial amount of net operating loss carryforwards the Company had at December 31, 2005.

11

ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)

NOTE 5. STOCK-BASED COMPENSATION(Continued)

Prior to January 1, 2006, the Company had historically followed SFAS No. 123, “Accounting for Stock-Based Compensation,” which permitted entities to continue to apply the provisions of Accounting Principles Board Opinion No. 25 (“APB 25”) and provide pro forma net earnings (loss) disclosures for employee stock option grants as if the fair-value-based method defined in SFAS 123 had been applied. Under this method, compensation expense was recorded on the date of grant only if the then current market price of the underlying stock exceeded the exercise price. The following table presents the Company’s pro forma net loss for the nine months ended September 30, 2005, had the Company determined compensation cost based on the fair value at the grant date for all of its employee stock options issued under SFAS No. 123:

	Nine months ended
	September 30, 2005
Net loss as reported	$	(3,099,798	)
Total stock-based compensation expense determined under fair value based method for all awards, net of related tax effects		(1,901,116	)
Pro forma net loss	$	(5,000,914	)
Earnings per share — basic and diluted:
As reported	($	0.00	)
Pro forma	($	0.01	)

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)

NOTE 6. COMMITMENTS AND CONTINGENCIES

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.

LACK OF PATENT PROTECTION

During the third quarter of 2006, the Company reviewed its patent inventory and the cost to maintain them, and determined that certain patents and patent applications were not useful, or that the cost to apply for and maintain patents in certain countries is not justified, and such patents should be abandoned. Patent costs are expensed when incurred and therefore the cost of abandoned patents and patent applications has no effect on the financial statements. The Company presently has issued or granted 14 U.S. patents, two Australian patents and one Canadian patent. In addition, the Company currently has five patent applications pending with the U.S. Patent Office and 16 foreign patent applications. 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.

NOTE 7. SECURITIES PURCHASE AGREEMENTS

STOCK PURCHASE AGREEMENTS

From time to time, the Company has issued warrants to purchase common stock to various parties as part of a stock purchase agreement or a settlement. The following is a summary of those warrants that have been issued:

	Warrants
Outstanding at December 31, 2005		73,776,501
Granted		—
Exercised		—
Forfeited		(5,735,000	)
Outstanding at September 30, 2006		68,041,501

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)

NOTE 8. DISCONTINUED OPERATIONS

During 2002, the Board of Directors approved a plan to sell Advance Viral Research, Ltd., the Company’s Bahamian subsidiary. 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 were reclassified as discontinued operations. The following table details the amounts reclassified to discontinued operations:

													Inception (February
	Three Months						Nine Months						20, 1984)
	Ended September 30,						Ended September 30,						to September 30,
	2006			2005			2006			2005			2006
Revenues	$	—		$	—		$	—		$	—		$	—
Costs and Expenses:
General and administrative		1,013			3,793			22,418			6,925			1,373,752
Depreciation		1,859			1,859			5,577			13,037			322,314
		2,872			5,652			27,995			19,962			1,696,066
Loss from Operations		(2,872	)		(5,652	)		(27,995	)		(19,962	)		(1,696,066	)
Other Income		—			1,828			—			1,828			140,020
Discontinued operations	($	2,872	)	($	3,824	)	($	27,995	)	($	18,134	)	($	1,556,046)

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

     The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes to Condensed Consolidated Financial Statements of Advanced Viral Research Corp. included in Item 1 of this Quarterly Report on Form 10-Q. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2005.

OVERVIEW

     Advanced Viral Research Corp. was incorporated in Delaware in July 1985 to engage in the development, production, marketing, promotion and sale of a pharmaceutical drug known by the trademark Reticulose^®. This drug was the forerunner of our current drug, “AVR118.” AVR118 is a complex mixture of peptides, amino acids, nucleosides, nucleotides and nucleic acid bases. We currently believe it may be employed in the treatment of conditions such as:

• Systemic symptoms such as cachexia (body wasting), loss of appetite and lethargy experienced by patients with cancer, AIDS and other diseases;

• Wound healing; and

• As an anti-inflammatory.

     Since our incorporation in July 1985, we have been engaged primarily in research and development activities. We have never generated material operating revenue, and as of September 30, 2006, we had incurred a cumulative net loss of approximately $71,507,000. Our ability to generate operating revenue depends upon our success in gaining approval for the commercial use and distribution of AVR118 from the Food and Drug Administration (FDA).

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     The costs relating to our research and development efforts for the years 2000, [2001, 2002, 2003, 2004], and 2005 and the three and nine months ended September 30, 2006 are presented below.

COSTS RELATING TO RESEARCH AND DEVELOPMENT EFFORTS
FROM JANUARY 2000 THROUGH SEPTEMBER 30. 2006

			3 Months
			ended		9 Months			2000-2006
COST CATEGORY	2000-2005		9/30/06		ended 930/06			to date
Hospital fees
Phase I (topical)	$	254,246	$	—	$	—		$	254,246
Phase I/II (Israel AIDS, leukemia/lymphoma, solid tumor)		197,500		—		(30,000	)		167,500
Phase II cancer study (NY)		107,507		663		7,495			115,002
Phase I diabetes study		103,410		22,146		152,595			256,005
In vitro and Avian Flu		—		18,003		41,868			41,868
Anti-Inflammatory		—		—		7,542			7,542
Wound healing		—		17,749		35,487			35,487
Lab fees		138,292		—		—			138,292
Insurance cost		70,721		7,750		23,250			93,971
TOTAL CLINICAL FEES		871,676		66,311		238,237			1,109,913
IND preparation/maintenance		286,209		—		—			286,209
CRO clinical trial management
Phase I (topical)		47,527		—		—			47,527
Phase I/II AIDS (Israel)		1,447,919		—		—			1,447,919
Argentina patient experiences		253,168		—		—			253,168
Data management & study reports		686,474		86,377		240,689			927,163
Clinical & Regulatory consulting		2,116,673		34,536		263,550			2,380,223
TOTAL CLINICAL/REGULATORY OPERATIONS		4,837,970		120,913		504,239			5,342,209
General lab supplies		1,103.917		7,863		53,480			1,157,397
Toxicology		197,135		—		—			197,135
Contracted research & development		617,368		—		—			617,368
Validation		705,249		—		—			705,249
Drug preparation and support		1,982,421		—		—			1,982,421
Salary & Facility allocations		7,310,773		157,942		624,648			7,935,421
R&D Miscellaneous Expenses		37,720		—		—			37,720
TOTAL PRECLINICAL RESEARCH & DEVELOPMENT		11,954,583		165,805		678,128			12,632,711
TOTAL RESEARCH AND DEVELOPMENT		17,664,229		353,029		1,420,604			19,084,833

     During 2002, the Board of Directors approved a plan to sell Advance Viral Research Ltd. (“AVR 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 AVR Ltd. have been classified on our Consolidated Balance Sheet at September 30, 2006 and December 31, 2005 as Assets held for Sale. AVR Ltd. had no liabilities as of September 30, 2006 and December 31, 2005, except inter-company payables which have been eliminated in consolidation. The operations for AVR Ltd. have been classified in the Consolidated Statements of Operations for the three and nine months ended September 30, 2006 and September 30, 2005 as Loss from Discontinued Operations.

     The independent registered public accounting firm’s report on our consolidated financial statements for the fiscal year ended December 31, 2005 includes an explanatory paragraph regarding our ability to continue as a going concern. Note 2 to the consolidated financial statements states that our cash position is inadequate to pay all the costs associated with the full range of testing and clinical trials of AVR118 required by the FDA for commercial approval, and, unless and until AVR118 is approved for sale in the United States or another industrially developed country, we will be dependent upon the continued sale of our securities, debt or equity financing for funds to meet our cash requirements, which raises substantial doubt about our ability to continue as a going concern. Further, the independent registered public accounting firm’s report states that the consolidated financial statements do not include any adjustments that might result from the

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outcome of this uncertainty. No assurance can be given that debt or equity financing will be available or that additional securities will be authorized beyond the current authorization of one billion shares of our common stock. See “Outstanding Securities.”

     Our offices are located at 200 Corporate Boulevard South, Yonkers, New York 10701. Our telephone number is (914) 376-7383. We have also established a website: www.adviral.com. Information contained on our website is not a part of this report.

RECENT EVENTS

Phase II Study

     In February 2005, we entered into an agreement with the Biomedical Research Alliance (BRANY), as agent for a network of hospitals, pursuant to which the hospitals would conduct our Phase II clinical study to evaluate the effect of a 4.0 ml dose of AVR118 administered to patients with systemic symptoms related to advanced cancer who are not receiving chemotherapy (the “Phase II Study”). The agreement with BRANY, among other things, defined the protocol for the Phase II Study, outlined the terms of payment and provided for cancellation of the contract by either party. We experienced difficulty accruing patients for the Phase II Study and in December 2005, amended the protocol to permit patients undergoing third-line chemotherapy treatment to become participants in the Phase II Study, in order to facilitate patient accrual.

     In the Phase II Study, patients are administered AVR118 for three weeks in order to compare treatment versus no treatment, after which the results of the study are to be analyzed. Those patients who did not receive AVR118 during the first three-week period are permitted to take the drug for the second three-week period. Patients who appear to benefit from treatment may be eligible to remain on AVR118, generating longer term safety data. The total cost incurred through September 30, 2006 relating to the Phase II study is approximately $474,000.

     As of September 30, 2006, only eleven patients had been enrolled in the Phase II Study. We are currently in discussions with several teaching centers to expand the study to include patients in the earlier stages of disease to determine the efficacy of AVR118 on such patients. We believe transitioning the study to such centers would not only enable us to accelerate enrollment in an expanded program where higher patient accrual rates can be achieved, but would also be a more cost-efficient method for accruing patients by eliminating a private vendor. We have requested that BRANY provide us with a complete report on the status of patients currently enrolled in the Phase II Study.

Phase I Study on Type 2 Diabetes

     In October 2005, we initiated a Phase I, double blind, placebo controlled, randomized, single center, safety study with AVR118 in subjects with Type 2 diabetes in the United States.

     Approximately 30 patients were to be entered in the study, the primary objective of which was to explore the effect of a 4.0 ml dose of AVR118 given subcutaneously on blood glucose in subjects with Type 2 diabetes who are on sulfonylureas and/or metformin, as compared to subjects not receiving AVR118. Sulfonylureas and metformin are commonly used drugs to control Type 2 diabetes. Additional objectives of this study were to explore the potential for AVR118 in decreasing blood glucose in patients with Type 2 diabetes.

     In February 2006, we amended the protocol for the Phase I diabetes study to include an additional 12 patients at a dose of 1.0 ml of AVR118 given subcutaneously. The purpose of this study was to determine if a lower dose would produce a more pronounced effect on blood glucose levels.

     In May 2006, we completed enrollment of the first 30 patients on the 4.0 ml dosage portion of the study. In June 2006, we terminated further accrual of the patients on the 1.0 ml dosage after three patients

17

had been accrued. Following an interim analysis of the 30 patients treated with the 4.0 ml dose, as well as the additional three patients treated with the 1.0 ml dose, we concluded that: (i) AVR118 can be given safely to patients with Type 2 diabetes, and (ii) in contrast to previous reports, AVR118 had no apparent effects on blood glucose levels in patients receiving oral hypoglycemic therapies, and no demonstrable effect on blood chemistry, hematology, weight gain or lean body mass in patients with Type 2 diabetes. The total cost incurred through September 30, 2006 relating to this Phase I study is approximately $500,000.

Wound Healing Study

     In April 2006, we commenced a study at the University of Miami to preliminarily test the efficacy of topically applying AVR118 to wounds in animal models [e.g. pigs]. A report received from the University of Miami in August 2006 analyzing the data from the three pig study indicated that the topical application of AVR118 accelerates the rate at which wounds heal. Although preliminary, we believe that further study is merited. Total costs incurred through September 30, 2006 relating to this study were approximately $35,000.

New Topical Study

     In November 2006, we filed an amendment with the FDA to our existing IND to expand the use of AVR118 to include a Phase II pilot study involving topical and intralesional therapy. Management believes these applications could potentially be used to treat a wide variety of common dermatologic conditions. The Phase II pilot study would involve patients with common skin problems ranging from acne scars to surgical wounds, and would study how AVR118’s ability to promote tissue repair and regeneration can be put to use in the clinical setting, and analyze the efficacy of AVR118 as a topical or intralesional therapy. We have begun work in developing a topical formulation that can easily be applied directly onto the skin.

Cash Requirements

     Our cash requirements to date have been satisfied by the sale of our securities. 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 currently do not have cash availability to meet such anticipated expenditures. We anticipate that we can continue operations through February 2007 with our current liquid assets, if no stock options or warrants are exercised, nor additional securities sold.

Authorized Common Stock

     We have been 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. However, our ability to raise capital is severely limited by the number of shares of common stock we are currently authorized to issue, which is one billion shares. In addition to the 696,587,734 shares of our common stock outstanding as of November 13, 2006, we have reserved for issuance approximately 181.2 million shares of common stock underlying currently outstanding stock options or warrants. Accordingly, we only have the authority to issue an additional 122.2 million shares of common stock. To increase the number of authorized shares of our common stock, we need to obtain stockholder approval. We are currently contemplating holding a stockholder meeting in order to obtain this approval.

Consulting Agreements

     Botter Consulting Agreement.In June 2006, we entered into a consulting agreement with a member of the Board of Directors, Angelo Botter, pursuant to which Mr. Botter receives a consulting fee of $1,000 per day for his services. The initial term of the consulting agreement is nine months, unless automatically extended by successive thirty (30) day periods unless either party notifies the other in writing of its intent not to extend the term within five days of the end of the then existing term.

     Pike Consulting Agreement.In June 2006, we entered into a consulting agreement with Izzy Pike, MD, Consulting, LLC, whose principal is Isadore Murray Pike, M.D., pursuant to which Dr. Pike provides consulting services in connection with our clinical programs and related matters. Dr. Pike’s firm receives a consulting fee of $375 per hour for his consulting services. The initial term of the consulting agreement shall be for nine months, unless automatically extended by successive thirty (30) day periods unless either party notifies the other in writing of its intent not to extend the term within five days of the end of the then existing term.

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     KGA Consulting Agreement.In June 2006, we entered into a consulting agreement with Kensington Global Alliances LLC (“KGA”), whose principal is Dr. Pablo A. Scolnick, pursuant to which KGA will provide consulting services relating to business development. KGA receives a retainer of $5,000 per month for such consulting services.

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006 VS. SEPTEMBER 30, 2005

     We incurred losses from continuing operations of $936,000 vs. $1,031,000 for the three months ended September 30, 2006 and 2005, respectively, and $3,151,000 vs. $3,082,000 for the nine months ended September 30, 2006 and 2005, respectively. Our losses were attributable primarily to:

     RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses for the three months ended September 30, 2006 decreased 40% to $353,000 compared to $588,000 for the three months ended September 30, 2005. Research and development expenses for the nine months ended September 30, 2006 increased 4% to $1,421,000 compared to $1,363,000 for the nine months ended September 30, 2005. The change in research and development expenses primarily resulted from:

• Research and development expenditures relating to salaries, benefits and facilities were $148,000 vs. $158,000 for the three months ended September 30, 2006 and 2005, respectively, and $436,000 vs. $496,000 for the nine months ended September 30, 2006 and 2005, respectively. This decrease was due to the elimination of the salary expense associated with Elma Hawkins, who resigned as President and CEO from the Company in February 2006, partly offset by the increase in expense associated with the salary of our new President and CEO, Stephen Elliston in May 2006. For the three months ended September 30, 2006 and 2005, 50% and 46% of our payroll and related expenses were allocated to research and development expenses, respectively. For the nine months ended September 30, 2006 and 2005, 49% and 47% of our payroll and related expenses were allocated to research and development expenses, respectively;

• Research and development expenditures relating to consulting services by Elma Hawkins relating to scientific matters was $0 for both the three months ended September 30, 2006 and 2005, and $153,000 vs. $0 for the nine months ended September 30, 2006 and 2005, respectively;

• Clinical testing fees were $66,000 vs. $124,000 for the three months ended September 30, 2006 and 2005, respectively, and $238,000 vs. $160,000 for the nine months ended September 30, 2006 and 2005, respectively. The decrease for the three month period ended September 30, 2006 vs. 2005 was primarily attributable to lower Phase I diabetes trial costs and no Phase II cancer/cachexia trial costs, offset by the commencement of various studies, including the wound healing study. The increase for the nine month period ended September 30, 2006 vs. 2005 was primarily attributable to higher payments for a Phase I diabetes trial and various studies, including the wound healing and avian flu study and;

• Expenses associated with clinical and regulatory activities were $121,000 and $274,000 for the three months ended September 30, 2006 and 2005, respectively, and $504,000 and $657,000 for the nine months ended September 30, 2006 and 2005, respectively. The decrease for the three months and nine months ended September 30, 2006 vs. 2005 was primarily attributable to lower regulatory consulting costs and data management fees for processing the current Phase II Study and Phase I diabetes studies.

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     GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense decreased 2% to $472,000 from $484,000 for the three months ended September 30, 2006 and 2005, respectively, and decreased 3% to $1,481,000 from $1,520,000 for the nine months ended September 30, 2006 and 2005, respectively. The changes in general and administrative expenses primarily resulted from:

• Decreased payroll and related expenses of $94,000 vs. $129,000 for the three months ended September 30, 2006 and 2005, respectively, and $289,000 vs. $387,000 for the nine months ended September 30, 2006 and 2005, respectively, due to the elimination of the salary expense associated with Elma Hawkins, who resigned as President and CEO from the Company in February 2006, partly offset by the salary of our new President and CEO, Stephen Elliston in May 2006.

• Professional fees increased 82% to $104,000 vs. $57,000 for the three months ended September 30, 2006 and 2005, respectively, and increased 78% to $336,000 vs. $189,000 for the nine months ended September 30, 2006 and 2005, respectively, primarily due to the expensing of patent costs of $45,000 and $148,000 for the three and nine months ended September 30, 2006. Patent costs of $43,000 and $140,000 for the three and nine months ended September 30, 2005 were capitalized to cost of patents. The 2005 cost was subsequently included in an impairment charge in December 2005.

     COMPENSATION AND OTHER EXPENSE FOR OPTIONS AND WARRANTS. The Company has applied the fair value recognition provisions of FASB Statement No. 123R, Share-Based Payments, to stock-based employee compensation. In the nine months ended September 30, 2006, $175,768 of stock-based employee compensation cost is reflected in the net loss. In 2005, this employee compensation of $1,901,116 was presented on a pro forma basis 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.

     DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization expense increased 1737% to $40,000 vs. $2,000 for the three months ended September 30, 2006 and 2005, respectively, and decreased 53% to $154,000 vs. $331,000 for the nine months ended September 30, 2006 and 2005, respectively. The increase for the comparative three month periods reflects a depreciation reduction in the three months ended September 30, 2005. This decrease for the comparative nine month periods was due to assets acquired in prior years that were fully depreciated in 2005.

     INTEREST INCOME (EXPENSE). Interest income decreased 54% to $21,000 vs. $45,000 for the three months ended September 30, 2006 and 2005, respectively, and decreased 37% to $86,000 vs. $137,000 for the nine months ended September 30, 2006 and 2005, respectively, as a result of decreased cash balances invested in money market accounts. Interest expense remained the same at $2,000 and $4,000 for the three and nine months ended September 30, 2006 and 2005.

     LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations decreased 9% to $936,000 vs. $1,031,000 for the three months ended September 30, 2006 and 2005, respectively, and increased 2% to $3,151,000 vs. 3,082,000 for the nine months ended September 30, 2006 and 2005, respectively. The change for the comparable periods was primarily due to increases or decreases in research and development expenses.

     LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations were $3,000 vs. $4,000 for the three months ended September 30, 2006 and 2005, respectively, and $28,000 vs. $18,000 for the nine months ended September 30, 2006 and 2005, respectively, which losses resulted from our 99% owned Bahamian subsidiary, Advance Viral Research Ltd. held for sale. During 2002, our Board of Directors approved a plan to sell Advance Viral Research Ltd.

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     REVENUES. We had no revenues for the three and nine months ended September 30, 2006 nor for the three and nine months ended September 30, 2005.

LIQUIDITY

     We had current assets of $1,822,000 as of September 30, 2006 compared to $4,737,000 as of December 31, 2005. We had total assets of $2,091,000 at September 30, 2006 compared to $5,149,000 at December 31, 2005. The decrease in current and total assets was primarily attributable to the use of cash on hand to fund current operations. We had current liabilities of $270,000 as of September 30, 2006, compared to $325,000 as of December 31, 2005.

     During the nine months ended September 30, 2006 we used cash of $2,883,000 for operating activities, compared to $2,934,000 during the nine months ended September 30, 2005. During the nine months ended September 30, 2006, our expenses included:

• $600,000 for payroll and related costs primarily for administrative staff, scientific personnel and executive officers;

• $938,000 for expenditures for AVR118 research;

• $435,000 for other professional and consulting fees;

• $287,000 for insurance costs;

• $283,000 for rent and utilities for our Yonkers facility; and

• $96,000 in recruiting and public relations costs.

     During the nine months ended September 30, 2006, we used $10,000 for investment activities, compared to $188,000 during the nine months ended September 30, 2005 related to leasehold improvements, equipment purchases and incurred patent costs.

     $5,000 in funds were used by financing activities for the nine months ended September 30, 2006 for a potential investor’s due diligence review compared to $9,000 provided for the nine months ended September 30, 2005 relating to the exercise of outstanding stock options.

     We have no off-balance sheet transactions.

CAPITAL RESOURCES

     During 2004, we completed several equity transactions and issued convertible debt for which it received cash proceeds of approximately $13,208,000. During 2005 and the nine months ended September 30, 2006, we did not receive any proceeds from any debt or equity transactions.

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     We have been and continue to be dependent upon the proceeds from the continued sale of securities for the funds required to continue operations at present levels and to fund further research and development activities. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. No assurance can be given that the Company will be able to sustain its operations until FDA approval of AVR118 for commercial sale is granted or that any approval will ever be granted. Management is currently seeking equity and debt financing, and exploring the sale of certain assets.

OUTSTANDING SECURITIES

     Our ability to raise capital is severely limited by the number of shares we are currently authorized to issue. In addition to the 696,587,734 shares of our common stock outstanding as of November 13, 2006, we have approximately: (i) 113.2 million shares of common stock are issuable pursuant to outstanding stock options at exercise prices ranging from $0.052 to $0.36, of which options to purchase 108.1 million shares are currently exercisable; (ii) 68.0 million shares of common stock are issuable pursuant to outstanding warrants at prices ranging from $0.091 to $1.00, all of which warrants are currently exercisable. Accordingly, we only have the authority to issue an additional 122.2 million shares of common stock. To complete the full range of testing necessary to commercially offer AVR118, we will need substantially more capital than we can raise given the current number of authorized common shares. To increase the number of authorized shares of our common stock, we need to obtain stockholder approval. We are uncertain that we could obtain this approval.

     If all of the foregoing securities were fully issued, exercised and/or converted, as the case may be, we would receive proceeds of approximately $28.2 million, and we would have approximately 877.8 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

     The independent registered public accounting firm’s report on our consolidated financial statements for the fiscal year ended December 31, 2005 includes an explanatory paragraph regarding our ability to continue as a going concern. Note 2 to the consolidated financial statements states that our cash position is inadequate to pay all the costs associated with the full range of testing and clinical trials of AVR118 required by the FDA for commercial approval, and, unless and until AVR118 is approved for sale in the United States or another industrially developed country, we will be dependent upon the continued sale of our securities, debt or equity financing for funds to meet our cash requirements, which raises substantial doubt about our ability to continue as a going concern. Further, the independent registered public accounting firm’s report states that the consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

     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 currently do not have cash availability to meet our anticipated expenditures. We anticipate that we can continue operations through February 2007 with our current liquid assets, if no stock options or warrants are exercised, nor additional securities sold.

     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

22

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. As of November 13, 2006, we had one billion shares of common stock authorized to be issued, 696,587,734 of which are outstanding and an additional 181.2 million shares reserved for issuance upon the exercise of outstanding stock options and warrants. Accordingly, we only have the authority to issue an additional 122.2 million shares of common stock. To complete the full range of testing necessary to commercially offer AVR118, we will need substantially more capital than we can raise given the current number of authorized common shares. To increase the number of authorized shares of our common stock, we need to obtain stockholder approval. We are uncertain that we could obtain this approval. 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 and our lack of access to capital, it is highly probable that we will never be able to sell AVR118 commercially.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

     Our exposure to market risk due to changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio. Our risk associated with fluctuating interest rates is limited to our investments in interest rate sensitive financial instruments. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to increase the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments due to their relatively short term nature. Declines in interest rates over time will, however, reduce our interest income while increases in interest rates over time will increase our interest income.

ITEM 4. CONTROLS AND PROCEDURES

     As of September 30, 2006, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including our Chief Executive Officer and Acting Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of September 30, 2006 in providing reasonable assurances that material information required to be disclosed is included on a timely basis in the reports it files with the Securities and Exchange Commission. Furthermore, management noted that no changes occurred during the quarter ended September 30, 2006 that materially affected, or would be reasonably likely to materially affect, our internal controls over financial reporting.

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PART II. OTHER INFORMATION

ITEM 6. EXHIBITS

     The following exhibits are filed with this Report:

Exhibit	Description
31.1	Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	Certification of Acting Chief Financial Officer pursuant to Item 601(b)(31) of Regulation 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 Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

     In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	ADVANCED VIRAL RESEARCH CORP.
Date: November 14, 2006	/s/ Stephen M. Elliston
	Stephen M. Elliston President and
	Chief Executive Officer
	/s/ Martin Bookman
	Martin Bookman, Acting Chief Financial Officer
	(Principal Financial and Accounting Officer)

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