Advanced Viral Research (ADVR) 10-Q 2007 Q1 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 March 31, 2007

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. Yes þ      No o

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). Yes o      No þ

Indicate the number of shares of the registrant’s Common Stock outstanding as of the close of business on May 14, 2007: 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.	21
ITEM 4.     CONTROLS AND PROCEDURES	22
PART II.     OTHER INFORMATION	22
ITEM 1A.     RISK FACTORS	22
ITEM 2.     UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	22
ITEM 3.     DEFAULTS UPON SENIOR SECURITIES	23
ITEM 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS	24
ITEM 5.     OTHER INFORMATION	24
ITEM 6.     EXHIBITS	26
EX-3.1 Amended and Restated Articles of Incorporation
EX-10.1 Elliston Employment Agreement
EX-10.2 Elliston Stock Option Agreement
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

	March 31,			December 31,
	2007			2006
ASSETS
Current Assets:
Cash and cash equivalents	$	1,530,675		$	1,042,279
Prepaid insurance		99,255			52,023
Other current assets		62,407			7,981
Total current assets		1,692,337			1,102,283
Property and Equipment, Net		46,703			54,081
Assets Held for Sale		115,216			112,319
Other Assets		256,802			94,392
Total assets	$	2,111,058		$	1,363,075
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable	$	105,765		$	65,151
Accrued liabilities		87,593			103,984
Total current liabilities		193,358			169,135
Long Term Debt
Convertible Debenture — Net		263,705			—
Commitments and Contingencies
Stockholders’ Equity:
Common stock; 2,000,000,000 shares (2007) and 1,000,000,000 (2006) of $.00001 par value authorized, 696,587,734 shares issued and outstanding		6,966			6,966
Undesignated preferred stock, 50,000,000 shares (2007) of $.00001 par value authorized, 0 shares issued and outstanding		—			—
Additional paid-in capital		74,783,487			73,362,626
Deficit accumulated during the development stage		(73,136,458	)		(72,175,652	)
Total stockholders’ equity		1,653,995			1,193,940
Total liabilities and stockholders’ equity	$	2,111,058		$	1,363,075

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						(February 20,
	March 31,						1984) to
							March 31,
	2007			2006			2007
Revenues	$	—		$	—		$	231,892
Costs and Expenses:
Research and development		185,900			497,258			25,023,375
General and administrative		624,230			695,162			32,928,115
Cost in connection with settlement of distribution agreement		—			—			687,005
Depreciation and amortization		8,913			60,077			4,315,823
Impairment charge — patent cost		—			—			1,081,085
		819,043			1,252,497			64,035,403
Loss from Operations		(819,043	)		(1,252,497	)		(63,803,511	)
Other Income (Expense):
Interest income		15,570			34,510			1,319,742
Other income		—			—			120,093
Interest expense		(153,847	)		(653	)		(8,915,361	)
Severance expense — former directors		—			—			(302,500	)
		(138,277	)		33,857			(7,778,026	)
Loss from Continuing Operations		(957,320	)		(1,218,640	)		(71,581,537	)
Loss from Discontinued Operations		(3,486	)		(2,875	)		(1,554,921	)
Net Loss	$	(960,806	)	$	(1,221,515	)	$	(73,136,458	)
Net Loss Per Common Share
Basic and Diluted:
Continuing operations	$	(0.00	)	$	(0.00	)
Discontinued operations		(0.00	)		(0.00	)
Net loss	$	(0.00	)	$	(0.00	)
Weighted Average Number of Common Shares Outstanding		696,587,734			696,587,734

See notes to condensed consolidated financial statements.

3

Advanced Viral Research Corp.
(A Development Stage Company)

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

							Inception
	Three Months Ended						(February 20,
	March 31,							1984) to
								March 31,
	2007			2006				2007
Cash Flows from Operating Activities:
Net loss	$	(960,806	)	$	(1,221,515	)		$	(73,136,458	)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization		8,914			61,936				4,926,601
Impairment charge — patent cost		—			—				1,081,085
Cost in connection with settlement of distribution agreement		—			—				687,005
Amortization of debt issuance costs		13,790			—				1,317,314
Amortization of beneficial conversion feature of convertible shares		60,929			—				5,484,508
Amortization of discount on warrants		52,265			—				1,733,798
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		45,112			142,684				4,138,525
Changes in operating assets and liabilities:
(Increase) decrease in other current assets		(104,555	)		9,314				(184,321	)
(Increase) decrease in other assets		—			(602	)			(825,736	)
Increase (decrease) in accounts payable and accrued liabilities		50,482			391				225,819
Total adjustments		126,937			213,723				21,398,833
Net cash used by operating activities		(833,869	)		(1,007,792	)			(51,737,625	)
Cash Flows from Investing Activities:
Purchase of investments		—			—				(6,292,979	)
Proceeds from sale of investments		—			—				6,292,979
Patent costs incurred		—			—				(1,239,119	)
Acquisition of property and equipment		(1,535	)		—				(4,405,705	)
Net cash used by investing activities		(1,535	)		—				(5,644,824	)
Cash Flows from Financing Activities:
Proceeds from issuance of convertible debt		1,323,800			—				15,893,188
Proceeds from sale of securities, net of issuance costs		—			—				43,410,584
Proceeds from common stock subscribed but not issued		—			—				1,163,900
Proceeds from exercise of stock options		—			—				9,000
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 by financing activities		1,323,800			—				58,913,124
Net Increase (Decrease) in Cash and Cash Equivalents		488,396			(1,007,792	)			1,530,675
Cash and Cash Equivalents, Beginning		1,042,279			4,615,581				—
Cash and Cash Equivalents, Ending	$	1,530,675		$	3,607,789			$	1,530,675
Supplemental Disclosure of Non-Cash Financing Activities:
Cash paid during the year for interest	$	602		$	663

See notes to condensed consolidated 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 March 31, 2007 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 March 31, 2007 and results of operations for the three months ended March 31, 2007 and 2006 and cash flows for the three months ended March 31, 2007 and 2006. 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, 2006.
	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 $73,136,458 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.
	In the first three months of 2007 the Company issued convertible debt for which it received net cash proceeds of approximately $1,323,800, as discussed in further detail in Note 7. During 2006 and 2005, the Company did not receive any proceeds from any debt or equity transactions.
	The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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

Summary

In November 2004 the Company submitted an Investigational New Drug (IND) application to the FDA. The purpose of the application was to obtain approval from the FDA to begin a clinical study in the United States for AVR118. In December 2004, the FDA notified the Company that the IND application was allowed and that it could proceed with its planned study.

Conducting the clinical trials of AVR118 will require significant cash expenditures. AVR118 may never be approved for commercial distribution by any country. Because the Company’s research and development expenses and clinical trial expenses will be charged against earnings for financial reporting purposes, 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.

Wound Healing and Phase II Dermatological Study

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 believed that further study is merited. Based on the results from the August 2006 report from the University of Miami, the Company filed an amendment with the FDA to its existing IND to expand the use of AVR118 to include a Phase II dermatological study involving topical therapy. Management believes these applications could potentially be used to treat a wide variety of common dermatologic conditions, such as micro-dermabrasion.

In January 2007, the Company began the Phase II dermatological study using a topically applied spray formulation of AVR118 as a wound healing agent. The Phase II dermatological study will involve patients with common skin problems ranging from acne scars to surgical wounds, and will 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 therapy. The protocol for the dermatological study provides for 12-20 patients to be treated with AVR118. Total costs incurred through March 31, 2007 relating to this study were approximately $3,750.

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)

Phase II Cancer 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 a 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 Company experienced difficulty accruing patients for the Phase II cancer study and in December 2005, amended the protocol to permit patients undergoing third-line chemotherapy treatment to become participants in the Phase II cancer study, in order to facilitate patient accrual. Only eleven patients had been enrolled in the Phase II cancer study. The total cost relating to this Phase II cancer study was approximately $478,000.

There has not been any activity in this study since the third quarter of 2006, when the Company commenced 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 enable it to accelerate enrollment in an expanded program where higher patient accrual rates can be achieved.

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.

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 March 31, 2007 relating to this Phase I study is approximately $516,000.

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)

	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 relating to this study was approximately $7,000.
NOTE 4.	CONSULTING AND EMPLOYMENT AGREEMENTS
	Elliston Employment Agreement
	On May 14, 2007, the Company entered into a new employment agreement with Stephen M. Elliston for the period commencing May 15, 2007. Mr. Elliston’s existing employment agreement with the Company expired on May 14, 2007. Under the terms of Mr. Elliston’s renewed employment agreement, Mr. Elliston shall be President and Chief Executive Officer on a full time basis commencing May 15, 2007 until May 14, 2009 unless it is terminated earlier as provided in the agreement. Mr. Elliston shall receive a base salary of $350,000 per year. The agreement also entitles Mr. Elliston and his dependents to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other executives of the Company and their dependents. The agreement further provides that:

• The Company shall pay the dues of such professional associations and societies of which Mr. Elliston is a member in furtherance of his duties.

• The Company shall reimburse Mr. Elliston for reasonable expenses relating to travel, professional licenses, entertainment and similar items in accordance with the policies, practices and procedures of the Company .

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

If the agreement is terminated by the Company for cause, or Mr. Elliston voluntarily resigns, becomes disabled or dies, then Mr. Elliston or his estate shall be entitled to his base salary earned through the date of termination, accrued vacation and all applicable reimbursements due. If the agreement is terminated for other reasons by either party, Mr. Elliston shall be entitled to his base salary for the remainder of the term, payable in accordance with the Company’s normal payroll practices, and all applicable reimbursements due. Payment of the severance benefit is conditioned upon the release by Mr. Elliston of the Company, to the maximum extent permitted by law, from any and all claims he may have against the Company that relate to or arise out of his employment or termination of employment.

8

Advanced Viral Research Corp.
(A Development Stage Company)

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

NOTE 4.	CONSULTING AND EMPLOYMENT AGREEMENTS(Continued)
	Elliston Employment Agreement(Continued)
	Upon the execution of his employment agreement, Mr. Elliston received an option to purchase 40,000,000 shares of the Company’s common stock. The option vests monthly in increments of 666,667 shares, and is exercisable at prices ranging from $0.05 to $0.08 per option share for a period of five years from the applicable vesting date.
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, 2007		113,208,283	$	0.1656
Granted		—		—
Exercised		—		—
Forfeited		—		—
Expired unexercised		—		—
Outstanding at March 31, 2007		113,208,283	$	0.1656
Options exercisable at March 31, 2007		109,084,283	$	0.1675

During the first three months of 2007, the Company recorded stock-based compensation in the amount of $45,112 compared with $142,684 for the first three months of 2006, 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 $45,000,for the three months ended March 31, 2007 vs. $143,000 or $0.0 per share, over what would have been recorded under the original provisions of SFAS No. 123. At March 31, 2007, there was approximately $417,000 of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.4 years.

No stock options were granted or exercised during the three months ended March 31, 2007 or March 31, 2006.

The weighted-average remaining contractual terms of outstanding stock options and exercisable stock options at March 31, 2007 was 3.2 years and 3.1 years, respectively. The aggregate intrinsic value of outstanding stock options and exercisable stock options at March 31, 2007 was approximately $0.

9

Advanced Viral Research Corp.
(A Development Stage Company)

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

NOTE 5.	STOCK-BASED COMPENSATION(Continued)
	Stock Incentive Plan
	The Advanced Viral Research Corp. 2007 Stock Incentive Plan (the “2007 Plan”) was approved by the Company’s stockholders at a special meeting of stockholders on March 21, 2007. The 2007 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, stock bonuses and restricted stock awards, restricted stock units, performance shares, performance units and other stock-based awards to employees, including officers, non-employee directors and consultants options to purchase common shares of the company at an exercise or stock price based on the market value of the shares on the date of grant. A maximum aggregate of 100,000,000 shares of common stock may be issued pursuant to stock options, rights or awards granted under the 2007 Plan. The 2007 Plan will terminate in March 2017 unless it is terminated earlier in accordance with the terms thereof.
	On May 14, 2007, the Company granted stock options to purchase an aggregate of 10,675,000 shares of its common stock under the 2007 Plan at an exercise price of $0.05 for a period of five years to members of the Board of Directors in consideration for their service on the Board. In addition, on May 14 2007, in connection with the new employment agreement with Mr. Elliston, the Company’s President and Chief Executive Officer, the Company granted Mr. Elliston stock options to purchase an aggregate of 40,000,000 shares of common stock under the 2007 Plan at exercise prices ranging from $0.05 to $0.08 for a period of five years from the vesting date.

10

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.

11

Advanced Viral Research Corp.
(A Development Stage Company)

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

NOTE 7.	SECURITIES PURCHASE AGREEMENTS
	On January 1, 2007, pursuant to a securities purchase agreement, the Company sold to Cornell Capital Partners, L.P. (“Cornell”) $1,500,000 principal amount of its 9% secured convertible debentures, due December 31, 2009, along with warrants to purchase an aggregate of 48,076,923 shares of its common stock, which are exercisable through December 31, 2009 at an exercise price equal to $0.0312 or as may be adjusted from time to time pursuant to the terms thereof (the “Cornell Agreement”). Pursuant to the Cornell Agreement, Yorkville Advisors LLC, the general partner of Cornell, received cash compensation equal to 10% of the gross proceeds of the convertible debentures purchased by Cornell as well as a $20,000 structuring fee and a $10,000 due diligence fee.
	Cornell acquired $1,000,000 of convertible debentures on January 5, 2007, and acquired an additional $500,000 of convertible debentures on February 16, 2007. In connection with the first closing, the Company received net proceeds of $875,000 on January 5, 2007. In connection with the second closing, the Company paid an additional $50,000 to Yorkville, and received net proceeds of $450,000 on February 16, 2007.
	Cornell may convert the debentures plus accrued interest, (which may be paid at the Company’s option, subject to certain conditions regarding registration of the shares underlying the debenture, in cash or common stock), in shares of the Company’s common stock at a conversion price equal to the lesser of $0.0312 or 95% of the lowest volume weighted average price of the Company’s common stock during the thirty consecutive trading days immediately preceding the applicable conversion date. Subject to certain exceptions, at the Company’s option, the Company may redeem a portion or the entire outstanding debenture at a price equal to 115% of the amount redeemed plus accrued interest. The Company was obligated to file a registration statement registering the resale of all shares of common stock that may be issued to Cornell upon the conversion of the convertible debentures or exercise of the warrants. The registration statement was filed on February 12, 2007.
	An allocation of the proceeds received from the issuance of the secured convertible debentures was made between the debt instrument and the warrant by determining the pro-rata share of the proceeds for each by comparing the fair value of each security issued to the total fair value. The fair value of the warrant ($644,605) was determined using the Black-Scholes model with the following assumptions: expected volatility of 86%, risk-free interest rate of 4.7% and an expected holding period of five years. The fair value of the secured convertible debentures was determined by measuring the fair value of the common shares on an “as-converted” basis. The amount allocated to the warrant was recorded as a discount on the debt issued and additional paid-in capital. The value of the beneficial conversion feature of the secured convertible debentures ($731,143) was calculated by comparing the fair value of the underlying common shares on the date of issuance based on the closing price of the Company’s common stock to the “effective” conversion price. The beneficial conversion feature was recorded as a discount on the debenture and is being amortized as additional interest expense over the life of the debenture.

12

Advanced Viral Research Corp.
(A Development Stage Company)

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

NOTE 7.	SECURITIES PURCHASE AGREEMENTS(Continued)
	Subject to the Company’s enrollment of the first patient in the Phase II study of AVR118 used as a topical therapy on dermatologic conditions and the registration statement being declared effective by the SEC, Cornell has agreed to purchase up to an additional $750,000 of convertible debentures upon the execution of similar transaction documents on terms mutually agreed upon by the parties.
	The Company’s obligations under the Cornell Agreement, the convertible debentures and the ancillary documents entered into in connection therewith are secured by a first priority security interest in all of the Company’s assets. This security interest expires upon the earlier to occur of (i) $500,000 or less principal amount of the convertible debentures remains outstanding; (ii) the Company receives $3,000,000 of capital, in any form other than through the issuance of free-trading shares of common stock, from sources other than Cornell, which is utilized to either repay the convertible debentures in full, or reduce the outstanding principal amount of the convertible debentures to $500,000; or (iii) the satisfaction of the Company’s obligations under the agreement, the convertible debentures and the ancillary documents entered into in connection therewith.
	The registration rights agreement with Cornell requires the Company, subject to certain terms and conditions, to register the underlying shares of the Company’s common stock under the Securities Act. The registration rights granted are subject to customary exceptions and qualifications and compliance with certain registration procedures. The Company is required to pay to Cornell liquidated damages of 2% of the aggregate purchase price of the liquidated value of the convertible debentures for each 30-day period if any of the following events occurs and during the period such event is continuing: (i) the Company fails to file with the Securities and Exchange Commission the registration statement on or before the 60th day after January 1, 2007; (ii) the registration statement is not declared effective by the Securities and Exchange Commission on or before May 1, 2007; or (iii) after the effective date of the registration, sales cannot be made pursuant to the registration statement (whether because of a failure to keep the registration statement effective, failure to disclose such information as is necessary for sales to be made pursuant to the registration statement, failure to register sufficient shares of common stock or otherwise). Such payments must be made within three business days of such failure and every 30-day period thereafter until such failure is cured. Any liquidated damages begin accruing on the date of any such failure. The registration statement has not yet been declared effective by the SEC.

13

Advanced Viral Research Corp.
(A Development Stage Company)

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

NOTE 7.	SECURITIES PURCHASE AGREEMENTS(Continued)
	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, 2006		68,041,501
Granted		48,076,923
Exercised		—
Forfeited		(15,535,134	)
Outstanding at March 31, 2007		100,583,290

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
	Three Months						(February 20, 1984)
	Ended March 31						to March 31,
	2007			2006			2007
Revenues	$	—		$	—		$	—
Costs and Expenses:
General and administrative		3,486			1,016			1,378,204
Depreciation		—			1,859			316,737
		3,486			2,875			1,694,941
Other Income		—			—			140,020
Loss from discontinued operations		($3,486	)		($2,875	)		($1,554,921	)

NOTE 9.

RECENT ACCOUNTING PRONOUNCEMENTS

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an interpretation of SFAS Statement No. 109. This Interpretation clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS Statement No. 109, Accounting for Income Taxes. This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This Interpretation also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company evaluated the impact of adopting FIN 48 on the consolidated financial statements and determined the adoption did not have a material effect on the Company’s financial condition, cash flows or results of operation.

14

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, 2006.

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;

• as an anti-inflammatory; and

• as a palliative agent to minimize certain toxicities associated with chemotherapy or immunotherapies.

     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 March 31, 2007, we had incurred a cumulative net loss of approximately $73,136,000. 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).

Research and Development

     The costs relating to our research and development efforts for the years 2000 to 2006 and the three months ended March 31, 2007 and March 31, 2006 are presented below. Since March 31, 2006, our expenditures for research and development have decreased significantly over each subsequent quarter (from $497,000 as of March 31, 2006 to $185,900 as of March 31, 2007), primarily due to the internalization of certain research and development functions within the Company, the increased efficiencies resulting from such internalization, and the elimination of certain expenses resulting from the transition of the Phase II cancer/cachexia study, the cessation of the type 2 diabetes study, the termination of the MediVector agreement, and the implementation of more cost effective patient accrual and other procedures relating to the Phase II dermatological study.

15

COSTS RELATING TO RESEARCH AND DEVELOPMENT EFFORTS
FROM JANUARY 2000 THROUGH MARCH 31, 2007

			3 Months		3 Months			2000-3/31/07
COST CATEGORY	2000-2006		ended 3/31/06		ended 3/31/07			to date
Hospital fees
Phase I (topical)		254,246		—		—			254,246
Phase I/II (I AIDS, (Israel)		140,500		—		—			140,500
Phase I leukemia/lymphoma (Israel)		19,000		—		—			19,000
Phase I solid tumor (Israel)		8,000		—		—			8,000
Phase II cancer study (NY)		115,002		29		—			115,002
Phase I diabetes study		266,452		61,509		—			266,452
In vitro and Avian Flu		41,868		23,859		—			41,868
Anti-Inflammatory		7,542		—		—			7,542
Wound healing / Dermatological study		35,487		—		3,750			39,237
Lab fees		138,292		—		—			138,292
Insurance cost		101,679		7,750		6,709			108,388
TOTAL CLINICAL FEES		1,128,068		93,147		10,459			1,138,527
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		—		(6,113	)		1,441,806
Argentina patient experiences		253,168		—		—			253,168
Data management & study reports		932,163		54,312		—			932,163
Clinical & Regulatory consulting		2,384,255		116,188		1,500			2,385,755
TOTAL CLINICAL/REGULATORY OPERATIONS		5,351,241		170,500		(4,613	)		5,346,628
General lab supplies		1,174,047		16,303		5,659			1,179,706
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		8,111,822		217,308		174,395			8,286,217
R&D Miscellaneous Expenses		37,720		—		—			37,720
TOTAL PRECLINICAL RESEARCH & DEVELOPMENT		12,825,762		233,611		180,054			13,005,816
TOTAL RESEARCH AND DEVELOPMENT		19,305,071		497,258		185,900			19,490,971

Proposed Sale of Assets

     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 March 31, 2007 and December 31, 2006 as Assets held for Sale. AVR Ltd. had no liabilities as of March 31, 2007 and December 31, 2006, 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 months ended March 31, 2007 and March 31, 2006 as Loss from Discontinued Operations.

Recent Events

     Phase II Dermatological Study. In August 2006 we received a report from the University of Miami analyzing data from a limited animal study indicating that a topical application of AVR118 accelerates the rate at which wounds heal. Although preliminary, we believed that further study was merited. 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 therapy. Management believes these applications could potentially be used to treat a wide variety of common dermatologic conditions. The Phase II pilot study involves patients with common skin problems ranging from acne scars to surgical wounds, and will 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 therapy.

16

     In January 2007 we began the Phase II dermatological study using a topically applied spray formulation of AVR118 as a wound healing agent. The protocol for the dermatological study provides for 12-20 patients to be treated with AVR118. Total costs incurred through March 31, 2007 relating to this study were approximately $3,750.

     As of May 4, 2007 a total of seven patients have been entered into the study at two different sites. One of the sites is treating surgical wounds while the second site is recruiting patients for other dermatological applications such as micro-dermabrasion. Two surgical wound patients and five micro-dermabrasion patients have completed the study. The Company is currently reviewing the possibility of opening additional study sites to increase patient recruitment.

     Elliston Employment Agreement.On May 14, 2007, Advanced Viral Research Corp. entered into a new employment agreement with Stephen M. Elliston for the period commencing May 15, 2007. See “Part II — Item 5. Other Information.”

     January 2007 Private Placement with Cornell Capital Partners, LP.On January 1, 2007, pursuant to a securities purchase agreement, we sold to Cornell Capital Partners, L.P. (“Cornell”) $1,500,000 principal amount of our 9% secured convertible debentures, due January 1, 2010, along with warrants to purchase an aggregate of 48,076,923 shares of our common stock, which are exercisable through January 1, 2012 at an exercise price equal to $0.0312 or as may be adjusted from time to time pursuant to the terms thereof. For more information regarding this transaction, see “Capital Resources” and “Part II — Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.”

Going Concern

     The independent registered public accounting firm’s report on our consolidated financial statements for the fiscal year ended December 31, 2006 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. No assurance can be given that debt or equity financing will be available.

     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.

RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2007 VS. MARCH 31, 2006.

     For the three months ended March 31, 2007 we incurred losses from continuing operations of $957,000 vs. $1,219,000 for the three months ended March 31, 2006. Our losses were attributable primarily to:

     RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses for the three months ended March 31, 2007 decreased 63% to $186,000 compared to $497,000 for the three months ended March 31, 2006. The change in research and development expenses primarily resulted from:

17

• Research and development expenditures relating to salaries, benefits and facilities were $160,000 vs. $141,000 for the three months ended March 31, 2007 and 2006, respectively. This increase was due to a full three month salary expense for Stephen Elliston, President and CEO compared to a partial salary expense associated with Elma Hawkins, who resigned as our President and CEO in February 2006. For the three months ended March 31, 2007 and 2006, 53% and 46% of our payroll and related expenses were allocated to research and development expenses, respectively;

• Research and development expenditures relating to consulting services provided by Elma Hawkins relating to scientific matters was $0 and $63,000 for the three months ended March 31, 2007 and 2006 respectively;

• Clinical testing fees were $10,000 vs. $93,000 for the three months ended March 31, 2007 and 2006, respectively. The decrease for the three month period ended March 31, 2007 vs. 2006 was primarily attributable to no Phase I diabetes trial costs and Phase II cancer/cachexia trial costs, offset by the commencement of the dermatological study; and

• Expenses associated with clinical and regulatory activities were $(4,600) and $121,000 for the three months ended March 31, 2007 and 2006, respectively. The decrease for the three months ended March 31, 2007 vs. 2006 was primarily attributable to the cessation of regulatory consulting costs and data management fees for processing the Phase II cancer/cachexia study with BRANY and Phase I diabetes study by December 31, 2006.

     GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense decreased 10% to $624,000 from $695,000 for the three months ended March 31, 2007 and 2006, respectively. The changes in general and administrative expenses primarily resulted from:

• Decreased payroll and related expenses of $142,000 vs. $168,000 for the three months ended March 31, 2007 and 2006, 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, as well as the termination of three other employees during the first quarter of 2006; and

• Professional fees increased 14% to $162,000 vs. $142,000 for the three months ended March 31, 2007 and 2006, respectively.

     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 three months ended March 31, 2007 and March 31, 2006 $45,112 and $142,684 respectively of stock-based employee compensation cost is reflected in the net loss.

     DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization expense decreased 85% to $9,000 vs. $60,000 for the three months ended March 31, 2007 and 2006, respectively.. This decrease for the comparative three month periods was due to assets acquired in prior years that were fully depreciated in 2007 and the determination that certain assets are currently not being used and may be sold.

     INTEREST INCOME (EXPENSE). Interest income decreased 55% to $16,000 vs. $35,000 for the three months ended March 31, 2007 and 2006, respectively, as a result of decreased cash balances invested in money market accounts. Interest expense increased by 154,000 from $1,000 for the three months ended March 31, 2007 and 2006. Interest expense for 2007 was comprised of approximately $14,000 for the amortization of loan costs and $61,000 for amortization of beneficial conversion feature and $52,000 of

18

amortization of discount on convertible debt and $26,000 interest earned relating to the $1,500,000 financing arrangement between the Company and Cornell Capital Partners.

     LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations decreased 21% to $957,000 vs. $1,219,000 for the three months ended March 31, 2007 and 2006, respectively. The change for the comparable periods was primarily due to decreases in research and development expenses.

     LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations were $3,000 vs. $3,000 for the three months ended March 31, 2007 and 2006, 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.

     REVENUES. We had no revenues for the three months ended March 31, 2007 and 2006.

LIQUIDITY

     We had current assets of $1,692,000 as of March 31, 2007 compared to $1,102,000 as of December 31, 2006. We had total assets of $2,111,000 at March 31, 2007 compared to $1,363,000 at December 31, 2006. The increase in current and total assets was primarily attributable to the receipt of cash of $1,325,000 relating to the $1,500,000 financing which was used to fund current operations. We had current liabilities of $193,000 as of March 31, 2007, compared to $169,000 as of December 31, 2006. We had long term debt of $263.000 as of March 31, 2007 compared to $0 as of December 31, 2006. This debt represents Convertible Debentures and earned interest of $1,526,000 offset by deferred discount on the Convertible Debentures of $1,263,000 relating to the financing with Cornell Capital Partners during the first three months ending March 31, 2007.

     During the three months ended March 31, 2007 we used cash of $834,000 for operating activities, compared to $1,008,000 during the three months ended March 31, 2006. During the three months ended March 31, 2007, our expenses included:

• $200,000 for payroll and related costs primarily for administrative staff, scientific personnel and executive officers;

• $160,000 for other professional and consulting fees

• $102,000 for rent and utilities for our Yonkers facility; and

• $94,000 in proxy costs.

• $92,000 for insurance costs;

• $17,000 for expenditures for AVR118 research;

     During the three months ended March 31, 2007, we used $2,000 for investment activities, compared to $0 during the three months ended March 31, 2006 related to equipment purchases.

     $1,324,000 in net funds were provided by financing activities for the three months ended March 31, 2007 in connection with the issuance and sale of convertible debentures in the aggregate principal amount of $1,500,000 compared to $0 provided for the three months ended March 31, 2006. See “Capital Resources.”

     We have no off-balance sheet transactions.

19

CAPITAL RESOURCES

January 2007 Private Placement

     On January 1, 2007, pursuant to a securities purchase agreement, we sold to Cornell $1,500,000 principal amount of our 9% secured convertible debentures, due January 1, 2010, along with warrants to purchase an aggregate of 48,076,923 shares of our common stock, which are exercisable through January 1, 2012 at an exercise price equal to $0.0312 or as may be adjusted from time to time pursuant to the terms thereof. Cornell acquired $1,000,000 principal amount of the debentures upon the first closing under the Cornell Agreement on January 5, 2007, for which we received net proceeds of $875,000, and the remaining $500,000 principal amount of the debentures on February 16, 2007, for which we received net proceeds of $450,000. We are using the net proceeds for working capital purposes. On February 12, 2007, we filed a registration statement on Form S-1 to register the resale of the shares issuable upon conversion or exercise of these securities, which has not yet been declared effective. For more information regarding this transaction, see “Capital Resources” and “Part II — Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.”

     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

     In March 2007 we amended and restated our Certificate of Incorporation to (i) increase the number of authorized shares of our common stock to 2 billion shares; (ii) authorize the issuance of up to 50 million shares of blank check preferred stock; and (iii) make certain conforming amendments to the headings, terminology and numbering of the provisions therein. A copy of our Amended and Restated Certificate of Incorporation is attached as Exhibit 3.1 to this report.

     In addition to the 696,587,734 shares of our common stock outstanding as of May 14, 2007, we have reserved for issuance approximately 312.5 million shares upon the conversion or exercise of currently outstanding convertible debentures, stock options and warrants. If all of the foregoing securities were fully issued, exercised and/or converted, as the case may be, we would receive proceeds of approximately $27.3 million, and we would have approximately 1.0 billion 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.

20

Projected Expenses

     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 December 2007 with our current liquid assets, if no stock options or warrants are exercised, nor additional securities sold. 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.

     To complete the full range of testing necessary to commercially offer AVR118, we will need substantially more capital. 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.

     The independent registered public accounting firm’s report on our consolidated financial statements for the fiscal year ended December 31, 2006 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.

     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.

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.

21

ITEM 4. CONTROLS AND PROCEDURES

     As of March 31, 2007, 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 March 31, 2007 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 March 31, 2007 that materially affected, or would be reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS

     There have been no material changes to the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2006 and in other reports filed from time to time with the SEC since the date we filed our Form 10-K. Readers are urged to carefully review our risk factors since they may cause our results to differ from the “forward-looking statements” made in this report or otherwise made by or on our behalf. Those risk factors are not the only ones we face. Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operation. We do not undertake to update any of these forward-looking statements or to announce the results of any revisions to these forward-looking statements except as required by law.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

January 2007 Private Placement

     On January 1, 2007, pursuant to a securities purchase agreement, we sold to Cornell $1,500,000 principal amount of our 9% secured convertible debentures, due January 1, 2010, along with warrants to purchase an aggregate of 48,076,923 shares of our common stock, which are exercisable through January 1, 2012 at an exercise price equal to $0.0312 or as may be adjusted from time to time pursuant to the terms thereof (the “Cornell Agreement”). In connection with the issuance and sale of the convertible debentures and warrants pursuant to the Cornell Agreement, we relied upon an exemption from registration provided by Section 4(2) of the Securities Act of 1933.

     The convertible debentures have a term of three years, accrue interest at 9% and are convertible into our common stock at a price per share equal to the lesser of (a) $0.0312 per share, or (b) an amount equal to 95% of the lowest volume weighted average price of our common stock for the 30 trading days immediately preceding the conversion date, as quoted by Bloomberg, LP.

     Cornell acquired $1,000,000 principal amount of the debentures upon the first closing under the Cornell Agreement on January 5, 2007, and the remaining $500,000 principal amount of the debentures on February 16, 2007. On February 12, 2007, we filed a registration statement on Form S-1 to register the resale of the shares issuable upon conversion or exercise of these securities, which has not yet been declared effective.

     Pursuant to the Cornell Agreement, we paid Yorkville Advisors LLC, the general partner of Cornell, cash compensation equal to 10% of the gross proceeds of the debentures purchased by Cornell as well as a $20,000 structuring fee and a $10,000 due diligence fee. In connection with the first closing of $1,000,000 principal amount of debentures, we paid $125,000 to Yorkville ($5,000 of the due diligence fee was previously paid), and received net proceeds of $875,000 on January 5, 2007. In connection with the second closing of $500,000 principal amount of debentures, we paid an additional $50,000 to Yorkville, and received net proceeds of $450,000 on February 16, 2007. We used the net proceeds for working capital

22

purposes. In addition, Cornell has agreed to purchase up to an additional $750,000 of debentures upon the satisfaction of certain conditions, including (i) our enrollment of the first patient in our Phase II dermatological study, (ii) the registration statement being declared effective by the SEC, and the execution of similar transaction documents on terms mutually agreed upon by the parties.

     Under the terms of the debentures and warrants, Cornell may not convert the debentures or exercise the warrants if following such conversion or exercise Cornell, together with its affiliates, would beneficially own more than 4.99% of our then outstanding shares of common stock (not counting the shares issuable upon conversion of the debentures and warrants remaining to be converted or exercised). However, Cornell may waive this limitation upon not less than 65 days prior written notice to us. As of the date hereof, we have not received any written notice that Cornell will waive the 4.99% ownership after the 65-day limitation period. Subject to certain exceptions, at our option, we may redeem a portion or the entire amount of outstanding debentures at a price equal to 115% of the amount redeemed plus accrued interest.

     Our obligations under the Cornell Agreement, the debentures and the ancillary documents entered into in connection therewith are secured by a first priority security interest in all of our assets. This security interest expires upon the earlier to occur of (i) $500,000 or less principal amount of the debentures remains outstanding; (ii) we receive $3,000,000 of capital, in any form other than through the issuance of free-trading shares of common stock, from sources other than Cornell, which is utilized to either repay the debentures in full, or reduce the outstanding principal amount of the debentures to $500,000; or (iii) the satisfaction of our obligations under the agreement, the debentures and the ancillary documents entered into in connection therewith.

     Pursuant to the Cornell Agreement, we filed a registration statement registering the resale of all shares of common stock that may be issued to Cornell upon the conversion of the debentures or exercise of the warrants. The registration rights granted are subject to customary exceptions and qualifications and compliance with certain registration procedures. We are required to pay to Cornell liquidated damages of 2% of the aggregate purchase price of the liquidated value of the debentures for each 30-day period if any of the following events occurs and during the period such event is continuing: (i) we fail to file with the Securities and Exchange Commission the registration statement on or before the 60th day after January 1, 2007; (ii) the registration statement is not declared effective by the Securities and Exchange Commission on or before May 1, 2007; or (iii) after the effective date of the registration, sales cannot be made pursuant to the registration statement (whether because of a failure to keep the registration statement effective, failure to disclose such information as is necessary for sales to be made pursuant to the registration statement, failure to register sufficient shares of common stock or otherwise). Such payments must be made within three business days of such failure and every 30-day period thereafter until such failure is cured. Any liquidated damages begin accruing on the date of any such failure. The registration statement has not yet been declared effective by the SEC.

Stock Incentive Plan/Stock Option Awards

     Our Advanced Viral Research Corp. 2007 Stock Incentive Plan (the “2007 Plan”) was approved by our stockholders at a special meeting of stockholders on March 21, 2007. The 2007 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, stock bonuses and restricted stock awards, restricted stock units, performance shares, performance units and other stock-based awards to employees, including officers, non-employee directors and consultants options to purchase common shares of the company at an exercise or stock price based on the market value of the shares on the date of grant. A maximum aggregate of 100,000,000 shares of common stock may be issued pursuant to stock options, rights or awards granted under the 2007 Plan. The 2007 Plan will terminate in March 2017 unless it is terminated earlier in accordance with the terms thereof. On May 14, 2007, our Board of Directors approved the form of option agreement to be used in connection with the grant of options under the 2007 Plan.

     On May 14, 2007, we granted stock options to purchase an aggregate of 10,675,000 shares of our common stock under the 2007 Plan at an exercise price of $0.05 for a period of five years to members of our Board of Directors in consideration for their service on the Board. In addition, on May 14, 2007 in connection with the new employment agreement with Mr. Elliston, our President and Chief Executive Officer (described below), we granted Mr. Elliston an option to purchase an aggregate of 40,000,000 shares of our common stock under the 2007 Plan. The option vests monthly in increments of 666,667 shares , and is exercisable at prices ranging from $0.05 to $0.08 per option share for a period of five years from the applicable vesting date. The stock options described above were issued pursuant to the 2007 Plan in reliance upon the exemption provided by Rule 701 promulgated under the Securities Act of 1933.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

     Not Applicable

23

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

     A special meeting of stockholders was held on March 21, 2007. The following proposals were adopted by the margins indicated:

		Number of Votes
	Proposal	For		Against		Abstained
1.	Blank Check Preferred Stock. Approve an amendment to the Company’s Certificate of Incorporation to authorize the issuance of up to 50,000,000 shares of blank check preferred stock.		354,576,973		36,192,876		7,131,980
2.	Increase in Number of Authorized Shares of Common Stock. Approve an amendment to the Company’s Certificate of Incorporation to increase the number of authorized shares of the Company’s common stock from 1,000,000,000 shares to 2,000,000,000 shares.		363,625,632		30,025,126		4,251,071
3.	Conforming Amendments to Certificate of Incorporation. Approve an Amended and Restated Certificate of Incorporation which will amend the headings, terminology and numbering of the provisions within our current Certificate of Incorporation, as amended, and integrate into a single instrument all of the provisions thereof.		366,828,433		24,669,698		6,403,698
4.	Stock Incentive Plan. Approve the adoption of the Company’s 2007 Stock Incentive Plan.		351,445,240		36,351,663		10,104,926

ITEM 5. OTHER INFORMATION

Stock Incentive Plan/Stock Option Awards.

     Our Advanced Viral Research Corp. 2007 Stock Incentive Plan (the “2007 Plan”) was approved by our stockholders at a special meeting of stockholders on March 21, 2007. The 2007 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, stock bonuses and restricted stock awards, restricted stock units, performance shares, performance units and other stock-based awards to employees, including officers, non-employee directors and consultants options to purchase common shares of the company at an exercise or stock price based on the market value of the shares on the date of grant. A maximum aggregate of 100,000,000 shares of common stock may be issued pursuant to stock options, rights or awards granted under the 2007 Plan. The 2007 Plan will terminate in March 2017 unless it is terminated earlier in accordance with the terms thereof. On May 14, 2007, our Board of Directors approved the form of option agreement to be used in connection with the grant of options under the 2007 Plan.

     On May 14, 2007, we granted stock options to purchase an aggregate of 10,675,000 shares of our common stock under the 2007 Plan at an exercise price of $0.05 for a period of five years to members of our Board of Directors in consideration for their service on the Board. In addition, May 14, 2007 in connection with the new employment agreement with Mr. Elliston, our President and Chief Executive Officer (described below), we granted Mr. Elliston an option to purchase an aggregate of 40,000,000 shares of our common stock under the 2007 Plan. The option vests monthly in increments of 666,667 shares, and is exercisable at prices ranging from $0.05 to $0.08 for a period of five years from the vesting date. The stock options described above were issued pursuant to the 2007 Plan in reliance upon the exemption provided by Rule 701 promulgated under the Securities Act of 1933.

24

Employment Agreement with Stephen Elliston

     On May 4, 2007, we entered into a new employment agreement with Stephen M. Elliston for the period commencing May 15, 2007. Mr. Elliston’s existing employment agreement with Advanced Viral expired on May 14, 2007. Under the terms of Mr. Elliston’s new employment agreement, Mr. Elliston shall continue to be our President and Chief Executive Officer on a full time basis through May 14, 2009 unless terminated earlier as provided in the agreement. Mr. Elliston shall receive a base salary of $350,000 per year. The agreement also entitles Mr. Elliston and his dependents to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other executives of the Company and their dependents. The agreement further provides that:

• We shall pay the dues of such professional associations and societies of which Mr. Elliston is a member in furtherance of his duties.

• We shall reimburse Mr. Elliston for reasonable expenses relating to travel, professional licenses, entertainment and similar items in accordance with the policies, practices and procedures of the Company.

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

     If the agreement is terminated by the Company for cause, or Mr. Elliston voluntarily resigns, becomes disabled or dies, then Mr. Elliston or his estate shall be entitled to his base salary earned through the date of termination, accrued vacation and all applicable reimbursements due. If the agreement is terminated for other reasons by either party, Mr. Elliston shall be entitled to his base salary for the remainder of the term, payable in accordance with the Company’s normal payroll practices, and all applicable reimbursements due. Payment of the severance benefit is conditioned upon the release by Mr. Elliston of the Company, to the maximum extent permitted by law, from any and all claims he may have against the Company that relate to or arise out of his employment or termination of employment.

     Upon the execution of his employment agreement, Mr. Elliston received an option to purchase 40,000,000 shares of the Company’s common stock. The option vests monthly in increments of 666,667 shares, and is exercisable at prices ranging from $0.05 to $0.08 per option share for a period of five years from the applicable vesting date.

     Copies of Mr. Elliston’s employment agreement and stock option are attached as Exhibits 10.1 and 10.2 to this report.

25

ITEM 6. EXHIBITS

     The following exhibits are filed with this Report:

Exhibit		Description
	3.1	Amended and Restated Articles of Incorporation of Advanced Viral Research Corp.
	10.1	Employment Agreement dated as of May 15, 2007, between Advanced Viral Research Corp. and Stephen M. Elliston.
	10.2	Stock Option Agreement dated as of May 15, 2007, between Advanced Viral Research Corp. and Stephen M. Elliston.
	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.

26

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: May 14, 2007	/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)

27