U.S. SECURITIES AND EXCHANGE COMMISSION

                                    FORM 10-K

                   [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                      For the year ended December 31, 2002

                                       OR
                 [ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                        Commission File Number: 33-2262-A

                          ADVANCED VIRAL RESEARCH CORP.
             ------------------------------------------------------
             (exact name of Registrant as specified in its charter)

           DELAWARE                                             59-2646820
           --------                                             ----------
(State or other jurisdiction of                             (I.R.S. Employer
 incorporation or organization)                            Identification No.)

200 CORPORATE BOULEVARD SOUTH, YONKERS, NEW YORK                  10701
- ------------------------------------------------                  -----
    (Address of principal executive offices)                   (Zip Code)

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

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

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


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

         The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the average of the closing bid and ask quotations
for the Common Stock on the OTC Bulletin Board, as of the last business day of
the Registrant's most recently completed second fiscal quarter, was
approximately $75.3 million. The shares of Common Stock held by each officer and
director and by each person known to the Registrant who owns 10% or more of the
outstanding Common Stock have been excluded in that such persons may be deemed
to be affiliates. This determination of affiliate status is not necessarily a
conclusive determination for other purposes. As of March 28, 2003, the
Registrant had 472,792,609 shares of Common Stock outstanding.

DOCUMENTS INCORPORATED BY REFERENCE:   None.




                          ADVANCED VIRAL RESEARCH CORP.

                                    FORM 10-K
                          YEAR ENDED DECEMBER 31, 2002


                                TABLE OF CONTENTS




                                                                                                              
PART I............................................................................................................1
     ITEM 1.      BUSINESS........................................................................................1
     ITEM 2.      DESCRIPTION OF PROPERTY........................................................................12
     ITEM 3.      LEGAL PROCEEDINGS..............................................................................12
     ITEM 4.      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS............................................13

PART II..........................................................................................................13
     ITEM 5.      MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..........................13
     ITEM 6.      SELECTED FINANCIAL DATA........................................................................14
     ITEM 7.      MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF  OPERATIONS.........16
     ITEM 7A.     QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK......................................24
     ITEM 8.      FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA....................................................24
     ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE...........24

PART III.........................................................................................................25
     ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.............................................25
     ITEM 11.     EXECUTIVE COMPENSATION.........................................................................27
     ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
                  STOCKHOLDER MATTERS............................................................................33
     ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.................................................34
     ITEM 14.     CONTROLS AND PROCEDURES........................................................................35

PART IV..........................................................................................................35
     ITEM 15.     EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K................................35
     ITEM 16.     PRINCIPAL ACCOUNTANT FEES AND SERVICES.........................................................35
SIGNATURES.......................................................................................................37
CERTIFICATIONS...................................................................................................38
INDEX OF EXHIBITS................................................................................................40





                           FORWARD-LOOKING STATEMENTS

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







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

                                     PART I

ITEM 1. BUSINESS

OVERVIEW

         Advanced Viral Research Corp. was formed in July 1985 to engage in the
production and marketing, promotion and sale of a pharmaceutical drug known by
the trademark Reticulose(R). The current formulation of Reticulose is currently
known as "Product R." We believe Product R may be employed in the treatment of
certain viral and autoimmune diseases such as:

         o   Human immunodeficiency virus, or HIV, including acquired immune
             deficiency syndrome, or AIDS;

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

         o   Cachexia (body wasting) in patients with solid cancers, leukemias
             and lymphomas; and

         o   Rheumatoid arthritis.

         Since 1962, when Reticulose(R) was reclassified as a "new drug" by the
Food and Drug Administration, or FDA, the FDA has not permitted Reticulose(R) to
be marketed in the United States. A forfeiture action was instituted in 1962 by
the FDA against Reticulose(R), and it was withdrawn from the United States
market. The injunction obtained by the FDA prohibits, among other things, any
shipment of Product R until a new drug application, or NDA, is approved by the
FDA. FDA approval of an NDA first requires clinical testing of Product R in
human trials, which cannot be conducted until we first satisfy the regulatory
protocols and the substantial pre-approval requirements imposed by the FDA upon
the introduction of any new or unapproved drug product pursuant to an
investigational new drug application, or IND.

         Our operations over the last five years have been limited principally
to research, testing and analysis of Product R in the United States, either in
vitro (outside the living body in an artificial environment, such as in a test
tube), or on animals, and engaging others to perform testing and analysis of
Product R on human patients both inside and outside the United States. On July
30, 2001, we submitted an IND application to the FDA to begin Phase 1 clinical
trials of Product R as a topical treatment for genital warts caused by the human
papilloma virus (HPV) infection. In September 2001, the FDA cleared the IND
application to begin Phase 1 clinical trials. Our Phase 1 study was performed in
the United States on human volunteers. In March 2002, we completed the Phase 1
trial and submitted to the FDA the results, which indicated that Product R was
safe and well tolerated dermatologically in all the doses applied in the study.
Currently, we do not have sufficient funds available to pursue the Phase 2
clinical trials of Product R as a topical treatment for genital warts caused by
HPV infection.

         In June 2002 the Israeli Ministry of Health approved the testing of
Product R in the following clinical trials using injectable Product R, which
began during November 2002:

         o   PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE
             THERAPY FOR AIDS. These patients have failed highly active
             anti-retroviral therapy (HAART), remain on HAART, and require
             salvage therapy. We believe that Product R may have three major
             beneficial effects in patients with AIDS:

                                       1


                  o   First, its therapeutic effects on body wasting (cachexia)
                      seen in patients with AIDS;

                  o   Second, the mitigation of the toxicity of drugs included
                      in HAART regimens for the treatment of AIDS;

                  o   Third, the synergistic activity with drugs used in HAART
                      regimens to suppress the replication of HIV and increase
                      the CD4 and CD8 cell counts in patients with AIDS.

                  Thus, we believe that Product R may prove to be an important
                  "enabler" drug in the treatment of AIDS.

         o   PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND LYMPHOMA.
             Included are patients with acute lymphocytic leukemia, multiple
             Myeloma, Hodgkin's disease and non-Hodgkin's lymphoma.

         o   PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS. Included are
             patients with solid tumors such as colonic, lung, breast, stomach
             and kidney cancers.

         Our objective for the three Israeli trials is to determine the safety,
tolerance and metabolic characteristics of Product R. Although there can be no
assurances, we anticipate that the clinical trials in Israel will help
facilitate the planned investigational new drug (IND) application process for
injectable Product R with the FDA.

         In April 2001, we formalized a 12 month agreement with Selikoff Center
in Israel to develop clinical trials in Israel using Product R. It is
anticipated that these trials will support future FDA applications. As of
December 31, 2002, we paid $242,000 for such research.

         In September 2002, we entered into a contract with EnviroGene LLC, an
affiliate of the Selikoff Center, to conduct, evaluate and maintain the
scientific quality for the 3 clinical studies listed above. Under the terms of
this agreement, EnviroGene will (1) finalize all Israeli government and hospital
approval documents, (2) complete and organize the 3 clinical trials including
establishing a network of scientists to perform said study/trial and initiate
recruitment of patients and (3) perform the studies/trials and evaluate the
results. Total costs incurred by EnviroGene LLC in connection with these
clinical trials are expected to be $1,551,000, of which $625,000 has been paid
through December 31, 2002.

         In the fourth quarter of 2002, we entered into various agreements
supporting the clinical trials in Israel aggregating approximately $1,000,000 to
be paid over a twelve-month period. These services include the monitoring and
auditing of the clinical sites, hospital support and laboratory testing.

         In March 2003, we commenced discussions and began to draft protocols to
expand the ongoing Israeli clinical trials of Product R for the treatment of
AIDS patients (who have failed HAART and remain on HAART therapy) into late
Phase II blinded, controlled clinical trials.

         On July 8, 2002, we extended an agreement with the Weizmann Institute
of Science and Yeda its developmental arm in Israel, to conduct research on the
effects of Product R on the immune system, especially on T lymphocytes. In
addition, scientists will explore the effects of Product R in animal models.
Under its provisions the study period is extended for another twelve months to
July 7, 2003. Total costs incurred in connection with this research are expected
to be $138,000, of which payments of $40,000 were made in July 2002 and November
2002.

                                       2


         Whether we will be able to proceed with clinical trials in Israel for
injectable Product R is dependent upon our ability to secure sufficient funds.
If sufficient funds do not become available, we will have to curtail our
operations by, among other things, limiting our clinical trials for Product R.
We may not be able to raise the funds we currently need to continue or complete
the clinical trials for injectable Product R in Israel. While we continue to
attempt to secure funds through the sale of our securities, there is no
assurance that such funds will be raised on favorable terms, if at all.

         Our offices are located at 200 Corporate Boulevard South, Yonkers, New
York 10701. Our telephone number in Yonkers, New York 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.

GOVERNMENT REGULATION

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

         The IND process in the United States is governed by regulations
established by the FDA which strictly control the use and distribution of
investigational drugs in the United States. The guidelines require that an
application contain sufficient information to justify administering the drug to
humans, that the application include relevant information on the chemistry,
pharmacology and toxicology of the drug derived from chemical, laboratory and
animal or in vitro testing, and that a protocol be provided for the initial
study of the new drug to be conducted on humans.

         In order to conduct a clinical trial of a new drug in humans, a sponsor
must prepare and submit to the FDA a comprehensive IND. The focal point of the
IND is a description of the overall plan for investigating the drug product and
a comprehensive protocol for each planned study. The plan is carried out in
three phases: Phase 1 clinical trials, which involve the administration of the
drug to a small number of healthy subjects to determine safety, tolerance,
absorption and metabolism characteristics; Phase 2 clinical trials, which
involve the administration of the drug to a limited number of patients for a
specific disease to determine dose response, efficacy and safety; and Phase 3
clinical trials, which involve the study of the drug to gain confirmatory
evidence of efficacy and safety from a wide base of investigators and patients.

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

                                       3


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

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

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

         The data in the NDA must establish that the drug has been shown to be
safe for use under its proposed labeling conditions and that there is
substantial evidence that the drug is effective for its proposed use(s).
Substantial evidence is defined by statute and FDA regulation to mean evidence
consisting of adequate and well-controlled investigations, including clinical
investigations by experts qualified by scientific training and experience, to
evaluate the effectiveness of the drug involved.

         In February 1998, we contracted with GloboMax LLC to advise and assist
us in our preparation of the IND that was filed with the FDA in July 2001 and
cleared for Phase 1 trials in September 2001, and to otherwise guide us through
the FDA process. During 2001 and 2002, GloboMax continued its project management
services for the pre-clinical development and IND submission of Product R to the
FDA, the development of standard operating procedures and validation protocol
for the preparation and manufacture of Product R. Expenses paid during 2001 and
2002 relating to the GloboMax agreement were approximately $3,587,000. Pursuant
to the agreement with GloboMax, we are obligated to pay for services on an
hourly basis, at prescribed rates.

         It is possible that the clinical tests of Product R on humans will not
be approved by the FDA for human clinical trials on HPV or other diseases, and
that any tests previously conducted or to be conducted will not satisfy FDA
requirements. It is also possible that the results of such human clinical

                                       4


trials, if performed, will not prove that Product R is safe or effective in the
treatment of HPV or other diseases, or that the FDA will not approve the sale of
Product R in the United States if we submitted a proper NDA. It is not known at
this time how extensive the Phase 2 and Phase 3 clinical trials will be, if they
are conducted. The data generated may not show that the drug Product R is safe
and effective, and even if the data shows that Product R is safe and effective,
obtaining approval of the NDA could take years and require financing of amounts
not presently available to us.

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

RESEARCH, DEVELOPMENT AND TESTING

         For the period from inception (February 20, 1984) through December 31,
2002 we expended approximately $18,315,000 on testing and research and
development activities either in our laboratories or pursuant to various testing
agreements with both domestic and foreign companies. We currently are funding
research and testing at institutes and several medical centers in Israel to:

         o   determine the safety and efficacy of Product R on animals and
             cultured human cells;

         o   determine the effectiveness of Product R in the treatment of
             cachexia (body wasting) in patients with AIDS taking a multi-drug
             cocktail (highly active anti-retroviral therapy (HAART));

         o   determine the effectiveness of Product R in the treatment of
             cachexia in patients with solid cancers;

         o   determine the effectiveness of Product R in the treatment of
             cachexia in patients with leukemias and lymphomas;

         o   study the effects of Product R in mitigating the toxic effects of
             other drugs used to treat HIV infections, such as nucleoside
             analogues, protease inhibitors and non-nucleoside reverse
             transcriptase inhibitors;

         o   study the effects of Product R in mitigating the toxic effects of
             drugs used in the chemotherapy of cancers; and

         o   assess the direct inhibitory and therapeutic effects of Product R
             on neoplasias, including lymphomas and lymphocytic leukemia.

                                       5


         In June 2002 the Israeli Ministry of Health approved the testing of
Product R in the following clinical trials using injectable Product R, which
began during November 2002:

         o   PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE
             THERAPY FOR AIDS. These patients have failed highly active
             anti-retroviral therapy (HAART), remain on HAART, and require
             salvage therapy. We believe that Product R may have three major
             beneficial effects in patients with AIDS:

                  o   First, its therapeutic effects on body wasting (cachexia)
                      seen in patients with AIDS:

                  o   Second, the mitigation of the toxicity of drugs included
                      in HAART regimens for the treatment of AIDS:

                  o   Third, the synergistic activity with drugs used in HAART
                      regimens to suppress the replication of HIV and increase
                      the CD4 and CD8 cell counts in patients with AIDS:

                  Thus, we believe that Product R may prove to be an important
                  "enabler" drug in the treatment of AIDS.

         o   PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND LYMPHOMA.
             Included are patients with acute lymphocytic leukemia, multiple
             Myeloma, Hodgkin's disease and non-Hodgkin's lymphoma.

         o   PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS. Included are
             patients with solid tumors such as colonic, lung, breast, stomach
             and kidney cancers.

         Our objective for the three Israeli trials is to determine the safety,
tolerance and metabolic characteristics of Product R. Although there can be no
assurances, we anticipate that the clinical trials in Israel will help
facilitate the planned investigational new drug (IND) application process for
injectable Product R with the FDA.

         In April 2001, we formalized a 12 month agreement with Selikoff Center
in Israel to develop clinical trials in Israel using Product R. It is
anticipated that these trials will support future FDA applications. As of
December 31, 2002, we paid $242,000 for such research.

         In September 2002, we entered into a contract with EnviroGene LLC, an
affiliate of the Selikoff Center, to conduct, evaluate and maintain the
scientific quality for the 3 clinical studies listed above. Under the terms of
this agreement, EnviroGene will (1) finalize all Israeli government and hospital
approval documents, (2) complete and organize the 3 clinical trials including
establishing a network of scientists to perform said study/trial and initiate
recruitment of patients and (3) perform the studies/trials and evaluate the
results. Total costs incurred by EnviroGene LLC in connection with these
clinical trials are expected to be $1,551,000, of which $625,000 has been paid
through December 31, 2002.

         In the fourth quarter of 2002, we entered into various agreements
supporting the clinical trials in Israel aggregating approximately $1,000,000 to
be paid over a twelve-month period. These services include the monitoring and
auditing of the clinical sites, hospital support and laboratory testing.

         In March 2003, we commenced discussions and began to draft protocols to
expand the ongoing Israeli clinical trials of Product R for the treatment of
AIDS patients (who have failed HAART and remain on HAART therapy) into late
Phase II blinded, controlled clinical trials.

         On July 8, 2002, we extended an agreement with the Weizmann Institute
of Science and Yeda its developmental arm in Israel, to conduct research on the
effects of Product R on the immune system,

                                       6


especially on T lymphocytes. In addition, scientists will explore the effects of
Product R in animal models. Under its provisions the study period is extended
for another twelve months to July 7, 2003. Total costs incurred in connection
with this research are expected to be $138,000, of which payments of $40,000
were made in July 2002 and November 2002.

         Whether we will be able to proceed with Phase 2 clinical trials of
Product R for topical therapy of genital warts and clinical trials in Israel for
injectable Product R is dependent upon our ability to secure sufficient funds.
If sufficient funds do not become available, we will have to curtail our
operations by, among other things, limiting our clinical trials for Product R.
We may not be able to raise the funds we currently need to begin or complete the
topical Phase 2 for Product R or to continue the clinical trials for injectable
Product R in Israel. While we continue to attempt to secure funds through the
sale of our securities, there is no assurance that such funds will be raised on
favorable terms, if at all.

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

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

SCIENTIFIC ADVISORY BOARD

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

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

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

         DR. JAMES D'OLIMPIO is Director of the North Shore University
Hospital's Supportive Oncology and Palliative Care Service and is also Associate
Professor of Medical Oncology at New York University's

                                       7


School of Medicine. His research has focused on improving the quality of life of
cancer patients, especially by reversing the wasting process (cachexia)
associated with cancer, and in cancer treatment related fatigue syndrome.

         MS. CAROL ARMENTI is the founder and Executive Director of the Center
for Cervical Health, a patient advocacy organization primarily devoted to
cervical health issues in the U.S. Ms. Armenti serves on the FDA advisory board
and other governmental consulting boards, and is a lecturer on women's health
issues.

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

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

PATENTS

         We believe that patent protection and trade secret protection are
important to our business and that our future will depend, in part, on our
ability to maintain trade secret protection, obtain patents and operate without
infringing the proprietary rights of others both in the United States and
abroad. We currently have 10 patent applications pending with the United States
Patent and Trademark Office (PTO) and 15 patent applications pending in other
countries relating to Product R. In the United States, we have 10 issued patents
from the PTO. We also have 2 issued patents in Australia and one patent granted
in China. During April 2002, under the terms of a settlement agreement entered
as part of a final judgment on March 25, 2002, we were assigned all rights,
title and interest in two issued U.S. patents pertaining to Reticulose(R)
technology.

         As patent applications in the United States are maintained in secrecy
until patents issue and as publication of discoveries in the scientific or
patent literature often lag behind the actual discoveries, we cannot be certain
that we were the first to make the inventions covered by each of our pending
patent applications or that we were the first to file patent applications for
such inventions. Furthermore, the patent positions of biotechnology and
pharmaceutical companies are highly uncertain and involve complex legal and
factual questions, and, therefore, the breadth of claims allowed in
biotechnology and pharmaceutical patents or their enforceability cannot be
predicted. We cannot be sure that any additional patents will issue

                                       8


from any of our patent applications or, should any patents issue, that we will
be provided with adequate protection against potentially competitive products.
Furthermore, we cannot be sure that should patents issue, they will be of
commercial value to us, or that private parties, including competitors, will not
successfully challenge our patents or circumvent our patent position in the
United States or abroad.

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

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

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

                                       9


MARKETING AND SALES

         Except for limited sales of Product R for testing and other purposes,
Product R is not sold commercially anywhere in the world. To date, our efforts
or the efforts of our representatives have produced no material benefits to us
regarding our ability to have Product R sold commercially anywhere in the world.
We have entered into exclusive distribution agreements with four separate
entities granting exclusive rights to distribute Product R in the countries of
Canada, China, Japan, Hong Kong, Macao, Taiwan, Mexico, Argentina, Bolivia,
Paraguay, Uruguay, Brazil and Chile. Pursuant to these agreements, the
distributors are obligated to cause Product R to be approved for commercial sale
in such countries and upon such approval, to purchase from us certain minimum
quantities of Product R to maintain the exclusive distribution rights. Our
marketing plans for Product R are still dependent upon registration of Product R
for sale in various jurisdictions. We have made no sales under the distribution
agreements other than for testing purposes. To date we have received no
information that would lead us to believe that we will be positioned to sell
Product R commercially anywhere in the world. On July 30, 2001, we submitted an
IND application to the FDA to begin Phase 1 clinical trials of Product R as a
topical treatment for genital warts caused by the human papilloma virus (HPV)
infection. In September 2001, the FDA cleared the IND application to begin Phase
1 clinical trials. In March 2002, Advanced Viral completed a Phase 1 trial and
submitted to the FDA the results, which indicated that Product R was safe and
well tolerated dermatologically in all the doses applied in the study Due to
limited financial resources, we currently are unable to pursue the Phase 2
clinical trials.

         Initially we targeted our sales and marketing efforts to those
countries where Reticulose was previously marketed by its prior owners for a
number of years as an anti-viral agent in the treatment of Asian influenza,
viral pneumonia, viral infectious hepatitis, mumps, encephalitis, herpes simplex
and herpes zoster. Those countries included Singapore, Hong Kong, Malaysia,
Taiwan, the Philippines and Malta. Registration of Product R will be required in
such countries as well as in the other countries comprising the distributors'
territories before any significant sales may begin. The registration of Product
R for sale in these countries has been frustrated due to our inability to obtain
the registration and approval to sell Product R in the Bahamas, the country of
origin, and a general lack of published data on the effectiveness of Product R.
Until Product R is registered and approved for sale in the United States, in
another developed country or in the other countries included in the
distributors' territories, we will not generate any material sales of Product R.
For the years ended December 31, 2002, 2001 and 2000, we reported no commercial
sales except limited sales for testing purposes. Product R is not legally
available for commercial sale anywhere in the world, except for testing
purposes. See "--Research, Development and Testing."

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

COMPETITION

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

                                       10


development of a cure or new treatment methods for the diseases we are targeting
could render Product R noncompetitive, obsolete or uneconomical. Many of our
competitors:

         o   have significantly greater financial, technical and human resources
             than we have and may be better equipped to develop, manufacture and
             market products;

         o   have extensive experience in preclinical testing and clinical
             trials, obtaining regulatory approvals and manufacturing and
             marketing pharmaceutical products; and

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

         A number of therapeutics are currently marketed or are in advanced
stages of clinical development for the treatment of HIV infection and AIDS,
including several products currently marketed as part of a "cocktail" in the
United States. We believe Product R should be added to such cocktails in order
to enhance their effectiveness and mitigate the toxic effects of other drugs
used to treat HIV infections. Among the companies with significant commercial
presence in the AIDS market are Glaxo SmithKline, Bristol-Myers Squibb,
Hoffmann-La Roche, Agouron Pharmaceuticals, Merck & Co. and DuPont Pharma.

         Several products are currently marketed for the treatment of cachexia
(body wasting) included Megace(R) oral suspension manufactured by Bristol-Myers
Squibb and Serostim(R) (injectable human growth hormone) marketed by Serono
Laboratories Inc.

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

         Several products are currently marketed or are in advanced stages of
clinical development for the treatment of rheumatoid arthritis. Immunex Corp.'s
product Enbrel, a biologic response modifier, was approved by the FDA in
November 1998 for the treatment of moderate to severe rheumatoid arthritis.
Centocor Inc. is developing a monoclonal antibody known as Remicade, an
anti-inflammatory agent that has completed Phase 3 trials in rheumatoid
arthritis. The FDA approved Remicade for treatment of Crohn's disease in August
1998. Centocor filed for FDA approval of an expanded indication for Remicade for
rheumatoid arthritis in January 1999. These products represent significant
competition for Product R as a treatment for rheumatoid arthritis.

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

         If we successfully develop and obtain approval for Product R, we will
face competition based on the safety and effectiveness of Product R, the timing
and scope of regulatory approvals, the availability of supply, marketing and
sales capability, reimbursement coverage, price, patent position and other
factors. Our competitors may develop or commercialize more effective or more
affordable products, or obtain more effective patent protection, than we do.
Accordingly, our competitors may commercialize products more rapidly or
effectively than we do, which could hurt our competitive position and adversely

                                       11


affect our business. If and when we obtain FDA approval for Product R, we expect
to compete primarily on the basis of product performance and price with a number
of pharmaceutical companies, both in the United States and abroad.

EMPLOYEES

         We have ten full-time employees, consisting of our two executive
officers, two employees involved in research, two employees responsible for
quality assurance and quality control, an assistant controller, a chief
information officer and two administrative employees. Dr. Hirschman, our
President, Chief Executive Officer and a director, and Alan V. Gallantar, our
Chief Financial Officer and Treasurer, each devote all of their business time to
our day-to-day business operations. Eli Wilner, Chairman of the Board of
Directors and Secretary, devotes as much time to his duties as is reasonably
necessary. Additionally, we may hire, as and when needed, and as available, such
sales and technical support staff and consultants for specific projects on a
contract basis. See "Management --Employment Contracts, Termination of
Employment and Change-in-Control Arrangements."

ITEM 2. DESCRIPTION OF PROPERTY

         We lease approximately 16,650 square feet for executive offices,
including research laboratory space and production area at 200 Corporate
Boulevard South, Yonkers, New York from an unaffiliated third party (the
"Yonkers Lease"). The term of the Yonkers Lease is five years through April 2005
and our annual rental obligation under the Yonkers Lease is approximately
$290,000.

         The Bahamian manufacturing facility, which was acquired on December 16,
1987, is located in Freeport, Bahamas and consists of an approximate 29,000
square foot site containing a one-story concrete building of approximately 7,300
square feet and is equipped for all topical phases of the testing, production,
and packaging of bulk Product R. We are currently negotiating the sale of the
Bahamian facility, after which sale we intend to manufacture Product R
exclusively at our facility in Yonkers, New York.

ITEM 3. LEGAL PROCEEDINGS

         In December 2002 Advanced Viral filed suit in the Circuit Court of the
11th Judicial Circuit of Florida charging that certain investors "misrepresented
their intentions in investing in Advanced Viral" and "engaged in a series of
manipulative activities to depress the price of Advanced Viral stock." Advanced
Viral alleges that the defendants sought to "guarantee they would be issued
significantly more shares of ADVR common stock" as a result of warrant repricing
provisions of a September 2002 financing agreement. Advanced Viral is seeking a
judgment for damages, interest and costs.

         The complaint names SDS Merchant Fund, L.P., a Delaware limited
partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein; Knight
Securities, L.P., a limited partnership conducting securities business in
Florida; Stonestreet Limited Partnership located in Canada; and Bristol
Investment Fund, Ltd., whose principal place of business is in Grand Cayman,
Cayman Islands, among others. The complaint claims that the "defendants have
each, at times acting individually, and at times acting in concert with at least
one or more of each other," engaged in practices that violate sections of the
Florida Securities and Investor Protection Act.

         Also named as a plaintiff in the case is William B. Bregman, a resident
of Miami-Dade County, Florida, and one of the largest shareholders of Advanced
Viral. The complaint alleges that Mr. Bregman suffered losses of approximately
$3.9 million as a result of the stock manipulation scheme.

                                       12


         The suit is related to an agreement, announced September 9, 2002,
pursuant to which we issued and sold to certain investors 21,500,000 shares of
our common stock for total gross proceeds of $3,010,000, or $.14 per share. We
also issued warrants to purchase an aggregate of 16,125,002 shares of our common
stock, which were covered by provisions that allowed for an adjustment of the
warrant exercise price. The complaint charges the defendants with manipulating
the share price to take favorable advantage of these warrant pricing provisions.

         Following the initiation of Advanced Viral's lawsuit in Florida, three
of the purchasers in the September financing (Alpha Capital, A.G., Bristol
Investment Fund, Ltd. and Stonestreet Limited Partnership (the "Alpha
Plaintiffs") filed separate lawsuits in the U.S. District Court for the Southern
District of New York. The suits sought a preliminary injunction and other relief
for breach of contract. The District Court entered an order on February 11, 2003
upon a motion of the Alpha Plaintiffs, that required that (i) we deliver to the
Alpha Plaintiffs the shares of Company common stock issuable upon exercise of
the warrants; (ii) the Alpha Plaintiffs post a bond of either $100,000 or the
market value of the warrant shares, whichever is higher for each group of
warrants as of the first and second determination dates; and (iii) all the
proceeds from the sale of the warrant shares be placed in escrow pending final
resolution of the litigation. Within ten days of the entry of the order, we
moved to alter/amend the judgment and/or reconsideration of the Court's order
requesting relief from the Court's order. The Court denied this motion and
ordered Advanced Viral to immediately deliver the warrant shares to the Alpha
Plaintiff's upon their payment of the exercise price and posting of a bond,
without further delay and not later than April 8, 2003. We have appealed the
order denying the motion for reconsideration. We continue to consider and pursue
all of our options relating to the litigation, including resolution through
settlement.

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

         During the fourth quarter of the year ended December 31, 2002, no
matters were submitted to a vote of security holders of Advanced Viral.

                                     PART II

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

COMMON STOCK

         The principal United States market in which our common stock is traded
is the over-the-counter market electronic Bulletin Board. The following table
shows the range of reported low bid and high bid per share quotations for our
common stock for each full quarterly period during the two recent years ended
December 31, 2001 and 2002, and for the first quarter of 2003. The high and low
bid prices for the periods indicated reflect inter-dealer prices, without retail
mark-up, mark-down or commission and may not represent actual transactions.


                                                                                  LOW BID             HIGH BID
                                                                                  -------             --------
                                                                                                   
     First Quarter 2001............................................................0.285                0.410
     Second Quarter 2001...........................................................0.265                0.495
     Third Quarter 2001............................................................0.171                0.395
     Fourth Quarter 2001...........................................................0.179                0.400

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

     First Quarter 2003 through March 24, 2003.....................................0.054                0.085


                                       13


STOCKHOLDERS

         The approximate number of holders of record of our common stock as of
March 28, 2003 is 3,135, inclusive of those brokerage firms and/or clearing
houses holding shares of common stock for their clientele (with each such
brokerage house and/or clearing house being considered as one holder).

DIVIDEND POLICY

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

ITEM 6. SELECTED FINANCIAL DATA

         The following selected historical financial data as of and for the
years ended December 31, 2002, 2001, 2000, 1999 and 1998 have been derived from
our audited financial statements. The selected consolidated financial data set
forth below should be read along with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the financial statements and
notes thereto included elsewhere in this report.

                      SELECTED STATEMENT OF OPERATIONS DATA


                                                                       YEAR ENDED DECEMBER 31
                                            ----------------------------------------------------------------------
                                                2002           2001        2000            1999            1998
                                            -----------   ------------  ----------     -----------      ----------
                                                                                            
Revenues                                           $  0       $17,601       $8,363         $10,953           $ 656
                                                   ----       -------       ------         -------           -----
Costs and Expenses:
 Research and development                     4,439,592     5,150,869    3,192,551       1,948,937       1,659,456
 General and administrative                   2,654,296     4,063,022    2,413,601       1,831,061       1,420,427
 Compensation expense                           755,397       691,404    1,901,927         210,144              --
 Depreciation                                   977,746       511,216      346,227         230,785         110,120
                                            -----------   -----------   ----------     -----------      ----------
                                              8,827,031    10,416,511    7,854,306       4,220,927       3,190,003
                                            -----------   -----------   ----------     -----------      ----------

Loss from Operations                        (8,827,031)   (10,398,910)  (7,845,943)     (4,209,974)     (3,189,347)
                                            -----------   -----------   ----------     -----------     -----------
Other Income (Expense):
 Interest income                                 27,659       113,812      161,832          42,744         102,043
 Other income                                        --            --           --              --             293
 Interest expense                            (1,341,809)     (868,856)  (1,446,692)     (2,007,032)     (1,470,699)
 Severance expense - former directors                --      (302,500)          --              --              --
                                            -----------  ------------   ----------     -----------      ----------
                                             (1,314,150)   (1,057,544)  (1,284,860)    (1, 964,288)     (1,368,363)
                                            -----------  ------------   ----------     -----------      ----------

Loss from continuing operations             (10,141,181)  (11,456,454)  (9,130,803)     (6,174,262)     (4,557,710)
Loss from discontinued operations              (201,154)     (259,114)    (223,861)         n/a             n/a

Net Loss                                   $(10,342,335) $(11,715,568) $(9,354,664)    $(6,174,262)    $(4,557,710)
                                           ============  ============  ===========     ===========     ===========
Net Loss Per Share of Common
 Stock - Basic and Diluted
     Continuing operations                      $(0.02)       $(0.03)       $(0.03)         $(0.02)         $(0.02)
                                                ======        ======        ======          ======          ======
     Discontinued operations                    $(0.00)       $(0.00)       $(0.00)             n/a             n/a
                                                ======        ======        ======


- ------------------------------
See notes to consolidated financial statements.


                                       14



                           SELECTED BALANCE SHEET DATA




                                                                         AS OF DECEMBER 31
                                                  -------------------------------------------------------------------
                                                    2002         2001           2000          1999            1998
                                                ----------    ----------     ----------    ----------      ----------
                                                                                              
ASSETS
Current Assets:
 Cash and cash equivalents                      $1,475,755    $1,499,809     $5,962,633      $836,876        $924,420
 Investments                                            --            --             --            --         821,047
 Inventory                                              --            --         19,729        19,729          19,729
 Other current assets                              294,496       252,161         34,804        59,734          29,818
                                                ----------    ----------     ----------    ----------      ----------
 Total current assets                            1,770.251     1,751,970      6,017,166       916,339       1,795,014
Property and Equipment, Net                      2,244,118     2,818,045      1,944,199     1,375,923       1,049,593
Other Assets                                      931,660        878,776        847,349       569,312         460,346
                                                ----------    ----------     ----------    ----------      ----------
 Total assets                                   $4,946,029    $5,448,791     $8,808,714    $2,861,574      $3,304,953
                                                ==========    ==========     ==========    ==========      ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Current Liabilities:
 Accounts payable and accrued liabilities       $  554,707    $1,843,706       $902,961      $728,872        $279,024
 Current portion of capital lease obligation       104,719        64,197         58,690        50,315         $38,335
 Current portion of note payable                    25,165        24,246         21,517        19,095              --
                                                ----------    ----------     ----------    ----------      ----------
 Total current liabilities                         684,591     1,932,149        983,168       798,282         317,359
                                                ----------    ----------     ----------    ----------      ----------
Long-Term Debt:
 Convertible debentures, net                     1,658,231            --             --     4,446,629       1,457,919
 Capital lease obligation - long term
  portion                                            5,834        42,370        106,567       152,059         167,380
 Note payable - long term portion                    4,879        32,198         56,446        77,964              --
                                                ----------    ----------     ----------    ----------      ----------
Total long-term debt                             1,668,944        74,568        163,013     4,676,652       1,625,299
                                                ----------    ----------     ----------    ----------      ----------
Deposit on Securities Purchase Agreement                --            --             --            --         600,000
 Common Stock Subscribed but not Issued            883,900            --             --            --              --

Stockholders' Equity (Deficiency):
 Common stock; 1,000,000,000 shares of
 $.00001 par value authorized, 455,523,990
 and 403,296,863 shares issued and
 outstanding                                         4,555         4,033          3,802         3,034           2,964
 Additional paid-in capital                     57,530,605    47,666,141     39,969,373    17,537,333      14,325,076
 Deficit accumulated during development
 stage                                          (5,137,805)  (40,795,470)   (29,079,902)  (19,725,238)    (13,550,976)
 Deferred compensation cost                                                                                   (14,769)
 Discount on warrants                           (4,688,761)   (3,432,630)    (3,230,740)     (428,489)             --
                                                ----------    ----------     ----------    ----------      ----------

 Total stockholders' equity (deficiency)         1,708,594     3,442,074      7,662,533    (2,613,360)        762,295
                                                ----------    ----------     ----------    ----------      ----------
 Total liabilities and stockholders' equity
 (deficiency)                                   $4,946,029    $5,448,791     $8,808,714    $2,861,574      $3,304,953
                                                ==========    ==========     ==========    ==========      ==========

 Shares outstanding at period end              455,523,990   403,296,863    380,214,618   303,472,035     296,422,907
                                               -----------   -----------    -----------   -----------     -----------


- ------------------------------
See notes to consolidated financial statements.


                                       15



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

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

OVERVIEW

         Since our inception in July 1985, Advanced Viral has been engaged
primarily in research and development activities. We have not generated
significant operating revenues, and as of December 31, 2002 we had incurred a
cumulative net loss of $51,137,805. Our ability to generate substantial
operating revenue depends upon our success in gaining FDA approval for the
commercial use and distribution of Product R. All of our research and
development efforts have been devoted to the development of Product R.

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

         During 2002, the Board of Directors approved a plan to sell Advance
Viral Research Ltd. (LTD), the Company's Bahamian subsidiary. The decision was
based upon the Company completing construction on its facility in Yonkers, New
York capable of providing all functions previously provided by the Freeport,
Bahamas plant. The assets of LTD have been classified on the Balance Sheet of
the Company at December 31, 2002 and 2001 as Assets held for Sale. LTD had no
liabilities as of December 31, 2002, except inter-company payables which have
been eliminated in consolidation. The operations for LTD have been classified in
the Consolidated Statements of Operations for the years ended December 31, 2002,
2001 and 2000 as Loss from Discontinued Operations.

         The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2002,
includes an explanatory paragraph regarding our ability to continue as a going
concern. Note 2 to the consolidated financial statements states that our ability
to continue operations is dependent upon the continued sale of our securities
and debt financing for funds to meet our cash requirements, which raise
substantial doubt about our ability to continue as a going concern. Further, the
accountants' report states that the financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

RESULTS OF OPERATIONS

         YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000

         During the years ended December 31, 2002, 2001 and 2000 we incurred
losses from continuing operations of approximately $10,141,000, $11,456,000 and
$9,131,000, respectively. Our losses for the years ended December 31, 2002, 2001
and 2000 were attributable primarily to:

         GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative
expenses were approximately $2,654,000, $4,063,000 and $2,414,000 in 2002, 2001
and 2000, respectively. General and administrative expenses decreased by
approximately $1,409,000 in 2002 vs. 2001 and increased by $1,649,000 in 2001
vs. 2000, resulting primarily from:

                                       16


                  o   decreased payroll and related expenses (approximately
                      $866,000 in 2002 vs. increases of $1,039,000 in 2001 and
                      $717,000 in 2000) The decrease in 2002 was primarily
                      attributable to a reduction in personnel from 33 to 10
                      employees as a cost cutting measure. The increase in 2001
                      and 2000 was primarily attributable to increased employee
                      and officer salaries and the addition of two vice
                      presidents for drug development and quality assurance in
                      2001;

                  o   increased insurance costs (approximately $564,000 in 2002
                      vs. $412,000in 2001 and $299,000 in 2000) representing
                      increased premiums for employee medical insurance and
                      additional corporate liability insurance including
                      directors and officers liability coverage; and

                  o   decreased professional fees (approximately $501,000 in
                      2002 vs. $1,431,000 in 2001, compared to $385,000 in
                      2000). The increase in 2001 is primarily attributable to
                      certain legal proceedings the cost of which was
                      approximately $953,000 in 2001 vs. $61,000 in 2002; and

                  o   decreased consulting fees (approximately $34,000 in 2002
                      vs. $212,000 in 2001 and $305,000 in 2000). This decrease
                      is primarily due to lower outside computer consultant
                      costs; and

                  o   decreased recruiting expenses (approximately $7,000 in
                      2002 vs. $135,000 in 2001 vs. $12,000 in 2000). The 2001
                      expense was for the hiring of new employees.

         COMPENSATION EXPENSE RELATED TO MODIFICATION OF EXISTING OPTIONS.
Compensation expense was approximately $755,000 in 2002, compared to $691,000
and $1,902,000 in 2001 and 2000, respectively. These amounts are the result of
the calculation of the fair value of options, using the Black-Scholes Pricing
Model, resulting from extending the exercise date of various non-employee
options outstanding.

         RESEARCH AND DEVELOPMENT EXPENSE. Research and development expense was
approximately $4,440,000 in 2002, compared to $5,151,000 and $3,193,000 in 2001
and 2000, respectively. The decrease from 2001 to 2002 resulted primarily from
research expenses (approximately $1,778,000) relating to the GloboMax agreement
in connection with the preparation of our first IND filing and offset by an
increase of approximately $749,000 for research expenditures relating to
research and testing of Product R in Israel. The increase from 2000 to 2001
resulted primarily from research expenses related to the GloboMax agreement of
approximately $1,417,000. The approximate costs of rent, personnel, operating
costs and laboratory supplies associated with research and development
activities at the Yonkers facility for the years ended 2002, 2001 and 2000,
which were charged to research and development expense, were $2,467,000,
$2,230,000 and $1,696,000, respectively.

         DEPRECIATION EXPENSE. Depreciation expense was approximately $978,000
in 2002 compared to $511,000 and $346,000 in 2001 and 2000, respectively. The
increase from 2000 to 2001 resulted primarily from the acquisition of furniture,
fixtures and equipment for the Yonkers office, laboratory and production
facility. In addition, leasehold improvements were made to the laboratory and
production areas during 2002, 2001 and 2000. The increase in 2002 over 2001
resulted from equipment and leasehold improvements acquired during 2002 and full
year's depreciation expense recorded in 2002 for 2001 additions.

         INTEREST EXPENSE. Interest expense for the years ended 2002, 2001 and
2000 was approximately $1,342,000, $869,000 and $1,447,000, respectively.
Included in interest expense for these periods was:

                  o   the beneficial conversion feature on certain convertible
                      debentures of approximately $137,000, $0, and $387,000 for
                      the years ended 2002, 2001 and 2000, respectively;

                                       17


                  o   interest expense associated with certain convertible
                      debentures of approximately $43,000, $0 and $76,000 for
                      the years ended 2002, 2001 and 2000, respectively;

                  o   amortization of discount on certain warrants of
                      approximately $1,102,000, $989,000 and $611,000 for the
                      years ended 2002, 2001 and 2000, respectively;

                  o   amortization of loan costs of approximately $34,000,
                      $15,000 and $106,000 for the years ended 2002, 2001 and
                      2000, respectively;

                  o   fees of approximately $265,000 in connection with the
                      November 2000 securities purchase agreement with various
                      investors;

                  o   additional financing costs related to effective date of
                      certain registration statements of approximately $286,000
                      in 1999 (of which approximately $156,000 was reversed in
                      2001).

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

         LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations for
the years ended 2002, 2001 and 2000 was approximately $10,141,000, $11,456,000
and $9,131,000, respectively. The decrease from 2002 to 2001 resulted primarily
from a reduction in general and administrative expenses due to a reduction in
legal fees due to the settlement of litigation during 2001 and a reduction of
personnel during 2002 from 33 to 10 employees.

         LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations
for the years ended 2002, 2001 and 2000 was approximately $201,000, $259,000 and
$224,000, respectively, relating to losses from our 99% owned subsidiary,
Advance Viral Research Ltd.

         REVENUES. There were approximately $0 and $18,000 in sales revenue in
2002 and 2001, respectively, compared to $8,000 in sales revenues for 2000. All
sales revenue resulted from purchases of Product R for testing purposes.
Interest income was approximately $28,000 and $114,000 in 2002 and 2001,
respectively, compared to approximately $162,000 in 2000.

LIQUIDITY

         YEARS ENDED DECEMBER 31, 2002 AND 2001

         As of December 31, 2002, we had current assets of approximately
$1,770,000, compared to approximately $1,752,000 at December 31, 2001. We had
total assets of approximately $4,946,000 and $5,449,000 at December 31, 2002 and
2001, respectively. Total asset levels did not change materially but total
assets declined due to the increase in fixed asset depreciation for property and
equipment acquisitions.

         During 2002, we used cash of approximately $8,701,000 for operating
activities, as compared to approximately $8,577,000 in 2001. During 2002, we
incurred expenses of:

                  o   approximately $2,809,000 for payroll and related costs
                      primarily for administrative staff, scientific personnel
                      and executive officers;

                  o   approximately $904,000 in consulting fees to GloboMax and
                      its subcontractors;

                                       18


                  o   approximately $395,000 for rent and utilities for our
                      Yonkers facility;

                  o   approximately $295,000 for laboratory supplies;

                  o   approximately $986,000 in expenditures on Product R
                      research in Israel;

                  o   approximately $573,000 for insurance costs and
                      approximately $501,000 for other professional fees.

         During the year ended December 31, 2002, cash flows provided by
financing activities was primarily due to the proceeds from the sale of common
stock of approximately $7,114,000 and $2,000,000 in convertible debentures,
offset by principal payments of approximately $169,000 on equipment obligations.
This compares to the year ended December 31, 2001 where funds of approximately
$5,783,000 were provided by the sale of common stock offset by principal
payments of approximately $80,000 on equipment obligations.

         During the year ended December 31, 2002, cash flow used by investing
activities were used for expenditures of approximately $268,000 for leasehold
improvements and research and laboratory equipment at our Yonkers, New York
facility.

         The independent certified public accountants' report on our
consolidated financial statements for the fiscal year ended December 31, 2002,
includes an explanatory paragraph regarding our ability to continue as a going
concern. Note 2 to the consolidated financial statements states that our ability
to continue operations is dependent upon the continued sale of our securities
and debt financing for funds to meet our cash requirements, which raise
substantial doubt about our ability to continue as a going concern. Further, the
accountants' report states that the financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

CAPITAL RESOURCES

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



                                                                                       PURCHASE PRICE
                                                             CONVERTIBLE /         CONVERSION PRICE /  MATURITY DATE /
    DATE ISSUED      GROSS PROCEEDS     SECURITY ISSUED     EXERCISABLE INTO        EXERCISE PRICE     EXPIRATION DATE
    -----------      --------------     ---------------    -----------------       ------------------  ---------------
                                                                                             
    Feb-2001             equity line        warrants       10,000,000 shares (1)      $1.00 per share         2/9/2006
    Jul-2001              $1,000,000      common stock      3,125,000 shares          $0.32 per share           n/a
    Jul-2001                $490,000      common stock      1,225,000 shares          $0.40 per share           n/a
                                            warrants          367,500 shares          $0.48 per share        7/27/2006
                                                              367,500 shares          $0.56 per share
    Aug-2001                $600,000      common stock      2,000,000 shares          $0.30 per share           n/a
    Sep-2001              $1,000,000      common stock      6,666,667 shares          $0.15 per share           n/a
    Dec-2001              $2,000,000      common stock      7,407,407 shares          $0.27 per share           n/a
    Dec-2001                $410,000      common stock      1,518,519 shares          $0.27 per share           n/a
    Dec-2001                $200,000      common stock        740,741 shares          $0.27 per share           n/a
    Feb-2002                $500,000      common stock      3,333,333 shares          $0.15 per share           n/a
    Feb-2002                $500,000      common stock      3,333,333 shares          $0.15 per share           n/a
    Mar-2002                $500,000      common stock      3,333,333 shares          $0.15 per share           n/a
    Apr-2002              $1,939,000      common stock     17,486,491 shares       $0.11089 per share           n/a
    May-2002                $500,000      convertible   Approx. 4,412,000 shares         (2)                 5/30/2004
                                           debenture
    May-2002     consulting services        warrants        1,000,000 shares          $0.18 per share        5/30/2008

    Jul-2002              $1,000,000      convertible   Approx. 9,350,000 shares         (3)                 7/3/2004
                                           debenture
    Jul-2002                $500,000      convertible   Approx. 4,588,000 shares         (4)                 7/15/2004
                                           debenture
    Sep-2002              $3,010,000      common stock     21,500,000 shares (5)     $0.14 per share           n/a
                                            warrants       16,125,000 shares         $0.001 per share (6)     9/9/2007

    Dec-2002 &            $1,100,000      common stock     13,750,000 shares         $0.08 per share           n/a
    Mar-2003                                warrants       9,075,000 shares          $0.12 per share     12/2007 - 3/2008


                                       19


- -------------------------
(1)  Represents warrants issued in connection with an equity line of credit,
     including Class A Warrants to purchase in the aggregate 5 million shares of
     our common stock at an exercise price per share equal to $1.00, exercisable
     at any time until February 9, 2006, and Class B Warrants to purchase in the
     aggregate 5 million shares of our common stock at an exercise price equal
     to the greater of $1.00 or 110% of the bid price of the common stock on the
     applicable advance date. Each Class B Warrant is exercisable pro rata on or
     after each advance date with respect to that number of warrant shares equal
     to the product obtained by multiplying 5 million by a fraction, the
     numerator of which is the amount of the advance payable on the applicable
     advance date and the denominator of which is $20 million, until sixty
     months from the date of issuance.
(2)  $0.11 per share for the first 20% of the principal balance of the
     Debenture, thereafter, 20% of the principal balance may be converted at
     six-month intervals at a conversion price equal to the higher of (i) 90% of
     the average closing bid price for the five trading days prior to the
     conversion date (the "Market Price"); or (ii) ten cents ($0.10) which
     amount is subject to certain adjustments.
(3)  $0.1539 per share for the first 20% of the principal balance of the
     Debenture, thereafter, 20% of the principal balance may be converted at
     six-month intervals at a conversion price equal to the higher of (i) 90% of
     the Market Price; or (ii) ten cents ($0.10) which amount is subject to
     certain adjustments.
(4)  $0.1818 per share for the first 20% of the principal balance of the
     Debenture, thereafter, 20% of the principal balance may be converted at
     six-month intervals at a conversion price equal to the higher of (i) 90% of
     the Market Price; or (ii) ten cents ($0.10) which amount is subject to
     certain adjustments.
(5)  Does not include an additional 1,032,000 shares of common stock issued to
     H.C. Wainwright & Co. as part of the finder's fee for the transaction.
(6)  See "Item 3.  LEGAL PROCEEDINGS."

         EQUITY LINE OF CREDIT AGREEMENT. On February 9, 2001, we entered into
an equity line of credit agreement with Cornell Capital Partners, LP, an
institutional investor, to sell up to $50,000,000 of our common stock. Under the
private equity line of credit, under which we may exercise "put options" to sell
shares for a price equal to 95% of the average of the three lowest reported
closing bid prices of our common stock over a 25 trading day period ending on
the advance notice date (the "Average Bid Price"). The agreement provides that
the closing bid price of the common stock on the put option notice date shall
not be less than the average closing bid price for the previous 25 trading days.
Upon signing the agreement, we issued to our placement agent, May Davis Group,
Inc., and certain investors Class A Warrants to purchase in the aggregate
5,000,000 shares of common stock at an exercise price per share equal to $1.00,
exercisable in part or in whole at any time until February 9, 2006, and Class B
Warrants to purchase in the aggregate 5,000,000 shares of common stock at an
exercise price equal to the greater of $1.00 or 110% of the bid price of the
common stock on the applicable advance date. Each Class B Warrant is exercisable
pro rata on or after each advance date with respect to that number of warrant
shares equal to the product obtained by multiplying 5,000,000 by a fraction, the
numerator of which is the amount of the advance payable on the applicable
advance date and the denominator of which is $20,000,000, until sixty months
from the date of issuance.

         The fair value of the Class A Warrants is estimated to be $1,019,153
($0.204 per warrant share) based in a financial analysis of the terms of the
warrants using the Black-Scholes Pricing Model with the following assumptions:
expected volatility of 80%; risk free interest rate of 6% and an expected
holding period of five years. This amount is being amortized to interest expense
over the term of the warrants.

         As of December 30, 2001, we had incurred approximately $83,700 in fees
in connection with the equity line of credit. Such fees have been deferred and
will be amortized over the life of the line of credit. We have no present plans
to draw on this equity line of credit but may negotiate a similar arrangement
on terms we consider more beneficial to Advanced Viral.

         VARIOUS PURCHASERS. On July 27, 2001, pursuant to a securities purchase
agreement with various purchasers, we authorized the issuance of and sold
1,225,000 shares of our common stock and warrants to purchase an aggregate of
735,000 shares of common stock in a private offering transaction pursuant to
Section 4(2) of the Securities Act for a purchase price of $0.40 per share, for
an aggregate purchase price of $490,000. Half of the warrants are exercisable at
$0.48 per share, and half of the warrants are exercisable at $0.56 per share,
until July 27, 2006. Each warrant contains anti-dilution provisions, which

                                       20


provide for the adjustment of warrant price and warrant shares. As of March 28,
2003, none of the warrants had been exercised.

         SHELF OFFERINGS

         On March 31, 2000, we filed a shelf registration statement on Form S-3
with the SEC relating to the offering of shares of our common stock to be used
in connection with financings and resales of the shares issued thereunder by the
recipients of such shares. Because we no longer satisfy the registrant
requirements set forth in the General Instructions for Use of Form S-3 for the
registration of securities under the Securities Act of 1933, the shelf
registration statement is no longer available for issuances of our common stock.
As of March 28, 2003, we have issued and sold approximately 59 million
shares of our common stock and received proceeds of approximately $11.2 million
under the shelf registration statement, as follows:

                  BNC BACH INTERNATIONAL. During 2001, we entered into several
stock purchase agreements with BNC Bach International, Ltd., a British Virgin
Islands corporation, as follows:

                  o   On July 19, 2001, we entered into a stock purchase
                      agreement with BNC Bach pursuant to which we issued and
                      sold to BNC Bach 3,125,000 shares of our common stock at
                      $0.32 per share for an aggregate purchase price of
                      $1,000,000.

                  o   On August 20, 2001, we entered into a stock purchase
                      agreement with BNC Bach pursuant to which we issued and
                      sold to BNC Bach 2,000,000 shares of our common stock at
                      $0.30 per share for an aggregate purchase price of
                      $600,000.

                  o   On December 18, 2001, we entered into a Stock purchase
                      agreement with BNC Bach pursuant to which we issued and
                      sold to BNC Bach 7,407,407 shares of our common stock at a
                      negotiated price of $0.27 per share, for a total purchase
                      price of $2,000,000.

                  CAMBOIS FINANCE, LTD. On September 28, 2001, we entered into a
stock purchase agreement with Cambois Finance, Ltd. pursuant to which we issued
and sold to Cambois 6,666,667 shares of our common stock at $0.15 per share for
an aggregate purchase price of $1,000,000.

                  HARBOR VIEW GROUP, INC. On December 17, 2001, we entered into
a Stock purchase agreement with Harbor View Group, Inc. pursuant to which we
issued and sold to Harbor View 1,518,519 shares of our common stock at a
negotiated price of $0.27 per share, for a total purchase price of $410,000.

                  RUSSEL KUHN. On December 17, 2001, we entered into a Stock
purchase agreement with Russel Kuhn pursuant to which we issued and sold to Mr.
Kuhn 740,741 shares of our common stock at a negotiated price of $0.27 per
share, for a total purchase price of $200,000.

                  ROSEWORTH GROUP. During the first quarter of 2002, we entered
into the following stock purchase agreements with Roseworth Group Limited, a
British Virgin Islands corporation wholly-owned subsidiary of Creon Management,
S.A., a British Virgin Islands corporation whose wholly-owned subsidiary,
Cambois Finance, Ltd., is discussed above:

                  o   On February 7, 2002, we entered into a Stock purchase
                      agreement with Roseworth Group pursuant to which we issued
                      and sold to Roseworth Group 3,333,333 shares of our common
                      stock at a negotiated price of $0.15 per share, for a
                      total purchase price of $500,000.

                                       21


                  o   On February 21, 2002, we entered into a Stock purchase
                      agreement with Roseworth Group pursuant to which we issued
                      and sold to Roseworth Group 3,333,333 shares of our common
                      stock at a negotiated price of $0.15 per share, for a
                      total purchase price of $500,000.

                  o   On March 22, 2002, we entered into a Stock purchase
                      agreement with Roseworth Group pursuant to which we issued
                      and sold to Roseworth Group 3,333,333 shares of our common
                      stock at a negotiated price of $0.15 per share, for a
                      total purchase price of $500,000.

                  VARIOUS PURCHASERS. On April 12, 2002, we issued and sold an
aggregate of 17,486,491 shares of our common stock pursuant to subscription
agreements with each of Alpha Capital AG (3,497,298 shares), Ellis Enterprises
(1,311,487 shares), Kazi Management, Inc. (3,060,136 shares), Palisades Equity
Fund L.P. (4,808,785 shares) and Stonestreet L.P. (4,808,785 shares), for net
proceeds of approximately $1,939,000, or $0.11089 per share.

                  VARIOUS PURCHASERS. On September 10, 2002, we issued and sold
an aggregate of 21,500,000 shares of our common stock pursuant to a Securities
Purchase Agreement with certain investors for total proceeds of approximately
$3,010,000, or $0.14 per share, along with warrants to purchase 16,125,000
shares of our common stock at an exercise price of $0.25 per share, subject to
adjustment, as described below. In addition, pursuant to a placement agent
agreement with H. C. Wainwright & Co., Inc. ("HCW"), we paid HCW a placement fee
of $150,500 cash and issued to HCW 1,032,000 shares of our common stock. An
adjustment provision in the Warrants provides that 60 trading days following the
original issue date of the Warrants (the "FIRST DETERMINATION DATE"), a certain
number of Warrants shall become exercisable at $.001. The number of shares for
which the Warrants are exercisable at $.001 per share is equal to the positive
difference, if any, between (i) $3,010,000 divided by the volume weighted
average price ("VWAP") of our common stock for the 60 trading days preceding the
First Determination Date and (ii) 21,500,000. Upon 120 trading days following
the original issue date of the Warrants (the "SECOND DETERMINATION DATE"), a
certain number of remaining Warrants shall become exercisable at $.001. The
number of shares for which the Warrants are exercisable at $.001 per share is
equal to the positive difference, if any, between (i) $3,010,000 divided by the
VWAP of our common stock for the 60 trading days preceding the Second
Determination Date and (ii) 21,500,000. No adjustment will be made in the event
that the VWAP for the 60 trading day period preceding the applicable
determination date is $.14 or greater.

         HARBOR VIEW GROUP, INC. On May 30, 2002 we entered into an agreement
with Harbor View to terminate a consulting agreement effective as of December
31, 2001. The consultant continued to perform services after the termination
date and as full compensation we granted warrants to purchase 1,000,000 shares
of our common stock at an exercise price of $0.18 per share. The warrants are
exercisable in whole or in part at any time and from time to time prior to May
30, 2008.

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

                                       22


transferred for a period of one year from the applicable vesting date of the
convertible portion of the debentures. We issued our 5% convertible debentures
as follows:

         o   On May 30, 2002, we sold to O. Frank Rushing and Justine Simoni
             $500,000 principal amount of our 5% convertible debenture. On June
             3, 2002, the holder converted the first 20% ($100,000) of the
             debenture into 909,091 shares of common stock at a conversion price
             of $0.11 per share. In January 2003, the holder converted the
             second 20% ($100,000 plus interest of $3,041) into 1,030,411 shares
             of common stock at a conversion price of $.10 per share.

         o   On July 3, 2002, we sold to James F. Dicke II, a member of our
             Board of Directors, $1,000,000 principal amount of our 5%
             convertible debenture. On July 3, 2002, Mr. Dicke converted the
             first 20% ($200,000) of the debenture for 1,299,545 shares of
             common stock at a conversion price of $0.1539 per share. In January
             2003, the holder converted the second 20% ($200,000 plus interest
             of $5,041) of the debenture into 2,050,411 shares of common stock
             at a conversion price of $.10 per share.

         o   On July 15, 2002, we sold to Peter Lunder $500,000 principal amount
             of our 5% convertible debenture. In January 2003, the holder
             converted 40% ($200,000 plus interest of $4,822) of the debenture
             into 1,587,797 shares of common stock, the first 20% of which was
             converted at a conversion price of $.1818 per share, and the second
             20% of which was converted at a conversion price of $.10 per share.

         VARIOUS PURCHASERS. From December 2002 through March 2003, pursuant to
securities purchase agreements with various purchasers, we authorized the
issuance of and sold 13,750,000 shares of our common stock and warrants to
purchase up to 8,250,000 shares of our common stock at $0.08 per share, for an
aggregate purchase price of $1,100,000. In connection with the agreement, we
paid finders' fees of approximately $50,000 in December 2002 and issued warrants
to purchase 825,000 shares of our common stock to Harbor View Group and AVIX,
Inc. All of the aforementioned warrants are exercisable at $0.12 per share
commencing six months after the closing date of the agreement, for a period of
five years. As of March 28, 2003, none of such warrants had been
exercised.

OUTSTANDING CONVERTIBLE SECURITIES

         As of March 28, 2003, in addition to the 472,792,609 shares of our
common stock currently outstanding, we have: (i) outstanding stock options to
purchase an aggregate of 65.9 million shares of common stock at exercise prices
ranging from $0.08 to $0.36, of which 57.5 million are currently exercisable;
(ii) outstanding warrants to purchase an aggregate of 59.4 million shares of
common stock at prices ranging from $0.12 to $1.00, of which warrants to
purchase 54.4 million shares are currently exercisable; (iii) outstanding
convertible debentures representing approximately 12.0 million shares of common
stock assuming a conversion price of $0.10; and (iv) up to 166,666,667 shares
issuable under the equity line of credit, assuming a purchase price equal to
$0.30.

         If all of the foregoing were fully issued, exercised and/or converted,
as the case may be, we would receive proceeds of approximately $88.7 million,
and we would have approximately 776.8 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.

                                       23


PROJECTED EXPENSES

         During the next 12 months, we expect to incur significant expenditures
relating to operating expenses and expenses relating to regulatory filings and
clinical trials for Product R. We currently do not have cash available to
meet our anticipated expenditures.

         We are currently seeking additional financing. We anticipate that we
can continue operations through April 2003 with our current liquid assets, if
none of our outstanding options or warrants are exercised or 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 Product R
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 are 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 operations. We anticipate that
we will be required to sell additional securities to obtain the funds necessary
to continue operations and further our research and development activities. We
are currently seeking debt financing, licensing agreements, joint ventures and
other sources of financing, but the likelihood of obtaining such financing on
favorable terms is uncertain. Management is not certain whether, at present,
debt or equity financing will be readily obtainable or whether it will be on
favorable terms. Because of the large uncertainties involved in the FDA approval
process for commercial drug use on humans, it is possible that we may never be
able to sell Product R commercially.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

         Not applicable.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE

         None.

                                       24


                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT


                                   MANAGEMENT

EXECUTIVE OFFICERS AND DIRECTORS

         Our directors and executive officers and further information concerning
them are as follows:



        NAME                                    AGE    POSITION
        ----                                    ---    --------
                                                 
        Shalom Z. Hirschman, MD (1)             66     President, Chief Executive Officer, Chief Scientific
                                                       Officer, Director
        Eli Wilner (1,2,3)                      47     Secretary, Chairman of the Board
        Alan V. Gallantar                       45     Chief Financial Officer, Treasurer
        David Seligman (1,2,3)                  64     Director
        Nancy J. Van Sant (3)                   53     Director
        Roy S. Walzer (2,3,4)                   55     Director


        ------------------------
        (1)  Member of the Executive Management Committee.
        (2)  Member of the Audit Committee.
        (3)  Member of the Compensation Committee.
        (4)  Member of the Investment Analysis Committee.

         SHALOM Z. HIRSCHMAN, MD has been President, Chief Executive Officer and
a director since October 1996, and was Chairman of the Board from December 2001
until May 2002. Dr. Hirschman was Director of the Division of Infectious
Diseases and Professor of Medicine at Mount Sinai School of Medicine, New York,
New York, from May 1969 until October 1996.

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

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

         DAVID SELIGMAN, a director since December 2001, is a partner and
founder of the Law Office of David Seligman, established in 1995. Since 1997,
Mr. Seligman has been a consulting attorney to Gibbons, Del Deo, Dolan,
Griffinger and Vecchione, a New Jersey based law firm. Mr. Seligman has over
thirty years of legal experience in the pharmaceutical industry, twenty-five of
which were spent supervising the activities of law department attorneys and
outside counsel. From 1989 to 1995, Mr. Seligman was Associate Vice President

                                       25

and responsible for the general legal activities of various divisions of
Hoffmann-La Roche Inc. Mr. Seligman is a member of the New York and New Jersey
State Bar Associations, and sits on the boards of Oxford Pharmaceutical
Services, Inc. and Greenbrook Pharmaceuticals, LLC. Mr. Seligman graduated from
Columbia University, College of Pharmacy (B.S.) in 1959, Fordham University
School of Law (J.D.) in 1962, and New York University School of Law (L.L.M.) in
1966.

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

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

         Richard Kent, MD resigned as a member of our Board of Directors in
February 2003.

         Directors are elected to serve until the next annual meeting of
stockholders and until their successors have been elected and have qualified.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

         No interlocking relationships exist between any member of our board of
directors and any other company's board of directors or compensation committee.

         EXECUTIVE MANAGEMENT COMMITTEE. On May 1, 2002, we established an
Executive Management Committee, which has been delegated the authority to
oversee the strategic management of Advanced Viral. Messrs. Wilner and Seligman
and Dr. Hirschman serve as members of the Executive Management Committee.

         AUDIT COMMITTEE. In late December 2001, we established an Audit and
Compensation Committee, which in November 2002 was split into two separate
committees, the Audit Committee and the Compensation Committee. The Audit
Committee, the current members of which are Eli Wilner, David Seligman and Roy
Walzer, recommends to the board of directors the independent certified public
accountants to be selected to audit our annual financial statements and will
approve any special assignments given to those accountants. The Committee also
will review the planned scope of the annual audit, the independent accountants'
letter of comments and management's response thereto regarding any major
accounting changes made or contemplated and the effectiveness and efficiency of
our internal accounting staff.

         COMPENSATION COMMITTEE. The Compensation Committee, the current members
of which are Eli Wilner, David Seligman, Nancy Van Sant and Roy Walzer, makes
recommendations to the board of directors regarding the compensation payable to
our executive officers, and reviews general policies relating to the
compensation and benefits of our employees.

         INVESTMENT ANALYSIS COMMITTEE. In July 2002, we established an
Investment Analysis Committee, which has been delegated the authority to analyze
financing and investment alternatives for Advanced Viral. Mr.Walzer serves as
the sole member of this committee.

                                       26


ITEM 11. EXECUTIVE COMPENSATION

DIRECTORS

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

EXECUTIVE OFFICERS

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

                           SUMMARY COMPENSATION TABLE



                                                                                            LONG TERM
                                               ANNUAL COMPENSATION                    COMPENSATION AWARDS
                                       -------------------------------------   -----------------------------------
                                                                                 SECURITIES
           NAME AND                                          OTHER ANNUAL        UNDERLYING           ALL OTHER
      PRINCIPAL POSITION       YEAR    SALARY   BONUS (1)   COMPENSATION (2)    OPTIONS/SARs (3)  COMPENSATION (4)
      ------------------       ----   -------   ---------   ----------------    ----------------  ----------------
                                                                                     
Shalom Z. Hirschman, MD,       2002   $361,000   $25,000        $26,800                                $17,865
Chairman December 2001 to May  2001   $361,000   $25,000        $30,192               ---              $21,270
2002, President, Chief         2000   $361,000      $0          $30,775               ---               $4,540
Executive Officer and Chief
Scientific Officer since
October 1996 and consultant
from May 24, 1995 until
October 1996.


Alan V. Gallantar,             2002   $223,000   $22,500         $6,000               --                 --
Chief Financial Officer since  2001   $225,000   $25,000         $6,000               --                 --
October 1999; Treasurer since  2000   $200,000   $25,000        $21,000               --                 --
December 2001.

William Bregman,               2002     n/a        n/a            n/a                 n/a                n/a
Secretary and director from    2001    $70,000      --             --                  --            $150,000 (5)
1985 until December 2001,      2000    $60,000      --             --                  --              $2,500 (4)
treasurer from 1985 to 1999.



Bernard Friedland,             2002     n/a        n/a            n/a                 n/a                n/a
Chairman of Advanced Viral     2001    $70,000      --             --                  --            $150,000 (5)
and President of subsidiary    2000    $60,000      --             --                  --              $1,800 (4)
Advance Viral Research Ltd.
from 1985 to December 2001.


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

(1)   With respect to Dr. Hirschman, represents portion of bonus paid to Dr.
      Hirschman pursuant to the terms of his employment agreement in connection
      with the IND number granted by the FDA. The remaining $50,000 due has been
      accrued as of December 31, 2002.

(2)   Other Annual Compensation for Dr. Hirschman includes medical insurance
      premiums paid by Advanced Viral on his behalf, and aggregate incremental
      cost to Advanced Viral of Dr. Hirschman's automobile lease, gas, oil,
      repairs and maintenance. Other Annual Compensation for Mr. Gallantar
      includes an automobile allowance of $500 per month and allowance for
      moving expenses of approximately $15,000.

(3)   Includes all options granted during fiscal years shown. No stock
      appreciation rights were granted with any options.

(4)   Represents the dollar value of insurance premiums paid by or on behalf of
      Advanced Viral with respect to term life insurance for the benefit of the
      Named Executive Officers.

(5)   Represents payments made to Messrs. Bregman and Friedland pursuant to the
      terms of the severance agreements discussed below.

                                       27



         The following table sets forth certain summary information concerning
exercised and unexercised options to purchase our common stock as of December
31, 2002 held by the Named Executive Officers. No options were exercised during
the year ended December 31, 2002 by the Named Executive Officers.

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




                                                              NUMBER OF SECURITIES          VALUE OF UNEXERCISED
                                SHARES                       UNDERLYING UNEXERCISED        IN-THE-MONEY OPTIONS AT
                             ACQUIRED ON       VALUE       OPTIONS AT FISCAL YEAR-END          FISCAL YEAR-END
NAME                         EXERCISE (#)   REALIZED (1)   EXERCISABLE/UNEXERCISABLE      EXERCISABLE/UNEXERCISABLE
- ----                         ------------   ------------   -------------------------      -------------------------

                                                                                         
Shalom Z. Hirschman, M.D.         0             N/A             39,100,000 / 0                    $0 / $0 (2)(3)

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

William Bregman                   0             N/A                  0 / 0                        $0 / $0

Bernard Friedland                 0             N/A                  0 / 0                        $0 / $0


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

(1)   Based on the difference between the average of the high and low bid prices
      per share of the common stock as reported by the Bulletin Board on the
      date of exercise, and the exercise or base price.
(2)   Based on the difference between the average of the closing bid and ask
      prices per share of the common stock as reported by the Bulletin Board on
      December 31, 2002, $0.08, and the exercise or base price of in-the-money
      stock options.
(3)   As of December 31, 2002, Dr. Hirschman held options to purchase 4,100,000
      shares of common stock at $0.18 per share; 4,000,000 shares of common
      stock at $0.19 per share; 4,000,000 shares of common stock at $0.27 per
      share; 4,000,000 shares of common stock at $0.36 per share, and 23,000,000
      shares of common stock at $0.27, all of which are currently exercisable.
(4)   As of December 31, 2002, Mr. Gallantar held options to purchase 4,547,880
      shares of common stock at $0.24255 per share, all of which were
      exercisable as of such date.

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

HIRSCHMAN EMPLOYMENT AGREEMENT

         Pursuant to an Amended and Restated Employment Agreement dated as of
May 12, 2000 between Advanced Viral and Dr. Hirschman, we employ Dr. Hirschman
on a full business time basis as our President, Chief Executive Officer, Chief
Scientific Officer and Chairman of our Scientific Advisory Board, with duties
including supervising our day-to-day operations, including management of
scientific, medical, financial, regulatory and corporate matters, establishing
appropriate laboratory, executive and other facilities on our behalf, and
raising additional capital on our behalf.

         Pursuant to the agreement, the term of Dr. Hirschman's employment
continues until December 31, 2002 and will continue for one year periods
thereafter unless either we or Dr. Hirschman gives the other notice at least two
years in advance that such one year automatic extension shall be vitiated. If
the agreement is terminated by us for cause, we may cancel all unvested stock
options, benefits under stock bonus plans and stock appreciation rights ("SARs")
granted to Dr. Hirschman. If the agreement is terminated by Dr. Hirschman for
cause, we are required to pay to Dr. Hirschman his annual salary and employee
benefits through the remainder of the then current term. In July 2002, we gave
Dr. Hirschman notice that the agreement would not be extended after December
2004.

         Pursuant to the agreement, Dr. Hirschman receives an annual salary of
$361,000, payable in equal biweekly installments. The agreement also entitles
Dr. Hirschman to a major medical insurance policy, disability policy and dental
policy insurance to Dr. Hirschman and his dependents that is reasonably

                                       28


acceptable to the parties, and a term life insurance policy at least in the
amount of $1,000,000, with a beneficiary to be designated by Dr. Hirschman. The
agreement further provides that we shall:

         o   take such action as may be necessary to permit Dr. Hirschman to be
             entitled to participate in stock option, stock bonus or similar
             plans (including plans for SARs) as are established by us;

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

         o   reimburse Dr. Hirschman for all of his proven expenses incurred in
             and about the course of his employment that are deductible under
             the current tax law, including, among other expenses, his license
             fees, membership dues in professional organizations, subscriptions
             to professional journals, necessary travel, hotel and entertainment
             expenses incurred in connection with overnight, out-of-town trips
             that contribute to the benefit of us in the reasonable
             determination of Dr. Hirschman, and all other expenses that may be
             pre-approved by our board of directors; and

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

                  The agreement also provides for the payment of $100,000 to Dr.
Hirschman on the earlier to occur of (i) the date an IND number is obtained from
and approved by the FDA so that human research may be conducted using Product R;
or (ii) the execution of an agreement relating to co-marketing pursuant to which
one or more third parties commit to make payments to us of at least $15 million.
On September 4, 2001, the Company received an IND number from the FDA. To date,
approximately $50,000 of the $100,000 bonus described above has been paid to Dr.
Hirschman, and $50,000 has been accrued.

         The agreement further provides that Dr. Hirschman is not authorized,
without the express written consent of the board of directors and other than in
the ordinary course of business, to pledge the credit of Advanced Viral, to bind
us, to release or discharge any debt due us unless we have received payment in
full, or to dispose (as collateral or otherwise) of all or substantially all of
our assets.

         Dr. Hirschman has agreed that he will assign to us all patents he
develops which result from his knowledge acquired while performing his duties
under the agreement, and that, if his employment under the agreement is
terminated by us "for cause" or by Dr. Hirschman otherwise than "for cause," as
specified in that agreement, he will not, directly or indirectly, compete with
us for three years after termination or solicit our employees to leave our
employ for one year after termination.

         Pursuant to the execution of the agreement, we ratified a $100,000
bonus payment made to Dr. Hirschman in February 1998 and the February 1998 grant
to Dr. Hirschman of options to acquire 23,000,000 shares of common stock
exercisable at $0.27 per share at any time through February 17, 2008 or (i) 90
days after (A) the termination of Dr. Hirschman's employment (other than for
good reason or upon the occurrence of a change in control, in which two cases
Dr. Hirschman may exercise such options until the expiration of the original
term, or (B) Dr. Hirschman is terminated for cause, or (ii) until 18 months
after death.

         SEVERANCE AGREEMENTS

         On December 3, 2001, William Bregman, Bernard Friedland and Louis
Silver resigned as officers and directors of Advanced Viral upon the terms and
conditions of separate Severance Agreements (the "Severance Agreements"), and

                                       29


James F. Dicke II, Christopher Forbes, David Seligman, and Eli Wilner were
appointed to the board of directors of Advanced Viral. The resignations of
Messrs. Bregman, Friedland and Silver were not due to any disagreement with
Advanced Viral on any matter relating to Advanced Viral's operations, policies
or practices.

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

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

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

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

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

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

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

         In connection with satisfying our financial obligations to our retiring
directors under the Severance Agreements, we obtained a loan in the amount of
$200,000 from our Chief Financial Officer, Alan Gallantar, as evidenced by a
Demand Promissory Note dated December 14, 2001 (the "Note"). We were obligated

                                       30


to repay the Note upon our receipt of proceeds upon the consummation of new
financing. The Note was repaid in full on December 17, 2001.

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

         Advanced Viral has adopted a 401(k) plan that allows eligible employees
to contribute up to 20% of their salary, subject to annual limits, which were
$10,500 in 2001. We match 50% of the first 6% of the employee contributions with
our common stock and may from time to time, at our discretion, make additional
contributions based upon earnings. In May 2002 we funded our matching
contribution of approximately $33,000 for the year ended December 31, 2001 by
purchasing our common stock in open market transactions. At December 31, 2002
the Company accrued $40,675 to fund the 401k plan representing the Company's
match for the plan year 2002. We intend to purchase our common stock in the open
market at prevailing market prices to satisfy our 2002 matching contribution
obligations. In March 2003, we amended the terms of the 401(k) plan to terminate
our obligation to make matching contributions.

                                       31


PERFORMANCE GRAPH

         SEC rules require that a line graph performance presentation be
provided comparing cumulative total stockholder return with a performance
indicator of a broad market index and a nationally recognized industry index.
The graph and table set forth below compare the cumulative total stockholder
return on Advanced Viral's Common Stock for 1997 through 2002 with the Dow Jones
Pharmaceuticals Index and the Dow Jones Equity Market Index for the same period.
The graph and table assume an investment of $100 in the Common Stock and each
index on December 31, 1996 and the reinvestment of all dividends, if any.

                         5-YEAR CUMULATIVE TOTAL RETURN


                                               12/97        12/98       12/99        12/00       12/01        12/02
                                               -----        -----       -----        -----       -----        -----
                                                                                            
Advanced Viral Research Corp.                 100.00       109.61       98.70       168.83      137.66        41.56
Dow Jones Pharmaceuticals                     100.00       124.90      153.28       139.07      122.50        95.45
Dow Jones Equity Market                       100.00       148.67      133.94       185.78      155.22       123.59


                               [GRAPHIC OMITTED]

                                       32


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

         The following table sets forth certain information regarding the common
shares of Advanced Viral owned as of March 28, 2003: (i) by each person
who beneficially owns more than 5% of the common shares, (ii) by each of our
directors, (iii) by each of our Named Executive Officers identified in the
Summary Compensation Table above and (iv) by all directors and executive
officers of Advanced Viral as a group. Except as otherwise indicated, each
person listed below has sole voting and investment power with respect to such
common shares.



NAME OF BENEFICIAL OWNER                                             NUMBER OF SHARES (1)       PERCENTAGE OWNERSHIP
- ------------------------                                             --------------------       --------------------
                                                                                                 
   Bernard Friedland (2, 3)                                               32,541,730                    6.9%
   William Bregman (2, 4)                                                 38,146,988                    8.1%
   Shalom Z. Hirschman, MD (5)                                            39,100,000                    7.6%
   Eli Wilner (7)                                                          4,533,900                     *
   Alan V. Gallantar (6)                                                   4,547,880                     *
   David Seligman (8)                                                      1,887.500                     *
   Nancy J. Van Sant (8)                                                     937,500                     *
   Roy Walzer (8)                                                          1,041,300                     *
ALL DIRECTORS AND EXECUTIVE OFFICERS AS A GROUP (6 PERSONS)               52,048,080                    9.9%

- ------------------------
 *  Represents less than 1%

(1)  Shares beneficially owned include shares that may be acquired pursuant to
     the exercise of outstanding stock options that are exercisable within 60
     days of March 28, 2003.

(2)  Pursuant to their severance agreements with Advanced Viral, each of Messrs.
     Bregman and Friedland have granted to Advanced Viral, with respect to the
     election of directors and compensation packages for directors of Advanced
     Viral, an irrevocable proxy to vote such shares of common stock at any
     stockholders meeting until the earlier to occur of November 29, 2003 or as
     to those shares sold, the date of the sale of such shares by either Mr.
     Bregman or Mr. Friedland, as the case may be, to one or more unrelated
     parties.

(3)  Includes 20,000,000 shares owned by Mr. Friedland and Shirley Friedland,
     his spouse, as joint tenants; and 400,000 shares owned by the B&SD
     Friedland Foundation, a not-for-profit foundation controlled by Mr.
     Friedland. Does not include 15,000 shares owned by Shirley Friedland as to
     which Mr. Friedland disclaims beneficial ownership.

(4)  Includes 21,758,614 shares held in a trust for which Mr. Bregman is the
     sole trustee and sole beneficiary; 165,000 shares owned by Carol Bregman,
     his daughter; 165,000 shares owned by Janet Berlin, his daughter; 165,000
     shares owned by Forest Berlin, his grandson; 165,000 shares owned by
     Jessica Berlin, his granddaughter; and 55,000 shares owned by David Berlin,
     his son-in-law.

(5)  Represents 39,100,000 shares that may be acquired pursuant to currently
     exercisable options to purchase common stock. Dr. Hirschman is the
     President, CEO and a Director of Advanced Viral Research Corp.

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

(7)  Includes (i) 750,000 shares issuable pursuant to currently exercisable
     outstanding warrants; (ii) 2,087,500 shares that may be acquired pursuant
     to currently exercisable stock options; (iii) 362,500 shares beneficially
     owned by his wife Barbara Ann Brennan; and (iv) 50,000 shares beneficially
     owned by his step-daughter Celia Conaway. Mr. Wilner is the Secretary and
     Chairman of the Board of Directors of Advanced Viral Research Corp.

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

                                       33



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

         In November 2002, we retained Sacher, Zelman, Van Sant, Paul, Beiley,
Hartman, Terzo & Waldman, P.A., a law firm of which Ms. Van Sant is a partner,
to provide legal services in connection with certain legal proceedings. For the
year ended December 2002 we were billed approximately $69,000. From January 1,
2003 through March 24, 2003, we were billed approximately $109,000. The balance
outstanding at March 24, 2003 is approximately $84,000.

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

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

         Delaware law also permits a corporation to purchase and maintain
insurance on behalf of any person who is or was a director or officer against
any liability asserted against him and incurred by him in such capacity or
arising out of his status as such, whether or not the corporation has the power
to indemnify him against that liability under Section 145 of the Delaware
General Corporation Law ("DGCL").

         Our Certificate of Incorporation was amended on December 30, 1987, to
limit or eliminate director liability by incorporating new Article 11, which
provides:

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

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

         Pursuant to the foregoing, we currently maintain directors and officers
insurance coverage. We may be required to indemnify certain officers and
directors against liabilities that arise by reason of their status or service as
officers or directors. In certain circumstances, we may be required to advance

                                       34


the expenses an officer or director incurs in legal proceedings. We believe that
the provisions in our Certificate of Incorporation are necessary to attract and
retain qualified persons as directors and officers.

ITEM 14. CONTROLS AND PROCEDURES

         We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed in our reports pursuant to the
Securities Exchange Act of 1934, as amended, is recorded, processed, summarized
and reported within the time periods specified in the SEC's rules and forms, and
that such information is accumulated and communicated to our management,
including our President and Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely disclosure. In designing and evaluating the
disclosure controls and procedures, management recognized that any controls and
procedures, no matter how well designed and operated, can only provide
reasonable assurance of achieving the desired control objectives, and management
necessarily was required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

         Within 90 days prior to March 28, 2003, we carried out an evaluation,
under the supervision and with the participation of our management, including
our President and Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures, as defined in Rules 13a-14(c) and 15d-14(c) under the Securities
Exchange Act of 1934. Based on the foregoing, our President and Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of the evaluation date.

CHANGES IN INTERNAL CONTROLS

         There have been no significant changes in our internal controls or in
other factors that could significantly affect these controls subsequent to the
date we carried out this evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.


                                     PART IV

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

         (a) Documents filed as part of this report

             1. Financial Statements (see page F-1)

             2. Exhibits: The Exhibits listed in the accompanying Exhibits Index
                are filed or incorporated by reference as part of this report.

         (b) Reports on Form 8-K during and after the fiscal quarter ended
December 31, 2002:

             None.

ITEM 16. PRINCIPAL ACCOUNTANT FEES AND SERVICES

         Rachlin Cohen & Holtz LLP, independent certified public accountants,
are the principal independent accountants of Advanced Viral and its
subsidiaries. Advanced Viral's auditors are retained solely to provide audit and

                                       35


audit-related services and advice with respect to tax matters, and have never
provided any other type of non-audit services to Advanced Viral or its
subsidiaries.

AUDIT FEES

         Rachlin Cohen & Holtz LLP billed Advanced Viral approximately $71,500
and $85,400 and were paid such amounts for 2002 and 2001, respectively, for the
following audit services: (i) audit of the annual consolidated financial
statements of Advanced Viral for the fiscal years ended December 31, 2002 and
2001; (ii) review of the interim financial statements of Advanced Viral included
in quarterly reports on Form 10-Q and quarterly reports to shareholders for the
periods ended March 31, June 30 and September 30, 2002 and 2001; (iii) the
provision of consent letters; and (iv) review and advice in respect of
accounting matters in connection with shelf registration statement and
prospectus filings of Advanced Viral and related public offerings by Advanced
Viral of its equity securities.

AUDIT-RELATED FEES

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

TAX FEES

         Rachlin Cohen & Holtz LLP billed Advanced Viral approximately $5,500
and $4,800 and were paid such amounts for 2002 and 2001, respectively, for the
following tax services: (i) tax compliance; (ii) tax planning; and (iii) tax
advice, including preparation of United States and state related tax filings.

ALL OTHER FEES

         No other services were provided by Rachlin Cohen & Holtz LLP to
Advanced Viral during 2002 and 2001.

AUDIT COMMITTEE PRE-APPROVAL POLICIES AND PROCEDURES

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

                                       36




                                   SIGNATURES

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


Date: March 31, 2003                      ADVANCED VIRAL RESEARCH CORP.
                                          (Registrant)


                                          By: /s/ Shalom Z. Hirschman, M.D.
                                              ------------------------------
                                              Shalom Z. Hirschman, M.D.,
                                              President, Chief Executive Officer
                                              and Director


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

Date: March 31, 2003                By:  /s/ Shalom Z. Hirschman, M.D.
                                         ---------------------------------------
                                    Shalom Z. Hirschman, M.D., President,
                                         Chief Executive Officer and Director

Date: March 31, 2003                By:  /s/ Eli Wilner
                                         ---------------------------------------
                                         Eli Wilner, Chairman of the Board
                                         and Secretary


Date: March 31, 2003                By:  /s/ Alan V. Gallantar
                                         ---------------------------------------
                                         Alan V. Gallantar, Principal Financial
                                         and Accounting Officer


Date: March 31, 2003                By:  /s/ David Seligman
                                         ---------------------------------------
                                         David Seligman, Director


Date: March 31, 2003                By:  /s/ Nancy Van Sant
                                         ---------------------------------------
                                         Nancy Van Sant, Director


Date: March 31, 2003                By:  /s/ Roy Walzer
                                         ---------------------------------------
                                         Roy Walzer, Director

                                       37




                                 CERTIFICATIONS

                         PURSUANT TO SECTION 302 OF THE
                           SARBANES-OXLEY ACT OF 2002

I, Alan V. Gallantar, certify that:

1. I have reviewed this annual report on Form 10-K of Advanced Viral Research
Corp.;

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

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

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

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

         (b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

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

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

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

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

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003

/s/ Alan V. Gallantar
- -----------------------------------------------------
Alan V. Gallantar, Chief Financial Officer, Treasurer


                                       38



                                 CERTIFICATIONS
                         PURSUANT TO SECTION 302 OF THE
                           SARBANES-OXLEY ACT OF 2002


I, Shalom Z. Hirschman, M.D., certify that:

1. I have reviewed this annual report on Form 10-K of Advanced Viral Research
Corp.;

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

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

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

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

         (b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
annual report (the "Evaluation Date"); and

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

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

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

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

6. The registrant's other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.

Date: March 31, 2003

/s/ Shalom Z. Hirschman, M.D.
- --------------------------------------------
Shalom Z. Hirschman, M.D., Chief Executive Officer


                                       39




                                INDEX OF EXHIBITS

EXHIBIT
NUMBER     DESCRIPTION
- ------     -----------

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

3.2        Bylaws of ADVR, as amended(1)

3.3        Amendment to Certificate of Incorporation of ADVR(2)

4.1        Specimen Certificate of Common Stock(1)

4.2        Specimen Warrant Certificate(1)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4.28       Form of Class A Warrant dated September 18, 2000 to purchase
           5,000,000 shares of common stock.(19)

4.29       Form of Class B Warrant dated September 18, 2000 to purchase
           5,000,000 shares of common stock.(19)

4.30       Form of Class A Warrant dated February 9, 2001 to purchase 5,000,000
           shares of common stock.(21)

4.31       Form of Class B Warrant dated February 9, 2001 to purchase 5,000,000
           shares of common stock.(21)

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       40



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                       41



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

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

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

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

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

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

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

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

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

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

99.1       Certification by Chief Executive Officer pursuant to Section 906 of
           the Sarbanes-Oxley Act of 2002.*

99.2       Certification by Chief Financial Officer pursuant to Section 906 of
           the Sarbanes-Oxley Act of 2002.*

- -----------------------------
*      Filed herewith.

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

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

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

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

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

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

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

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

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

10.    Documents incorporated by reference herein to certain exhibits to our
       Quarterly Report on Form 10-QSB for the period ended March 31, 1996.

11.    Incorporated by reference herein to our Current Reports on Form 8-K and
       exhibits thereto as follows:
       (a)    A report on Form 8-K dated January 3, 1992.
       (b)    A report on Form 8-K dated September 14, 1993.
       (c)    A report on Form 8-K dated April 25, 1994.
       (d)    A report on Form 8-K dated June 3, 1994.
       (e)    A report on Form 8-K dated June 17, 1994.
       (f)    A report on Form 8-K dated October 25, 1994.
       (g)    A report on Form 8-K dated December 28, 1995.
       (h)    A report on Form 8-K dated April 22, 1996.
       (i)    A report on Form 8-K dated July 12, 1996.
       (j)    A report on Form 8-K dated October 17, 1996.
       (k)    A report on Form 8-K dated February 21, 1997.
       (l)    A report on Form 8-K dated March 25, 1997.
       (m)    A report on Form 8-K dated September 26, 1997.
       (n)    A report on Form 8-K dated July 21, 1998.
       (o)    A report on Form 8-K dated November 24, 1998.
       (p)    A report on Form 8-K dated December 3, 2001.
       (q)    A report on Form 8-K dated September 10, 2002.

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

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

                                       42


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

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

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

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

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

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

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

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

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

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

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

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

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

                                       43




                         ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)



                          INDEX TO FINANCIAL STATEMENTS





                                                                                                                    PAGE
                                                                                                                    ----
                                                                                                                    
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS                                                                   F-1

CONSOLIDATED FINANCIAL STATEMENTS

    Balance Sheets, December 31, 2002 and 2001                                                                       F-2

    Statements of Operations for the Years Ended December 31, 2002, 2001 and 2000 and from
        Inception (February 20, 1984) to December 31, 2002                                                           F-3

    Statements of Stockholders' Equity from Inception (February 20, 1984) to
        December 31, 2002                                                                                            F-4

    Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 and from
        Inception (February 20, 1984) to December 31, 2002                                                          F-15

    Notes to Consolidated Financial Statements                                                                    F-16-F-42









               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS


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

We have audited the accompanying consolidated balance sheets of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 2002 and 2001,
and the related consolidated statements of operations, stockholders' equity and
cash flows for each of the years in the three year period ended December 31,
2002 and for the period from inception (February 20, 1984) to December 31, 2002.
These consolidated financial statements are the responsibility of the management
of the Company. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Advanced Viral
Research Corp. (A Development Stage Company) as of December 31, 2002 and 2001
and the results of their operations and their cash flows for each of the years
in the three year period ended December 31, 2002 and for the period from
inception (February 20, 1984) to December 31, 2002 in conformity with accounting
principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 2 to the consolidated
financial statements, the Company has suffered accumulated losses from
operations since its inception and its cash position may be inadequate to fund
the full range of testing required by the FDA in order to approve Product R for
sale. These issues raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 2. The consolidated financial statements do not include
any adjustments that might result from the outcome of this uncertainty.


                                             RACHLIN COHEN & HOLTZ LLP

Miami, Florida
February 21, 2003


                                      F-1




                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                           CONSOLIDATED BALANCE SHEETS

                           DECEMBER 31, 2002 AND 2001




                                                                        2002                  2001
                                                                    ------------          ------------
                                                                                    
                                 ASSETS
Current Assets:
   Cash and cash equivalents                                        $  1,475,755          $  1,499,809
   Prepaid insurance                                                      86,368                51,702
   Assets held for sale                                                  172,601               188,999
   Other current assets                                                   35,527                11,460
                                                                    ------------          ------------
         Total current assets                                          1,770,251             1,751,970

Property and Equipment, Net                                            2,244,118             2,818,045

Other Assets                                                             931,660               878,776
                                                                    ------------          ------------
         Total assets                                               $  4,946,029          $  5,448,791
                                                                    ============          ============


                  LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Accounts payable                                                 $    417,061          $  1,620,150
   Accrued liabilities                                                   137,646               223,556
   Current portion of capital lease obligation                           104,719                64,197
   Current portion of note payable                                        25,165                24,246
                                                                    ------------          ------------
         Total current liabilities                                       684,591             1,932,149
                                                                    ------------          ------------

Long-Term Debt:
   Convertible debenture, net                                          1,658,231                    --
   Capital lease obligation                                                5,834                42,370
   Note payable                                                            4,879                32,198
                                                                    ------------          ------------
        Total long-term debt                                           1,668,944                74,568
                                                                    ------------          ------------
Common Stock Subscribed but not Issued                                   883,900                    --
                                                                    ------------          ------------
Commitments, Contingencies and Subsequent Events                              --                    --
                                                                    ------------          ------------

Stockholders' Equity:
   Common stock; 1,000,000,000 shares of $.00001 par value
      authorized, 455,523,990 and 403,296,863 shares issued
       and outstanding                                                     4,555                 4,033
   Additional paid-in capital                                         57,530,605            47,666,141
   Deficit accumulated during the development stage                  (51,137,805)          (40,795,470)
   Discount on warrants                                               (4,688,761)           (3,432,630)
                                                                    ------------          ------------
         Total stockholders' equity                                    1,708,594             3,442,074
                                                                    ------------          ------------
         Total liabilities and stockholders' equity                 $  4,946,029          $  5,448,791
                                                                    ============          ============




                 See notes to consolidated financial statements.




                                      F-2



                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                      CONSOLIDATED STATEMENTS OF OPERATIONS





                                                                                                                     INCEPTION
                                                                                                                   (FEBRUARY 20,
                                                                 YEAR ENDED DECEMBER 31,                              1984) TO
                                                -----------------------------------------------------------          DECEMBER 31,
                                                    2002                   2001                   2000                  2002
                                                -------------          -------------          -------------          ------------
                                                                                                         
Revenues                                        $          --          $      17,601          $       8,363          $    231,892
                                                -------------          -------------          -------------          ------------

Costs and Expenses:
   Research and development                         4,439,592              5,150,869              3,192,551            18,315,416
   General and administrative                       2,654,296              4,063,022              2,413,601            17,594,477
   Compensation and other expense for
      options and warrants                            755,397                691,404              1,901,927             3,558,872
   Depreciation                                       977,746                511,216                346,227             2,167,189
                                                -------------          -------------          -------------          ------------
                                                    8,827,031             10,416,511              7,854,306            41,635,954
                                                -------------          -------------          -------------          ------------

Loss from Operations                               (8,827,031)           (10,398,910)            (7,845,943)          (41,404,062)
                                                -------------          -------------          -------------          ------------

Other Income (Expense):
   Interest income                                     27,659                113,812                161,832               901,435
   Other income                                            --                     --                     --               120,093
   Interest expense                                (1,341,809)              (868,856)            (1,446,692)           (8,875,578)
   Severance expense - former directors                    --               (302,500)                    --              (302,500)
                                                -------------          -------------          -------------          ------------
                                                   (1,314,150)            (1,057,544)            (1,284,860)           (8,156,550)
                                                -------------          -------------          -------------          ------------

Loss from Continuing Operations                   (10,141,181)           (11,456,454)            (9,130,803)          (49,560,612)
Loss from Discontinued Operations                    (201,154)              (259,114)              (223,861)           (1,577,193)
                                                -------------          -------------          -------------          ------------

Net Loss                                        $ (10,342,335)         $ (11,715,568)         $  (9,354,664)         $(51,137,805)
                                                =============          =============          =============          ============

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

Weighted Average Number of
   Common Shares Outstanding                      439,009,322            389,435,324            362,549,690
                                                =============          =============          =============




                 See notes to consolidated financial statements.


                                      F-3



                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002




                                                                   COMMON STOCK                                       DEFICIT
                                                     -----------------------------------------                       ACCUMULATED
                                                         AMOUNT                                     ADDITIONAL       DURING THE
                                                          PER                                        PAID-IN         DEVELOPMENT
                                                         SHARE          SHARES         AMOUNT        CAPITAL          STAGE
                                                      -----------     -----------      -------       ---------       ---------

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

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

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

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

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

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

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

Issuance of common stock - public offering                  0.01       40,000,000          400         399,600              --
Issuance of underwriter's warrants                                             --           --             100              --
Expenses of public offering                                                    --           --        (117,923)             --
Issuance of common stock, exercise of "A" warrants          0.03          819,860            9          24,587              --
Net loss, year ended December 31, 1986                                         --           --              --        (159,674)
                                                                      -----------      -------       ---------       ---------
Balance, December 31, 1986                                            154,666,014        1,547         307,534        (203,942)
                                                                      -----------      -------       ---------       ---------




                 See notes to consolidated financial statements.


                                      F-4






                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002





                                                                   COMMON STOCK                                       DEFICIT
                                                     -----------------------------------------                       ACCUMULATED
                                                         AMOUNT                                     ADDITIONAL       DURING THE
                                                          PER                                        PAID-IN         DEVELOPMENT
                                                         SHARE          SHARES         AMOUNT        CAPITAL          STAGE
                                                      -----------     -----------      -------       ---------       ---------

                                                                                                      

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

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

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

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

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

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

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

Issuance of common stock, expiration of redemption          0.05        6,729,850          67          336,475                --
   offer on "B" warrants
Issuance of common stock, exercise of "B" warrants          0.05          268,500           3           13,422                --
Issuance of common stock, exercise of "C" warrants          0.08           12,900          --            1,032                --
Net loss, year ended December 31, 1990                                         --          --               --          (267,867)
                                                                      -----------      ------      -----------       -----------
Balance, December 31, 1990                                            200,299,882       2,003        1,845,992        (1,200,915)
                                                                      -----------      ------      -----------       -----------



                 See notes to consolidated financial statements.




                                      F-5

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002







                                                                   COMMON STOCK                                       DEFICIT
                                                     -----------------------------------------                       ACCUMULATED
                                                         AMOUNT                                     ADDITIONAL       DURING THE
                                                          PER                                        PAID-IN         DEVELOPMENT
                                                         SHARE          SHARES         AMOUNT        CAPITAL          STAGE
                                                      -----------     -----------      -------       ---------       ---------

                                                                                                      

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

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

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

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

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

Issuance of common stock, for consulting services            0.06           500,000           5          27,495               --
Issuance of common stock, for consulting services            0.03         3,500,000          35         104,965               --
Issuance of common stock, for testing                        0.04         5,000,000          50         174,950               --
Net loss, year ended December 31, 1993                                           --          --              --         (563,309)
                                                                        -----------      ------      ----------      -----------
Balance, December 31, 1993                                              236,276,991       2,363       3,416,070       (2,854,076)
                                                                        -----------      ------      ----------      -----------



                 See notes to consolidated financial statements.


                                      F-6

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002






                                          COMMON STOCK                                                 DEFICIT
                                -----------------------------------                                   ACCUMULATED
                                AMOUNT                                    ADDITIONAL                   DURING THE      DEFERRED
                                  PER                                      PAID-IN    SUBSCRIPTION    DEVELOPMENT     COMPENSATION
                                 SHARE         SHARES        AMOUNT        CAPITAL     RECEIVABLE        STAGE            COST
                                ------      ------------    -------      ----------   ------------    ------------   -------------
                                                                                                    
Balance, December 31, 1993            0      236,276,991      $2,363      $3,416,070      $  --      $(2,854,076)        $  --

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

Balance, December 31, 1994                   241,616,991       2,416       3,704,517         --       (3,294,913)           --
                                                                                                                         -----
Issuance of common stock,
  exercise of options              0.05        3,333,333          33         166,633         --               --            --
Issuance of common stock,
  exercise of options              0.08        2,092,850          21         167,407         --               --            --
Issuance of common stock,
  exercise of options              0.10        2,688,600          27         268,833         --               --            --
Issuance of common stock, for
  consulting services              0.11        1,150,000          12         126,488         --               --            --
Issuance of common stock, for
  consulting services              0.14          300,000           3          41,997         --               --            --
Net loss, year ended
  December 31, 1995                                   --          --              --         --         (401,884)           --
                                             -----------      ------      ----------      -----      -----------         -----
Balance, December 31, 1995                   251,181,774       2,512       4,475,875         --       (3,696,797)           --
                                             -----------      ------      ----------      -----      -----------         -----





                 See notes to consolidated financial statements.


                                      F-7



                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002






                                          COMMON STOCK                                                 DEFICIT
                                -----------------------------------                                   ACCUMULATED
                                AMOUNT                                    ADDITIONAL                   DURING THE      DEFERRED
                                  PER                                      PAID-IN    SUBSCRIPTION    DEVELOPMENT     COMPENSATION
                                 SHARE         SHARES        AMOUNT        CAPITAL     RECEIVABLE        STAGE            COST
                                ------      ------------    -------      ----------   ------------    ------------   -------------
                                                                                                    
Balance, December 31, 1995                 251,181,774      $2,512    $4,475,875      $     --       $(3,696,797)      $      --

Issuance of common
  stock, exercise of options    $0.05        3,333,334          33       166,634            --                --              --
Issuance of common stock,
  exercise of options            0.08        1,158,850          12        92,696            --                --              --
Issuance of common stock,
  exercise of options            0.10        7,163,600          72       716,288            --                --              --
Issuance of common stock,
  exercise of options            0.11          170,000           2        18,698            --                --              --
Issuance of common stock,
  exercise of options            0.12        1,300,000          13       155,987            --                --              --
Issuance of common stock,
  exercise of options            0.18        1,400,000          14       251,986            --                --              --
Issuance of common stock,
  exercise of options            0.19          500,000           5        94,995            --                --              --
Issuance of common stock,
  exercise of options            0.20          473,500           5        94,695            --                --              --
Issuance of common stock,
  for services rendered          0.50          350,000           3       174,997            --                --              --
Options granted                                     --          --       760,500            --                --        (473,159)
Subscription receivable                             --          --            --       (19,000)               --              --
Net loss, year ended
  December 31, 1996                                 --          --            --            --        (1,154,740)             --
                                           -----------      ------    ----------      --------       -----------       ---------
Balance, December 31, 1996                 267,031,058         159     2,529,988       (19,000)        3,321,135        (473,159)
                                           -----------      ------    ----------      --------       -----------       ---------



                 See notes to consolidated financial statements.




                                      F-8



                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002






                                          COMMON STOCK                                                 DEFICIT
                                -----------------------------------                                   ACCUMULATED
                                AMOUNT                                    ADDITIONAL                   DURING THE      DEFERRED
                                  PER                                      PAID-IN    SUBSCRIPTION    DEVELOPMENT     COMPENSATION
                                 SHARE         SHARES        AMOUNT        CAPITAL     RECEIVABLE        STAGE            COST
                                ------      ------------    -------      ----------   ------------    ------------   -------------
                                                                                                    

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

Issuance of common
  stock, exercise
  of options                     $  0.08       3,333,333         33         247,633           --               --             --
Issuance of common
  stock, conversion
  of debt                           0.20       1,648,352         16         329,984           --               --             --
Issuance of common
  stock, conversion
  of debt                           0.15         894,526          9         133,991           --               --             --
Issuance of common
  stock, conversion
  of debt                           0.12       2,323,580         23         269,977           --               --             --
Issuance of common
  stock, conversion
  of debt                           0.15       1,809,524         18         265,982           --               --             --
Issuance of common
  stock, conversion
  of debt                           0.16         772,201          8         119,992           --               --             --
Issuance of common
  stock, for services
  rendered                          0.41          50,000         --          20,500           --               --             --
Issuance of common
  stock, for services
  rendered                          0.24         100,000          1          23,999           --               --             --
Beneficial conversion
  feature, February
  debenture                                           --         --         413,793           --               --             --
Beneficial conversion
  feature, October debenture                          --         --       1,350,000           --               --             --
Warrant costs, February
  debenture                                           --         --          37,242           --               --             --
Warrant costs, October
  debenture                                           --         --         291,555           --               --             --
Amortization of deferred
  compensation cost                                   --         --              --           --               --        399,322
Imputed interest on
  convertible debenture                               --         --           4,768           --               --             --
Net loss, year ended
  December 31, 1997                                   --         --              --           --       (4,141,729)            --
                                             -----------     ------     -----------     --------      -----------      ---------
Balance, December 31, 1997                   277,962,574      2,779      10,512,767      (19,000)      (8,993,266)       (73,837)
                                             -----------     ------     -----------     --------      -----------      ---------




                 See notes to consolidated financial statements.


                                      F-9


                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002






                                          COMMON STOCK                                                 DEFICIT
                                -----------------------------------                                   ACCUMULATED
                                AMOUNT                                    ADDITIONAL                   DURING THE      DEFERRED
                                  PER                                      PAID-IN    SUBSCRIPTION    DEVELOPMENT     COMPENSATION
                                 SHARE         SHARES        AMOUNT        CAPITAL     RECEIVABLE        STAGE            COST
                                ------      ------------    -------      ----------   ------------    ------------   -------------
                                                                                                    


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

Issuance of common
  stock, exercise
  of options                   $  0.12         295,000          3           35,397            --                --            --
Issuance of common
  stock, exercise
  of options                      0.14         500,000          5           69,995            --                --            --
Issuance of common
  stock, exercise
  of options                      0.16         450,000          5           71,995            --                --            --
Issuance of common
  stock, exercise
  of options                      0.20          10,000         --            2,000            --                --            --
Issuance of common
  stock, exercise
  of options                      0.26         300,000          3           77,997            --                --            --
Issuance of common
  stock, conversion
  of debt                         0.13       1,017,011         10          132,990            --                --            --
Issuance of common
  stock, conversion
  of debt                         0.14       2,512,887         25          341,225            --                --            --
Issuance of common
  stock, conversion
  of debt                         0.15       5,114,218         51          749,949            --                --            --
Issuance of common
  stock, conversion
  of debt                         0.18       1,491,485         15          274,985            --                --            --
Issuance of common
  stock, conversion
  of debt                         0.19       3,299,979         33          619,967            --                --            --
Issuance of common
  stock, conversion
  of debt                         0.22       1,498,884         15          335,735            --                --            --
Issuance of common
  stock, conversion
  of debt                         0.23       1,870,869         19          424,981            --                --            --
Issuance of common
  stock, for services
   rendered                       0.21         100,000          1           20,999            --                --            --
Beneficial conversion
  feature, November
  debenture                                         --         --          625,000            --                --            --
Warrant costs,
  November debenture                                --         --           48,094            --                --            --
Amortization of deferred
  compensation cost                                 --         --               --            --                --        59,068
Write off of
  subscription receivable                           --         --          (19,000)       19,000                --            --
Net loss, year
  ended December 31, 1998                           --         --               --            --        (4,557,710)           --
                                           -----------     ------     ------------      --------      ------------      --------
Balance, December 31, 1998                 296,422,907      2,964       14,325,076            --       (13,550,976)      (14,769)
                                           -----------     ------     ------------      --------      ------------      --------





                 See notes to consolidated financial statements.



                                      F-10


                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002




                                              COMMON STOCK                                 DEFICIT
                                     --------------------------------                    ACCUMULATED
                                      AMOUNT                              ADDITIONAL      DURING THE      DEFERRED     DISCOUNT
                                        PER                                PAID-IN       DEVELOPMENT    COMPENSATION     ON
                                       SHARE      SHARES        AMOUNT     CAPITAL          STAGE           COST       WARRANTS
                                     ---------   -----------    ------    -----------    ------------   -----------    ---------
                                                                                                  
Balance, December 31, 1998                       296,422,907    $2,964    $14,325,076    $(13,550,976)    $(14,769)    $      --

Issuance of common stock,
  securities purchase
  agreement                             $0.16      4,917,276        49        802,451              --           --            --
Issuance of common stock,
  securities purchase
  agreement                              0.27      1,851,852        18        499,982              --           --            --
Issuance of common stock,
  for services
  rendered                               0.22        100,000         1         21,999              --           --            --
Issuance of common stock,
  for services
  rendered                               0.25        180,000         2         44,998              --           --            --
Beneficial conversion
  feature, August debenture                               --        --        687,500              --           --            --
Beneficial conversion
  feature, December debenture                             --        --        357,143              --           --            --
Warrant costs, securities
  purchase agreement                                      --        --        494,138              --           --      (494,138)
Warrant costs, securities
  purchase agreement                                      --        --         37,025              --           --       (37,025)
Warrant costs, August debenture                           --        --         52,592              --           --            --
Warrant costs, December debenture                         --        --          4,285              --           --            --
Amortization of warrant costs,
  securities purchase agreement                           --        --             --              --           --       102,674
Amortization of deferred
  compensation cost                                       --        --             --              --       14,769            --
Credit arising from
  modification of option terms                            --        --        210,144              --           --            --
Net loss, year ended December 31, 1999                    --        --             --      (6,174,262)          --            --
                                                 -----------    ------    -----------    ------------     --------     ---------
Balance, December 31, 1999                       303,472,035     3,034     17,537,333     (19,725,238)          --      (428,489)
                                                 -----------    ------    -----------    ------------     --------     ---------




                See notes to consolidated financial statements.


                                      F-11



                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002





                                                  COMMON STOCK                                    DEFICIT
                                         --------------------------------                        ACCUMULATED
                                          AMOUNT                               ADDITIONAL        DURING THE        DISCOUNT
                                            PER                                 PAID-IN         DEVELOPMENT          ON
                                           SHARE      SHARES        AMOUNT      CAPITAL            STAGE           WARRANTS
                                         ---------   -----------    ------     -----------      ------------       ---------
                                                                                                 

Balance, December 31, 1999                          303,472,035    $  3,034    $ 17,537,333     $(19,725,238)    $  (428,489)

Issuance of common stock,
  exercise of options                   $ 0.1400        600,000           6          83,994               --              --
Issuance of common stock,
  exercise of options                     0.1500      1,600,000          16         239,984               --              --
Issuance of common stock,
  exercise of options                     0.1600        650,000           7         103,994               --              --
Issuance of common stock,
  exercise of options                     0.1700        100,000           1          16,999               --              --
Issuance of common stock,
  exercise of options                     0.2100        792,500           8         166,417               --              --
Issuance of common stock,
  exercise of options                     0.2500      1,000,000          10         246,090               --              --
Issuance of common stock,
  exercise of options                     0.2700        281,000           3          75,867               --              --
Issuance of common stock,
  exercise of options                     0.3600        135,000           1          48,599               --              --
Issuance of common stock,
  exercise of warrants                    0.2040        220,589           2          44,998               --              --
Issuance of common stock,
  exercise of warrants                    0.2448        220,589           2          53,998               --              --
Issuance of common stock,
  exercise of warrants                    0.2750         90,909           1          24,999               --              --
Issuance of common stock,
  exercise of warrants                    0.3300         90,909           1          29,999               --              --
Issuance of common stock,
  conversion of debt                      0.1400     35,072,571         351       4,907,146               --              --
Issuance of common stock,
  conversion of debt                      0.1900      1,431,785          14         275,535               --              --
Issuance of common stock,
  conversion of debt                      0.2000      1,887,500          19         377,481               --              --
Issuance of common stock,
  conversion of debt                      0.3600         43,960          --          15,667               --              --
Issuance of common stock,
  cashless exercise of warrants                         563,597           6         326,153               --              --
Issuance of common stock,
  services rendered                       0.4650        100,000           1          46,499               --              --
Private placement of common stock         0.2200     13,636,357         136       2,999,864               --              --
Private placement of common stock         0.3024      4,960,317          50       1,499,950               --              --
Private placement of common stock         0.4000     13,265,000         133       5,305,867               --              --
Cashless exercise of warrants                                --          --        (326,159)              --              --
Beneficial conversion feature,
  January Debenture                                          --          --         386,909               --              --
Warrant costs, consulting agreement                          --          --         200,249               --              --
Warrant costs, January Debenture                             --          --          13,600               --              --
Warrant costs, private placement                             --          --       3,346,414               --      (3,346,414)
Recovery of subscription
  receivable previously written off                          --          --          19,000               --              --
Amortization of warrant costs,
  securities purchase agreements                             --          --              --               --         544,163
Credit arising from modification
  of option terms                                            --          --       1,901,927               --              --
Net loss, year ended December 31, 2000                       --          --              --       (9,354,664)             --
                                                    -----------    --------    ------------     ------------     -----------
Balance, December 31, 2000                          380,214,618       3,802      39,969,373      (29,079,902)     (3,230,740)
                                                    -----------    --------    ------------     ------------     -----------




                 See notes to consolidated financial statements.



                                      F-12



                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002




                                                      COMMON STOCK
                                         -----------------------------------                        DEFICIT
                                                                                                  ACCUMULATED
                                           AMOUNT                               ADDITIONAL         DURING THE      DISCOUNT
                                             PER                                  PAID-IN         DEVELOPMENT         ON
                                            SHARE          SHARES      AMOUNT     CAPITAL            STAGE          WARRANTS
                                         ----------     -----------    ------    ------------     ------------     -----------
                                                                                                 
Balance,  December 31, 2000                             380,214,618    $3,802    $ 39,969,373     $(29,079,902)    $(3,230,740)

Issuance of common stock,
  exercise of options                     $   0.2700         40,000         1          10,799               --              --
Issuance of common stock,
  exercise of options                         0.3600         20,000         1           7,199               --              --
Issuance of common stock,
  cashless exercise of warrants                              76,411         1          77,491               --              --
Issuance of common stock,
  for services rendered                       0.3500        100,000         1          34,999               --              --
Sale of common stock, for cash                0.1500      6,666,667        66         999,933
Sale of common stock, for cash                0.3000      2,000,000        20         599,980               --              --
Sale of common stock, for cash                0.3200      3,125,000        31         999,969               --              --
Sale of common stock, for cash                0.4000      1,387,500        14         554,986               --              --
Sale of common stock, for cash                0.2700      9,666,667        96       2,609,904
Cashless exercise of warrants                                    --        --         (77,491)              --              --
Warrant costs, private placement                                 --        --         168,442               --        (168,442)
Warrant costs, private equity
  line of credit                                                 --        --       1,019,153               --      (1,019,153)
Amortization of warrant costs,
  securities purchase agreements                                 --        --              --               --         985,705
Credit arising from modification
  of option terms                                                --        --         691,404               --              --
Net loss, year ended December 31, 2001                           --        --              --      (11,715,568)             --
                                                        -----------    ------    ------------     ------------     -----------
Balance, December 31, 2001                              403,296,863    $4,033    $ 47,666,141     $(40,795,470)    $(3,432,630)
                                                        ===========    ======    ============     ============     ===========




                 See notes to consolidated financial statements.


                                      F-13


                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                   (Continued)

               INCEPTION (FEBRUARY 20, 1984) TO DECEMBER 31, 2002





                                                      COMMON STOCK
                                         -----------------------------------                        DEFICIT
                                                                                                  ACCUMULATED
                                           AMOUNT                               ADDITIONAL        DURING THE       DISCOUNT
                                             PER                                  PAID-IN         DEVELOPMENT         ON
                                            SHARE          SHARES      AMOUNT     CAPITAL            STAGE          WARRANTS
                                         ----------     -----------    ------    ------------     ------------     -----------
                                                                                                 
Balance,  December 31, 2001                          403,296,863    $4,033    $ 47,666,141     $(40,795,470)    $(3,432,630)

Sale of common stock,
  for cash                                $0.1109     17,486,491       175       1,938,813
Sale of common stock,
  for cash                                 0.1400     22,532,001       225       2,840,575               --              --
Sale of common stock,
  for cash                                 0.1500      9,999,999       100       1,499,900
Issuance of common stock,
  conversion of debt                       0.1100        909,091         9          99,991               --              --
Issuance of common stock,
  conversion of debt                       0.1539      1,299,545        13         199,987               --              --
Warrant costs,
  termination agreement                                       --        --         190,757               --              --
Warrant costs, issued
  with sale of common
  stock, for cash                                             --        --       2,358,033               --      (2,358,033)
Expenses of stock issuance                                    --        --         (50,160)              --              --
Warrants granted for consulting
  services                                                    --        --         386,677               --              --
Credit arising from modification
  of option terms                                             --        --         177,963               --              --
Amortization of warrant costs,
  securities purchase agreements                              --        --              --               --       1,101,902
Beneficial conversion feature,
  May debenture                                               --        --          55,413               --              --
Beneficial conversion feature,
  July debentures                                             --        --         166,515               --              --
Net loss, year ended December 31, 2002                        --        --              --      (10,342,335)             --
                                                     -----------    ------    ------------     ------------     -----------
Balance, December 31, 2002                           455,523,990    $4,555    $ 57,530,605     $(51,137,805)    $(4,688,761)
                                                     ===========    ======    ============     ============     ===========



                 See notes to consolidated financial statements.


                                      F-14



                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                      CONSOLIDATED STATEMENTS OF CASH FLOWS




                                                                                                                       INCEPTION
                                                                                                                     (FEBRUARY 20,
                                                                                 YEAR ENDED DECEMBER 31,               1984) TO
                                                                      -------------------------------------------     DECEMBER 31,
                                                                           2002            2001            2000          2002
                                                                      ------------    ------------    ------------    ------------
                                                                                                          
Cash Flows from Operating Activities:
   Net loss                                                           $(10,342,335)   $(11,715,568)   $ (9,354,664)   $(51,137,805)
                                                                      ------------    ------------    ------------    ------------
   Adjustments to reconcile net loss to
      net cash used by operating activities:
         Depreciation                                                      997,874         532,264         362,392       2,438,663
         Amortization of debt issuance costs                                34,078          15,344         106,030         828,637
         Amortization of deferred interest cost on beneficial
            conversion feature of convertible debenture                    136,734              --         386,909       3,955,397
         Amortization of discount on warrants                            1,101,902         985,705         611,134       3,137,300
         Amortization of discount on warrants - consulting services             --              --         230,249         230,249
         Amortization of deferred compensation cost                             --              --              --         760,500
         Issuance of common stock for debenture interest                    43,425              --          76,212         119,637
         Issuance of common stock for services                                  --          35,000          46,500       1,586,000
         Compensation expense for options and warrants                     755,397         691,404       1,901,927       3,558,872
         Changes in operating assets and liabilities:
            Increase in other current assets                               (52,155)        (28,358)         (5,063)       (145,311)
            Decrease in inventory                                               --          19,729              --              --
            Increase in other assets                                       (86,962)        (53,232)       (278,037)     (1,635,189)
            Increase (decrease) in accounts payable and
               accrued liabilities                                      (1,288,999)        940,745         174,089         560,907
                                                                      ------------    ------------    ------------    ------------
                  Total adjustments                                      1,641,294       3,138,601       3,612,342      15,395,662
                                                                      ------------    ------------    ------------    ------------
                  Net cash used by operating activities                 (8,701,041)     (8,576,967)     (5,742,322)    (35,742,143)
                                                                      ------------    ------------    ------------    ------------

Cash Flows from Investing Activities:
   Purchase of investments                                                      --              --              --      (6,292,979)
   Proceeds from sale of investments                                            --              --              --       6,292,979
   Acquisition of property and equipment                                  (267,715)     (1,588,648)       (917,471)     (4,323,384)
                                                                      ------------    ------------    ------------    ------------
                  Net cash used by investing activities                   (267,715)     (1,588,648)       (917,471)     (4,323,384)
                                                                      ------------    ------------    ------------    ------------

Cash Flows from Financing Activities:
   Proceeds from issuance of convertible debt                            2,000,000              --       1,000,000      11,500,000
   Proceeds from sale of securities, net of issuance costs               6,229,628       5,783,000      10,835,970      29,529,686
   Proceeds from common stock subscribed but not issued                    883,900              --              --         883,900
   Payments under capital lease                                           (142,426)        (58,690)        (50,324)       (310,028)
   Payments on note payable                                                (26,400)        (21,519)        (19,096)        (81,276)
   Recovery of subscription receivable written off                              --              --          19,000          19,000
                                                                      ------------    ------------    ------------    ------------
                  Net cash provided by financing activities              8,944,702       5,702,791      11,785,550      41,541,282
                                                                      ------------    ------------    ------------    ------------

Net Increase (Decrease) in Cash and Cash Equivalents                       (24,054)     (4,462,824)      5,125,757       1,475,755

Cash and Cash Equivalents, Beginning                                     1,499,809       5,962,633         836,876              --
                                                                      ------------    ------------    ------------    ------------

Cash and Cash Equivalents, Ending                                     $  1,475,755    $  1,499,809    $  5,962,633       1,475,755
                                                                      ============    ============    ============    ============

Supplemental Disclosure of Non-Cash Financing Activities:
   Cash paid during the year for interest                             $     25,669    $     20,556    $     36,681
                                                                      ============    ============    ============


Supplemental Schedule of Non-Cash Investing and Financing Activities:
   A capital lease obligation of approximately $140,000 was incurred
      during 2002 to finance the purchase of new equipment.







                 See notes to consolidated financial statements.



                                      F-15




                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                           DECEMBER 31, 2002 AND 2001


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         BUSINESS

         Advanced Viral Research Corp. (the Company) was incorporated in
         Delaware on July 31, 1985. The Company was organized for the purpose of
         manufacturing and marketing a pharmaceutical product initially named
         Reticulose, the current formulation of which is now known as and
         hereinafter referred to as "Product R." The success of the Company will
         be dependent upon obtaining certain regulatory approval for its
         pharmaceutical product, Product R, to commence commercial operations.

         PRINCIPLES OF CONSOLIDATION

         The consolidated financial statements include the accounts of the
         Company and its 99.6% owned subsidiary, Advance Viral Research, Ltd.
         (LTD), a Bahamian Corporation. LTD is presented in the financial
         statements under "Discontinued Operations" (See Notes 5 and 15). All
         significant intercompany accounts have been eliminated.

         DEVELOPMENT STAGE ENTERPRISE

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

         CASH AND CASH EQUIVALENTS

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

         PROPERTY AND EQUIPMENT

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



                                      F-16


                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         RESEARCH AND DEVELOPMENT

         Research and development costs are expensed as incurred by the Company.

         IMPAIRMENT OF LONG-LIVED ASSETS

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

         OTHER ASSETS

         Patent development costs are capitalized as incurred. Such costs will
         be amortized over the life of the patent, commencing at the time
         Product R is marketed. Loan costs include fees paid in connection with
         the February 2001 private equity line of credit agreement and are being
         amortized over the life of the agreement (see Note 7).

         INCOME TAXES

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

         ESTIMATED FAIR VALUE OF FINANCIAL INSTRUMENTS

         The information set forth below provides disclosure of the estimated
         fair value of the Company's financial instruments presented in
         accordance with the requirements of Statement of Financial Accounting
         Standards (SFAS) No. 107. Fair value estimates discussed herein are
         based upon certain market assumptions and pertinent information
         available to management as of December 31, 2002 and 2001. Since the
         reported fair values of financial instruments are based upon a variety
         of factors, they may not represent actual values that could have been
         realized as of December 31, 2002 and 2001 or that will be realized in
         the future.

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




                                      F-17


                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         CONCENTRATIONS OF CREDIT RISk

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

         STOCK-BASED COMPENSATION

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

         NET LOSS PER COMMON SHARE

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

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

         REVENUE RECOGNITION

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

         USE OF ESTIMATES

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



                                      F-18


                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         RECLASSIFICATIONS

         Certain amounts in the financial statements have been reclassified to
         conform to 2002 presentation.

         RECENT ACCOUNTING PRONOUNCEMENTS

         In November 2002 the FASB issued FASB Interpretation No., or FIN 45,
         GUARANTOR'S ACCOUNTING AND DISCLOSURE REQUIREMENTS FOR GUARANTEES,
         INCLUDING INDIRECT GUARANTEE OF INDEBTEDNESS OF OTHERS. FIN 45 requires
         that upon issuance of a guarantee, the guarantor must recognize a
         liability for the fair value of the obligation it assumes under that
         guarantee. FIN 45's provisions for initial recognition and measurement
         should be applied on a prospective basis to guarantees issued or
         modified after December 31, 2002. The guarantor's previous accounting
         for guarantees that were issued before the date of FIN 45's initial
         application may not be revised or restated to reflect the effect of the
         recognition and measurement provisions of the Interpretation. The
         disclosure requirements are effective for financial statements of both
         interim and annual periods that end after December 15, 2002. The
         Company is not a guarantor under any significant guarantees and thus
         this interpretation is not expected to have a significant effect on the
         Company's financial position or results of operations.

         On December 31, 2002, the FASB issued SFAS No. 148, ACCOUNTING FOR
         STOCK-BASED COMPENSATION - TRANSITION AND DISCLOSURE - AN AMENDMENT OF
         SFAS 123. The standard provides additional transition guidance for
         companies that elect to voluntarily adopt the accounting provisions of
         SFAS 123, ACCOUNTING FOR STOCK-BASED COMPENSATION. SFAS 148 does not
         change the provisions of SFAS 123 that permits entities to continue to
         apply the intrinsic value method of APB 25, ACCOUNTING FOR STOCK ISSUED
         TO EMPLOYEES. As the Company continues to follow APB 25, its accounting
         for stock-based compensation will not change as a result of SFAS 148.
         SFAS 148 does require certain new disclosures in both annual and
         interim financial statements. The required annual disclosures are
         effective immediately and have been included in Note 10 of the
         Company's consolidated financial statements. The new interim disclosure
         provisions will be effective in the first quarter of 2003.

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

         In April 2002, the FASB issued SFAS No. 145, RESCISSION OF FASB
         STATEMENTS NO. 4, 44, AND 64, AMENDMENT OF FASB STATEMENT NO. 13, AND
         TECHNICAL CORRECTIONS. SFAS 145 is effective for fiscal years beginning
         after May 15, 2002. The Company has not determined the impact that SFAS
         145 will have, if any, on its financial statements.




                                      F-19


                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

         RECENT ACCOUNTING PRONOUNCEMENTS (Continued)

         In August 2001, the FASB issued Statement No. 144, ACCOUNTING FOR THE
         IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS (SFAS 144), which addresses
         financial accounting and reporting for the impairment or disposal of
         long-lived assets. SFAS 144 supersedes Statement No. 121, ACCOUNTING
         FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE
         DISPOSED OF, and the accounting and reporting provisions of APB Opinion
         No. 30, REPORTING THE RESULTS OF OPERATIONS - REPORTING THE EFFECTS OF
         DISPOSAL OF A SEGMENT OF A BUSINESS, and EXTRAORDINARY, UNUSUAL AND
         INFREQUENTLY OCCURRING EVENTS AND TRANSACTIONS, for the disposal of a
         segment of a business. SFAS 144 retains the requirement in Opinion No.
         30 to report separately discontinued operations and extends that
         reporting to a component of an entity that either has been disposed of
         or is classified as held for sale. The Company adopted SFAS 144 on
         January 1, 2002 (see Notes 5 and 15).

         In July 2001, the FASB issued SFAS No. 141, BUSINESS COMBINATIONS, and
         SFAS No. 142, GOODWILL AND OTHER INTANGIBLE ASSETS which replace
         Accounting Principles Board Opinion Nos. 16, BUSINESS COMBINATIONS and
         17, INTANGIBLE ASSETS, respectively. SFAS No. 141 requires that the
         purchase method of accounting be used for all business combinations
         initiated after June 30, 2001, and that the use of the
         pooling-of-interests method be prohibited. SFAS No. 142 changes the
         accounting for goodwill from an amortization method to an
         impairment-only method. Amortization of goodwill, including goodwill
         recorded in past business combinations, will cease upon adoption of
         SFAS No. 142, which the Company will be required to adopt on January 1,
         2002. After December 31, 2001, goodwill can only be written down upon
         impairment discovered during annual tests for fair value, or discovered
         during tests taken when certain triggering events occur. The Company
         adopted SFAS 142 on January 1, 2002 and there was no impact on the
         results of operations or financial position of the Company.

         In March 2000, the Financial Accounting Standards Board (FASB) issued
         FASB Interpretation No. 44, ACCOUNTING FOR CERTAIN TRANSACTIONS
         INVOLVING STOCK COMPENSATION - AN INTERPRETATION OF APB OPINION NO. 25
         (FIN 44). FIN 44 clarifies the application of APB Opinion No. 25 and,
         among other issues, clarifies the following: the definition of an
         employee for purposes of applying APB Opinion No. 25; the criteria for
         determining whether a plan qualifies as a non-compensatory plan; the
         accounting consequences of various modifications to the terms of
         previously fixed stock options or awards; and the accounting for an
         exchange of stock compensation awards in a business combination. FIN 44
         was effective July 1, 2000, but certain conclusions in FIN 44 cover
         specific events that occurred after either December 15, 1998 or January
         12, 2000. The Company adopted FIN 44 in the third quarter of 2000 and
         there was no material impact on the Company's results of operations or
         financial position.

         In June 1999, the Financial Accounting Standards Board issued SFAS No.
         137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES -
         DEFERRAL OF THE EFFECTIVE DATE OF SFAS NO. 133 AN AMENDMENT OF SFAS NO.
         133, which deferred the effective date to all fiscal quarters of all
         fiscal years beginning after June 15, 2000. Historically, the Company
         has not entered into derivatives contracts to hedge existing risks or
         for speculative purposes. Adoption of the new standard on January 1,
         2001 had no effect on the financial statements.




                                      F-20


                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 2.  GOING CONCERN

         As indicated in the accompanying financial statements, the Company has
         suffered accumulated net losses of $51,137,805 since inception and is
         dependent upon registration of Product R for sale before it can begin
         commercial operations. The Company's cash position may be inadequate to
         pay all the costs associated with operations and the full range of
         testing and clinical trials required by the FDA. Unless and until
         Product R 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. The foregoing issues raise substantial
         doubt about the Company's ability to continue as a going concern.

         Management intends to continue to sell the Company's securities in an
         attempt to meet its cash flow requirements; however, no assurance can
         be given that equity or debt financing, if and when required, will be
         available.

NOTE 3.  PROPERTY AND EQUIPMENT




                                                 ESTIMATED USEFUL LIVES (YEARS)         2002           2001
                                                 ------------------------------         ----           ----
                                                                                           
         Land and improvements                                15                    $   34,550      $   34,550
         Building and improvements                            30                     1,410,165       1,233,524
         Machinery and equipment                               5                     3,394,431       3,170,759
                                                                                    ----------      ----------
                                                                                     4,839,146       4,438,833
         Less accumulated depreciation                                               2,433,185       1,438,250
                                                                                    ----------      ----------
                                                                                     2,405,961       3,000,583
         Less property and equipment included in
           assets held for sale, net (Note 5)                                          161,843         182,538
                                                                                    ----------      ----------
                                                                                    $2,244,118      $2,818,045
                                                                                    ==========      ==========



         The Company maintains certain property and equipment in Freeport,
         Bahamas. This property and equipment amounted to $429,782 as of
         December 31, 2002 and $433,119 as of December 31, 2001. Included with
         machinery and equipment is equipment purchased under capital leases of
         $135,537 during 2002. Depreciation expense for equipment under the
         capital leases was approximately $27,488, $10,368 and $7,729 in 2002,
         2001 and 2000, respectively. These amounts are included above.




                                      F-21




                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 4.  OTHER ASSETS



                                                                                 2002          2001
                                                                               --------      --------
                                                                                       
         Patent development costs                                              $897,385      $765,388
         Loan costs, net of accumulated amortization of $828,637
            and $794,559                                                         34,275        68,353
         Other                                                                    6,461        51,496
                                                                               --------      --------
                                                                                938,121       885,237
         Less other assets included in assets held for sale, net (Note 5)         6,461         6,461
                                                                               --------      --------
                                                                               $931,660      $878,776
                                                                               ========      ========



NOTE 5.  ASSETS HELD FOR SALE

         During 2002, the Board of Directors approved a plan to sell Advance
         Viral Research, Ltd. (LTD), the Company's Bahamian subsidiary. The
         Company decided to sell LTD due to the fact that the Company has
         completed construction of the facility in Yonkers, New York, which
         facility is capable to provide all functions previously provided by the
         Freeport, Bahamas plant. As required under SFAS 144, the net book
         values of the assets (LTD had no liabilities as of December 31, 2002
         other than an inter-company payable that has been eliminated) have been
         reflected on the balance sheet as held for sale and the operations have
         been included in discontinued operations for the years ended December
         31, 2002, 2001 and 2000 (see Note 15).

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

NOTE 6.  ACCRUED LIABILITIES

         Accrued bonus                  $ 50,000      $100,000

         Accrued 401k contribution        40,675        32,717

         Accrued payroll                  35,157        81,181

         Other                            11,814         9,658
                                        --------      --------
                                        $137,646      $223,556
                                        ========      ========




                                      F-22

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 7.  NOTE PAYABLE

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

         The aggregate maturities of the installment purchase agreement are as
follows:

           Year ending December 31:
              2003                                                 $25,165
              2004                                                   4,879
                                                                  --------
                                                                    30,044
           Less current portion                                     25,165
                                                                  --------
           Note payable - long-term portion                        $ 4,879
                                                                   =======


NOTE 8.  SECURITIES PURCHASE AGREEMENTS

         CONVERTIBLE DEBENTURES AND WARRANTS

         The Company issued warrants to purchase common stock in connection with
         the issuance of several convertible debentures sold during the years
         1997 to 2000, which debentures have all been fully converted. As of
         December 31, 2002, warrants to purchase approximately 3.2 million
         shares of the Company's common stock relating to these fully converted
         debentures were outstanding with expiration dates through 2009 at
         exercise prices ranging from $.199 to $.864.

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




                                      F-23

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 8.  SECURITIES PURCHASE AGREEMENTS (Continued)

         CONVERTIBLE DEBENTURES AND WARRANTS (Continued)

         o  On May 30, 2002, the Company sold to O. Frank Rushing and Justine
            Simoni, as joint tenants, $500,000 principal amount of its 5%
            convertible debenture. Based on the terms for conversion associated
            with this debenture, there was an intrinsic value associated with
            the beneficial conversion feature of approximately $55,000, which
            was recorded as deferred interest expense and is presented as a
            discount on the convertible debenture. This amount will be amortized
            over an expected holding period of two years. Of this amount,
            $36,000 has been amortized to interest expense at December 31, 2002.
            On June 3, 2002, these investors converted the first 20% ($100,000)
            into 909,091 shares of common stock at a conversion price of $0.11
            per share. In January 2003, the holder converted the second 20%
            ($100,000 plus interest of $3,041) into 1,030,411 shares of common
            stock at a conversion price of $.10 per share.

         o  On July 3, 2002, the Company sold to James F. Dicke II, who was then
            a member of its Board of Directors, $1,000,000 principal amount of
            its 5% convertible debenture. Based on the terms for conversion
            associated with this debenture, there was an intrinsic value
            associated with the beneficial conversion feature of approximately
            $111,000 which was recorded as deferred interest expense and is
            presented as a discount on the convertible debenture. This amount
            will be amortized over an expected holding period of two years. Of
            this amount, $68,000 has been amortized to interest expense at
            December 31, 2002. On July 3, 2002, Mr. Dicke converted the first
            20% of the debenture ($200,000) for 1,299,545 shares of common stock
            at a conversion price of $0.1539 per share. . In January 2003, the
            holder converted the second 20% ($200,000 plus interest of $5,041)
            of the debenture into 2,050,411 shares of common stock at a
            conversion price of $.10 per share.

         o  On July 15, 2002, the Company sold to Peter Lunder $500,000
            principal amount of the Company's 5% convertible debenture. Based on
            the terms for conversion associated with this debenture, there was
            an intrinsic value associated with the beneficial conversion feature
            of approximately $55,000, which was recorded as deferred interest
            expense and is presented as a discount on the convertible debenture.
            This amount will be amortized over an expected holding period of two
            years. Of this amount, $32,000 has been amortized to interest
            expense at December 31, 2002. In January 2003, the holder converted
            40% ($200,000 plus interest of $4,822) of the debenture into
            1,587,797 shares of common stock, the first 20% of which was
            converted at a conversion price of $.1818 per share, and the second
            20% of which was converted at a conversion price of $.10 per share.




                                      F-24

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 8.  SECURITIES PURCHASE AGREEMENTS (Continued)

         STOCK PURCHASE AGREEMENTS

         Pursuant to certain securities purchase agreements, the Company issued
         warrants to purchase common stock in connection with the sale of
         approximately 61,500,000 shares of common stock during the years 1998
         to 2001 for cash consideration of approximately $16,900,000. As of
         December 31, 2002, warrants to purchase approximately 16.5 million
         shares of the Company's common stock relating to these securities
         purchase agreements were outstanding with expiration dates through
         2006.

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

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

         On September 10, 2002, the Company issued and sold an aggregate of
         21,500,000 shares of its common stock pursuant to a securities purchase
         agreement with certain institutional investors for total proceeds of
         approximately $3,010,000, or $0.14 per share, along with warrants to
         purchase 16,125,000 shares of the Company's common stock at an exercise
         price of $0.25 per share, subject to adjustment, as described below. In
         addition, pursuant to a placement agent agreement with H. C. Wainwright
         & Co., Inc. ("HCW"), the Company paid HCW a placement fee of $150,500
         cash and issued to HCW 1,032,000 shares of its common stock. An
         adjustment provision in the warrants provides that 60 trading days
         following the original issue date of the warrants (the "First
         Determination Date"), a certain number of warrants shall become
         exercisable at $0.001. The number of shares for which the warrants are
         exercisable at $0.001 per share is equal to the positive difference, if
         any, between (i) $3,010,000 divided by the volume weighted average
         price ("VWAP") of the Company's common stock for the 60 trading days
         preceding the First Determination Date and (ii) 21,500,000. Upon 120
         trading days following the original issue date of the warrants (the
         "Second Determination Date"), a certain number of remaining warrants
         shall become exercisable at $0.001. The number of shares for which the
         Warrants are exercisable at $.001 per share is equal to the positive
         difference, if any, between (i) $3,010,000 divided by the VWAP of the
         Company's common stock for the 60 trading days preceding the Second
         Determination Date and (ii) 21,500,000. No adjustment will be made in
         the event that the VWAP for the 60 trading day period preceding the
         applicable determination date is $0.14 or greater (see Note 12).

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




                                      F-25

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 8.  SECURITIES PURCHASE AGREEMENTS (Continued)

         STOCK PURCHASE AGREEMENTS (Continued)

         value of all warrants issued under this agreement was estimated to be
         $368,000 (price per warrant ranging from $0.0485 to $0.0598 per
         warrant) based upon a financial analysis of the terms of the warrants
         using the Black-Scholes Pricing Model with the following assumptions:
         expected volatility of 114%; a risk free interest rate of 3.1% and an
         expected holding period of five years. This amount is being amortized
         to interest expense in the accompanying consolidated financial
         statements.

         On December 23, 2002 the Company received an additional $40,000 from
         various investors representing 500,000 shares of common stock or $0.08
         per share. These shares of common stock were issued during January 2003
         along with warrants dated January 2003 to purchase 300,000 shares of
         common stock at an exercise price of $0.12 per share until January
         2008. The fair value of all warrants issued under this agreement was
         estimated to be $16,000 (price per warrant $0.0528 per warrant) based
         upon a financial analysis of the terms of the warrants using the
         Black-Scholes Pricing Model with the following assumptions: expected
         volatility of 114%; a risk free interest rate of 3.1% and an expected
         holding period of five years. This amount is being amortized to
         interest expense in the accompanying consolidated financial statements.
         In connection with this transaction the Company paid a finders fee of
         $2,400 during January 2003 and issued warrants to purchase 30,000
         shares of common stock with an exercise price of $.12 for a period of
         five years.

         PRIVATE EQUITY LINE OF CREDIT

         On February 9, 2001, the Company entered into an equity line of credit
         agreement with Cornell Capital Partners, LP, an institutional investor,
         to sell up to $50,000,000 of the Company's common stock. Under such
         agreement, the Company may exercise "put options" to sell shares for
         certain prices based on certain average trading prices. Upon signing
         this agreement, the Company issued to its placement agent, May Davis
         Group, Inc., and certain investors, Class A warrants to purchase an
         aggregate of 5,000,000 shares of common stock at an exercise price of
         $1.00 per share, exercisable in part or whole until February 9, 2006,
         and Class B warrants to purchase an aggregate of 5,000,000 shares of
         common stock at an exercise price equal to the greater of $1.00 or 110%
         of the bid price on the applicable advance date. Such Class B warrants
         are exercisable pro rata with respect to the number of warrant shares
         as determined by the fraction of the advance payable on that date as
         the numerator and $20,000,000 as the denominator multiplied by
         5,000,000, until sixty months from the date of issuance.

         The fair value of the Class A warrants was estimated to be $1,019,153
         ($0.204 per warrant) based upon a financial analysis of the terms of
         the warrants using the Black-Scholes Pricing Model with the following
         assumptions: expected volatility of 80%; a risk free interest rate of
         6% and an expected holding period of five years. This amount is being
         amortized to interest expense in the accompanying consolidated
         financial statements.





                                      F-26

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 8.  SECURITIES PURCHASE AGREEMENTS (Continued)

         SUBSEQUENT FINANCINGS - STOCK PURCHASE AGREEMENTS

         During January 2003, pursuant to a Stock Purchase Agreement with
         various investors, the Company issued 1,550,000 shares of common stock
         at a negotiated price of $0.08 per share, for a total purchase price of
         $124,000 along with warrants to purchase 930,000 shares of common stock
         at an exercise price of $0.12 per share until January 2008. In
         connection with this transaction the Company paid a finders fee of
         $7,440 during January 2003 and issued warrants to purchase 93,000
         shares of common stock with an exercise price of $.12 for a period of
         five years.

         During March 2003, pursuant to a Stock Purchase Agreement with various
         investors, the Company issued 1,250,000 shares of common stock at a
         negotiated price of $0.08 per share, for a total purchase price of
         $100,000 along with warrants to purchase 750,000 shares of common stock
         at an exercise price of $0.12 per share through March 2007. In
         connection with this transaction the Company paid a finders fee of
         $6,000 during March 2003 and issued warrants to purchase 75,000 shares
         of common stock with an exercise price of $.12 for a period of five
         years.

NOTE 9.  COMMON STOCK SUBSCRIBED BUT NOT ISSUED

         Represents cash received during December 2002 pursuant to several
         private placements of securities with various investors ($876,000) for
         10,950,000 shares of common stock at a negotiated price of $0.08 per
         share. These shares of common stock were issued during January 2003. In
         addition, 100,000 shares of common stock were issued during January
         2003 pursuant to an employment agreement. The value of these shares on
         the date of issue was $7,900, which was recorded as compensation
         expense.

NOTE 10. COMMITMENTS AND CONTINGENCIES

         GENERAL

         POTENTIAL CLAIM FOR ROYALTIES

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

         PRODUCT LIABILITY

         The Company is unaware of any claims or threatened claims since Product
         R was initially marketed in the 1940's; however, one study noted
         adverse reactions from highly concentrated doses in guinea pigs.
         Therefore, the Company could be subjected to claims for adverse
         reactions resulting from the use of Product R. In the event any claims
         for substantial amounts were successful, they could have a material
         adverse effect on the Company's financial condition and on the
         marketability of Product R. During November 2002, the Company secured
         $3,000,000 of product liability coverage at a cost of approximately
         $24,000 per annum. In addition, during October 2002, the Company
         secured $3,000,000 in liability coverage for each of the three clinical
         trials in Israel at a cost of approximately $16,000. There can be no
         assurance that the



                                      F-27

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

         GENERAL (Continued)

         PRODUCT LIABILITY

         Company will be able to secure additional insurance in adequate amounts
         or at reasonable premiums if it determined to do so. Should the Company
         be unable to secure additional product liability insurance, the risk of
         loss to the Company in the event of claims would be greatly increased
         and could have a material adverse effect on the Company.

         LACK OF PATENT PROTECTION

         The Company has 10 issued U.S. patents, two issued Australian patents
         and one granted China patent for the use of Product R. The Company
         currently has 10 patent applications pending with the U.S. Patent
         Office and 15 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.

         STATUS OF FDA FILINGS

         On July 30, 2001, the Company submitted an Investigational New Drug
         (IND) application to the United States Food and Drug Administration
         (FDA) to begin Phase I clinical trials of Product R as a topical
         treatment for genital warts caused by human papilloma virus (HPV)
         infection. In September 2001, the FDA cleared the Company's IND
         application for Product R to begin Phase I clinical trials. The Company
         has commenced these clinical trials. The Phase I initial trials are
         placebo controlled, open label, dose escalation safety studies in
         healthy volunteers. These studies are being conducted in the United
         States under the supervision of GloboMax, LLC. On April 12, 2002, the
         Company successfully completed Phase 1 trials. Phase 2 trials are
         pivotal clinical investigations designed to establish the efficacy and
         safety of Product R. Currently, the Company does not have sufficient
         funds available to pursue the Phase 2 clinical trials of Product R as a
         topical treatment for genital warts caused by HPV infection.




                                      F-28

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

         STATUS OF ISRAEL CLINICAL TRIALS

         In June 2002 the Israeli Ministry of Health approved the testing of
         Product R in the following clinical trials using injectable Product R,
         which began during November 2002:

         o  PHASE I/PHASE II STUDY IN CACHECTIC PATIENTS NEEDING SALVAGE THERAPY
            FOR AIDS. These patients have failed highly active anti-retroviral
            therapy (HAART), remain on HAART, and require salvage therapy. The
            Company believes that Product R may have three major beneficial
            effects in patients with AIDS:

            o     First, its therapeutic effects on body wasting (cachexia) seen
                  in patients with AIDS:

            o     Second, the mitigation of the toxicity of drugs included in
                  HAART regimens for the treatment of AIDS:

            o     Third, the synergistic activity with drugs used in HAART
                  regimens to suppress the replication of HIV and increase the
                  CD4 and CD8 cell counts in patients with AIDS:

                 The Company believe that Product R may prove to be an important
                 "enabler" drug in the treatment of AIDS.

         o  PHASE I STUDY IN CACHECTIC PATIENTS WITH LEUKEMIA AND LYMPHOMA.
            Included are patients with acute lymphocytic leukemia, multiple
            Myeloma, Hodgkin's disease and non-Hodgkin's lymphoma.

         o  PHASE I STUDY IN CACHECTIC PATIENTS WITH SOLID TUMORS. Included are
            patients with solid tumors such as colonic, lung, breast, stomach
            and kidney cancers.

         The Company's objective for the three Israeli trials is to determine
         the safety, tolerance and metabolic characteristics of Product R.
         Although there can be no assurances, the Company anticipate that the
         clinical trials in Israel will help facilitate the planned
         investigational new drug (IND) application process for injectable
         Product R with the FDA.

         In April 2001, the Company formalized a 12 month agreement with
         Selikoff Center in Israel to develop clinical trials in Israel using
         Product R. It is anticipated that these trials will support future FDA
         applications. As of December 31, 2002, the Company paid $242,000 for
         such research.

         In September 2002, the Company entered into a contract with EnviroGene
         LLC, an affiliate of the Selikoff Center, to conduct, evaluate and
         maintain the scientific quality for the 3 clinical studies listed
         above. Under the terms of this agreement, EnviroGene will (1) finalize
         all Israeli government and hospital approval documents, (2) complete
         and organize the 3 clinical trials including establishing a network of
         scientists to perform said study/trial and initiate recruitment




                                      F-29

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

         STATUS OF ISRAEL CLINICAL TRIALS (Continued)

         of patients and (3) perform the studies/trials and evaluate the
         results. Total costs incurred by EnviroGene LLC in connection with
         these clinical trials are expected to be $1,551,000, of which $625,000
         has been paid through December 31, 2002.

         In the fourth quarter of 2002, the Company entered into various
         agreements supporting the clinical trials in Israel aggregating
         approximately $1,000,000 to be paid over a twelve-month period. These
         services include the monitoring and auditing of the clinical sites,
         hospital support and laboratory testing.

         In March 2003, the Company commenced discussions and began to draft
         protocols to expand the ongoing Israeli clinical trials of Product R
         for the treatment of AIDS patients (who have failed HAART and remain on
         HAART therapy) into late Phase II blinded, controlled clinical trials.

         On July 8, 2002, the Company extended an agreement with the Weizmann
         Institute of Science and Yeda its developmental arm in Israel, to
         conduct research on the effects of Product R on the immune system,
         especially on T lymphocytes. In addition, scientists will explore the
         effects of Product R in animal models. Under its provisions the study
         period is extended for another twelve months to July 7, 2003. Total
         costs incurred in connection with this research are expected to be
         $138,000, of which payments of $40,000 were made in July 2002 and
         November 2002.

         CONSULTING AND EMPLOYMENT AGREEMENTS

         HIRSCHMAN AGREEMENT

         In May 1995, the Company entered into a consulting agreement with
         Shalom Hirschman, M.D., Professor of Medicine of Mt. Sinai School of
         Medicine, New York, New York and Director of Mt. Sinai's Division of
         Infectious Diseases, whereby Dr. Hirschman was to provide consulting
         services to the Company through May 1997. The consulting services
         included the development and location of pharmacological and
         biotechnology companies and assisting the Company in seeking joint
         ventures with and financing of companies in such industries. In
         connection with the consulting agreement, the Company issued to Dr.
         Hirschman 1,000,000 shares of the Company's common stock and the option
         to acquire 5,000,000 shares of the Company's common stock for a period
         of three years as per the vesting schedule as referred to in the
         agreement, at a purchase price of $0.18 per share. As of September 30,
         2002, 900,000 shares have been issued upon exercise of these options
         for cash consideration of $162,000 under this Agreement.

         In March 1996, the Company entered into an addendum to the consulting
         agreement with Dr. Hirschman whereby Dr. Hirschman agreed to provide
         consulting services to the Company through May 2000 (the "Addendum").
         Pursuant to the Addendum, the Company granted to Dr. Hirschman and his
         designees options to purchase an aggregate of 15,000,000 shares of the
         Company's common stock for a three year period pursuant to the
         following schedule: (i) options to purchase 5,000,000 shares
         exercisable at any time and from time to time commencing March 24, 1996
         and ending February 17, 2008 at an exercise price of $0.19 per share;
         (ii) options to




                                      F-30

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)

         HIRSCHMAN AGREEMENT (Continued)

         purchase 5,000,000 shares exercisable at any time and from time to time
         commencing March 24, 1997 and ending February 17, 2008 at an exercise
         price of $0.27 per share; and (iii) options to purchase 5,000,000
         shares exercisable at any time and from time to time commencing March
         24, 1998 and ending February 17, 2008 at an exercise price of $0.36 per
         share. In addition, the Company has agreed to cause the shares
         underlying these options to be registered so long as there is no cost
         to the Company.

         Dr. Hirschman assigned to third parties unaffiliated with the Company
         options to acquire an aggregate of three million shares of the
         Company's common stock, all of which assigned options have expired and
         are no longer exercisable.

         Effective December 31, 2001, the remaining unexercised $0.27 and $0.36
         options, which had been extended to December 31, 2001, were further
         extended to June 30, 2002 at exercise prices of $0.28 and $0.37,
         respectively. As a result of this modification of the option terms, the
         fair value of the options was estimated to be $6,158 based on a
         financial analysis of the terms of the options using the Black-Scholes
         pricing model with the following assumptions: expected volatility of
         80%; risk free interest rate of 5%. This amount has been charged to
         compensation expense for options and warrants during the year ended
         December 31, 2001. Effective June 30, 2002, the remaining unexercised
         $0.27 and $0.36 options were extended to December 31, 2002. As a result
         of this modification of the option terms, the fair value of the options
         was estimated to be $3,895 based on a financial analysis of the terms
         of the options using the Black-Scholes pricing model with the following
         assumptions: expected volatility of 117%; risk free interest rate of
         1.7%. This amount has been charged to compensation expense for options
         and warrants during the quarter ended June 30, 2002.

         In May 2000, the Company and Dr. Hirschman entered into a second
         amended and restated employment agreement (the "Agreement") which
         supersedes in its entirety the July 1998 Employment Agreement. Pursuant
         to this Agreement, Dr. Hirschman was employed to serve as Chief
         Executive Officer and President of the Company until December 31, 2002,
         provided, however, the Agreement is extended automatically by one year,
         each year, unless notice of termination has been given by either Dr.
         Hirschman or the Company. In July 2002, the Company notified Dr.
         Hirschman that the Agreement will not be extended subsequent to
         December 31, 2004. The Agreement provides for Dr. Hirschman to receive
         an annual base salary of $361,000 (effective January 1, 2000), use of
         an automobile, major medical, disability, dental and term life
         insurance benefits for the term of his employment and for the payment
         of $100,000 to Dr. Hirschman on the earlier to occur of (i) the date an
         IND number is obtained from and approved by the FDA so that human
         research may be conducted using Product R; or (ii) the execution of an
         agreement relating to co-marketing pursuant to which one or more third
         parties commit to make payments to the Company of at least $15 million.
         On September 4, 2001, the Company received an IND number from the FDA.
         Therefore, of the $100,000 described above, $25,000 was paid as of
         December 31, 2001 with an additional $25,000 paid through September 30,
         2002.


                                      F-31

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)

         HIRSCHMAN AGREEMENT (Continued)

         The Agreement also provides for previously issued options to acquire
         23,000,000 shares of common stock at $0.27 per option share to be
         immediately vested as of the date of this agreement and are exercisable
         until February 17, 2008. The fair value of these options was estimated
         to be $5,328,441 ($0.2317 per option share) based upon a financial
         analysis of the terms of the options using the Black-Scholes Pricing
         Model with the following assumptions: expected volatility of 80%; a
         risk free interest rate of 6% and an expected life of 32 months. The
         Company is recognizing the $5,328,441 fair value of the options as
         compensation expense on a pro-forma basis over the 32 month service
         period (the term of the employment agreement).

         OTHER EMPLOYEES

         In connection with the employment of its Chief Financial Officer, the
         Company granted Alan Gallantar options to purchase an aggregate of
         4,547,880 shares of the Company's common stock. Such options have a
         term of ten years commencing October 1, 1999 through September 30, 2009
         and have an exercise price of $0.24255 per share. These options are
         fully vested.

         The fair value of these options was estimated to be $376,126 ($0.0827
         per option share) based upon a financial analysis of the terms of the
         options using the Black-Scholes Pricing Model with the following
         assumptions: expected volatility of 20%; a risk free interest rate of
         6% and an expected life of ten years. The Company has recognized the
         $376,126 fair value of the options as compensation costs on a pro-forma
         basis over a three year service period.

         On January 3 and December 29, 2000, the Company issued to certain other
         employees stock options to acquire an aggregate of 430,000 and 716,000
         shares of common stock at an exercise price of $0.21 and $0.33 per
         share, respectively. These options expire on January 2, 2010 and
         December 29, 2010, respectively, and vest in 20% increments at the end
         of each year for five years. The fair value of the these options was
         estimated to be $42,342 ($0.1721 per option share) and $117,893
         ($0.2788 per option share), respectively, based upon a financial
         analysis of the terms of the options using the Black-Scholes Pricing
         Model with the following assumptions: expected volatility of 80%; a
         risk free interest rate of 6%; an expected life of ten years; and a
         termination rate of 10%. The Company will recognize the fair value of
         the options as compensation costs on a pro-forma basis over a one year
         service period (the term of the employment agreements).




                                      F-32

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)

         OTHER EMPLOYEES (Continued)

         In May 2002, the Company granted to certain of its employees options to
         purchase 274,000 shares of the Company's common stock. Such options
         have an exercise price of $0.17 per share, vest in 20% increments over
         a five-year period commencing January 2003 through January 2012. The
         fair value of the these options was estimated to be $43,922 ($0.1603
         per option share) and based upon a financial analysis of the terms of
         the options using the Black-Scholes Pricing Model with the following
         assumptions: expected volatility of 117%; a risk free interest rate of
         4.38%; an expected life of approximately 10 years. The Company will
         recognize the fair value of the options as compensation costs on a
         pro-forma basis over approximately 10 years (the term of the options).

         OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
         BOARDS

         MEMBERS OF ADVISORY BOARDS

         In May 2002, the Company granted to members of its of the Scientific
         Advisory Board and Business Advisory Board options to purchase an
         aggregate of 2,250,000 shares of common stock at an exercise price of
         $0.12 per share, which options are exercisable 25% immediately, 25% on
         June 20, 2002, 25% on September 20, 2002 and 25% on December 20, 2002
         through May 5, 2010. The fair value of the options was estimated to be
         $246,822 ($0.1097 per option) based upon a financial analysis of the
         terms of the warrants using the Black-Scholes Pricing Model with the
         following assumptions: expected volatility of 115%; a risk free)
         interest rate of 4.88% and an expected holding period of eight years.
         This amount was charged to compensation expense for options and
         warrants during the year ended December 31, 2002. The Business Advisory
         Board was dissolved during December 2002.

         In September 2002, the Company granted to Sidney Pestka, M.D., a member
         of the Scientific Advisory Board, options to purchase 250,000 shares of
         common stock at an exercise price of $0.14 per share, which options are
         exercisable 25% immediately, 25% on December 18, 2002, 25% on March 18,
         2003 and 25% on June 18, 2003 through September 17, 2010. The fair
         value of the options was estimated to be $30,462 ($0.1218 per option)
         based upon a financial analysis of the terms of the warrants using the
         Black-Scholes Pricing Model with the following assumptions: expected
         volatility of 127%; a risk free interest rate of 4.38% and an expected
         holding period of eight years. This amount was charged to compensation
         expense for options and warrants during the year ended December 31,
         2002.

         In December 2002, the Company granted to members of its Scientific
         Advisory Board options to purchase an additional 1,500,000 shares of
         common stock at an exercise price of $0.075 per share, which options
         are exercisable 25% on March 20, 2003, 25% on June 20, 2003, 25% on
         September 20, 2003 and 25% on December 20, 2003 through December 20,
         2010. The fair value of the options was estimated to be $109,393
         ($0.0729 per option) based upon a financial analysis of the terms of
         the options using the Black-Scholes Pricing Model with the following




                                      F-33

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)

         OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
         BOARDS (Continued)

         assumptions: expected volatility of 114%; a risk free interest rate of
         4.14% and an expected holding period of eight years. This amount was
         charged to compensation expense for options and warrants during the
         year ended December 31, 2002.

         BOARD OF DIRECTORS

         In May 2002, the Company granted an aggregate of 4,150,000 options to
         purchase shares of the Company's Common stock to certain Members of the
         Board of Directors and various committees of the Board of Directors.
         The exercise price was $0.12 per share exercisable 25% immediately, 25%
         on June 20, 2002, 25% on September 20, 2002 and 25% on December 20,
         2002 through May 5, 2010. The fair value of the these options was
         estimated to be $455,249 ($0.1097 per option share) based upon a
         financial analysis of the terms of the options using the Black-Scholes
         Pricing Model with the following assumptions: expected volatility of
         115%; a risk free interest rate of 4.88% and an expected life of eight
         years. The Company will recognize the fair value of the options as
         compensation costs on a pro-forma basis over an eight year period (the
         term of the options).

         In June 2002, the Company granted to Roy S. Walzer, upon his becoming a
         member of the Board of Directors and member of various committees of
         the Board, options to purchase 528,800 shares of common stock at an
         exercise price of $0.295 per share, which options are exercisable 25%
         immediately, 25% on September 10, 2002, 25% on December 10, 2002 and
         25% on March 10, 2003 through June 9, 2010. The fair value of the these
         options was estimated to be $140,608 ($0.2659 per option share) based
         upon a financial analysis of the terms of the options using the
         Black-Scholes Pricing Model with the following assumptions: expected
         volatility of 115%; a risk free interest rate of 4.88% and an expected
         life of eight years. The Company will recognize the fair value of the
         options as compensation costs on a pro-forma basis over an eight year
         period (the term of the options).

         In July 2002, the Company granted to Paul Bishop, upon his becoming a
         member of the Board of Directors, options to purchase 238,356 shares of
         common stock at an exercise price of $0.17 per share,) which options
         are exercisable 25% immediately, 25% on October 29, 2002, 25% on
         January 29, 2003 and 25% on April 29, 2003 through July 28, 2010. The
         fair value of the these options was estimated to be $38,509 ($0.1616
         per option share) based upon a financial analysis of the terms of the
         options using the Black-Scholes Pricing Model with the following
         assumptions: expected volatility of 133%; a risk free interest rate of
         4.38% and an expected life of eight years. The Company will recognize
         the fair value of the options as compensation costs on a pro-forma
         basis over an eight year period (the term of the options).




                                      F-34

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)

         OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
         BOARDS (Continued)

         In September 2002, the Company granted to Richard Kent, upon his
         becoming a member of the Board of Directors, and member of various
         committees of the Board, options to purchase 241,096 shares of common
         stock at an exercise price of $0.14 per share, which options are
         exercisable 25% immediately, 25% on December 24, 2002, 25% on March 24,
         2003 and 25% on June 24, 2003 through September 23, 2010. The fair
         value of the these options was estimated to be $29,377 ($0.1218 per
         option share) based upon a financial analysis of the terms of the
         options using the Black-Scholes Pricing Model with the following
         assumptions: expected volatility of 127%; a risk free interest rate of
         4.38% and an expected life of eight years. The Company will recognize
         the fair value of the options as compensation costs on a pro-forma
         basis over an eight year period (the term of the options).

         In December 2002, the Company granted an aggregate of 10,600,000
         options to purchase shares of the Company's Common stock to certain
         Members of the Board of Directors and various committees of the Board
         of Directors. The exercise price was $0.075 per share are exercisable
         25% on March 20, 2003, 25% on June 20, 2003, 25% on September 20, 2003
         and 25% on December 20, 2003 through December 20, 2010. The fair value
         of the options was estimated to be $773,042 ($0.0729 per option) based
         upon a financial analysis of the terms of the options using the
         Black-Scholes Pricing Model with the following assumptions: expected
         volatility of 114%; a risk free interest rate of 4.14% and an expected
         holding period of eight years. The Company will recognize the fair
         value of the options as compensation costs on a pro forma basis over an
         eight-year period (the term of the options).

         Financial reporting of options granted to the Board of Directors,
         Hirschman, Gallantar and other employees has been prepared pursuant to
         the Company's policy of following APB No. 25, and related
         interpretations, in accounting for its employee stock options.
         Accordingly, the following pro forma financial information is presented
         to reflect amortization of the fair value of the options.




                                      F-35

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)

         OPTIONS GRANTED TO MEMBERS OF THE BOARD OF DIRECTORS AND ADVISORY
         BOARDS (Continued)





                                                                    YEAR ENDED DECEMBER 31,
                                                       ---------------------------------------------------
                                                            2002               2001               2000
                                                       ------------       ------------       ------------
                                                                                    
         Net loss as reported                          $(10,342,335)      $(11,715,568)      $ (9,354,664)
         Deduct: total stock-based
            compensation expense determined
            under fair value based method for all
            awards, net of related tax effects           (2,016,132)        (2,374,643)        (1,799,827)
                                                       ------------       ------------       ------------
         Pro forma net loss                            $(12,358,467)      $(14,090,211)      $(11,154,491)
                                                       ============       ============       ============
         Earnings per share - basic and diluted:
            As reported                                $      (0.02)      $      (0.03)      $      (0.03)
                                                       ============       ============       ============
            Pro forma                                  $      (0.03)      $      (0.04)      $      (0.03)
                                                       ============       ============       ============


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

         On November 4, 2002, Paul Bishop resigned from the Company's Board of
         Directors. Under the terms of his option agreement he is entitled to
         exercise options to purchase 119,178 shares of the Company's common
         stock until November 3, 2005.

         On November 4, 2002, James F. Dicke, II resigned from the Company's
         Board of Directors. Under the terms of his option agreement, he is
         entitled to exercise options to purchase 600,000 shares of the
         Company's common stock until November 3, 2005.

         On November 6, 2002, Jozef Straus resigned from the Company's Business
         Advisory Board. Under the terms of his option agreement he is entitled
         to exercise options to purchase 187,500 shares of the Company's common
         stock until November 5, 2005.

         During February 2003, Richard S. Kent resigned from the Company's Board
         of Directors. Under the terms of his option agreements he is entitled
         to exercise options to purchase 394,437 shares of the Company's common
         stock until February 2006.

         GLOBOMAX AGREEMENT

         On January 18, 1999, the Company entered into a consulting agreement
         with Globomax LLC to provide services at hourly rates established by
         the contract to the Company's Investigational New Drug application
         submission and to perform all work that is necessary to obtain FDA
         approval. In addition, GloboMax and its subcontractors are assisting
         the Company in conducting Phase I clinical trials for Product R. The
         contract was extended by mutual consent of both parties. The Company
         has paid approximately $5,031,000 for services rendered and
         reimbursement of expenses by GloboMax and its subcontractors through
         December 31, 2002.



                                      F-36

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)




NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

         CONSULTING AND EMPLOYMENT AGREEMENTS (Continued)

         HARBOR VIEW AGREEMENT

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

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

         DISTRIBUTION AGREEMENTS

         The Company currently is a party to separate agreements with four
         different entities, whereby the Company has granted exclusive rights to
         distribute Product R in the countries of Canada, China, Japan, Macao,
         Hong Kong, Taiwan, Mexico, Argentina, Bolivia, Paraguay, Uruguay,
         Brazil and Chile. Pursuant to these agreements, distributors are
         obligated to cause Product R to be approved for commercial sale in such
         countries and, upon such approval, to purchase from the Company certain
         minimum quantities of Product R to maintain the exclusive distribution
         rights. Leonard Cohen, a former consultant to the Company, has informed
         the Company that he is an affiliate of two of these entities. To date,
         the Company has recorded revenue classified as other income for the
         sale of territorial rights under the distribution agreements. The
         Company has made no sales under the distribution agreements other than
         for testing purposes.



                                      F-37

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

         CONSTRUCTION COMMITMENT

         In November 1999, the Company entered into an agreement with an
         unaffiliated third party to construct leasehold improvements at an
         approximate cost of $380,000 for research and development purposes at
         the Company's Yonkers, New York facilities which has been completed as
         of June 30, 2001. In October 2000, the Company entered into another
         agreement with the unaffiliated third party to construct additional
         leasehold improvements at an approximate cost of $325,000 for research
         and development purposes at the Company's Yonkers, New York facilities,
         of which the entire amount has been incurred as of December 31, 2001.
         During 2002, additional costs were incurred to complete leasehold
         improvements for research and development purposes of approximately
         $222,000, which has not been paid at December 31, 2002.

         SOFTWARE ACQUISITION

         During 2001, the Company contracted with a software vendor at a cost of
         approximately $500,000 to acquire and install an SAP system for
         accounting, administrative and production control. As of December 31,
         2001, the entire cost was incurred and was capitalized as an additional
         element of cost of the computer equipment.

         LEASES

         CAPITAL LEASES

         During 1998, the Company entered into a purchase lease agreement for
         equipment totaling $222,318. The lease calls for monthly payments of
         $4,529 for 60 months commencing on September 1998 and expiring on July
         2003. During 1999, the Company entered into a purchase lease agreement
         for equipment totaling $38,645. The lease calls for monthly payments of
         $965 for 48 months commencing in August 1999 and expiring in July 2003.
         During 2000, the Company entered into a purchase lease agreement for
         equipment totaling $13,197. The lease calls for monthly payments of
         $447 for 36 months commencing in January 2001 and expiring in December
         2003. During 2002, the Company entered into a purchase lease agreement
         for equipment totaling $146,672. The lease calls for monthly payments
         of $5,903 for 24 months commencing in February 2002 and expiring in
         January 2004.

         Future minimum capital lease payments and the net present value of the
         future minimum lease payments at December 31, 2002 are as follows:

              Year ending December 31:
                 2003                                              $ 108,764
                 2004                                                  5,903
                                                                   ---------
              Total minimum lease payments                           114,667
              Less amount representing interest                        4,114
                                                                   ---------
              Net present value of future minimum lease payments     110,553
              Less current maturities                                104,719
                                                                   ---------
                                                                   $   5,834
                                                                   =========




                                      F-38


                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)



NOTE 10. COMMITMENTS AND CONTINGENCIES (Continued)

         LEASES (Continued)

         OPERATING LEASES

         Management executed a non-cancelable lease for new office space in
         Florida on January 1, 1996, expiring on December 31, 1999 at
         approximately $17,000 annually. The Company has three options to renew
         for an additional one year per option. Management has exercised its
         second option for the year 2001. Effective December 2001, the Company
         closed its Florida office.

         On December 30, 1998, the Company executed an amendment to its existing
         lease dated April 1997 for the laboratory facilities in Yonkers, New
         York. The lease on the additional space is effective May 1, 1999. The
         new lease adds 10,550 square feet (for a total of 16,650 square feet)
         and extends its term until April 2005. Annual rent on the original
         lease is approximately $85,000. Rent for the additional facilities is
         approximately $175,000. Total rental commitment for the Yonkers
         facilities will be $260,000 until May 1, 2002 at which time it will
         increase to approximately $290,000.

         The Company leased an automobile in November 1999 for 39 months at $711
         per month expiring in January 2003. The Company entered into a new 39
         month lease for $716 per month, starting in February 2003 and expiring
         in April 2006.

         Total lease expense for the years ended December 31, 2002, 2001 and
         2000 amounted to $298,763, $263,609 and $296,064, respectively.

         Future minimum lease commitments as of December 31, 2002 are as
         follows:

         Year ending December 31:
            2003                                    $ 299,000
            2004                                      299,000
            2005                                      105,000
                                                    ---------
              Total                                 $ 703,000
                                                    =========


NOTE 11. SEVERANCE AGREEMENTS

         On December 3, 2001, William Bregman, Bernard Friedland and Louis
         Silver resigned as officers and directors of the Company upon the terms
         and conditions of separate severance agreements. The resignations were
         not due to any disagreement with the Company or any matter relating to
         the Company's operations, policies or practices.

         In connection with their resignation, the Company paid $150,000 to each
         of Messrs. Bregman and Friedland and $2,500 to Mr. Silver. In
         connection with the severance agreements, the Company obtained a loan
         in the amount of $200,000 from the Company's Chief Financial Officer,
         as evidenced by a demand promissory note. The note was repaid on
         December 17, 2001.



                                      F-39

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 12. LITIGATION

         In December 2002 the Company filed suit in the Circuit Court of the
         11th Judicial Circuit of Florida charging that certain investors
         "misrepresented their intentions in investing in the Company" and
         "engaged in a series of manipulative activities to depress the price of
         Advanced Viral stock." The Company alleges that the defendants sought
         to "guarantee they would be issued significantly more shares of ADVR
         common stock" as a result of warrant repricing provisions of a
         September 2002 financing agreement. The Company is seeking a judgment
         for damages, interest and costs.

         The complaint names SDS Merchant Fund, L.P., a Delaware limited
         partnership; Alpha Capital, A.G., located in Vaduz, Lichtenstein;
         Knight Securities, L.P., a limited partnership conducting securities
         business in Florida; Stonestreet Limited Partnership located in Canada;
         and Bristol Investment Fund, LTD., whose principal place of business is
         in Grand Cayman, Cayman Islands, among others. The complaint claims
         that the "defendants have each, at times acting individually, and at
         times acting in concert with at least one or more of each other,"
         engaged in practices that violate sections of the Florida Securities
         and Investor Protection Act.

         Also named as a plaintiff in the case is William B. Bregman, a resident
         of Miami-Dade County, Florida, and one of the largest shareholders of
         the Company. The complaint alleges that Mr. Bregman suffered losses of
         approximately $3.9 million as a result of the stock manipulation
         scheme.

         The suit is related to an agreement, announced September 9, 2002,
         pursuant to which the Company issued and sold to certain investors
         21,500,000 shares of its common stock for total gross proceeds of
         $3,010,000, or $.14 per share. The Company also issued warrants to
         purchase an aggregate of 16,125,002 shares of the Company's common
         stock, which were covered by provisions that allowed for an adjustment
         of the warrant exercise price. The complaint charges the defendants
         with manipulating the share price to take favorable advantage of these
         warrant pricing provisions.

         Following the initiation of the Company's lawsuit in Florida, three of
         the purchasers in the September financing (Alpha Capital, A.G., Bristol
         Investment Fund, Ltd. and Stonestreet Limited Partnership (the "Alpha
         Plaintiffs") filed separate lawsuits in the U.S. District Court for the
         Southern District of New York. The suits sought a preliminary
         injunction and other relief for breach of contract. The District Court
         entered an order on February 11, 2003 upon a motion of the Alpha
         Plaintiffs, that required that (i) the Company deliver to the Alpha
         Plaintiffs the shares of Company common stock issuable upon exercise of
         the warrants; (ii) the Alpha Plaintiffs post a bond of either $100,000
         or the market value of the warrant shares, whichever is higher for each
         group of warrants as of the first and second determination dates; and
         (iii) all the proceeds from the sale of the warrant shares be placed in
         escrow pending final resolution of the litigation. Within ten days of
         the entry of the order, the Company moved to alter/amend the judgment
         and/or reconsideration of the Court's order requesting relief from the
         Court's order. The Court denied this motion and ordered the Company to
         immediately deliver the warrant shares to the Alpha Plaintiffs upon
         their payment of the exercise price and posting of a bond, without
         further delay and no later than April 8, 2003. The Company has appealed
         the order denying the motion for reconsideration. The Company continues
         to consider and pursue all of its options relating to the litigation,
         including resolution through settlement.



                                      F-40

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 13. STOCKHOLDERS' EQUITY

         During 2001, the Company issued 23,082,245 shares of common stock for
         an aggregate consideration of $5,895,491. The amounts were comprised of
         the issuance of 22,845,834 shares of common stock for cash of
         $5,765,000, issuance of 60,000 shares common stock pursuant to the
         exercise of options for $18,000, issuance of 76,411 shares of common
         stock pursuant to the cashless exercise of warrants for $77,491 and
         issuance of 100,000 shares of common stock in exchange for services for
         $35,000.

         During 2002, Company issued 52,227,127 shares of common stock for an
         aggregate consideration of $6,529,608. The amounts were comprised of
         the issuance of 50,018,491 shares of common stock for cash of
         $6,229,608 and issuance of 2,208,636 shares of common stock upon
         conversion of $300,000 of convertible debentures.

NOTE 14. INCOME TAXES

         The Company accounts for income taxes under the provisions of Statement
         of Financial Accounting Standards (SFAS) No. 109, ACCOUNTING FOR INCOME
         TAXES. SFAS No. 109 is an asset and liability approach for computing
         deferred income taxes.

         As of December 31, 2002 and 2001, the Company had net operating loss
         carryforwards for Federal income tax reporting purposes amounting to
         approximately $40,100,000 and $31,000,000, which expire in varying
         amounts to 2021.

         The Company presently has temporary differences between financial
         reporting and income tax reporting relating to the amortization of
         warrant costs, compensation expense for the extension of options,
         depreciation and patent costs.

         The components of the deferred tax asset as of December 31, 2002 and
         2001 were as follows:



                                                               2002             2001
                                                          -----------      -----------
                                                                     
         Benefit of net operating loss carryforwards      $13,634,000      $11,730,000
         Less valuation allowance                          13,634,000       11,730,000
                                                          -----------      -----------
         Net deferred tax asset                           $        --      $        --
                                                          ===========      ===========



         As of December 31, 2002 and 2001, sufficient uncertainty exists
         regarding the realizability of these operating loss carryforwards and,
         accordingly, a 100% valuation allowance has been established regarding
         these deferred tax assets.

         In accordance with certain provisions of the Tax Reform Act of 1986, a
         change in ownership of greater than 50% of a corporation within a three
         year period will place an annual limitation on the corporation's
         ability to utilize its existing tax benefit carryforwards. The
         Company's utilization of its tax benefit carryforwards may be further
         restricted in the event of future changes in the ownership of the
         Company from the exercise of options and warrants or other future
         issuances of common stock.



                                      F-41

                          ADVANCED VIRAL RESEARCH CORP.
                          (A DEVELOPMENT STAGE COMPANY)

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                   (Continued)


NOTE 15. DISCONTINUED OPERATIONS

         SFAS No. 144 requires the operating results of any assets with their
         own identifiable cash flows that are disposed of or held for sale to be
         removed from income from continuing operations and reported as
         discontinued operations. The operating results for any such assets for
         any prior periods presented must also be reclassified as discontinued
         operations. See Note 1 and Note 5 for more detail regarding the planed
         sale of LTD and classification as held for sale during 2002. The
         following table details the amounts reclassified to discontinued
         operations:



                                                                                                  INCEPTION
                                                                                                (FEBRUARY 20,
                                                             YEAR ENDED DECEMBER 31,               1984) TO
                                             ----------------------------------------------       DECEMBER 31,
                                                2002              2001              2000              2002
                                            -----------       -----------       -----------       -----------
                                                                                        
         Revenues                           $        --       $        --       $        --       $        --
                                            -----------       -----------       -----------       -----------
         Costs and Expenses:
            General and administrative          181,348           238,311           207,941         1,310,350
            Depreciation                         20,062            21,048            16,165           271,498
                                            -----------       -----------       -----------       -----------
                                                201,410           259,359           224,106         1,581,848
                                            -----------       -----------       -----------       -----------
         Loss from Operations                  (201,410)         (259,359)         (224,106)       (1,581,848)
         Other Income                               256               245               245             4,655
                                            -----------       -----------       -----------       -----------
            Discontinued operations         $  (201,154)      $  (259,114)      $  (223,861)      $(1,577,193)
                                            ===========       ===========       ===========       ===========



NOTE 16. 401(K) PLAN

         In December 1999, the Company adopted a 401(k) plan that allows
         eligible employees to contribute up to 20% of their salary, subject to
         annual limits imposed by the Internal Revenue Service. The Company
         matches 50% of the first 6% of the employee contributions in common
         stock and may, at its discretion, make additional contributions based
         upon earnings. In March 2001, the Company funded the 401(k) plan with
         $23,757 to enable the 401(k) plan to purchase shares of common stock on
         the open market to contribute to the 401(k) plan for the employer match
         for the year ended December 31, 2001. At December 31, 2002 the Company
         accrued $40,675 to fund the 401k plan representing the Company's match
         for the plan year 2002. The Company intends to purchase common stock in
         the open market at prevailing market prices to satisfy its 2002
         matching contribution obligations. In March 2003, the Company amended
         the terms of the Company's 401(k) plan to terminate the obligation to
         make matching contributions.



                                      F-42