10-Q 1 g08965e10vq.htm ADVANCED VIRAL RESEARCH CORP. Advanced Viral Research Corp.
Table of Contents

 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
     
x
  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
   
 
  For the quarterly period ended June 30, 2007
 
   
 
  OR
 
   
o
  TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
   
 
  For the transition period from          to          
Commission File Number 000-18293
ADVANCED VIRAL RESEARCH CORP.
(Exact name of registrant as specified in its charter)
     
Delaware   59-2646820
     
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification Number)
     
200 Corporate Boulevard South, Yonkers, New York   10701
     
Address of principal executive offices)   Zip Code
(914) 376-7383
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesx No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Securities Exchange Act of 1934).
Large accelerated filer o   Accelerated filer o   Non-accelerated filer x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
Indicate the number of shares of the registrant’s Common Stock outstanding as of the close of business on August 14, 2007: 739,705,158
 
 

 


 

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 EX-3.1 Corrected Amended and Restated Certificate of Incorporation
 EX-31.1 Section 302 Certification of CEO
 EX-31.2 Section 302 Certification of CFO
 EX-32.1 Section 906 Certification of CEO
 EX-32.2 Section 906 Certification of CFO
As used in this Quarterly Report on Form 10-Q, the terms “we,” “us,” “our,” the “Company” and “Advanced Viral” mean Advanced Viral Research Corp. and its subsidiaries (unless the context indicates a different meaning).

 


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ADVANCED VIRAL RESEARCH CORP.
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
     The condensed consolidated financial statements include the accounts of the Company and have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. In the opinion of the Company, all adjustments (consisting solely of normal recurring adjustments) necessary to present fairly the information in the following unaudited consolidated financial statements of the Company have been included. The results of operations for such interim periods are not necessarily indicative of the results for the full year.
     These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s latest Annual Report on Form 10-K.

 


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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONDENSED CONSOLIDATED BALANCE SHEETS
                 
    June 30,     December 31,  
    2007     2006  
ASSETS
               
Current Assets:
               
Cash and cash equivalents
  $ 1,382,904     $ 1,042,279  
Prepaid insurance
    119,349       52,023  
Other current assets
    40,823       7,981  
 
           
Total current assets
    1,543,076       1,102,283  
 
               
Property and Equipment, Net
    27,221       54,081  
Assets Held for Sale
    114,251       112,319  
Other Assets
    160,078       94,392  
 
           
Total assets
  $ 1,844,626     $ 1,363,075  
 
           
 
               
LIABILITIES AND STOCKHOLDERS’ EQUITY
               
Current Liabilities:
               
Accounts payable
  $ 107,528     $ 65,151  
Accrued liabilities
    91,580       103,984  
 
           
Total current liabilities
    199,108       169,135  
 
           
Long Term Debt
               
Convertible Debenture — Net
    208,203        
 
           
 
               
Commitments and Contingencies
               
 
               
Stockholders’ Equity:
               
Common stock, $.00001 par value:
               
2,000,000,000 shares as of June 30, 2007 and 1,000,000,000 shares as of December 31, 2006 authorized, 739,705,158 shares as of June 30, 2007 and 696,587,734 shares issued and outstanding as of December 31, 2006.
    7,397       6,966  
 
               
Undesignated preferred stock, $0.00001 par value:
               
50,000,000 shares authorized as of June 30, 2007, no shares authorized as of December 31, 2006, no shares issued and outstanding
           
Additional paid-in capital
    76,093,806       73,362,626  
 
               
Deficit accumulated during the development stage
    (74,663,888 )     (72,175,652 )
 
           
Total stockholders’ equity
    1,437,315       1,193,940  
 
           
Total liabilities and stockholders’ equity
  $ 1,844,626     $ 1,363,075  
 
           
See notes to condensed consolidated financial statements.

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                         
                                    Inception  
                                    (February 20,  
    Three Months Ended     Six Months Ended     1984) to  
    June 30,     June 30,     June 30,  
    2007     2006     2007     2006     2007  
 
            `                          
Revenues
  $     $     $     $     $ 231,892  
 
                             
 
                                       
Costs and Expenses:
                                       
Research and development
    189,006       570,317       374,906       1,067,575       25,212,381  
General and administrative
    448,070       399,794       1,072,300       1,094,956       33,376,185  
Cost in connection with settlement of distribution agreement
                                687,005  
Depreciation and amortization
    5,930       54,757       14,843       114,834       4,321,753  
Impairment charge — patent cost
                            1,081,085  
 
                             
 
    643,006       1,024,868       1,462,049       2,277,365       64,678,409  
 
                             
 
                                       
Loss from Operations
    (643,006 )     (1,024,868 )     (1,462,049 )     (2,277,365 )     (64,446,517 )
 
                             
 
                                       
Other Income (Expense):
                                       
Interest income
    9,621       30,525       25,191       65,035       1,329,363  
Other income
                            120,093  
Interest expense
    (893,029 )     (1,964 )     (1,046,876 )     (2,617 )     (9,808,390 )
Severance expense — former directors
                            (302,500 )
 
                             
 
    (883,408 )     28,561       (1,021,685 )     62,418       (8,661,434 )
 
                             
 
                                       
Loss from Continuing Operations
    (1,526,414 )     (996,307 )     (2,483,734 )     (2,214,947 )     (73,107,951 )
Loss from Discontinued Operations
    (1,016 )     (22,248 )     (4,502 )     (25,123 )     (1,555,937 )
 
                             
 
                                       
Net Loss
  $ (1,527,430 )   $ (1,018,555 )   $ (2,488,236 )   $ (2,240,070 )   $ (74,663,888 )
 
                             
 
                                       
Net Loss Per Common Share
                                       
Basic and Diluted:
                                       
Continuing operations
  $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00 )        
Discontinued operations
    (0.00 )     (0.00 )     (0.00 )     (0.00 )        
 
                               
Net loss
  $ (0.00 )   $ (0.00 )   $ (0.00 )   $ (0.00 )        
 
                               
 
                                       
Weighted Average Number of Common Shares Outstanding
    721,411,972       696,587,734       699,676,065       696,587,734          
 
                               
See notes to condensed consolidated financial statements.

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                         
                    Inception  
                    (February 20,  
    Six Months Ended     1984) to  
    June 30,     June 30,  
    2007     2006     2007  
Cash Flows from Operating Activities:
                       
Net loss
  $ (2,488,236 )   $ (2,240,070 )   $ (74,663,888 )
 
                 
 
                       
Adjustments to reconcile net loss to net cash used by operating activities:
                       
Depreciation and amortization
    14,843       118,552       4,932,530  
Impairment charge — patent cost
                1,081,085  
Cost in connection with settlement of distribution agreement
                687,005  
Amortization of debt issuance costs
    110,515             1,414,039  
Amortization of beneficial conversion feature of convertible shares
    467,127             5,890,706  
Amortization of discount on warrants
    411,839             2,093,372  
Amortization of discount on warrants — consulting services
                230,249  
Amortization of deferred compensation cost
                760,500  
Issuance of common stock for debenture interest
                237,486  
Issuance of common stock for services
                1,586,000  
Compensation expense for options and warrants
    193,863       86,377       4,287,276  
Changes in operating assets and liabilities:
                       
(Increase) decrease in other current assets
    (88,549 )     4,007       (168,315 )
(Increase) decrease in other assets
          (602 )     (825,736 )
Increase (decrease) in accounts payable and accrued liabilities
    84,958       (90,696 )     260,295  
 
                 
Total adjustments
    1,194,596       117,638       22,466,492  
 
                 
Net cash used by operating activities
    (1,293,640 )     (2,122,432 )     (52,197,396 )
 
                 
 
                       
Cash Flows from Investing Activities:
                       
Purchase of investments
                (6,292,979 )
Proceeds from sale of investments
                6,292,979  
Patent costs incurred
                (1,239,119 )
Acquisition of property and equipment
    (1,535 )     (5,722 )     (4,405,705 )
 
                 
Net cash (used) provided by investing activities
    (1,535 )     (5,722 )     (5,644,824 )
 
                 
 
                       
Cash Flows from Financing Activities:
                       
Proceeds from exercise of warrants
    312,000             312,000  
Proceeds from issuance of convertible debt
    1,323,800             15,893,188  
Proceeds from sale of securities, net of issuance costs
                43,410,584  
Proceeds from common stock subscribed but not issued
                1,163,900  
Proceeds from exercise of stock options
                9,000  
Payments under litigation settlement
                (1,050,647 )
Payments under capital lease
                (420,581 )
Payments on note payable
                (111,320 )
Recovery of subscription receivable written off
                19,000  
 
                 
Net cash provided by financing activities
    1,635,800             59,225,124  
 
                 
 
                       
Net Increase (Decrease) in Cash and Cash Equivalents
    340,625       (2,128,154 )     1,382,904  
 
                       
Cash and Cash Equivalents, Beginning
    1,042,279       4,615,581        
 
                 
 
                       
Cash and Cash Equivalents, Ending
  $ 1,382,904     $ 2,487,427     $ 1,382,904  
 
                 
 
                       
Supplemental Disclosure of Non-Cash Financing Activities:
                       
Cash paid during the year for interest
  $ 2,410     $ 2,617          
 
                   
See notes to condensed consolidated financial statements.

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION
    The accompanying unaudited consolidated financial statements as of June 30, 2007 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information on Form 10-Q and reflect all adjustments which, in the opinion of management, are necessary for a fair presentation of the financial position as of June 30, 2007 and results of operations for the three and six months ended June 30, 2007 and 2006 and cash flows for the six months ended June 30, 2007 and 2006. All such adjustments are of a normal recurring nature.
 
    The results of operations for interim periods are not necessarily indicative of the results to be expected for a full year. The statements should be read in conjunction with the audited consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2006.
 
    Certain amounts in prior year financial statements have been reclassified for comparative purposes to conform to the presentation in the current year financial statements.
NOTE 2. GOING CONCERN
    The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As shown in the accompanying financial statements, the Company has suffered accumulated net losses of $74,663,888 since inception and is dependent upon registration of AVR118 for sale before it can begin commercial operations. The Company’s current cash position is inadequate to pay all the costs associated with operations and the full range of testing and clinical trials required by the FDA. Unless and until AVR118 is approved for sale in the United States or another industrially developed country, the Company will be dependent upon the continued sale of its securities, debt or equity financing for funds to meet its cash requirements. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. No assurance can be given that the Company will be able to sustain its operations until FDA approval of AVR118 for commercial sale is granted or that any approval will ever be granted. Management is currently seeking equity and debt financing, and exploring the sale of certain assets.
 
    In the first six months of 2007 the Company issued convertible debt for which it received net cash proceeds of approximately $1,323,800 and also received proceeds of $312,000 from the exercise of 10,000,000 warrants under terms of the convertible debt issue, as discussed in further detail in Note 7. During 2006, the Company did not receive any proceeds from any debt or equity transactions.
 
    The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. RESEARCH AND DEVELOPMENT, CLINICAL TRIALS AND DRUG TESTING
    Summary
 
    In November 2004 the Company submitted an Investigational New Drug (IND) application to the FDA. The purpose of the application was to obtain approval from the FDA to begin a clinical study in the United States for AVR118. In December 2004, the FDA notified the Company that the IND application was allowed and that it could proceed with its planned study.
 
    Conducting the clinical trials of AVR118 will require significant cash expenditures. AVR118 may never be approved for commercial distribution by any country. Because the Company’s research and development expenses and clinical trial expenses will be charged against earnings for financial reporting purposes, the Company expects that losses from operations will continue to be incurred for the foreseeable future. The Company currently does not have sufficient funds to complete all phases of clinical trials of AVR118 which are necessary to permit the commercial sale of AVR118. The Company is attempting to secure funds through the sale of its securities.
 
    The Company cannot provide assurances that it will acquire additional financial resources to complete all phases of the clinical trials of AVR118, or, if it acquires such resources, that it will do so on favorable terms. It is possible that the results of clinical trials will not prove that AVR118 is safe and effective. It is also possible that the FDA will not approve the sale of AVR118 in the United States if the Company submits a New Drug Application, or NDA. It is not known at this time how later stage clinical trials will be conducted, if at all. Even if the data show that AVR118 is safe and effective, obtaining approval of the NDA could take years and require financing of amounts not presently available to the Company.
    Wound Healing and Phase II Dermatological Study
 
    In April 2006, the Company commenced a study at the University of Miami to preliminarily test the efficacy of topically applying AVR118 to wounds in animal models (e.g. pigs). A report received from the University of Miami in August 2006 analyzing the data from the three pig study indicated that the topical application of AVR118 accelerates the rate at which wounds heal. Although preliminary, the Company believed that further study was merited. Based on the results from the August 2006 report from the University of Miami, the Company filed an amendment with the FDA to its existing IND to expand the use of AVR118 to include a Phase II dermatological study involving topical therapy. Management believes these applications could potentially be used to treat a wide variety of common dermatologic conditions, such as micro-dermabrasion.
 
    In January 2007, the Company began the Phase II dermatological study using a topically applied spray formulation of AVR118 as a wound healing agent. The Phase II dermatological study involves patients with common skin problems ranging from acne scars to surgical wounds, and will study how

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. RESEARCH AND DEVELOPMENT, CLINICAL TRIALS AND DRUG TESTING (Continued)
    Wound Healing and Phase II Dermatological Study (Continued)
 
    AVR118’s ability to promote tissue repair and regeneration can be put to use in the clinical setting, and analyze the efficacy of AVR118 as a topical therapy. The protocol for the dermatological study provides for 12-20 patients to be treated with AVR118. While there can be no assurances, preliminary findings from the study show that topical treatment with AVR118 appears to have clinical activity in reducing inflammation and redness associated with surgical incisions or dermatologic dermabrasion. The first cohort of patients examined underwent dermabrasion for the treatment of severe acne. Following the procedure, AVR118 was applied directly to one half of the inflamed facial tissue. The other half of the face remained untreated. A preliminary examination of five patients demonstrated visible improvement on the treated side of their face. The treated area showed less inflammation as well as a reduction in the redness and swelling of acne lesions. The second cohort of patients examined underwent plastic surgery that resulted in a minimum of two bilateral surgical incisions. AVR118 was applied topically to one wound and the second wound served as an untreated control. In early results from two patients, one patient demonstrated a decrease in inflammation on the treated side. Total costs incurred through June 30, 2007 relating to this study were approximately $12,800.
 
    Phase II Cancer Study
 
    In February 2005, the Company entered into an agreement with the Biomedical Research Alliance (BRANY), as agent for a network of hospitals, pursuant to which the hospitals would conduct a Phase II clinical study to evaluate the effect of a 4.0 ml dose of AVR118 administered to patients with systemic symptoms related to advanced cancer who are not receiving chemotherapy. The Company experienced difficulty accruing patients for the Phase II cancer study and in December 2005, amended the protocol to permit patients undergoing third-line chemotherapy treatment to become participants in the Phase II cancer study, in order to facilitate patient accrual. Only eleven patients had been enrolled in the Phase II cancer study. The total cost relating to this Phase II cancer study was approximately $478,000.
 
    In the third quarter of 2006, the Company commenced discussions with several teaching centers in the U.S. and Canada to expand the study to include patients in the earlier stages of disease to determine the efficacy of AVR118 on such patients. The Company believes transitioning the study to such centers would enable it to accelerate enrollment in an expanded program where higher patient accrual rates can be achieved, and to expand the Company’s network of clinical trial sites. On June 28, 2007 the Therapeutic Products Division of Health Canada approved the Company’s application for a clinical IND for a Phase II open label study with AVR118 in patients with a variety of wounds. This approval will allow the Company to commence clinical trails in patients with histologically confirmed malignancies who present with clinically demonstrable anorexia or anorexia-cachexia syndrome at Canadian centers which are recognized by the FDA as being fully compliant with U.S. clinical standards.

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 3. RESEARCH AND DEVELOPMENT, CLINICAL TRIALS AND DRUG TESTING
    Phase I Study on Type 2 Diabetes
 
    In October 2005 the Company initiated a Phase I, double blind, placebo controlled, randomized, single center, safety study with AVR118 in subjects with Type 2 diabetes in the United States. Approximately 30 patients were to be entered in the study, the primary objective of which was to explore the effect of a 4.0 ml dose of AVR118 given subcutaneously on blood glucose in subjects with Type 2 diabetes who are on sulfonylureas and/or metformin, as compared to subjects not receiving AVR118. Sulfonylureas and metformin are commonly used drugs to control Type 2 diabetes. Additional objectives of this study were to explore the potential for AVR118 in decreasing blood glucose in patients with Type 2 diabetes.
 
    In February 2006, the Company amended the protocol for the Phase I diabetes study to include an additional 12 patients at a dose of 1.0 ml of AVR118 given subcutaneously. The purpose of this study was to determine if a lower dose would produce a more pronounced effect on blood glucose levels.
 
    In May 2006, the Company completed enrollment of the first 30 patients on the 4.0 ml dosage portion of the study. In June 2006, the Company terminated further accrual of the patients on the 1.0 ml dosage after three patients had been accrued. Following an interim analysis of the 30 patients treated with the 4.0 ml dose as well as the additional three patients treated with the 1.0 ml dose, the Company concluded that: (i) AVR118 can be given safely to patients with Type 2 diabetes, and (ii) in contrast to previous reports, AVR118 had no apparent effects on blood glucose levels in patients receiving oral hypoglycemic therapies, and no demonstrable effect on blood chemistry, hematology, weight gain or lean body mass in Type 2 diabetes patients. The total costs incurred relating to this Phase I study were approximately $516,000.
 
    Testing on Avian Flu
 
    In 2006, the Company performed testing for the efficacy of AVR118 on the H5N1 hybrid strain of the avian flu. Although antiviral activity was seen at very high dosages, there are no current plans to pursue further work in this area. The total cost incurred relating to this study was approximately $7,000.

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 4. EMPLOYMENT AGREEMENT
    Elliston Employment Agreement
 
    On May 14, 2007, the Company entered into a new employment agreement with Stephen M. Elliston for the period commencing May 15, 2007. Mr. Elliston’s existing employment agreement with the Company expired on May 14, 2007. Under the terms of Mr. Elliston’s renewed employment agreement, Mr. Elliston shall be President and Chief Executive Officer on a full time basis commencing May 15, 2007 until May 14, 2009 unless it is terminated earlier as provided in the agreement. Mr. Elliston shall receive a base salary of $350,000 per year. The agreement also entitles Mr. Elliston and his dependents to participate in all incentive, savings and retirement plans, practices, policies and programs applicable generally to other executives of the Company and their dependents. The agreement further provides that:
    The Company shall pay the dues of such professional associations and societies of which Mr. Elliston is a member in furtherance of his duties.
 
    The Company shall reimburse Mr. Elliston for reasonable expenses relating to travel, professional licenses, entertainment and similar items in accordance with the policies, practices and procedures of the Company .
 
    Mr. Elliston will be entitled to four (4) weeks paid vacation annually or such other time as authorized by the Board of Directors during which time his compensation shall be paid in full. Vacation days unused in any calendar year may not be accumulated and carried forward and used in future years.
    If the agreement is terminated by the Company for cause, or Mr. Elliston voluntarily resigns, becomes disabled or dies, then Mr. Elliston or his estate shall be entitled to his base salary earned through the date of termination, accrued vacation and all applicable reimbursements due. If the agreement is terminated for other reasons by either party, Mr. Elliston shall be entitled to his base salary for the remainder of the term, payable in accordance with the Company’s normal payroll practices, and all applicable reimbursements due. Payment of the severance benefit is conditioned upon the release by Mr. Elliston of the Company, to the maximum extent permitted by law, from any and all claims he may have against the Company that relate to or arise out of his employment or termination of employment.
 
    Upon the execution of his employment agreement, Mr. Elliston received an option to purchase 40,000,000 shares of the Company’s common stock. The option vests monthly in increments of 666,667 shares, and is exercisable at prices ranging from $0.05 to $0.08 per option share for a period of five years from the applicable vesting date.

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. STOCK-BASED COMPENSATION
    Stock Options Granted to Officers, Directors, Advisory Boards and Employees
 
    From time to time, the Company has granted options to purchase common stock to officers, various members of the Board of Directors, Advisory Boards and employees for their services. The following is a summary of those options that have been recently granted.
                 
            Weighted Average  
    Total Options     Exercise Price  
Outstanding at January 1, 2007
    113,208,283     $ 0.1656  
Granted
    50,675,000     $ .0618  
Exercised
           
Forfeited
           
Expired unexercised
           
 
           
 
               
Outstanding at June 30, 2007
    163,883,283     $ 0.1336  
 
           
Options exercisable at June 30, 2007
    113,003,033     $ 0.1534  
 
           
    During the first six months of 2007, the Company recorded stock-based compensation in the amount of $193,863 compared with $86,377 for the first six months of 2006, substantially all of which pertained to options granted to the Company’s officers and directors during 2007 and 2004. At June 30, 2007, there was approximately $1,477,000 of unrecognized compensation expense related to unvested stock options, which is expected to be recognized over a weighted-average period of 1.0 years.
 
    During the six months ended June 30, 2007, the Company granted stock options to purchase an aggregate of 50,675,000 shares of common stock to its President and members of its Board of Directors. No stock options were granted during the six months ended June 30, 2006.
 
    The weighted-average remaining contractual terms of outstanding stock options and exercisable stock options at June 30, 2007 was 4.4 years and 2.2 years, respectively. The aggregate intrinsic value of outstanding stock options and exercisable stock options at June 30, 2007 was approximately $0. The total fair value of the stock options granted during the six months ended June 30, 2007 is $1,209,556.

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 5. STOCK-BASED COMPENSATION (Continued)
    Stock Incentive Plan
 
    The Advanced Viral Research Corp. 2007 Stock Incentive Plan (the “2007 Plan”) was approved by the Company’s stockholders at a special meeting of stockholders on March 21, 2007. The 2007 Plan provides for the grant of incentive stock options, nonstatutory stock options, stock appreciation rights, stock bonuses and restricted stock awards, restricted stock units, performance shares, performance units and other stock-based awards to employees, including officers, non-employee directors and consultants options to purchase common shares of the company at an exercise or stock price based on the market value of the shares on the date of grant. A maximum aggregate of 100,000,000 shares of common stock may be issued pursuant to stock options, rights or awards granted under the 2007 Plan. The 2007 Plan will terminate in March 2017 unless it is terminated earlier in accordance with the terms thereof.
 
    On May 14, 2007, the Company granted stock options to purchase an aggregate of 10,675,000 shares of its common stock under the 2007 Plan at an exercise price of $0.05 for a period of ten years to members of the Board of Directors in consideration for their service on the Board. In addition, on May 14 2007, in connection with the new employment agreement with Mr. Elliston, the Company’s President and Chief Executive Officer, the Company granted Mr. Elliston stock options to purchase an aggregate of 40,000,000 shares of common stock under the 2007 Plan at exercise prices ranging from $0.05 to $0.08 for a period of five years from the vesting date.
NOTE 6. COMMITMENTS AND CONTINGENCIES
    Potential Claim for Royalties
 
    The Company may be subject to claims from certain third parties for royalties due on sale of AVR118. The Company has not as yet received any notice of claim from such parties.
 
    Lack of Patent Protection
 
    During the third quarter of 2006, the Company reviewed its patent inventory and the cost to maintain them, and determined that certain patents and patent applications were not useful, or that the cost to apply for and maintain patents in certain countries is not justified, and such patents should be abandoned. Patent costs are expensed when incurred and therefore the cost of abandoned patents and patent applications has no effect on the financial statements. The Company presently has issued or granted 14 U.S. patents, two Australian patents and one Canadian patent. In addition, the Company currently has five patent applications pending with the U.S. Patent Office and 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.

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 7. SECURITIES PURCHASE AGREEMENTS
    January 2007 Private Placement
 
    On January 1, 2007, pursuant to a securities purchase agreement, the Company sold to Cornell Capital Partners, L.P. (“Cornell”) $1,500,000 principal amount of its 9% secured convertible debentures, due December 31, 2009, along with warrants to purchase an aggregate of 48,076,923 shares of its common stock, which are exercisable through December 31, 2012 at an exercise price equal to $0.0312 or as may be adjusted from time to time pursuant to the terms thereof. Pursuant to the agreement, Yorkville Advisors LLC, the general partner of Cornell, received cash compensation equal to 10% of the gross proceeds of the convertible debentures purchased by Cornell as well as a $20,000 structuring fee and a $10,000 due diligence fee.
 
    Cornell acquired $1,000,000 of convertible debentures on January 5, 2007, and acquired an additional $500,000 of convertible debentures on February 16, 2007. In connection with the first closing, the Company received net proceeds of $875,000 on January 5, 2007. In connection with the second closing, the Company paid an additional $50,000 to Yorkville, and received net proceeds of $450,000 on February 16, 2007.
 
    Cornell may convert the debentures plus accrued interest, (which may be paid at the Company’s option, subject to certain conditions regarding registration of the shares underlying the debenture, in cash or common stock), in shares of the Company’s common stock at a conversion price equal to the lesser of $0.0312 or 95% of the lowest volume weighted average price of the Company’s common stock during the thirty consecutive trading days immediately preceding the applicable conversion date. Subject to certain exceptions, at the Company’s option, the Company may redeem a portion or the entire outstanding debenture at a price equal to 115% of the amount redeemed plus accrued interest. The Company was obligated to file a registration statement registering the resale of all shares of common stock that may be issued to Cornell upon the conversion of the convertible debentures or exercise of the warrants. The registration statement was filed on February 12, 2007 and was declared effective on May 29, 2007.
 
    An allocation of the proceeds received from the issuance of the secured convertible debentures was made between the debt instrument and the warrant by determining the pro-rata share of the proceeds for each by comparing the fair value of each security issued to the total fair value. The fair value of the warrant ($644,605) was determined using the Black-Scholes model with the following assumptions: expected volatility of 86%, risk-free interest rate of 4.7% and an expected holding period of five years. The fair value of the secured convertible debentures was determined by measuring the fair value of the common shares on an “as-converted” basis. The amount allocated to the warrant was recorded as a discount on the debt issued and additional paid-in capital. The value of the beneficial conversion feature of the secured convertible debentures ($731,143) was calculated by comparing the fair value of the underlying common shares on the date of issuance based on the closing price of the Company’s common stock to the “effective” conversion price. The beneficial conversion feature was recorded as a discount on the debenture and is being amortized as additional interest expense over the life of the debenture.

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 7. SECURITIES PURCHASE AGREEMENTS (Continued)
    January 2007 Private Placement (Continued)
 
    Subject to the Company’s enrollment of the first patient in the Phase II study of AVR118 used as a topical therapy on dermatologic conditions and the registration statement being declared effective by the SEC, Cornell has agreed to purchase up to an additional $750,000 of convertible debentures upon the execution of similar transaction documents on terms mutually agreed upon by the parties.
 
    The Company’s obligations under the agreement, the convertible debentures and the ancillary documents entered into in connection therewith are secured by a first priority security interest in all of the Company’s assets. This security interest expires upon the earlier to occur of (i) $500,000 or less principal amount of the convertible debentures remains outstanding; (ii) the Company receives $3,000,000 of capital, in any form other than through the issuance of free-trading shares of common stock, from sources other than Cornell, which is utilized to either repay the convertible debentures in full, or reduce the outstanding principal amount of the convertible debentures to $500,000; or (iii) the satisfaction of the Company’s obligations under the agreement, the convertible debentures and the ancillary documents entered into in connection therewith.
 
    The registration rights agreement with Cornell requires the Company, subject to certain terms and conditions, to register the underlying shares of the Company’s common stock under the Securities Act. The registration rights granted are subject to customary exceptions and qualifications and compliance with certain registration procedures. The Company is required to pay to Cornell liquidated damages of 2% of the aggregate purchase price of the liquidated value of the convertible debentures for each 30-day period if any of the following events occurs and during the period such event is continuing: (i) the Company fails to file with the Securities and Exchange Commission (SEC) the registration statement on or before the 60th day after January 1, 2007; (ii) the registration statement is not declared effective by the Securities and Exchange Commission on or before May 1, 2007; or (iii) after the effective date of the registration, sales cannot be made pursuant to the registration statement (whether because of a failure to keep the registration statement effective, failure to disclose such information as is necessary for sales to be made pursuant to the registration statement, failure to register sufficient shares of common stock or otherwise). Such payments must be made within three business days of such failure and every 30-day period thereafter until such failure is cured. Any liquidated damages begin accruing on the date of any such failure. The SEC declared the registration statement effective on May 29, 2007. The penalty was waived by Cornell.
 
    On May 30, 2007, Cornell exercised warrants to purchase 10,000,000 shares of the Company’s common stock at an exercise price of $0.0312 for net proceeds of $312,000. On May 31, 2007, Cornell converted $600,000 principal amount of the convertible debentures at a conversion price of $0.0239 for 25,104,603 shares of the Company’s common stock. On June 22, 2007, Cornell converted $250,000 principal amount of the convertible debentures at a conversion price of $0.0312 for 8,012,821 shares of the Company’s common stock. Upon the conversion of $850,000 principal amount of convertible debt, the Company recorded approximately $671,000 of interest expense relating to the beneficial conversion feature and discount on convertible debt.

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 7. SECURITIES PURCHASE AGREEMENTS (Continued)
    Subsequent Event — July 2007 Private Placement
 
    On July 24, 2007, the Company entered into a securities purchase agreement with Cornell to sell $2,750,000 principal amount of the Company’s 9% secured convertible debentures due July 24, 2010, consisting of: (i) $750,000 of the Company’s Series A secured convertible debentures (the “Series A Debentures”); and (ii) $2,000,000 of the Company’s Series B secured convertible debentures (the “Series B Debentures”). The Series A Debentures have a conversion price equal to the lesser of $0.0312 or 95% of the lowest volume weighted average price of the Company’s common stock during the thirty consecutive trading days immediately preceding the applicable conversion date, and the Series B Debentures have a conversion price equal to the lesser of $0.0262 or 95% of the lowest volume weighted average price of the Company’s common stock during the thirty consecutive trading days immediately preceding the applicable conversion date. In addition, pursuant to the agreement, the Company issued to Cornell (i) warrants to purchase an aggregate of 24,038,462 shares of the Company’s common stock at an exercise price equal to $0.0312; and (ii) warrants to purchase an aggregate of 76,335,878 shares of the Company’s common stock at an exercise price equal to $0.0262. The warrants are exercisable for five years from the date of issuance.
 
    Pursuant to the agreement, Yorkville Advisors LLC, the general partner of Cornell, will receive cash compensation equal to 10% of the gross proceeds of the convertible debentures purchased by Cornell as well as a $15,000 structuring fee and a $5,000 due diligence fee.
 
    Subject to certain exceptions, at the Company’s option, the Company may redeem a portion or all of the outstanding Convertible debentures at a price equal to 120% of the amount redeemed plus accrued interest. The Company is obligated to file a registration statement with the SEC registering the resale of all shares of common stock that may be issued to Cornell upon the conversion of the convertible debentures or exercise of the warrants.
 
    Cornell acquired the Series A Debentures, $750,000 principal amount of the Series B Debentures, and all of the warrants at the first closing upon execution of the agreement on July 25, 2007, from which the Company received net proceeds of $1,330,000, in reliance upon an applicable exemption from registration under Section 4(2) of the Securities Act of 1933 in connection with a transaction that did not involve a public offering. Cornell is also obligated to acquire an additional $625,000 of the Series B Debentures on the date the registration statement is filed; and $625,000 of the Series B Debentures on the date the registration statement is declared effective by the SEC.
 
    The registration rights agreement provides that the registration statement may be filed no earlier than the later of (i) November 29, 2007 or (ii) the date that is sixty (60) days from the date that Cornell has sold substantially all the shares registered for resale on the previous registration statement (file number 333-140634), or such earlier date that the Company may file the registration statement for the resale of shares underlying the convertible debentures and warrants in reliance on Rule 415 promulgated by the SEC pursuant to the Securities Act of 1933.

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 7. SECURITIES PURCHASE AGREEMENTS (Continued)
    Subsequent Event — July 2007 Private Placement (Continued)
 
    The Company’s obligations under the agreement and the documents entered into in connection therewith are secured by a first priority security interest in all of its assets pursuant to a security agreement entered in connection with a previously disclosed private placement transaction with Cornell in January 1, 2007.
 
    Outstanding Warrants
 
    From time to time, the Company has issued warrants to purchase common stock to various parties as part of a stock purchase agreement or a settlement. The following is a summary of those warrants that have been issued:
         
    Warrants  
Outstanding at January 1, 2007
    68,041,501  
Granted
    48,076,923  
Exercised
    (10,000,000 )
Expired
    (15,535,134 )
 
     
Outstanding at June 30, 2007
    90,583,290  
 
     
NOTE 8. DISCONTINUED OPERATIONS
    During 2002, the Board of Directors approved a plan to sell Advance Viral Research, Ltd., the Company’s Bahamian subsidiary. SFAS No. 144 requires the operating results of any assets with their own identifiable cash flows that are disposed of or held for sale to be removed from income from continuing operations and reported as discontinued operations. The operating results for any such assets for any prior periods presented were reclassified as discontinued operations. The following table details the amounts reclassified to discontinued operations:
                                         
                                    Inception  
    Three Months     Six Months     (February 20, 1984)  
    Ended June 30,     Ended June 30,     to June 30,  
    2007     2006     2007     2006     2007  
Revenues
  $     $     $     $     $  
 
                             
Costs and Expenses:
                                       
General and administrative
    1,016       20,389       4,502       21,405       1,379.220  
Depreciation
          1,859             3,718       316,737  
 
                             
 
    1,016       22,248       4,502       25,123       1,695,557  
 
                             
Other Income
                            140,020  
 
                             
Loss from discontinued operations
    ($1,016 )     ($22,248 )     ($4,502 )     ($25,123 )     ($1,555,937 )
 
                             

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ADVANCED VIRAL RESEARCH CORP.
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(Continued)
NOTE 9. RECENT ACCOUNTING PRONOUNCEMENTS
    In February 2007, the Financial Accounting Standards Board (the “FASB”) issued SFAS No. 159, The Fair Value Option for Financial Assets and Liabilities Including an amendment of FASB Statement No. 115 (“SFAS No. 159”). SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value. SFAS No. 159 also establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. The Company expects to adopt SFAS No. 159 on January 1, 2008 and has not yet determined the impact on the consolidated financial statements.
 
    In September 2006, the FASB issued SFAS No. 157, Fair Value Measurements. SFAS No. 157 clarifies the principle that fair value should be based on the assumptions market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years, with early adoption permitted. The Company expects to adopt SFAS No. 157 on January 1, 2008 and has not yet determined the impact on the consolidated financial statements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
     The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and the related Notes to Condensed Consolidated Financial Statements of Advanced Viral Research Corp. included in Item 1 of this Quarterly Report on Form 10-Q. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. The statements should be read in conjunction with the consolidated financial statements and footnotes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2006.
OVERVIEW
     Advanced Viral Research Corp. was incorporated in Delaware in July 1985 to engage in the development, production, marketing, promotion and sale of a pharmaceutical drug known by the trademark Reticulose®. This drug was the forerunner of our current drug, “AVR118.” AVR118 is a complex mixture of peptides, amino acids, nucleosides, nucleotides and nucleic acid bases. We currently believe it may be employed in the treatment of conditions such as:
    systemic symptoms such as cachexia (body wasting), loss of appetite and lethargy experienced by patients with cancer, AIDS and other diseases;
 
    wound healing;
 
    as an anti-inflammatory; and
 
    as a palliative agent to minimize certain toxicities associated with chemotherapy or immunotherapies.
     Since our incorporation in July 1985, we have been engaged primarily in research and development activities. We have never generated material operating revenue, and as of June 30, 2007, we had incurred a cumulative net loss of approximately $74,664,000. Our ability to generate operating revenue depends upon our success in gaining approval for the commercial use and distribution of AVR118 from the Food and Drug Administration (FDA).
Research and Development
     The costs relating to our research and development efforts for the years 2000 to 2006 and the three and six months ended June 30, 2007 are presented below. Since March 31, 2006, our expenditures for research and development have decreased significantly over each subsequent quarter (from $497,000 as of March 31, 2006 to $189,000 as of June 30, 2007), primarily due to the internalization of certain research and development functions, the increased efficiencies resulting from such internalization, and the elimination of certain expenses resulting from the transition of the Phase II cancer/cachexia study, the cessation of the type 2 diabetes study, the termination of the MediVector agreement, and the implementation of more cost effective patient accrual and other procedures relating to the Phase II dermatological study.

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Costs Relating to Research and Development Efforts
from January 2000 through June 30, 2007
                                 
            3 Months     6 Months Ended     2000-6/30/07  
    2000-2006     6/30/07     6/30/07     To Date  
COST CATEGORY
                               
Hospital fees
                               
Phase I (topical)
    254,246                   254,246  
Phase I/II (I AIDS, (Israel)
    140,500                   140,500  
Phase I leukemia/lymphoma (Israel)
    19,000                   19,000  
Phase I solid tumor (Israel)
    8,000                   8,000  
Phase II cancer study (NY)
    115,002                   115,002  
Phase I diabetes study
    266,452                   266,452  
In vitro and Avian Flu
    41,868                   41,868  
Anti-Inflammatory
    7,542                   7,542  
Wound healing / Dermatological study
    35,487       9,050       12,800       48,267  
Lab fees
    138,292                   138,292  
Insurance cost
    101,679       6,250       12,959       114,438  
 
                       
TOTAL CLINICAL FEES
    1,128,068       15,300       25,759       1,153,827  
 
                       
IND preparation/maintenance
    286,209                   286,209  
CRO clinical trial management Phase I (topical)
    47,527                   47,527  
Phase I/II AIDS (Israel)
    1,447,919             (6,113 )     1,441,806  
Argentina patient experiences
    253,168                   253,168  
Data management & study reports
    932,163                   932,163  
Clinical & Regulatory consulting
    2,384,255       94       1,594       2,385,849  
 
                       
TOTAL CLINICAL/REGULATORY OPERATIONS
    5,351,241       94       (4,519 )     5,346,722  
 
                       
 
                               
General lab supplies
    1,174,047       4,479       10,138       1,184,185  
Toxicology
    197,135                   197,135  
Contracted research & development
    617,368                   617,368  
Validation
    705,249                   705,249  
Drug preparation and support
    1,982,421                   1,982,421  
Salary & Facility allocations
    8,111,822       169,133       343,528       8,455,350  
R&D Miscellaneous Expenses
    37,720                   37,720  
 
                       
TOTAL PRECLINICAL RESEARCH & DEVELOPMENT
    12,825,762       173,612       353,666       13,179,428  
 
                       
 
                               
TOTAL RESEARCH AND DEVELOPMENT
    19,305,071       189,006       374,906       19,679,977  
 
                       
     Phase II Dermatological Study
     In April 2006, we commenced a study at the University of Miami to preliminarily test the efficacy of topically applying AVR118 to wounds in animal models (e.g. pigs). A report received from the University of Miami in August 2006 analyzing the data from the three pig study indicated that the topical application of AVR118 accelerates the rate at which wounds heal. Although preliminary, we believed that further study was merited. Based on the results from the August 2006 report from the University of Miami, we filed an amendment with the FDA to our existing IND to expand the use of AVR118 to include a Phase II dermatological study involving topical therapy. We believe these applications could potentially be used to treat a wide variety of common dermatologic conditions, such as micro-dermabrasion.
     In January 2007, we began the Phase II dermatological study using a topically applied spray formulation of AVR118 as a wound healing agent. The Phase II dermatological study involves patients with common skin problems ranging from acne scars to surgical wounds, and will study how AVR118’s ability to promote tissue repair and regeneration can be put to use in the clinical setting, and analyze the efficacy of AVR118 as a topical therapy. The protocol for the dermatological study provides for 12-20 patients to be treated with AVR118. While there can be no assurances, preliminary findings from the study show that topical treatment with AVR118 appears to have clinical activity in reducing inflammation and redness associated with surgical incisions or dermatologic dermabrasion. The first cohort of patients examined underwent dermabrasion for the treatment of severe acne. Following the procedure, AVR118 was applied directly to one half of the inflamed facial tissue. The other half of the face remained untreated. A preliminary

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examination of five patients demonstrated visible improvement on the treated side of their face. The treated area showed less inflammation as well as a reduction in the redness and swelling of acne lesions. The second cohort of patients examined underwent plastic surgery that resulted in a minimum of two bilateral surgical incisions. AVR118 was applied topically to one wound and the second wound served as an untreated control. In early results from two patients, one patient demonstrated a decrease in inflammation on the treated side. We are currently reviewing the possibility of opening additional study sites to increase patient recruitment. Total costs incurred through June 30, 2007 relating to this study were approximately $12,800.
     Phase II Cancer Study
     In February 2005, we entered into an agreement with the Biomedical Research Alliance (BRANY), as agent for a network of hospitals, pursuant to which the hospitals would conduct our Phase II clinical study to evaluate the effect of a 4.0 ml dose of AVR118 administered to patients with systemic symptoms related to advanced cancer who are not receiving chemotherapy. We experienced difficulty accruing patients for the Phase II cancer study and in December 2005, amended the protocol to permit patients undergoing third-line chemotherapy treatment to become participants in the Phase II cancer study, in order to facilitate patient accrual. In the Phase II cancer study, patients are administered AVR118 for three weeks in order to compare treatment versus no treatment, after which the results of the study are to be analyzed. Those patients who did not receive AVR118 during the first three-week period are permitted to take the drug for the second three-week period.
     The total cost incurred through June 30, 2007 relating to the Phase II cancer study is approximately $478,000. Only eleven patients had been enrolled in the Phase II Study. In the third quarter of 2006, we commenced discussions with several teaching centers to expand the study to include patients in the earlier stages of disease to determine the efficacy of AVR118 on such patients. We believe transitioning the study to such centers would enable it to accelerate enrollment in an expanded program where higher patient accrual rates can be achieved, and to expand our network of clinical trial sites. On June 28, 2007 the Therapeutic Products Division of Health Canada approved our application for a clinical IND for a Phase II open label study with AVR118 in patients with a variety of wounds. This approval will allow us to commence clinical trails in patients with histologically confirmed malignancies who present with clinically demonstrable anorexia or anorexia-cachexia syndrome at Canadian centers which are recognized by the FDA as being fully compliant with U.S. clinical standards.
Private Placements with Cornell Capital Partners, LP
     January 2007 Private Placement. On January 1, 2007, we entered into a securities purchase agreement with Cornell Capital Partners, L.P. (“Cornell”), to sell $1,500,000 principal amount of our 9% secured convertible debentures, due January 1, 2010, along with warrants to purchase an aggregate of 48,076,923 shares of our common stock, which are exercisable through January 1, 2012 at an exercise price equal to $0.0312 or as may be adjusted from time to time pursuant to the terms thereof. The convertible debentures have a term of three years, accrue interest at 9% and are convertible into our common stock at a price per share equal to the lesser of (a) $0.0312 per share, or (b) an amount equal to 95% of the lowest volume weighted average price of our common stock for the 30 trading days immediately preceding the conversion date, as quoted by Bloomberg, LP. Cornell acquired $1,000,000 principal amount of the convertible debentures upon the first closing under the purchase agreement on January 5, 2007, and the remaining $500,000 principal amount of the convertible debentures on February 16, 2007. In addition, Cornell agreed to purchase up to an additional $750,000 of convertible debentures upon the satisfaction of certain conditions, including (i) our enrollment of the first patient in our Phase II dermatological study, (ii) the registration statement, of which this prospectus forms a part, being declared effective by the SEC, and the execution of similar transaction documents on terms mutually agreed upon by the parties. Our obligations under the Cornell Agreement, the convertible debentures and the ancillary documents entered into in connection therewith are secured by a first priority security interest in all of our assets. The registration statement registering the resale of all shares of common stock that may be issued to Cornell upon the conversion of the convertible debentures or exercise of the warrants was filed on February 12, 2007 and was declared effective on May 29, 2007.

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     July 2007 Private Placement. On July 24, 2007, we entered into a securities purchase agreement with Cornell to sell $2,750,000 principal amount of our 9% secured convertible debentures due July 24, 2010, consisting of: (i) $750,000 of our Series A secured convertible debentures (the “Series A Debentures”); and (ii) $2,000,000 of our Series B secured convertible debentures (the “Series B Debentures”). The Series A Debentures have a conversion price equal to the lesser of $0.0312 or 95% of the lowest volume weighted average price of our common stock during the thirty consecutive trading days immediately preceding the applicable conversion date, and the Series B Debentures have a conversion price equal to the lesser of $0.0262 or 95% of the lowest volume weighted average price of our common stock during the thirty consecutive trading days immediately preceding the applicable conversion date. In addition, pursuant to the agreement, we issued to Cornell (i) warrants to purchase an aggregate of 24,038,462 shares of our common stock at an exercise price equal to $0.0312; and (ii) warrants to purchase an aggregate of 76,335,878 shares of our common stock at an exercise price equal to $0.0262. The warrants are exercisable for five years from the date of issuance.
     Pursuant to the agreement, Yorkville Advisors LLC, the general partner of Cornell, will receive cash compensation equal to 10% of the gross proceeds of the Series A and Series B convertible debentures purchased by Cornell as well as a $15,000 structuring fee and a $5,000 due diligence fee.
     Subject to certain exceptions, at our option, we may redeem a portion or all of the outstanding Series A and Series B convertible debentures at a price equal to 120% of the amount redeemed plus accrued interest. We are obligated to file a registration statement with the SEC registering the resale of all shares of common stock that may be issued to Cornell upon the conversion of the convertible debentures or exercise of the warrants.
     Cornell acquired the Series A Debentures, $750,000 of the Series B Debentures and the warrants at the first closing upon execution of the agreement on July 25, 2007, from which we received net proceeds of $1,330,000, in reliance upon an applicable exemption from registration under Section 4(2) of the Securities Act of 1933 in connection with a transaction that did not involve a public offering. Cornell is also obligated to acquire an additional $625,000 of the Series B Debentures on the date the registration statement is filed; and $625,000 of the Series B Debentures on the date the registration statement is declared effective by the SEC.
     The registration rights agreement provides that the registration statement may be filed no earlier than the later of (i) November 29, 2007 or (ii) the date that is sixty (60) days from the date that Cornell has sold substantially all the shares registered for resale on the previous registration statement (file number 333-140634), or such earlier date that we may file the registration statement for the resale of shares underlying the convertible debentures and warrants in reliance on Rule 415 promulgated by the SEC pursuant to the Securities Act of 1933.
     Our obligations under the agreement and the documents entered into in connection therewith are secured by a first priority security interest in all of its assets pursuant to a security agreement entered in connection with a previously disclosed private placement transaction with Cornell in January 1, 2007.
Proposed Sale of Assets
     During 2002, the Board of Directors approved a plan to sell Advance Viral Research Ltd. (“AVR Ltd”), our Bahamian subsidiary. The decision was based upon the completion of construction on our facility in Yonkers, New York capable of providing all functions previously provided by the Freeport, Bahamas plant. The assets of AVR Ltd. have been classified on our Consolidated Balance Sheet at June 30, 2007 and

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December 31, 2006 as Assets held for Sale. AVR Ltd. had no liabilities as of June 30, 2007 and December 31, 2006, except inter-company payables which have been eliminated in consolidation. The operations for AVR Ltd. have been classified in the Consolidated Statements of Operations for the three and six months ended June 30, 2007 and June 30, 2006 as Loss from Discontinued Operations.
Going Concern
     The independent registered public accounting firm’s report on our consolidated financial statements for the fiscal year ended December 31, 2006 includes an explanatory paragraph regarding our ability to continue as a going concern. Note 2 to the consolidated financial statements states that our cash position is inadequate to pay all the costs associated with the full range of testing and clinical trials of AVR118 required by the FDA for commercial approval, and, unless and until AVR118 is approved for sale in the United States or another industrially developed country, we will be dependent upon the continued sale of our securities, debt or equity financing for funds to meet our cash requirements, which raises substantial doubt about our ability to continue as a going concern. Further, the independent registered public accounting firm’s report states that the consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. No assurance can be given that debt or equity financing will be available.
     Our offices are located at 200 Corporate Boulevard South, Yonkers, New York 10701. Our telephone number is (914) 376-7383. We have also established a website: www.adviral.com. Information contained on our website is not a part of this report.
RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2007 VS. JUNE 30, 2006.
     We incurred losses from continuing operations of $1,526,000 vs. $996,000 for the three months ended June 30, 2007 and 2006 respectively and $2,484,000 vs. $2,215,000 for the six months ended June 30, 2007 and 2006 respectively. Our losses were attributed primarily to:
     RESEARCH AND DEVELOPMENT EXPENSE. Research and development expenses for the three months ended June 30, 2007 decreased 66% to $189,000 compared to $570,000 for the three months ended June 30, 2006. Research and development expenses for the six months ended June 30, 2007 decreased 65% to $375,000 compared to $1,068,000 for the six months ended June 30, 2006.The change in research and development expenses primarily resulted from:
    Research and development expenditures relating to salaries, benefits and facilities were $115,000 vs. $104,000 for the three months ended June 30, 2007 and 2006, respectively and $231,000 vs. $209,000 for the six months ended June 30, 2007 and 2006, respectively. This increase was due to a full salary expense for Stephen Elliston, President and CEO compared to a partial salary expense associated with Elma Hawkins, who resigned as our President and CEO in February 2006. For the three months ended June 30, 2007 and 2006, 53% of our payroll and related expenses were allocated to research and development expenses, respectively. For the six months ended June 30, 2007 and 2006, 53% and 49% of our payroll and related expenses were allocated to research and development expenses, respectively;
 
    Research and development expenditures relating to consulting services provided by Elma Hawkins relating to scientific matters was $0 and $90,000 for the three months ended June 30, 2007 and 2006 respectively and was $0 and $153,000 for the six months ended June 30, 2007 and 2006 respectively;

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    Clinical testing fees were $15,000 vs. $79,000 for the three months ended June 30, 2007 and 2006, respectively, and were $26,000 vs. $172,000 for the six months ended June 30, 2007 and 2006, respectively. The decrease for the three and six month period ended June 30, 2007 vs. 2006 was primarily attributable to no Phase I diabetes trial costs and Phase II cancer/cachexia trial costs, offset by the commencement of the dermatological study; and
 
    Expenses associated with clinical and regulatory activities were $100 and $213,000 for the three months ended June 30, 2007 and 2006, respectively and ($4,500) and $383,000 for the six months ended June 30, 2007 and 2006, respectively . The decrease for the three and six months ended June 30, 2007 vs. 2006 was primarily attributable to the cessation of regulatory consulting costs and data management fees for processing the Phase II cancer/cachexia study with BRANY and Phase I diabetes study by December 31, 2006.
     GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense increased 12% to $448,000 from $400,000 for the three months ended June 30, 2007 and 2006, respectively and decreased 2% to $1,072,000 from $1,095,000 for the six months ended June 30, 2007 and 2006. The changes in general and administrative expenses primarily resulted from:
    Increased payroll and related expenses of $85,000 vs.$76,000 for the three months ended June 30, 2007 and 2006, respectively and decreased payroll and related expenses of $169,000 vs.$194,000 for the six months ended June 30, 2007 and 2006, respectively due to the elimination of the salary expense associated with Elma Hawkins, who resigned as President and CEO in February 2006, as well as the termination of three other employees during the first quarter of 2006; and
 
    Professional fees increased 49% to $133,000 vs. $89,000 for the three months ended June 30, 2007 and 2006, respectively and increased 26% to $293,000 vs. $232,000 for the six months ended June 30, 2007 and 2006 respectively, and
 
    Compensation and other expense for options and warrants. We have applied the fair value recognition provisions of FASB Statement No. 123R, Share-Based Payments, to stock-based employee compensation. In the three months ended June 30, 2007 and June 30, 2006 $149,000 and ($56,000) respectively of stock-based employee compensation cost and in the six months ended June 30, 2007 and June 30, 2006 $194,000 and $86,000 respectively of stock-based employee compensation cost is reflected in General and Administrative expense.
     DEPRECIATION AND AMORTIZATION EXPENSE Depreciation and amortization expense decreased 89% to $6,000 vs. $55,000 for the three months ended June 30, 2007 and 2006, respectively and decreased 87% to $15,000 vs. $115,000 for the six months ended June 30, 2007 and 2006, respectively This decrease for the comparative three and six month periods was due to assets acquired in prior years that were fully depreciated in 2007 and the determination that certain assets were taken out of service and held for sale.
     INTEREST INCOME (EXPENSE). Interest income decreased 68% to $10,000 vs.$30,000 for the three months ended June 30, 2007 and 2006, respectively and decreased 61% to $25,000 vs.$65,000 for the six months ended June 30, 2007 and 2006 as a result of decreased cash balances invested in money market accounts. Interest expense increased to $893,000 from $2,000 for the three months ended June 30, 2007 and 2006 and increased to $1,047,000 from $3,000 for the six months ended June 30, 2007 and 2006.
     Interest expense for the three months ended June 30, 2007 and 2006 was comprised of primarily:
    $96,000 for the amortization of loan costs;
 
    $406,000 for amortization of beneficial conversion feature;

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    $359,000 of amortization of discount on convertible debt; and
 
    $29,000 of interest earned relating to the $1,500,000 financing arrangement between us and Cornell.
     Interest expense for the six months ended June 30, 2007 and 2006 was comprised of primarily:
    $111,000 for the amortization of loan costs;
 
    $467,000 for amortization of beneficial conversion feature;
 
    $412,000 of amortization of discount on convertible debt; and
 
    $55,000 of interest earned relating to the $1,500,000 financing arrangement between the Company and Cornell.
     Interest expense in 2006 was insignificant and related to the financing of our director and officer insurance policy.
     LOSS FROM CONTINUING OPERATIONS. Losses from continuing operations increased 35% to $1,526,000 vs. $996,000 for the three months ended June 30, 2007 and 2006, respectively and losses from continuing operations increased 11% to $2,484,000 vs. $2,215,000 for the six months ended June 30, 2007 and 2006, respectively. The change for the comparable periods was primarily due to interest expenses relating to the financing arrangement between the Company and Cornell Capital Partners.
     LOSS FROM DISCONTINUED OPERATIONS. Losses from discontinued operations were $1,000 vs. $22,000 for the three months ended June 30, 2007 and 2006, respectively and $5,000 vs. $25,000 for the six months ended June 30, 2007 and 2006, respectively which losses resulted from our 99% owned Bahamian subsidiary, Advance Viral Research Ltd. held for sale. During 2002, our Board of Directors approved a plan to sell Advance Viral Research Ltd.
     REVENUES. We had no revenues for the three or six months ended June 30, 2007 and 2006.
LIQUIDITY
     We had current assets of $1,543,000 as of June 30, 2007 compared to $1,102,000 as of December 31, 2006. We had total assets of $1,845,000 at June 30, 2007 compared to $1,363,000 at December 31, 2006. The increase in current and total assets was primarily attributable to the receipt of cash of $1,325,000 relating to the $1,500,000 financing which was used to fund current operations. We had current liabilities of $199,000 as of June 30, 2007, compared to $169,000 as of December 31, 2006. We had long term debt of $208,000 as of June 30, 2007 compared to $0 as of December 31, 2006. This debt represents convertible debentures and earned interest of $705,000 offset by deferred discount on the convertible debentures of $497,000 relating to the financing with Cornell during the first quarter of 2007.
     During the six months ended June 30, 2007 we used cash of $1,294,000 for operating activities, compared to $2,122,000 during the six months ended June 30, 2006. During the six months ended June 30, 2007, our expenses included:
    $400,000 for payroll and related costs primarily for administrative staff, scientific personnel and executive officers;
 
    $292,000 for other professional and consulting fees
 
    $199,000 for rent and utilities for our Yonkers facility; and
 
    $97,000 in proxy costs.

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    $177,000 for insurance costs;
 
    $47,000 for expenditures for AVR118 research;
     During the six months ended June 30, 2007, we received $1,636,000 in net funds provided by financing activities compared to $0 for the six months ended June 30, 2006, due to the issuance and sale to Cornell of convertible debentures in the aggregate principal amount of $1,500,000, and the receipt of $312,000 from the exercise by Cornell of warrants to purchase 10,000,000 shares of our common stock. During the six months ended June 30, 2007 we used $2,000 and $6,000 respectively for equipment purchases.
     We have no off-balance sheet transactions.
CAPITAL RESOURCES
Private Placements
     On January 1, 2007, pursuant to a securities purchase agreement, we sold to Cornell $1,500,000 principal amount of our 9% secured convertible debentures, due January 1, 2010, along with warrants to purchase an aggregate of 48,076,923 shares of our common stock, which are exercisable through January 1, 2012 at an exercise price equal to $0.0312 or as may be adjusted from time to time pursuant to the terms thereof. Cornell acquired $1,000,000 principal amount of the debentures upon the first closing under the Cornell Agreement on January 5, 2007, for which we received net proceeds of $875,000, and the remaining $500,000 principal amount of the debentures on February 16, 2007, for which we received net proceeds of $450,000. We are using the net proceeds for working capital purposes. On May 30, 2007, Cornell exercised warrants to purchase 10,000,000 shares of our common stock at an exercise price of $0.0312 for net proceeds of $312,000. On May 31, 2007, Cornell converted $600,000 principal amount of the convertible debentures at a conversion price of $0.0239 for 25,104,603 shares of our common stock. On June 22, 2007, Cornell converted $250,000 principal amount of the convertible debentures at a conversion price of $0.0312 for 8,012,821 shares of our common stock.
     On July 24, 2007, we entered into a securities purchase agreement with Cornell to sell $2,750,000 principal amount of our 9% secured convertible debentures due July 24, 2010, consisting of: (i) $750,000 of our Series A Debentures; and (ii) $2,000,000 of our Series B Debentures. The Series A Debentures have a conversion price equal to the lesser of $0.0312 or 95% of the lowest volume weighted average price of our common stock during the thirty consecutive trading days immediately preceding the applicable conversion date, and the Series B Debentures have a conversion price equal to the lesser of $0.0262 or 95% of the lowest volume weighted average price of our common stock during the thirty consecutive trading days immediately preceding the applicable conversion date. In addition, pursuant to the agreement, we issued to Cornell (i) warrants to purchase an aggregate of 24,038,462 shares of our common stock at an exercise price equal to $0.0312; and (ii) warrants to purchase an aggregate of 76,335,878 shares of our common stock at an exercise price equal to $0.0262. The warrants are exercisable for five years from the date of issuance. We are obligated to file a registration statement registering the resale of all shares of common stock that may be issued to Cornell upon the conversion of the convertible debentures or exercise of the warrants.
     We have been and continue to be dependent upon the proceeds from the continued sale of securities for the funds required to continue operations at present levels and to fund further research and development activities. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. No assurance can be given that the Company will be able to sustain its operations until FDA approval of AVR118 for commercial sale is granted or that any approval will ever be granted. Management is currently seeking equity and debt financing, and exploring the sale of certain assets.

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Outstanding Securities
     In addition to the 739,705,158 shares of our common stock outstanding as of August 14, 2007, we have reserved for issuance approximately 354.8 million shares upon the exercise of currently outstanding stock options and warrants. If all of the foregoing options and warrants were fully exercised, we would receive proceeds of approximately $29.8 million, and we would have approximately 1.1 billion shares of common stock outstanding. In addition, we have reserved for issuance approximately 153.4 million shares upon the conversion of currently outstanding convertible debentures in the aggregate principal amount of $2,150,000. See “Overview — Private Placements with Cornell Capital Partners, LP.” The sale or availability for sale of this number of shares of common stock in the public market could depress the market price of the common stock. Additionally, the sale or availability for sale of this number of shares may lessen the likelihood that additional equity financing will be available to us, on favorable or unfavorable terms. Furthermore, the sale or availability for sale of this number of shares could limit the annual amount of net operating loss carryforwards that could be utilized.
Projected Expenses
     Our cash requirements to date have been satisfied by the sale of our securities. During the next 12 months, we expect to incur significant expenditures relating to operating expenses and expenses relating to regulatory filings and clinical trials for AVR118. We currently do not have cash availability to meet such anticipated expenditures. We anticipate that we can continue operations through December 2007 with our current liquid assets, if no stock options or warrants are exercised, nor additional securities sold. We are currently seeking debt financing, licensing agreements, joint ventures and other sources of financing, but the likelihood of obtaining such financing on favorable terms is uncertain.
     To complete the full range of testing necessary to commercially offer AVR118, we will need substantially more capital. We have been and continue to be dependent upon the proceeds from the continued sale of securities for the funds required to continue operations at present levels and to fund further research and development activities. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. No assurance can be given that the Company will be able to sustain its operations until FDA approval of AVR118 for commercial sale is granted or that any approval will ever be granted. Management is currently seeking equity and debt financing, and exploring the sale of certain assets.
     The independent registered public accounting firm’s report on our consolidated financial statements for the fiscal year ended December 31, 2006 includes an explanatory paragraph regarding our ability to continue as a going concern. Note 2 to the consolidated financial statements states that our cash position is inadequate to pay all the costs associated with the full range of testing and clinical trials of AVR118 required by the FDA for commercial approval, and, unless and until AVR118 is approved for sale in the United States or another industrially developed country, we will be dependent upon the continued sale of our securities, debt or equity financing for funds to meet our cash requirements, which raises substantial doubt about our ability to continue as a going concern. Further, the independent registered public accounting firm’s report states that the consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
     Any proceeds received from the exercise of outstanding options or warrants will contribute to working capital and increase our budget for research and development and clinical trials and testing, assuming AVR118 receives subsequent approvals to justify such increased levels of operation. The recent prevailing market price for shares of common stock has from time to time been below the exercise prices of certain of our outstanding options or warrants. As such, recent trading levels may not be sustained nor may any additional options or warrants be exercised. If none of the outstanding options or warrants is exercised, and we obtain no other additional financing, in order for us to achieve the level of operations contemplated by management, management anticipates that we will have to materially limit or suspend operations.

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
     Our exposure to market risk due to changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio. Our risk associated with fluctuating interest rates is limited to our investments in interest rate sensitive financial instruments. Under our current policies, we do not use interest rate derivative instruments to manage exposure to interest rate changes. We attempt to increase the safety and preservation of our invested principal funds by limiting default risk, market risk and reinvestment risk. We mitigate default risk by investing in investment grade securities. A hypothetical 100 basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of our interest sensitive financial instruments due to their relatively short term nature. Declines in interest rates over time will, however, reduce our interest income while increases in interest rates over time will increase our interest income.
ITEM 4. CONTROLS AND PROCEDURES
     As of June 30, 2007, an evaluation was performed under the supervision and with the participation of management, including our Chief Executive Officer and Acting Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on that evaluation, our management, including our Chief Executive Officer and Acting Chief Financial Officer, concluded that our disclosure controls and procedures were effective as of June 30, 2007 in providing reasonable assurances that material information required to be disclosed is included on a timely basis in the reports it files with the Securities and Exchange Commission (SEC). Furthermore, management noted that no changes occurred during the quarter ended June 30, 2007 that materially affected, or would be reasonably likely to materially affect, our internal controls over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
     We are not currently a party to any material litigation, nor to the knowledge of management, is any such litigation threatened.
ITEM 1A. RISK FACTORS
     There have been no material changes to the risk factors previously disclosed in our Form 10-K for the year ended December 31, 2006 and in other reports filed from time to time with the SEC since the date we filed our Form 10-K. Readers are urged to carefully review our risk factors since they may cause our results to differ from the “forward-looking statements” made in this report or otherwise made by or on our behalf. Those risk factors are not the only ones we face. Additional risks not presently known to us or other factors not perceived by us to present significant risks to our business at this time also may impair our business operation. We do not undertake to update any of these forward-looking statements or to announce the results of any revisions to these forward-looking statements except as required by law.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Stock Incentive Plan/Stock Option Awards
     On May 14, 2007, we granted stock options to purchase an aggregate of 10,675,000 shares of our common stock under the Advanced Viral Research Corp. 2007 Stock Incentive Plan (the “2007 Plan”) at an exercise price of $0.05 for a period of ten years to members of our Board of Directors in consideration for their service on the Board. In addition, on May 14, 2007 in connection with the new employment agreement

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with Mr. Elliston, our President and Chief Executive Officer (described in Item 5 below), we granted Mr. Elliston an option to purchase an aggregate of 40,000,000 shares of our common stock under the 2007 Plan. The option vests monthly in increments of 666,667 shares, and is exercisable at prices ranging from $0.05 to $0.08 per option share for a period of five years from the applicable vesting date. The stock options described above were issued pursuant to the 2007 Plan in reliance upon the exemption provided by Rule 701 promulgated under the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
     Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
     Not applicable.
ITEM 5. OTHER INFORMATION
     Not applicable.

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ITEM 6. EXHIBITS
     The following exhibits are filed with this Report:
     
Exhibit   Description
3.1
  Corrected Amended and Restated Certificate of Incorporation of Advanced Viral Research Corp.
 
   
31.1
  Certification of Chief Executive Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
31.2
  Certification of Acting Chief Financial Officer pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
   
32.1
  Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
   
32.2
  Certification of Acting Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES
     In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
         
  ADVANCED VIRAL RESEARCH CORP.
 
 
Date: August 14, 2007  /s/ Stephen M. Elliston    
  Stephen M. Elliston President and Chief Executive Officer   
 
         
     
  /s/ Martin Bookman    
  Martin Bookman, Acting Chief Financial Officer
(Principal Financial and Accounting Officer) 
 
 

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